**Exhibit 13.1**

 

 

**Landmark National Bank, a Bauer 5-Star ratedbank, continues the dedication to our customers and their future by providingsecurity, convenience and expertise. Landmark looks forward to the consummationof our acquisition of First Kansas Financial Corporation headquartered inOsawatomie, Kansas in the second quarter of 2004 providing us with a network offull service financial institutions in 16 Kansas communities.**

 

 

**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 our Stockholders, Customers And Friends**

 

2003 was a year of Stellar BankingPerformance for Landmark Bancorp, Inc. Your company achieved record net earnings of approximately $4.9million.  This profit performancetranslates into a return on average assets of 1.46 percent and a return onaverage equity of 11.53 percent.  Whenthe annual 5 percent stock dividend was considered, the cash dividends pershare were effectively increased from $.55 to $.63, an increase of 13.7percent.  Additionally, during 2003 wewere able to repurchase 72 thousand shares of our Landmark Bancorp stock at acost of approximately $1.9 million. These stellar results were achieved even though interest rates remainedat the lowest levels seen in recent history. While low interest rates continued to exert pressure on our net interestmargin, we were able to overcome this issue with significant increases innon-interest income and strict control of non-interest expense.   Furthermore, in November we announced thesigning of a definitive agreement to acquire First Kansas FinancialCorporation, a $150 million thrift holding company.  Your company continues to grow and develop as a premier financialservices provider serving communities across the state of Kansas.  In the space below I will recap the year andelaborate on the opportunities and challenges we face as we move the companyforward in 2004.

 

2003 was the second full calendar year afterour October, 2001 merger with MNB Bancshares, Inc.  Our associates have done an outstanding job over these past twoyears of assimilating the two organizations into one cohesive whole andobtaining the efficiencies that we had envisioned when the merger wasconsummated. This is demonstrated by the fact that we were able to holdnon-interest expense steady at $9.2 million in 2003 as net earnings increasedby 6 percent from $4.6 million to $4.9 million.  When this earnings increase was combined with the results of ourstock repurchase plan, your company experienced earnings per share in 2003 of$2.28 on a fully diluted basis compared to $2.03 in 2002, an increase of 12.4percent.  The continued improvements inour operational processes and work flows contributed significantly to oursuccess in 2003.  Our associates havenot only created but thrive upon a dynamic environment that embraces change andovercomes organizational inertia in order to make improvements in the way thatwe go about doing business.  Theincreased efficiencies that we have been able to accomplish have not beenimplemented at the expense of customer service and the delivery of communitybanking services in the highly personalized manner that our customers have cometo expect.  This attitude will serve uswell as we look forward to 2004 and the assimilation of First Kansas FinancialCorporation into the Landmark banking culture and organization.

 

The interest rate environment continues toprovide challenges for both your company and the banking industry as awhole.  Interest rates declined in 2002and remain at levels not seen over the last forty years.  The Federal Reserve continues to keep rateslow to encourage economic growth and job creation.  This prolonged low interest rate environment has begun to exertsubstantial pressure on our net interest margin.  Our assets continue to re-price at lower rates as loans arerepaid and securities mature.  Depositrates have already been reduced and have very little room left to re-pricedownward.  To combat this we must growour loan portfolio and transition funds from our investment portfolio to higheryielding loans.  Over the past year thisprocess has been hampered by the rapid prepayments which we have experienced inour 1-4 family residential mortgage loan portfolio.  In 2003 we experienced a reduction of $19.2 million in ourresidential loan portfolio.  Thisdecrease was partially offset by an increase of $11.8 million in commercial andcommercial real estate loans.  Wecontinue to underwrite our loans in a disciplined manner that preserves ourcredit standards and continues our tradition of high asset quality. Our lendingteam’s efforts are focused on the growth of our commercial and commercial realestate loan portfolios.  We areaccomplishing this through the development of relationships with our borrowersand the development of a total banking relationship.  We feel that this approach to lending and banking in general isthe key to the development of a high quality banking organization.

 

The current interest rate environment hascreated both opportunity and challenges in residential real estatelending.  As discussed above, prepaymentspeeds have accelerated to unprecedented levels causing your company’sresidential real estate loan portfolio to decrease from $101.3 million to $82.1million.  At the same time ourorigination of residential real estate loans increased from $69.1 million in2002 to $91.0 million in 2003. We chose to sell almost all of this loanproduction into the secondary market in order to properly manage interest raterisk that would have been created had we kept these long term fixed rate loansin our loan portfolio.  The sale ofthese loans created gains on sale of loans of approximately $1.6 million in2003, up from $1.4 million in 2002. However, in late 2003 long-term interest rates bounced upward somewhatand the refinancing activity experienced over the last two years slowed dramatically.  Residential loan refinancing activity hascontinued at these lower levels and is approaching a rate that has beenconsidered normal by historical standards. We expect this more normal pace of residential real estate lending tocontinue throughout the balance of 2004. This pace will inevitably lead to a reduced level of income resultingfrom gains on sale of loans.

 

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Conversely, this lower level of refinancingactivity should significantly reduce residential loan prepayment speeds andstabilize the decline we have experienced in the residential loan portfolio thepast two years.  Ultimately, this willcontribute to an increase in loans as commercial and commercial real estateloans continue to grow which should help net interest income and our overallinterest margin.

 

Credit quality continued to be a primaryfocus of your company in 2003.  As Imentioned last year, with the slowing economy we were experiencing somedeterioration in the consumer loan portfolio and increased delinquency in theresidential mortgage portfolio.  We werealso experiencing some concerns on a few of our commercial loans that haddeteriorated over the previous years. In response to those issues, we dramatically increased our collectionefforts on both consumer and residential real estate loans.  We aggressively addressed our commercialloan concerns with workout plans and collection efforts aimed at eithercorrecting the situation or moving the problem credits out of the bank.  I am happy to report that our efforts havebeen successful and credit quality remains high.  Classified loans as a percentage of Tier 1 capital have beenreduced to 14.36 percent.  Other realestate owned and repossessed assets total $290 thousand, or .45 percent oftotal assets.  Our allowance for losseson loans totaled $2.3 million at year end, which is 1.07 percent of grossloans.  We expect to continue ourefforts to aggressively control loan delinquency and address problem loans in adirect problem solving manner.  It isdifficult to determine if the economic slowdown has ended and the effect onindustry reserves has already been felt. However, it appears that economic conditions are slowly beginning toimprove.  Our credit quality and collectionefforts should continue to pay dividends in an improving economic environmentwhich may be developing in 2004. Regardless, we will continue to focus on maintaining the strong assetquality that we have experienced in the past and that our lending cultureexpects.

 

We are looking forward to the consummation ofour acquisition of First Kansas Financial Corporation.  First Kansas is a $150 million thriftholding company headquartered in Osawatomie, Kansas that is the parent companyof First Kansas Federal Savings Bank. Upon closing of the transaction we will merge the First Kansasorganization into Landmark National Bank. First Kansas has banking offices in Osawatomie, Paola, Louisburg, FortScott, Beloit, and Phillipsburg, Kansas. Osawatomie, Paola, and Louisburg are located in Miami County which isadjacent to Johnson County, the highest growth county in Kansas.  Miami County has experienced solid growth asthe economic activity in this area continues to expand.  With the completion of the four lane highwaysU.S. 69 and 169 to these communities we expect the growth to continue toaccelerate.  We feel that thisacquisition strategically positions us to participate in the exciting potentialthat these communities expect to experience. We will be expanding First Kansas’ products to our full service bankingproduct line which offers a complete array of banking products.  We are excited about the markets we areentering and the potential that they hold for revenue generation and assetgrowth.

 

 

We expect the transaction to close early inthe second quarter and will begin the assimilation immediately.  We look forward to welcoming the FirstKansas associates to our Landmark organization and participating in the communitiesin which they serve.  I am confidentthat it will be a mutually beneficial partnership.

 

We continue to be very excited as wecontemplate the future of your company. We feel the company is well positioned to take advantage of theopportunities that await us in 2004. When the acquisition is consummated we will have total assets ofapproximately $490 million.  We willserve 16 Kansas communities with a comprehensive array of financial products.We have assembled a banking team that is highly qualified, capable, and focusedon delivering quality financial services and products to the customers andcommunities which we serve.  The stageis set for continued progress and success.

 

Our efforts are constantly focused onenhancing our franchise value and insuring the continuing long term success andprosperity of your company.  I wouldlike to thank you, our shareholders, for your continuing support andconfidence.  I would also like to thankall of my associates for their dedicated work and tireless efforts over thepast several months and years.  Finally,I must thank our customers for their continued confidence and patronage, whichis imperative if we are to remain successful and achieve our goals.  We look forward to 2004 and beyond withanticipation and enthusiasm.

 

 

Sincerely,

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

 

3

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**Selected Financial And OtherData****OfLandmark Bancorp, Inc.**

 
|                                                             |   |                                                                  |       |              |       | **Three  months ended**                      |       |     |       |     |       |     |       |
|------------------------------------------------------------------|--------|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                             |   | **At or for  the years ended December 31,**                           |       | **December  31,** |       | **At or for  the years ended September 30,** |       |
|                                                             |   | **2003**                                                              |       | **2002**          |       | **2001**                                     |       | **2001** |       | **2000** |       | **1999** |       |
|                                                             |   | **(Dollars  in thousands, except per share amounts and percentages)** | ** ** |
| **Selected Financial Data:**                                     |   |                                                                  |       |              |       |                                         |       |     |       |     |       |     |       |
| Total assets                                                     |   | $                                                                     | 334,046    |              | $          | 341,314                                      |       | $        | 349,700    |     | $          | 200,255  |       | $ | 250,676 |   | $ | 244,116 |   |
| Loans (1)                                                        |   | 215,030                                                               |       | 229,112           |       | 240,979                                      |       | 144,473  |       | 191,514  |       | 177,840  |       |
| Investments held-to-maturity                                     |   | —                                                                |       | —            |       | —                                       |       | —   |       | 38,779   |       | 42,339   |       |
| Investments available-for-sale                                   |   | 99,746                                                                |       | 89,296            |       | 75,311                                       |       | 30,889   |       | 9,869    |       | 12,022   |       |
| Cash and cash equivalents                                        |   | 7,708                                                                 |       | 11,449            |       | 22,163                                       |       | 20,001   |       | 5,090    |       | 5,976    |       |
| Deposits                                                         |   | 253,108                                                               |       | 264,281           |       | 273,246                                      |       | 148,064  |       | 165,325  |       | 158,936  |       |
| Borrowings                                                       |   | 33,755                                                                |       | 26,203            |       | 28,697                                       |       | 21,000   |       | 57,000   |       | 58,000   |       |
| Stockholders’ equity                                        |   | 42,572                                                                |       | 41,074            |       | 40,205                                       |       | 26,099   |       | 23,662   |       | 22,404   |       |
|                                                             |   |                                                                  | ** ** |              | ** ** |                                         | ** ** |     | ** ** |     | ** ** |     | ** ** |
| **Selected Operating Data:**                                     |   |                                                                  |       |              |       |                                         |       |     |       |     |       |     |       |
| Interest Income                                                  |   | $                                                                     | 17,276     |              | $          | 19,562                                       |       | $        | 5,224      |     | $          | 16,438   |       | $ | 18,230 |   | $ | 17,059 |   |
| Interest expense                                                 |   | 5,655                                                                 |       | 7,111             |       | 2,475                                        |       | 9,909    |       | 11,229   |       | 10,029   |       |
| Net interest income                                              |   | 11,622                                                                |       | 12,451            |       | 2,749                                        |       | 6,529    |       | 7,001    |       | 7,030    |       |
| Provision for loan losses                                        |   | 240                                                                   |       | 182               |       | 33                                           |       | 120      |       | 267      |       | 785      |       |
| Net interest income after provision for  loan losses             |   | 11,382                                                                |       | 12,269            |       | 2,716                                        |       | 6,409    |       | 6,734    |       | 6,245    |       |
| Non-interest income                                              |   | 4,974                                                                 |       | 3,856             |       | 1,012                                        |       | 2,353    |       | 997      |       | 1,636    |       |
| Severance and other costs related to merger  with MNB Bancshares |   | —                                                                |       | —            |       | 2,705                                        |       | —   |       | —   |       | —   |       |
| Non-interest expense                                             |   | 9,229                                                                 |       | 9,184             |       | 4,796                                        |       | 4,277    |       | 4,056    |       | 4,191    |       |
| Income (loss) before income taxes                                |   | 7,127                                                                 |       | 6,941             |       | (1,068                                       | )          | 4,485    |       | 3,655    |       | 3,690    |       |
| Provision (benefit) for income taxes                             |   | 2,275                                                                 |       | 2,363             |       | (430                                         | )          | 1,780    |       | 1,272    |       | 1,334    |       |
| Cumulative effect of change in accounting  principle, net of tax |   | —                                                                |       | —            |       |                                         |       | (215     | )          | —   |       | —   |       |
| Net earnings (loss)                                              |   | $                                                                     | 4,852      |              | 4,578      |                                         | $          | (638     | )          | $        | 2,490      |     | $          | 2,383 |   | $ | 2,356 |   |
| Net earnings (loss) per share (2):                               |   |                                                                  |       |              |       |                                         |       |     |       |     |       |     |       |
| Basic                                                            |   | $                                                                     | 2.31       |              | $          | 2.09                                         |       | $        | (0.29      | )        | $          | 2.03     |       | $ | 1.90 |   | $ | 1.78 |   |
| Diluted                                                          |   | 2.28                                                                  |       | 2.03              |       | (0.29                                        | )          | 1.88     |       | 1.76     |       | 1.62     |       |
| Dividends per share (2)                                          |   | 0.63                                                                  |       | 0.55              |       | 0.13                                         |       | 0.51     |       | 0.51     |       | 0.61     |       |
| Book value per common share outstanding (2)                      |   | 20.39                                                                 |       | 19.46             |       | 17.53                                        |       | 20.46    |       | 18.46    |       | 17.10    |       |
|                                                             |   |                                                                  | ** ** |              | ** ** |                                         | ** ** |     | ** ** |     | ** ** |     | ** ** |
| **Other Data:**                                                  |   |                                                                  |       |              |       |                                         |       |     |       |     |       |     |       |
| Return on average assets (3)                                     |   | 1.46                                                                  | %          | 1.35              | %          | (0.72                                        | )%         | 1.13     | %          | 0.97     | %          | 1.01     | %          |
| Return on average equity (3)                                     |   | 11.53                                                                 |       | 11.31             |       | (6.29                                        | )          | 10.17    |       | 10.23    |       | 10.09    |       |
| Equity to total assets                                           |   | 12.74                                                                 |       | 12.03             |       | 11.50                                        |       | 13.03    |       | 9.44     |       | 9.18     |       |
| Net interest rate spread (3)                                     |   | 3.35                                                                  |       | 3.44              |       | 2.82                                         |       | 2.57     |       | 2.48     |       | 2.64     |       |
| Net yield on average interest-earning  assets (3)                |   | 3.71                                                                  |       | 3.86              |       | 3.22                                         |       | 3.09     |       | 2.93     |       | 3.10     |       |
| Non-performing assets to total assets                            |   | 0.45                                                                  |       | 0.41              |       | 0.37                                         |       | 0.50     |       | 0.52     |       | 0.26     |       |
| Non-performing loans to net loans                                |   | 0.56                                                                  |       | 0.42              |       | 0.43                                         |       | 0.53     |       | 0.59     |       | 0.28     |       |
| Allowance for loan losses to total loans                         |   | 1.07                                                                  |       | 1.12              |       | 1.10                                         |       | 0.99     |       | 0.72     |       | 0.74     |       |
| Dividend payout ratio                                            |   | 27.63                                                                 |       | 27.57             |       | NM                                           |       | 25.38    |       | 27.31    |       | 34.18    |       |
| Number of full service banking offices                           |   | 12                                                                    |       | 12                |       | 12                                           |       | 6        |       | 6        |       | 6        |       |
|                                                                  |        |                                                                       |            |                   |            |                                              |            |          |            |          |            |          |            |  |  |  |  |  |  |  |

 

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**Our selected consolidated financial datashould be read in conjunction with, and is qualified in its entirety by, ourconsolidated financial statements, including the related notes.  In conjunction with the October 9, 2001,merger with MNB Bancshares, we changed our fiscal year end from September 30 toDecember 31. Our selected consolidated financial data presented above as of andfor the three months ended December 31, 2001, include our accounts, andcommencing October 9, 2001, MNB Bancshares. The selected consolidated financial data for periods prior to October 1,2001, are Landmark Bancshares historical financial data. (NM: not meaningful)

(1)          Includes loans held for sale totaling $734,000, $5.1 million, $5.7million, $2.5 million, $8.9 million, and $604,000 at December 31, 2003, 2002,and 2001, and September 30, 2001, 2000, and 1999, respectively.

(2)          All per share amounts have been adjusted to give effect to the 5% stockdividends paid in December 2003, 2002 and 2001.

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

 

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**Management’s Discussion AndAnalysis****OfFinancial Condition And Results Of Operations**

 

**Corporate Profile and Overview**

 

Landmark Bancorp, Inc. is a one-bank holdingcompany incorporated under the laws of the State of Delaware and is engaged inthe banking business through its wholly-owned subsidiary, Landmark NationalBank.  Landmark Bancorp is listed on theNasdaq Stock Market under the symbol “LARK”. Effective October 9, 2001, Landmark Bancshares, Inc. and MNB Bancshares,Inc. completed their merger into Landmark Merger Company, which immediatelychanged its name to Landmark Bancorp, Inc. In addition, Landmark Federal Savings Bank merged with Security NationalBank and the resulting bank changed its name to Landmark National Bank, whichis the wholly-owned subsidiary of Landmark Bancorp, Inc.  Landmark Bancorp is the accounting successorto the former Landmark Bancshares and therefore, all financial informationpresented for periods prior to October 9, 2001, reflects only the operations ofLandmark Bancshares.  The formerLandmark Bancshares utilized a September 30 fiscal year end.  Landmark Bancorp has a December 31 fiscalyear end and has presented the results for the quarter ended December 31, 2001,as a transition period.  The results forthe quarter ended December 31, 2001, include MNB Bancshares’ results sinceOctober 9, 2001.

 

 

Landmark National Bank is principally engagedin the business of attracting deposits from the general public and using suchdeposits, together with Federal Home Loan Bank borrowings and funds fromoperations, to originate commercial real estate and non-real estate loans andone-to-four family residential mortgage loans. Landmark National Bank alsooriginates consumer loans, small business loans, multi-family residentialmortgage loans, and home equity loans. Although not our primary business function, we do invest in certaininvestment and mortgage-related securities using deposits and other funds asfunding sources.

 

Our results of operations are primarilydependent on net interest income, which is the difference between interestincome from interest-earning assets and interest expense on interest-bearingliabilities.  Net interest income is affectedby regulatory, economic and competitive factors that influence interest rates,loan demand and deposit flows.  Inaddition, we are subject to interest rate risk to the degree that ourinterest-earning assets mature or reprice at different times, or at differentspeeds, than our interest-bearing liabilities.

 

 

Our results of operations are also affectedby non-interest income, such as service charges, loan fees and gains and lossesfrom the sale of newly originated loans and investments.  Our operating expenses, aside from interestexpense, principally consist of compensation and employee benefits, occupancycosts, federal deposit insurance costs, data processing expenses and provisionsfor potential loan losses.

 

We are significantly impacted by prevailingeconomic conditions including federal monetary and fiscal policies and federalregulations of financial institutions. Deposit balances are influenced by numerous factors such as competingpersonal investments, the level of personal income and the personal rate ofsavings within our market areas. Factors influencing lending activities include the demand for housingand the interest rate pricing competition from other lending institutions.

 

Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities.  Our strategy includes continuing a traditionof quality assets while growing our commercial and commercial real estate loanportfolios.  We are committed to developingrelationships with our borrowers and providing a total banking service.

 

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Currently, our business consists of ownershipof Landmark National Bank, with its main office in Manhattan, Kansas and elevenbranch offices in central and southwestern Kansas.  In November2003, we moved forward with our plans of growth and expansion when we announcedthe acquisition of First Kansas Financial Corporation (First Kansas).  First Kansas is a single-thrift holding company based inOsawatomie, Kansas with six locations in eastern and northcentral Kansas.  The acquisition is expected to be completedduring the second quarter of 2004, at which time we will expand First Kansas’products and services to ours for further revenue generation and asset growth.

 

**Critical Accounting Policies**

 

Critical accounting policies are those whichare both most important to the portrayal of our financial condition and resultsof operations, and require our management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  Our critical accounting policies relate to the allowance for loanlosses, the valuation of investment securities, and accounting for incometaxes, all of which involve significant judgment by our management.

 

We perform periodic and systematic detailedreviews of our lending portfolio to assess overall collectability.  The level of the allowance for loan lossesreflects our estimate of the collectability of the loan portfolio.  While these estimates are based onsubstantive methods for determining allowance requirements, nevertheless,actual outcomes may differ significantly from estimated results.  Additional explanation of the methodologiesused in establishing this reserve is provided in the “Asset Quality andDistribution” section.

 

We report our investment securities atestimated fair values based on readily ascertainable values which are obtainedfrom 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 webelieve that our estimates of the fair values of investment securities to bereasonable, economic and market factors may affect the amounts that willultimately be realized from these investments.

 

The objectives of accounting for income taxesare to recognize the amount of taxes payable or refundable for the current yearand deferred tax liabilities and assets for the future tax consequences ofevents that have been recognized in an entity’s financial statements or taxreturns.  Judgment is required inassessing the future tax consequences of events that have been recognized inour financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences,including the effects of IRS examinations and examinations by other stateagencies, could materially impact our financial position and results ofoperations.

 

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**Comparison Of Operating Results ForThe Years Ended December 31, 2003 And December 31, 2002**

 

**Summary of Performance.**  Net earnings for the year ended December 31,2003, increased $274,000, or 6.0%, to $4.9 million as compared to the yearended December 31, 2002.  Thisimprovement in net earnings was generally attributable to an increase innon-interest income including increased gains on sale of investments, increasedfees and service charges, and increased gains on sale of loans which was offsetby a reduction of net interest income. Also contributing to improved net earnings was non-interest expensewhich remained flat at $9.2 million for the years ended December 31, 2003 and2002.

 

The year ended December 31, 2003, resulted indiluted earnings per share of $2.28 compared to $2.03 for the same period in2002.  Return on average assets was1.46% for the year ended December 31, 2003, compared to 1.35% for the sameperiod in 2002.  Return on averagestockholders’ equity was 11.53% for the year ended December 31, 2003, comparedto 11.31% for the same period in 2002.

 

We continued our stock repurchase programduring 2003, resulting in the repurchase of an additional 72,228 shares.  As of December 31, 2003, we held 119,657shares as treasury stock at an average cost per share of $23.34.

 

We distributed a 5% stock dividend for thethird consecutive year in December 2003. All per share and average share data in this report has been restated toreflect the 2003 stock dividend.

 

**Interest Income.**  Interest income for the year ended December31, 2003, decreased $2.3 million, or 11.7%, to $17.3 million from $19.6 millionfor the year ended December 31, 2002. Interest income on loans decreased $2.3 million, or 14.1%, for the yearended December 31, 2003, compared to the same time period of 2002.  This decrease was related in part to thedecrease in interest rates experienced as interest earning assets repriceddownward during 2002 and continued throughout 2003.  A continued decline in average loans during 2003, which were$217.3 million, at December 31, 2003, compared to $233.3 million at December31, 2002, also contributed to the decrease in interest income.  The decline in average loans primarilyresulted from refinancings and paydowns in our residential mortgage portfolio.  Offsetting the decrease in total interestincome on loans was an increase in interest earned on investment securities to$2.9 million for the year ended December 31, 2003, from $2.8 million for thesame period of 2002.  The increase ininterest income on investment securities was due primarily to an increase inaverage investment securities from $93.3 million at December 31, 2003, comparedto $84.3 million at December 31, 2002, which was offset by a decline ininterest rates on these investments.

 

**Interest Expense.**  Interest expense for the year ended December31, 2003, decreased to $5.7 million from $7.1 million for the year endedDecember 31, 2002, or 20.5%.  Interestexpense on deposits declined to $4.4 million, or 23.0%, from $5.8 million duringthis period as a result of the decline in interest rates and a reduction inaverage deposits from $263.9 million at December 31, 2002, to $254.8 million atDecember 31, 2003.  Interest expense onborrowings, consisting mostly of advances from the Federal Home Loan Bank ofTopeka, decreased $129,000, or 9.7%, to $1.2 million for the year endedDecember 31, 2003, as compared to the year ended December 31, 2002.  The decrease in interest expense onborrowings resulted from scheduled principal payments and the decline ininterest rates.  The interest expenserelated to the $8.2 million in subordinated debentures that we issued inmid-December 2003 was nominal.  Theinterest expense associated with the subordinated debentures should be higherfor 2004 as we expect to incur twelve months of expense.

 

**Net Interest Income.**  Net interest income represents the differencebetween income derived from interest-earning assets and the expense incurred oninterest-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 for the year endedDecember 31, 2003, totaled $11.6 million, a 6.7% decrease, as compared to $12.5million for the year ended December 31, 2002. Average earning assets for 2003 totaled $313.2 million as compared to$322.7 million for 2002.  The netinterest margin on earning assets was 3.71% for the year ended December 31,2003, down from 3.86% for the same period of 2002.  The refinancings and paydowns in our residential mortgageportfolio exceeded our commercial loan growth during 2002 and 2003, resultingin the excess liquidity being invested into lower yielding investmentsecurities.  In addition, the prolongedlow-rate environment caused the net interest margin to compress as assetscontinued to reprice downward with little room left for liability repricing.

 

Given the mix of our interest bearingliabilities and interest bearing assets as of December 31, 2003, the netinterest margin could be expected to decline in a falling interest rateenvironment, and conversely, to increase in a rising rate environment.  Between 2001 and 2003, the Federal OpenMarket Committee lowered the target for the Federal Funds rate on twelveoccasions, decreasing the rate from 6.5% on January

 

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1, 2001, to 1.00% by the end of the firstquarter of 2003, for a total decline of 550 basis points.  These actions caused a correspondingdecrease in our prime loan rates which declined from 9.5% to 4.00%.  Since the first quarter of 2003, the FederalFunds rate held steady for the remainder of the year.  This continued stabile low rate environment had an adverse affecton our net interest margin during 2003 as our interest earning assets continuedto reprice downward and caught up with our interest bearing liabilities whichhad already repriced downward.

 

**Provision for Loan Losses.**  We maintain, and our Board of Directorsmonitors, an allowance for losses on loans. 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 appropriatelevel of reserves involves a high degree of management judgment and is basedupon historical and projected losses in the loan portfolio and the collateralvalue of specifically identified problem loans.  Additionally, allowance strategies and policies are subject toperiodic review and revision in response to a number of factors, includingcurrent market conditions, actual loss experience and management’sexpectations.

 

The provision for loan losses increased to$240,000 during the year ended December 31, 2003, compared to $181,500 for theyear ended December 31, 2002.  Ourcontinuous review of the loan portfolio prompted an increase in our provision,primarily as a result of the loan portfolio’s increased percentage ofcommercial loans and some deterioration in the asset quality of the commercialand consumer loan portfolios as a result of weak economic conditions.  One measure of the adequacy of the allowancefor estimated losses on loans is the ratio of the allowance to the total loanportfolio.  At December 31, 2003, theallowance for loan losses was $2.3 million, or 1.1% of gross loans outstanding,compared to $2.6 million, or 1.1% of gross loans outstanding, at December 31,2002.  For further discussion of theprovision for loan losses, refer to the “Asset Quality and Distribution”section.

 

**Non-interest Income.** Non-interest income increased $1.1 million, or 29.0%, for the year endedDecember 31, 2003, to $5.0 million compared to $3.9 million for the year endedDecember 31, 2002.  The increase innon-interest income reflected an improvement in gains on sale of loans from$1.4 million for the year ended December 31, 2002, to $1.6 million for the yearended December 31, 2003, as residential mortgage financing activity increaseddue to low home mortgage rates. Mortgage refinancing activity slowed down during the fourth quarter of2003 and is expected to continue at lower levels during 2004 as many mortgageholders have already taken advantage of the low interest rates favorable formortgage originations and as mortgage rates increase.  Also contributing to the increase in non-interest income wasincreased fees and service charges from $2.1 million for the year ended December31, 2002, to $2.5 million for the year ended December 31, 2003, relatingprimarily to the enhancement of our fee-based services and product offeringsduring the second half of 2002.  Theincrease in non-interest income also reflected a $222,000 increase in gains onsale of investments for the year ended December 31, 2003, as compared to thesame period of 2002.  This increase ingains on sale of investments resulted from equity security sales from ourholding company’s investment portfolio. We periodically sell equity securities based on performance and otherindicators.  We estimate that the gainson sale of investments during 2004 will be at a level less than the amountrealized during 2003 as our security portfolio and amount of unrealized gains hasdecreased as a result of the sales.  Weestimate that our planned acquisition of First Kansas in April 2004 willpositively impact our non-interest income for 2004 as we enter new markets andexpand First Kansas’ deposit-related products and services to ours.

 

**Non-interest Expense.** Non-interest expense increased $45,000, or 0.5%, to $9.2 million for theyear ended December 31, 2003, as compared to the year ended December 31,2002.  The increase in non-interestexpense was primarily related to an increase of $61,000 in professional fees, a$52,000 increase in occupancy and equipment expense and an increase of $38,000in amortization expense for the year ended December 31, 2003, compared to theyear ended December 31, 2002.  Theincrease in professional fees included legal fees of approximately $25,000incurred related to securing our “Landmark” trade name.  The increase in occupancy and equipmentexpense was primarily related to the depreciation of our enhanced computersystem while amortization expense increased as prepayments in our mortgage servicingportfolio have accelerated.

 

**Income Taxes.**  Income tax expense decreased $87,000, or3.7%, to $2.3 million for the year ended December 31, 2003, from $2.4 millionfor the year ended December 31, 2002. The decrease in income tax expense and the effective rate for the yearended December 31, 2003, resulted primarily from the utilization of investmenttax credits.

 

8

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND SEPTEMBER 30,2001**

 

**Summary of Performance.**  Net earnings for the year ended December 31,2002, were $4.6 million, an increase of 83.8%, compared to net earnings of $2.5million for the year ended September 30, 2001. Diluted earnings per share for the year ended December 31, 2002, was$2.03 compared to $1.88 for the year ended September 30, 2001.  The improvement in net earnings wasgenerally attributable to the MNB Bancshares merger, increased fees and servicecharges, and an improvement in our net interest margin.  The earnings per share amount was impacted bythe 817,806 shares that were issued in connection with the MNB Bancsharesmerger.

 

**Interest Income.** Interest income for the year ended December 31, 2002, increased $3.1million, or 19.0%, to $19.6 million from $16.4 million for the year endedSeptember 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 securities and other investments increased $65,000 to$2.9 million for the year ended December 31, 2002, compared to the year endedSeptember 30, 2001.  The increase ininterest income was primarily related to an increase in average earning assetsresulting from the MNB Bancshares merger, which overcame the decrease in ratesexperienced as interest earning assets repriced downward during 2002.

 

**Interest Expense.** Interest expense for the year ended December 31, 2002, decreased to $7.1million from $9.9 million for the year ended September 30, 2001, or 28.2%.  Deposit interest expense declined to $5.8million from $7.8 million during this period despite acquiring $131.0 millionin deposits from the MNB Bancshares merger, as a result of the decline in interestrates.  Interest expense on borrowings,consisting primarily of advances from the Federal Home Loan Bank of Topeka,decreased $790,000, or 37.1%, to $1.3 million for the year ended December 31,2002, as compared to the year ended September 30, 2001, as a result ofscheduled principal payments and the decline in interest rates.

 

**Net Interest Income.**  Netinterest income increased to $12.5 million for the year ended December 31,2002, compared to $6.5 million for the year ended September 30, 2001.  The net interest margin for the year endedDecember 31, 2002, was 3.86% compared to 3.09% for the year ended September 30,2001.  This increase resulted frominterest rates on our interest-bearing liabilities which repriced downward at amore rapid pace than our interest-earning assets.  In addition, the acquired commercial and consumer loan portfoliosof MNB Bancshares combined with the commercial loan growth experienced during2002 resulted in improved yields on interest-earning assets.

 

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% byDecember 31, 2002, for a total decline of 525 basis points.  These actions caused a correspondingdecrease in our prime loan rates which declined from 9.5% to 4.25%.  Our net interest margin improved duringfiscal 2002 as a result of the MNB Bancshares merger and the acquiredcommercial and consumer loan portfolios of MNB Bancshares combined with thecommercial loan growth experienced during 2002.  The net interest margin also improved due to our interest bearingliabilities repricing downward at a more rapid pace than our interest earningassets.

 

**Provision For Loan Losses.**  The provision for loan losses increased to$181,500 during the year ended December 31, 2002, compared to $120,000 for theyear ended September 30, 2001.  Ourreview of the loan portfolio during 2002 prompted an increase in our provision,resulting primarily from increased commercial loan balances and some deteriorationin the consumer loan portfolio quality due to the economic downturn.  One measure of the adequacy of the allowancefor the estimated losses on loans is the ratio of the allowance to the totalloan portfolio.  At December 31, 2002,the allowance for loan losses was $2.6 million, or 1.1% of gross loansoutstanding, compared to $1.4 million, or 1.0% of gross loans outstanding, atSeptember 30, 2001.

 

**Non-interest Income.**  Non-interest income for the year endedDecember 31, 2002, increased $1.5 million, or 63.9%, to $3.9 million from $2.4million for the year ended September 30, 2001. Fees and service charge income increased to $2.1 million from $437,000as a result of the MNB Bancshares merger and the fee income associated with MNBBancshares’ products and services.  Alsocontributing to the increase in non-interest income was an improvement of 78.9%in gains on sale of loans from $763,000 for the year ended September 30, 2001,to $1.4 million for the year ended December 31, 2002, as residential mortgagefinancing activity increased due to the MNB Bancshares merger and the declininginterest rates during 2002.  Partiallyoffsetting the increase in

 

9

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non-interest income was an $874,000, or87.5%, decrease in net gains on sales of investments from $998,000 for the yearended 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.

 

**Non-interest Expense.** Non-interest expense increased $4.9 million to $9.2 million for the yearended December 31, 2002, compared to the year ended September 30, 2001.  The increase was primarily related to anincrease of $2.2 million in compensation and benefits expense and an increaseof $652,000 in occupancy and equipment expense for the year ended December 31,2002, compared to the year ended September 30, 2001. The additionalcompensation and benefits expense and occupancy and equipment expense incurredduring 2002 was a result of the MNB Bancshares merger.

 

**Income Taxes.** Income tax expense increased $582,000, or 32.7%, to $2.4 million for theyear ended December 31, 2002, from $1.8 million for the year ended September30, 2001.  This increase in income taxexpense resulted primarily from an increase in taxable income.  The effective tax rate for fiscal 2002 was34.0% compared to 39.7% for fiscal 2001. The decrease in the effective tax rate was primarily due to the effectof non-taxable investments that were acquired as a result of the MNB Bancsharesmerger.

 

**Average Assets/Liabilities.**  Thefollowing table sets forth information relating to average balances ofinterest-earning assets and interest-bearing liabilities for the years endedDecember 31, 2003 and 2002, the three months ended December 31, 2001, and theyear ended September 30, 2001.  The assetsand liabilities of MNB Bancshares were recorded at their respective fair marketvalues at the merger date.  Based on therelatively low interest rates prevailing at the merger date, the effectiveyields on MNB Bancshares’ interest-earning assets and rates on MNB Bancshares’interest-bearing liabilities were significantly reduced, thus causing our postmerger blended yields and cost of funds to decline in comparison to the periodspresented prior to the merger. This table reflects the average yields on assetsand average 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.

 

10

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**AverageBalance Sheets – Average Yields And Rates**

 
|                                                                              |   | **Year ended  December 31, 2003** |    | **Year ended  December 31, 2002** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                                                                              |   | **Average  Balance**              |    | **Interest**                      |   | **Average  Yield/Rate** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/Rate** |   |
| **ASSETS**                                                                        |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                          |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Investment securities (1)                                                         |   | $                                 | 95,923  |                              | $      | 2,973 |   | 3.10 | % | $ | 89,393 |   | $ | 2,911 |   | 3.26 | % |
| Loans receivable, net (2)                                                         |   | 217,327                           |    | 14,303                            |   | 6.58 | % | 233,311 |   | 16,650 |   | 7.14 | % |
| Total interest-earning assets                                                     |   | 313,250                           |    | 17,276                            |   | 5.52 | % | 322,704 |   | 19,561 |   | 6.06 | % |
| Non-interest-earning assets                                                       |   | 17,899                            |    |                              |   |   |   | 15,861 |   |   |   |   |   |
| Total                                                                             |   | $                                 | 331,149 |                              |   |   |   |   | $ | 338,565 |   |   |   |   |   |
|                                                                              |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                    |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                     |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                           |   | $                                 | 141,877 |                              | $      | 3,706 |   | 2.61 | % | $ | 152,407 |   | $ | 4,578 |   | 3.00 | % |
| Money market and NOW accounts                                                     |   | 76,316                            |    | 678                               |   | 0.89 | % | 74,032 |   | 1,026 |   | 1.39 | % |
| Savings accounts                                                                  |   | 15,033                            |    | 62                                |   | 0.41 | % | 17,201 |   | 169 |   | 0.98 | % |
| FHLB advances and other borrowings                                                |   | 27,887                            |    | 1,209                             |   | 4.34 | % | 28,164 |   | 1,338 |   | 4.75 | % |
| Total interest-bearing liabilities                                                |   | 261,113                           |    | 5,655                             |   | 2.17 | % | 271,804 |   | 7,111 |   | 2.62 | % |
| Non-interest-bearing liabilities                                                  |   | 27,603                            |    |                              |   |   |   | 26,267 |   |   |   |   |   |
| Stockholders’ equity                                                         |   | 42,433                            |    |                              |   |   |   | 40,494 |   |   |   |   |   |
| Total                                                                             |   | $                                 | 331,149 |                              |   |   |   |   | $ | 338,565 |   |   |   |   |   |
|                                                                              |   |                              |    |                              |   |   |   |   |   |   |   |   |   |
| Net interest income                                                               |   |                              |    | $                                 | 11,621 |   |   |   |   |   | $ | 12,450 |   |   |   |
| Interest rate spread (3)                                                          |   |                              |    |                              |   | 3.35 | % |   |   |   |   | 3.44 | % |
| Net interest margin (4)                                                           |   |                              |    |                              |   | 3.71 | % |   |   |   |   | 3.86 | % |
| Ratio of average interest-earning assets to average interest-bearing  liabilities |   |                              |    | 119.97                            | %      |   |   |   |   | 118.73 | % |   |   |

 
|                                                                              |   | **Three  months ended December 31, 2001** |    | **Year ended  September 30, 2001** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------------------|---------|------------------------------------|--------|
|                                                                              |   | **Average  Balance**                      |    | **Interest**                       |   | **Average  Yield/Rate(5)** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/Rate** |   |
| **ASSETS**                                                                        |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                          |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| Investment securities (1)                                                         |   | $                                         | 93,466  |                               | $      | 595 |   | 2.53 | % | $ | 47,261 |   | $ | 2,847 |   | 6.02 | % |
| Loans receivable, net (2)                                                         |   | 245,669                                   |    | 4,629                              |   | 7.48 | % | 164,165 |   | 13,591 |   | 8.28 | % |
| Total interest-earning assets                                                     |   | 339,135                                   |    | 5,224                              |   | 6.11 | % | 211,426 |   | 16,438 |   | 7.77 | % |
| Non-interest-earning assets                                                       |   | 11,173                                    |    |                               |   |   |   | 8,392 |   |   |   |   |   |
| Total                                                                             |   | $                                         | 350,308 |                               |   |   |   |   | $ | 219,818 |   |   |   |   |   |
|                                                                              |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                    |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                     |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                           |   | $                                         | 166,925 |                               | $      | 1,716 |   | 4.08 | % | $ | 124,627 |   | $ | 7,031 |   | 5.64 | % |
| Money market and NOW accounts                                                     |   | 80,310                                    |    | 338                                |   | 1.67 | % | 22,716 |   | 532 |   | 2.34 | % |
| Savings accounts                                                                  |   | 18,352                                    |    | 76                                 |   | 1.64 | % | 7,284 |   | 218 |   | 2.99 | % |
| FHLB advances and other borrowings                                                |   | 33,141                                    |    | 345                                |   | 4.13 | % | 35,810 |   | 2,128 |   | 5.94 | % |
| Total interest-bearing liabilities                                                |   | 298,728                                   |    | 2,475                              |   | 3.29 | % | 190,437 |   | 9,909 |   | 5.20 | % |
| Non-interest-bearing liabilities                                                  |   | 11,356                                    |    |                               |   |   |   | 4,536 |   |   |   |   |   |
| Stockholders’ equity                                                         |   | 40,224                                    |    |                               |   |   |   | 24,845 |   |   |   |   |   |
| Total                                                                             |   | $                                         | 350,308 |                               |   |   |   |   | $ | 219,818 |   |   |   |   |   |
|                                                                              |   |                                      |    |                               |   |   |   |   |   |   |   |   |   |
| Net interest income                                                               |   |                                      |    | $                                  | 2,749  |   |   |   |   |   | $ | 6,529 |   |   |   |
| Interest rate spread (3)                                                          |   |                                      |    |                               |   | 2.82 | % |   |   |   |   | 2.57 | % |
| Net interest margin (4)                                                           |   |                                      |    |                               |   | 3.22 | % |   |   |   |   | 3.09 | % |
| Ratio of average interest-earning assets to average interest-bearing  liabilities |   |                                      |    | 113.53                             | %      |   |   |   |   | 111.02 | % |   |   |

 

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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.

 

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**Comparison Of Operating Results ForThe QUARTERS Ended December 31, 2001 And 2000**

 

**Summary Of Performance.**  Operatingearnings, net of tax, for the quarter ended December 31, 2001, were $1.1million, an increase of 58.0%, compared to operating earnings, net of tax, of$680,000 for the quarter ended December 31, 2000.  The MNB Bancshares merger was completed on October 9, 2001.  Accordingly, the results for the quarterended December 31, 2001, included MNB Bancshares’ results since that date.  In conjunction with the merger, expenses of$2.7 million were incurred during the quarter ended December 31, 2001.  The inclusion of the merger expensesresulted in a net loss of $638,000 for the quarter ended December 31,2001.  Diluted net loss per share forthe quarter ended December 31, 2001, was $0.29.

 

On October 1, 2000, we adopted Statement ofFinancial Accounting Standards No. 133. In connection with the adoption, certain investments were reclassifiedfrom held-to-maturity to available-for-sale and trading and resulted in acumulative decrease in earnings of $215,000, net of tax.  Net earnings after the cumulative effect ofthe change in accounting principle for the quarter ended December 31, 2000,were $466,000.  Diluted net earnings pershare for the quarter ended December 31, 2000, was $0.35.

 

**Interest Income.** Interest income increased by $739,000, or 16.5%, to $5.2 million in thequarter ended December 31, 2001. Average interest-earning assets increased from $222.9 million for thequarter ended December 31, 2000, to $339.1 million for the quarter endedDecember 31, 2001, primarily due to the MNB Bancshares merger.  Interest income on loans increased $888,000,or 23.5%, to $4.6 million.  Interestearned on securities and other investments declined $140,000 to $595,000.  The increase in interest income was due toan increase in average loans resulting from the MNB Bancshares merger, whichovercame the decrease in rates experienced as interest-earning assets repricedduring 2001.

 

**Interest Expence.**  Interest expense decreased from $2.9 millionfor the quarter ended December 31, 2000, to $2.5 million for the quarter endedDecember 31, 2001, or 14.0%.  Depositinterest expense remained consistent at $2.1 million, despite acquiring $131.0million in deposits from the MNB Bancshares merger, as a result of the declinein rates. Interest expense on borrowings, consisting primarily of advances fromthe Federal Home Loan Bank of Topeka, decreased $417,000, or 54.7%, to $344,000at December 31, 2001, as a result of scheduled principal payments and thedecline in rates.

 

**Net Interest Income.**  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 net interest margin for the quarterended December 31, 2001, was 3.22% compared to 2.86% for the quarter endedDecember 31, 2000.  This increaseresulted from interest rates on our interest-bearing liabilities which repriceddownward at a more rapid pace than our interest-earning assets.

 

**Provision For Loan Losses.**  The provision for loan losses decreased to$33,000 during the quarter ended December 31, 2001, compared to $45,000 in thequarter ended December 31, 2000.  Withthe loan portfolio quality remaining strong, our review of the portfolio,coupled with loan sales during the quarter ended December 31, 2000, prompted aslight decline in our provision.  AtDecember 31, 2001, the allowance for loan losses was $2.6 million, or 1.1% ofgross loans outstanding, compared to $1.4 million, or 1.0% of gross loansoutstanding, at September 30, 2001.

 

**Non-interest Income.**  Non-interest income increased $468,000, or86.1%, to $1.0 million for the quarter ended December 31, 2001.  Fees and service charge income increasedfrom $132,000 to $426,000, or by 223.6%, relating primarily to the MNBBancshares merger and the fee income associated with MNB Bancshares’ productsand services offered. Also contributing to this increase was an improvement ingains on sale of loans by $220,000, or 69.0%, to $539,000, as loan originationincreased due to the decrease in home mortgage interest rates during 2001.

 

**Non-interest Expense.**  Non-interest expense increased $3.8 millionto $4.8 million for the quarter ended December 31, 2001, resulting fromadditional expenses associated with the MNB Bancshares merger and the $2.7million severance and other expenses related to the MNB Bancshares merger.

 

**Income Taxes.**  Anincome tax benefit of $430,000 was recognized for the three months endedDecember 31, 2001, compared to an income tax expense of $410,000 that wasincurred for the three months ended December 31, 2000.  This decrease in income tax expenseprimarily relates to the inclusion of $2.7 million in merger-related expensesthat were associated with the MNB Bancshares merger that was completed inOctober 2001.

 

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**LandmarkBancorp, Inc. and Subsidiary**

**QuarterlyResults of Operations**

** **
|                                                |   | **Fiscal 2003  Quarters Ended** |      |
|-----------------------------------------------------|--------|---------------------------------|-----------|
|                                                |   | **March 31**                    |      | **June 30** |   | **September  30** |   | **December 31** |   |
| Interest income                                     |   | $                               | 4,635,165 |   | $ | 4,311,598 |   | $ | 4,132,953 |   | $ | 4,196,586 |   |
| Interest expense                                    |   | 1,549,418                       |      | 1,454,050 |   | 1,350,762 |   | 1,300,342 |   |
| Net interest income                                 |   | 3,085,747                       |      | 2,857,548 |   | 2,782,191 |   | 2,896,244 |   |
| Provision for loan losses                           |   | 60,000                          |      | 60,000 |   | 60,000 |   | 60,000 |   |
| Net interest income after provision for loan losses |   | 3,025,747                       |      | 2,797,548 |   | 2,722,191 |   | 2,836,244 |   |
| Non-interest income                                 |   | 1,341,228                       |      | 1,245,056 |   | 1,297,633 |   | 1,090,274 |   |
| Non-interest expense                                |   | 2,353,190                       |      | 2,290,000 |   | 2,191,014 |   | 2,394,551 |   |
| Earnings before income taxes                        |   | 2,013,785                       |      | 1,752,604 |   | 1,828,810 |   | 1,531,967 |   |
| Provision for income taxes                          |   | 690,252                         |      | 537,198 |   | 597,168 |   | 450,851 |   |
| Net earnings                                        |   | $                               | 1,323,533 |   | $ | 1,215,406 |   | $ | 1,231,642 |   | $ | 1,081,116 |   |
| Earnings per share(1):                              |   |                            |      |   |   |   |   |   |   |
| Basic                                               |   | $                               | 0.63      |   | $ | 0.58 |   | $ | 0.59 |   | $ | 0.51 |   |
| Diluted                                             |   | 0.62                            |      | 0.57 |   | 0.58 |   | 0.51 |   |

 
|                                                |   | **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 |   |
| Non-interest income                                 |   | 730,885                         |      | 861,264 |   | 917,103 |   | 1,346,764 |   |
| Non-interest 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                                               |   | $                               | 0.42      |   | $ | 0.53 |   | $ | 0.56 |   | $ | 0.58 |   |
| Diluted                                             |   | 0.41                            |      | 0.52 |   | 0.54 |   | 0.56 |   |

 

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(1) All per share amounts have been adjustedto give effect to the 5% stock dividends paid by us in December 2003 and 2002.

 

13

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**Capital Resources And Liquidity**

 

**Asset Quality And Distribution.** Totalassets declined to $334.0 million at December 31, 2003, compared to $341.3million at December 31, 2002.  Ourprimary ongoing sources of funds are deposits, proceeds from principal andinterest payments on loans and investment securities and proceeds from the saleof mortgage loans and investment securities. While maturities and scheduled amortization of loans are a predictablesource of funds, deposit flows and mortgage prepayments are greatly influencedby general interest rates, economic conditions, competition, and therestructuring of the financial services industry.

 

Net loans, excluding loans held for sale,decreased $9.8 million to $214.3 million as of December 31, 2003, from $224.1million as of December 31, 2002.  Thedecline was primarily the result of refinancings and paydowns in ourresidential mortgage portfolio.  Ourloan portfolio composition continues to diversify as a result of pay downs andour planned expansion of commercial lending activities.  This is evidenced by our one-to-four residentialreal estate loans comprising 54.4%, 44.7% and 37.9% of total loans as ofDecember 31, 2001, December 31, 2002, and December 31, 2003, respectively.

 

Our primary investing activities are theorigination of mortgage, consumer, and commercial loans and the purchase ofinvestment and mortgage-backed securities. Generally, we originate fixed-rate, residential mortgage loans withmaturities in excess of ten years for sale in the secondary market.  We do not originate and warehouse thesefixed-rate residential loans for resale in order to speculate on interestrates.  As of December 31, 2003, ourresidential mortgage loan portfolio consisted of $35.4 million with fixed ratesand $46.7 million with variable rates.

 

The allowance for losses on loans is establishedthrough a provision for losses on loans based on our evaluation of the riskinherent in the loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans with respect to which full collectibility maynot be reasonably assured, considers the fair value of the underlyingcollateral, economic conditions, historical loan loss experience, level ofclassified loans and other factors that warrant recognition in providing for anadequate allowance for losses on loans.

 

We believe that the quality of the loanportfolio continues to be strong as evidenced by our low levels of past due andnon-accrual loans.  Loans past due morethan one month and less than 90 days as of December 31, 2003, totaled $2.3million.  As of December 31, 2003, loanswith a balance of $1.2 million were on non-accrual status, or 0.55% of totalloans, compared to a balance of $925,000 loans on non-accrual status, or 0.40%of total loans, as of December 31, 2002. In addition, the ratio of non-performing assets as a percentage of totalassets remained relatively flat at 0.45% at December 31, 2003, compared to0.41% at December 31, 2002.

 

Residential home loans comprised 72.3% of the$1.2 million non-accrual balance at December 31, 2003.  We have historically incurred minimal lossesbased upon collateral values.  We dididentify some asset quality deterioration in the commercial and consumer loanportfolios during 2003, primarily as a result of the weak economy.  Net charge offs were $489,000 for the yearended December 31, 2003, compared to net charge offs of $257,000 for the yearended December 31, 2002.  We feel thatthe instances identified in 2003 were appropriately addressed as either chargesagainst the allowance for loan losses or through provisions to the reserveduring 2003.

 

A slowdown in economic activity beginning in2001 severely impacted several major industries as well as the economy as awhole.  While we are pleased that thereappears to be numerous indications of emerging strength in the economy, westill have a concern for the outlook of the economy in 2004.  The strengthening may not be sustainable andconsumer confidence may be slow to respond to the positive effects, if any, onthe economy.  These events couldadversely affect cash flows for both commercial and individual borrowers, as aresult of which, we could experience increases in problem assets, delinquenciesand losses on loans.  Many financialinstitutions have experienced an increase in non-performing assets during therecent difficult economic period, as even well-established business borrowersdeveloped cash flow, profitability and other business-related problems.  We believe that the allowance for losses onloans at December 31, 2003, was adequate. While we believe that we use the best information available to determinethe allowance for losses on loans, unforeseen market conditions could result inadjustment to the allowance for losses on loans.  In addition, net earnings could be significantly affected ifcircumstances differ substantially from the assumptions used in establishingthe allowance for losses on loans.

 

**Liability Distribution.** Totaldeposits decreased $11.2 million to $253.1 million at December 31, 2003, from$264.3 million at December 31, 2002. Borrowings increased $7.6 million to $33.8 million at December 31, 2003,from $26.2

 

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million at December 31, 2002.  Non-interest bearing deposits at December31, 2003, were $20.5 million, or 8.1% of deposits, compared to $23.4 million,or 8.9% of deposits, at December 31, 2002. Money market and NOW deposit accounts were 30.4% of the portfolio andtotaled $77.0 million at December 31, 2003, compared to $78.4 million, or 29.6%of deposits, at December 31, 2002. Savings accounts decreased to $14.8 million at December 31, 2003, from$15.0 million at December 31, 2002. Certificates of deposit decreased to $140.8 million, or 55.6%, ofdeposits at December 31, 2003, from $147.4 million, or 55.8% of deposits, atDecember 31, 2002.  The reduction ofcertificates of deposit was reflective of our excess liquidity position in thatwe did not bid aggressively on public deposits in 2003.

 

Certificates of deposit at December 31, 2003,which were scheduled to mature in one year or less, totaled $104.8 million.Historically, maturing deposits have generally remained with our Bank and webelieve that a significant portion of the deposits maturing in one year or lesswill remain with us upon maturity.

 

**Cash Flows.** During the year ended December 31, 2003, ourcash and cash equivalents decreased $3.7 million.  Our operating activities during 2003 provided us net cash of $5.7million. We used net cash of $3.2 million in investing activities in 2003,primarily for the purchase of investment securities of $66.5 million and thepurchase of equipment of $338,000, net of retirements.  These outflows of cash for investingpurposes were offset by the maturities and prepayments of investment securitiesof $52.6 million and a net decrease in our loan portfolio of $9.3 million, theproceeds from sales of investment securities of $1.2 million, and the proceedsfrom sale of other real estate and premises and equipment of $434,000.  We used net cash of $6.2 million in financingactivities during 2003, primarily due to a $11.2 million decrease in ourdeposits portfolio, the purchase of $1.9 million in treasury stock, the paymentof $1.3 million in dividends, and the payment of $78.2 million of debt whichwas offset by $85.9 million in borrowings. The $85.9 million in borrowings during 2003 included the issuance of$8.2 million of subordinated debentures. These outflows of cash for financing activities were also offset by$480,000 of proceeds from the issuance of common stock associated with theexercise of stock options.

 

During the year ended December 31, 2002, ourcash and cash equivalents decreased $10.7 million.  Our operating activities during 2002 provided us net cash of $9.3million. 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 cash for investingpurposes were offset by the maturities and prepayments of investment securitiesof $27.1 million and a net decrease in our loan portfolio of $10.4million.  We used net cash of $17.2million in financing activities during 2002, primarily due to a $9.0 milliondecrease in our deposits portfolio, the purchase of $5.3 million in treasurystock, the payment of $1.2 million in dividends, and the payment of $36.4million of debt which was offset by $34.1 million in borrowings.  These outflows of cash for financingactivities were also offset by $733,000 of proceeds from the issuance of commonstock associated with the exercise of stock options.

 

During the quarter ended December 31, 2001,our cash and cash equivalents increased $2.2 million.  We had net cash provided by investing activities of $9.0 million,which consisted primarily of a net decrease of loans of $8.4 million,maturities and prepayments of investment securities of $15.8 million which wereoffset by purchases of investment securities of $21.4 million.  Net cash of $1.8 million was used inoperating activities during the three months ended December 31, 2001.  Net cash of $5.0 million was used in financing activities primarily from thedecrease in deposits of  $5.8 million.

 

**Contractual Obligations AndCommercial Commitments.**  The followingtable presents contractual obligations, defined as operating lease obligationsand principal payments due on non-deposit obligations with maturities in excessof one year as of December 31, 2003, for the periods indicated.

 
| **Contractual cash  obligations** |   | **Total**  |       | **One year  or less** |   | **One to  three years** |   | **Four to  five years** |       | **More than  five years** |   |
|-----------------------------------|--------|------------|------------|-----------------------|--------|-------------------------|--------|-------------------------|------------|---------------------------|--------|
|                              |   |       |       |                  |   |                    |   |                    |       |                      |   |
| Operating leases                  |   | $          | 133,730    |                  | $      | 120,837                 |   | $                       | 12,893     |                      | $      | — |   | $ | — |   |
| Service contracts                 |   | 2,585,000  |       | 660,000               |   | 1,925,000               |   | —                  |       | —                    |   |
| FHLB advances                     |   | 23,057,104 |       | 1,000,000             |   | 11,000,000              |   | 4,000,000               |       | 7,057,104                 |   |
| Other borrowing                   |   | 8,248,000  |       | —                |   | —                  |   | —                  |       | 8,248,000                 |   |
| Total contractual obligations     |   | $          | 34,023,834 |                  | $      | 1,780,837               |   | $                       | 12,937,893 |                      | $      | 4,000,000 |   | $ | 15,305,104 |   |

 

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**Liquidity.******Our most liquid assets are cash and cash equivalents and investmentsecurities available for sale. The level of these assets is dependent on ouroperating, financing, lending and investing activities during any given period.  At December 31, 2003 and 2002, the carryingvalue of these liquid assets totaled $107.5 million and $100.7 million,respectively.  During periods in whichwe are not able to originate a sufficient amount of loans and/or periods ofhigh principal prepayments, we increase our liquid assets by investing inshort-term U.S. Government and agency securities or high-grade municipalsecurities.

 

Liquidity management is both a daily andlong-term function of our strategy. Excess funds are generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are available through theuse of Federal Home Loan Bank advances, a line of credit with the Federal HomeLoan Bank or through sales of securities. At December 31, 2003, we had outstanding Federal Home Loan Bank advancesof $23.1 million and had borrowings of $2.2 million on our line of credit withthe Federal Home Loan Bank.  At December31, 2003, our total borrowing capacity with the Federal Home Loan Bank wasapproximately $59.7 million.  InDecember 2003, we issued $8.2 million of subordinated debentures for thepurpose of funding the acquisition of First Kansas, which is scheduled to closein April 2004.  In addition to thesubordinated dentures, we have obtained a $9.0 million loan commitment from anunrelated financial institution to provide financing for the First Kansasacquisition.

 

As a provider of financial services, weroutinely issue financial guarantees in the form of financial and performancestandby letters of credit.  Standbyletters of credit are contingent commitments issued by us generally toguarantee the payment or performance obligation of a customer to a thirdparty.  While these standby letters ofcredit represent a potential outlay by us, a significant amount of thecommitments may expire without being drawn upon.  We have recourse against the customer for any amount the customeris required to pay to a third party under a standby letter of credit.  The letters of credit are subject to thesame credit policies, underwriting standards and approval process as loans madeby us.  Most of the standby letters ofcredit are secured, and in the event of nonperformance by the customers, wehave the right to the underlying collateral, which could include commercialreal estate, physical plant and property, inventory, receivables, cash andmarketable securities.  The contractamount of these standby letters of credit, which represents the maximumpotential future payments guaranteed by us, was $2.4 million at December 31,2003.

 

At December 31, 2003, we had outstanding loancommitments, excluding standby letters of credit, of $28.0 million.  We anticipate that sufficient funds will beavailable to meet current loan commitments. These commitments consist of lettersof credit, unfunded lines of credit and commitments to finance real estateloans.

 

**Capital.** 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.

 

At December 31, 2003, we continued tomaintain a sound leverage capital ratio of 22% and a total risk based capitalratio of 23%.  As shown by the followingtable, our capital exceeded the minimum capital requirements at December 31,2003 (dollars in thousands):

 
|                     |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|--------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                 |   | $                  | 47,522 |                | 22     | %                     | 4      | %                    | $      | 8,548 |   |
| Tier 1 capital           |   | $                  | 47,522 |                | 14     | %                     | 4      | %                    | $      | 13,273 |   |
| Total risk based capital |   | $                  | 49,838 |                | 23     | %                     | 8      | %                    | $      | 17,097 |   |

 

At December 31, 2003, our subsidiary bankcontinued to maintain a sound leverage ratio of 16% and a total risk basedcapital ratio of 17%.  As shown by thefollowing table, Landmark National Bank’s capital exceeded the minimum capitalrequirements at December 31, 2003 (dollars in thousands):

 
|                     |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|--------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                 |   | $                  | 34,775 |                | 16     | %                     | 4      | %                    | $      | 8,514 |   |
| Tier 1 capital           |   | $                  | 34,775 |                | 10     | %                     | 4      | %                    | $      | 13,223 |   |
| Total risk based capital |   | $                  | 37,091 |                | 17     | %                     | 8      | %                    | $      | 17,029 |   |

 

Banks and bank holding companies aregenerally expected to operate at or above the minimum capital requirements. Theabove ratios are well in excess of regulatory minimums and should allow us tooperate without capital adequacy concerns. The Federal Deposit InsuranceCorporation Improvement Act of 1991 establishes a bank rating system based onthe capital levels of banks. As of December 31, 2003 and 2002, we were rated“well capitalized”, which is the highest rating available under thiscapital-based rating system.  DuringDecember 2003, we obtained $8.2 million in trust preferred borrowings.

 

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In accordance with current capitalguidelines, this amount has been included in our Tier 1 capital ratios as ofDecember 31, 2003.  There has beenspeculation that the Federal Reserve Board may change its capitalguidelines.  If such changes were tooccur, and if such changes precluded banks and bank holding companies fromincluding the trust preferred borrowing as a component of Tier 1 capital, wewould still maintain a “well-capitalized” rating as of December 31, 2003.

 

**Dividends.******During the year ended December 31, 2003, we paid a cash dividend of$0.16 per share to our stockholders for the first and second quarters.  The cash dividend was increased to $0.17 pershare in the third quarter of 2003 which represented a 6.25% increase over theamount paid in the previous quarter. Additionally, we distributed a 5% stock dividend for the thirdconsecutive year in December 2003.

 

The payment of dividends by any financialinstitution or its holding company is affected by the requirement to maintainadequate capital pursuant to applicable capital adequacy guidelines andregulations. As described above, Landmark National Bank exceeded its minimumcapital requirements under applicable guidelines as of December 31, 2003.  The National Bank Act imposes limitations onthe amount of dividends that a national bank may pay without prior regulatoryapproval. Generally, the amount is limited to the bank’s current year’s netearnings plus the adjusted retained earnings for the two preceding years.  As of December 31, 2003, approximately $1.2million was available to be paid as dividends to Landmark Bancorp by LandmarkNational Bank without prior regulatory approval.

 

**Recent Accounting Developments**

 

The Financial Accounting Standards Board(FASB) issued Interpretation No. 46R (FIN 46R), *Consolidation of Variable Interest Entities*,in December 2003.  FIN 46R clarifies therequirements that investments in variable interest entities (VIE) beconsolidated by the entity that has a variable interest that will absorb amajority of the VIE’s expected losses if they occur, receive a majority of theVIE’s expected returns, or both.  Publiccompanies must apply the unmodified provisions of the Interpretation to“special-purpose entities” by the end of the first reporting period endingafter December 15, 2003.  Publiccompanies, other than small business issuers, must apply the revisedInterpretation by the end of the first reporting period beginning afterDecember 15, 2003, to all entities that are not special-purpose entities.  We have an investment in a low-incomehousing partnership which is being evaluated under several provisions ofInterpretation No. 46R.  We do not haveany other investments in unconsolidated entities meeting the requirements ofInterpretation No. 46R.

 

SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activitie**s*.SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*.  The amendments (i) reflect decisions of theDerivatives Implementation Group; (ii) reflect decisions made by the FASB inconjunction with other projects dealing with financial instruments; and (iii)address implementation issues related to the application of the definition of aderivative.  SFAS No. 149 also modifiesvarious other existing pronouncements to conform with the changes made to SFASNo. 133. SFAS No. 149 is effective for contracts entered into or modified afterJune 30, 2003, and for hedging relationships designated after June 30, 2003,with all provisions applied prospectively. Adoption of SFAS No. 149 on July 1,2003, did not have a significant impact on our financial statements.

 

SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity*. SFAS No. 150 establishes standards for how an issuer classifies,measures and discloses in its financial statements certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuerclassify financial instruments that are within its scope as a liability, inmost circumstances.  Such financialinstruments include (i) financial instruments that are issued in the form ofshares that are mandatorily redeemable; (ii) financial instruments that embodyan obligation to repurchase the issuer’s equity shares, or are indexed to suchan obligation, and that require the issuer to settle the obligation bytransferring assets; (iii) financial instruments that embody an obligation thatthe issuer may settle by issuing a variable number of its equity shares if, atinception, the monetary value of the obligation is predominately based on afixed amount, variations in something other than the fair value of the issuer’sequity shares or variations inversely related to changes in the fair value ofthe issuer’s equity shares; and (iv) certain freestanding financialinstruments.  SFAS No. 150 is effectivefor contracts entered into or modified after May 31, 2003, and is otherwiseeffective at the beginning of the first interim period beginning after June 15,2003.  Adoption of SFAS No. 150 on July1, 2003, did not have a significant impact on our financial statements.

 

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**Effects Of Inflation**

 

Our consolidated financial statements andaccompanying footnotes have been prepared in accordance with GAAP (accountingprinciples generally accepted in the United States of America), which generallyrequires the measurement of financial position and operating results in termsof historical dollars without consideration for changes in the relativepurchasing power of money over time due to inflation. The impact of inflationcan be found in the increased cost of our operations because our assets andliabilities are primarily monetary and interest rates have a greater impact onour performance than do the effects of inflation.

 

**Quantitative And QualitativeDisclosures About Market Risk**

 

Our assets and liabilities are principallyfinancial in nature and the resulting net interest income thereon is subject tochanges in market interest rates and the mix of various assets andliabilities.  Interest rates in thefinancial markets affect our decision on pricing our assets and liabilitieswhich impacts our net interest income, a significant cash flow source forus.  As a result, a substantial portionof our risk management activities relates to managing interest rate risk.

 

Our Asset/Liability Management Committeemonitors the interest rate sensitivity of our balance sheet using earningssimulation models and interest sensitivity GAP analysis.  We have set policy limits of interest raterisk to be assumed in the normal course of business and monitor such limitsthrough our simulation process.

 

We have been successful in meeting theinterest rate sensitivity objectives set forth in our policy.  Simulation models are prepared to determinethe impact on net interest income for the coming twelve months, including usingrates at December 31, 2003, and forecasting volumes for the twelve monthprojection.  This position is thensubjected to a shift in interest rates of 100 and 200 basis points rising and100 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  |   | $                                     | 297,471  |                                | 2.6    | % |
| 200 basis point rising  |   | $                                     | 580,195  |                                | 5.0    | % |
| 100 basis point falling |   | $                                     | (273,293 | )                                   | (2.3   | )% |

 

We believe that no significant changes in ourinterest rate sensitivity position have occurred since December 31, 2003.  We believe we are appropriately positionedfor future interest rate movements, although we may experience somefluctuations in net interest income due to short term timing differencesbetween the repricing of assets and liabilities.

 

**Asset/Liability Management**

 

We are emphasizing the origination ofadjustable rate mortgages for portfolio retention along with shorter-termconsumer and commercial loans to reduce the sensitivity of our earnings tointerest rate fluctuations. Interest rate “gap” analysis is a common, thoughimperfect, measure of interest rate risk which measures the relative dollaramounts of interest-earning assets and interest bearing liabilities whichreprice within a specific time period, either through maturity or rateadjustment. The “gap” is the difference between the amounts of such assets andliabilities that are subject to such repricing. A “positive” gap for a givenperiod means that the amount of interest-earning assets maturing or otherwiserepricing within that period exceeds the amount of interest-bearing liabilitiesmaturing or otherwise repricing during that same period. In a rising interestrate environment, an institution with a positive gap would generally beexpected, absent the effects of other factors, to experience a greater increasein the yield of its assets relative to the cost of its liabilities. Conversely,the cost of funds for an institution with a positive gap would generally beexpected to decline less quickly than the yield on its assets in a fallinginterest rate environment. Changes in interest rates generally have theopposite effect on an institution with a “negative” gap.

 

Following is our “static gap” schedule.  One-to-four family and consumer loansincluded prepayment assumptions, while all other loans assume noprepayments.  The mortgage-backedsecurities included published prepayment assumptions, while all otherinvestments assume no prepayments.

 

Certificates of deposit reflect contractualmaturities only.  Money market accountsare rate sensitive and accordingly, a higher percentage of the accounts havebeen included as repricing immediately in the first period.  Savings and NOW accounts are not as ratesensitive as money market accounts and for that reason a significant percentageof the accounts are reflected in the more than 1 to 5 years category.

 

We have been successful in meeting theinterest sensitivity objectives set forth in our policy.  This has been accomplished primarily bymanaging the assets and liabilities while maintaining our traditional highcredit standards.

 

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**Interest-EarningAssets And Interest-Bearing LiabilitiesRepricing Schedule (“Gap” Table)**

 

AtDecember 31, 2003

(Dollarsin 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                                                                           |   | $                     | 5,939  |                          | $      | —                      |   | $                 | —  |      | $      | — |   | $ | 5,939 |   |
| Investment securities                                                                           |   | 12,270                |   | 18,655                        |   | 62,691                      |   | 6,130             |    | 99,746    |   |
| Loans                                                                                           |   | 54,256                |   | 75,945                        |   | 77,851                      |   | 8,563             |    | 216,615   |   |
| Total interest-earning assets                                                                   |   | $                     | 72,465 |                          | $      | 94,600                      |   | $                 | 140,542 |      | $      | 14,693 |   | $ | 322,300 |   |
|                                                                                            |   |                  |   |                          |   |                        |   |              |    |      |   |
| Interest-bearing liabilities:                                                                   |   |                  |   |                          |   |                        |   |              |    |      |   |
| Certificates of deposit                                                                         |   | $                     | 40,707 |                          | $      | 64,068                      |   | $                 | 35,997  |      | $      | 5 |   | $ | 140,777 |   |
| Money market and NOW accounts                                                                   |   | 7,699                 |   | 11,549                        |   | 57,743                      |   | —            |    | 76,991    |   |
| Savings accounts                                                                                |   | 740                   |   | 2,220                         |   | 11,842                      |   | —            |    | 14,802    |   |
| Borrowed money                                                                                  |   | 4,450                 |   | 9,248                         |   | 13,000                      |   | 7,057             |    | 33,755    |   |
| Total interest-bearing liabilities                                                              |   | $                     | 53,596 |                          | $      | 87,085                      |   | $                 | 118,582 |      | $      | 7,062 |   | $ | 266,325 |   |
|                                                                                            |   |                  |   |                          |   |                        |   |              |    |      |   |
| Interest sensitivity gap per period                                                             |   | $                     | 18,869 |                          | $      | 7,515                       |   | $                 | 21,960  |      | $      | 7,631 |   | $ | 55,975 |   |
| Cumulative interest sensitivity gap                                                             |   | $                     | 18,869 |                          | $      | 26,384                      |   | $                 | 48,344  |      | $      | 55,975 |   |   |   |
| Cumulative gap as a percent of total interest-earning assets                                    |   | 5.85                  | %      | 8.19                          | %      | 15.00                       | %      | 17.37             | %       |      |   |
| Cumulative interest sensitive assets as a percent of cumulative  interest sensitive liabilities |   | 135.21                | %      | 118.75                        | %      | 118.65                      | %      | 121.02            | %       |      |   |

 

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**Safe Harbor Statement Under ThePrivate Securities Litigation Reform Act Of 1995**

 

**Forward-Looking Statements**

 

This document (including informationincorporated by reference) contains, and future oral and written statements byus and our management may contain, forward-looking statements, within themeaning of such term in the Private Securities Litigation Reform Act of 1995,with respect to our financial condition, results of operations, plans,objectives, future performance and business. 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, all statements in thisdocument, including forward-looking statements, speak only as of the date theyare made, and we undertake no obligation to update any statement in light ofnew information or future events.

 

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

 

•                  The strength of the United States economy ingeneral and the strength of the local economies in which we conduct ouroperations which may be less favorable than expected and may result in, amongother things, a deterioration in the credit quality and value of the ourassets.

 

•                  The economic impact of past and any futureterrorist attacks, acts of war or threats thereof, and the response of theUnited States to any such threats and attacks.

 

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

 

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

 

•                  Our ability to compete with other financialinstitutions as effectively as we currently intend due to increases incompetitive pressures in the financial services sector.

 

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

 

•                  The timely development and acceptance ofproducts and services, including products and services offered throughalternative delivery channels such as the Internet.

 

•                  Technological changes implemented by us andby other parties, including third party vendors, which may be more difficult ormore expensive than anticipated or which may have unforeseen consequences to usand our customers.

 

•                  Our ability to develop and maintain secureand reliable electronic systems.

 

•                  Our ability to retain key executives andemployees and the difficulty that we may experience in replacing key executivesand employees in an effective manner.

 

•                  Consumer spending and saving habits which maychange in a manner that affects our business adversely.

 

•                  Business combinations and the integration ofacquired businesses which may be more difficult or expensive than expected.

 

•                  The costs, effects and outcomes of existingor future litigation.

 

•                  Changes in accounting policies and practices,as may be adopted by state and federal regulatory agencies and the FinancialAccounting Standards Board.

 

•                  Our ability to manage the risks associatedwith the foregoing as well as anticipated.

 

These risks and uncertainties should beconsidered in evaluating forward-looking statements and undue reliance shouldnot be placed on such statements. Additional information concerning us and our business, including otherfactors that could materially affect our financial results, is included in ourfilings with the Securities and Exchange Commission.

 

**Controls And Procedures**

 

An evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operations of the Company’s disclosure controls andprocedures (as defined in Rule 13a-15(e) promulgated under the Securities andExchange Act of 1934, as amended) as of December 31, 2003.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures wereeffective.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls.

 

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**Independent Auditors’ Report**

 

 

The Board of Directors

Landmark Bancorp, Inc.:

 

We have audited the accompanying consolidatedbalance sheets of Landmark Bancorp, Inc. and subsidiary (the Company) as ofDecember 31, 2003 and 2002, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income, and cash flows forthe years ended December 31, 2003 and 2002, the three months ended December 31,2001, and the year ended September 30, 2001, respectively. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financialstatements referred to above, present fairly, in all material respects, thefinancial position of the Company as of December 31, 2003 and 2002, and theresults of their operations and their cash flows for the years ended December31, 2003 and 2002, the three months ended December 31, 2001, and the year endedSeptember 30, 2001, respectively, in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in note 2(e) to the consolidatedfinancial statements, effective October 1, 2001, the Company adopted theprovisions of Statement of Financial Accounting Standards (SFAS) No. 141,Business Combinations, and certain provisions of SFAS No. 142, Goodwill andOther Intangible Assets, as required for goodwill and intangible assetsresulting from business combinations consummated after June 30, 2001. TheCompany adopted the remaining provisions of SFAS No. 142 on January 1, 2002.

 

 
|   | /s/ KPMG LLP          |
|--------|-----------------------|
|   |                  |
|   | Kansas City, Missouri |
|   | February 27, 2004     |

 

21

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**ConsolidatedBalance Sheets**

** **
|                                                                                                |   | **December  31,  2003** |        | **December  31,  2002** |        |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|-------------------------|-------------|
| **Assets**                                                                                          |   |                    |        |                    |        |
| Cash and cash equivalents:                                                                          |   |                    |        |                    |        |
| Cash                                                                                                |   | $                       | 1,768,914   |                    | 3,982,332   |   |
| Interest-bearing deposits in other financial institutions                                           |   | 5,939,201               |        | 7,466,352               |        |
| Total cash and cash equivalents                                                                     |   | 7,708,115               |        | 11,448,684              |        |
| Investment securities available-for-sale                                                            |   | 99,746,365              |        | 89,296,337              |        |
| Loans, net                                                                                          |   | 214,295,940             |        | 224,061,263             |        |
| Loans held for sale                                                                                 |   | 734,456                 |        | 5,050,603               |        |
| Premises and equipment, net of accumulated depreciation                                             |   | 3,631,102               |        | 3,755,048               |        |
| Goodwill                                                                                            |   | 1,971,178               |        | 1,971,178               |        |
| Other intangible assets, net                                                                        |   | 959,532                 |        | 1,131,584               |        |
| Accrued interest and other assets                                                                   |   | 4,999,601               |        | 4,599,483               |        |
| Total assets                                                                                        |   | $                       | 334,046,289 |                    | 341,314,180 |   |
| **Liabilities  and Stockholders’ Equity**                                                      |   |                    |        |                    |        |
| Liabilities:                                                                                        |   |                    |        |                    |        |
| Deposits:                                                                                           |   |                    |        |                    |        |
| Noninterest bearing demand                                                                          |   | $                       | 20,538,514  |                    | 23,443,639  |   |
| Money market and NOW                                                                                |   | 76,990,610              |        | 78,387,200              |        |
| Savings                                                                                             |   | 14,801,950              |        | 15,004,882              |        |
| Time, $100,000 and greater                                                                          |   | 28,294,325              |        | 22,683,902              |        |
| Time, other                                                                                         |   | 112,482,821             |        | 124,761,247             |        |
| Total deposits                                                                                      |   | 253,108,220             |        | 264,280,870             |        |
| Federal Home Loan Bank borrowings                                                                   |   | 25,257,104              |        | 26,203,121              |        |
| Other borrowings                                                                                    |   | 8,498,000               |        | —                  |        |
| Accrued interest and expenses, taxes, and other liabilities                                         |   | 4,610,862               |        | 9,756,414               |        |
| Total liabilities                                                                                   |   | 291,474,186             |        | 300,240,405             |        |
|                                                                                                |   |                    |        |                    |        |
| Commitments and contingencies                                                                       |   |                    |        |                    |        |
|                                                                                                |   |                    |        |                    |        |
| Stockholders’ equity:                                                                          |   |                    |        |                    |        |
| Common stock, $0.01 par. Authorized 3,000,000 shares; issued  2,207,807 and 2,157,865, respectively |   | 22,078                  |        | 21,578                  |        |
| Additional paid-in capital                                                                          |   | 19,332,130              |        | 18,269,582              |        |
| Retained earnings                                                                                   |   | 25,213,188              |        | 24,295,211              |        |
| Treasury stock, at cost; 119,657 and 148,031 shares, respectively                                   |   | (2,792,225              | )           | (3,266,359              | )           |
| Unearned employee benefits                                                                          |   | —                  |        | (145,207                | )           |
| Accumulated other comprehensive income                                                              |   | 796,932                 |        | 1,898,970               |        |
| Total stockholders’ equity                                                                     |   | 42,572,103              |        | 41,073,775              |        |
| Total liabilities and stockholders’ equity                                                     |   | $                       | 334,046,289 |                    | 341,314,180 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

22

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Operations**

 

 
|                                                                            |   |                          |       |              |       | **Three****months  ended** |      | **Year ended** |       |
|---------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------|------------|----------------------------|-----------|----------------|------------|
|                                                                            |   | **Years  ended December 31,** |       | **December  31,** |       | **September  30,**         |      |
|                                                                            |   | **2003**                      |       | **2002**          |       | **2001**                   |      | **2001**       |       |
| Interest income:                                                                |   |                          |       |              |       |                       |      |           |       |
| Loans                                                                           |   | $                             | 14,303,182 |              | 16,649,738 |                       | 4,628,776 |           | 13,591,077 |   |
| Investment securities                                                           |   | 2,915,681                     |       | 2,809,559         |       | 532,745                    |      | 2,630,289      |       |
| Other                                                                           |   | 57,439                        |       | 102,229           |       | 62,582                     |      | 216,817        |       |
| Total interest income                                                           |   | 17,276,302                    |       | 19,561,526        |       | 5,224,103                  |      | 16,438,183     |       |
| Interest expense:                                                               |   |                          |       |              |       |                       |      |           |       |
| Deposits                                                                        |   | 4,446,050                     |       | 5,773,331         |       | 2,130,349                  |      | 7,781,296      |       |
| Borrowings                                                                      |   | 1,208,522                     |       | 1,337,868         |       | 344,829                    |      | 2,127,900      |       |
| Total interest expense                                                          |   | 5,654,572                     |       | 7,111,199         |       | 2,475,178                  |      | 9,909,196      |       |
| Net interest income                                                             |   | 11,621,730                    |       | 12,450,327        |       | 2,748,925                  |      | 6,528,987      |       |
| Provision for loan losses                                                       |   | 240,000                       |       | 181,500           |       | 32,500                     |      | 120,000        |       |
| Net interest income after provision for loan losses                             |   | 11,381,730                    |       | 12,268,827        |       | 2,716,425                  |      | 6,408,987      |       |
| Non-interest income:                                                            |   |                          |       |              |       |                       |      |           |       |
| Fees and service charges                                                        |   | 2,499,870                     |       | 2,126,059         |       | 425,599                    |      | 437,312        |       |
| Gains on sales of loans                                                         |   | 1,587,714                     |       | 1,365,691         |       | 538,510                    |      | 763,470        |       |
| Gains (losses) on sales of investment securities, net                           |   | 551,038                       |       | 124,333           |       | (601                       | )         | 997,859        |       |
| Other                                                                           |   | 335,569                       |       | 239,933           |       | 48,212                     |      | 154,035        |       |
| Total non-interest income                                                       |   | 4,974,191                     |       | 3,856,016         |       | 1,011,720                  |      | 2,352,676      |       |
| Non-interest expense:                                                           |   |                          |       |              |       |                       |      |           |       |
| Compensation and benefits                                                       |   | 4,834,982                     |       | 4,849,011         |       | 1,099,979                  |      | 2,674,664      |       |
| Severance and other costs related to merger with MNB                            |   | —                        |       | —            |       | 2,704,826                  |      | —         |       |
| Occupancy and equipment                                                         |   | 1,250,212                     |       | 1,198,710         |       | 268,443                    |      | 546,576        |       |
| Amortization of intangibles                                                     |   | 426,442                       |       | 388,568           |       | 113,556                    |      | 181,262        |       |
| Professional fees                                                               |   | 343,208                       |       | 281,949           |       | 49,753                     |      | 76,100         |       |
| Data processing                                                                 |   | 311,364                       |       | 347,900           |       | 70,193                     |      | 145,289        |       |
| Other                                                                           |   | 2,062,547                     |       | 2,118,053         |       | 489,625                    |      | 652,631        |       |
| Total non-interest expense                                                      |   | 9,228,755                     |       | 9,184,191         |       | 4,796,375                  |      | 4,276,522      |       |
| Earnings (loss) before income taxes                                             |   | 7,127,166                     |       | 6,940,652         |       | (1,068,230                 | )         | 4,485,141      |       |
| Income tax expense (benefit)                                                    |   | 2,275,469                     |       | 2,362,739         |       | (430,438                   | )         | 1,780,394      |       |
| Net earnings (loss) before cumulative effect of change in accounting  principle |   | 4,851,697                     |       | 4,577,913         |       | (637,792                   | )         | 2,704,747      |       |
| Cumulative effect of change in accounting principle, net of tax of  $125,144    |   | —                        |       | —            |       | —                     |      | (214,553       | )          |
| Net earnings (loss)                                                             |   | $                             | 4,851,697  |              | 4,577,913  |                       | (637,792  | )              | 2,490,194  |   |
| Earnings (loss) per share:                                                      |   |                          |       |              |       |                       |      |           |       |
| Basic:                                                                          |   |                          |       |              |       |                       |      |           |       |
| Earnings (loss) before cumulative effect of change in accounting  principle     |   | $                             | 2.31       |              | 2.09       |                       | (0.29     | )              | 2.20       |   |
| Cumulative effect of change in accounting principle, net of tax                 |   | —                        |       | —            |       | —                     |      | (0.17          | )          |
|                                                                            |   | $                             | 2.31       |              | 2.09       |                       | (0.29     | )              | 2.03       |   |
| Diluted:                                                                        |   |                          |       |              |       |                       |      |           |       |
| Earnings (loss) before cumulative effect of change in accounting  principle     |   | $                             | 2.28       |              | 2.03       |                       | (0.29     | )              | 2.04       |   |
| Cumulative effect of change in accounting principle, net of tax                 |   | —                        |       | —            |       | —                     |      | (0.16          | )          |
|                                                                            |   | $                             | 2.28       |              | 2.03       |                       | (0.29     | )              | 1.88       |   |

 

See accompanying notes to consolidatedfinancial statements.

 

23

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Income**

**Years endedDecember 31, 2003 and 2002, three months ended December 31, 2001,  and year ended September 30, 2001**

** **
|                                                                                                                |   | **Common  stock** |    | **Additional  paid-in  capital** |       | **Retained  earnings** |       | **Treasury  stock** |        | **Unearned  employee  benefits** |     | **Accumulated  other  comprehensive  income (loss)** |     | **Total**  |       |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|----------------------------------|------------|------------------------|------------|---------------------|-------------|----------------------------------|----------|------------------------------------------------------|----------|------------|------------|
| 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 ($0.51 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 connecting 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 ($0.13 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:                                                                                               |   |              |    |                             |       |                   |       |                |        |                             |     |                                                 |     |       |       |
| 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 ($0.55 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  |       |
| Stock-based compensation                                                                                            |   | —            |    | 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 |       |
| Comprehensive income:                                                                                               |   |              |    |                             |       |                   |       |                |        |                             |     |                                                 |     |       |       |
| Net income                                                                                                          |   | —            |    | —                           |       | 4,851,697              |       | —              |        | —                           |     | —                                               |     | 4,851,697  |       |
| Change in fair value of investment securities available-for-sale, net  of tax                                       |   | —            |    | —                           |       | —                 |       | —              |        | —                           |     | (1,102,038                                           | )        | (1,102,038 | )          |
| Total comprehensive income                                                                                          |   | —            |    | —                           |       | 4,851,697              |       | —              |        | —                           |     | (1,102,038                                           | )        | 3,749,659  |       |
| Dividends paid ($0.63 per share)                                                                                    |   | —            |    | —                           |       | (1,331,146             | )          | —              |        | —                           |     | —                                               |     | (1,331,146 | )          |
| Amortization of unearned employee benefits                                                                          |   | —            |    | 82,731                           |       | —                 |       | —              |        | 145,207                          |     | —                                               |     | 227,938    |       |
| Exercise of stock options, 49,942 shares, including tax benefit of  $241,775                                        |   | 500               |    | 720,857                          |       | —                 |       | —              |        | —                           |     | —                                               |     | 721,357    |       |
| Stock-based compensation                                                                                            |   | —            |    | 1,727                            |       | —                 |       | —              |        | —                           |     | —                                               |     | 1,727      |       |
| Purchase of 72,228 treasury shares                                                                                  |   | —            |    | —                           |       | —                 |       | (1,871,207          | )           | —                           |     | —                                               |     | (1,871,207 | )          |
| 5% stock dividend, 100,602 shares                                                                                   |   | —            |    | 257,233                          |       | (2,602,574             | )          | 2,345,341           |        | —                           |     | —                                               |     | —     |       |
| Balance at December 31, 2003                                                                                        |   | $                 | 22,078  |                             | 19,332,130 |                   | 25,213,188 |                | (2,792,225  | )                                | —   |                                                 | 796,932  |       | 42,572,103 |   |

 

See accompanying notes toconsolidated financial statements.

 

24

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Cash Flows**

 
|                                                                                                 |   |                          |      |              |       | **Three  months ended** |       | **Year ended** |       |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|-------------------|------------|-------------------------|------------|----------------|------------|
|                                                                                                 |   | **Years  ended December 31,** |      | **December  31,** |       | **September  30,**      |       |
|                                                                                                 |   | **2003**                      |      | **2002**          |       | **2001**                |       | **2001**       |       |
| Cash flows from operating activities:                                                                |   |                          |      |              |       |                    |       |           |       |
| Net earnings (loss)                                                                                  |   | $                             | 4,851,697 |              | 4,577,913  |                    | (637,792   | )              | 2,490,194  |   |
| Adjustments to reconcile net earnings  (loss) to net cash provided by operating activities:          |   |                          |      |              |       |                    |       |           |       |
| Cumulative effect of change in accounting  principle                                                 |   | —                        |      | —            |       | —                  |       | 339,697        |       |
| Provision for loan losses                                                                            |   | 240,000                       |      | 181,500           |       | 32,500                  |       | 120,000        |       |
| Amortization of intangibles                                                                          |   | 426,442                       |      | 388,568           |       | 113,556                 |       | 181,262        |       |
| Depreciation                                                                                         |   | 461,836                       |      | 462,458           |       | 116,113                 |       | 209,064        |       |
| Stock-based compensation                                                                             |   | 1,727                         |      | 4,307             |       | —                  |       | —         |       |
| Deferred income taxes                                                                                |   | 364,465                       |      | 83,674            |       | (666,196                | )          | (185,375       | )          |
| Net (gains) losses on sales of investment  securities, premises and equipment, and foreclosed assets |   | (561,155                      | )         | (120,364          | )          | 16,070                  |       | (918,424       | )          |
| Net gain on sales of loans                                                                           |   | (1,587,714                    | )         | (1,365,691        | )          | (538,510                | )          | (763,470       | )          |
| Proceeds from sale of loans                                                                          |   | 96,899,940                    |      | 71,045,396        |       | 22,811,389              |       | 35,713,523     |       |
| Origination of loans held for sale                                                                   |   | (90,996,079                   | )         | (69,076,231       | )          | (24,749,172             | )          | (28,558,331    | )          |
| Purchase of loans held for sale                                                                      |   | —                        |      | —            |       | —                  |       | (36,000        | )          |
| Changes in assets and liabilities:                                                                   |   |                          |      |              |       |                    |       |           |       |
| Accrued interest and other assets                                                                    |   | 63,920                        |      | 1,182,652         |       | 998,319                 |       | 475,687        |       |
| Accrued expenses, taxes, and other  liabilities                                                      |   | (4,447,593                    | )         | 1,930,596         |       | 741,299                 |       | 789,833        |       |
| Net cash provided by (used in) operating  activities                                                 |   | 5,717,486                     |      | 9,294,778         |       | (1,762,424              | )          | 9,857,660      |       |
| Cash flows from investing activities:                                                                |   |                          |      |              |       |                    |       |           |       |
| Net increase in loans                                                                                |   | 9,304,074                     |      | 10,445,920        |       | 8,367,115               |       | 22,342,678     |       |
| Maturities and prepayments of investment  securities available-for-sale                              |   | 52,601,851                    |      | 27,067,374        |       | 15,829,860              |       | 5,725,216      |       |
| Net cash received from merger of MNB                                                                 |   | —                        |      | —            |       | 5,987,107               |       | —         |       |
| Purchases of investment securities  available-for-sale                                               |   | (66,450,936                   | )         | (40,587,495       | )          | (21,375,571             | )          | (10,000        | )          |
| Proceeds from sale of investment securities  available-for-sale                                      |   | 1,203,725                     |      | 437,604           |       | 61,815                  |       | 31,485,856     |       |
| Proceeds from sales of premises and  equipment and foreclosed assets                                 |   | 433,969                       |      | 569,330           |       | 109,284                 |       | 335,209        |       |
| Purchases of premises and equipment, net                                                             |   | (337,967                      | )         | (759,993          | )          | (34,716                 | )          | (38,500        | )          |
| Other investing activity, net                                                                        |   | —                        |      | (992              | )          | 15,229                  |       | (40,652        | )          |
| Net cash (used in) provided by investing  activities                                                 |   | (3,245,284                    | )         | (2,828,252        | )          | 8,960,123               |       | 59,799,807     |       |
| Cash flows from financing activities:                                                                |   |                          |      |              |       |                    |       |           |       |
| Net increase in deposits                                                                             |   | (11,172,650                   | )         | (8,965,415        | )          | (5,826,283              | )          | (17,841,970    | )          |
| Federal Home Loan Bank borrowings                                                                    |   | 77,400,000                    |      | 34,055,000        |       | 1,750,000               |       | 209,000,000    |       |
| Federal Home Loan Bank repayments                                                                    |   | (78,215,350                   | )         | (36,418,276       | )          | (789,809                | )          | (245,000,000   | )          |
| Proceeds from other borrowings                                                                       |   | 8,498,000                     |      | —            |       | —                  |       | —         |       |
| Repayments on note payable                                                                           |   | —                        |      | —            |       | (520,000                | )          | —         |       |
| Proceeds from issuance of common stock  under stock option plans                                     |   | 479,582                       |      | 732,932           |       | 693,626                 |       | 200,393        |       |
| Payment of dividends                                                                                 |   | (1,331,146                    | )         | (1,239,819        | )          | (298,884                | )          | (632,115       | )          |
| Purchase of treasury stock                                                                           |   | (1,871,207                    | )         | (5,345,522        | )          | (43,940                 | )          | (472,897       | )          |
| Net cash used in by financing activities                                                             |   | (6,212,771                    | )         | (17,181,100       | )          | (5,035,290              | )          | (54,746,589    | )          |
| Net (decrease) increase in cash and cash  equivalents                                                |   | (3,740,569                    | )         | (10,714,574       | )          | 2,162,409               |       | 14,910,878     |       |
| Cash and cash equivalents at beginning of  period                                                    |   | 11,448,684                    |      | 22,163,258        |       | 20,000,849              |       | 5,089,971      |       |
| Cash and cash equivalents at end of period                                                           |   | $                             | 7,708,115 |              | 11,448,684 |                    | 22,163,258 |           | 20,000,849 |   |
| Supplemental disclosure of cash flow  information:                                                   |   |                          |      |              |       |                    |       |           |       |
| Cash paid during the period for income  taxes                                                        |   | $                             | 1,985,000 |              | 1,403,000  |                    | —     |           | 1,572,000  |   |
| Cash paid during the period for interest                                                             |   | 5,689,909                     |      | 7,195,000         |       | 2,375,000               |       | 9,759,000      |       |
| Supplemental schedule of noncash investing  and financing activities:                                |   |                          |      |              |       |                    |       |           |       |
| Transfer of loans to real estate owned                                                               |   | 303,033                       |      | 717,000           |       | —                  |       | 871,000        |       |
| Bank merger:                                                                                         |   |                          |      |              |       |                    |       |           |       |
| Fair value of liabilities assumed                                                                    |   | —                        |      | —            |       | 140,781,000             |       | —         |       |
| Fair value of assets acquired                                                                        |   | —                        |      | —            |       | 149,225,000             |       | —         |       |
| Loans securitized and transferred to  investment securities                                          |   | —                        |      | —            |       | —                  |       | 17,786,000     |       |

 

See accompanying notes toconsolidated financial statements.

 

25

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**Notes to ConsolidatedFinancial Statements**

**December 31, 2003, 2002, and 2001,and September 30, 2001**

 

**(1)****         Merger of Landmark Bancshares and MNB Bancshares**

 

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 1,103,938common shares were issued to the former LBI stockholders and 817,806 commonshares were issued to the former MNB stockholders. The merger was accounted foras an acquisition 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, basedon the average closing price of the LBI common stock for the five days prior toand following the announcement of the signing of the merger agreement. The costin excess of the tangible and identifiable intangible net assets acquired hasbeen recorded as goodwill. In conjunction with the merger, the Company recordedgoodwill of approximately $2 million and a core deposit intangible asset of$780,000.

 

The former LBI utilized aSeptember 30 fiscal year while the Company has a December 31 year end. Theaccompanying consolidated financial statements for the three months endedDecember 31, 2001, include the accounts of the Company and, commencing October9, 2001, MNB, and are presented as a transition period. The consolidatedfinancial statements for the year ended September 30, 2001, are LBI’shistorical financial statements. Pro forma information for the year endedSeptember 30, 2001, as if the merger was consummated October 1, 2000, andexcluding the severance and other costs related to the merger, is as follows:

 
| Revenue                                                                      |   | $         | 29,936,000 |   |
|------------------------------------------------------------------------------|--------|-----------|------------|--------|
| Net earnings before cumulative effect of the change in accounting  principle |   | 3,881,000 |       |
| Net earnings                                                                 |   | 3,666,000 |       |
| Diluted earnings per share                                                   |   | 1.61      |       |

 

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 at December 31, 2002. All relatedamounts had been disbursed as of December 31, 2003.

 

**(2)****         Summary of Significant Accounting Policies**

 

*(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 available-for-sale, which are recorded atfair value with unrealized gains and losses excluded from earnings and reportedin a separate component of stockholders’ equity until realized. Purchasedpremiums and discounts on investment securities are amortized/accreted intointerest income over the estimated lives of the securities using a method whichapproximates the interest method. Declines in the fair value of individual securities below their costthat are deemed to be other than temporary result in write-downs of individualsecurities to their estimated fair value. The related write-downs are includedin earnings as realized losses.  Gainsand losses on sales of available-for-sale securities are recorded on a tradedate basis and are calculated using the specific identification method.

 

*(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.

 

26

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Mortgage loans originatedand intended for sale in the secondary market are carried at the lower of costor estimated fair value.  Net unrealizedlosses are recognized through a valuation allowance by charges to income.Origination fees received on such loans are deferred and recognized in incomeas part of the gain or loss on sale. Origination fees received on other loansin excess of amounts representing the estimated costs of origination aredeferred and credited to interest 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 smallerindividual balance 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 non-accrual or are charged off at an earlier date ifcollection of 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.

 

*(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. The estimated useful lives of the assets are as follows:

 
| Buildings and improvements         |   | 10  – 15 years |   |
|------------------------------------|--------|---------------------|--------|
| Furniture, fixtures, and equipment |   | 1  – 15 years  |   |
| Automobiles                        |   | 2  – 5 years   |   |

 

Major replacements andbetterments are capitalized while maintenance and repairs are charged toexpense when incurred.  Gains or losseson dispositions are reflected in operations as incurred.

 

*(e) Intangible Assets*

Effective October 1, 2001,the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 141, *Business Combinations*, and certain provisions of SFAS No.142, *Goodwill andOther Intangible Assets*,as required for goodwill and intangible assets resulting from businesscombinations consummated after June 30, 2001. The remaining provisions of SFASNo. 142 were adopted on January 1, 2002. The Company’s goodwill and coredeposit intangible resulted from the acquisition of MNB by LBI on October 9,2001. Pursuant to certain provisions in SFAS No. 142, goodwill resulting fromthe merger with MNB is not amortized;

 

27

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however, it is tested forimpairment. When facts and circumstances indicate potential impairment ofamortizable intangible assets, the Company will evaluate the recoverability ofthe asset carrying value, using estimates of undiscounted future cash flowsover the remaining asset life. Any impairment loss is measured by the excess ofcarrying value over fair value. Goodwill impairment tests are performed at eachcalendar year end or when events or circumstances dictate.

 

Intangible assets that havefinite useful lives, such as core deposit intangibles and mortgage servicingrights, continue to be amortized over their useful lives. The core depositintangible is being amortized over ten years on an accelerated basis.Amortization expense related to the core deposit was $124,000, $138,000, and$35,000 for the years ended December 31, 2003 and 2002, and the three monthsended December 31, 2001, respectively.

 

Mortgage servicing assetsare recognized as separate assets when rights are acquired through the sale offinancial assets. Capitalized servicing rights are reported in other intangibleassets and are amortized into non-interest expense in proportion to, and overthe period of, the estimated future net servicing income of the underlyingfinancial assets. Servicing assets are recorded at the lower of cost or fairvalue, and are evaluated for impairment based upon the fair value of the rightsas compared to amortized cost.

 

*(f) Income Taxes*

Amounts provided for incometax expense are based on income reported for financial statement purposes anddo not necessarily represent amounts currently payable under tax laws. Deferredtax assets and liabilities are recorded for the future tax consequencesattributable to differences between the consolidated financial statementcarrying amounts of existing assets and liabilities and their respective incometax bases. Deferred tax assets and liabilities are measured using enacted taxrates applied to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities, of a change in tax rates, is recognized in income inthe period that includes the 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:

 
|                                                                        |   |                          |       |              |      | **Three  months ended** |     | **Year ended** |      |
|-----------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------|-----------|-------------------------|----------|----------------|-----------|
|                                                                        |   | **Years ended  December 31,** |       | **December  31,** |      | **September  30,**      |     |
|                                                                        |   | **2003**                      |       | **2002**          |      | **2001**                |     | **2001**       |      |
| Unrealized holding gains (losses)                                           |   | $                             | (2,328,518 | )                 | 2,504,707 |                    | (171,888 | )              | 3,170,655 |   |
| Less cumulative effect of a change in accounting principle                  |   | —                        |       | —            |      | —                  |     | 1,139,745      |      |
| Less reclassification adjustment for gains (losses) included in net  income |   | 551,038                       |       | 124,333           |      | (601                    | )        | 997,859        |      |
| Net unrealized gains (losses) on securities                                 |   | (1,777,480                    | )          | 2,380,374         |      | (171,287                | )        | 1,033,051      |      |
| Income tax expense (benefit)                                                |   | (675,442                      | )          | 904,542           |      | (66,989                 | )        | 395,021        |      |
| Other comprehensive income (loss)                                           |   | $                             | (1,102,038 | )                 | 1,475,832 |                    | (104,298 | )              | 638,030   |   |

 

*(i) Foreclosed assets*

Assets acquired through, orin lieu of, foreclosure are to be sold and are initially recorded at the dateof foreclosure, at the lower of carrying value or fair value, establishing anew cost basis. Subsequent to foreclosure, management periodically performsvaluations, and an allowance for losses is established by a charge tooperations if the carrying value of a property exceeds the fair value lessestimated costs to sell. Revenue and expenses from operations and changes inthe valuation allowance are included in other non-interest expense on theincome statement.

 

28

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*(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, *Accountingfor 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 reflect additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would resultfrom the assumed issuance. Potential common shares that may be issued by theCompany relate solely to outstanding stock options and are determined using thetreasury stock method. Earnings per share for all periods presented have beenadjusted to give effect to the 5% stock dividends paid by the Company inDecember 2003, 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 2003, 2002 and 2001, are shownbelow:

 
|                                       |   |                          |   |              |   | **Three**          |   |           |   |
|--------------------------------------------|--------|-------------------------------|--------|-------------------|--------|--------------------|--------|----------------|--------|
|                                       |   |                          |   |              |   | **months  ended**  |   | **Year ended** |   |
|                                       |   | **Years  ended December 31,** |   | **December  31,** |   | **September  30,** |   |
|                                       |   | **2003**                      |   | **2002**          |   | **2001**           |   | **2001**       |   |
| Weighted average common shares outstanding |   | 2,102,922                     |   | 2,188,191         |   | 2,164,699          |   | 1,225,724      |   |
| Stock options                              |   | 29,141                        |   | 61,415            |   | 80,573             |   | 97,532         |   |
|                                       |   | 2,132,063                     |   | 2,249,606         |   | 2,245,272          |   | 1,323,256      |   |

 

*(l) Treasury Stock*

Purchases of the Company’scommon stock are recorded at cost. Upon reissuance, treasury stock is reducedbased upon the average cost basis of shares held.

 

*(m) Cash and cash equivalents*

Cash and cash equivalentsinclude cash on hand, amounts due from banks and fed funds sold.

 

*(n) Reclassifications*

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

 

**(3)****         Investment Securities Available-for-Sale**

 

A summary of investmentsecurities information is as follows:

 
|                                    |   | **December  31, 2003** |       |
|-----------------------------------------|--------|------------------------|------------|
|                                    |   | **Amortized  cost**    |       | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
| U. S. Government and agency obligations |   | $                      | 32,341,892 |   | 326,624 |   | (52,249 | ) | 32,616,267 |   |
| Municipal obligations                   |   | 13,577,760             |       | 462,791 |   | (20,231 | ) | 14,020,320 |   |
| Mortgage-backed securities              |   | 46,379,211             |       | 515,246 |   | (331,014 | ) | 46,563,443 |   |
| Federal Home Loan Bank stock            |   | 2,543,600              |       | — |   | — |   | 2,543,600 |   |
| Common stock                            |   | 280,310                |       | 384,197 |   | (2,114 | ) | 662,393 |   |
| Federal Reserve Bank stock              |   | 805,050                |       | — |   | — |   | 805,050 |   |
| Corporate bond                          |   | 50,000                 |       | 2,125 |   | — |   | 52,125 |   |
| Other investments                       |   | 2,483,167              |       | — |   | — |   | 2,483,167 |   |
| Total                                   |   | $                      | 98,460,990 |   | 1,690,983 |   | (405,608 | ) | 99,746,365 |   |

 

29

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|                                    |   | **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 |   |

 

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 Bank for regulatory purposes and borrowing availability. Thecost of such investments represents their redemption value.

 

The tables above show thatsome of the securities in the available for sale investment portfolio hadunrealized losses, or were temporarily impaired, as of December 31, 2003 and2002. This temporary impairment represents the amount of loss that would berealized if the securities were sold at valuation date.  Securities which were temporarily impairedat December 31, 2003 are shown below, along with the length of the impairmentperiod.

 
|                                    |   | **Less than  12 months** |       | **12 months  or longer** |     | **Total**      |   |
|-----------------------------------------|--------|--------------------------|------------|--------------------------|----------|----------------|--------|
|                                    |   | **Fair Value**           |       | **Unrealized  Losses**   |     | **Fair Value** |   | **Unrealized  Losses** |   | **Fair Value** |   | **Unrealized  Losses** |   |
| U. S. Government and agency obligations |   | $                        | 7,496,142  |                     | (52,249  | )              | — |   | — |   | 7,496,142 |   | (52,249 | ) |
| Municipal obligations                   |   | 3,120,398                |       | (20,231                  | )        | —         |   | — |   | 3,120,398 |   | (20,231 | ) |
| Mortgage-backed securities              |   | 28,982,653               |       | (331,014                 | )        | —         |   | — |   | 28,982,653 |   | (331,014 | ) |
| Common stock                            |   | —                   |       | —                   |     | 1,572          |   | (2,114 | ) | 1,572 |   | (2,114 | ) |
| Total                                   |   | $                        | 39,599,193 |                     | (403,494 | )              | 1,572  |   | (2,114 | ) | 39,600,765 |   | (405,608 | ) |

 

At December 31, 2003, thetotal investment portfolio consisted of over 290 securities.  The table above includes 39 securities thatwere in an unrealized loss position.

 

Maturities of investmentsecurities at December 31, 2003, are as follows:

 
|                                                                                     |   | **Amortized  cost** |       | **Estimated  fair value** |       |
|------------------------------------------------------------------------------------------|--------|---------------------|------------|---------------------------|------------|
| Due in less than one year                                                                |   | $                   | 8,121,628  |                      | 8,225,287  |   |
| Due after one year but within five years                                                 |   | 37,075,041          |       | 37,643,663                |       |
| Due after five years                                                                     |   | 3,221,150           |       | 3,267,929                 |       |
| Mortgage-backed securities, FHLB stock, FR  B stock, common stock, and other investments |   | 50,043,171          |       | 50,609,486                |       |
| Total                                                                                    |   | $                   | 98,460,990 |                      | 99,746,365 |   |

 

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

** **
|            |   |                          |    |              |    | **Three  months ended** |   | **Year ended** |      |
|-----------------|--------|-------------------------------|---------|-------------------|---------|-------------------------|--------|----------------|-----------|
|            |   | **Years  ended December 31,** |    | **December  31,** |    | **September  30,**      |   |
|            |   | **2003**                      |    | **2002**          |    | **2001**                |   | **2001**       |      |
| Realized gains  |   | $                             | 551,038 |              | 124,333 |                    | 2,036  |           | 1,175,489 |   |
| Realized losses |   | —                        |    | —            |    | (2,637                  | )      | (177,630       | )         |
| Total           |   | $                             | 551,038 |              | 124,333 |                    | (601   | )              | 997,859   |   |

 

30

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During the year endedSeptember 30, 2001, certain securities previously classified as available-for-salesuffered declines in value which management believed were other thantemporary.  Accordingly, the unrealizedloss on those securities, aggregating $94,957, was recorded as a component ofthe gain on sale of investment securities, net, for the year ended September30, 2001.

 

At December 31, 2003 and2002, securities pledged to secure public funds on deposit had a carrying valueof approximately $70.3 million and $45.0 million, respectively.  Except for U. S. government and agencyobligations, no investment in a single issuer exceeded 10% of stockholders’equity.

 

**(4)****         Loans**

 

Loans consist of thefollowing:

 
|                                    |   | **December  31,  2003** |        | **December  31,  2002** |        |
|-----------------------------------------|--------|-------------------------|-------------|-------------------------|-------------|
| Real estate loans:                      |   |                    |        |                    |        |
| One-to-four family residential          |   | $                       | 82,093,729  |                    | 101,289,931 |   |
| Commercial                              |   | 65,728,619              |        | 62,207,236              |        |
| Construction                            |   | 9,171,510               |        | 8,969,481               |        |
| Commercial loans                        |   | 50,053,993              |        | 41,808,738              |        |
| Consumer loans                          |   | 9,566,650               |        | 12,809,571              |        |
| Total                                   |   | 216,614,501             |        | 227,084,957             |        |
| Less:                                   |   |                    |        |                    |        |
| Deferred loan fees and loans in process |   | 2,691                   |        | 458,493                 |        |
| Allowance for loan losses               |   | 2,315,870               |        | 2,565,201               |        |
| Loans, net                              |   | $                       | 214,295,940 |                    | 224,061,263 |   |

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet customers’ financing needs. These financial instrumentsconsist principally of commitments to extend credit. The Company uses the samecredit policies in making commitments and conditional obligations as it doesfor on-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. Unfunded commitments to extend credit,excluding standby letters of credit, aggregated $25.6 million and $30.9 millionat December 31, 2003 and 2002, respectively. Standby letters of credit totaled $2.4 million and $600,000 at December31, 2003 and 2002, 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 ultimatecollectibility of the Company’s loan portfolio is dependent in part upon marketconditions in those areas. These geographic concentrations are considered inmanagement’s establishment of the allowance for loan losses.

 

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

 
|                           |   |                          |      |              |      | **Three  months ended** |      | **Year ended** |      |
|--------------------------------|--------|-------------------------------|-----------|-------------------|-----------|-------------------------|-----------|----------------|-----------|
|                           |   | **Years  ended December 31,** |      | **December  31,** |      | **September  30,**      |      |
|                           |   | **2003**                      |      | **2002**          |      | **2001**                |      | **2001**       |      |
| Balance at beginning of period |   | $                             | 2,565,201 |              | 2,640,288 |                    | 1,424,129 |           | 1,376,707 |   |
| Allowance of merged bank       |   | —                        |      | —            |      | 1,238,213               |      | —         |      |
| Provision for loan losses      |   | 240,000                       |      | 181,500           |      | 32,500                  |      | 120,000        |      |
| Charge-offs                    |   | (553,768                      | )         | (318,557          | )         | (63,563                 | )         | (159,804       | )         |
| Recoveries                     |   | 64,437                        |      | 61,970            |      | 9,009                   |      | 87,226         |      |
| Balance at end of period       |   | $                             | 2,315,870 |              | 2,565,201 |                    | 2,640,288 |           | 1,424,129 |   |

 

31

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At December 31, 2003 and2002, impaired loans, including nonaccrual loans, aggregated $1.2 million and$925,000, respectively. The net amount of interest income recorded on suchloans during their impairment periods was not significant. There were no loans90 days delinquent and still accruing interest at December 31, 2003 and2002.  Average impaired loans were $1.1million for 2003 and $929,000 for 2002. Specific reserves related to these non-accrual loans at December 31,2003 and 2002, were not significant.

 

The Company serviced loansfor others with outstanding principal balances of $107.2 million and $103.5million at December 31, 2003 and 2002, respectively. Gross service fee incomerelated to such loans was $274,000, $253,000, $68,000, and $201,000 for theyears ended December 31, 2003, and 2002, the three months ended December 31,2001, and the year ended September 30, 2001, respectively.

 

The following is an analysisof the changes in mortgage servicing rights:

 
|                           |   |                          |    |              |    | **Three  months ended** |    | **Year ended** |    |
|--------------------------------|--------|-------------------------------|---------|-------------------|---------|-------------------------|---------|----------------|---------|
|                           |   | **Years  ended December 31,** |    | **December  31,** |    | **September  30,**      |    |
|                           |   | **2003**                      |    | **2002**          |    | **2001**                |    | **2001**       |    |
| Balance at beginning of period |   | $                             | 525,311 |              | 524,247 |                    | 485,436 |           | 263,522 |   |
| Additions                      |   | 254,390                       |    | 251,362           |    | 116,912                 |    | 403,176        |    |
| Amortization                   |   | (302,351                      | )       | (250,298          | )       | (78,101                 | )       | (181,262       | )       |
| Balance at end of period       |   | $                             | 477,350 |              | 525,311 |                    | 524,247 |           | 485,436 |   |

 

The Company had loans todirectors and officers at December 31, 2003, which carry terms similar to thosefor other loans. Management believes such outstanding loans do no representmore than a normal risk of collection. A summary of such loans is as follows:

 
| Balance at December 31, 2002 |   | $          | 4,232,778 |   |
|------------------------------|--------|------------|-----------|--------|
| New loans                    |   | 4,646,579  |      |
| Repayments                   |   | (3,055,639 | )         |
| Balance at December 31, 2003 |   | $          | 5,823,718 |   |

 

**(5)****         Premises and Equipment**

 

Premises and equipmentconsisted of the following:

 
|                              |   | **December  31,****2003** |      | **December  31,****2002** |      |
|-----------------------------------|--------|---------------------------|-----------|---------------------------|-----------|
| Land                              |   | $                         | 651,778   |                      | 651,778   |   |
| Office buildings and improvements |   | 4,286,586                 |      | 4,218,033                 |      |
| Furniture and equipment           |   | 3,661,110                 |      | 3,536,145                 |      |
| Automobiles                       |   | 203,683                   |      | 205,088                   |      |
| Total                             |   | 8,803,157                 |      | 8,611,044                 |      |
| Less accumulated depreciation     |   | 5,172,055                 |      | 4,855,996                 |      |
| Total                             |   | $                         | 3,631,102 |                      | 3,755,048 |   |

 

**(6)****         Deposits**

 

Maturities of time depositswere as follows at December 31, 2003:

 
| **Year:**  |   | **Amount** |        |
|------------|--------|------------|-------------|
| 2004       |   | $          | 104,775,044 |   |
| 2005       |   | 24,507,353 |        |
| 2006       |   | 6,229,582  |        |
| 2007       |   | 3,280,820  |        |
| 2008       |   | 1,979,347  |        |
| Thereafter |   | 5,000      |        |
| Total      |   | $          | 140,777,146 |   |

 

Regulations of the FederalReserve System require reserves to be maintained by all banking institutionsaccording to the types and amounts of certain deposit liabilities. Theserequirements restrict a portion of the amounts shown as consolidated cash anddue from banks from everyday usage in operation of the banks. The minimumreserve requirements for the subsidiary bank totaled $25,000 at December 31,2003.

 

32

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**(7)****         Federal Home Loan Bank Borrowings**

 

Advances from the FHLB atDecember 31, 2003 and 2002, amounted to $23,057,104 and $26,203,121,respectively. Maturities of such borrowings at December 31, 2003, aresummarized as follows:

 
| **Year ending December 31:** |   | **Amount** |       | **Rates**      |   |
|------------------------------|--------|------------|------------|----------------|--------|
| 2004                         |   | $          | 1,000,000  |           | 6.44%  |   |
| 2005                         |   | 10,000,000 |       | 6.02% - 6.18%  |   |
| 2006                         |   | 1,000,000  |       | 5.50% - 5.62%  |   |
| 2007                         |   | —     |       | —         |   |
| 2008                         |   | 4,000,000  |       | 1.30% - 4.74%  |   |
| Thereafter                   |   | 7,057,104  |       | 4.44% - 6.372% |   |
|                         |   | $          | 23,057,104 |           |   |   |

 

The Bank also has a line ofcredit, renewable annually in September, with the FHLB under which there wereoutstanding borrowings of $2.2 million at December 31, 2003. There were nooutstanding borrowings against the line of credit at December 31, 2002.  Interest on any outstanding balances on theline of credit accrues at the federal funds rate plus 0.15% (1.05% at December31, 2003).

 

Included in the table aboveis a $2.0 million advance with the FHLB which has a variable rate, adjustablequarterly, and matures in 2008 with no prepayment penalties.  All of the Bank’s remaining advances withthe FHLB have fixed rates and prepayment penalties. However, certain borrowingscontain a convertible provision at which date the FHLB may exercise an optionto convert the borrowing to a variable rate equal to the FHLB one monthshort-term advance rate. The Bank would then have the option to prepay theadvances without penalty.  Interestwould adjust monthly upon conversion. The Bank may refinance the advance ateach respective conversion date if the FHLB first exercises its option toconvert the fixed-rate borrowing.

 

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, 2003, theBank’s total borrowing capacity with the FHLB was approximately $59.7 million.

 

**(8)****         Other Borrowings**

 

In 2003, the Company issued$8.2 million of subordinated debentures. These debentures, which are due in2034 and are redeemable beginning in 2009, were issued to a wholly ownedgrantor trust (the Trust) formed to issue preferred securities representingundivided beneficial interests in the assets of the Trust. The Trust theninvested the gross proceeds of such preferred securities in the debentures. TheTrust requires quarterly interest payments and has a variable rate, adjustablequarterly.  The interest rate atDecember 31, 2003, was 1.17%.  After thefirst quarter of 2004, interest will accrue at LIBOR plus 2.85%.  While the Trust is accounted for as anunconsolidated equity investment under the requirements of Financial AccountingInterpretation No. 46R, *Consolidation of Variable Interest Entities*, a portion of the trust preferredsecurities issued by the Trust qualifies as Tier 1 Capital for regulatorypurposes. Additionally, the Bank had $250,000 in repurchase agreementsoutstanding and included in other borrowings at December 31, 2003.

 

**(9)****         Income Taxes**

 

Total income tax expense(benefit) was as follows:

** **
|                                                                                                  |   |                          |      |              |      | **Three  months ended** |     | **Year ended** |      |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|-------------------|-----------|-------------------------|----------|----------------|-----------|
|                                                                                                  |   | **Years  ended December 31,** |      | **December  31,** |      | **September  30,**      |     |
|                                                                                                  |   | **2003**                      |      | **2002**          |      | **2001**                |     | **2001**       |      |
| Income (loss) from operations                                                                         |   | $                             | 2,275,469 |              | 2,362,739 |                    | (430,438 | )              | 1,780,394 |   |
| Loss from a change in accounting principle                                                            |   | —                        |      | —            |      | —                  |     | (125,144       | )         |
| Stockholders’ equity, recognition of tax benefit for stock options                               |   | (241,775                      | )         | (313,383          | )         | (19,607                 | )        | —         |      |
| Stockholders’ equity, recognition of unrealized gains (losses) on  available-for-sale securities |   | (675,442                      | )         | 904,542           |      | (66,989                 | )        | 395,021        |      |
|                                                                                                  |   | $                             | 1,358,252 |              | 2,953,898 |                    | (517,034 | )              | 2,050,271 |   |

 

33

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

** **
|     |   |                          |      |              |      | **Three  months ended** |     | **Year ended** |      |
|----------|--------|-------------------------------|-----------|-------------------|-----------|-------------------------|----------|----------------|-----------|
|     |   | **Years  ended December 31,** |      | **December  31,** |      | **September  30,**      |     |
|     |   | **2003**                      |      | **2002**          |      | **2001**                |     | **2001**       |      |
| Current  |   | $                             | 1,911,004 |              | 2,279,065 |                    | 235,758  |           | 1,965,769 |   |
| Deferred |   | 364,465                       |      | 83,674            |      | (666,196                | )        | (185,375       | )         |
|     |   | $                             | 2,275,469 |              | 2,362,739 |                    | (430,438 | )              | 1,780,394 |   |
| Federal  |   | $                             | 1,994,836 |              | 2,065,038 |                    | (380,110 | )              | 1,598,572 |   |
| State    |   | 280,633                       |      | 297,701           |      | (50,328                 | )        | 181,822        |      |
|     |   | $                             | 2,275,469 |              | 2,362,739 |                    | (430,438 | )              | 1,780,394 |   |

 

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:

 
|                                                 |   |                          |      |              |      | **Three  months ended** |     | **Year ended** |      |
|------------------------------------------------------|--------|-------------------------------|-----------|-------------------|-----------|-------------------------|----------|----------------|-----------|
|                                                 |   | **Years  ended December 31,** |      | **December  31,** |      | **September  30,**      |     |
|                                                 |   | **2003**                      |      | **2002**          |      | **2001**                |     | **2001**       |      |
| Computed “expected” tax expense (benefit)  |   | $                             | 2,423,236 |              | 2,359,822 |                    | (363,198 | )              | 1,524,948 |   |
| Increase (reduction) in income taxes resulting from: |   |                          |      |              |      |                    |     |           |      |
| Tax-exempt interest income, net                      |   | (156,473                      | )         | (162,637          | )         | (41,735                 | )        | (17,844        | )         |
| Contributions to employee stock ownership plan       |   | 28,129                        |      | 51,375            |      | —                  |     | 10,783         |      |
| State income taxes, net of federal benefit           |   | 186,586                       |      | 196,483           |      | (33,216                 | )        | 120,002        |      |
| Investment tax credits                               |   | (125,000                      | )         | (42,000           | )         | (5,000                  | )        | —         |      |
| Other, net                                           |   | (81,009                       | )         | (40,304           | )         | 12,711                  |     | 142,505        |      |
|                                                 |   | $                             | 2,275,469 |              | 2,362,739 |                    | (430,438 | )              | 1,780,394 |   |

 

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,  2003** |    | **December  31,  2002** |     |
|---------------------------------------------------------------|--------|-------------------------|---------|-------------------------|----------|
| Deferred tax assets:                                          |   |                    |    |                    |     |
| Carrying value of loans, including allowance for loan losses  |   | $                       | 744,360 |                    | 877,094  |   |
| Carrying value of certain liabilities and deposit accounts    |   | —                  |    | 44,426                  |     |
| Deferred compensation arrangements                            |   | 332,082                 |    | 306,052                 |     |
| Accrued expenses                                              |   | 69,487                  |    | 120,098                 |     |
| State taxes                                                   |   | 47,463                  |    | 77,371                  |     |
| Total deferred tax assets                                     |   | 1,193,392               |    | 1,425,041               |     |
| Deferred tax liabilities:                                     |   |                    |    |                    |     |
| Unrealized gain on investment securities available-for-sale   |   | 488,443                 |    | 1,163,885               |     |
| FHLB stock dividends                                          |   | 353,816                 |    | 346,268                 |     |
| Carrying value of premises and equipment, net of depreciation |   | 103,940                 |    | 56,106                  |     |
| Other, net                                                    |   | 97,242                  |    | 19,808                  |     |
| Total deferred tax liabilities                                |   | 1,043,441               |    | 1,586,067               |     |
| Net deferred tax asset (liability)                            |   | $                       | 149,951 |                    | (161,026 | ) |

 

There was no valuationallowance required for deferred tax assets at December 31, 2003 or 2002.Management believes it is more likely than not that the results of futureoperations will generate sufficient taxable income to realize the deferred taxassets. Retained earnings at December 31, 2003 and 2002, included approximately$5,585,000, respectively, for which no provision for federal income tax hadbeen made. This amount represents allocations of income to bad debt deductionsin years prior to 1988 for tax purposes only. Reduction of amounts allocatedfor purposes other than tax bad debt losses will create income for tax purposesonly, which will be subject to the then current corporate income tax rate.

 

34

----

 

**(10) Employee Benefit Plans**

 

*Employee Retirement Plan*

Substantially all employeesare covered under 401(k) defined contribution savings plans. Contributions of$78,000, $91,000, $10,000, and $40,000, respectively, were charged tooperations for the years ended December 31, 2003 and 2002, the three monthsended December 31, 2001, and the year ended September 30, 2001, respectively.

 

*Deferred Compensation andRetirement Agreements*

LBI entered into deferredcompensation and retirement agreements with certain key employees that providedfor cash payments to be made after their retirement. The liabilities underthese arrangements have been recorded at the present values of accrued benefitsusing a 2% discount rate.  The Companyhas also entered into agreements with certain directors and officers to deferportions of their compensation.  Thebalance of estimated accrued benefits under these arrangements were $977,000and $900,000 at December 31, 2003 and 2002, respectively. To assist in fundingbenefits, the Bank purchased certain assets including life insurance policieson covered employees in which the Bank is the beneficiary.  At December 31, 2003 and 2002, the cashsurrender values on the policies and other assets were $1.2 million and $1.1million, respectively, and were included in other assets.

 

*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, was repaid over aten-year period through annual contributions by the Bank. The Bank made annualcontributions to the ESOP equal to the ESOP’s debt service less dividendsreceived by the ESOP. All dividends received by the ESOP were used to pay debtservice. The ESOP shares initially were pledged as collateral for its debt. Asthe debt was repaid, shares were released from the collateral and allocated toactive employees based on the proportion of debt service paid in each year. MNBalso had an ESOP which operated similarly, although the MNB ESOP was funded witha note payable to an unrelated financial institution. The two plans were mergedand are presented on a combined basis in the accompanying December 31, 2003 and2002, consolidated financial statements.

 

The Company and the Bankaccount for the ESOP shares in accordance with AICPA Statement of Position No.93-6. Accordingly, the ESOP indebtedness of $145,000 at December 31, 2002, isshown as a deduction from stockholders’ equity in the accompanying consolidatedbalance sheet. The note was fully repaid in 2003. As shares are released fromcollateral, the Company reports compensation expense equal to the currentmarket price of the shares, and the shares become outstanding for earnings pershare computations. Dividends on allocated ESOP shares are recorded as areduction of retained earnings; dividends on unallocated ESOP shares arerecorded as compensation expense. All shares were fully allocated at December31, 2003. ESOP compensation expense was $70,000, $267,000, $51,000, and$169,000 for the years ended December 31, 2003 and 2002, the three months endedDecember 31, 2001, and the year ended September 30, 2001, respectively.

 

**(11) Stock Option Plan**

 

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 employees to whom options are granted andthe number of shares granted. The option price may not be less than 100% of thefair market value of the shares on the date of the grant, and no option shallbe exercisable after the expiration of ten years from the grant date. In thecase of any employee who owns more than 10% of the outstanding common stock atthe time the option is granted, the option price may not be less than 110% ofthe fair market value of the shares on the date of the grant, and the optionshall not be exercisable after the expiration of ten years from the grant date.Options outstanding at December 31, 2003, were exercisable at prices rangingfrom $20.41 to $8.64.

 

35

----

 

The Company records the fairvalue of options issued under the plan as expense in accordance with SFAS No.123, Accounting for Stock Based Compensation. The compensation cost that has beencharged to compensation and benefits expense for the plan was $1,700 and $4,300for the years ended December 31, 2003 and 2002, respectively. The fair value ofeach option grant is estimated on the date of grant. The fair value of optionsgranted in 2002 were estimated utilizing the following assumptions: dividend of4.7%, volatility of 20.8%, risk-free interest rate of 4.5%, and expected livesof five years, resulting in a fair value of $3.03 per option at grant date.There were no options granted in 2003.

 

Certain information relativeto stock options is as follows:

 
|                                                 |   | **December  31, 2003** |   | **December  31, 2002**                 |   | **December  31, 2001** |    | **September  30, 2001**                |   |
|------------------------------------------------------|--------|------------------------|--------|----------------------------------------|--------|------------------------|---------|----------------------------------------|--------|
|                                                 |   | **Shares**             |   | **Weighted  average  exercise  price** |   | **Shares**             |    | **Weighted  average  exercise  price** |   | **Shares** |   | **Weighted  average  exercise  price** |   | **Shares** |   | **Weighted  average  exercise  price** |   |
| Outstanding at beginning of period                   |   | 109,274                |   | $                                      | 11.97  |                   | 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                          |   | 3,289                  |   | —                                 |   | 5,202                  |    | —                                 |   | 8,555 |   | — |   | — |   | — |   |
| Expired                                              |   | (1,255                 | )      | 16.76                                  |   | (3,150                 | )       | 22.14                                  |   | — |   | — |   | — |   | — |   |
| Exercised                                            |   | (49,942                | )      | 9.60                                   |   | (75,184                | )       | 9.59                                   |   | (63,917 | ) | 10.85 |   | (20,039 | ) | 10.00 |   |
| Outstanding at end of period                         |   | 61,366                 |   | 13.17                                  |   | 109,274                |    | 11.97                                  |   | 179,781 |   | 11.48 |   | 196,321 |   | 11.26 |   |
| Exercisable at end of period                         |   | 59,977                 |   | 13.10                                  |   | 107,510                |    | 11.89                                  |   | 179,781 |   | 11.48 |   | 196,321 |   | 11.26 |   |
| Weighted-average contractual remaining life in years |   |                   |   | 3.94                                   |   |                   |    | 3.54                                   |   |   |   | 3.54 |   |   |   | 2.93 |   |
|                                                      |        |                        |        |                                        |        |                        |         |                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The number of sharesavailable for future grants at December 31, 2003, was 170,750.

 

**(12) Fair Value of Financial Instruments**

 

Fair value estimates of theCompany’s financial instruments as of December 31, 2003 and 2002, includingmethods and assumptions utilized, are set forth below:

 
|                                                      |   | **December  31, 2003** |        | **December  31, 2002**    |        |
|-----------------------------------------------------------|--------|------------------------|-------------|---------------------------|-------------|
|                                                      |   | **Carrying  amount**   |        | **Estimated  fair value** |        | **Carrying  amount** |   | **Estimated  fair value** |   |
| Investment securities                                     |   | $                      | 99,746,365  |                      | 99,746,000  |   | 89,296,337 |   | 89,296,000 |   |
| Loans, net of unearned fees and allowance for loan losses |   | $                      | 214,295,940 |                      | 215,802,000 |   | 224,061,263 |   | 229,155,000 |   |
| Loans held for sale                                       |   | $                      | 734,456     |                      | 750,000     |   | 5,050,603 |   | 5,192,000 |   |
| Non-interest bearing demand deposits                      |   | $                      | 20,538,514  |                      | 20,539,000  |   | 23,443,639 |   | 23,444,000 |   |
| Money market and NOW deposits                             |   | 76,990,610             |        | 76,991,000                |        | 78,387,200 |   | 78,387,000 |   |
| Savings deposits                                          |   | 14,801,950             |        | 14,802,000                |        | 15,004,882 |   | 15,005,000 |   |
| Time deposits                                             |   | 140,777,146            |        | 141,819,000               |        | 147,445,149 |   | 148,704,000 |   |
| Total deposits                                            |   | $                      | 253,108,220 |                      | 254,151,000 |   | 264,280,870 |   | 265,540,000 |   |
| FHLB advances                                             |   | $                      | 25,257,104  |                      | 26,745,000  |   | 26,203,121 |   | 27,608,000 |   |
| Other borrowings                                          |   | $                      | 8,498,000   |                      | 8,498,000   |   | — |   | — |   |

 

36

----

 

*Methods and Assumptions Utilized*

The carrying amount of cashand cash equivalents, repurchase agreements, 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.

 

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 rateloans is 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 nonperforming loans is the estimated fair value of theunderlying collateral based on recent external appraisals or other availableinformation, which generally approximates carrying value, reduced by anallocation of the allowance for loan losses.

 

The fair value of loans heldfor sale is estimated utilizing sales commitments or dealer quotations.

 

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 similarborrowings.  The fair values of otherborrowings approximate its carrying value as the Trust borrowing has a variablerate which is adjustable quarterly.

 

*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.

 

**(13) RegulatoryCapital Requirements**

 

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.” As of December 31, 2003 and 2002, the Company and the Bank wererated “well capitalized,” which is the highest rating available under thiscapital-based rating system.  Managementbelieves that as of December 31, 2003, the Company and the Bank meet allcapital adequacy requirements to which they are subject.

 

37

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The following is acomparison of the Bank’s regulatory capital to minimum capital requirements atDecember 31, 2003 and 2002 (dollars in thousands):

 
|                                     |   | **Actual** |   | **For  capital  adequacy purposes** |   | **To be well  -  capitalized under prompt  corrective action provisions** |   |
|------------------------------------------|--------|------------|--------|-------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                     |   | **Amount** |   | **Ratio**                           |   | **Amount**                                                                |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As of December 31, 2003:                 |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 37,091 |                                | 17     | %                                                                         | $      | > 17,029 |   | > 8 | % | $ | > 21,286 |   | > 10 | % |
| Tier 1 capital (to risk weighted assets) |   | 34,775     |   | 16                                  |   | >   8,514                                                    |   | > 4 |   | > 12,772 |   | >   6 |   |
| Tier 1 capital (to average assets)       |   | 34,775     |   | 10                                  |   | > 13,223                                                               |   | > 4 |   | > 16,528 |   | >   5 |   |
|                                     |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| As of December 31, 2002:                 |   |       |   |                                |   |                                                                      |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 35,886 |                                | 17     | %                                                                         | $      | >16,706 |   | > 8 | % | $ | > 20,882 |   | > 10 | % |
| Tier 1 capital (to risk weighted assets) |   | 33,321     |   | 16                                  |   | >  8,353                                                          |   | > 4 |   | > 12,529 |   | >   6 |   |
| Tier 1 capital (to average assets)       |   | 33,321     |   | 10                                  |   | >13,124                                                                |   | > 4 |   | > 16,404 |   | >   5 |   |

 

The following is acomparison of the Company’s regulatory capital to minimum capital requirementsat December 31, 2003, and 2002 (dollars in thousands):

 
|                                     |   | **Actual** |   | **For  capital  adequacy purposes** |   | **To be  well-  capitalized under prompt  corrective action provisions** |   |
|------------------------------------------|--------|------------|--------|-------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                     |   | **Amount** |   | **Ratio**                           |   | **Amount**                                                               |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| As of December 31, 2003:                 |   |       |   |                                |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 49,838 |                                | 23     | %                                                                        | $      | > 17,097 |   | > 8 | % | $ | > 21,371 |   | > 10 | % |
| Tier 1 capital (to risk weighted assets) |   | 47,522     |   | 22                                  |   | >   8,548                                                   |   | > 4 |   | > 12,823 |   | >   6 |   |
| Tier 1 capital (to average assets)       |   | 47,522     |   | 14                                  |   | > 13,273                                                              |   | > 4 |   | > 16,591 |   | >   5 |   |
|                                     |   |       |   |                                |   |                                                                     |   |   |   |   |   |   |   |
| As of December 31, 2002:                 |   |       |   |                                |   |                                                                     |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 39,110 |                                | 19     | %                                                                        | $      | > 16,763 |   | > 8 | % | $ | > 20,954 |   | > 10 | % |
| Tier 1 capital (to risk weighted assets) |   | 36,545     |   | 17                                  |   | >   8,382                                                   |   | > 4 |   | > 12,572 |   | >   6 |   |
| Tier 1 capital (to average assets)       |   | 36,545     |   | 11                                  |   | > 13,289                                                              |   | > 4 |   | > 16,611 |   | >   5 |   |

 

**(14) Parent Company CondensedFinancial Statements**

 

The following is condensedfinancial information of the parent company as of and for years ended December31, 2003 and 2002, the three months ended December 31, 2001, and the year endedSeptember 30, 2001 (dollars in thousands):

 

***Condensed BalanceSheets***

** **
|                                            |   | **December  31,  2003** |       | **December  31,  2002** |       |
|-------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
| **Assets**                                      |   |                    | ** ** |                    | ** ** |
| Cash                                            |   | $                       | 10,162     |                    | 1,419      |   |
| Investment securities                           |   | 1,109                   |       | 1,966                   |       |
| Investment in Bank                              |   | 37,834                  |       | 37,513                  |       |
| Other                                           |   | 1,732                   |       | 423                     |       |
| Total assets                                    |   | $                       | 50,837     |                    | 41,321     |   |
|                                            |   |                    |       |                    |       |
| **Liabilities  and Stockholders’ Equity**  |   |                    |       |                    |       |
| Borrowed funds                                  |   | $                       | 8,248      |                    | —     |   |
| Other                                           |   | 17                      |       | 247                     |       |
| Stockholders’ equity                       |   | 42,572                  |       | 41,074                  |       |
| Total liabilities and stockholders’ equity |   | $                       | 50,837     |                    | 41,321     |   |

 

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***CondensedStatements of Operations***

** **
|                                                          |   |                          |   |              |   | **Three  months ended** |   | **Year ended** |   |
|---------------------------------------------------------------|--------|-------------------------------|--------|-------------------|--------|-------------------------|--------|----------------|--------|
|                                                          |   | **Years  ended December 31,** |   | **December  31,** |   | **September  30,**      |   |
|                                                          |   | **2003**                      |   | **2002**          |   | **2001**                |   | **2001**       |   |
| Dividends from Bank                                           |   | $                             | 3,424  |              | 2,649  |                    | — |           | 2,700  |   |
| Interest income                                               |   | 75                            |   | 90                |   | 24                      |   | 226            |   |
| Other income                                                  |   | 559                           |   | 131               |   | 2                       |   | 785            |   |
| Interest expense                                              |   | (4                            | )      | —            |   | —                  |   | (40            | )      |
| Other expense, net                                            |   | (198                          | )      | (167              | )      | (50                     | )      | (134           | )      |
| Income (loss before equity) in undistributed earnings of Bank |   | 3,856                         |   | 2,703             |   | (24                     | )      | 3,537          |   |
| Increase (decrease) in undistributed equity of Bank           |   | 1,097                         |   | 1,881             |   | (623                    | )      | (692           | )      |
| Earnings (loss) before income taxes                           |   | 4,953                         |   | 4,584             |   | (647                    | )      | 2,845          |   |
| Income tax expense (benefit)                                  |   | (101                          | )      | (6                | )      | 9                       |   | (355           | )      |
| Net earnings (loss)                                           |   | $                             | 4,852  |              | 4,578  |                    | (638   | )              | 2,490  |   |

 

***CondensedStatements of Cash Flows***

** **
|                                                                |   |                          |   |              |   | **Three  months ended** |   | **Year ended** |   |
|---------------------------------------------------------------------|--------|-------------------------------|--------|-------------------|--------|-------------------------|--------|----------------|--------|
|                                                                |   | **Years  ended December 31,** |   | **December  31,** |   | **September  30,**      |   |
|                                                                |   | **2003**                      |   | **2002**          |   | **2001**                |   | **2001**       |   |
| Cash flows from operating activities:                               |   |                          |   |              |   |                    |   |           |   |
| Net earnings (loss)                                                 |   | $                             | 4,852  |              | 4,578  |                    | (638   | )              | 2,490  |   |
| (Increase) decrease in undistributed equity of Bank                 |   | (1,097                        | )      | (1,881            | )      | 623                     |   | 692            |   |
| Other                                                               |   | (1,789                        | )      | 193               |   | 267                     |   | (179           | )      |
| Net cash provided by operating activities                           |   | 1,966                         |   | 2,890             |   | 252                     |   | 3,003          |   |
| Cash flows from investing activities:                               |   |                          |   |              |   |                    |   |           |   |
| Proceeds from sale of investment securities available-for-sale, net |   | 1,252                         |   | 287               |   | 64                      |   | 3,345          |   |
| Net cash received in acquisition of MNB                             |   | —                        |   | —            |   | 22                      |   | —         |   |
| Other                                                               |   | —                        |   | —            |   | (2                      | )      | (171           | )      |
| Net cash provided by investing activities                           |   | 1,252                         |   | 287               |   | 84                      |   | 3,174          |   |
| Cash flows from financing activities:                               |   |                          |   |              |   |                    |   |           |   |
| Issuance of shares under stock option plan                          |   | 479                           |   | 733               |   | 694                     |   | 200            |   |
| Proceeds from other borrowings                                      |   | 8,248                         |   | —            |   | —                  |   | —         |   |
| Repayments on note payable                                          |   | —                        |   | —            |   | (520                    | )      | (1,537         | )      |
| Purchase of treasury stock                                          |   | (1,871                        | )      | (5,345            | )      | (44                     | )      | (473           | )      |
| Payment of dividends                                                |   | (1,331                        | )      | (1,240            | )      | (299                    | )      | (632           | )      |
| Net cash provided by (used in) financing activities                 |   | 5,525                         |   | (5,852            | )      | (169                    | )      | (2,442         | )      |
| Net increase (decrease) in cash                                     |   | 8,743                         |   | (2,675            | )      | 167                     |   | 3,735          |   |
| Cash at beginning of period                                         |   | 1,419                         |   | 4,094             |   | 3,927                   |   | 192            |   |
| Cash at end of period                                               |   | $                             | 10,162 |              | 1,419  |                    | 4,094  |           | 3,927  |   |

 

Dividends paid by theCompany are provided through subsidiary bank dividends. At December 31, 2003,the Bank could distribute dividends of up to $1.2 million without regulatoryapprovals.

 

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**(15) Stockholders’Rights Plan**

 

On October 11, 2001, theCompany’s board of directors 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 Planprovides that if a person, group or entity acquires a 15% or larger stake inthe Company or announces a tender offer, and the Company’s board of directorschooses not to redeem the rights, all holders of rights, other than the 15% stockholderor the tender offeror, will be able to purchase a certain amount of theCompany’s common stock for half of its market price.

 

**(16) IntangibleAssets**

 

The following table presentsinformation about the Company’s intangible assets, which are being amortized inaccordance with SFAS No. 142:

 
|                          |   | **December  31, 2003**      |      | **December  31, 2002**        |     |
|-------------------------------|--------|-----------------------------|-----------|-------------------------------|----------|
|                          |   | **Gross  carrying  amount** |      | **Accumulated  amortization** |     | **Gross  carrying  amount** |   | **Accumulated  amortization** |   |
| Amortizing intangible assets: |   |                        |      |                          |     |   |   |   |   |
| Core deposit premium          |   | $                           | 780,000   |                          | (297,818 | ) | 780,000 |   | (173,727 | ) |
| Mortgage servicing rights     |   | 727,158                     |      | (249,808                      | )        | 773,254 |   | (247,943 | ) |
| Total                         |   | $                           | 1,507,158 |                          | (547,626 | ) | 1,553,254 |   | (421,670 | ) |

 

Aggregate amortizationexpense for the years ended December 31, 2003 and 2002, was $426,000 and$389,000, respectively. The following is estimated amortization expense for theyears ending December 31:

 
| **Year:** |   |    | **Amount** |   |
|-----------|--------|---------|------------|--------|
| 2004      |   | $       | 254,000    |   |
| 2005      |   | 240,000 |       |
| 2006      |   | 226,000 |       |
| 2007      |   | 112,000 |       |
| 2008      |   | 53,000  |       |
|           |        |         |            |        |  |

 

**(17) Commitments,Contingencies and Guarantees**

 

Commitments to extend creditare legally binding agreements to lend to a borrower providing there are noviolations of any conditions established in the contract. The Company, as aprovider of financial services, routinely issues financial guarantees in theform of financial and performance commercial and standby letters of credit. Asmany of the commitments are expected to expire without being drawn upon, thetotal commitment does not necessarily represent future cash requirements (seeNote 4).

 

The Company guaranteespayments to holders of certain trust preferred securities issued by a whollyowned grantor trust. The securities are due in 2034 and are redeemablebeginning in 2009. The maximum potential future payments guaranteed by theCompany, which includes future interest and principal payments throughmaturity, was approximately $10.1 million at December 31, 2003. At December 31,2003, the Company had a recorded liability of $8.2 million of principal andaccrued interest to date, representing amounts owed to the Trust.

 

There are no pending legalproceedings to which the Company or the Bank is a party other than ordinaryroutine litigation incidental to the Bank’s business.  While the ultimate outcome of current legal proceedings cannot bepredicted with certainty, it is the opinion of management that the resolutionof these legal actions should not have a material effect on the Company’sconsolidated financial position or results of operations.

 

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**(18) Pending Acquisitions**

 

Effective November 13, 2003,the Company announced the acquisition of First Kansas Financial Corporation(First Kansas), a single thrift holding company based in Osawatomie, Kansas. AtSeptember 30, 2003, First Kansas had total assets of $152.4 million, includingnet loans and deposits of $69.0 million and $83.6 million, respectively. TheCompany will pay $19.00 per share for all of the outstanding stock of FirstKansas. The acquisition of First Kansas by the Company is expected to close inApril 2004.

 

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**Corporate Information**

 

**Directors Of LandmarkBancorp, Inc. and Landmark National Bank**

 

Larry Schugart, Chairman

Former President and ChiefExecutive Officer

Landmark Bancshares, Inc.

 

Patrick L. Alexander

President and Chief ExecutiveOfficer

Landmark Bancorp, Inc. andLandmark National Bank

 

Richard A. Ball

CPA

Adams, Brown, Beran & Ball,Chtd.

 

Brent A. Bowman

President

Brent Bowman and AssociatesArchitects, 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 VicePresident/Secretary/Cashier,

Security National Bank

 

C. Duane Ross

President, High PlainsPublishers, Inc.

 

David H. Snapp

Partner, Waite, Snapp &Doll Attorneys at Law

 

**Executive Officers OfLandmark Bancorp, Inc.**

 

Patrick L. Alexander

President and Chief ExecutiveOfficer

 

Mark A. Herpich

Chief Financial Officer, VicePresident, Secretary and Treasurer

 

**Executive Officers OfLandmark National Bank**

 

Patrick L. Alexander

President and Chief ExecutiveOfficer

 

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

 

**Stock PriceInformation**

 

Our common stock has traded onthe Nasdaq Stock Market National Market system under the symbol “LARK” sinceOctober 9, 2001. At December 31, 2003, the Company had approximately 1,080stockholders, consisting of approximately 450 owners of record andapproximately 630 beneficial owners of our common stock.   Set forth below are the reported high andlow bid prices of the common stock and dividends paid during the past twoyears.  Information presented below hasbeen restated to give effect to the 5% stock dividends paid in December 2003,2002 and 2001.

 

**Year Ended December 31, 2003**

** **
|           |   | **High** |   | **Low** |   | **Dividends** |   |
|----------------|--------|----------|--------|---------|--------|---------------|--------|
| First Quarter  |   | $        | 23.14  |    | $      | 22.05         |   | $ | 0.1524 |   |
| Second Quarter |   | 26.43    |   | 22.62   |   | 0.1524        |   |
| Third Quarter  |   | 27.55    |   | 23.52   |   | 0.1619        |   |
| Fourth Quarter |   | 27.89    |   | 23.39   |   | 0.1619        |   |
|                |        |          |        |         |        |               |        |  |  |  |

 

**Year Ended December 31, 2002**

** **
|           |   | **High** |   | **Low** |   | **Dividends** |   |
|----------------|--------|----------|--------|---------|--------|---------------|--------|
| First Quarter  |   | $        | 19.138 |    | $      | 17.696        |   | $ | 0.1360 |   |
| Second Quarter |   | 21.089   |   | 18.821  |   | 0.1360        |   |
| Third Quarter  |   | 20.934   |   | 19.274  |   | 0.1360        |   |
| Fourth Quarter |   | 22.810   |   | 18.512  |   | 0.1450        |   |
|                |        |          |        |         |        |               |        |  |  |  |

 

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**CorporateHeadquarters**

 

800 Poyntz Avenue

Manhattan, Kansas 66502

 

**Annual Metting**

 

The annual meeting ofstockholders will be held at the Boot Hill Repertory Theatre Company, 201 EastWyatt Earp, Dodge City, Kansas, on Wednesday, May 19, 2004 at 2:00 PM.

 

**Form 10-K**

 

A copy of the Annual Report onForm 10-K filed with the Securities and Exchange Commission (SEC) may beobtained by stockholders without charge on written request to Patrick L.Alexander, President and Chief Executive Officer, Landmark Bancorp, Inc., POBox 308, Manhattan, Kansas 66505-0308, or by accessing the SEC’s website atwww.SEC.gov.

 

**Registrar AndTransfer Agent**

 

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016-3572

 

**IndependentAccountants**

 

KPMG LLP

1000 Walnut, Suite 1600

Kansas City, Missouri 64199

 

 

 

Corporate headquarters located at 800 PoyntzAvenue, Manhattan, Kansas

 

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**MissionStatement**

 

We are dedicated to providing qualityfinancial services to customers in a manner that exceeds customer expectations.These services will be delivered by outgoing, professional, and knowledgeableassociates that are focused on asking for the business and establishinglong-term banking relationships. These banking relationships will have afoundation of personal service and quality products that are delivered in aconvenient matter that meet our customer’s needs at a fair and competitiveprice.

 

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