**Exhibit 13.1**

 

 

[GRAPHIC OF THE STATE OF KANSAS WITH THE 10 CITIES OF OUR LOCATIONSIDENTIFIED]

 

**Landmark National Bank continues the dedication to ourcustomers and their future. Providing security, convenience and expertise. With12 locations across Kansas, Landmark National Bank continues itscustomer-focused philosophy, with local decision-makers committed to thecommunities they serve – for the long term.**

 

**CONTENTS**

 
| Letter To  Stockholders                     |
|---------------------------------------------|
|                                        |
| Selected  Financial and Other Data          |
|                                        |
| Management’s  Discussion and Analysis  |
|                                        |
| Independent Auditors’  Report          |
|                                        |
| Consolidated Financial  Statements          |
|                                        |
| Notes to  Consolidated Financial Statements |
|                                        |
| Corporate  Information                      |

 

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**TO OURSTOCKHOLDER****S,****CUSTOMERS AND FRIENDS**

 

Achievement aptly describes the calendar year of 2002 for LandmarkBancorp Inc. Your company achieved net earnings in excess of $4.5 million.These earnings translate to a return on average equity of 11.31 percent and areturn on average assets of 1.35 percent. This record financial performance wasaccomplished as the company continued to implement organizational changes toassimilate the merger with MNB Bancshares, Inc. which was consummated inOctober 2001. Significant operational changes, including a computer conversion,were made during the year in order to achieve the projected cost savings andrevenue enhancements anticipated to be realized as a result of the merger. Ourassociates were able to deal with these changes and at the same time accomplishoutstanding financial results. During the year 2002 we were also able to buyback 242 thousand shares of Landmark Bancorp, Inc. stock at a cost ofapproximately $5.3 million. Our quarterly cash dividend was increased 6.7percent and a 5 percent stock dividend was paid in December. All of theseachievements represent the continued evolvement of Landmark Bancorp, Inc. as avibrant, progressive, financially strong organization providing communitybanking services to the Kansas communities we serve. In the space below I willrecap the year and elaborate on the opportunities and challenges that liebefore us as we continue to move the company forward in 2003.

 

The achievements of 2002 would not have been possible without theunwavering dedication of our associates. The combination of the two formerbanking organizations brought significant change, not only in operationalprocedures, but in policies and cultures. These changes could not have beenmade without significant planning, hard work, and flexibility from allinvolved. The ability of a merged organization to deal with change defineswhether the merger will successfully meet the expectations and achieve theanticipated synergies of the combined companies. I am proud to report that yourcompany and its associates have risen to this challenge in an exemplary manner.We were able to successfully complete a dual computer conversion in June 2002as both of the former data processing systems converted to a new commoncomputer system. Throughout the year we worked on consolidating otheroperational systems and processes in order to achieve the efficienciesanticipated from the merger. Our associates responded with a “can do” attitudeand willingly went the extra mile to insure that our efforts would be successful.As our industry continues to evolve, this organizational aptitude to adapt willserve us well as the company makes the necessary adjustments for continuedsuccess in this changing environment.

 

It has been approximately forty years since we have experiencedinterest rates as low as those experienced in 2002 and continuing throughtoday. This is the result of the Federal Reserve’s continued efforts toforestall an economic downturn and to stimulate economic growth and recovery.This economic environment has created both opportunities and challenges foryour company. Residential mortgage loan refinancing continued at a frenziedlevel. Your company captured much of this activity as we continue our traditionand reputation as a leading residential mortgage lender within our communities.In an effort to reduce interest rate risk exposure we continue to sell the vastmajority of our fixed rate mortgage loan production to the secondary market.This activity resulted in gains on sale of loans of $1.4 million for 2002compared to $763 thousand for the year ended September 30, 2001. We do notexpect this level of refinancing activity to continue in 2003. In 2002 wewitnessed a decline of approximately $28 million in the one to four familyresidential loan portfolio. However, as the anticipated rate of refinancingslows, we also expect the prepayments of our mortgage loan portfolio todecrease and our residential mortgage loan portfolio total dollar outstandingsto begin to stabilize.

 

This period of low interest rates has accelerated our plannedtransition of the balance sheet to less reliance on residential mortgage loansand more emphasis on commercial and consumer lending. The decline in one tofour family loans was partially offset by an increase of approximately $22million in commercial and commercial real estate loans. One of our challengesin 2003 will be to continue to increase our commercial lending activity. Thiswill need to be accomplished in an economy that, in the best case scenario, isexperiencing slow growth. We will need to accomplish this increase incommercial loans in a manner that preserves our credit quality standards anddoes not increase our interest rate risk in the event that interest ratesincrease either in 2003 or shortly thereafter. These loans should not only havehigher yields, but should also reprice more frequently and reduce the interestrate risk that has been inherent within our balance sheet. Assuming we aresuccessful in our effort to increase the commercial loan portion of the totalportfolio, this should contribute to greater profitability that will besustainable over the entire interest rate cycle.

 

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A slowing economy coupled with continued low interest rates createschallenges for most banking organizations. Interest margins come under pressureas borrowers refinance their loans in order to obtain lower interest costs.Depositors balk at the record low returns being earned on their deposits andlook for alternative investments. As previously discussed, we will have tointensify our efforts in order to obtain the quality growth we need to achievein our loan portfolio. Competition for loans is strong in this environment withthe banking industry possessing strong overall capital and liquidity positions.Credit quality can pose a challenge in the economic environment which we facetoday. Our company has seen some deterioration in our retail lending portfolioas consumers face increased debt loads and increased unemployment. We have alsoexperienced a slight increase in mortgage loan delinquency caused by the samefactors. We have responded with enhanced loan underwriting and increasedefforts that focus on aggressive collection activity in the early stages ofdelinquency. These efforts are showing good results. Additionally, we haveincreased our provision for loan losses in response to these trends. Thesesteps have ensured that our reserve for losses on loans remained relativelystable at $2.6 million and increased from 1.10 percent to 1.12 percent as apercentage of loans. It is difficult to project the duration or severity ofthis economic slowdown and the impact that it will ultimately have on ourindustry’s loan portfolios and loan loss reserves. We will continue to focus onmaintaining the strong asset quality that we have experienced in the past andthat our lending culture expects.

 

The merger with MNB Bancshares, Inc. allowed us to expand the financialproducts which we offer our customers. In 2002 we were able to introduceInternet banking and the Overdraft Privilege program to our customer base on astatewide basis. We have dramatically expanded our commercial and consumerlending capabilities to meet customers’ needs. The former MNB customers nowhave access to a large array of mortgage loan products, including FHA and RuralEconomic Development guaranteed loans. We offer investment brokerage servicesto customers in all of our markets. Our ATM network has expanded across thestate of Kansas, which when coupled with Internet and telephone banking, givescustomers unprecedented access to their accounts. All of these developmentshave been received with great customer enthusiasm. We are in the process ofdeveloping expanded treasury cash management services for our commercialcustomer base so that they may more efficiently manage their cash and gainmaximum utility from their banking relationship with us. These efforts haveallowed us to expand core deposit transaction accounts which are a key elementof our strategy to lower funding costs and forge a complete bankingrelationship with our customers. These efforts have also been instrumental inour success in growing non-interest income over the past year. We expect thesetrends to continue.

 

We are very excited as we contemplate the future of your company. Wefeel the company is well positioned to take advantage of the opportunitieswhich await us in 2003. Our financial platform gives us the strength andresources to continue the growth of your organization and the quality deliveryof financial products to our customers. In spite of our repurchase of $5.3million of Landmark stock in 2002, our capital exceeds $41 million, which givesus an equity to total assets ratio that is in excess of 12 percent. We arestill quite liquid with $100.7 million in cash, cash equivalents, andinvestment securities available for sale. Our financial product array iscomprehensive. Our associates are focused on delivering quality financialservices and products to the customers and communities which we serve. Webelieve that the stage is set for another year of growth and achievement.

 

 

[PICTURE OF PAT L. ALEXANDER, PRESIDENT ANDCHIEF EXECUTIVE OFFICER, AND QUOTE]

 

Our efforts focus on insuring the long-term success and prosperity ofyour company. I would like to thank you, our shareholders, for your continuingsupport and confidence throughout this period of transition and growth. I wouldalso like to thank all of my associates for their dedicated work and tirelessefforts over the past several months and years. Finally, I would be remiss notto thank our customers for their continued confidence and patronage, which isimperative if we are to remain successful and achieve our goals. We lookforward to 2003 and beyond with anticipation and enthusiasm.

 

Sincerely,

 
| /s/ Patrick L. Alexander              |   |
|---------------------------------------|--------|
| Patrick L. Alexander                  |
| President and Chief Executive Officer |

 

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**SELECTED****FINANCIAL****AND****OTHER****DATA****OF********LANDMARK****BANCORP****, INC****.**

 
|                                                             |   | **At or for the  year ended  December 31, 2002**                      |    | **At or for the  three months ended  December 31, 2001** |   | **At or for the years ended September 30,** |    |
|------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|----------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                             |   |                                                                  |    | **2001**                                                 |   | **2000**                                    |    | **1999** |   | **1998** |   |
|                                                             |   | **(Dollars in thousands, except per share amounts and  percentages)** |    |
| **Selected  Financial Data:**                                    |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| Total Assets                                                     |   | $                                                                     | 341,314 |                                                     | $      | 349,700                                     |    | $ | 200,255 |   | $ | 250,676 |   | $ | 244,116 |   | $ | 225,368 |   |
| Loans(1)                                                         |   | 229,112                                                               |    | 240,979                                                  |   | 144,473                                     |    | 191,514 |   | 177,840 |   | 174,733 |   |
| Investments  held-to-maturity                                    |   | —                                                                |    | —                                                   |   | —                                      |    | 38,779 |   | 42,339 |   | 33,299 |   |
| Investments  available-for-sale                                  |   | 89,296                                                                |    | 75,311                                                   |   | 30,889                                      |    | 9,869 |   | 12,022 |   | 9,221 |   |
| Cash and cash equivalents                                        |   | 11,449                                                                |    | 22,163                                                   |   | 20,001                                      |    | 5,090 |   | 5,976 |   | 2,844 |   |
| Deposits                                                         |   | 264,281                                                               |    | 273,246                                                  |   | 148,064                                     |    | 165,325 |   | 158,936 |   | 154,793 |   |
| Borrowings                                                       |   | 26,203                                                                |    | 28,697                                                   |   | 21,000                                      |    | 57,000 |   | 58,000 |   | 41,700 |   |
| Stockholders’ equity                                        |   | 41,074                                                                |    | 40,205                                                   |   | 26,099                                      |    | 23,662 |   | 22,404 |   | 25,024 |   |
|                                                             |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| **Selected  Operating Data:**                                    |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| Interest  Income                                                 |   | $                                                                     | 19,562  |                                                     | $      | 5,224                                       |    | $ | 16,438 |   | $ | 18,230 |   | $ | 17,059 |   | $ | 17,207 |   |
| Interest expense                                                 |   | 7,111                                                                 |    | 2,475                                                    |   | 9,909                                       |    | 11,229 |   | 10,029 |   | 10,216 |   |
| Net interest income                                              |   | 12,451                                                                |    | 2,749                                                    |   | 6,529                                       |    | 7,001 |   | 7,030 |   | 6,991 |   |
| Provision for loan losses                                        |   | 182                                                                   |    | 33                                                       |   | 120                                         |    | 267 |   | 785 |   | 265 |   |
| Net interest income after  provision for loan losses             |   | 12,269                                                                |    | 2,716                                                    |   | 6,409                                       |    | 6,734 |   | 6,245 |   | 6,726 |   |
| Noninterest income                                               |   | 3,856                                                                 |    | 1,012                                                    |   | 2,353                                       |    | 977 |   | 1,636 |   | 1,226 |   |
| Severance and other costs  related to merger with MNB(3)         |   | —                                                                |    | 2,705                                                    |   | —                                      |    | — |   | — |   | — |   |
| Noninterest expense                                              |   | 9,184                                                                 |    | 4,796                                                    |   | 4,277                                       |    | 4,056 |   | 4,191 |   | 4,134 |   |
| Income (loss) before  income taxes                               |   | 6,941                                                                 |    | (1,068                                                   | )      | 4,485                                       |    | 3,655 |   | 3,690 |   | 3,818 |   |
| Provision (benefit) for  income taxes                            |   | 2,363                                                                 |    | (430                                                     | )      | 1,780                                       |    | 1,272 |   | 1,334 |   | 1,454 |   |
| Cumulative effect of  change in accounting principle, net of tax |   | —                                                                |    | —                                                   |   | (215                                        | )       | — |   | — |   | — |   |
| Net Earnings (loss)                                              |   | $                                                                     | 4,578   |                                                     | (638   | )                                      | $       | 2,490 |   | $ | 2,383 |   | $ | 2,356 |   | $ | 2,364 |   |
| Net earnings (loss) per  share(2):                               |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| Basic                                                            |   | $                                                                     | 2.20    |                                                     | $      | (0.31                                       | )  | $ | 2.13 |   | $ | 1.99 |   | $ | 1.87 |   | $ | 1.42 |   |
| Diluted                                                          |   | 2.14                                                                  |    | (0.31                                                    | )      | 1.98                                        |    | 1.85 |   | 1.70 |   | 1.29 |   |
| Operating diluted(3)                                             |   | 2.14                                                                  |    | 0.50                                                     |   | 2.14                                        |    | 1.85 |   | 1.70 |   | 1.29 |   |
| Dividends per share(2)                                           |   | 0.58                                                                  |    | 0.14                                                     |   | 0.54                                        |    | 0.54 |   | 0.64 |   | 0.54 |   |
| Book value per common  share outstanding(2)                      |   | 20.44                                                                 |    | 18.41                                                    |   | 21.48                                       |    | 19.38 |   | 17.96 |   | 17.09 |   |
|                                                             |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| **Other  Data:**                                                 |   |                                                                  |    |                                                     |   |                                        |    |   |   |   |   |   |   |
| Return on average  assets(3)(4)                                  |   | 1.35                                                                  | %       | (0.72%                                                   | )      | 1.13                                        | %       | 0.97 | % | 1.01 | % | 1.03 | % |
| Return on average  equity(3)(4)                                  |   | 11.31                                                                 |    | (6.29                                                    | )      | 10.17                                       |    | 10.23 |   | 10.09 |   | 7.52 |   |
| Equity to total assets(4)                                        |   | 12.03                                                                 |    | 11.50                                                    |   | 13.03                                       |    | 9.44 |   | 9.18 |   | 11.10 |   |
| Net interest rate  spread(4)                                     |   | 3.44                                                                  |    | 2.82                                                     |   | 2.57                                        |    | 2.48 |   | 2.64 |   | 2.41 |   |
| Net yield on average  interest-earning assets(4)                 |   | 3.86                                                                  |    | 3.22                                                     |   | 3.09                                        |    | 2.93 |   | 3.10 |   | 3.12 |   |
| Nonperforming assets to  total assets                            |   | 0.41                                                                  |    | 0.37                                                     |   | 0.50                                        |    | 0.52 |   | 0.26 |   | 0.34 |   |
| Nonperforming loans to  total loans                              |   | 0.42                                                                  |    | 0.43                                                     |   | 0.53                                        |    | 0.59 |   | 0.28 |   | 0.39 |   |
| Allowance for loan losses  to total loans                        |   | 1.12                                                                  |    | 1.10                                                     |   | 0.99                                        |    | 0.72 |   | 0.74 |   | 0.65 |   |
| Dividend payout ratio                                            |   | 27.57                                                                 |    | NM                                                       |   | 25.38                                       |    | 27.31 |   | 34.18 |   | 39.31 |   |
| Number of full service  banking offices                          |   | 12                                                                    |    | 12                                                       |   | 6                                           |    | 6 |   | 6 |   | 6 |   |

 

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**Our selected consolidated financial data should be read in conjunctionwith, and is qualified in its entirety by, our consolidated financialstatements, including the related notes. In conjunction with the October 9,2001, merger with MNB Bancshares, we changed our fiscal year end from September30 to December 31. Our selected consolidated financial data presented above asof and for the three months ended December 31, 2001, include our accounts andcommencing October 9, 2001, MNB Bancshares. The selected consolidated financialdata for periods prior to October 1, 2001, are Landmark Bancshares historicalfinancial data. (NM: not meaningful) 

(1)                Includes loans held for sale totaling $5,051,$5,654, $2,486, $8,854, $604, and $2,409, at December 31, 2002, and 2001, andSeptember 30, 2001, 2000, 1999, and 1998, respectively.

(2)               All per share amounts have been adjusted togive effect to the 5% stock dividends paid in December 2002 and December 2001.

(3)               Operating earnings exclude the after taxeffect of the severance and other nonrecurring costs related to the merger withMNB Bancshares in the quarter ended December 31, 2001, and the cumulativeeffect of the change in accounting principle in the year ended September 30,2001. Operating earnings are a non-GAAP (Generally Accepted AccountingPrinciples) measure of performance, and are presented herein as additionalinformation regarding our performance for those periods. Annualized return onaverage assets and average equity, excluding the severance and othermerger-related costs were 1.21% and 10.58%, respectively, for the three monthsended December 31, 2001.

(4)               Amounts for the three months ended December31, 2001, have been annualized.

 

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**M****ANAGEMENT****’****S****D****ISCUSSION****A****ND****A****NALYSIS****O****F****F****INANCIAL****C****ONDITION****A****ND****R****ESULTS****O****F****O****PERATIONS**

 

**CORPORATE****PROFILE AND****OVERVIEW**

 

Landmark Bancorp, Inc. is a one-bank holding company incorporated underthe laws of the State of Delaware and is engaged in the banking businessthrough its wholly-owned subsidiary, Landmark National Bank. Landmark Bancorpis listed on the Nasdaq Stock Market National Market System (symbol “LARK”).Landmark National Bank is dedicated to providing quality financial or bankingservices to its local communities and continues to originate commercial loans,commercial real estate loans, small business loans, residential mortgage loans,consumer loans, and home equity loans. Effective October 9, 2001, LandmarkBancshares, Inc. and MNB Bancshares, Inc. (MNB) completed their merger intoLandmark Merger Company, which immediately changed its name to LandmarkBancorp, Inc. In addition, Landmark Federal Savings Bank merged with SecurityNational Bank and the resulting bank changed its name to Landmark NationalBank, which is the wholly-owned subsidiary of Landmark Bancorp, Inc. LandmarkBancorp, Inc. is the accounting successor to the former Landmark Bancshares andtherefore, all financial information presented for periods prior to October 9,2001, reflects only the operations of Landmark Bancshares. The former LandmarkBancshares utilized a September 30 fiscal year. Landmark Bancorp has a December31 fiscal year end and has presented the results for the quarter ended December31, 2001, as a transition period. The results for the quarter ended December31, 2001, include MNB’s results since October 9, 2001.

 

 

[GRAPHIC ADVERTISING CHECKING AND OVERDRAFT PRIVILEDGE SERVICES]

 

We achieved net earnings of $4.6 million for the year ended December31, 2002. Diluted net earnings per share for the year ended December 31, 2002,was $2.14. The annualized return on average assets was 1.35% and the annualizedreturn on average equity was 11.31%. During the year ended December 31, 2002,the board of directors declared a 5% stock dividend and cash dividends totaling$0.58 per share, as adjusted for the 5% stock dividend. During 2002, wesuccessfully completed two 5% stock repurchase programs and announced theapproval of a third repurchase program enabling us to repurchase an additional5% of our outstanding common stock.

 

The tradition of quality assets continues and our strategy is tofurther diversify the deposit and loan portfolios in order to increaseprofitability in the future. Focusing on customers’ needs and the developmentof full service banking relationships has been instrumental to our success. Webelieve that our strong capital position puts us on solid ground and providesan excellent base for further growth and expansion.

 

 

[PICTURE OF MARK A. HERPICH, EXECUTIVE VICE PRESIDENT AND CHIEFFINANCIAL OFFICER, AND QUOTE]

 

Landmark National Bank is principally engaged in the business ofattracting deposits from the general public and using such deposits, togetherwith borrowings and other funds, to originate commercial and consumer loans,multi-family residential mortgage loans and one-to-four family residentialmortgage loans.

 

Deposits are insured by either the Savings Association Insurance Fundor the Bank Insurance Fund of the Federal Deposit Insurance Corporation up tothe maximum amount allowed by applicable federal law and regulation. Ourprimary regulator is the Office of the Comptroller of the Currency.Additionally, we are subject to regulation by the Federal Deposit InsuranceCorporation, as administrator of the two insurance

 

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[GRAPHIC ADVERTISING INTERNET BANKINGSERVICE]

 

funds and by the Board of Governors of the Federal Reserve System withrespect to reserves required to be maintained against deposits and certainother matters. We are a member of the Federal Home Loan Bank of Topeka and theFederal Reserve Bank of Kansas City.

 

As a bank holding company, we are subject to regulation and supervisionby the Federal Reserve Board. We are also subject to various reporting andother requirements under the federal securities laws and the regulations of theSecurities and Exchange Commission.

 

 

[PICTURE OF MICHAEL E.SCHEOPNER, EXECUTIVE VICE PRESIDENT AND CREDIT RISK MANAGER, AND QUOTE]

 

Currently, our businessconsists of ownership of Landmark National Bank, with its main office inManhattan, Kansas and branch offices in central and southwestern Kansas. Weplan to continue exploring and evaluating opportunities to expand andenter complementary markets in an effort to enhance our asset base, long-termearnings and resources.

 

**CRITICAL****ACCOUNTING****POLICIES**

 

Critical accounting policies are those which are both most important tothe portrayal of our financial condition and results of operations, and requireour management’s most difficult, subjective or complex judgments, often as aresult of the need to make estimates about the effect of matters that areinherently uncertain. Our critical accounting policies relate to the allowancefor loan losses, the valuation of investment securities, and accounting forincome taxes, all of which involve significant judgment by our management.

 

We perform periodic and systematic detailed reviews of our lendingportfolio to assess overall collectability. The level of the allowance for loanlosses reflects our estimate of the collectability of the loan portfolio. Whilethese estimates are based on substantive methods for determining allowancerequirements, nevertheless, actual outcomes may differ significantly fromestimated results. Additional explanation of the methodologies used inestablishing this reserve is provided in the “Asset Quality and Distribution”section.

 

We report our investment securities at estimated fair values based onreadily ascertainable values which are obtained from independent sources. Ourmanagement performs periodic reviews of the investment securities to determineif any investment securities have declined in value which might be consideredother than temporary. Although we believe that our estimates of the fair valuesof investment securities to be reasonable and conservative, economic and marketfactors may affect the amounts that will ultimately be realized from theseinvestments.

 

The objectives of accounting for income taxes are to recognize theamount of taxes payable or refundable for the current year and deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns. Judgment isrequired in assessing the future tax consequences of events that have beenrecognized in our financial statements or tax returns. Fluctuations in theactual outcome of these future tax consequences, including the effects of IRSexaminations and examinations by other state agencies, could materially impactour financial position and results of operations.

 

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**C****OMPARISON****O****F****O****PERATING****R****ESULTS****F****OR****T****HE****Y****EARS****E****NDED****D****ECEMBER****31, 2002****AND****S****EPTEMBER****30, 2001**

 

**S****UMMARY OF****P****ERFORMANCE****.**Net earningsfor the year ended December 31, 2002, were $4.6 million, an increase of 83.8%,compared to net earnings of $2.5 million for the year ended September 30, 2001.Diluted earnings per share for the year ended December 31, 2002, was $2.14compared to $1.98 for the year ended September 30, 2001. The improvement in netearnings was generally attributable to the MNB merger, increased fees andservice charges, and an improvement in our net interest margin. The earningsper share amount was impacted by the 817,806 shares that were issued inconnection with the MNB merger.

 

**I****NTEREST****I****NCOME****.**Interestincome for the year ended December 31, 2002, increased 19.0% to $19.6 millionfrom $16.4 million for the year ended September 30, 2001. Interest income onloans increased $3.1 million, or 22.5%, for the year ended December 31, 2002,compared to the year ended September 30, 2001. Interest earned on securitiesand other investments increased $65,000 to $2.9 million for the year endedDecember 31, 2002, compared to the year ended September 30, 2001. The increasein interest income was primarily related to an increase in average earningassets resulting from the MNB merger, which overcame the decrease in ratesexperienced as interest earning assets repriced downward during 2002.

 

**I****NTEREST****E****XPENSE****.**Interestexpense for the year ended December 31, 2002, decreased to $7.1 million from$9.9 million for the year ended September 30, 2001, or 28.2%. Deposit interestexpense declined to $5.8 million from $7.8 million during this period despiteacquiring $131.0 million in deposits from the MNB merger, as a result of thedecline in interest rates. Interest expense on borrowings, consisting primarilyof advances from the Federal Home Loan Bank of Topeka, decreased $790,000, or37.1%, to $1.3 million for the year ended December 31, 2002, as compared to theyear ended September 30, 2001, as a result of scheduled principal payments andthe decline in interest rates. 

 

**N****ET****I****NTEREST****I****NCOME****.**Netinterest income represents the difference between income derived frominterest-earning assets and the expense on interest-bearing liabilities. Netinterest income is affected by both the difference between the rates ofinterest earned on interest-earnings assets and the rates paid oninterest-bearing liabilities (“interest rate spread”) as well as the relativeamounts of interest-earning assets and interest-bearing liabilities. 

 

Net interest income increased to $12.5 million for the year endedDecember 31, 2002, compared to $6.5 million for the year ended September 30,2001. The net interest margin for the year ended December 31, 2002, was 3.86%compared to 3.09% for the year ended September 30, 2001. This increase resultedfrom interest rates on our interest-bearing liabilities which repriced downwardat a more rapid pace than our interest-earning assets. In addition, theacquired commercial and consumer loan portfolios of MNB combined with thecommercial loan growth experienced during 2002 resulted in improved yields oninterest-earning assets.

 

 

[PICTURE OF DEAN R. THIBAULT, MANHATTANMARKET PRESIDENT, AND QUOTE]

 

Given the mix of our interest bearing liabilities and interest bearingassets as of December 31, 2002, the net interest margin could be expected todecline in a falling interest rate environment, and conversely, to increase ina rising rate environment. During 2001 and 2002, the Federal Open MarketCommittee (FOMC) lowered the target for the Federal Funds rate on elevenoccasions, decreasing the rate from 6.5% on January 1, 2001, to 1.25% by December31, 2002, for a total decline of 525 basis points. These actions caused acorresponding decrease in our prime loan rates which declined from 9.5% to4.25%. Our net interest margin improved during fiscal 2002 as a result of theMNB merger and the acquired commercial and consumer loan portfolios of MNBcombined with the commercial loan growth experienced during 2002. The netinterest margin also improved due to our interest bearing liabilities repricingdownward at a more rapid pace than our interest earning assets. This continuedstabile low rate environment could have an adverse affect on our net interestmargin during 2003 as our interest earning assets repricing downward catches upwith our interest bearing liabilities which have already repriced downward.

 

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**P****ROVISION FOR****L****OAN****L****OSSES****.**Wemaintain, and our Board of Directors monitors, an allowance for losses onloans. The allowance is established based upon management’s periodic evaluationof known and inherent risks in the loan portfolio, review of significantindividual loans and collateral, review of delinquent loans, past lossexperience, adverse situations that may affect the borrowers’ ability to repay,current and expected market conditions, and other factors management deemsimportant. Determining the appropriate level of reserves involves a high degreeof management judgment and is based upon historical and projected losses in theloan portfolio and the collateral value of specifically identified problemloans. Additionally, allowance strategies and policies are subject to periodicreview and revision in response to a number of factors, including currentmarket conditions, actual loss experience and management’s expectations.

 

The provision for loan losses increased to $181,500 during the yearended December 31, 2002, compared to $120,000 for the year ended September 30,2001. Our review of the loan portfolio during 2002 prompted an increase in ourprovision, resulting primarily from increased commercial loan balances and somedeterioration in the consumer loan portfolio quality due to the economicdownturn. One measure of the adequacy of the allowance for the estimated losseson loans is the ratio of the allowance to the total loan portfolio. At December31, 2002, the allowance for loan losses was $2.6 million, or 1.1% of grossloans outstanding, compared to $1.4 million, or 1.0% of gross loansoutstanding, at September 30, 2001.

 

 

[PICTURE OF MARK J. OLIPHANT, DODGE CITY MARKET PRESIDENT, AND QUOTE]

 

**N****ONINTEREST****I****NCOME****.**Noninterestincome for the year ended December 31, 2002, increased $1.5 million, or 63.9%,to $3.9 million from $2.4 million for the year ended September 30, 2001. Feesand service charge income increased to $2.1 million from $437,000 as a resultof the MNB merger and the fee income associated with MNB’s products andservices. Also contributing to the increase in non-interest income was animprovement of 78.9% in gains on sale of loans from $763,000 for the year endedSeptember 30, 2001, to $1.4 million for the year ended December 31, 2002, asresidential mortgage financing activity increased due to the MNB merger and thedeclining interest rates during 2002. Partially offsetting the increase innon-interest income was an $874,000, or 87.5%, decrease in net gains on salesof investments from $998,000 for the year ended September 30, 2001, compared to$124,000 for the year ended December 31, 2002. This decrease in net gains onsale of investments was the result of fewer equity securities in our investmentportfolio being sold during the year ended December 31, 2002, compared to theyear ended September 30, 2001.

 

**N****ONINTEREST****E****XPENSE****.**Noninterestexpense increased $4.9 million to $9.2 million for the year ended December 31,2002, compared to the year ended September 30, 2001. The increase was primarilyrelated to an increase of $2.2 million in compensation and benefits expense andan increase of $652,000 in occupancy and equipment expense for the year endedDecember 31, 2002, compared to the year ended September 30, 2001. Theadditional compensation and benefits expense and occupancy and equipmentexpense incurred during 2002 was a result of the MNB merger. 

 

**I****NCOME****T****AXES****.**Incometax expense increased $582,000, or 32.7%, to $2.4 million for the year endedDecember 31, 2002, from $1.8 million for the year ended September 30, 2001.This increase in income tax expense resulted primarily from an increase intaxable income. The effective tax rate for fiscal 2002 was 34.0% compared to39.7% for fiscal 2001. The decrease in the effective tax rate was primarily dueto the effect of non-taxable investments that were acquired as a result of theMNB merger.

 

**A****VERAGE****A****SSETS****/L****IABILITIES****.**Thefollowing table sets forth information relating to average balances ofinterest-earning assets and interest-bearing liabilities for the year endedDecember 31, 2002, the three months ended December 31, 2001, and the yearsended September 30, 2001, and 2000. The assets and liabilities of MNB wererecorded at their respective fair market values at the merger date. Based onthe relatively low interest rates prevailing at the merger date, the effectiveyields on MNB’s interest-earning assets and rates on MNB’s interest-bearingliabilities were significantly reduced, thus causing our post merger blendedyields and cost of funds to decline in comparison to the periods presentedprior to the merger. This table reflects the average yields on assets andaverage costs of liabilities for the periods indicated (derived by dividingincome or expense by the monthly average balance of assets or liabilities,respectively) as well as the “net interest margin” (which reflects the effectof the net earnings balance) for the periods shown.

 

8

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**A****VERAGE****B****ALANCE****S****HEETS****– A****VERAGE****Y****IELDS****A****ND****R****ATES**

 
|                                                                              |   | **Year ended December 31, 2002** |    | **Three months ended December 31, 2001** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------|---------|------------------------------------------|--------|
|                                                                              |   | **Average**                      |    |                                     |   | **Average** |   | **Average** |   |   |   | **Average** |   |
|                                                                              |   | **Balance**                      |    | **Interest**                             |   | **Yield/Rate** |   | **Balance** |   | **Interest** |   | **Yield/Rate (5)** |   |
| **ASSETS:**                                                                       |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                          |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| Investment securities(1)                                                          |   | $                                | 89,393  |                                     | $      | 2,911 |   | 3.26 | % | $ | 93,466 |   | $ | 595 |   | 2.53 | % |
| Loans receivable, net(2)                                                          |   | 233,311                          |    | 16,650                                   |   | 7.14 | % | 245,669 |   | 4,629 |   | 7.48 | % |
| Total interest-earning  assets                                                    |   | 322,704                          |    | 19,561                                   |   | 6.06 | % | 339,135 |   | 5,224 |   | 6.11 | % |
| Noninterest-earning assets                                                        |   | 15,861                           |    |                                     |   |   |   | 11,173 |   |   |   |   |   |
| Total                                                                             |   | $                                | 338,565 |                                     |   |   |   |   | $ | 350,308 |   |   |   |   |   |
|                                                                              |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**                                   |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                           |   | $                                | 152,407 |                                     | $      | 4,578 |   | 3.00 | % | $ | 166,925 |   | $ | 1,716 |   | 4.08 | % |
| Money market and NOW  accounts                                                    |   | 74,032                           |    | 1,026                                    |   | 1.39 | % | 80,310 |   | 338 |   | 1.67 | % |
| Savings accounts                                                                  |   | 17,201                           |    | 169                                      |   | 0.98 | % | 18,352 |   | 76 |   | 1.64 | % |
| FHLB advances and other  borrowings                                               |   | 28,164                           |    | 1,338                                    |   | 4.75 | % | 33,141 |   | 345 |   | 4.13 | % |
| Total interest-bearing  liabilities                                               |   | 271,804                          |    | 7,111                                    |   | 2.62 | % | 298,728 |   | 2,475 |   | 3.29 | % |
| Noninterest-bearing  liabilities                                                  |   | 26,267                           |    |                                     |   |   |   | 11,356 |   |   |   |   |   |
| Stockholders’ equity                                                         |   | 40,494                           |    |                                     |   |   |   | 40,224 |   |   |   |   |   |
| Total                                                                             |   | $                                | 338,565 |                                     |   |   |   |   | $ | 350,308 |   |   |   |   |   |
|                                                                              |   |                             |    |                                     |   |   |   |   |   |   |   |   |   |
| Net interest income                                                               |   |                             |    | $                                        | 12,450 |   |   |   |   |   | $ | 2,749 |   |   |   |
| Interest rate spread(3)                                                           |   |                             |    |                                     |   | 3.44 | % |   |   |   |   | 2.82 | % |
| Net interest margin(4)                                                            |   |                             |    |                                     |   | 3.86 | % |   |   |   |   | 3.22 | % |
| Ratio of average interest-earning  assets to average interest-bearing liabilities |   |                             |    | 118.73                                   | %      |   |   |   |   | 113.53 | % |   |   |

 

 
|                                                                              |   | **Year ended September 30, 2001** |    | **Year ended September 30, 2000** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                                                                              |   | **Average**                       |    |                              |   | **Average** |   | **Average** |   |   |   | **Average** |   |
|                                                                              |   | **Balance**                       |    | **Interest**                      |   | **Yield/Rate** |   | **Balance** |   | **Interest** |   | **Yield/Rate** |   |
| **ASSETS:**                                                                       |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                          |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Investment securities(1)                                                          |   | $                                 | 47,261  |                              | $      | 2,847 |   | 6.02 | % | $ | 54,659 |   | $ | 3,447 |   | 6.31 | % |
| Loans receivable, net(2)                                                          |   | 164,165                           |    | 13,591                            |   | 8.28 | % | 184,269 |   | 14,783 |   | 8.02 | % |
| Total interest-earning  assets                                                    |   | 211,426                           |    | 16,438                            |   | 7.77 | % | 238,928 |   | 18,230 |   | 7.63 | % |
| Noninterest-earning assets                                                        |   | 8,392                             |    |                              |   |   |   | 6,898 |   |   |   |   |   |
| Total                                                                             |   | $                                 | 219,818 |                              |   |   |   |   | $ | 245,826 |   |   |   |   |   |
|                                                                              |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**                                   |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                           |   | $                                 | 124,627 |                              | $      | 7,031 |   | 5.64 | % | $ | 122,882 |   | $ | 6,519 |   | 5.31 | % |
| Money market and NOW  accounts                                                    |   | 22,716                            |    | 532                               |   | 2.34 | % | 23,608 |   | 630 |   | 2.67 | % |
| Savings accounts                                                                  |   | 7,284                             |    | 218                               |   | 2.99 | % | 7,165 |   | 191 |   | 2.67 | % |
| FHLB advances and other  borrowings                                               |   | 35,810                            |    | 2,128                             |   | 5.94 | % | 64,253 |   | 3,889 |   | 6.05 | % |
| Total interest-bearing  liabilities                                               |   | 190,437                           |    | 9,909                             |   | 5.20 | % | 217,908 |   | 11,229 |   | 5.15 | % |
| Noninterest-bearing  liabilities                                                  |   | 4,536                             |    |                              |   |   |   | 4,618 |   |   |   |   |   |
| Stockholders’ equity                                                         |   | 24,845                            |    |                              |   |   |   | 23,300 |   |   |   |   |   |
| Total                                                                             |   | $                                 | 219,818 |                              |   |   |   |   | $ | 245,826 |   |   |   |   |   |
| Net interest income                                                               |   |                              |    | $                                 | 6,529  |   |   |   |   |   | $ | 7,001 |   |   |   |
| Interest rate spread(3)                                                           |   |                              |    |                              |   | 2.57 | % |   |   |   |   | 2.48 | % |
| Net interest margin(4)                                                            |   |                              |    |                              |   | 3.09 | % |   |   |   |   | 2.93 | % |
| Ratio of average interest-earning  assets to average interest-bearing liabilities |   |                              |    | 111.02                            | %      |   |   |   |   | 109.65 | % |   |   |

 

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(1)          Income on investment securities includes all securities, interestbearing deposits in other financial institutions and stock owned in the FederalHome Loan Bank and the Federal Reserve Bank.

(2)          Includes loans classified as non-accrual.

(3)          Interest rate spread represents the difference between the average yieldon interest-earning assets and the average cost of interest-bearingliabilities.

(4)          Net interest margin represents net interest income divided by averageinterest-earning assets.

(5)          Amounts for the three months ended December 31, 2001, have beenannualized.

 

9

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**C****OMPARISON****O****F****O****PERATING****R****ESULTS****F****OR****T****HE****Q****UARTERS****E****NDED****D****ECEMBER****31, 2001****AND****2000**

 

**S****UMMARY OF****P****ERFORMANCE****.**Operatingearnings, net of tax, for the quarter ended December 31, 2001, were $1.1million, an increase of 58%, compared to operating earnings, net of tax, of$680,000 for the quarter ended December 31, 2000. Diluted operating earnings,net of tax, per share for the quarter ended December 31, 2001, was $0.50 versus$0.54 for the quarter ended December 31, 2000. The decrease in earnings pershare was primarily the result of the issuance of 817,806 shares to former MNBBancshares, Inc. shareholders as a result of the October 9, 2001, merger. TheMNB merger was completed on October 9, 2001. Accordingly, the results for thequarter ended December 31, 2001, included MNB’s results since that date. In conjunctionwith the merger, expenses of $2.7 million were incurred during the quarterended December 31, 2001. The inclusion of the merger expenses resulted in a netloss of $638,000 for the quarter ended December 31, 2001. Diluted net loss pershare for the quarter ended December 31, 2001, was $0.31.

 

On October 1, 2000, we adopted Statement of Financial AccountingStandards No. 133. In connection with the adoption, certain investments werereclassified from held-to-maturity to available-for-sale and trading andresulted in a cumulative decrease in earnings of $215,000, net of tax. Netearnings after the cumulative effect of the change in accounting principle forthe quarter ended December 31, 2000, were $466,000. Diluted net earnings pershare for the quarter ended December 31, 2000, was $0.37.

 

**I****NTEREST****I****NCOME****.**Interestincome increased by $739,000, or 16.5%, to $5.2 million in the quarter endedDecember 31, 2001. Average interest-earning assets increased from $222.9million for the quarter ended December 31, 2000, to $339.1 million for thequarter ended December 31, 2001, primarily due to the MNB merger. Interestincome on loans increased $888,000, or 23.5%, to $4.6 million. Interest earnedon securities and other investments declined $140,000 to $595,000. The increasein interest income was due to an increase in average loans resulting from theMNB merger, which overcame the decrease in rates experienced asinterest-earning assets repriced during 2001.

 

**I****NTEREST****E****XPENSE****.**Interestexpense decreased from $2.9 million for the quarter ended December 31, 2000, to$2.5 million for the quarter ended December 31, 2001, or 14.0%. Depositinterest expense remained consistent at $2.1 million, despite acquiring $131.0million in deposits from the MNB merger, as a result of the decline in rates.  Interestexpense on borrowings, consisting primarily of advances from the Federal HomeLoan Bank of Topeka, decreased $417,000, or 54.7%, to $344,000 at December 31,2001, as a result of scheduled principal payments and the decline in rates.

 

**N****ET****I****NTEREST****I****NCOME****.**Netinterest income increased to $2.7 million for the quarter ended December 31,2001, compared to $1.6 million for the quarter ended December 31, 2000. The netinterest margin for the quarter ended December 31, 2001, was 3.22% compared to2.86% for the quarter ended December 31, 2000. This increase resulted frominterest rates on our interest-bearing liabilities which repriced downward at amore rapid pace than our interest-earning assets.

 

**P****ROVISION FOR****L****OAN****L****OSSES****.**The provisionfor loan losses decreased to $33,000 during the quarter ended December 31,2001, compared to $45,000 in the quarter ended December 31, 2000. With the loanportfolio quality remaining strong, our review of the portfolio, coupled withloan sales during the quarter ended December 31, 2000, prompted a slightdecline in our provision. At December 31, 2001, the allowance for loan losseswas $2.6 million, or 1.1% of gross loans outstanding, compared to $1.4 million,or 1.0% of gross loans outstanding, at September 30, 2001.

 

**N****ONINTEREST****I****NCOME****.**Noninterestincome increased $468,000, or 86.1%, to $1.0 million for the quarter endedDecember 31, 2001. Fees and service charge income increased from $132,000 to$426,000, or by 223.6%, relating primarily to the MNB merger and the fee incomeassociated with MNB’s products and services offered. Also contributing to thisincrease was an improvement in gains on sale of loans by $220,000, or 69.0%, to$539,000, as loan originations increased due to the decrease in home mortgageinterest rates during 2001.

 

**N****ONINTEREST****E****XPENSE****.**Noninterestexpense increased $3.8 million to $4.8 million for the quarter ended December31, 2001, resulting from additional expenses associated with the MNB merger andthe $2.7 million severance and other expenses related to the MNB merger.

 

**INCOME****TAXES****.**An income tax benefit of $430,000 wasrecognized for the three months ended December 31, 2001, compared to an incometax expense of $410,000 that was incurred for the three months ended December 31,2000. This decrease in income tax expense primarily relates to the inclusion of$2.7 million in merger-related expenses that were associated with the MNBmerger that was completed in October 2001.

 

10

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**C****OMPARISON****O****F****O****PERATING****R****ESULTS****F****OR****T****HE****F****ISCAL****Y****EARS****E****NDED****S****EPTEMBER****30, 2001****AND****2000**

 

**S****UMMARY OF****P****ERFORMANCE****.**Netincome increased $107,000, or 4.5%, from $2.4 million for the year endedSeptember 30, 2000, to $2.5 million for the year ended September 30, 2001. Thisresulted in diluted earnings per share of $1.98 ($2.13 per basic share) forfiscal year 2001 compared to $1.85 per diluted share ($1.99 per basic share)for fiscal year 2000. This increase in net income related primarily to anincrease in non-interest income offset by a decrease in net interest incomeafter provision for loan losses.

 

**I****NTEREST****I****NCOME****.**Totalinterest income decreased $1.8 million, or 9.8%, to $16.4 million for the yearended September 30, 2001, from $18.2 million for the year ended September 30,2000. This decrease resulted partly from the average yield on investmentsecurities decreasing to 6.02% for the year ended September 30, 2001, comparedto 6.31% for the year ended September 30, 2000. Additionally, the decrease wasthe result of a decrease in the balance of the loan and investment portfolios.

 

**I****NTEREST****E****XPENSE****.**Interestexpense for the year ended September 30, 2001, decreased $1.3 million or 11.8%,to $9.9 million from $11.2 million at September 30, 2000. This decrease was primarilydue to a decrease in the volume of borrowed funds.

 

**N****ET****I****NTEREST****I****NCOME****.**Netinterest income decreased $472,000 from $7.0 million for the year endedSeptember 30, 2000, to $6.5 million for the year ended September 30, 2001.Based on the portfolios of interest-earning assets and interest-bearingliabilities over the last two fiscal years, interest rate spreads were 2.57%and 2.48% for the years ended September 30, 2001, and 2000, respectively. Thedecrease in net interest income was attributable to the decrease in loanbalances during fiscal 2001. We, as part of our interest rate risk reductionplan, sold long-term fixed rate loans out of the portfolio, moved loans tomortgage-backed investments, and began selling long-term fixed rate mortgageloans as they were originated during the year ended September 30, 2001. Thissubstantially reduced the loan portfolio and corresponding interest income.This reduction in income was partially offset by a reduction in borrowings andlower interest rates paid on deposits. The risks related to interest ratemovement are managed and continuously reviewed by management. See“Asset/Liability Management.”

 

**P****ROVISION FOR****L****OAN****L****OSSES****.**Theallowance for losses on loans was $1.4 million at September 30, 2001, and 2000.The provision for losses on loans decreased $147,000, or 55.0%, from $267,000for the year ended September 30, 2000, to $120,000 for the year ended September30, 2001. The decrease in the provision was related to the reduction in loanbalances during fiscal 2001 along with management’s evaluation of the allowancein relation to the composition of the Bank’s loan portfolio.

 

The Bank had loan chargeoffs, net of recoveries, of $73,000 and$208,000 for fiscal years 2001 and 2000, respectively. Historical non-performingloan ratios are presented with the five-year financial summary information.

 

**N****ONINTEREST****I****NCOME****.**Non-interestincome increased $1.4 million, or 140.7%, from $977,000 for the year endedSeptember 30, 2000, to $2.4 million for the year ended September 30, 2001. Thiswas primarily due to the increase in the net gain on the sale of investments to$998,000 for fiscal year 2001 compared to $51,000 for fiscal 2000, a $947,000increase, or 1,865.3%, and the increase in the net gain on the sale of loans to$763,000 for fiscal year 2001 compared to $181,000 for fiscal 2000, a $582,000increase, or 321.9%.

 

**N****ONINTEREST****E****XPENSE****.**Non-interestexpense increased $220,000, or 5.1%, from $4.1 million for the year endedSeptember 30, 2000, to $4.3 million for the year ended September 30, 2001. TheBank experienced a $336,000 increase in compensation and related expenses dueto filling employee positions vacant in the prior year and other normalincreases in compensation.

 

**I****NCOME****T****AXES****.**Incometax expense increased $508,000, or 40.0%, from $1.3 million for the year endedSeptember 30, 2000, to $1.8 million for the year ended September 30, 2001. Thisincrease in income tax resulted primarily from an increase in taxable income.The effective tax rate for fiscal 2001 was 39.7% compared to 34.8% for fiscal2000.

 

11

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**L****ANDMARK****B****ANCORP****, I****NC****.****AND****S****UBSIDIARY**

**QUARTERLY****RESULTSOF****OPERATIONS**

 
|                                                 |   | **Fiscal 2002 Quarters Ended** |      |
|------------------------------------------------------|--------|--------------------------------|-----------|
|                                                 |   | **March 31**                   |      | **June 30** |   | **September 30** |   | **December 31** |   |
| Interest income                                      |   | $                              | 5,042,396 |   | $ | 4,956,001 |   | $ | 4,913,082 |   | $ | 4,650,047 |   |
| Interest expense                                     |   | 2,077,032                      |      | 1,782,307 |   | 1,668,299 |   | 1,583,561 |   |
| Net interest income                                  |   | 2,965,364                      |      | 3,173,694 |   | 3,244,783 |   | 3,066,486 |   |
| Provision for loan losses                            |   | 33,500                         |      | 33,000 |   | 50,000 |   | 65,000 |   |
| Net interest income after  provision for loan losses |   | 2,931,864                      |      | 3,140,694 |   | 3,194,783 |   | 3,001,486 |   |
| Noninterest income                                   |   | 730,885                        |      | 861,264 |   | 917,103 |   | 1,346,764 |   |
| Noninterest expense                                  |   | 2,216,453                      |      | 2,207,169 |   | 2,286,558 |   | 2,474,011 |   |
| Earnings before income  taxes                        |   | 1,446,296                      |      | 1,794,789 |   | 1,825,328 |   | 1,874,239 |   |
| Provision for income taxes                           |   | 487,956                        |      | 615,287 |   | 620,828 |   | 638,668 |   |
| Net earnings                                         |   | $                              | 958,340   |   | $ | 1,179,502 |   | $ | 1,204,500 |   | $ | 1,235,571 |   |
| Earnings per share (1):                              |   |                           |      |   |   |   |   |   |   |
| Basic                                                |   | $                              | 0.44      |   | $ | 0.56 |   | $ | 0.59 |   | $ | 0.61 |   |
| Diluted                                              |   | 0.43                           |      | 0.55 |   | 0.57 |   | 0.59 |   |

 
|                                                                         |   | **Fiscal  2001 Quarters Ended** | ** ** |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **December  31**                |       | **March 31** | ** ** | **June 30** | ** ** | **September  30** | ** ** |
| Interest income                                                              |   | $                               | 4,484,636  |   | $ | 4,268,546 |   | $ | 4,092,177 |   | $ | 3,592,824 |   |
| Interest expense                                                             |   | 2,878,105                       |       | 2,643,107 |   | 2,354,586 |   | 2,033,398 |   |
| Net interest income                                                          |   | 1,606,531                       |       | 1,625,439 |   | 1,737,591 |   | 1,559,426 |   |
| Provision for loan losses                                                    |   | 45,000                          |       | 45,000 |   | 15,000 |   | 15,000 |   |
| Net interest income after  provision for loan losses                         |   | 1,561,531                       |       | 1,580,439 |   | 1,722,591 |   | 1,544,426 |   |
| Noninterest income                                                           |   | 543,731                         |       | 349,211 |   | 606,888 |   | 852,846 |   |
| Noninterest expense                                                          |   | 1,014,645                       |       | 1,054,376 |   | 1,010,136 |   | 1,197,365 |   |
| Earnings before income  taxes                                                |   | 1,090,617                       |       | 875,274 |   | 1,319,343 |   | 1,199,907 |   |
| Provision for income taxes                                                   |   | 410,144                         |       | 322,400 |   | 488,250 |   | 559,600 |   |
| Net earnings before  cumulative effect of change in accounting principle     |   | 680,473                         |       | 552,874 |   | 831,093 |   | 640,307 |   |
| Cumulative effect of  change in accounting principle, net of tax of $125,144 |   | (214,553                        | )          | — |   | — |   | — |   |
| Net earnings                                                                 |   | $                               | 465,920    |   | $ | 552,874 |   | $ | 831,093 |   | $ | 640,307 |   |
| Earnings per share (1):                                                      |   |                            |       |   |   |   |   |   |   |
| Basic:                                                                       |   |                            |       |   |   |   |   |   |   |
| Earnings before cumulative  effect of change in accounting principle         |   | $                               | 0.58       |   | $ | 0.48 |   | $ | 0.71 |   | $ | 0.54 |   |
| Cumulative effect of  change in accounting principle, net of tax             |   | (0.18                           | )          | — |   | — |   | — |   |
|                                                                         |   | $                               | 0.40       |   | $ | 0.48 |   | $ | 0.71 |   | $ | 0.54 |   |
| Diluted:                                                                     |   |                            |       |   |   |   |   |   |   |
| Earnings before cumulative  effect of change in accounting principle         |   | $                               | 0.54       |   | $ | 0.45 |   | $ | 0.67 |   | $ | 0.49 |   |
| Cumulative effect of  change in accounting principle, net of tax             |   | (0.17                           | )          | — |   | — |   | — |   |
|                                                                         |   | $                               | 0.37       |   | $ | 0.45 |   | $ | 0.67 |   | $ | 0.49 |   |

 

----

(1)          All per share amounts have been adjusted to give effect to the 5% stockdividends paid in December 2002 and December 2001.

 

12

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**C****APITAL****R****ESOURCES****A****ND****L****IQUIDITY**

 

**A****SSET****Q****UALITY AND****D****ISTRIBUTION****.**Totalassets declined to $341.3 million at December 31, 2002, compared to $349.7million at December 31, 2001. Our primary ongoing sources of funds aredeposits, proceeds from principal and interest payments on loans and investmentsecurities and proceeds from the sale of mortgage loans and investmentsecurities. While maturities and scheduled amortization of loans are apredictable source of funds, deposit flows and mortgage prepayments are greatlyinfluenced by general interest rates, economic conditions, competition, and therestructuring of the financial services industry.

 

Our primary investing activities are the origination of mortgage,consumer, and commercial loans and the purchase of investment andmortgage-backed securities. Generally, we originate long-term, fixed-rate,residential mortgage loans for sale in the secondary market and do notoriginate and warehouse those loans for resale in order to speculate on interestrates. Net loans, excluding loans held for sale, decreased $11.3 million to$224.1 million as of December 31, 2002, from $235.3 million as of December 31,2001. The decline was primarily the result of refinancings and paydowns in ourresidential mortgage portfolio. Our loan portfolio composition continues todiversify as a result of pay downs and the merger with MNB. This is evidencedby our one-to-four residential real estate loans comprising 80.6%, 54.4% and44.7% of total loans as of September 30, 2001, December 31, 2001, and December31, 2002, respectively.

 

The allowance for losses on loans is established through a provisionfor losses on loans based on our evaluation of the risk inherent in the loanportfolio and changes in the nature and volume of its loan activity. Suchevaluation, which includes a review of all loans with respect to which fullcollectibility may not be reasonably assured, considers the fair value of theunderlying collateral, economic conditions, historical loan loss experience, levelof classified loans and other factors that warrant recognition in providing foran adequate allowance for losses on loans.

 

We believe that the quality of the loan portfolio continues to bestrong as evidenced by the small number and amount of loans past due one monthor more. As of December 31, 2002, loans with a balance of $925,000 were onnon-accrual status, or 0.40% of total loans, compared to a balance of $1.0million loans on non-accrual status, or 0.43% of total loans, as ofDecember 31, 2001. Although residential homeloans comprised 67.3% of the $925,000 non-accrual balance at December 31, 2002,we have historically incurred minimal losses based upon collateral values. Wehave not experienced significant asset quality deterioration relating to thecommercial loans as a result of the current economic downturn. We have seensome deterioration, however, in the consumer loan portfolio asset quality as aresult of the current economic conditions. Consequently, we increased themonthly loan loss provision during the third quarter of 2002 in response tothese developments.

 

A slowdown in economic activity during 2002 which began in 2001severely impacted several major industries as well as the economy as a whole.Even though there are numerous indications of emerging strength, it is notcertain that this strength is sustainable. In addition, consumer confidence maybe negatively impacted by the substantial decline in equity prices. Theseevents could still adversely affect cash flows for both commercial andindividual borrowers, as a result of which, we could experience increases inproblem assets, delinquencies and losses on loans. Many financial institutionshave experienced an increase in non-performing assets during this difficulteconomic period, as even well-established business borrowers have developedcash flow and other business related problems. We believe that the allowancefor losses on loans at December 31, 2002, was adequate. While we believe thatwe use the best information available to determine the allowance for losses onloans, unforeseen market conditions could result in adjustment to the allowancefor losses on loans. In addition, net earnings could be significantly affectedif circumstances differ substantially from the assumptions used in establishingthe allowance for losses on loans.

 

**L****IABILITY****D****ISTRIBUTION****.**Totaldeposits decreased $8.9 million to $264.3 million at December 31, 2002, from$273.2 million at December 31, 2001. Borrowings decreased $2.5 million to $26.2million at December 31, 2002, from $28.7 million at December 31, 2001.

 

Non-interest bearing deposits at December 31, 2002, were $23.4 million,or 8.9% of deposits, compared to $19.0 million, or 6.9% of deposits, atDecember 31, 2001. Money market and NOW deposit accounts were 29.6% of theportfolio and totaled $78.4 million at December 31, 2002, compared to $73.3million, or 26.8% of deposits, at

 

13

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December 31, 2001. Savings accounts decreased to $15.0 million atDecember 31, 2002, from $19.7 million at December 31, 2001. Certificates ofdeposit decreased to $147.4 million, or 55.8% of deposits, at December 31,2002, from $161.2 million, or 59.1% of deposits, at December 31, 2001. Thereduction of certificates of deposit was reflective of our excess liquidityposition in that we did not bid aggressively on public deposits in 2002.

 

Certificates of deposit at December 31, 2002, which were scheduled tomature in one year or less, totaled $107.5 million. Historically, maturing depositshave generally remained with our Bank and we believe that a significant portionof the deposits maturing in one year or less will remain with us upon maturity.

** **

**C****ASH****F****LOWS****.**Duringthe year ended December 31, 2002, our cash and cash equivalents decreased $10.7million. Our operating activities during 2002 provided us net cash of $9.1million. We used net cash of $2.8 million in investing activities in 2002,primarily for the purchase of investment securities of $40.6 million and thepurchase of equipment of $760,000, net of retirements. These outflows of cashfor investing purposes were offset by the maturities and prepayments ofinvestment securities of $27.1 million and a net decrease in our loan portfolioof $10.4 million. We used net cash of $17.0 million in financing activitiesduring 2002, primarily due to a $9.0 million decrease in our depositsportfolio, the purchase of $5.3 million in treasury stock, the payment of $1.2million in dividends, and the payment of $36.5 million of debt which was offsetby $34.1 million in borrowings. These outflows of cash for financing activitieswere also offset by $1.0 million of proceeds from the issuance of common stockassociated with the exercise of stock options.

 

During the quarter ended December 31, 2001, our cash and cashequivalents increased $2.2 million. We had net cash provided by investingactivities of $9.0 million, which consisted primarily of a net decrease ofloans of $8.4 million, maturities and prepayments of investment securities of$15.8 million which were offset by purchases of investment securities of $21.4million. Net cash of $1.8 million was used in operating activities during thethree months ended December 31, 2001. Net cash of $5.0 million was used infinancing activities primarily from the decrease in deposits of $5.8 million.

 

During the year ended September 30, 2001, our cash and cash equivalentsincreased $14.9 million. We had net cash provided by investing activities of$59.8 million, which consisted primarily of a net decrease of loans of $22.3million and proceeds from sales of investment securities available-for-sale andtrading of $31.5 millionwhichwas offset by $5.7 million of investment securities purchases. Operatingactivities provided net cash of $9.9 million during the fiscal year 2001. Netcash of $54.7 million was used in financing activities primarily due to adecrease in deposits of $17.8 million and the payment of $245 million of debtwhich was offset by $209 million in borrowings.

 

**L****IQUIDITY****.**Ourmost liquid assets are cash and cash equivalents and investment securitiesavailable for sale. The level of these assets is dependent on our operating,financing, lending and investing activities during any given period. AtDecember 31, 2002, and 2001, and September 30, 2001, the carrying value ofthese liquid assets totaled $100.7 million, $97.5 million, and $50.9 million,respectively. During periods in which we are not able to originate a sufficientamount of loans and/or periods of high principal prepayments, we increase ourliquid assets by investing in short-term U.S. Government and agency securitiesor high-grade municipal securities.

 

Liquidity management is both a daily and long-term function of ourstrategy. Excess funds are generally invested in short-term investments. In theevent we require funds beyond our ability to generate them internally,additional funds are available through the use of Federal Home Loan Bankadvances, a line of credit with the Federal Home Loan Bank or through sales ofsecurities. At December 31, 2002, we had outstanding Federal Home Loan Bankadvances of $26.2 million and no borrowings outstanding on our line of creditwith the Federal Home Loan Bank. At December 31, 2002, our total borrowingcapacity with the Federal Home Loan Bank was approximately $77.7 million.

 

At December 31, 2002, we had outstanding loan commitments of $31.6million. We anticipate that sufficient funds will be available to meet currentloan commitments. These commitments consist of letters of credit, unfundedlines of credit and commitments to finance real estate loans.

 

**C****APITAL****.**TheFederal Reserve Board has established capital requirements for bank holdingcompanies which generally parallel the capital requirements for national banksunder the Office of the Comptroller of the Currency regulations. Theregulations provide that such standards will generally be applied on aconsolidated (rather than a bank-only) basis in the case of a bank holdingcompany with more than $150 million in total consolidated assets.

 

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At December 31, 2002, we continued to maintain a sound Tier 1 capitalratio of 11% and a risk based capital ratio of 19%. As shown by the followingtable, our capital exceeded the minimum capital requirements: (dollars inthousands)

 
|                    |   | **Amount** |   | **Percent** |   | **Required** |   |
|-------------------------|--------|------------|--------|-------------|--------|--------------|--------|
| Tier 1 leverage capital |   | $          | 36,545 |        | 11     | %            | 4      | % |
| Risk based capital      |   | $          | 39,110 |        | 19     | %            | 8      | % |

 

Banks and bank holding companies are generally expected to operate ator above the minimum capital requirements. The above ratios are well in excessof regulatory minimums and should allow us to operate without capital adequacyconcerns. The Federal Deposit Insurance Corporation Improvement Act of 1991establishes a bank rating system based on the capital levels of banks. We arerated “well capitalized”, which is the highest rating available under thiscapital-based rating system.

 

**D****IVIDENDS****.**Duringthe year ended December 31, 2002, we paid a cash dividend of $0.15 per share toour stockholders for each of the first three quarters. The cash dividend wasincreased to $0.16 per share in the fourth quarter of 2002. The fourth quarterdividend represented a 6.7% increase over the amount paid in the previousquarter. Additionally, a 5% stock dividend was granted in December 2002. A 5%stock dividend was also granted in December 2001.

 

The payment of dividends by any financial institution or its holdingcompany is affected by the requirement to maintain adequate capital pursuant toapplicable capital adequacy guidelines and regulations. As described above,Landmark National Bank exceeded its minimum capital requirements underapplicable guidelines as of December 31, 2002. The National Bank Act imposeslimitations on the amount of dividends that a national bank may pay without priorregulatory approval. Generally, the amount is limited to the bank’s currentyear’s net earnings plus the adjusted retained earnings for the two precedingyears. As of December 31, 2002, approximately $2.4 million was available to bepaid as dividends to Landmark Bancorp by Landmark National Bank without priorregulatory approval.

 

**RECENT****ACCOUNTING****DEVELOPMENTS**

 

In June 2002, the Financial Accounting Standards Board (FASB) issuedStatement No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*. The provisions of thisStatement are effective for exit or disposal activities initiated afterDecember 31, 2002. We do not believe that the adoption of Statement No. 146will have a significant impact on our consolidated financial statements.

 

In October 2002, the FASB issued Statement No. 147,*Acquisitions of CertainFinancial Institutions*. ThisStatement provides guidance on the accounting for the acquisition of afinancial institution and applies to all acquisitions except those between two ormore mutual enterprises. Those transition provisions were effective on October1, 2002. The scope of Statement No. 144 was amended to include long-termcustomer-relationship intangible assets such as depositor-andborrower-relationship intangible assets and credit cardholder intangibleassets. We do not believe that the adoption of Statement No. 147 will have asignificant impact on our consolidated financial statements.

 

In December 2002, the FASB issued Statement No. 148,*Accounting for Stock-BasedCompensation — Transition and Disclosure*. This Statement, which amends Statement 123, *Accounting for Stock-Based Compensation*,provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition it requires more prominent and more frequent disclosures in financialstatements about the effects of stock-based compensation.

 

In November 2002, the FASB issued Interpretation No. 45, *Requirements for Guarantees Including IndirectGuarantees of Indebtedness of Others.*This Interpretation elaborateson the disclosures to be made by a guarantor in its interim and annualfinancial statements about its obligations under certain guarantees that it hasissued. It also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The disclosure requirements in thisInterpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. We do not believe that the adoption ofInterpretation No. 45 will have a significant impact on our consolidatedfinancial statements.

 

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**EFFECTS OF****INFLATION**

 

Our consolidated financial statements and accompanying footnotes havebeen prepared in accordance with GAAP (accounting principles generally acceptedin the United States of America), which generally requires the measurement offinancial position and operating results in terms of historical dollars withoutconsideration for changes in the relative purchasing power of money over timedue to inflation. The impact of inflation can be found in the increased cost ofour operations because our assets and liabilities are primarily monetary andinterest rates have a greater impact on our performance than do the effects ofinflation.

 

**QUANTITATIVE AND****QUALITATIVE****DISCLOSURES ABOUT****MARKET****RISK**

 

Our assets and liabilities are principally financial in nature and theresulting net interest income thereon is subject to changes in market interestrates and the mix of various assets and liabilities. Interest rates in thefinancial markets affect our decision on pricing our assets and liabilitieswhich impacts our net interest income, a significant cash flow source for us.As a result, a substantial portion of our risk management activities relates tomanaging interest rate risk.

 

Our Asset/Liability Management Committee monitors the interest ratesensitivity of our balance sheet using earnings simulation models and interestsensitivity gap analysis. We have set policy limits of interest rate risk to beassumed in the normal course of business and monitor such limits through oursimulation process.

 

Simulation models are prepared to determine the impact on net interestincome for the coming twelve months, including using rates at December 31,2002, and forecasting volumes for the twelve month projection. This position isthen subjected to a shift in interest rates of 100 and 200 basis points risingand 100 basis points falling with an impact to our net interest income on a oneyear horizon as follows:

 

 
| **Scenario**            |   | **$ change in net  interest income** |     | **% of net  interest income** |   |
|-------------------------|--------|--------------------------------------|----------|-------------------------------|--------|
| 100 basis point rising  |   | $                                    | 270,000  |                          | 2.2    | % |
| 200 basis point rising  |   | $                                    | 503,000  |                          | 4.1    | % |
| 100 basis point falling |   | $                                    | (393,000 | )                             | (3.2   | )% |

 

We believe we are appropriately positioned for future interest ratemovements, although we may experience some fluctuations in net interest incomedue to short term timing differences between the repricing of assets andliabilities.

 

**ASSET****/LIABILITY****MANAGEMENT**

 

We are emphasizing the origination of adjustable rate mortgages forportfolio retention along with shorter-term consumer and commercial loans toreduce the sensitivity of our earnings to interest rate fluctuations. Interestrate “gap” analysis is a common, though imperfect, measure of interest raterisk which measures the relative dollar amounts of interest-earning assets andinterest bearing liabilities which reprice within a specific time period,either through maturity or rate adjustment. The “gap” is the difference betweenthe amounts of such assets and liabilities that are subject to such repricing.A “positive” gap for a given period means that the amount of interest-earningassets maturing or otherwise repricing within that period exceeds the amount ofinterest-bearing liabilities maturing or otherwise repricing during that sameperiod. In a rising interest rate environment, an institution with a positivegap would generally be expected, absent the effects of other factors, toexperience a greater increase in the yield of its assets relative to the costof its liabilities. Conversely, the cost of funds for an institution with apositive gap would generally be expected to decline less quickly than the yieldon its assets in a falling interest rate environment. Changes in interest ratesgenerally have the opposite effect on an institution with a “negative” gap.

 

Following is our “static gap” schedule. One-to-four family and consumerloans included prepayment assumptions, while all other loans assume noprepayments. The mortgage-backed securities included published prepaymentassumptions, while all other investments assume no prepayments.

 

Certificates of deposit reflect contractual maturities only. Moneymarket accounts are rate sensitive and accordingly, a higher percentage of theaccounts have been included as repricing immediately in the first period.Savings and NOW accounts are not as rate sensitive as money market accounts andfor that reason a significant percentage of the accounts are reflected in the 1to 5 years category.

 

We have been successful in meeting the interest sensitivity objectivesset forth in our policy. This has been accomplished primarily by managing theassets and liabilities while maintaining our traditional high credit standards.

 

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**I****NTEREST-****E****ARNING****A****SSETS****A****ND****I****NTEREST-****B****EARING****L****IABILITIES**

**R****EPRICING****S****CHEDULE****(“G****AP****”****T****ABLE****)**

 

At December 31, 2002

(Dollars in thousands)

 
|                                                                                            |   | **3 months  or less** |   | **More than  3 to 12 months** |   | **More than  1 to 5 years** |   | **Over 5 years** |    | **Total** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-------------------------------|--------|-----------------------------|--------|------------------|---------|-----------|--------|
| Interest-earning assets:                                                                        |   |                  |   |                          |   |                        |   |             |    |      |   |
| Overnight investments                                                                           |   | $                     | 7,466  |                          | $      | —                      |   | $                | —  |      | $      | — |   | $ | 7,466 |   |
| Investment securities                                                                           |   | 13,175                |   | 23,484                        |   | 46,513                      |   | 6,124            |    | 89,296    |   |
| Loans                                                                                           |   | 35,443                |   | 80,105                        |   | 98,254                      |   | 13,283           |    | 227,085   |   |
| Total interest-earning  assets                                                                  |   | $                     | 56,084 |                          | $      | 103,589                     |   | $                | 144,767 |      | $      | 19,407 |   | $ | 323,847 |   |
|                                                                                            |   |                  |   |                          |   |                        |   |             |    |      |   |
| Interest-bearing  liabilities:                                                                  |   |                  |   |                          |   |                        |   |             |    |      |   |
| Certificates of deposit                                                                         |   | $                     | 36,548 |                          | $      | 70,966                      |   | $                | 39,919  |      | $      | 12 |   | $ | 147,445 |   |
| Money market and NOW  accounts                                                                  |   | 7,783                 |   | 11,567                        |   | 59,037                      |   | —           |    | 78,387    |   |
| Savings accounts                                                                                |   | 750                   |   | 2,250                         |   | 12,005                      |   | —           |    | 15,005    |   |
| Borrowed money                                                                                  |   | 800                   |   | 2,309                         |   | 12,000                      |   | 11,094           |    | 26,203    |   |
| Total interest-bearing  liabilities                                                             |   | $                     | 45,881 |                          | $      | 87,092                      |   | $                | 122,961 |      | $      | 11,106 |   | $ | 267,040 |   |
|                                                                                            |   |                  |   |                          |   |                        |   |             |    |      |   |
| Interest sensitivity gap  per period                                                            |   | $                     | 10,203 |                          | $      | 16,497                      |   | $                | 21,806  |      | $      | 8,301 |   | $ | 56,807 |   |
| Cumulative interest  sensitivity gap                                                            |   | $                     | 10,203 |                          | $      | 26,700                      |   | $                | 48,506  |      | $      | 56,807 |   |   |   |
|                                                                                            |   |                  |   |                          |   |                        |   |             |    |      |   |
| Cumulative gap as a  percent of total interest-earning assets                                   |   | 3.15                  | %      | 8.24                          | %      | 14.98                       | %      | 17.54            | %       |      |   |
|                                                                                            |   |                  |   |                          |   |                        |   |             |    |      |   |
| Cumulative interest  sensitive assets as a percent of cumulative interest sensitive liabilities |   | 122.24                | %      | 120.08                        | %      | 118.95                      | %      | 121.27           | %       |      |   |

 

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**SAFE****HARBOR****STATEMENT****UNDER THE****PRIVATE****SECURITIES****LITIGATION****REFORM****ACT OF****1995.**

 

**F****ORWARD****-L****OOKING****S****TATEMENTS**

 

This document (including information incorporated by reference)contains, and future oral and written statements by us and our management maycontain, forward-looking statements, within the meaning of such term in thePrivate Securities Litigation Reform Act of 1995, with respect to our financialcondition, results of operations, plans, objectives, future performance andbusiness. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of our management and on information currentlyavailable to management, are generally identifiable by the use of words such as“believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,”“would,” “could,” “should” or other similar expressions. Additionally, allstatements in this document, including forward-looking statements, speak onlyas of the date they are made, and we undertake no obligation to update anystatement in light of new information or future events.

 

Our ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. Factors which could have a material adverseeffect on our operations and future prospects include, but are not limited to,the following:

 

•   The strength of the United States economy in general and the strengthof the local economies in which we conduct our operations which may be lessfavorable than expected and may result in, among other things, a deteriorationin the credit quality and value of our assets.

 

•   The economic impact of past and any future terrorist attacks, acts ofwar or threats thereof, and the response of the United States to any suchthreats and attacks.

 

•   The effects of, and changes in, federal, state and local laws,regulations and policies affecting banking, securities, insurance and monetaryand financial matters.

 

•   The effects of changes in interest rates (including the effects ofchanges in the rate of prepayments of our assets) and the policies of the Boardof Governors of the Federal Reserve System.

 

•   Our ability to compete with other financial institutions as effectivelyas we currently intend due to increases in competitive pressures in thefinancial services sector.

 

•   Our inability to obtain new customers and to retain existing customers.

 

•   The timely development and acceptance of products and services,including products and services offered through alternative delivery channelssuch as the Internet.

 

•   Technological changes implemented by us and by other parties, includingthird party vendors, which may be more difficult or more expensive thananticipated or which may have unforeseen consequences to us and our customers.

 

•   Our ability to develop and maintain secure and reliable electronicsystems.

 

•   Our ability to retain key executives and employees and the difficultythat we may experience in replacing key executives and employees in aneffective manner.

 

•   Consumer spending and saving habits which may change in a manner thataffects our business adversely.

 

•   Business combinations and the integration of acquired businesses whichmay be more difficult or expensive than expected.

 

•   The costs, effects and outcomes of existing or future litigation.

 

•   Changes in accounting policies and practices, as may be adopted bystate and federal regulatory agencies and the Financial Accounting StandardsBoard.

 

•   Our ability to manage the risks associated with the foregoing as wellas anticipated.

 

These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements. Additional information concerning us and our business, includingother factors that could materially affect our financial results, is includedin our filings with the Securities and Exchange Commission.

 

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**I****NDEPENDENT****A****UDITORS****’ R****EPORT**

 

The Board of Directors

Landmark Bancorp, Inc.:

 

We have audited the accompanying consolidated balance sheets ofLandmark Bancorp, Inc. and subsidiary (the Company) as of December 31, 2002,December 31, 2001, and September 30, 2001, and the related consolidatedstatements of operations, stockholders’ equity and comprehensive income, andcash flows for the year ended December 31, 2002, the three months endedDecember 31, 2001, and the year ended September 30, 2001, respectively. Theaccompanying consolidated statements of operations for the year ended September30, 2000 were audited by other auditors whose report, dated October 26, 2000,expressed an unqualified opinion thereon. These consolidated financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of the Companyas of December 31, 2002, December 31, 2001, and September 30, 2001, and the resultsof their operations and their cash flows for the year ended December 31, 2002,the three months ended December 31, 2001 and the year ended September 30, 2001,respectively, in conformity with accounting principles generally accepted inthe United States of America.

 

As discussed in note 2(e) to the consolidated financial statements,effective October 1, 2001, the Company adopted the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 141,*Business Combinations,*and certain provisions of SFAS No. 142, *Goodwill and Other Intangible Assets,*asrequired for goodwill and intangible assets resulting from businesscombinations consummated after June 30, 2001. The Company adopted the remainingprovisions of SFAS 142 on January 1, 2002.

 
|   | /s/ KPMG LLP          |   |
|--------|-----------------------|--------|
|   | Kansas City, Missouri |   |
|   | March 4, 2003         |   |

 

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**LANDMARKBANCORP, INC.****AND****SUBSIDIARY**

**C****ONSOLIDATED****B****ALANCE****S****HEETS**

 
|                                                                                                                                                    |   | **December  31,  2002** |        | **December  31,  2001** |        | **September  30,  2001** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|-------------------------|-------------|--------------------------|-------------|
| **Assets**                                                                                                                                              |   |                    |        |                    |        |                     |        |
| Cash and cash equivalents:                                                                                                                              |   |                    |        |                    |        |                     |        |
| Cash                                                                                                                                                    |   | $                       | 3,982,332   |                    | 2,947,512   |                     | 1,026,721   |   |
| Interest-bearing deposits  in other financial institutions                                                                                              |   | 7,466,352               |        | 19,215,746              |        | 18,974,128               |        |
| Total cash and cash  equivalents                                                                                                                        |   | 11,448,684              |        | 22,163,258              |        | 20,000,849               |        |
| Investment securities  available-for-sale                                                                                                               |   | 89,296,337              |        | 75,310,561              |        | 30,888,921               |        |
| Loans, net                                                                                                                                              |   | 224,061,263             |        | 235,324,457             |        | 141,987,020              |        |
| Loans held for sale                                                                                                                                     |   | 5,050,603               |        | 5,654,077               |        | 2,486,449                |        |
| Premises and equipment,  net of accumulated depreciation                                                                                                |   | 3,755,048               |        | 3,521,469               |        | 1,464,606                |        |
| Goodwill                                                                                                                                                |   | 1,971,178               |        | 2,108,801               |        | —                   |        |
| Accrued interest and other  assets                                                                                                                      |   | 5,731,067               |        | 5,616,935               |        | 3,427,540                |        |
| Total assets                                                                                                                                            |   | $                       | 341,314,180 |                    | 349,699,558 |                     | 200,255,385 |   |
|                                                                                                                                                    |   |                    |        |                    |        |                     |        |
| **Liabilities  and Stockholders’ Equity**                                                                                                          |   |                    |        |                    |        |                     |        |
| Liabilities:                                                                                                                                            |   |                    |        |                    |        |                     |        |
| Deposits:                                                                                                                                               |   |                    |        |                    |        |                     |        |
| Noninterest bearing demand                                                                                                                              |   | $                       | 23,443,639  |                    | 18,969,312  |                     | 8,040,520   |   |
| Money market and NOW                                                                                                                                    |   | 78,387,200              |        | 73,332,537              |        | 19,751,450               |        |
| Savings                                                                                                                                                 |   | 15,004,882              |        | 19,742,912              |        | 8,382,663                |        |
| Time, $100,000 and greater                                                                                                                              |   | 22,683,902              |        | 21,828,171              |        | 20,716,486               |        |
| Time, other                                                                                                                                             |   | 124,761,247             |        | 139,373,353             |        | 91,172,383               |        |
| Total deposits                                                                                                                                          |   | 264,280,870             |        | 273,246,285             |        | 148,063,502              |        |
| Federal Home Loan Bank  borrowings                                                                                                                      |   | 26,203,121              |        | 28,697,063              |        | 21,000,000               |        |
| Accrued interest and  expenses, taxes, and other liabilities                                                                                            |   | 9,756,414               |        | 7,551,457               |        | 5,092,495                |        |
| Total liabilities                                                                                                                                       |   | 300,240,405             |        | 309,494,805             |        | 174,155,997              |        |
|                                                                                                                                                    |   |                    |        |                    |        |                     |        |
| Stockholders’ equity:                                                                                                                              |   |                    |        |                    |        |                     |        |
| Common stock, $0.01 par,  $0.01 par and $0.10 par, respectively. Authorized 3,000,000 shares; issued  2,157,865, 2,082,681, and 2,281,312, respectively |   | 21,578                  |        | 20,827                  |        | 228,131                  |        |
| Additional paid-in capital                                                                                                                              |   | 18,269,582              |        | 17,075,297              |        | 22,368,048               |        |
| Retained earnings                                                                                                                                       |   | 24,295,211              |        | 23,073,530              |        | 25,880,695               |        |
| Treasury stock, at cost;  148,031, 2,306, and 1,179,374 shares, respectively                                                                            |   | (3,266,359              | )           | (43,940                 | )           | (22,622,838              | )           |
| Unearned employee benefits                                                                                                                              |   | (145,207                | )           | (344,099                | )           | (282,084                 | )           |
| Accumulated other  comprehensive income                                                                                                                 |   | 1,898,970               |        | 423,138                 |        | 527,436                  |        |
| Total stockholders’ equity                                                                                                                         |   | 41,073,775              |        | 40,204,753              |        | 26,099,388               |        |
|                                                                                                                                                    |   |                    |        |                    |        |                     |        |
| Commitments and  contingencies                                                                                                                          |   |                    |        |                    |        |                     |        |
| Total liabilities and  stockholders’ equity                                                                                                        |   | $                       | 341,314,180 |                    | 349,699,558 |                     | 200,255,385 |   |

 

See accompanying notes to consolidated financial statements.

 

20

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**LANDMARKBANCORP, INC.****AND****SUBSIDIARY**

 

**C****ONSOLIDATED****S****TATEMENTS OF****O****PERATIONS**

 
|                                                                            |   | **Year ended  December 31,** |       | **Three  months  ended December 31,** |      | **Years ended  September 30,** |      |
|---------------------------------------------------------------------------------|--------|------------------------------|------------|---------------------------------------|-----------|--------------------------------|-----------|
|                                                                            |   | **2002**                     |       | **2001**                              |      | **2000**                       |      | **2001** |   | **2000** |   |
|                                                                            |   | **(Unaudited)**              | ** ** |
| Interest income:                                                                |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Loans                                                                           |   | $                            | 16,649,738 |                                  | 4,628,776 |                           | 3,749,080 |   | 13,591,077 |   | 14,782,605 |   |
| Investment securities                                                           |   | 2,809,559                    |       | 532,745                               |      | 696,053                        |      | 2,630,289 |   | 3,283,504 |   |
| Other                                                                           |   | 102,229                      |       | 62,582                                |      | 39,503                         |      | 216,817 |   | 164,499 |   |
| Total interest income                                                           |   | 19,561,526                   |       | 5,224,103                             |      | 4,484,636                      |      | 16,438,183 |   | 18,230,608 |   |
| Interest expense:                                                               |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Deposits                                                                        |   | 5,773,331                    |       | 2,130,349                             |      | 2,116,260                      |      | 7,781,296 |   | 7,340,453 |   |
| Other borrowings                                                                |   | 1,337,868                    |       | 344,829                               |      | 761,845                        |      | 2,127,900 |   | 3,888,907 |   |
| Total interest expense                                                          |   | 7,111,199                    |       | 2,475,178                             |      | 2,878,105                      |      | 9,909,196 |   | 11,229,360 |   |
| Net interest income                                                             |   | 12,450,327                   |       | 2,748,925                             |      | 1,606,531                      |      | 6,528,987 |   | 7,001,248 |   |
| Provision for loan losses                                                       |   | 181,500                      |       | 32,500                                |      | 45,000                         |      | 120,000 |   | 266,970 |   |
| Net interest income after  provision for loan losses                            |   | 12,268,827                   |       | 2,716,425                             |      | 1,561,531                      |      | 6,408,987 |   | 6,734,278 |   |
| Noninterest income:                                                             |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Fees and service charges                                                        |   | 2,126,059                    |       | 425,599                               |      | 131,519                        |      | 437,312 |   | 455,021 |   |
| Gains on sales of loans                                                         |   | 1,365,691                    |       | 538,510                               |      | 318,730                        |      | 763,470 |   | 180,979 |   |
| Gains (losses) on sales of  investment securities, net                          |   | 124,333                      |       | (601                                  | )         | 66,867                         |      | 997,859 |   | 50,768 |   |
| Other                                                                           |   | 239,933                      |       | 48,212                                |      | 26,615                         |      | 154,035 |   | 290,712 |   |
| Total noninterest income                                                        |   | 3,856,016                    |       | 1,011,720                             |      | 543,731                        |      | 2,352,676 |   | 977,480 |   |
| Noninterest expense:                                                            |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Compensation and benefits                                                       |   | 4,849,011                    |       | 1,099,979                             |      | 627,247                        |      | 2,674,664 |   | 2,338,671 |   |
| Severance and other costs  related to merger with MNB                           |   | —                       |       | 2,704,826                             |      | —                         |      | — |   | — |   |
| Occupancy and equipment                                                         |   | 1,198,710                    |       | 268,443                               |      | 149,229                        |      | 546,576 |   | 560,047 |   |
| Amortization                                                                    |   | 388,568                      |       | 113,556                               |      | 29,775                         |      | 181,262 |   | 89,036 |   |
| Professional fees                                                               |   | 281,949                      |       | 49,753                                |      | 23,981                         |      | 76,100 |   | 107,438 |   |
| Data processing                                                                 |   | 347,900                      |       | 70,193                                |      | 32,008                         |      | 145,289 |   | 164,622 |   |
| Other                                                                           |   | 2,118,053                    |       | 489,625                               |      | 152,405                        |      | 652,631 |   | 796,632 |   |
| Total noninterest expense                                                       |   | 9,184,191                    |       | 4,796,375                             |      | 1,014,645                      |      | 4,276,522 |   | 4,056,446 |   |
| Earnings (loss) before  income taxes                                            |   | 6,940,652                    |       | (1,068,230                            | )         | 1,090,617                      |      | 4,485,141 |   | 3,655,312 |   |
| Income tax expense  (benefit)                                                   |   | 2,362,739                    |       | (430,438                              | )         | 410,144                        |      | 1,780,394 |   | 1,271,947 |   |
| Net earnings (loss) before  cumulative effect of change in accounting principle |   | 4,577,913                    |       | (637,792                              | )         | 680,473                        |      | 2,704,747 |   | 2,383,365 |   |
| Cumulative effect of change  in accounting principle, net of tax of $125,144    |   | —                       |       | —                                |      | (214,553                       | )         | (214,553 | ) | — |   |
| Net earnings (loss)                                                             |   | $                            | 4,577,913  |                                  | (637,792  | )                              | 465,920   |   | 2,490,194 |   | 2,383,365 |   |
| Earnings (loss) per share:                                                      |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Basic:                                                                          |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Earnings (loss) before  cumulative effect of change in accounting principle     |   | $                            | 2.20       |                                  | (0.31     | )                              | 0.58      |   | 2.31 |   | 1.99 |   |
| Cumulative effect of change  in accounting principle, net of tax                |   | —                       |       | —                                |      | (0.18                          | )         | (0.18 | ) | — |   |
|                                                                            |   | $                            | 2.20       |                                  | (0.31     | )                              | 0.40      |   | 2.13 |   | 1.99 |   |
| Diluted:                                                                        |   |                         |       |                                  |      |                           |      |   |   |   |   |
| Earnings (loss) before  cumulative effect of change in accounting principle     |   | $                            | 2.14       |                                  | (0.31     | )                              | 0.54      |   | 2.15 |   | 1.85 |   |
| Cumulative effect of change  in accounting principle, net of tax                |   | —                       |       | —                                |      | (0.17                          | )         | (0.17 | ) | — |   |
|                                                                            |   | $                            | 2.14       |                                  | (0.31     | )                              | 0.37      |   | 1.98 |   | 1.85 |   |

 

See accompanying notes to consolidated financial statements.

 

21

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**L****ANDMARK****B****ANCORP****, I****NC****.****AND****S****UBSIDIARY**

 

**CONSOLIDATED****STATEMENTSOF****STOCKHOLDERS****’ EQUITY AND****COMPREHENSIVE****INCOME**

**Y****EAR E****NDED D****ECEMBER 31, 2002, T****HREE M****ONTHS E****NDED D****ECEMBER 31, 2001,**

**AND Y****EARS E****NDED S****EPTEMBER 30, 2001,****AND 2000**

 
|                                                                                                                 |   | **Common  stock** |    | **Additional  paid-in  capital** |       | **Retained  earnings** |       | **Treasury  stock** |        | **Unearned  employee  benefits** |     | **Accumulated  other  comprehensive  income  (loss)** |      | **Total**  |       |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|----------------------------------|------------|------------------------|------------|---------------------|-------------|----------------------------------|----------|-------------------------------------------------------|-----------|------------|------------|
| Balance at September 30,  1999                                                                                       |   | $                 | 228,131 |                             | 22,706,378 |                   | 22,290,140 |                | (22,144,168 | )                                | (555,841 | )                                                     | (120,493  | )          | 22,404,147 |   |
| Comprehensive income:                                                                                                |   |              |    |                             |       |                   |       |                |        |                             |     |                                                  |      |       |       |
| Net earnings                                                                                                         |   | —            |    | —                           |       | 2,383,365              |       | —              |        | —                           |     | —                                                |      | 2,383,365  |       |
| Change in fair value of  investment securities available-for-sale, net of tax                                        |   | —            |    | —                           |       | —                 |       | —              |        | —                           |     | 9,899                                                 |      | 9,899      |       |
| Total comprehensive income                                                                                           |   | —            |    | —                           |       | 2,383,365              |       | —              |        | —                           |     | 9,899                                                 |      | 2,393,264  |       |
| Dividends paid ($0.57 per  share)                                                                                    |   | —            |    | —                           |       | (650,889               | )          | —              |        | —                           |     | —                                                |      | (650,889   | )          |
| Amortization of unearned  employee benefits                                                                          |   | —            |    | 59,134                           |       | —                 |       | —              |        | 136,878                          |     | —                                                |      | 196,012    |       |
| Exercise of stock options,  42,803 shares                                                                            |   | —            |    | (290,304                         | )          | —                 |       | 692,308             |        | —                           |     | —                                                |      | 402,004    |       |
| Purchase of 60,148 treasury  shares                                                                                  |   | —            |    | —                           |       | —                 |       | (1,082,534          | )           | —                           |     | —                                                |      | (1,082,534 | )          |
| Balance at September 30,  2000                                                                                       |   | 228,131           |    | 22,475,208                       |       | 24,022,616             |       | (22,534,394         | )           | (418,963                         | )        | (110,594                                              | )         | 23,662,004 |       |
| Comprehensive income:                                                                                                |   |              |    |                             |       |                   |       |                |        |                             |     |                                                  |      |       |       |
| Net earnings                                                                                                         |   | —            |    | —                           |       | 2,490,194              |       | —              |        | —                           |     | —                                                |      | 2,490,194  |       |
| Change in fair value of  investment securities available-for-sale, net of tax                                        |   | —            |    | —                           |       | —                 |       | —              |        | —                           |     | 638,030                                               |      | 638,030    |       |
| Total comprehensive income                                                                                           |   | —            |    | —                           |       | 2,490,194              |       | —              |        | —                           |     | 638,030                                               |      | 3,128,224  |       |
| Dividends paid ($0.54 per  share)                                                                                    |   | —            |    | —                           |       | (632,115               | )          | —              |        | —                           |     | —                                                |      | (632,115   | )          |
| Amortization of unearned  employee benefits                                                                          |   | —            |    | 76,900                           |       | —                 |       | —              |        | 136,879                          |     | —                                                |      | 213,779    |       |
| Exercise of stock options,  20,039 shares                                                                            |   | —            |    | (184,060                         | )          | —                 |       | 384,453             |        | —                           |     | —                                                |      | 200,393    |       |
| Purchase of 25,475 treasury  shares                                                                                  |   | —            |    | —                           |       | —                 |       | (472,897            | )           | —                           |     | —                                                |      | (472,897   | )          |
| Balance at September 30,  2001                                                                                       |   | 228,131           |    | 22,368,048                       |       | 25,880,695             |       | (22,622,838         | )           | (282,084                         | )        | 527,436                                               |      | 26,099,388 |       |
| Comprehensive loss:                                                                                                  |   |              |    |                             |       |                   |       |                |        |                             |     |                                                  |      |       |       |
| Net loss                                                                                                             |   | —            |    | —                           |       | (637,792               | )          | —              |        | —                           |     | —                                                |      | (637,792   | )          |
| Change in fair value of  investment securities available-for-sale, net of tax                                        |   | —            |    | —                           |       | —                 |       | —              |        | —                           |     | (104,298                                              | )         | (104,298   | )          |
| Total comprehensive loss                                                                                             |   | —            |    | —                           |       | (637,792               | )          | —              |        | —                           |     | (104,298                                              | )         | (742,090   | )          |
| Retirement of 1,177,374  treasury shares and change in par value to $0.01 in connection with the  merger of MNB      |   | (217,112          | )       | (22,367,346                      | )          | —                 |       | 22,584,458          |        | —                           |     | —                                                |      | —     |       |
| Issuance of 817,806 shares  in connection with the acquisition of MNB, net of cost of issuance  aggregating $892,000 |   | 8,178             |    | 14,527,089                       |       | —                 |       | —              |        | (103,950                         | )        | —                                                |      | 14,431,317 |       |
| Dividends paid ($0.14 per  share)                                                                                    |   | —            |    | —                           |       | (298,884               | )          | —              |        | —                           |     | —                                                |      | (298,884   | )          |
| Amortization of unearned  employee benefits                                                                          |   | —            |    | 3,794                            |       | —                 |       | —              |        | 41,935                           |     | —                                                |      | 45,729     |       |
| Exercise of stock options,  63,917 shares including tax benefit of $19,607                                           |   | 639               |    | 674,214                          |       | —                 |       | 38,380              |        | —                           |     | —                                                |      | 713,233    |       |
| Purchase of 2,306 treasury  shares                                                                                   |   | —            |    | —                           |       | —                 |       | (43,940             | )           | —                           |     | —                                                |      | (43,940    | )          |
| 5% stock dividend, 99,020  shares                                                                                    |   | 991               |    | 1,869,498                        |       | (1,870,489             | )          | —              |        | —                           |     | —                                                |      | —     |       |
| Balance at December 31,  2001                                                                                        |   | 20,827            |    | 17,075,297                       |       | 23,073,530             |       | (43,940             | )           | (344,099                         | )        | 423,138                                               |      | 40,204,753 |       |
| Comprehensive income  (loss):                                                                                        |   |              |    |                             |       |                   |       |                |        |                             |     |                                                  |      |       |       |
| Net income                                                                                                           |   | —            |    | —                           |       | 4,577,913              |       | —              |        | —                           |     | —                                                |      | 4,577,913  |       |
| Change in fair value of  investment securities available-for-sale, net of tax                                        |   | —            |    | —                           |       | —                 |       | —              |        | —                           |     | 1,475,832                                             |      | 1,475,832  |       |
| Total comprehensive income                                                                                           |   | —            |    | —                           |       | 4,577,913              |       | —              |        | —                           |     | 1,475,832                                             |      | 6,053,745  |       |
| Dividends paid ($.58 per  share)                                                                                     |   | —            |    | —                           |       | (1,239,819             | )          | —              |        | —                           |     | —                                                |      | (1,239,819 | )          |
| Amortization of unearned  employee benefits                                                                          |   | —            |    | 151,104                          |       | —                 |       | —              |        | 198,892                          |     | —                                                |      | 349,996    |       |
| Exercise of stock options,  75,184 shares, including tax benefit of $313,383                                         |   | 751               |    | 1,045,564                        |       | —                 |       | —              |        | —                           |     | —                                                |      | 1,046,315  |       |
| Issuance of 2,625 stock  options                                                                                     |   | —            |    | 4,307                            |       | —                 |       | —              |        | —                           |     | —                                                |      | 4,307      |       |
| Purchase of 242,409  treasury shares                                                                                 |   | —            |    | —                           |       | —                 |       | (5,345,522          | )           | —                           |     | —                                                |      | (5,345,522 | )          |
| 5% stock dividend, 96,684  shares                                                                                    |   | —            |    | (6,690                           | )          | (2,116,413             | )          | 2,123,103           |        | —                           |     | —                                                |      | —     |       |
| Balance at December 31,  2002                                                                                        |   | $                 | 21,578  |                             | 18,269,582 |                   | 24,295,211 |                | (3,266,359  | )                                | (145,207 | )                                                     | 1,898,970 |       | 41,073,775 |   |

 

See accompanying notes to consolidated financial statements.

 

22

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

 

**CONSOLIDATED****STATEMENTSOF****CASH****FLOWS**

 
|                                                                                                 |   | **Year ended  December 31,** |       | **Three  months  ended December 31,** |       | **Years ended  September 30,** |      |
|------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|---------------------------------------|------------|--------------------------------|-----------|
|                                                                                                 |   | **2002**                     |       | **2001**                              |       | **2000**                       |      | **2001** |   | **2000** |   |
|                                                                                                 |   | **(Unaudited)**              |       |
| Cash flows from operating  activities:                                                               |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Net earnings (loss)                                                                                  |   | $                            | 4,577,913  |                                  | (637,792   | )                              | 465,920   |   | 2,490,194 |   | 2,383,365 |   |
| Adjustments to reconcile  net earnings (loss) to net cash provided by operating activities:          |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Cumulative effect of change  in accounting principle                                                 |   | —                       |       | —                                |       | 339,697                        |      | 339,697 |   | — |   |
| Provision for loan losses                                                                            |   | 181,500                      |       | 32,500                                |       | 45,000                         |      | 120,000 |   | 266,970 |   |
| Amortization of intangibles                                                                          |   | 388,568                      |       | 113,556                               |       | 29,775                         |      | 181,262 |   | 89,036 |   |
| Depreciation                                                                                         |   | 462,458                      |       | 116,113                               |       | 54,945                         |      | 209,064 |   | 231,345 |   |
| Issuance of stock options                                                                            |   | 4,307                        |       | —                                |       | —                         |      | — |   | — |   |
| Deferred income taxes                                                                                |   | 83,674                       |       | (666,196                              | )          | —                         |      | (185,375 | ) | (127,684 | ) |
| Net (gains) losses on sales  of investment securities, premises and equipment, and foreclosed assets |   | (120,364                     | )          | 16,070                                |       | (66,867                        | )         | (918,424 | ) | (50,768 | ) |
| Net gain on sales of loans                                                                           |   | (1,365,691                   | )          | (538,510                              | )          | (318,730                       | )         | (763,470 | ) | (180,979 | ) |
| Proceeds from sale of loans                                                                          |   | 71,045,396                   |       | 22,811,389                            |       | 16,148,425                     |      | 35,713,523 |   | 8,939,705 |   |
| Origination of loans held  for sale                                                                  |   | (69,076,231                  | )          | (24,749,172                           | )          | (7,346,658                     | )         | (28,558,331 | ) | (9,787,423 | ) |
| Purchase of loans held for  sale                                                                     |   | —                       |       | —                                |       | —                         |      | (36,000 | ) | — |   |
| Changes in assets and  liabilities:                                                                  |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Accrued interest and other  assets                                                                   |   | 1,313,318                    |       | 998,319                               |       | 309,561                        |      | 475,687 |   | 20,794 |   |
| Accrued expenses, taxes,  and other liabilities                                                      |   | 1,617,213                    |       | 721,692                               |       | 198,251                        |      | 789,833 |   | (117,679 | ) |
| Net cash provided by (used  in) operating activities                                                 |   | 9,112,061                    |       | (1,782,031                            | )          | 9,859,319                      |      | 9,857,660 |   | 1,666,682 |   |
| Cash flows from investing  activities:                                                               |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Net increase (decrease) in  loans                                                                    |   | 10,445,920                   |       | 8,367,115                             |       | 2,881,405                      |      | 22,342,678 |   | (13,163,886 | ) |
| Maturities and prepayments  of investment securities held-to-maturity                                |   | —                       |       | —                                |       | —                         |      | — |   | 3,571,577 |   |
| Maturities and prepayments  of investment securities available-for-sale                              |   | 27,067,374                   |       | 15,829,860                            |       | 829,467                        |      | 5,725,216 |   | — |   |
| Net cash received from  merger of MNB                                                                |   | —                       |       | 5,987,107                             |       | —                         |      | — |   | — |   |
| Purchases of investment  securities available-for-sale                                               |   | (40,587,495                  | )          | (21,375,571                           | )          | (10,000                        | )         | (10,000 | ) | (825,000 | ) |
| Proceeds from sale of  investment securities                                                         |   | 437,604                      |       | 61,815                                |       | 9,843,691                      |      | 31,485,856 |   | 3,493,977 |   |
| Proceeds from sales of  premises and equipment and foreclosed assets                                 |   | 569,330                      |       | 109,284                               |       | 181,989                        |      | 335,209 |   | 281,826 |   |
| Purchases of premises and  equipment, net                                                            |   | (759,993                     | )          | (34,716                               | )          | —                         |      | (38,500 | ) | (106,745 | ) |
| Other investing activity,  net                                                                       |   | (992                         | )          | 15,229                                |       | 6,967                          |      | (40,652 | ) | (6,574 | ) |
| Net cash (used in) provided  by investing activities                                                 |   | (2,828,252                   | )          | 8,960,123                             |       | 13,733,519                     |      | 59,799,807 |   | (6,754,825 | ) |
| Cash flows from financing  activities:                                                               |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Net (decrease) increase in  deposits                                                                 |   | (8,965,415                   | )          | (5,826,283                            | )          | (11,316,446                    | )         | (17,841,970 | ) | 6,582,388 |   |
| Federal Home Loan Bank  borrowings                                                                   |   | 34,055,000                   |       | 1,750,000                             |       | 122,000,000                    |      | 209,000,000 |   | 405,500,000 |   |
| Federal Home Loan Bank  repayments                                                                   |   | (36,548,942                  | )          | (789,809                              | )          | (133,000,000                   | )         | (245,000,000 | ) | (406,500,000 | ) |
| Repayments on note payable                                                                           |   | —                       |       | (520,000                              | )          | —                         |      | — |   | — |   |
| Proceeds from issuance of  common stock under stock option plan                                      |   | 1,046,315                    |       | 713,233                               |       | —                         |      | 200,393 |   | 359,580 |   |
| Payment of dividends                                                                                 |   | (1,239,819                   | )          | (298,884                              | )          | (159,072                       | )         | (632,115 | ) | (650,889 | ) |
| Purchase of treasury stock                                                                           |   | (5,345,522                   | )          | (43,940                               | )          | (270,654                       | )         | (472,897 | ) | (1,082,534 | ) |
| Other financing activities,  net                                                                     |   | —                       |       | —                                |       | —                         |      | — |   | (6,161 | ) |
| Net cash (used in) provided  by financing activities                                                 |   | (16,998,383                  | )          | (5,015,683                            | )          | (22,746,172                    | )         | (54,746,589 | ) | 4,202,384 |   |
| Net (decrease) increase in  cash and cash equivalents                                                |   | (10,714,574                  | )          | 2,162,409                             |       | 846,666                        |      | 14,910,878 |   | (885,759 | ) |
| Cash and cash equivalents  at beginning of period                                                    |   | 22,163,258                   |       | 20,000,849                            |       | 5,089,971                      |      | 5,089,971 |   | 5,975,730 |   |
| Cash and cash equivalents  at end of period                                                          |   | $                            | 11,448,684 |                                  | 22,163,258 |                           | 5,936,637 |   | 20,000,849 |   | 5,089,971 |   |
| Supplemental disclosure of  cash flow information:                                                   |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Cash paid during the period  for income taxes                                                        |   | $                            | 1,403,000  |                                  | —     |                           | 182,000   |   | 1,572,000 |   | 1,296,000 |   |
| Cash paid during the period  for interest                                                            |   | 7,195,000                    |       | 2,375,000                             |       | 3,028,000                      |      | 9,759,000 |   | 11,409,000 |   |
| Supplemental schedule of  noncash investing and financing activities:                                |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Transfer of loans to real  estate owned                                                              |   | $                            | 717,000    |                                  | —     |                           | 325,000   |   | 871,000 |   | 601,000 |   |
| Loans to facilitate sale of  foreclosed assets                                                       |   | —                       |       | —                                |       | —                         |      | — |   | 116,000 |   |
| Bank merger:                                                                                         |   |                         |       |                                  |       |                           |      |   |   |   |   |
| Fair value of liabilities  assumed                                                                   |   | —                       |       | 140,781,000                           |       | —                         |      | — |   | — |   |
| Fair value of assets  acquired                                                                       |   | —                       |       | 149,225,000                           |       | —                         |      | — |   | — |   |
| Net transfer of loans held  for investment to held for sale                                          |   | —                       |       | —                                |       | —                         |      | — |   | 7,221,000 |   |
| Loans securitized and  transferred to investment securities                                          |   | —                       |       | —                                |       | —                         |      | 17,786,000 |   | — |   |

 

See accompanying notes to consolidated financial statements.

 

23

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**LANDMARK BANCORP, INC.****AND****SUBSIDIARY**

 

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

**DECEMBER****31, 2002, AND****2001, AND****SEPTEMBER****30, 2001, AND****2000**

 

**(1)****M****ERGER OF****L****ANDMARK****B****ANCSHARES AND****MNB B****ANCSHARES**

 

On October 9, 2001, LandmarkBancshares, Inc. (LBI) and MNB Bancshares, Inc. (MNB) completed a merger ofequals. Concurrent with the merger, Landmark National Bank and SecurityNational Bank (wholly owned subsidiaries of LBI and MNB) merged. In connectionwith the merger, Landmark Bancorp, Inc. (the Company) was formed, and 1,103,938shares were issued to the former LBI stockholders and 817,806 shares wereissued to the former MNB stockholders. The merger was accounted for as anacquisition of MNB by LBI, using the purchase method of accounting. Totalconsideration paid, consisting primarily of the fair value of the 817,806shares issued to the former MNB stockholders, aggregated $15.3 million. Thevalue of the 817,806 shares issued was based on the average closing price ofthe LBI common stock for the five days prior to and following the announcementof the signing of the merger agreement. The cost in excess of the tangible andidentifiable intangible net assets acquired has been recorded as goodwill. TheCompany recorded a core deposit intangible asset of $780,000 and goodwillattributable to the merger with MNB of $2.1 million, which is included inaccrued interest and other assets in the accompanying consolidated balancesheet.

 

The former LBI utilized aSeptember 30 fiscal year while the Company has a December 31 year. Theaccompanying consolidated financial statements as of and for the three monthsended December 31, 2001, include the accounts of the Company and, commencingOctober 9, 2001, MNB, which are presented as a transition period. Theconsolidated financial statements for periods prior to October 1, 2001, areLBI’s historical financial statements. Pro forma information, as if the mergerwas consummated October 1, 1999, and excluding the severance and other costsrelated to the merger, is as follows:

 
|                                                                         |     | **Years  ended September 30,** |       |
|------------------------------------------------------------------------------|----------|--------------------------------|------------|
|                                                                         | **2001** |                           | **2000**   |   |
| Revenue                                                                      |     | $                              | 29,936,000 |   | $ | 29,801,000 |   |
| Net earnings before  cumulative effect of the change in accounting principle |     | $                              | 3,881,000  |   | $ | 3,294,000 |   |
| Net earnings                                                                 |     | $                              | 3,666,000  |   | $ | 3,294,000 |   |
| Diluted earnings per share                                                   |     | $                              | 1.69       |   | $ | 1.50 |   |

 

In conjunction with themerger, the Company incurred severance and other merger-related costs of $2.7million, which were charged to operating expenses in the three-month periodended December 31, 2001. Included in accrued expenses are undisbursed amountsrelating to such costs aggregating $30,000 and $479,000 at December 31, 2002,and 2001, respectively.

 

**(2)****S****UMMARY OF****S****IGNIFICANT****A****CCOUNTING****P****OLICIES**

 

***(a) Principles of Consolidation***

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary, Landmark National Bank (the Bank). Intercompanybalances and transactions have been eliminated in consolidation. The Bank isprincipally engaged in the business of attracting deposits from the generalpublic and using such deposits, together with borrowings and other funds, tooriginate commercial and consumer loans, multifamily residential mortgageloans, and one-to-four family residential mortgage loans.

 

***(b) Investment Securities***

 

The Company classifies itsinvestment securities portfolio as held-to-maturity, which are recorded atamortized cost; available-for-sale, which are recorded at fair value withunrealized gains and losses excluded from earnings and reported in a separatecomponent of stockholders’ equity until realized; or trading securities, whichare held principally for resale and reported at fair value, with unrealizedchanges in value reported in the Bank’s income statement as part of earnings.

 

24

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Gains and losses on the saleof available-for-sale securities are determined using the specific identificationmethod. Purchased premiums and discounts on investment securities areamortized/accreted into interest income using the yield-to-maturity methodbased upon the contractual maturity of the asset, adjusted for any unexpectedprepayments. Declines in the fair value of individual securities below theircost that are other than temporary result in write-downs of individualsecurities to their fair value. The related write-downs are included inearnings as realized losses.

 

Effective October 1, 2000,the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,*Accountingfor Derivative Instruments and Hedging Activities*. In connection with the adoption, certaininvestments were reclassified from held-to-maturity to available-for-sale andtrading (see note 3). Premiums and discounts are amortized over the estimatedlives of the securities using a method which approximates the interest method.Gains and losses on sales are calculated using the specific identificationmethod.

 

During the year endedSeptember 30, 2001, certain securities previously classified asavailable-for-sale suffered declines in value which management believed wereother than temporary. Accordingly, the unrealized loss on those securities,aggregating $94,957, was recorded as a part of the gain on sale of investmentsecurities, net, for the year ended September 30, 2001.

 

***(c) Loans and Related Earnings***

 

Loans receivable thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding principal balances,net of undisbursed loan proceeds, the allowance for loan losses, and anydeferred fees or costs on originated loans.

 

Mortgage loans originatedand intended for sale in the secondary market are carried at the lower of costor estimated fair value. Net unrealized losses are recognized through avaluation allowance by charges to income. Origination fees received on suchloans are deferred and recognized in income as part of the gain or loss onsale. Origination fees received on other loans in excess of amountsrepresenting the estimated costs of origination are deferred and credited tointerest income using the interest method.

 

The allowance for loanlosses is increased by charges to income and decreased by charge-offs (net ofrecoveries). Management’s periodic evaluation of the adequacy of the allowanceis based on the Bank’s past loan loss experience, known and inherent risks inthe portfolio, adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral, the current level ofnonperforming assets, and current economic conditions. This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

A loan is consideredimpaired when, based on current information and events, it is probable that theBank will be unable to collect the scheduled payments of principal or interestwhen due according to the contractual terms of the loan agreement. Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments when due. Loans that experience insignificant payment delaysand payment shortfalls generally are not classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed. Impairment ismeasured on a loan-by-loan basis for commercial and construction loans byeither the present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

 

Large groups of smallerbalance homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment disclosures. The accrual of interest onnonperforming loans is discontinued at the time the loan is ninety daysdelinquent, unless the credit is well-secured and in process of collection.Loans are placed on nonaccrual or charged off at an earlier date if collectionof principal or interest is considered doubtful.

 

All interest accrued but notcollected for loans that are placed on nonaccrual or charged off is reversedagainst interest income. The interest on these loans is accounted for on thecash-basis or cost-recovery method, until qualifying for return to accrual.Loans are returned to accrual status when all the principal and interestamounts contractually due are brought current and future payments arereasonably assured.

 

25

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***(d) Premises and Equipment***

 

Premises and equipment arestated at cost less accumulated depreciation. Depreciation is provided usingthe straight-line or accelerated methods over the estimated useful lives of theassets, ranging from three to fifty years. Major replacements and bettermentsare capitalized while maintenance and repairs are charged to expense whenincurred. Gains or losses on dispositions are reflected in operations asincurred.

 

***(e) Intangible Assets***

 

Effective October 1, 2001,the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 141, *BusinessCombinations*, and certain provisions of SFAS No. 142, *Goodwill and Other Intangible Assets*, asrequired for goodwill and intangible assets resulting from businesscombinations consummated after June 30, 2001. The remaining provisions of SFAS142 were adopted on January 1, 2002. The Company’s goodwill and core depositintangible resulted from the acquisition of MNB by LBI on October 9, 2001.Pursuant to certain provisions in SFAS No. 142, goodwill resulting from themerger with MNB is not amortized; however, it is tested for impairment on aperiodic basis. The core deposit intangible is being amortized over ten yearson an accelerated basis. Core deposit amortization expense was $138,000 for theyear ended December 31, 2002, and $35,000 for the three months ended December31, 2001.

 

Mortgage servicing assetsare recognized as separate assets when rights are acquired through the sale offinancial assets. Capitalized servicing rights are reported in other assets andare amortized into non-interest expense in proportion to, and over the periodof, the estimated future net servicing income of the underlying financialassets. Servicing assets are evaluated for impairment based upon the fair valueof the rights as compared to amortized cost.

 

***(f) Income Taxes***

 

Deferred tax assets andliabilities are recorded for the future tax consequences attributable todifferences between the consolidated financial statement carrying amounts ofexisting assets and liabilities and their respective income tax bases. Deferredtax assets and liabilities are measured using enacted tax rates applied totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilities,of a change in tax rates, is recognized in income in the period that includesthe enactment date.

 

***(g) Use of Estimates***

 

Management of the Companyhas made a number of estimates and assumptions relating to the reporting ofassets and liabilities and the disclosure of contingent assets and liabilitiesto prepare these consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America.Actual results could differ from those estimates.

 

***(h) Comprehensive Income***

 

The Company’s only componentof other comprehensive income (loss) is the unrealized holding gains and losseson available-for-sale securities as shown below:

 
|                                                                        |   | **Year ended  December 31, 2002** |      | **Three  months ended  December 31, 2001** |     | **Years ended September 30,** |      |
|-----------------------------------------------------------------------------|--------|-----------------------------------|-----------|--------------------------------------------|----------|-------------------------------|-----------|
| **2001**                                                                    |   | **2000**                          |
| Unrealized holding gains  (losses)                                          |   | $                                 | 2,504,707 |                                       | (171,888 | )                             | 3,170,655 |   | 68,528 |   |
| Less cumulative effect of  a change in accounting principle (see note 3)    |   | —                            |      | —                                     |     | 1,139,745                     |      | — |   |
| Less reclassification  adjustment for gains (losses) included in net income |   | 124,333                           |      | (601                                       | )        | 997,859                       |      | 50,768 |   |
| Net unrealized gains  (losses) on securities                                |   | 2,380,374                         |      | (171,287                                   | )        | 1,033,051                     |      | 17,760 |   |
| Income tax expense  (benefit)                                               |   | 904,542                           |      | (66,989                                    | )        | 395,021                       |      | 7,861 |   |
| Other comprehensive income  (loss)                                          |   | $                                 | 1,475,832 |                                       | (104,298 | )                             | 638,030   |   | 9,899 |   |

 

26

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***(i) Foreclosed assets***

 

Assets acquired through, orin lieu of, foreclosure are to be sold and are initially recorded at the dateof foreclosure establishing a new cost basis. Subsequent to foreclosure,management periodically performs valuations, and an allowance for losses isestablished by a charge to operations if the carrying value of a propertyexceeds the fair value less estimated costs to sell. Revenue and expenses fromoperations and changes in the valuation allowance are included in net expensesfrom foreclosed assets.

 

***(j) Stock Based Compensation***

 

The Company has stock-basedemployee compensation plans, which are described more fully in Note 10. TheCompany utilizes the fair value recognition provisions of SFAS Statement No.123, *Accounting for Stock-Based Compensation*.SFAS 123 establishes a fair-value method of accounting for employee stockoptions or similar equity instruments. The fair value of stock-based awards toemployees is calculated through the use of option pricing models, even thoughsuch models were developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which significantly differfrom the Company’s stock option awards. These models also require subjectiveassumptions, including future stock price volatility and expected time toexercise, which greatly affect the calculated values. The Company uses theBlack-Scholes option pricing model to estimate the grant date fair value of itsstock options. The fair value is recognized as additional compensation expenseover the option vesting period, which is typically five years.

 

***(k) Earnings Per Share***

 

Basic earnings (loss) pershare represents net earnings divided by the weighted average number of commonshares outstanding during the year. Diluted earnings (loss) per share reflectsadditional common shares that would have been outstanding if dilutive potentialcommon shares had been issued, as well as any adjustment to income that wouldresult from the assumed issuance. Potential common shares that may be issued bythe Company relate solely to outstanding stock options and are determined usingthe treasury stock method. Earnings per share for all periods presented hasbeen adjusted to give effect to the 5% stock dividends paid by the Company inDecember 2002 and 2001.

 

The shares used in thecalculation of basic and diluted earnings per share, which have been restatedfor the 5% stock dividends paid in December 2002 and 2001, are shown below:

 
|                                        |   | **Year ended  December 31,  2002** |   | **Three  months ended  December 31,  2001** |   | **Years ended September 30,** |   |
|---------------------------------------------|--------|------------------------------------|--------|---------------------------------------------|--------|-------------------------------|--------|
| **2001**                                    |   | **2000**                           |
| Weighted average common  shares outstanding |   | 2,083,991                          |   | 2,061,618                                   |   | 1,167,356                     |   | 1,197,897 |   |
| Stock options                               |   | 58,491                             |   | 76,736                                      |   | 92,888                        |   | 89,653 |   |
|                                        |   | 2,142,482                          |   | 2,138,354                                   |   | 1,260,244                     |   | 1,287,550 |   |

 

***(l) Reclassifications***

 

Certain reclassifications toprior year amounts have been made to conform with the current year presentation.

 

**(3)****I****NVESTMENT****S****ECURITIES****A****VAILABLE****-****FOR****-S****ALE**

 

A summary of investmentsecurities information is as follows:

 
|                                     |   | **December  31, 2002** |       |
|------------------------------------------|--------|------------------------|------------|
|                                     |   | **Amortized  cost**    |       | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
| U. S. government and agency  obligations |   | $                      | 12,020,551 |   | 635,249 |   | — |   | 12,655,800 |   |
| Municipal obligations                    |   | 12,569,039             |       | 609,880 |   | — |   | 13,178,919 |   |
| Mortgage-backed securities               |   | 56,832,802             |       | 1,274,622 |   | (284 | ) | 58,107,140 |   |
| Federal Home Loan Bank  stock            |   | 2,521,400              |       | — |   | — |   | 2,521,400 |   |
| Common stock                             |   | 932,997                |       | 548,367 |   | (6,579 | ) | 1,474,785 |   |
| Federal Reserve Bank stock               |   | 805,050                |       | — |   | — |   | 805,050 |   |
| Corporate bonds                          |   | 100,000                |       | 1,600 |   | — |   | 101,600 |   |
| Other investments                        |   | 451,643                |       | — |   | — |   | 451,643 |   |
| Total                                    |   | $                      | 86,233,482 |   | 3,069,718 |   | (6,863 | ) | 89,296,337 |   |

 

27

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|                                     |                | **December  31, 2001** |                         |
|------------------------------------------|---------------------|------------------------|------------------------------|
|                                     | **Amortized  cost** |                   | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
| U. S. government and  agency obligations |                | $                      | 12,620,348                   |   | 147,905 |   | — |   | 12,768,253 |   |
| Municipal obligations                    |                | 11,853,020             |                         | 105,844 |   | 11,103 |   | 11,947,761 |   |
| Mortgage-backed securities               |                | 44,645,121             |                         | 398,809 |   | 271,291 |   | 44,772,639 |   |
| Federal Home Loan Bank  stock            |                | 3,425,400              |                         | — |   | — |   | 3,425,400 |   |
| Common stock                             |                | 1,146,267              |                         | 332,874 |   | 24,457 |   | 1,454,684 |   |
| Federal Reserve Bank stock               |                | 287,700                |                         | — |   | — |   | 287,700 |   |
| Corporate bonds                          |                | 200,000                |                         | 3,900 |   | — |   | 203,900 |   |
| Other investments                        |                | 450,224                |                         | — |   | — |   | 450,224 |   |
| Total                                    |                | $                      | 74,628,080                   |   | 989,332 |   | 306,851 |   | 75,310,561 |   |

 
|                                     |                | **September 30, 2001** | ** **                   |
|------------------------------------------|---------------------|------------------------|------------------------------|
|                                     | **Amortized  cost** |                   | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| U. S. government and  agency obligations |                | $                      | 8,500,000                    |   | 7,630 |   | — |   | 8,507,630 |   |
| Municipal obligations                    |                | 985,000                |                         | 34,443 |   | — |   | 1,019,443 |   |
| Mortgage-backed securities               |                | 15,314,207             |                         | 589,690 |   | 11,754 |   | 15,892,143 |   |
| Federal Home Loan Bank  stock            |                | 3,597,500              |                         | — |   | — |   | 3,597,500 |   |
| Common stock                             |                | 1,208,682              |                         | 288,345 |   | 52,586 |   | 1,444,441 |   |
| Corporate bonds                          |                | 200,000                |                         | — |   | 2,000 |   | 198,000 |   |
| Other investments                        |                | 229,764                |                         | — |   | — |   | 229,764 |   |
| Total                                    |                | $                      | 30,035,153                   |   | 920,108 |   | 66,340 |   | 30,888,921 |   |

 

Included in investmentsecurities available-for-sale are restricted stock investments in the FederalHome Loan Bank (FHLB) and Federal Reserve Bank (FRB) that are required to bemaintained by the Company. The cost of such investments represents theirredemption value.

 

In June 1998, the FinancialAccounting Standards Board issued SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.This statement requires the recognition of all derivative financial instrumentsas either assets or liabilities in the statement of financial position andmeasurement of those instruments at fair value. The accounting for gains andlosses associated with changes in the fair value of a derivative and the effecton the consolidated financial statements will depend on its hedge designationand whether the hedge is highly effective in achieving offsetting changes inthe fair value or cash flows of the asset or liability hedged. The Company adoptedSFAS No. 133 on October 1, 2000. As permitted by SFAS No. 133, the Companytransferred all of its securities on that date from the held-to-maturityportfolio to the available-for-sale and trading portfolios as follows:

 
|                       |   | **Securities  transferred**  |      |
|----------------------------|--------|------------------------------|-----------|
|                       |   | **Trading  (at fair value)** |      | **Available  for-sale  (at fair value)** |   | **Total  (at fair value)** |   | **Total  (at book value)** |   |
| Investment securities      |   | $                            | 9,642,188 |   | 17,621,420 |   | 27,263,608 |   | 28,666,885 |   |
| Mortgage-backed securities |   | —                       |      | 10,035,853 |   | 10,035,853 |   | 10,112,018 |   |
| Total                      |   | $                            | 9,642,188 |   | 27,657,273 |   | 37,299,461 |   | 38,778,903 |   |

 

28

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Gross realized gains andlosses on sales of available-for-sale securities are as follows:

 
|            |   | **Year ended  December 31,  2002** |    | **Three  months ended  December 31,  2001** |   | **Years ended September 30,** |      |
|-----------------|--------|------------------------------------|---------|---------------------------------------------|--------|-------------------------------|-----------|
| **2001**        |   | **2000**                           |
| Realized gains  |   | $                                  | 124,333 |                                        | 2,036  |                          | 1,175,489 |   | 92,516 |   |
| Realized losses |   | —                             |    | (2,637                                      | )      | (177,630                      | )         | (41,748 | ) |
| Total           |   | $                                  | 124,333 |                                        | (601   | )                             | 997,859   |   | 50,768 |   |

 

All trading securities weresold during 2000. As of October 1, 2000, the effect of the transfer of thesesecurities was reported as a cumulative adjustment from a change in accountingprinciple, net of tax effect, impacting earnings, and other comprehensiveincome as follows:
|                       |   | **Adjustment  to earnings** |     | **Adjustment  to other  comprehensive  income** | ** ** | **Total  adjustments** | ** ** |
|----------------------------|--------|-----------------------------|----------|-------------------------------------------------|------------|------------------------|------------|
| Investment securities      |   | $                           | (339,697 | )                                               | (1,063,580 | )                      | (1,403,277 | ) |
| Mortgage-backed securities |   | —                      |     | (76,165                                         | )          | (76,165                | )          |
| Pretax loss                |   | (339,697                    | )        | (1,139,745                                      | )          | (1,479,442             | )          |
| Income tax benefit         |   | 125,144                     |     | 419,882                                         |       | 545,026                |       |
| Net loss                   |   | $                           | (214,553 | )                                               | (719,863   | )                      | (934,416   | ) |

 

Maturities of investmentsecurities at December 31, 2002, are as follows:

 
|                                                                                                      |   | **Amortized  cost** |       | **Estimated  fair value** | ** ** |
|-----------------------------------------------------------------------------------------------------------|--------|---------------------|------------|---------------------------|------------|
| Due in less than one year                                                                                 |   | $                   | 5,240,208  |                      | 5,304,673  |   |
| Due after one year but  within five years                                                                 |   | 16,342,432          |       | 17,413,372                |       |
| Due after five years                                                                                      |   | 3,006,950           |       | 3,116,674                 |       |
| Mortgage-backed  securities, FHLB stock, FRB stock, corporate bonds, common stock, and other  investments |   | 61,643,892          |       | 63,461,618                |       |
| Total                                                                                                     |   | $                   | 86,233,482 |                      | 89,296,337 |   |

 

Except for U. S. governmentand agency obligations, no investment in a single issuer exceeded 10% ofstockholders’ equity.

 

At December 31, 2002, and2001, and September 30, 2001, securities pledged to secure public funds on deposithad a carrying value of approximately $45 million, $40 million, and $17million, respectively.

 

**(4)****L****OANS**

 

Loans consist of thefollowing at:

 
|                                     |   | **December  31,  2002** |        | **December  31,  2001** | ** **  | **September  30,  2001** | ** **  |
|------------------------------------------|--------|-------------------------|-------------|-------------------------|-------------|--------------------------|-------------|
| Real estate loans:                       |   |                    |        |                    |        |                     |        |
| One-to-four family  residential          |   | $                       | 101,289,931 |                    | 129,524,836 |                     | 115,600,439 |   |
| Commercial                               |   | 62,207,236              |        | 48,817,639              |        | 10,084,314               |        |
| Construction                             |   | 8,969,481               |        | 10,798,633              |        | 3,247,777                |        |
| Commercial loans                         |   | 41,808,738              |        | 33,077,397              |        | 7,604,138                |        |
| Consumer loans                           |   | 12,809,571              |        | 15,979,107              |        | 6,926,143                |        |
| Total                                    |   | 227,084,957             |        | 238,197,612             |        | 143,462,811              |        |
| Less:                                    |   |                    |        |                    |        |                     |        |
| Deferred loan fees and  loans in process |   | 458,493                 |        | 232,867                 |        | 51,662                   |        |
| Allowance for loan losses                |   | 2,565,201               |        | 2,640,288               |        | 1,424,129                |        |
| Loans, net                               |   | $                       | 224,061,263 |                    | 235,324,457 |                     | 141,987,020 |   |

 

29

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The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet customers’ financing needs. These financial instruments consistprincipally of commitments to extend credit. The Company uses the same creditpolicies in making commitments and conditional obligations as it does foron-balance sheet instruments. The Company’s exposure to credit loss in theevent of nonperformance by the other party is represented by the contractualamount of those instruments. In the normal course of business, there arevarious commitments and contingent liabilities, such as guarantees, commitmentsto extend credit, letters of credit, and lines of credit, which are properlynot recorded in the accompanying consolidated financial statements. The Companygenerally requires collateral or other security on unfunded loan commitmentsand irrevocable letters of credit. Commitments to extend credit and lines ofcredit aggregated approximately $31.6 million, $33.4, million and $10.0 millionat December 31, 2002, and 2001, and September 30, 2001, respectively.

 

The Company is exposed tovarying risks associated with concentrations of credit relating primarily tolending activities in specific geographic areas. The Company’s principallending area consists of the cities of Manhattan, Auburn, Dodge City, GardenCity, Great Bend, Hoisington, LaCrosse, Osage City, Topeka, and Wamego, Kansasand the surrounding communities, and substantially all of the Company’s loansare to residents of or secured by properties located in its principal lendingarea. Accordingly, the ultimate collectibility of the Company’s loan portfoliois dependent in part upon market conditions in those areas. These geographicconcentrations are considered in management’s establishment of the allowancefor loan losses.

 

A summary of the activity inthe allowance for loan losses is as follows:

 
|                            |   | **Year ended  December 31,  2002** |      | **Three  months ended  December 31,  2001** |      | **Years ended September 30,** |      |
|---------------------------------|--------|------------------------------------|-----------|---------------------------------------------|-----------|-------------------------------|-----------|
| **2001**                        |   | **2000**                           |
| Balance at beginning of  period |   | $                                  | 2,640,288 |                                        | 1,424,129 |                          | 1,376,707 |   | 1,317,676 |   |
| Allowance of merged bank        |   | —                             |      | 1,238,213                                   |      | —                        |      | — |   |
| Provision for loan losses       |   | 181,500                            |      | 32,500                                      |      | 120,000                       |      | 266,970 |   |
| Charge-offs                     |   | (318,557                           | )         | (63,563                                     | )         | (159,804                      | )         | (352,390 | ) |
| Recoveries                      |   | 61,970                             |      | 9,009                                       |      | 87,226                        |      | 144,451 |   |
| Balance at end of period        |   | $                                  | 2,565,201 |                                        | 2,640,288 |                          | 1,424,129 |   | 1,376,707 |   |

 

At December 31, 2002, and2001, and September 30, 2001, impaired loans, including nonaccrual loans,aggregated $925,000, $1.0 million, and $641,000 respectively.

 

The Company serviced loansfor others of $103.5 million, $97.1 million, and $86.6 million at December 31,2002, and 2001, and September 30, 2001, respectively. Gross service fee incomerelated to such loans was $253,000, $68,000, $201,000, and $158,000 for theyear ended December 31, 2002, the three months ended December 31, 2001, and theyears ended September 30, 2001, and 2000, respectively. The following is ananalysis of the changes in mortgage servicing rights:

 
|                            |   | **Year ended  December 31,** |    | **Three  months ended  December 31,** |    | **Years  ended September 30,** |    |
|---------------------------------|--------|------------------------------|---------|---------------------------------------|---------|--------------------------------|---------|
|                            |   | **2002**                     |    | **2001**                              |    | **2001**                       |    | **2000** |   |
| Balance at beginning of  period |   | $                            | 524,247 |                                  | 485,436 |                           | 263,522 |   | 318,543 |   |
| Additions                       |   | 251,362                      |    | 116,912                               |    | 403,176                        |    | 34,015 |   |
| Amortization                    |   | (250,298                     | )       | (78,101                               | )       | (181,262                       | )       | (89,036 | ) |
| Balance at end of period        |   | $                            | 525,311 |                                  | 524,247 |                           | 485,436 |   | 263,522 |   |

 

The Company had loans todirectors and officers at December 31, 2002, which carry terms similar to thosefor other loans. A summary of such loans is as follows:

 
| Balance at December 31,  2001 |   | $          | 5,369,029 |   |
|-------------------------------|--------|------------|-----------|--------|
| New loans                     |   | 850,002    |      |
| Repayments                    |   | (1,986,253 | )         |
| Balance at December 31,  2002 |   | $          | 4,232,778 |   |

 

30

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**(5)****P****REMISESAND****E****QUIPMENT**

Premises and equipmentconsisted of the following:

 
|                               |   | **December  31,  2002** |      | **December  31,  2001** |      | **September  30,  2001** |      |
|------------------------------------|--------|-------------------------|-----------|-------------------------|-----------|--------------------------|-----------|
| Land                               |   | $                       | 651,778   |                    | 651,778   |                     | 298,366   |   |
| Office buildings and  improvements |   | 4,218,033               |      | 4,188,267               |      | 1,947,070                |      |
| Furniture and equipment            |   | 3,536,145               |      | 3,348,120               |      | 1,240,099                |      |
| Automobiles                        |   | 205,088                 |      | 205,088                 |      | 15,000                   |      |
| Total                              |   | 8,611,044               |      | 8,393,253               |      | 3,500,535                |      |
| Less accumulated  depreciation     |   | 4,855,996               |      | 4,871,784               |      | 2,035,929                |      |
| Total                              |   | $                       | 3,755,048 |                    | 3,521,469 |                     | 1,464,606 |   |

** **

**(6)****T****IME****D****EPOSITS**

 

Maturities of time depositswere as follows at December 31, 2002:

 
|       |   | **Amount** |        |
|------------|--------|------------|-------------|
| Year:      |   |       |        |
| 2003       |   | $          | 107,514,857 |   |
| 2004       |   | 18,379,604 |        |
| 2005       |   | 16,208,161 |        |
| 2006       |   | 3,154,734  |        |
| 2007       |   | 2,175,793  |        |
| Thereafter |   | 12,000     |        |
| Total      |   | $          | 147,445,149 |   |

** **

**(7)****F****EDERAL****H****OME****L****OAN****B****ANK****B****ORROWINGS**

 

Long-term borrowings fromthe FHLB at December 31, 2002, and 2001, and September 30, 2001, amounted to$26,203,121, $28,697,063, and $21,000,000, respectively. Maturities of suchborrowings at December 31, 2002, are summarized as follows:

 
| **Year ending December 31** |   | **Amount** | ** ** | **Rates**     |          |
|-----------------------------|--------|------------|------------|---------------|---------------|
| 2003                        |   | $          | 3,109,249  |          | 1.51% - 7.233 | % |
| 2004                        |   | 1,000,000  |       | 6.44          | %             |
| 2005                        |   | 10,000,000 |       | 6.02% - 6.18  | %             |
| 2006                        |   | 1,000,000  |       | 5.50% - 5.62  | %             |
| 2007                        |   | —     |       | —        |          |
| Thereafter                  |   | 11,093,872 |       | 1.51% - 6.372 | %             |
|                        |   | $          | 26,203,121 |          |          |   |

 

The Bank has a line ofcredit, renewable annually in September, with the FHLB under which there are nooutstanding borrowings at December 31, 2002, or 2001, or September 30, 2001.Certain borrowings contain a convertible provision at which date the FHLB mayexercise an option to convert the borrowing to a variable rate equal to theFHLB one month short term advance rate. The Bank would then have the option toprepay the advances without penalty. Interest will adjust monthly uponconversion. The Bank may refinance the advance at each respective conversiondate if the FHLB first exercises its option to convert the fixed rateborrowing.

 

Although no loans arespecifically pledged, the FHLB requires the Bank to maintain eligiblecollateral (qualifying loans and investment securities) that has a lendingvalue at least equal to its required collateral. At December 31, 2002, theBank’s total borrowing capacity with the FHLB was approximately $77.7 million.

 

31

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**(8)I****NCOME T****AXES**

 

Total income tax expense(benefit) was allocated as follows:

 
|                                                                                                  |   | **Year ended  December 31,  2002** |      | **Three  months ended  December 31,  2001** |     | ****     |      |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------|-----------|---------------------------------------------|----------|----------|-----------|
| **Years  ended September 30,**                                                                        |   |
| **2001**                                                                                              |   | **2000**                           |
| Income (loss) from operations                                                                         |   | $                                  | 2,362,739 |                                        | (430,438 | )        | 1,780,394 |   | 1,271,947 |   |
| Loss from a change in  accounting principle                                                           |   | —                             |      | —                                      |     | (125,144 | )         | — |   |
| Stockholders’ equity,  recognition of tax benefit for stock options                              |   | (313,383                           | )         | (19,607                                     | )        | —   |      | — |   |
| Stockholders’ equity,  recognition of unrealized gains (losses on) available-for-sale securities |   | 904,542                            |      | (66,989                                     | )        | 395,021  |      | 7,861 |   |
|                                                                                                  |   | $                                  | 2,953,898 |                                        | (517,034 | )        | 2,050,271 |   | 1,279,808 |   |

 

Income tax expense (benefit)attributable to income (loss) from operations consisted of:

 
|                           |   | **Year ended  December 31,  2002** |      | **Three  months ended  December 31,  2001** |     | ****     |      |
|--------------------------------|--------|------------------------------------|-----------|---------------------------------------------|----------|----------|-----------|
| **Years  ended September 30,** |   |
| **2001**                       |   | **2000**                           |
| Current                        |   | $                                  | 2,279,065 |                                        | 235,758  |     | 1,965,769 |   | 1,399,631 |   |
| Deferred                       |   | 83,674                             |      | (666,196                                    | )        | (185,375 | )         | (127,684 | ) |
|                           |   | $                                  | 2,362,739 |                                        | (430,438 | )        | 1,780,394 |   | 1,271,947 |   |
| Federal                        |   | $                                  | 2,065,038 |                                        | (380,110 | )        | 1,598,572 |   | 1,128,163 |   |
| State                          |   | 297,701                            |      | (50,328                                     | )        | 181,822  |      | 143,784 |   |
|                           |   | $                                  | 2,362,739 |                                        | (430,438 | )        | 1,780,394 |   | 1,271,947 |   |

 

The reasons for thedifference between actual income tax expense (benefit) and expected income taxexpense (benefit) attributable to income (loss) from operations at the 34%statutory federal income tax rate were as follows:

 
|                                                  |   | **Year ended  December 31,  2002** |      | **Three  months ended  December 31,  2001** |     | ****    |      |
|-------------------------------------------------------|--------|------------------------------------|-----------|---------------------------------------------|----------|---------|-----------|
| **Years  ended September 30,**                        |   |
| **2001**                                              |   | **2000**                           |
| Computed “expected” tax  expense (benefit)  |   | $                                  | 2,359,822 |                                        | (363,198 | )       | 1,524,948 |   | 1,242,806 |   |
| Increase (reduction) in  income taxes resulting from: |   |                               |      |                                        |     |    |      |   |   |
| Tax-exempt interest  income, net                      |   | (162,637                           | )         | (41,735                                     | )        | (17,844 | )    | (21,312 | ) |
| Contributions to employee  stock ownership plan       |   | 51,375                             |      | —                                      |     | 10,783  |      | 5,985 |   |
| State income taxes, net of  deferred benefit          |   | 196,483                            |      | (33,216                                     | )        | 120,002 |      | 84,072 |   |
| Other, net                                            |   | (82,304                            | )         | 7,711                                       |     | 142,505 |      | (39,604 | ) |
|                                                  |   | $                                  | 2,362,739 |                                        | (430,438 | )       | 1,780,394 |   | 1,271,947 |   |

 

32

----

 

The tax effects of temporarydifferences that give rise to the significant portions of the deferred taxassets and liabilities at the following dates were as follows:

 
|                                                          |   | **December  31,  2002** |     | **December  31,  2001** |    | **September  30,  2001** |    |
|---------------------------------------------------------------|--------|-------------------------|----------|-------------------------|---------|--------------------------|---------|
| Deferred tax assets:                                          |   |                    |     |                    |    |                     |    |
| Carrying value of loans,  including allowance for loan losses |   | $                       | 877,094  |                    | 770,860 |                     | 431,109 |   |
| Carrying value of certain  liabilities and deposit accounts   |   | 44,426                  |     | 391,526                 |    | —                   |    |
| Deferred compensation  arrangements                           |   | 306,052                 |     | 397,279                 |    | 224,387                  |    |
| Accrued expenses                                              |   | 120,098                 |     | 285,343                 |    | —                   |    |
| State taxes                                                   |   | 77,371                  |     | 83,557                  |    | 31,878                   |    |
| Other, net                                                    |   | —                  |     | —                  |    | 34,500                   |    |
| Total deferred tax assets                                     |   | 1,425,041               |     | 1,928,565               |    | 721,874                  |    |
| Deferred tax liabilities:                                     |   |                    |     |                    |    |                     |    |
| Unrealized gain on  investment securities available-for-sale  |   | 1,163,885               |     | 259,343                 |    | 326,332                  |    |
| FHLB stock dividends                                          |   | 346,268                 |     | 470,416                 |    | 395,502                  |    |
| Carrying value of  investments                                |   | —                  |     | 324,500                 |    | —                   |    |
| Core deposit intangible                                       |   | 30,811                  |     | 36,436                  |    | —                   |    |
| Other, net                                                    |   | 45,103                  |     | 10,680                  |    | —                   |    |
| Total deferred tax  liabilities                               |   | 1,586,067               |     | 1,101,375               |    | 721,834                  |    |
| Net deferred tax asset  (liability)                           |   | $                       | (161,026 | )                       | 827,190 |                     | 40      |   |

 

There was no valuationallowance required for deferred tax assets at December 31, 2002, or 2001, orSeptember 30, 2001. Management believes it is more likely than not that theresults of future operations will generate sufficient taxable income to realizethe deferred tax assets.

 

Retained earnings atDecember 31, 2002, and 2001, included approximately $5,585,000 for which noprovision for federal income tax had been made. This amount representsallocations of income to bad debt deductions in years prior to 1988 for taxpurposes only. Reduction of amounts allocated for purposes other than tax baddebt losses will create income for tax purposes only, which will be subject tothe then current corporate income tax rate.

 

**(9)****E****MPLOYEE****B****ENEFIT****P****LANS**

** **

***Employee Retirement Plan***

Substantially all employeesare covered under 401(k) defined contribution savings plans. Costs attributableto the year ended December 31, 2002, the three months ended December 31, 2001,and the years ended September 30, 2001, and 2000, were $91,000, $10,000,$40,000, and $38,000, respectively.

*** ***

***Deferred Compensation and Retirement Agreements***

LBI entered into deferredcompensation and retirement agreements with certain key employees that providedfor cash payments to be made after their retirement. The liabilities under thearrangements have been recorded at the present values of accrued benefits usinga 2% discount rate. The balance of estimated accrued benefits was $722,000 atDecember 31, 2002, $973,000 at December 31, 2001, and $420,000 at September 30,2001, respectively. Pursuant to the agreements, additional amounts resultingfrom the merger with MNB were recognized. Such amounts aggregating $590,000were included in severance and other merger-related costs in the three monthsended December 31, 2001. In connection with the agreements, the Bank haspurchased life insurance policies on covered employees in which the Bank is thebeneficiary to assist in funding benefits. At December 31, 2002, and 2001, andSeptember 30, 2001, the cash surrender values on the policies included in otherassets were $911,000, $871,000, and $869,000, respectively.

 

33

----

 

***Employee Stock Ownership Plan (ESOP)***

LBI established an ESOP inconnection with its formation in 1994. The original acquisition of 136,878shares of LBI stock by the plan was funded by a loan from LBI to the ESOP inthe amount of $1,368,780. The loan, together with interest, is being repaidover a ten-year period through annual contributions by the Bank. The Bank makesannual contributions to the ESOP equal to the ESOP’s debt service lessdividends received by the ESOP. All dividends received by the ESOP are used topay debt service. The ESOP shares initially were pledged as collateral for itsdebt. As the debt is repaid, shares are released from the collateral andallocated to active employees based on the proportion of debt service paid inthe year. MNB also had an ESOP which operated similarly, although the MNB ESOPwas funded with a note payable to an unrelated financial institution. The twoplans have been merged and are presented on a combined basis in theaccompanying December 31, 2002, and 2001 consolidated financial statements.

 

The Company and the Bankaccount for the ESOP shares in accordance with Statement of Position No. 93-6.Accordingly, the ESOP indebtedness of $145,000, $344,000, and $282,000 atDecember 31, 2002, and 2001, and September 30, 2001, respectively, is shown asa deduction from stockholders’ equity in the accompanying consolidated balancesheets. As shares are released from collateral, the Company reportscompensation expense equal to the current market price of the shares, and theshares become outstanding for earnings per share computations. Dividends onallocated ESOP shares are recorded as a reduction of retained earnings;dividends on unallocated ESOP shares are recorded as compensation expense. ESOPcompensation expense was $267,000, $51,000, $169,000, and $154,000 for the yearended December 31, 2002, the three months ended December 31, 2001, and theyears ended September 30, 2001, and 2000, respectively. The remaining 16,673unallocated shares at December 31, 2002, had an estimated market value of$396,000.

** **

**(10)****S****TOCK****O****PTION****P****LAN**

 

LBI had a stock option plan,the purpose of which was to provide additional incentive to certain officers,directors, and key employees by facilitating their purchase of a stock interestin the Company. The plan provided for the granting of incentive andnonincentive stock options. In connection with the merger, LBI options wereexchanged for options to acquire shares of the Company, and the Companyexchanged 38,822 options with former MNB option holders. The MNB optionsexchanged were valued at $87,000 and included in the total consideration paidfor MNB (see note 1).

 

Subsequent to the merger,the Company adopted a new stock option plan. The plan is administered by theboard of directors who will select the employees to whom options are grantedand the number of shares granted. The option price may not be less than 100% ofthe fair market value of the shares on the date of the grant, and no optionshall be exercisable after the expiration of ten years from the grant date. Inthe case of any employee who owns more than 10% of the outstanding common stockat the time the option is granted, the option price may not be less than 110%of the fair market value of the shares on the date of the grant, and the optionshall not be exercisable after the expiration of five years from the grantdate. Options outstanding at December 31, 2002, were exercisable at pricesranging from $9.07 to $21.43.

 

The Company records the fairvalue of the options issued under the plan as expense in accordance with SFASNo. 123, Accounting for Stock Based Compensation. The compensation cost thathas been charged to compensation and benefits expense for the plan was $4,300,$0, $0, and $49,000 for the periods ended December 31, 2002, and 2001, andSeptember 30, 2001, and 2000, respectively. The fair value of each option grantis estimated on the date of grant. The fair value of options granted in 2002 wereestimated utilizing the following assumptions: dividend of 4.7%, volatility of20.8%, risk-free interest rate of 4.5%, and expected lives of five years.

 

34

----

 

Certain information for theyear ended December 31, 2002, the three months ended December 31, 2001, and theyears ended September 30, 2001, relative to stock options was as follows:

 
|                                |   | **December  31, 2002** |   | **December  31, 2001**                |   | **September  30, 2001** |    |
|-------------------------------------|--------|------------------------|--------|---------------------------------------|--------|-------------------------|---------|
|                                |   | **Shares**             |   | **Weighted  average  exercise price** |   | **Shares**              |    | **Weighted average  exercise price** |   | **Shares** |   | **Weighted  average  exercise price** |   |
| Outstanding at beginning  of period |   | 179,781                |   | $                                     | 11.48  |                    | 196,321 |   | $ | 11.26 |   | 216,360 |   | $ | 11.14 |   |
| Granted                             |   | 2,625                  |   | 16.78                                 |   | —                  |    | — |   | — |   | — |   |
| MNB options converted               |   | —                 |   | —                                |   | 38,822                  |    | 14.76 |   | — |   | — |   |
| Effect of 5% stock  dividend        |   | 5,202                  |   | —                                |   | 8,555                   |    | — |   | — |   | — |   |
| Expired                             |   | (3,150                 | )      | 22.14                                 |   | —                  |    | — |   | — |   | — |   |
| Exercised                           |   | (75,184                | )      | 9.59                                  |   | (63,917                 | )       | 10.85 |   | (20,039 | ) | 10.00 |   |
| Outstanding at end of  period       |   | 109,274                |   | $                                     | 11.97  |                    | 179,781 |   | $ | 11.48 |   | 196,321 |   | $ | 11.26 |   |
| Exercisable at end of  period       |   | 107,510                |   | $                                     | 11.89  |                    | 179,781 |   | $ | 11.48 |   | 196,321 |   | $ | 11.26 |   |

 

The number of sharesavailable for future grant at December 31, 2002, was 162,619.

 

**(11)****F****AIR****V****ALUE OF****F****INANCIAL****I****NSTRUMENTS**

 

Fair value estimates of theCompany’s financial instruments as of December 31, 2002, and 2001, andSeptember 30, 2001, including methods and assumptions utilized, are set forthbelow:

 
|                                                       |   | **December  31,  2002** |        | **December  31,  2001**   |        | **September  30,  2001** |        |
|------------------------------------------------------------|--------|-------------------------|-------------|---------------------------|-------------|--------------------------|-------------|
|                                                       |   | **Carrying  amount**    |        | **Estimated  fair value** |        | **Carrying  amount**     |        | **Estimated  fair value** |   | **Carrying  amount** |   | **Estimated  fair value** |   |
| Investment securities                                      |   | $                       | 89,296,337  |                      | 89,296,000  |                     | 75,310,561  |   | 75,311,000 |   | 30,888,921 |   | 30,889,000 |   |
| Loans, net of unearned  fees and allowance for loan losses |   | 224,061,263             |        | 229,155,000               |        | 235,324,457              |        | 236,155,000 |   | 141,987,020 |   | 142,940,000 |   |
| Loans held for sale                                        |   | 5,050,603               |        | 5,192,000                 |        | 5,654,077                |        | 5,654,000 |   | 2,486,449 |   | 2,486,000 |   |
| Noninterest bearing demand  deposits                       |   | 23,443,639              |        | 23,444,000                |        | 18,969,312               |        | 18,969,000 |   | 8,040,520 |   | 8,040,000 |   |
| Money market and NOW  deposits                             |   | 78,387,200              |        | 78,387,000                |        | 73,332,537               |        | 73,333,000 |   | 19,751,450 |   | 19,751,000 |   |
| Savings deposits                                           |   | 15,004,882              |        | 15,005,000                |        | 19,742,912               |        | 19,743,000 |   | 8,382,663 |   | 8,382,000 |   |
| Time deposits                                              |   | 147,444,149             |        | 148,704,000               |        | 161,201,524              |        | 162,967,000 |   | 111,888,869 |   | 112,853,000 |   |
|                                                       |   |                    |        |                      |        |                     |        |   |   |   |   |   |   |
| Total deposits                                             |   | $                       | 264,279,870 |                      | 265,540,000 |                     | 273,246,285 |   | 275,012,000 |   | 148,063,502 |   | 149,026,000 |   |
|                                                       |   |                    |        |                      |        |                     |        |   |   |   |   |   |   |
| FHLB advances                                              |   | $                       | 26,203,121  |                      | 27,608,000  |                     | 28,697,063  |   | 29,125,000 |   | 21,000,000 |   | 22,289,000 |   |

 

***Methods and Assumptions Utilized***

The carrying amount of cashand cash equivalents, loans held for sale, federal funds sold, and accruedinterest receivable and payable are considered to approximate fair value.

 

The estimated fair value ofinvestment securities, except certain obligations of states and politicalsubdivisions, is based on bid prices published in financial newspapers or bidquotations received from securities dealers. The fair value of certainobligations of states and political subdivisions is not readily availablethrough market sources other than dealer quotations, so fair value estimatesare based upon quoted market prices of similar instruments, adjusted fordifferences between the quoted instruments and the instruments being valued.

 

35

----

 

The estimated fair value ofthe Company’s loan portfolio is based on the segregation of loans by collateraltype, interest terms, and maturities. In estimating the fair value of eachcategory of loans, the carrying amount of the loan is reduced by an allocationof the allowance for loan losses. Such allocation is based on management’s loanclassification system which is designed to measure the credit risk inherent ineach classification category. The estimated fair value of performing variablerate loans is the carrying value of such loans, reduced by an allocation of theallowance for loan losses. The estimated fair value of performing fixed rate loansis calculated by discounting scheduled cash flows through the estimatedmaturity using estimated market discount rates that reflect the interest raterisk inherent in the loan, reduced by an allocation of the allowance for loanlosses. The estimate of maturity is based on the Company’s historicalexperience with repayments for each loan classification, modified, as required,by an estimate of the effect of current economic and lending conditions. Thefair value for significant nonperforming loans is the estimated fair value ofthe underlying collateral based on recent external appraisals or otheravailable information, which generally approximates carrying value, reduced byan allocation of the allowance for loan losses.

 

The estimated fair value ofdeposits with no stated maturity, such as noninterest bearing demand deposits,savings, money market accounts, and NOW accounts, is equal to the amountpayable on demand. The fair value of interest-bearing time deposits is based onthe discounted value of contractual cash flows of such deposits. The discountrate is estimated using the rates currently offered for deposits of similarremaining maturities.

 

The fair value of advancesfrom the FHLB is estimated using the current rates offered for similar borrowings.

*** ***

***Limitations***

Fair value estimates aremade at a specific point in time based on relevant market information andinformation about the financial instruments. These estimates do not reflect anypremium or discount that could result from offering for sale at one time theCompany’s entire holdings of a particular financial instrument. Because nomarket exists for a significant portion of the Company’s financial instruments,fair value estimates are based on judgments regarding future loss experience,current economic conditions, risk characteristics of various financialinstruments, and other factors. These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment, and, therefore,cannot be determined with precision. Changes in assumptions could significantlyaffect the estimates. Fair value estimates are based on existing balance sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments.

** **

**(12)****R****EGULATORY****C****APITAL****R****EQUIREMENTS**

 

Current regulatory capitalregulations require financial institutions to meet two different regulatorycapital requirements. Institutions are required to have minimum leveragecapital equal to 4% of total average assets and total qualifying capital equalto 8% of total risk-weighted assets in order to be considered “adequatelycapitalized”. Management believes that as of December 31, 2002, the Company andthe Bank meet all capital adequacy requirements to which they are subject. Thefollowing is a comparison of the Bank’s regulatory capital to minimum capitalrequirements at December 31, 2002, and 2001, and September 30, 2001 (dollars inthousands):

 
|                                      |   | **Actual** |   | **For capital  adequacy purposes** |   | **To be well-  capitalized under prompt  corrective action provisions** |   |
|-------------------------------------------|--------|------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                      |   | **Amount** |   | **Ratio**                          |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As of December 31, 2002:                  |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 35,886 |                               | 17%    |                                                                    | $      | 3 16,706 |   | 3  8% |   | $ | 320,882 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 33,321     |   | 16                                 |   | 3   8,353                                           |   | 3  4 |   | 3 12,529 |   | 3  6 |   |
| Tier 1 capital (to average  assets)       |   | 33,321     |   | 10                                 |   | 3 13,124                                                      |   | 3  4 |   | 3 16,404 |   | 3  5 |   |
|                                      |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| As of December 31, 2001:                  |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 33,451 |                               | 16%    |                                                                    | $      | 3 16,492 |   | 3  8% |   | $ | 320,616 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 30,875     |   | 15                                 |   | 3   8,246                                           |   | 3  4 |   | 3 12,369 |   | 3 6 |   |
| Tier 1 capital (to average  assets)       |   | 30,875     |   | 9                                  |   | 3 13,974                                                      |   | 3  4 |   | 3 17,468 |   | 3 5 |   |
|                                      |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| As of September 30, 2001:                 |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 20,563 |                               | 21%    |                                                                    | $      | 7,962 |   | 3 8% |   | $ | 3 9,953 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 19,317     |   | 19                                 |   | N/A                                                                     |   | N/A |   | 3 5,972 |   | 3 6 |   |
| Tier 1 capital (to average  assets)       |   | 19,317     |   | 10                                 |   | 3   7,892                                           |   | 3 4 |   | 3 9,865 |   | 3 5 |   |

 

36

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The followingis a comparison of the Company’s regulatory capital to minimum capitalrequirements at December 31, 2002, and 2001, and September 30, 2001 (dollars inthousands):

 
|                                      |   | **Actual** |   | **For capital  adequacy purposes** |   | **To be well-  capitalized under prompt  corrective action provisions** |   |
|-------------------------------------------|--------|------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                      |   | **Amount** |   | **Ratio**                          |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As of December 31, 2002:                  |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 39,110 |                               | 19%    |                                                                    | $      | 3 16,763 |   | 38% |   | $ | 3 20,954 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 36,545     |   | 17                                 |   | 3   8,382                                                |   | 3 4 |   | 3 12,572 |   | 3 6 |   |
| Tier 1 capital (to average  assets)       |   | 36,545     |   | 11                                 |   | 3 13,289                                                           |   | 3 4 |   | 3 16,611 |   | 3 5 |   |
|                                      |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| As of December 31, 2001:                  |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 39,645 |                               | 19%    |                                                                    | $      | 3 16,537 |   | 3 8% |   | $ | 3 20,672 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 37,069     |   | 18                                 |   | 3   8,269                                                |   | 3 4 |   | 3 12,403 |   | 3 6 |   |
| Tier 1 capital (to average  assets)       |   | 37,069     |   | 11                                 |   | 3 13,974                                                           |   | 3 4 |   | 3 17,468 |   | 3 5 |   |
|                                      |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| As of September 30, 2001:                 |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets)  |   | $          | 26,996 |                               | 27%    |                                                                    | $      | 3   8,116 |   | 3 8% |   | $ | 3 10,144 |   | 3 10 | % |
| Tier 1 capital (to  risk-weighted assets) |   | 25,621     |   | 25                                 |   | N/A                                                                     |   | N/A |   | 3   6,087 |   | 3 6 |   |
| Tier 1 capital (to average  assets)       |   | 25,621     |   | 13                                 |   | 3   7,979                                                |   | 3 4 |   | 3   9,974 |   | 3 5 |   |

 

**(13)****P****ARENT****C****OMPANY****C****ONDENSED****F****INANCIAL****S****TATEMENTS**

** **

The following is condensedfinancial information of the parent company as of and for years ended December31, 2002, the three months ended December 31, 2001, and the years endedSeptember 30, 2001 and 2000 (dollars in thousands):

*** ***

***Condensed Balance Sheets***

 
|                                             |   | **December  31,  2002** |   | **December  31,  2001** |   | **September  30,  2001** |   |
|--------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|--------------------------|--------|
| **Assets**                                       |   |                    |   |                    |   |                     |   |
| Cash                                             |   | $                       | 1,419  |                    | 4,094  |                     | 3,927  |   |
| Investment securities                            |   | 1,966                   |   | 1,881                   |   | 1,643                    |   |
| Investment in Bank                               |   | 37,513                  |   | 34,011                  |   | 19,750                   |   |
| Other                                            |   | 423                     |   | 470                     |   | 960                      |   |
| Total assets                                     |   | $                       | 41,321 |                    | 40,456 |                     | 26,280 |   |
|                                             |   |                    |   |                    |   |                     |   |
| **Liabilities  and Stockholders’ Equity**   |   |                    |   |                    |   |                     |   |
| Borrowed funds                                   |   | $                       | — |                    | 62     |                     | — |   |
| Other                                            |   | 247                     |   | 189                     |   | 181                      |   |
| Stockholders’ equity                        |   | 41,074                  |   | 40,205                  |   | 26,099                   |   |
| Total liabilities and  stockholders’ equity |   | $                       | 41,321 |                    | 40,456 |                     | 26,280 |   |

 

***Condensed Statements of Operations***

 
|                                                           |   | **Year ended  December 31,  2002** |   | **Three  months ended  December 31,  2001** |   |   |   |   |   |
|----------------------------------------------------------------|--------|------------------------------------|--------|---------------------------------------------|--------|--------|--------|--------|--------|
| **Years  ended September 30,**                                 |
| **2001**                                                       |   | **2000**                           |
| Dividends from Bank                                            |   | $                                  | 2,649  |                                        | — |   | 2,700  |   | 1,300  |   |
| Interest income                                                |   | 90                                 |   | 24                                          |   | 226    |   | 236    |   |
| Other income                                                   |   | 131                                |   | 2                                           |   | 785    |   | 77     |   |
| Interest expense                                               |   | —                             |   | —                                      |   | (40    | )      | (144   | )      |
| Other expense, net                                             |   | (167                               | )      | (50                                         | )      | (134   | )      | (158   | )      |
| Income (loss) before  equity in undistributed earnings of Bank |   | 2,703                              |   | (24                                         | )      | 3,537  |   | 1,311  |   |
| Increase (decrease) in  undistributed equity of Bank           |   | 1,881                              |   | (623                                        | )      | (692   | )      | 1,032  |   |
| Earnings (loss) before  income taxes                           |   | 4,584                              |   | (647                                        | )      | 2,845  |   | 2,343  |   |
| Income tax expense  (benefit)                                  |   | (6                                 | )      | 9                                           |   | (355   | )      | 40     |   |
| Net earnings (loss)                                            |   | $                                  | 4,578  |                                        | (638   | )      | 2,490  |   | 2,383  |   |

 

37

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***Condensed Statements of Cash Flows***

 
|                                                                 |   | **Three  Year ended  December 31,  2002** |   | **Three  months ended  December 31,  2001** |   |   |   |   |   |
|----------------------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------------------------|--------|--------|--------|--------|--------|
| **Years  ended September 30,**                                       |
| **2001**                                                             |   | **2000**                                  |
| Cash flows from operating  activities:                               |   |                                      |   |                                        |   |   |   |   |   |
| Net earnings (loss)                                                  |   | $                                         | 4,578  |                                        | (638   | )      | 2,490  |   | 2,383  |   |
| (Increase) decrease in  undistributed equity of Bank                 |   | (1,881                                    | )      | 623                                         |   | 692    |   | (1,032 | )      |
| Other                                                                |   | (120                                      | )      | 248                                         |   | (179   | )      | (191   | )      |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Net cash provided by  operating activities                           |   | 2,577                                     |   | 233                                         |   | 3,003  |   | 1,160  |   |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Cash flows from investing  activities:                               |   |                                      |   |                                        |   |   |   |   |   |
| Proceeds from sale of  investment securities available-for-sale, net |   | 287                                       |   | 64                                          |   | 3,345  |   | 870    |   |
| Net cash received in  acquisition of MNB                             |   | —                                    |   | 22                                          |   | — |   | — |   |
| Other                                                                |   | —                                    |   | (2                                          | )      | (171   | )      | 303    |   |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Net cash provided by  investing activities                           |   | 287                                       |   | 84                                          |   | 3,174  |   | 1,173  |   |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Cash flows from financing  activities:                               |   |                                      |   |                                        |   |   |   |   |   |
| Issuance of shares under  stock option plan                          |   | 1,046                                     |   | 713                                         |   | 200    |   | 360    |   |
| Repayments on note payable                                           |   | —                                    |   | (520                                        | )      | (1,537 | )      | (1,546 | )      |
| Purchase of treasury stock                                           |   | (5,345                                    | )      | (44                                         | )      | (473   | )      | (1,083 | )      |
| Payment of dividends                                                 |   | (1,240                                    | )      | (299                                        | )      | (632   | )      | (650   | )      |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Net cash used in financing  activities                               |   | (5,539                                    | )      | (150                                        | )      | (2,442 | )      | (2,919 | )      |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Net (decrease) increase in  cash                                     |   | (2,675                                    | )      | 167                                         |   | 3,735  |   | (586   | )      |
| Cash at beginning of  period                                         |   | 4,094                                     |   | 3,927                                       |   | 192    |   | 778    |   |
|                                                                 |   |                                      |   |                                        |   |   |   |   |   |
| Cash at end of period                                                |   | $                                         | 1,419  |                                        | 4,094  |   | 3,927  |   | 192    |   |

 

Dividends paid by theCompany are provided through subsidiary Bank dividends. At December 31, 2002,the Bank could distribute dividends of up to $2,351,000 without regulatoryapprovals.

 

**(14)****S****TOCKHOLDERS****’ R****IGHTS****P****LAN**

 

On October 11, 2001, theCompany’s Board of Dircetors adopted a stockholders’ rights plan (the “RightsPlan”). The Rights Plan provided for the distribution of one right on February13, 2002, for each share of the Company’s outstanding common stock as ofFebruary 1, 2002. The rights have no immediate economic value to stockholdersbecause they cannot be exercised unless and until a person, group or entityacquires 15% or more of the Company’s common stock or announces a tender offer.The Rights Plan also permits the Company’s Board of Directors to redeem eachright for one cent under various circumstances. In general, the Rights Plan providesthat if a person, group or entity acquires a 15% or larger stake in the Companyor announces a tender offer, and the Company’s Board chooses not to redeem therights, all holders of rights, other than the 15% stockholder or the tenderoffer, will be able to purchase a certain amount of the Company’s common stockfor half of its market price. Issuance of the rights has no immediate dilutiveeffect, does not currently affect reported earnings per share, is not taxableto the Company or its shareholders, and will not change the way in which theCompany’s shares are traded. The rights expire in October, 2011.

 

38

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**C****ORPORATE****I****NFORMATION**

** **

**D****IRECTORS****O****F****L****ANDMARK****B****ANCORP****, I****NC****.****AND****L****ANDMARK****N****ATIONAL****B****ANK**

Larry Schugart, Chairman

Former President and Chief Executive OfficerLandmark Bancshares, Inc.

 

Patrick L. Alexander

President and Chief Executive Officer

Landmark Bancorp, Inc. and Landmark National Bank

 

Richard A. Ball 

CPA

Adams, Brown, Beran & Ball, Chtd.

 

Brent A. Bowman President Brent Bowman and Associates Architects, P.A.

 

Joseph L. Downey

Retired Senior Vice President, Director and Executive Dow Chemical Company

 

Jim W. Lewis

Owner, Auto Dealerships

 

Jerry R. Pettle Retired Dentist

Dental Associates of Manhattan, P.A.

 

Susan E. Roepke

Retired Vice President, Secretary and Treasurer, MNB Bancshares, Inc.

Retired Senior Vice President/Secretary/Cashier, Security National Bank

 

C. Duane Ross

President, High Plains Publishers, Inc.

 

David H. Snapp

Partner, Waite, Snapp & Doll Attorneys at Law

** **

**C****ORPORATE****H****EADQUARTERS**

800 Poyntz Avenue Manhattan, Kansas 66502

** **

**A****NNUAL****M****EETING**

The annual meeting of stockholders will be held at the Kansas StateUniversity Alumni Center, 1st Floor, Manhattan, Kansas 66506, on Wednesday, May21, 2003 at 2:00 PM.

** **

**F****ORM****10-K**

A copy of the Annual Report on Form 10-K filed with the Securities andExchange Commission (SEC) may be obtained by stockholders without charge onwritten request to Patrick L. Alexander, President and Chief Executive Officer,Landmark Bancorp, Inc., PO Box 308, Manhattan, Kansas 66505-0308, or byaccessing the SEC’s Web site at www.SEC.gov.

** **

**R****EGISTRAR****A****ND****T****RANSFER****A****GENT**

Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572

 

**E****XECUTIVE****O****FFICERS OF****L****ANDMARK****B****ANCORP****, I****NC****.**

Patrick L. Alexander

President and Chief Executive Officer

 

Mark A. Herpich

Chief Financial Officer, Vice President, Secretary and Treasurer

** **

**E****XECUTIVE****O****FFICERS OF****L****ANDMARK****N****ATIONAL****B****ANK**

Patrick L. Alexander

President and Chief Executive Officer

 

Mark A. Herpich

Executive Vice President, Secretary and Cashier

 

Michael E. Scheopner

Executive Vice President, Credit Risk Manager

 

Mark J. Oliphant

Market President - Dodge City

 

Dean R. Thibault

Market President - Manhattan

** **

**S****TOCK****P****RICE****I****NFORMATION**

Our common stock has traded on the Nasdaq Stock Market National Marketsystem under the symbol “LARK” since October 9, 2001. At December 31, 2002, theCompany had approximately 1,100 stockholders, consisting of approximately 500owners of record and approximately 600 beneficial owners of our common stock.Set forth below are the reported high and low bid prices of the common stockand dividends paid during the past two years. Information presented below has been restated to give effect to the 5%stock dividends paid in December 2002 and 2001. Information below prior toOctober 9, 2001 relates to Landmark Bancshares, Inc., which completed itsmerger with MNB Bancshares, Inc. into the Company on that date.

 

 
| **Fiscal 2002**   |   | **High** |   | **Low** |   | **Dividends** |   |
|-------------------|--------|----------|--------|---------|--------|---------------|--------|
| First Quarter     |   | $        | 20.095 |    | $      | 18.581        |   | $ | 0.1428 |   |
| Second Quarter    |   | 22.143   |   | 19.762  |   | 0.1428        |   |
| Third Quarter     |   | 21.981   |   | 20.238  |   | 0.1428        |   |
| Fourth Quarter    |   | 23.950   |   | 19.438  |   | 0.1523        |   |
|              |   |     |   |    |   |          |   |
| **Quarter ended** |   | **High** |   | **Low** |   | **Dividends** |   |
| December 31, 2001 |   | $        | 19.524 |    | $      | 16.689        |   | $ | 0.1428 |   |
|              |   |     |   |    |   |          |   |
| **Fiscal 2001**   |   | **High** |   | **Low** |   | **Dividends** |   |
| First Quarter     |   | $        | 17.460 |    | $      | 15.873        |   | $ | 0.136 |   |
| Second Quarter    |   | 16.780   |   | 14.512  |   | 0.136         |   |
| Third Quarter     |   | 17.188   |   | 15.601  |   | 0.136         |   |
| Fourth Quarter    |   | 20.009   |   | 16.417  |   | 0.136         |   |

 

**I****NDEPENDENT****A****CCOUNTANTS**

KPMG LLP

1000 Walnut, Suite 1600 Kansas City, Missouri 64199

 

39

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**MISSION****STATEMENT**

 

We are dedicated to providing quality financial services to customersin a manner that exceeds customer expectations. These services will bedelivered by outgoing, professional, and knowledgeable associates that arefocused on asking for the business and establishing long-term bankingrelationships. These banking relationships will have a foundation of personalservice and quality products that are delivered in a convenient matter thatmeet our customer’s needs at a fair and competitive price.

 

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