SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) _X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 - OR - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-23164 LANDMARK BANCSHARES, INC. (Exact Name of Registrant as Specified in Its Charter) Kansas 48-1142260 (State or Other Jurisdiction of (I.R.S. Employer of Incorporation or Organization) Identification No.) Central and Spruce Streets, Dodge City, Kansas 67801 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (620) 227-8111 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Prior to October 9, 2001, as described herein, the Company's voting stock traded on The Nasdaq Stock Market under the symbol "LARK". The aggregate market value of the voting common equity held by non-affiliates of the registrant, based upon the closing price of such stock as quoted on Nasdaq's National Market on September 30, 2001, was $15.7 million. As of September 30, 2001, the issuer had 1,101,938 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None PART I The Company may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this annual report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward- looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; changes in consumer spending and saving habits; and the success of the Company at managing these risks. The Company cautions that this list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business Recent Events Effective Tuesday, October 9, 2001, Landmark Bancshares, Inc. (the "Company" or the "Registrant"), the holding company for Landmark Federal Savings Bank (the "Bank"), and MNB Bancshares, Inc., the holding company for Security National Bank, completed their merger into Landmark Merger Company, which immediately changed its name to Landmark Bancorp, Inc. (the "Merger"). In addition, the Bank merged with Security National Bank and the resulting bank changed its name to Landmark National Bank, which is the wholly- owned subsidiary of Landmark Bancorp, Inc. The Company is the accounting predecessor to the new Landmark Bancorp, Inc. Therefore, because the Merger was consummated after the end of the Company's latest fiscal year, September 30, 2001, the Company is required to file this Annual Report on Form 10-K for its fiscal year ended September 30, 2001. The information presented in this Form 10-K does not take into account the consummation of the Merger, and presents information only on behalf of the Company as of September 30, 2001, and not with respect to MNB Bancshares, Inc. or Landmark Bancorp, Inc. Therefore, much of the discussion throughout this document no longer applies, and the information should be read only as a report on the business of the Company for the fiscal year ended September 30, 2001. Landmark Bancorp, Inc., the resulting company from the Merger, has a fiscal year ending on December 31. Therefore, Landmark Bancorp, Inc. will file a Form 10-K with audited consolidated financial information in March 2002. General The Company is a unitary savings and loan holding company that was incorporated in November of 1994 under the laws of the State of Kansas for the purpose of acquiring all of the issued and outstanding common stock of Landmark Federal Savings Bank (the "Bank"). This acquisition occurred in March of 1994. At that time the Bank simultaneously converted from a mutual to stock institution and sold all of its outstanding capital stock to the Company, and the Company made its initial public offering of common stock. As of September 30, 2001, the Company had total assets of $200.3 million, total deposits of $148.1 million, and stockholders' equity of $26.1 million or 13% of total assets under generally accepted accounting principles ("GAAP"). The Company's only subsidiary is the Bank. The Bank is a federally chartered stock savings bank headquartered in Dodge City, Kansas and originally founded in 1920. The Bank's deposits are federally insured by the Savings Association Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"). The Company's primary activity is directing and planning the activities of the Bank, the Company's primary asset. At September 30, 2001, the remainder of the assets of the Company were maintained as deposits in the Bank or in the form of common stock of other banks. The Company engages in no other significant activities. As a result, references to the Company or Registrant generally refer to the Bank, unless the context indicates otherwise. In the discussion of regulation, except for the discussion of the regulation of the Company, all regulations apply to the Bank rather than the Company. Registrant is primarily engaged in attracting deposits from the general public and using those funds to originate and sell real estate loans on one-to-four family residences and, to a lesser extent, to originate consumer, commercial and construction loans for its portfolio. Registrant also purchases one- to four-family residential loans. Registrant has offices in Garden City, Dodge City, Great Bend, LaCrosse, and Hoisington, Kansas, which are located in its primary market area of Ford, Finney, Barton, and Rush Counties in the State of Kansas. Registrant also has a loan origination office in the Kansas City area. In addition, Registrant invests in mortgage- related securities and investment securities. Registrant offers its customers fixed-rate and adjustable-rate mortgage loans, as well as FHA/VA loans, commercial and consumer loans, including home equity and savings account loans. Prior to the current year, adjustable-rate mortgage loans and 20-year fixed-rate mortgage loans were originated for retention in Registrant's portfolio while 30-year fixed-rate mortgage loans were sold into the secondary market. Beginning with the current fiscal year all fixed rate mortgage loans were sold in the secondary market, and adjustable rate loans were retained. All consumer loans are retained in Registrant's portfolio. The principal sources of funds for Registrant's lending activities are deposits and the amortization, repayment, and maturity of loans, mortgage-related securities, and investment securities. Principal sources of income are interest and fees on loans, mortgage-related securities, investment securities, and deposits held in other financial institutions. Registrant's principal expense is interest paid on deposits. Market Area The Kansas counties of Ford, Finney, Barton, and Rush are Registrant's primary market area. This area was founded on agriculture, which continues to play a major role in the economy. Predominant activities involve agricultural and cattle feed lot operations. Dodge City, the location of Registrant's main office is known as the "Cowboy Capital of the World" and maintains a significant tourism industry. In the central part of Kansas, where Registrant has most of its branch offices, the oil industry is prevalent. The largest employment sector in Registrant's market area is agriculture. The market area of Registrant is largely dependent upon the agricultural, beef packing, and oil and gas industries. A downturn in any of these industries could have a negative impact on the results of operations of Registrant. Lending Activities General. Registrant's loan portfolio consists primarily of fixed and adjustable-rate mortgage loans secured by one- to four-family residences and, to a lesser extent, consumer loans, commercial loans and construction loans. The portfolio also includes commercial real estate loans. Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of Registrant's loan portfolio by type of loan on the dates indicated: Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of Registrant's loan portfolio by type of loan on the dates indicated: At September 30, 2001 2000 1999 1998 1997 $ % $ % $ % $ % $ % (Dollars in Thousands) Type of Loan: (1) Real estate loans Construction $3,248 2.25% 857 0.45 1,848 1.04 1,386 0.79 $1,937 1.22% Resident 108,568 75.15 156,370 81.66 138,613 77.94 132,077 75.59 125,961 79.64 Commercial 10,084 6.98 9,331 4.87 9,050 5.09 4,937 2.83 2,666 1.69 Second mortgage 9,531 6.60 10,403 5.43 9,716 5.46 10,072 5.76 9,986 6.31 Commercial business 7,604 5.26 7,034 3.67 6,531 3.67 8,579 4.91 4,050 2.56 Consumer: Savings account 430 0.30 488 0.25 660 0.37 588 0.34 574 0.36 Automobile 6,084 4.21 8,074 4.22 12,269 6.90 17,623 10.08 13,310 8.42 Other 412 0.29 488 0.25 650 0.37 837 0.48 968 0.61 Gross loans 145,961 101.04 193,045 100.80 179,337 100.84 176,099 100.78 159,452 100.81 Less: Unamortized premiums (discounts) on loan purchases 20 0.01 30 0.02 35 0.02 31 0.02 30 0.02 Loans in process -- -- -- -- -- -- 24 0.01 (2) -- Deferred loan origination fees and costs (84)(0.06)(184)(0.10)(214)(0.12)(284)(0.16)(348)(0.22) Allowance for loan losses (1,424)(0.99)(1,377)(0.72)(1,318)(0.74)(1,137)(0.65)(969)(0.61) Total loans, net $144,473 100.00 191,514 100.00 177,840 100.00 174,733 100.00 158,163 100.00% (1) Includes loans classified as held for sale. Loan Maturity. The following table sets forth the maturity of Registrant's loan portfolio at September 30, 2001. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on loans totaled $61.1 million, $56.8 million, and $74.1 million for the three years ended September 30, 2001, 2000, and 1999, respectively. Adjustable-rate mortgage loans are shown as maturing based on contractual maturities. 1-4 Family Other Real Estate Residential Mortgage Commercial Construction Consumer(1)Total (In Thousands) Amounts Due: Within 1 year $ 11 $ 3,927 $2,690 $2,228 $ 8,856 After 1 year: 1 to 3 years 312 3,052 -- 4,814 8,178 3 to 5 years 531 862 -- 4,522 5,915 5 to 10 years 13,970 3,935 -- 4,491 22,396 10 to 20 years 28,465 4,921 119 402 33,907 Over 20 years 65,279 991 439 -- 66,709 Total due after one year 108,557 13,761 558 14,229 137,105 Total amount due $108,568 $17,688 $3,248 $16,457 $145,961 Less: Unamortized premium on loan purchases 20 -- -- -- 20 Allowance for loan loss (665) (240) -- (519) (1,424) Deferred loan fees (76) -- (8) -- (84) Loans receivable, net $107,847 $17,448 $3,240 $15,938 $144,473 ____________________ (1) Includes $9,531 of loans classified as second mortgage loans. The following table sets forth the dollar amount of all loans due after September 30, 2002, which have predetermined interest rates and which have floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total (In Thousands) One-to-four family $37,276 $71,281 $108,557 Commercial 6,833 6,928 13,761 Construction 558 -- 558 Consumer 13,325 904 14,229 Total $57,992 $79,113 $137,105 Residential Loans. Registrant's primary lending activity consists of the origination of one-to-four family, owner-occupied, residential mortgage loans secured by property located in its primary market area. Registrant also originates a small number of residential real estate loans secured by multi-family dwellings. Registrant offers adjustable-rate mortgages ("ARMs") that adjust every one, three, and five years and have terms from 1 to 30 years, and fixed-rate mortgage loans with terms of 1 to 30 years. The interest rates on ARMs are based on Treasury note rates and the national cost of funds. Registrant considers the market factors and competitive rates on loans as well as its own cost of funds when determining the rates on the loans that it offers. Registrant also has a small network of correspondents from whom Registrant may be referred both fixed- and adjustable-rate real estate mortgage loans. Registrant retains the adjustable-rate loans for its own loan portfolio and sells most of the fixed rate loans into the secondary market, primarily to the Federal Home Loan Mortgage Corporation ("FHLMC"). Registrant generally sells its 30-year fixed rate loans in the secondary market and holds its 15-year and 20-year fixed rate mortgage loans to maturity. Beginning with the current year 15 and 20 year fixed rate loans were sold in the secondary market. Registrant also offers Federal Housing Administration and Veterans Administration ("FHA/VA") loans. Fixed- rate mortgage loans are generally originated to FHLMC standards. Although Registrant originates adjustable-rate mortgage loans for its own portfolio, these loans are underwritten to FHLMC standards, so they are saleable in the secondary market. FHA/VA loans are originated in accordance with FHA/VA guidelines, most of which are sold to various private investors. Generally, during periods of rising interest rates, the risk of default on an ARM is considered to be greater than the risk of default on a fixed-rate loan due to the upward adjustment of interest costs to the borrower. To help reduce such risk, Registrant qualifies the loan at the fully indexed accrual rate, as opposed to the original interest rate. ARMs may be made up to 95% of the loan to value ratio. Registrant does not originate ARMs with negative amortization. Regulations limit the amount which a savings association may lend in relationship to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value ratio of 100% for residential property and 90% for all other real estate loans. Registrant's lending policies, however, generally limit the maximum loan-to-value ratio to 80% of the appraised value of the property, based on an independent or staff appraisal. When Registrant makes a loan in excess of 80% of the appraised value or purchase price, private mortgage insurance is generally required for at least the amount of the loan in excess of 80% of the appraised value. Registrant generally does not make non- owner occupied one- to four-family loans in excess of 80% of the appraised value. The loan-to-value ratio, maturity, and other provisions of the residential real estate loans made by Registrant reflect the policy of making loans generally below the maximum limits permitted under applicable regulations. Registrant requires an independent or staff appraisal, title insurance or an attorney's opinion with an abstract, flood hazard insurance (if applicable), and fire and casualty insurance on all properties securing real estate loans made by Registrant. Registrant reserves the right to approve the selection of which title insurance companies' policies are acceptable to insure the real estate in the loan transactions. While one- to four-family residential real estate loans are normally originated with 15-30 year terms, such loans typically remain outstanding for substantially shorter periods. This is because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all of the fixed-interest rate loans in Registrant's loan portfolio contain due-on-sale clauses providing Registrant may declare the unpaid amount due and payable upon the sale of the property securing the loan. Registrant enforces these due-on-sale clauses to the extent permitted by law. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates, and the interest rates payable on outstanding loans. Second Mortgage Loans. Registrant makes loans on real estate secured by secondary, or junior, mortgages. Second mortgage loans possess somewhat greater risk than primary mortgage loans because the security underlying the second mortgage loan must first be used to satisfy the obligation under the primary mortgage loan. Registrant's lending policies for second mortgage loans secured by one- to four-family residences are similar to those used for residential loans, including the required loan-to-value ratio. Registrant does not currently originate any second mortgage loans outside its primary market area. Multi-Family Loans. Registrant also makes fixed- rate and adjustable-rate multi-family loans, including loans on apartment complexes. The largest group of multi-family real estate loans on a single complex had a balance of approximately $590,000 at September 30, 2001, on an apartment complex located within the Registrant's primary market area. Multi-family loans generally provide higher origination fees and interest rates, as well as shorter terms to maturity and repricing, than can be obtained from single-family mortgage loans. Multi-family lending, however, entails significant additional risks compared with one- to four-family residential lending. For example, multi-family loans typically involve larger loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the real estate project, and these risks can be significantly impacted by supply and demand conditions in the market for multi-family residential units and commercial office, retail, and warehouse space. Consumer Loans. Registrant views consumer lending as an important component of its business operations because consumer loans generally have shorter terms and higher yields, thus reducing exposure to changes in interest rates. In addition, Registrant believes that offering consumer loans helps to expand and create stronger ties to its customer base. Consequently, Registrant intends to continue its consumer lending. Regulations permit federally-chartered savings banks to make certain secured and unsecured consumer loans up to 35% of assets. In addition, Registrant has lending authority above the 35% limit for certain consumer loans, such as home improvement, credit card, and education loans, and loans secured by savings accounts. Consumer loans consist of personal unsecured loans, home improvement loans, automobile loans, and savings account loans, all at fixed rates. The underwriting standards employed by Registrant for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. In addition, the stability of the applicant's monthly income from primary employment is considered during the underwriting process. Credit worthiness of the applicant is of primary consideration. The underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount. Consumer loans entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles. Registrant adds a general provision to its consumer loan loss allowance, based on general economic conditions, prior loss experience, and management's periodic evaluation. Commercial Real Estate Loans. Secured commercial real estate loans are originated in amounts up to 80% of the appraised value of the property. Such appraised value is determined by an independent appraiser previously approved by Registrant. Registrant's commercial real estate loans are permanent loans secured by improved property such as small office buildings, retail stores, small strip plazas, and other non-residential buildings. Registrant originates commercial real estate loans with amortization periods of 1 to 20 years, primarily as adjustable rate mortgages. Loans secured by commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. At September 30, 2001, the largest commercial real estate loan had a balance of approximately $991,000. Construction Loans. Registrant does not actively seek to make construction loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors can result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, Registrant may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, Registrant may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Commercial Business Loans. Regulations authorize Registrant to make secured or unsecured loans for commercial, corporate, business, and agricultural purposes. The aggregate amount of such loans outstanding may not exceed 10% of Registrant's assets. In addition, another 10% of total assets may be invested in commercial equipment leasing. Most of Registrant's commercial business loans are secured by real estate or other assets such as automobiles. The Registrant had an outstanding commercial line of credit of $1.5 million at September 30, 2001. The commercial portfolio includes additional loans with large aggregate dollar balances. It is the policy of Registrant to annually request financial statements from commercial loan borrowers. The financial statements are reviewed as received by management to detect any conditions or trends, including cash flows of the project that may affect the ability of the borrower to repay the debt. Because of the large dollar amounts outstanding on some of the loans in the portfolio, the failure of only one of these borrowers to repay a loan could have a material impact on the Registrant. Loan Solicitation and Processing. Registrant's sources of mortgage loan applications are referrals from existing or past customers, local realtors, builders, loan correspondents, and walk-in customers and also as the result of advertising. The Bank actively solicits local realtors and believes they provide a substantial number of customers that originate loans with Registrant. Registrant also solicits loans from a small network of correspondent lenders in Kansas City, Kansas and Albuquerque, New Mexico as well as various communities in central and western Kansas. These correspondents, selected by management, are located in markets Registrant does not otherwise serve. The loan approval process is segmented by the type of loan and size of loan. Consumer loans are approved by certain loan officers within designated limits. One or more signatures of members of senior management are also required for larger consumer loans. The Board of Directors ratifies all loans that have been approved by officers or committees. All commercial real estate loans are submitted to the Board of Directors for approval upon the recommendation of senior management. The real estate loan committee consists of various officers. Any two of those individuals may collectively approve one- to four-family residential real estate loans up to $100,000. Loans in amounts greater than $100,000 and up to the current FHLMC maximum loan amount must be approved by no less than three members of the loan committee. Real estate loans over the current FHLMC limit require the approval of the Board of Directors. Registrant uses fee appraisers or staff appraisers on all real estate related transactions that are originated in the main office or branch offices of Registrant. It is Registrant's policy to obtain title insurance on all properties securing real estate loans and to obtain fire and casualty insurance on all loans that require security. On occasion, when originating loans, abstracts or attorney opinions may be utilized in lieu of title insurance. Origination, Purchase, and Sale of Loans During the fiscal year ended September 30, 2001, Registrant originated $57.8 million in loans, purchased $2.5 million in loans (all secured by one- to four-family residences), and sold $35.6 million in loans. Loan Sales. Registrant generally retains servicing on all loans sold with the exception of fixed rate FHA/VA loans which are sold with servicing released. All such loans were sold without recourse. Loan Commitments. Registrant issues written, formal commitments to prospective borrowers on all real estate approved loans. The commitments generally requires acceptance within 60 days of the date of issuance. For commercial real estate loans or commercial loans in general, the commitment is issued for approximately 60 days and must be closed within 60 days of issuance. Commitments for consumer loans expire 30 days after issuance. At September 30, 2001, Registrant had $4.8 million of commitments to originate loans and $5.4 million of unfunded commitments under lines of credit. Loan Processing and Servicing Fees. In addition to interest earned on loans, the Company recognizes fees and service charges which consist primarily of fees on loans serviced for others and late charges. The Company recognized net loan servicing fees of $201,000, $158,000, and $165,000 for the years ended September 30, 2001, 2000 and 1999, respectively. As of September 30, 2001, loans serviced for others totaled $86.6 million. Loans to One Borrower. Savings associations are subject to the same limits as those applicable to national banks, which under current regulations generally limit loans-to-one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus. This is calculated as the sum of the Bank's core and supplementary capital included in total capital, plus the balance of the general valuation allowances for loan and lease losses not included in supplementary capital, plus investments in subsidiaries that are not included in calculating core capital, or $500,000, whichever is greater. An additional amount equal to 10% of unimpaired capital and unimpaired surplus may be included if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate). Under this general restriction, the Bank's maximum loan to one borrower limit at September 30, 2001 was approximately $3.2 million. Registrant's largest amount of loans to one borrower was approximately $3.0 million as of September 30, 2001. These loans are secured primarily by interests in automobiles. These loans were current at September 30, 2001. Loan Delinquencies. Registrant's collection procedures provide that when a mortgage loan is 15 days past due, a computer printed delinquency notice is sent to the borrower. If payment is still delinquent after 15 days, a telephone call is made to the borrower. If the delinquency continues, subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 60 days or more, the Board of Directors of Registrant generally approves the initiation of foreclosure proceedings unless other repayment arrangements are made. Collection procedures for non- mortgage loans generally begin after a loan is 10 days delinquent. Loans are reviewed on a regular basis and are generally placed on a non-accrual status when the loan becomes more than 90 days delinquent and, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. The following table sets forth information regarding non-accrual loans, real estate owned ("REO") and other repossessed assets, and loans that are 90 days or more delinquent but on which Registrant was accruing interest at the dates indicated. At such dates, Registrant had no restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15. At September 30, 2001 2000 1999 1998 1997 (Dollars in thousands) Loans accounted for on a non- accrual basis: Mortgage loans: Permanent loan secured by 1-4 dwelling units $425 $418 $128 $185 $ 78 All other mortgage loans 188 - - 91 - Non-Mortgage loans: Consumer loans 9 73 185 230 294 Total $622 $491 $313 $506 $372 === === === === === Accruing loans that are contractually past due 90 days or more: Mortgage loans: Permanent loans secured by 1-4 dwelling units $ 145 $ 634 $180 $182 $ 50 Total $ 145 $ 634 $180 $182 $ 50 ===== ====== ==== ==== ==== Total non-accrual and 90-day past due accrual loans $ 767 $1,125 $493 $688 $422 ===== ===== ==== ==== ==== Real estate owned $ 233 $ 171 $147 $ 71 $252 ===== ====== ==== ==== ==== Total non-performing assets $1,000 $1,296 $640 $759 $674 ===== ====== ==== ===== ==== Total non-accrual and 90-day past due accrual loans to net loans 0.53% 0.59% 0.28% 0.39% 0.27% ===== ==== ===== ===== ===== Total non-accrual and 90-day past due accrual loans to total assets 0.38% 0.45% 0.20% 0.31% 0.19% ===== ===== ===== ===== ===== Total non-performing assets to total assets 0.50% 0.52% 0.26% 0.34% 0.30% ===== ===== ===== ===== ===== Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $54,000 for the year ended September 30, 2001. Amounts foregone and not included in Registrant's interest income for the year ended September 30, 2001 totaled $31,000. Classified Assets. Office of Thrift Supervision ("OTS") regulations provide for a classification system for problem assets of insured institutions that covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets designated special mention by management are assets included on Registrant's internal watch list because of potential weakness but which do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. At September 30, 2001, Registrant had a general loss allowance for loans and REO of $1,424,000. (In Thousands) Special mention assets $ 108 ======= Classified assets Substandard $ 1,336 Doubtful -- Loss -- Total $ 1,336 ======= Foreclosed Assets. Assets owned or acquired by Registrant as a result of foreclosure, judgment, or by a deed in lieu of foreclosure are classified as foreclosed assets until they are sold. When property is acquired it is recorded at fair value as of the date of foreclosure or transfer less estimated disposal costs. Valuations are periodically performed by management and subsequent charges to general loan reserves are taken when it is determined that the carrying value of the property exceeds the fair value less estimated costs to sell. It is subsequently carried at the lower of the new basis (fair value at foreclosure or transfer) or fair value. Registrant had $233,000 in foreclosed assets as of September 30, 2001. Allowance for Loan and Real Estate Losses. It is management's policy to provide for losses on unidentified loans in its loan portfolio and foreclosed real estate. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in Registrant's loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral. During the years ended September 30, 2001, 2000, and 1999, Registrant charged $120,000, $267,000 and $785,000, respectively, to the provision for loan losses and $0, $0 and $0, respectively, to the provision for losses on foreclosed assets. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. The distribution of Registrant's allowance for losses on loans at the dates indicated and the percent of loans in each category to total loans is summarized as follows: At September 30, 2001 2000 1999 1998 1997 $ % $ % $ % $ % $ % (Dollars in Thousands) Residential real estate $665 83.14% $668 86.84% $689 83.74% $689 81.51% $603 86.47% Commercial real estate 124 6.91 103 4.83 70 5.05 22 2.80 12 1.67 Commercial business 116 5.21 77 3.64 50 3.64 38 4.87 76 2.54 Consumer 519 4.74 529 4.69 509 7.57 388 10.82 278 9.32 Total $1,424 100.00 1,377 100.00 1,318 100.00 1,137 100.00 969 100.00 ===== ====== ===== ======= ==== ====== ===== ====== ==== ====== The following table sets forth information with respect to Registrant's allowance for loan losses at the dates indicated: September 30, 2001 2000 1999 1998 1997 (Dollars in Thousands) Total loans outstanding $144,473 $191,514 $177,840 $174,733 $158,163 ======= ====== ======= ======= ======= Average loans outstanding $165,831 $184,269 $176,318 $167,490 $145,395 ======= ======= ======= ======= ======= Allowance balances (at beginning of year) 1,377 1,318 1,137 969 740 Provision (credit): Real estate-mortgage -- -- -- 75 88 Consumer 60 207 725 130 220 Commercial 60 60 60 60 -- 120 267 785 265 308 Charge-offs: Real estate-mortgage (11) (21) -- (2) (17) Consumer (149) (331) (658) (105) (75) (160) (352) (658) (107) (92) Recoveries: Real estate-mortgage 9 -- -- 1 13 Consumer 78 144 54 9 -- 87 144 54 10 13 Net(charge-offs)recoveries (73) (208) (604) (97) (79) == === === == == Allowance balance (at end of year) $ 1,424 $1,377 $1,318 $ 1,137 $969 ======== ======== ====== ====== ==== Allowance for loan losses as a percent of total loans outstanding 0.99% 0.72% 0.74% 0.65% 0.61% ===== ===== ===== ===== ===== Net loans charged off as a percent of average loans outstanding 0.04% 0.11% 0.34% 0.06% 0.06% ===== ===== ===== ===== ===== Interest Bearing Accounts Held at Other Financial Institutions As of September 30, 2001, the Company had a balance of $18,974,000 of interest-bearing deposits in other financial institutions, principally with the Federal Home Loan Bank ("FHLB") of Topeka (including up to $100,000 at the other financial institutions covered by FDIC deposit insurance and held in time deposits). The Company maintains these accounts in order to maintain liquidity and improve the interest-rate sensitivity of its assets. Investment Activities Registrant is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments. Registrant has generally maintained a liquidity portfolio well in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short-term demand for funds to be used in Registrant's loan origination and other activities. As of September 30, 2001, Registrant had an investment portfolio of approximately $30.9 million, consisting primarily of U.S. Government agency obligations, U.S. Treasury securities, investment grade corporate debt securities, municipal obligations, and FHLB stock as permitted by the OTS regulations. Of this portfolio, approximately $1.4 million consists of investments in common stock of other issuers. Registrant has also invested in mortgage-related securities principally in Federal National Mortgage Association ("FNMA") ARMs and FHLMC ARMs, and to a lesser extent, Collateralized Mortgage Obligations ("CMOs"). Registrant anticipates having the ability to fund all of its investing activities from funds held on deposit at FHLB of Topeka. Registrant will continue to seek high quality investments with short to intermediate maturities and duration from one to five years. The Registrant adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as of October 1, 2000. As permitted by SFAS No. 133, on October 1, 2000, the Company transferred all of its securities from the held-to-maturity portfolio to the available-for-sale and trading portfolios. Registrant classifies its investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. SFAS No. 115 requires classification of investments into three categories. Debt securities that Registrant has the positive intent and ability to hold to maturity must be reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term must be reported at fair value, with unrealized gains and losses included in earnings. All other debt and equity securities must be considered available for sale and must be reported at fair value, with unrealized gains and losses excluded from earnings but reported as a separate component of stockholders' equity (net of tax effects). Investment Portfolio The following table sets forth the carrying value of Registrant's investment securities portfolio, short-term investments, mutual funds, and FHLB stock, at the dates indicated. None of the investment securities held as of September 30, 2001 was issued by an individual issuer in excess of 10% of Registrant's capital, excluding the securities of U.S. Government and U.S. Government Agencies and Corporations. At September 30, 2001 2000 1999 (In thousands) Investments Held to Maturity: U.S. Agency Securities $ - $ 27,482 $ 27,465 Municipal Obligations - 1,185 1,385 Total Investments Held to Maturity - 28,667 28,850 Investments Available-for-Sale: U.S. Agency Securities 8,508 1,952 4,000 Common Stock 1,444 3,644 4,378 Municipal Obligations 1,019 - - FHLB Stock 3,598 3,800 3,441 Other 230 291 300 Corporate Notes and Bonds 198 182 193 Total Investments Available -for-Sale 14,997 9,869 12,312 Total Investments $ 14,997 $ 38,536 $ 41,162 ====== ====== ====== Registrant classifies its investments in accordance with SFAS No. 115. Investment Portfolio Maturities The following table sets forth certain information regarding the carrying values, weighted average yields, and maturities of the Company's nvestment securities portfolio as of September 30, 2001. Yields on tax-exempt obligations have not been computed on a tax equivalent basis. As of September 30, 2001 1 Yr or Less 1-5 Yrs 5-10 Yrs More than 10 Yrs Total Investment Securities Carrying Avg Carrying Avg Carrying Avg Carrying Avg Carrying Avg Value Yield Value Yield Value Yield Value Yield Value Yield (Dollars in Thousands) Investment Securities: U.S. Agency Obligations $7,508 6.28% $-- --% $-- --% $1,000 6.52% $8,508 6.31% Municipal Obligations 150 4.93 384 5.24 485 4.79 -- -- 1,019 4.97 Corporate Notes and Bonds -- -- 150 12.00 -- -- 48 9.00 198 11.25 Total $7,658 6.25% $534 7.27% $485 4.79% $1,048 6.64% $9,725 6.28% Mortgage-Backed Securities To supplement lending activities, Registrant invests in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. At September 30, 2001, the mortgage-backed securities portfolio had a fair value of $15.9 million and an amortized cost of $15.3 million. All mortgage-backed securities are classified as available for sale and are recorded at fair value, with unrealized gains and losses excluded from earnings but reported as a separate component of stockholders' equity (net of tax effects). Mortgage-backed securities represent a participation interest in a pool of single-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such quasi- governmental agencies, which guarantee the payment of principal and interest to investors, primarily include the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal National Mortgage Association ("FNMA"). FHLMC is a publicly-owned corporation chartered by the United States Government. FHLMC issues participation certificates backed principally by conventional mortgage loans. FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year. FHLMC securities are indirect obligations of the United States Government. FNMA is a private corporation chartered by Congress with a mandate to establish a secondary market for conventional mortgage loans. FNMA guarantees the timely payment of principal and interest, and FNMA securities are indirect obligations of the United States Government. GNMA is a government agency within the Department of Housing and Urban Development ("HUD") which is intended to help finance government assisted housing programs. GNMA guarantees the timely payment of principal and interest, and GNMA securities are backed by the full faith and credit of the United States Government. Because FHLMC, FNMA, and GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed rate mortgages or adjustable rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, (i.e., fixed rate or adjustable rate) as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA, and GNMA make up a majority of the pass-through certificates market. The collateralized mortgage obligations ("CMOs") (in the form of real estate mortgage investment conduits) held by Registrant at September 30, 2001 totaled $1.5 million at fair value and consisted of CMOs issued by FHLMC, FNMA and private issuers. The aggregate book value of CMOs issued by any one private issuer did not exceed 10% of stockholders' equity at September 30, 2001, 2000, or 1999. The portfolio of CMOs held in Registrant's mortgage-backed securities portfolio at September 30, 2001 did not include any residual interests in CMOs. Further, at September 30, 2001, Registrant's mortgage-backed securities portfolio did not include any "stripped" CMOs (i.e., CMOs that pay interest only and do not repay principal or CMOs that repay principal only and do not pay interest). The following table sets forth the carrying value of Registrant's mortgage-backed securities portfolio at the dates indicated. Weighted Average Rate At September 30, 2001 2001 2000 1999 (Dollars in Thousands) FNMA ARMs 5.89% $ 3,472 $4,986 $5,901 FHLMC ARMs 5.57% 1,108 1,461 1,901 FHLMC Fixed Rate 7.17% 9,550 50 80 GNMA Fixed Rate 8.00% 10 44 103 FNMA Fixed Rate 5.50% 248 305 344 CMOs 5.64% 1,504 3,266 5,160 Total Held for Investment -- -- 10,112 13,489 Total Held for Sale 6.60% 15,892 -- -- Mortgage-Backed Securities Maturity. The following table sets forth the contractual maturity of Registrant's mortgage-backed securities portfolio at September 30, 2001. The table does not include scheduled principal payments and estimated prepayments. Contractual Maturities Due (In Thousands) Less than 1 year $0 1 to 3 years 252 3 to 5 years 0 5 to 10 years 404 10 to 20 years 11,732 Over 20 years 3,504 Total mortgage-backed securities $15,892 ======= Sources of Funds General. Deposits are the major source of Registrant's funds for lending and other investment purposes. Registrant derives funds from amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. Registrant may also borrow funds from the FHLB of Topeka as a source of funds. Deposits. Consumer and commercial deposits are attracted principally from within Registrant's primary market area through the offering of a broad selection of deposit instruments including regular savings, demand and negotiable order of withdrawal ("NOW") accounts, and term certificate accounts (including negotiated jumbo certificates in denominations of $100,000 or more). Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate, among other factors. Money Market and NOW accounts constituted $19.8 million, or 13.3% of Registrant's deposit portfolio at September 30, 2001. Non-interest bearing demand accounts constituted $8.0 million, or 5.4% of the deposit portfolio at September 30, 2001. Savings deposits constituted $8.4 million, or 5.7% of the deposit portfolio at September 30, 2001. Certificates of deposit constituted $111.9 million or 75.6% of the deposit portfolio, including certificates of deposit with principal amounts of $100,000 or more which constituted $20.7 million or 14.0% of the deposit portfolio at September 30, 2001. As of September 30, 2001, Registrant had no brokered deposits. At September 30, 2001, $17 million in securities were pledged as collateral for public funds. Although such securities are held for investment, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. Jumbo Certificates of Deposit The following table indicates the amount of Registrant's certificates of deposit of $100,000 or more by time remaining until maturity as of September 30, 2001. (In Thousands) Maturity Period Within three months $ 9,282 Over three through six months 6,035 Over six through twelve months 4,171 Over twelve months 1,228 Total $ 20,716 Borrowings Deposits are the primary source of funds of Registrant's lending and investment activities and for its general business purposes. Registrant may obtain advances from the FHLB of Topeka to supplement its supply of lendable funds, and Registrant has utilized this funding source. Advances from the FHLB of Topeka would typically be secured by a pledge of Registrant's stock in the FHLB of Topeka and a portion of Registrant's first mortgage loans and certain other assets. Registrant, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At September 30, 2001, Registrant had $21.0 million outstanding from the FHLB of Topeka and no borrowings of any other kind. Personnel As of September 30, 2001 Registrant had 55 full-time and 5 part-time employees. None of Registrant's employees are represented by a collective bargaining group. Competition Registrant encounters strong competition both in the attraction of deposits and origination of loans. Competition comes primarily from savings institutions, commercial banks, and credit unions that operate in counties where Registrant's offices are located. Registrant competes for savings accounts by offering depositors competitive interest rates and a high level of personal service. Registrant competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers, and contractors. Regulation of the Company General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non- savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. Regulation of the Bank General. Set forth below is a brief description of certain laws that relate to the regulation of the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Bank, and their operations. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. As a member of the SAIF, the Bank pays an insurance premium to the FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. The FDIC has set the deposit insurance assessment rates for SAIF-member institutions at 0% to 0.27% of insured deposits on an annualized basis, with the assessment rate for most savings institutions set at 0%. Regulatory Capital Requirements. OTS capital regulations require savings associations to meet two capital standards: (1) a leverage ratio (core capital) requirement of 4% of total adjusted assets and (2) a risk-based capital requirement equal to 8% of total risk- weighted assets. Additional regulatory requirements are discussed in Note 11 to the Consolidated Financial Statements. These additional capital requirements effectively require higher levels of capital. As shown below, the Bank's regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of September 30, 2001: Percent of Adjusted Amount Assets (Dollars in Thousands) Core Capital: Regulatory requirement $ 7,892 4.0% Regulatory capital 19,317 9.8 Excess $11,425 5.8% Risk-Based Capital: Regulatory requirement $ 7,962 8.0% Regulatory capital 20,563 20.7 Excess $12,601 12.7% Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings association that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings associations are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations, (2) they would remain adequately capitalized after the distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS and the savings association or any OTS regulations. Any other situation would require an application to the OTS. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that the distribution would constitute an unsafe or unsound practice. A federal savings institution is prohibited from making a capital distribution if, after making the distribution, the savings institution would be unable to meet any one of its minimum regulatory capital requirements. Further, a federal savings institution cannot distribute regulatory capital that is needed for its liquidation account. Qualified Thrift Lender Test. Savings institutions must meet a qualified thrift lender ("QTL") test pursuant to OTS regulations or they become subject to certain operating restrictions. If the Bank maintains an appropriate level of certain specified investments (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Topeka. The required percentage of investments under the QTL test is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test on a monthly basis in nine out of every 12 months. As of September 30, 2001, the Bank was in compliance with its QTL requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non- interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At September 30, 2001, the Bank was in compliance with this requirement. Proposed Regulation. The OTS has announced that it will consider amending its capital standards so as to more closely conform its requirements to those of the other federal banking agencies. The impact of this possible change is not expected to materially impact the Bank. The impact on the Company cannot yet be determined. Executive Officers of the Registrant Larry L. Schugart, age 62, has been with the Bank for 37 years, serving as President since 1985, and has been the President, Chief Executive Officer and a director of the Company since its incorporation in November 1993. He is a former director of the Federal Home Loan Bank of Topeka where he served on the Finance and Executive Committees. Mr. Schugart is a member and chair of various committees of the Heartland Community Bankers Association, is a past Chairman of the Kansas-Nebraska League of Savings and serves as a member of the Governmental Affairs Committee of the America's Community Bankers. Mr. Schugart is a member of the Dodge City Area Chamber of Commerce and the Dodge City/Ford County Development Corporation. In addition, Mr. Schugart has been president of numerous civic and charitable organizations in Great Bend. Stephen H. Sundberg, age 54, has served as a Senior Vice President and as Chief Financial Officer of the Company and the Bank since May, 2000. Prior to joining the Company, Mr. Sundberg was General Manager and an owner of a professional employment organization. Prior to that he was a stockholder in corporations providing transportation and services to packing plants in the central United States. Mr. Sundberg is a CPA and a member of the AICPA and Kansas Society of CPAs. He is past president of Finney County Big Brothers/Big Sisters, served as a school Board member of USD 457 and has served as a member of various city boards for the City of Garden City, Kansas. Gary L. Watkins, age 46, has been employed by the Bank since 1985 and is currently a Senior Vice President, Chief Operating Officer, and Secretary of the Company and Bank. He is also a member of the Kiwanis and the Board of Directors of Trinity Association. Mr. Watkins is a past Vice President of the Dodge City Area Chamber of Commerce. Item 2. Properties Registrant owns its main office in Dodge City and four branch offices and leases one additional branch office and one loan origination office. Registrant also leases a parking lot for its main office. Item 3. Legal Proceedings There are various claims and lawsuits in which Registrant is periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which Registrant holds security interests, claims involving the making and servicing of real property loans, and other issues incident to Registrant's business. In the opinion of management, no material loss is expected from any of the pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders On September 27, 2001, the Company held a special meeting for its stockholders where the stockholders approved the merger transaction by and among the Company and MNB Bancshares, Inc. with and into Landmark Bancorp, Inc. As of the record date of the special meeting, there were 1,092,438 issued and outstanding shares of Common Stock. The voting results were as follows: Withheld/ Broker For Against Abstain Non-Votes For the merger transaction 649,489 1,043 7,297 434,609 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters There were 1,101,938 shares (net of treasury stock) of Common Stock outstanding on September 30, 2001, held by approximately 300 stockholders of record (not including the number of persons or entities holding the stock in nominee or street name through various brokerage firms). Since its issuance in March 1994, the Company's common stock has been traded on the Nasdaq National Market. Prior to the Merger, the daily stock quotation for the Company was listed in the Nasdaq National Market section published in The Wall Street Journal and other leading newspapers under the trading symbol "LARK". The following table reflects stock price information based on sales as published by the Nasdaq National Market statistical report for each quarter for fiscal years 2001 and 2000. Year Ended September 30, 2001 2000 HIGH LOW HIGH LOW First Quarter 19 1/4 17 1/2 21 1/2 15 1/4 Second Quarter 18 1/2 15 7/8 20 13 1/4 Third Quarter 19 16 5/9 18 14 Fourth Quarter 22 1/6 18 1/9 19 1/2 15 1/4 The following table sets forth, for each quarter the dividends declared on the common stock for the indicated fiscal years ended September 30. The Company's ability to pay dividends to shareholders is largely dependent upon the dividends it receives from the Bank. The Bank is subject to regulatory limitations on the amount of cash dividends it may pay. Year Ended September 30, Dividends per share 2001 2000 First Quarter $0.15 $0.15 Second Quarter 0.15 0.15 Third Quarter 0.15 0.15 Fourth Quarter 0.15 0.15 Item 6. Selected Financial Data FIVE-YEAR FINANCIAL SUMMARY** Selected Financial Condition Data (Dollars in Thousands) At September 30, 2001 2000 1999 1998 1997 Total assets $200,255 $250,676 $244,116 $225,368 $227,850 Loans receivable, net (1) 144,473 191,514 177,840 174,733 158,163 Investments held-to-maturity -0- 38,779 42,339 33,299 55,528 Investments available-for-sale 30,889 9,588 12,022 9,221 7,123 Cash and cash equivalents 20,001 5,090 5,976 2,844 2,741 Deposits 148,064 165,325 158,936 154,793 144,735 FHLB borrowings 21,000 57,000 58,000 41,700 46,200 Stockholders' equity 26,099 23,662 22,404 25,024 32,245 Summary of Operations (Dollars in Thousands) Year Ended September 30, 2001 2000 1999 1998 1997 Interest income $16,438 $18,230 $17,059 $17,207 $16,695 Interest expense 9,909 11,229 10,029 10,216 9,768 Net interest income 6,529 7,001 7,030 6,991 6,927 Provision for loan losses 120 267 785 265 308 Net interest income after provision for losses on loans 6,409 6,734 6,245 6,726 6,619 Non-interest income 2,353 977 1,636 1,226 1,026 Non-interest expense 4,277 4,056 4,191 4,134 3,581 Income before income taxes 4,485 3,655 3,690 3,818 4,064 Provision for income taxes 1,780 1,272 1,334 1,454 1,550 Cumulative effect of change in accounting principle, net of tax (215) - - - - Net income $2,490 $2,383 $2,356 $2,364 $2,514 ====== ====== ====== ====== ====== Basic earnings per share $2.35(2) $2.19 $2.06 $1.56 $1.52 ===== ===== ===== ===== ===== Diluted earnings per share $2.18(3) $2.04 $1.87 $1.42 $1.42 ===== ===== ===== ===== ===== Dividends per share $0.60 $0.60 $0.70 $0.60 $0.40 ===== ===== ===== ===== ===== Book value per common share outstanding at September 30 $23.68 $21.37 $19.80 $18.84 $19.10 ====== ====== ====== ====== ====== ** The selected consolidated financial data of the Company should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements of the Company, including the related notes. (1) Includes loans held for sale totaling $2,486, $8,854, $604, $2,409, and $490 at September 30, 2001, 2000, 1999, 1998 and 1997, respectively. (2) Net of effect of $(0.20) for cumulative effect of change in accounting principle. (3) Net of effect of $(0.18) for cumulative effect of change in accounting principle. FIVE-YEAR FINANCIAL SUMMARY Selected Ratios and Other Data At or For the Year Ended September 30, 2001 2000 1999 1998 1997 Return on average assets 1.13% 0.97% 1.01% 1.03% 1.12% Return on average equity 10.17 10.23 10.09 7.52 7.79 Average equity to average assets 11.30 9.48 10.02 13.71 14.44 Equity to assets at period end 13.03 9.44 9.18 11.10 14.15 Net interest spread 2.57 2.48 2.64 2.41 2.41 Net yield on average interest-earning assets 3.09 2.93 3.10 3.12 3.16 Non-performing assets to total assets 0.50 0.52 0.26 0.34 0.30 Non-performing loans to net loans 0.53 0.59 0.28 0.39 0.27 Allowance for loan losses to total loans 0.99 0.72 0.74 0.65 0.61 Dividend payout 25.38 27.31 34.18 39.31 26.95 Number of: Loans outstanding 5,383 5,996 6,262 6,741 6,210 Deposit accounts 11,598 11,649 12,461 12,878 12,888 Full service offices 6 6 6 6 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of the financial condition and results of operations of the Company and the Bank should be read in conjunction with the accompanying Consolidated Financial Statements. Recent Events Effective Tuesday, October 9, 2001, the Company and MNB Bancshares, Inc. completed their merger into Landmark Merger Company, which immediately changed its name to Landmark Bancorp, Inc. In addition, the Bank merged with Security National Bank and the resulting bank changed its name to Landmark National Bank, which is the wholly-owned subsidiary of Landmark Bancorp, Inc. The Company is the accounting predecessor to the new Landmark Bancorp, Inc. Therefore, because the Merger was consummated after the end of the Company's latest fiscal year, September 30, 2001, the Company is required to file this Annual Report on Form 10-K for its fiscal year ended September 30, 2001. The information presented in the following discussion does not take into account the consummation of the Merger, and presents information only on behalf of the Company, and not with respect to MNB Bancshares, Inc. or Landmark Bancorp, Inc. Therefore, much of the discussion throughout this document no longer applies, and the information should be read only as a report on the business of the Company for the fiscal year ended September 30, 2001. Landmark Bancorp, Inc., the resulting company from the Merger, has a fiscal year ending on December 31. Therefore, Landmark Bancorp, Inc. will file a Form 10-K with audited consolidated financial information in March 2002. General The Bank is primarily engaged in the business of attracting deposits from the general public and using those deposits, together with other funds, to originate mortgage loans for the purchase and refinancing of residential properties located in central and southwestern Kansas. In addition, the Bank offers and purchases loans through correspondent lending relationships in Kansas and in other states. The Bank also makes commercial, automobile, second mortgage, equity and deposit loans. The Bank's market has historically provided an excess of savings deposits over loan demand. Accordingly, in addition to originating loans in its market, the Bank also purchases mortgage-backed securities and investment securities. The Company's operations, as with those of the entire banking industry, are significantly affected by prevailing economic conditions, competition, and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for loans, competition among lenders, the prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings in the market area. The earnings of the Bank depend primarily on its level of net interest income, which is the difference between interest income and interest expense. The Bank's net interest income is a function of its interest rate spread, which is determined by the difference between rates of interest earned on interest-earning assets, and rates of interest paid on interest-bearing liabilities. The Bank's earnings are also affected by its provision for losses on loans, as well as the amount of non-interest income and non-interest expense, such as compensation and related expenses, occupancy expense, data processing costs and income taxes. The Company's strategy for growth emphasizes both internal and external growth. Operations focus on increasing deposits, making loans and providing customers with a high level of customer service. As part of the Bank's emphasis on external growth, the Bank has expanded its operations within its market areas. During fiscal 1998, the Bank opened a branch office in Dodge City and a loan origination office in the Kansas City area. As part of the Bank's strategy for internal growth, during fiscal 1997, the Bank established a commercial loan department and has been active in increasing its market share of the commercial lending market. This management's discussion and analysis of financial condition and results of operations contains, or incorporates by reference, forward-looking statements that involve inherent risks and uncertainties. The Company cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, economic conditions, adequacy of allowance for loan losses, technology changes and competition in the geographic and business areas in which the Company conducts its operations. These statements are based on management's current expectations. Actual results in future periods may differ from those currently expected because of changes in the factors referred to above and various risks and uncertainties. The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Financial Condition Consolidated total assets decreased $50,420,590 or 20% from $250,675,975 at September 30, 2000 to $200,255,385 at September 30, 2001. The principal factors contributing to the decrease in assets was the decrease in loans receivable and investment securities during the year. Cash and cash equivalents. Cash and cash equivalents increased $14,910,878 or 293%, from $5,089,971 at September 30, 2000 to $20,000,849 at September 30, 2001. This increase results from sales of investments and certain callable investments being called prior to year end. Loans receivable. Net loans receivable held-for- investment decreased $40,672,627 or 22%, from $182,659,647 at September 30, 2000 to $141,987,020 at September 30, 2001. Real estate loans decreased $39,174,446 or 23%, from $168,106,976 at September 30, 2000 to $128,932,530 at September 30, 2001. Approximately $18 million of loans were transferred to mortgage-backed securities during the current year to allow the Bank to take advantage of market conditions. Many borrowers took advantage of lower interests rates during the year to refinance loans. As part of the Company's plan to reduce interest rate risk, approximately $15 million in loans were sold as discussed under Asset/Liability Management. The Bank continues to sell most fixed rate residential mortgage loans originated since the adoption of the plan to reduce interest rate risk. The allowance for loan losses was increased $47,422, from $1,376,707 at September 30, 2000 to $1,424,129 at September 30, 2001. The continued increase in loan loss reserves is based on management's evaluation of the Bank's loan portfolio, discussed further in the "Results of Operations" section. The Bank had impaired loans of $640,759 and $505,276 at September 30, 2001 and 2000, respectively. A loan is impaired when, based on management's evaluation of current and historical information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Loans that are classified as impaired are typically collateral dependent; therefore, impairment is measured based upon the fair value of the collateral less estimated costs to sell. Impairment is recognized by creating a valuation allowance with a corresponding charge to provision for loss on loans. Management, as part of the monitoring and evaluation of non-performing loans, classifies loans and repossessed assets in accordance with regulatory provisions as loss, doubtful or substandard. Total assets classified as of September 30, 2001 and 2000, amounted to $1,336,000, and $1,870,000, respectively. Those loans classified that are not recognized as impaired include loans that are currently past due 90 days or more and still accruing interest, or have a past history of delinquency. Classified loans decreased $534,000 during fiscal 2001. The decrease was largely the result of management's efforts to collect past due loans and insuring loan originations follow lending policies. At September 30, 2001, the Bank's ratio of total non- performing assets to total assets was 0.50%. The Bank will continue with its aggressive collection policies to keep non-performing assets to a minimum, but no assurance can be given that negotiations with borrowers will continue to be successful. Classified loans have been considered by management in the evaluation of the adequacy of the allowance for loan loss. Investment securities. As permitted by the Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, on October 1, 2000, the Company transferred all of its held-to-maturity investment and mortgage- backed securities portfolios to available-for-sale and trading portfolios. See Note 2 of the Consolidated Financial Statements for further discussion. Investment Securities available-for-sale increased from $9,869,378 at September 30, 2000 to $30,888,921 or 213%. This increase is the net of the increase from the transfer in of held-to-maturity investments and dispositions of available-for-sale investments. Proceeds from the sales of available-for-sale assets for the current year were $37,211,072. Foreclosed assets. The balance of foreclosed assets at September 30, 2001 and 2000 was $232,934 and $170,724 respectively. The September 30, 2001 balance in foreclosed assets consisted of four single-family residences. Deposits. Deposits decreased $17,261,938, or 10%, from $165,325,440 at September 30, 2000 to $148,063,502 at September 30, 2001. This decrease relates primarily to the decrease in certificates of deposit accounts of $24,806,355 from $136,695,224 at September 30, 2000 to $111,888,869 at September 30, 2001. The decrease in certificates of deposit accounts relates primarily to a decrease in public funds. Public funds on deposit totaled $11,396,629 at September 30, 2001 compared to $37,411,681 at September 30, 2000, a decrease of $26,015,052 or 69.54%. The cost on savings deposits and certificates of deposit decreased 70 basis points from 5.65% at September 30, 2000 to 4.95% at September 30, 2001. The cost on demand deposits decreased 63 basis points from 2.25% at September 30, 2000 to 1.62% at September 30,2001. Of the $111,888,869 in certificates of deposit held by the Bank at September 30, 2001, $96,863,474 of these deposits will mature during the year ending September 30, 2002. The majority of the Bank's time deposits consist of regular deposits from customers and institutional investors from the Bank's surrounding community rather than brokered deposit accounts. As a result, most of these local accounts are expected to remain with the Bank upon renewal. Advances and other borrowings from Federal Home Loan Bank. The Bank has continued to utilize advances from the Federal Home Loan Bank ("FHLB") as a source of funds. Fixed term advances from the FHLB totaled $21,000,000 and $57,000,000 at September 30, 2001 and 2000, respectively. The Bank also has a line of credit with the FHLB. The Bank had an outstanding balance on the line of credit of $0 and $0 at September 30, 2001 and 2000, respectively. The funds provided by these borrowings were used primarily to fund lending activity throughout the year. The weighted average cost of these borrowings from the FHLB was 5.43% and 6.31% as of September 30, 2001 and 2000, respectively. Of the advances and other borrowings outstanding at September 30, 2001, $0 matures during the year ending September 30, 2002. Stockholders' equity. Stockholders' equity increased $2,437,384, or 9%, from $23,662,004 at September 30, 2000 to $26,099,388 at September 30, 2001. As of September 30, 2001 the Company had repurchased 1,179,374 shares, or 51.70% of its outstanding common stock to enhance stockholder value. Total stock repurchases for the year ended September 30, 2001 amounted to 25,475 shares at a cost of $472,897. Average Balances, Interest and Average Yields and Rates The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily balances At For Year Ended September 30, September 30, 2001 2001 Average Average Yield/Cost Balance Interest Yield/Cost (Dollars in Thousands) Interest-earning assets: Loans receivable 8.03% $164,165 $13,591 8.28% Mortgage-backed securities 6.60% 14,070 962 6.84% Investment securities 6.31% 28,280 1,707 6.04% Other interest-earning assets 3.02% 4,911 178 3.62% Total interest-earning assets 7.62% $211,426 $16,438 7.77% Non-interest earning assets: 8,392 Total assets $219,818 Interest-bearing liabilities: Demand deposits 1.62% $22,716 $5322.34% Savings deposits and certificates of deposit 4.95% 131,911 7,249 5.50% Other liabilities 5.43% 35,810 2,128 5.94% Total interest-bearing liabilities 4.46% $190,437 $9,909 5.20% Non-interest bearing liabilities 4,536 Total liabilities $194,973 Stockholder's equity 24,845 Total liabilities and stockholders' equity $219,818 Net interest income $6,529 Interest rate spread 3.16% 2.57% Net yield on interest-earning assets 3.09% Ratio of interest-earning assets to interest-bearing liabilities 111.02% For Year Ended September 30, 2000 1999 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost (Dollars in Thousands) Interest-earning assets: Loans receivable $184,269 $14,783 8.02% $176,318 $14,102 8.00% Mortgage-backed securities 11,752 765 6.51% 17,555 1,108 6.31% Investment securities 38,349 2,504 6.53% 29,384 1,728 5.88% Other interest-earning assets 4,558 178 3.91% 3,548 121 3.41% Total interest-earning assets $238,928 $18,230 7.63% $226,805 $17,059 7.52% Non-interest earning assets: 6,898 6,231 Total assets $245,826 $233,036 Interest-bearing liabilities: Demand deposits $23,608 $630 2.67% $22,941 $597 2.60% Savings deposits and certificates of deposit 130,047 6,710 5.16% 133,729 6,918 5.17% Other liabilities 64,253 3,889 6.05% 48,671 2,513 5.16% Total interest-bearing liabilities $217,908 $11,229 5.15% $205,341 $10,028 4.88% Non-interest bearing liabilities 4,618 4,348 Total liabilities $222,526 $209,689 Stockholder's equity 23,300 23,347 Total liabilities and stockholders' equity $245,826 $233,036 Net interest income $7,001 Interest rate spread 3.16% 2.48% 2.64% 3.10% Net yield on interest-earning assets 2.93% Ratio of interest-earning assets to interest-bearing liabilities 109.65% 110.45 The following Rate/Volume Analysis table presents, for the periods indicated, information regarding changes in interest income and interest expense (in thousands) of the Company. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes attributable to (i) changes in volume (changes in average daily balances of the portfolio multiplied by the prior year rate), (ii) changes in rate (changes in rate multiplied by prior year volume), and (iii) changes in rate/volume (changes in rate multiplied by the change in average volume). Years Ended September 30, 2001 vs. 2000 2000 vs. 1999 Increase (Decrease) Increase (Decrease) Due to Due to Rate/ Rate/ Volume Rate Volume Net Volume Rate Volume Net (In Thousands) Interest income: Loans receivable $(1,619) $479 $(52) $(1,192) $642 $36 $3 $681 Mortgage-backed securities 151 39 7 197 (366) 35 (12)(343) Investment securities (657) (188) 48 (797) 527 191 58 776 Other interest-earning assets 14 (13) (1) - 35 18 4 57 Total interest-earning assets $(2,111) $317 $2 $(1,792) $838 $280 $53 $1,171 Interest expense: Demand deposits $ (24) $(78) $4 $(98) $17 $16 $- $33 Savings deposits and certificates of deposits 96 442 1 539 (195) (13) - (208) Other liabilities (1,725) (71) 35 (1,761) 804 433 139 1,376 Total interest-bearing liabilities $(1,653) $293 $ 40 $(1,320) $626 $436 $139 $1,201 Change in net interest income $(458) $24 $(38) $(472) $212 $(156)$(86) $(30) Results of Operations General. Net income increased $106,829, or 4.48%, from $2,383,365 for the year ended September 30, 2000 to $2,490,194 for the year ended September 30, 2001. This resulted in diluted earnings per share of $2.18 ($2.35 per basic share) for fiscal year 2001 compared to $2.04 per diluted share ($2.19 per basic share) for fiscal year 2000. This increase in net income relates primarily to an increase in non-interest income offset by a decrease in net interest income after provision for loan losses. Net income increased $27,795, or 1.18%, from $2,355,570 for the year ended September 30, 1999 to $2,383,365 for the year ended September 30, 2000. This resulted in diluted earnings per share of $2.04 ($2.19 per basic share) for fiscal year 2000 compared to $1.87 per diluted share ($2.06 per basic share) for fiscal year 1999. This slight increase in net income relates primarily to a reduction in the provision for losses on loans offset by a decrease in other non-interest income. Net interest income. The operating results of the Company depend to a great degree on its net interest income, which is the difference between interest income on interest-earning assets, primarily loans, mortgage- backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Total interest income decreased $1,792,425, or 9.83%, to $16,438,183 for the year ended September 30, 2001, from $18,230,608 for the year ended September 30, 2000. This decrease resulted partly from the average yield on interest-earning assets decreasing to 7.62% for the year ended September 30, 2001 compared to 7.75% for the year ended September 30, 2000. Additionally, the decrease was the result of a decrease in the size of the loan and investment portfolios. The change in interest income due to the volume of loans receivable was a decrease of $1,619,000 during fiscal year 2001 from fiscal year 2000. The change in interest income due to the volume of investment securities was a decrease of $657,000 during fiscal year 2001 from fiscal year 2000. Income resulting from the increase in loan and investment volume was partially offset by increases in the volume of mortgage-backed securities. Interest expense for the year ended September 30, 2001 decreased $1,320,164 or 12%, to $9,909,196 from $11,229,360 at September 30, 2000. This decrease is primarily due to a decrease in the volume of borrowed funds. The Bank's rate/volume analysis reflects approximately $1,653,000 of the decrease in interest expense resulting from changes in volume. Net interest income decreased $472,261, from $7,001,248 for the year ended September 30, 2000 to $6,528,987 for the year ended September 30, 2001. Based on the portfolios of interest-earning assets and interest-bearing liabilities at the end of the last three fiscal years, interest rate spreads were 3.16%, 2.25% and 2.89% at September 30, 2001, 2000 and 1999, respectively. The decrease in net interest income is attributable to the decrease in loan balances during fiscal 2001. The Bank, as part of its interest rate risk reduction plan, as discussed in Note 2 of the consolidated financial statements for the fiscal year ended September 30, 2001, has sold loans, moved loans to mortgage-backed investments, and sold fixed rate mortgage loans originated in the current fiscal year. This has substantially reduced the loan portfolio and corresponding interest income. This reduction in income has been partially offset by a reduction in borrowings and lower interest rates paid on deposits. Total interest income increased $1,171,556, or 6.87%, to $18,230,608 for the year ended September 30, 2000, from $17,059,052 for the year ended September 30, 1999. This increase resulted partly from the average yield on interest-earning assets increasing to 7.63% for the year ended September 30, 2000 compared to 7.52% for the year ended September 30, 1999. Additionally, the increase was the result of an increase in the size of the loan and investment portfolios. The change in interest income due to the volume of loans receivable was an increase of $642,000 during fiscal year 2000 from fiscal year 1999. The change in interest income due to the volume of investment securities was an increase of $527,000 during fiscal year 2000 from fiscal year 1999. Income resulting from the increase in loan and investment volume was partially offset by decreases in the volume of mortgage-backed securities. Interest expense for the year ended September 30, 2000 increased $1,200,765, or 11.97%, to $11,229,360 from $10,028,595 at September 30, 1999. This increase is primarily due to an increase in the volume of borrowed funds. The Bank's rate/volume analysis reflects approximately $626,0000 of the increase in interest expense resulting from changes in volume. Net interest income decreased $29,209, from $7,030,457 for the year ended September 30, 1999 to $7,001,248 for the year ended September 30, 2000. Based on the portfolios of interest-earning assets and interest-bearing liabilities at the end of the last three fiscal years, interest rate spreads were 2.25%, 2.89% and 2.51% at September 30, 2000, 1999 and 1998, respectively. The decrease in net interest income is attributable to the overall increase in interest rates during fiscal 2000. As interest rates increase, the Bank's interest rate sensitive liabilities reprice faster than its interest rate sensitive assets causing a decline in the Bank's interest rate spread and margin. This has resulted from an increase in the Bank's cost of funds that could not be immediately offset by an increase in its yield on earning assets. This has been partially offset by an increase in net interest income attributable to volume of $212,000 resulting from a shift in the composition of interest- earning assets from generally lower yielding mortgage- backed securities to loans and investment securities. The risks related to interest rate movement are managed and continuously reviewed by management. See "Asset/Liability Management." Provision for losses on loans. The Bank maintains, and the Board of Directors monitors, allowances for losses on loans. These allowances are established based upon management's periodic evaluation of known and inherent risks in the loan portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers' ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan portfolio and the collateral value of specifically identified problem loans. Additionally, allowance strategies and policies are subject to periodic review and revision in response to current market conditions, actual loss experience and management's expectations. The allowance for loss on loans was $1,424,129 at September 30, 2001 and $1,376,707 at September 30, 2000. The provision for losses on loans decreased $146,900, or 55% from $266,970 for the year ended September 30, 2000 to $120,000 for the year ended September 30, 2001. The decrease in the provision was related to the reduction in loan balances during fiscal 2001 along with management's evaluation of the allowance in relation to the Bank's loan portfolio. During fiscal 1999 the Bank became aware that a large number of consumer loans at one branch had not been properly underwritten. Throughout fiscal 1999, management realized the degree of the problem and began to adjust the allowance accordingly. The Bank also took additional steps to ensure that proper underwriting guidelines would be followed in the future. Management is now keenly aware of the need to closely monitor the consumer loan underwriting process and has made every effort to identify and address any substandard consumer loans. The Bank continues to rely on the origination of consumer loans and it intends to enforce proper underwriting guidelines prior to loan origination. The Bank increased the allowance for loan losses during fiscal 2000 and 1999 in response to the identified loans. The Bank had loan chargeoff's, net of recoveries, of $72,578 and $207,939 for fiscal years 2001 and 2000, respectively. Historical non-performing loan ratios are presented with the five-year financial summary information. While management maintains its allowance for loan losses at levels which it considers adequate to provide for potential losses, there can be no assurance that additions will not be made to the allowance in future years and that such losses will not exceed the estimated amounts. The allowance for loan losses was $1,376,707 and $1,317,676 at September 30, 2000 and 1999, respectively. The provision for losses on loans was $266,970 for the year ended September 30, 2000 compared to $785,000 for the year ended September 30, 1999, a decrease of $518,030 or 66%. The decrease in the provision for the year ended September 30, 2000 was based on management's evaluation of the allowance in relation to the Bank's loan portfolio, including non- mortgage lending, and the decrease in non-performing loans discussed above. Non-interest income. Non-interest income increased $1,375,196 or 141%, from $977,480 for the year ended September 30, 2000 to $2,352,676 for the year ended September 30, 2001. This was primarily due to the increase in the net gain on the sale of investments to $997,859 for fiscal year 2001 compared to $50,768 for fiscal 2000, a $947,091 increase, or 1,866% and the increase in the net gain on the sale of loans to $763,470 for fiscal year 2001 compared to $180,979 for fiscal 2000, a $582,491 increase, or 322%. Non-interest income decreased $658,581, or 40.25%, from $1,636,061 for the year ended September 30, 1999 to $977,480 for the year ended September 30, 2000. This was primarily due to the decrease in the net gain on the sale of investments of $50,768 for fiscal year 2000 compared to $500,123 for fiscal 1999, a $449,355 decrease, or 89.85% and the decrease in the net gain on the sale of loans to $180,979 for fiscal year 2000 compared to $462,813 for fiscal 1999, a $281,834 decrease, or 60.90%. Non-interest expense. Non-interest expense increased $220,076, or 5.1% from $4,056,446 for the year ended September 30, 2000 to $4,276,522 for the year ended September 30, 2001. The Bank experienced a $335,993 increase in compensation and related expenses due to filling employee positions vacant in the prior year and expected increases in compensation. Non-interest expense decreased $134,949, or 3.22% from $4,191,395 for the year ended September 30, 1999 to $4,056,446 for the year ended September 30, 2000. The Bank experienced a $161,450 decrease in compensation and related expenses due to vacant employee positions and reduced costs of employee benefit plans. Income taxes. Income tax expense increased $508,447 or 40%, from $1,271,947 for the year ended September 30, 2000 to $1,780,394 for the year ended September 30, 2001. This increase in income tax resulted primarily from an increase in taxable income. The effective tax rate for fiscal 2001 was 39.7% compared to 34.8% for fiscal 2000. Income tax expense decreased $62,606, or 4.69%, from $1,334,553 for the year ended September 30, 1999 to $1,271,947 for the year ended September 30, 2000. This decrease in income tax resulted primarily from a decrease in state income tax expense and the benefit of non-taxable income. Liquidity and Capital Resources Liquidity is measured by a financial institution's ability to raise funds through (i) deposits, (ii) principal repayments on loans, mortgage-backed securities and investment securities, (iii) advances from the FHLB, (iv) the sale available-for-sale securities and (v) cash generated from operations. During fiscal 2001, cash and cash equivalents increased $14,910,878. The Company had net cash provided by investing activities of $59,799,807 which consisted primarily of a net decrease of loans of $22,342,678 and proceeds from sales of investment securities available-for-sale and trading of $37,211,072. Cash of $9,857,660 was provided by normal operating activities. Net cash of $54,746,584 was used in financing activities primarily to repay $36,000,000 of debt and decreases in deposits of $17,261,938. Amounts provided or used by investing activities tend to fluctuate from period to period primarily as a result of (i) principal repayments on loans and mortgage-backed securities, (ii) the purchase and origination of loans, mortgage-backed securities and investment securities and (iii) proceeds from maturities and sales of investment securities. During fiscal 2000, cash and cash equivalents decreased $885,759. The Company had net cash used by investing activities of $6,754,825 which consisted primarily of loans purchased for investment. This was offset by net cash provided by operating and financing activities of $1,666,682 and $4,202,384, respectively. Cash and cash equivalents provided by operating activities consisted of normal operating activities. Cash and cash equivalents provided by financing activities resulted primarily from the net increase in deposits. Amounts provided or used by investing activities tend to fluctuate from period to period primarily as a result of (i) principal repayments on loans and mortgage-backed securities, (ii) the purchase and origination of loans, mortgage-backed securities and investment securities and (iii) proceeds from maturities and sales of investment securities. The Company's principal asset is its investment in the capital stock of the Bank, and because it does not generate any significant revenues independent of the Bank, the Company's liquidity is dependent on the extent to which it receives dividends from the Bank. The Bank's ability to pay dividends to the Company is dependent on its ability to generate earnings and is subject to a number of regulatory restrictions, the liquidation account and tax considerations. The Bank must give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the dividend would (1) reduce the regulatory capital of the Bank below the amount required for the liquidation account established in connection with the conversion from mutual to stock form or (2) reduce the amount of capital of the Bank below the amounts required in accordance with other OTS regulations. In contrast, the Company has fewer restrictions on dividends. Future dividend distributions by the Bank in excess of Bank earnings could result in recapture of income tax bad debt deductions resulting in income tax on the amounts recaptured. Cash dividends paid by the parent company to its common stock shareholders totaled $632,116 $650,889 and $805,072 during the fiscal years 2001, 2000 and 1999, respectively. The payment of dividends on the common stock is subject to the direction of the Board of Directors of the Company and depends on a variety of factors, including operating results and financial condition, liquidity, regulatory capital limitations and other factors. It is the intention of the Bank to continue to pay dividends to the parent company, subject to regulatory, income tax and liquidation account considerations, to cover cash dividends on common stock when and as declared by the parent company. The Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings bank maintain liquid assets of not less than 4% of its average daily balance of net withdrawable deposit accounts. At September 30, 2001, the Bank met its liquidity requirement and expects to meet this requirement in the future. Liquidity levels will vary depending upon savings flows, future loan fundings, cash operating needs, collateral requirements and general prevailing economic conditions. The Bank adjusts liquidity as appropriate to meet its asset/liability objectives and does not foresee any difficulty in meeting its liquidity requirements. OTS has also set minimum capital requirements for institutions such as the Bank. The capital standards require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement and a risk-based capital requirement. At September 30, 2001 the Bank exceeded all of the minimum capital requirements as currently required. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant effect on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 141, 'Business Combination', applies to all combinations initiated after June 30, 2001. It requires that all business combinations be accounted for by a single method, the purchase method. Prior to this standard, business combination were accounted for using one of two methods, the pooling-of-interests method (pooling method) or the purchase method. The pooling method, required if certain criteria were met, involved joining the balance sheets of the combining entities with no adjustments to assets or liabilities. The purchase method requires the acquiring entity to allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition, and the excess of the cost over the net amounts assigned to assets acquired and liabilities assumed to be recognized as goodwill. SFAS No. 141 required disclosure of the primary reasons for the business combination and the allocation of the purchase price among the acquired assets and liabilities. When the amount of goodwill and intangible assets acquired are significant, additional disclosure about those assets is required. Additional guidance on the identification and recognition of intangible assets is provided in the Statement. SFAS No. 142, 'Goodwill and Other Intangible Assets' will be adopted by the Company on January 1, 2002. This Statement addresses the accounting and reporting for acquired goodwill and other intangible assets. Goodwill shall not be amortized after December 31, 2001. It shall be tested for impairment at a reporting unit level, under certain circumstances. Intangible assets with definite useful lives shall be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment. In connection with the transitional goodwill impairment evaluation, SFAS, No. 142 requires the Company to assess whether there is an indication that goodwill is impaired as of the date of adoption. This assessment is a two step process. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the test must be performed. The second step is to compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. SFAS No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets', will be adopted by the Company on January 1, 2002. This Statement establishes a single accounting model for all long-lived assets to be disposed of by sale, which is to measure a long-lived assets classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. The Statement also establishes criteria to determine when a long-lived asset is held for sale and provides additional guidance on accounting for such in specific circumstances. The Company does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Bank has established an Asset/Liability Management Committee ('ALCO') for the purpose of monitoring and managing interest rate risk. The Bank is subject to the risk of interest rate fluctuations to the extent that there is a difference, or mismatch, between the amount of the Bank's interest-earning assets and interest- bearing liabilities that mature or reprice within specified time periods. Consequently, when interest rates change, to the extent the Bank's interest-earning assets have longer maturities or effective repricing periods than its interest-bearing liabilities, the interest income realized on the Bank's interest-earning assets will adjust more slowly than the interest expense on its interest-bearing liabilities. This mismatch in the maturity and interest rate sensitivity of assets and liabilities is commonly referred to as the 'gap.' A gap is considered positive when the amount of interest rate sensitive assets maturing, or repricing, during a specified period exceeds the amount of interest rate sensitive liabilities maturing, or repricing during such period, and is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a specified period exceeds the amount of interest rate sensitive assets maturing or repricing during such period. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income, and during a period of declining interest rates, a negative gap would result in an increase in net interest income while a positive gap would adversely affect net interest income. The Bank utilizes internally generated gap reports and externally prepared interest rate sensitivity of net portfolio value reports to monitor and manage its interest rate risk. Quarterly, the OTS prepares a report on the interest rate sensitivity of the net portfolio value ('NPV') from information provided by Bank. The IRR component is a dollar amount that will be deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its NPV to changes in interest rates. The NPV is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off- balance sheet contracts. An institution's IRR is measured as the change to its NPV as the result of a hypothetical 200 basis point change in market interest rates. A resulting change in NPV of more than 2% of the estimated market value of its assets will require the institution to deduct from its capital 50% of that excess change. The rule provides that the OTS will calculate the IRR component quarterly for each institution. The following tables present the Bank's NPV as well as other data as of September 30, 2001, as calculated by the OTS, based on information provided to the OTS by the Bank. Change in Interest Rates in Basis Points (Rate Shock) Net Portfolio Value NPV as % of Present Value of Assets $ Amount $ Change % Change NPV Ratio Change (Dollars in Thousands) +200 bp $21,487 (3,789) (15)% 10.73% (152) bp +100 bp $23,646 (1,631) (6)% 11.62% (63) bp 0 bp $25,277 -- -- 12.24% -- -100 bp $25,559 283 1% 12.28% 4 bp -200 bp $25,902 626 2% 12.33% 9 bp Utilizing the data above, the Bank, at September 30, 2001, would have been considered by the OTS to have been subject to "minimal" interest rate risk. Accordingly, no deduction from risk-based capital would have been required. Set forth below is a breakout, by basis points of the Bank's NPV as of September 30, 2001 by assets, liabilities, and off balance sheet items. No Net Portfolio Value -200 bp -100 bp Change +100 bp +200 bp Assets $ 210,051 $ 208,139 $ 206,438 $ 203,550 $ 200,289 -Liabilities 184,143 182,594 181,211 179,982 178,884 +Off Balance Sheet (6) 14 50 77 83 Net Portfolio Value $ 25,902 $ 25,559 $ 25,277 $ 23,646 $ 21,487 Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations were employed in preparing the previous table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Bank's assets and liabilities would perform as set forth above. Certain shortcomings are inherent in the preceding NPV tables because the data reflect hypothetical changes in NPV based upon assumptions used by the OTS to evaluate the Bank as well as other institutions. However, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in the Bank's interest rate spread and margin. This would result from an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds, without an equivalent increase in the yield of earning assets, would tend to reduce net interest income. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Bank's net interest income. However, changes in only certain rates, such as shorter term interest rate declines without longer term interest rate declines, could reduce or reverse the expected benefit from decreasing interest rates. The Company has historically invested in interest- earning assets that have a longer duration than its interest- bearing liabilities. The mismatch in duration of the interest-sensitive liabilities indicates that the Bank is exposed to interest rate risk. In a rising rate environment, in addition to reducing the market value of long-term interest-earning assets, liabilities will reprice faster than assets; therefore, decreasing net interest income. To mitigate this risk, the Bank has placed a greater emphasis on shorter-term higher yielding assets that reprice more frequently in reaction to interest rate movements. In addition, the Bank has continued to include in total assets a concentration of adjustable-rate assets. This will benefit the one-year cumulative gap as such adjustable-rate assets reprice and are more responsive to the sensitivity of more frequently repricing interest-bearing liabilities. During the fourth quarter of fiscal year 2000, management evaluated the Company's interest rate risk position and concluded that it was necessary to reduce the current level of interest rate risk. As a result of this evaluation, management implemented a plan to reduce interest rate risk by reclassifying loans previously held for investment to loans held-for-sale. The Bank reclassified $7,221,401 of loans held for investment to held-for-sale at September 30, 2000 and sold them during fiscal year 2001. The Bank historically sold its 30-year fixed rate loans in the secondary market and held its 15-year and 20-year fixed rate mortgage loans to maturity. However, with the implementation of the interest rate risk plan, management has sold some loans from the 15-year and 20-year fixed rate portfolios. Management pursued the sale of loans previously classified as held for investment to improve the Bank's liquidity and reduce borrowings and other liabilities. The completion of the sale of these loans and the resulting application of the proceeds had a positive affect on improving the Bank's level of interest rate risk during fiscal year 2001. Item 8. Financial Statements and Supplementary Data Registrant's financial statements listed under Item 14 are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Prior to the Merger, the Company's independent auditor was Regier Carr & Monroe, L.L.P. ("Regier"). At the time of the Merger, which occurred after the Company's last completed fiscal year, Landmark Bancorp, Inc., as the successor company to the Company, engaged KPMG LLP ("KPMG") as its independent auditors for the fiscal year ended December 31, 2001. The Company notified Regier that the auditor-client relationship has ceased upon effectiveness of the Merger. The decision to engage KPMG was approved by the Company's Board of Directors. The reports of Regier on the Company's consolidated financial statements for the fiscal years ended September 30, 2000 and September 30, 1999 did not contain an adverse opinion or a disclaimer of opinion, and the reports were not qualified or modified as to uncertainty, audit scope or accounting principles. During the two fiscal years ended September 30, 2000, and the interim period of October 1, 2000 through the effective date of the merger, there were no disagreements with Regier on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Regier, would have caused Regier to make reference to the matter in their report. In connection with the audits of the Company's consolidated financial statements for each of the fiscal years ended September 30, 2000 and September 30, 1999: (a) Regier did not advise that the internal controls necessary for the Company to develop reliable financial statements do not exist; (b) Regier did not advise the Company that information had come to the attention of Regier that had led it to no longer be able to rely on the Company's management representations, or that had made Regier unwilling to be associated with the financial statements prepared by the Company's management; and (c) Regier did not advise the Company that Regier would need to expand significantly the scope of its audit, or that information had come to the attention of Regier during such time period that if further investigated may: (i) materially impact the fairness or reliability of either a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent it from rendering an unqualified audit report on those financial statements); or (ii) cause Regier to be unwilling to rely on the Company's management representations or to be associated with the Company's consolidated financial statements. Landmark Bancorp, Inc., as successor to the Company, has entered into an agreement with KPMG that provides for, among other things, the engagement of KPMG as the independent accounting firm that will audit the consolidated financial statements of the Company for the twelve month period ended September 30, 2001, which are filed with this Form 10-K, and the consolidated financial statements of Landmark Bancorp, Inc. for the three month period ended December 31, 2001. During the Company's fiscal years ended September 30, 2000 and September 30, 1999 and the subsequent period prior to engaging KPMG, the Company (or anyone on the Company's behalf) did not consult KPMG regarding: (a) either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements; and as such no written report was provided to the Company and no oral advice was provided that the new accountant concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (b) any matter that was either the subject of disagreement or a reportable event. PART III Item 10. Directors and Executive Officers of the Registrant The following are the directors and executive directors of the Company as of September 30, 2001, prior to the consummation of the Merger. Please note that the terms have all expired as of the filing of this Form 10-K because of the Merger. Year First Shares of Elected or Term Common Stock Percent Age at Appointed to Beneficially of Name 9/30/01 a Director(1) Expire Owned (2)(3)(4) Percent Larry L. Schugart 62 1971 2000 123,842(5) 11.2% Jim W. Lewis 45 1991 2000 34,525(6)(7) 3.1% David H. Snapp 46 1986 2001 31,052(6)(8) 2.8% C. Duane Ross 65 1986 2002 31,263(6)(9) 2.8% Richard A. Ball 48 1995 2002 17,787(6)(10)1.6% Gary L. Watkins 46 N/A N/A 62,658(11) 5.7% Stephen H. Sundberg 54 N/A N/A 2,500(12) 0.2% (1) Refers to the year the individual first became a director of the Bank or Company. All directors of the Bank as of November 1993 became directors of the Company when it was incorporated in November 1993. (2) Includes shares of Common Stock held directly as well as by spouses or minor children, in trust and other indirect ownership, over which shares the individuals effectively exercise sole or shared voting or dispositive power, as indicated. (3) Beneficial ownership as of September 30, 2001. (4) Includes shares of Common Stock subject to options that are exercisable within 60 days of the Record Date for the following individuals (in the following amount of shares of Common Stock); C. Ross (13,687), R. Ball (13,687), L. Schugart (44,494), J. Lewis (13,687) and D. Snapp (12,887). (5) Reflects sole voting power with respect to 46,044 shares and shared voting power with respect to 33,304 shares. Reflects sole dispositive power with respect to 105,026 shares and shared dispositive power with respect to 5,551 shares. Includes 44,494 shares of Common Stock that may be acquired through the exercise of options that are exercisable within 60 days of the Record Date. (6) Excludes 120,120 shares of Common Stock held by the ESOP for which such person serves as a member of the ESOP Committee and as a plan trustee and exercises shared voting power. Shares which are unallocated to participating employees (approximately 28,208 shares) and allocated shares for which no voting directions are received are voted by the plan trustees as directed by the ESOP Committee. Once allocated to participant accounts, such Common Stock are voted by the plan trustees as directed by the plan participant as the beneficial owner of such Common Stock. The individuals serving as plan trustees disclaim beneficial ownership of stock held under the ESOP. (7) Reflects sole dispositive power with respect to 29,525 shares, sole voting power with respect to 15,838 shares and shared voting and dispositive power with respect to 5,000 shares. (8) Reflects sole voting power with respect to 17,566 shares and shared voting power with respect to 599 shares. Reflects sole dispositive power with respect to 30,453 shares and shared dispositive power with respect to 599 shares. (9) Reflects sole voting power with respect to 15,587 shares and shared voting power with respect to 1,989 shares. Reflects sole dispositive power with respect to 29,274 shares and shared dispositive power with respect to 1,989 shares. (10) Reflects sole voting power with respect to 4,000 shares and sole dispositive power with respect to 17,687 shares and shared voting and dispositive power with respect to 100 shares. (11) No information on Watkins ownership. (12) Reflects sole voting and dispositive power. The principal occupation of, and other information about, each director and executive officer of the Company is set forth below as of September 30, 2001. All directors and executive officers have held their present positions for five years unless otherwise stated. Larry L. Schugart has been with the Bank for 37 years, serving as President since 1985, and has been the President, Chief Executive Officer and a director of the Company since its incorporation in November 1993. He is a former director of the Federal Home Loan Bank of Topeka where he served on the Finance and Executive Committees. Mr. Schugart is a member and chair of various committees of the Heartland Community Bankers Association, is a past Chairman of the Kansas-Nebraska League of Savings and serves as a member of the Governmental Affairs Committee of the America's Community Bankers. Mr. Schugart is a member of the Dodge City Area Chamber of Commerce and the Dodge City/Ford County Development Corporation. In addition, Mr. Schugart has been president of numerous civic and charitable organizations in Great Bend. Jim W. Lewis has served as a director of the Bank since 1991 and of the Company since its incorporation in November 1993. Mr. Lewis is the owner of several automobile dealerships across the State of Kansas, including Dodge City Toyota, Inc. Mr. Lewis is a member of the Dodge City Area Chamber of Commerce. He was a founding member of "The Alley," a community Teen Center in Dodge City. C. Duane Ross has served as a director of the Bank since 1986 and of the Company since its incorporation in November 1993. He has served as Chairman of the Boards of the Company and the Bank since January 1995. He is President of High Plains Publishers, Inc., a publishing/printing company. Mr. Ross is Vice Chairman of the Board of Commissioners of the Dodge City Housing Authority, a current member of the Dodge City Community College Endowment Board, and a past president of the Dodge City/Ford County Development Corporation. In addition, he is President of the Dodge City Community College Foundation and is a past president of the Dodge City Area Chamber of Commerce. Richard A. Ball has served as a director of the Company and the Bank since 1995. Mr. Ball, a Certified Public Accountant, is a shareholder of Adams, Brown, Beran & Ball, Chtd., an accounting firm with offices in Great Bend, Hays, LaCrosse, Ellinwood, Colby, Lyons, McPherson and Hutchinson, Kansas. He has served as a Board Chairman of the Great Bend Chamber of Commerce, Great Bend United Way, Petroleum Club and Barton County Community College Academic Fund Campaign. He has also served on the boards of the Kiwanis Club, Cougar Booster Club, Downtown Development, Mid-Kansas Economic Development and the Kansas Oil & Gas Museum Committee. David H. Snapp has been a director of the Bank since 1986 and of the Company since its incorporation in November 1993. He is a partner in the law firm of Waite, Snapp & Doll in Dodge City, Kansas. Mr. Snapp is also a board member of Arrowhead West, Inc., a mental and physical rehabilitation center, and Catholic Social Service. Stephen H. Sundberg, age 54, has served as a Senior Vice President and as Chief Financial Officer of the Company and the Bank since May, 2000. Prior to joining the Company, Mr. Sundberg was General Manager and an owner of a professional employment organization. Prior to that he was a stockholder in corporations providing transportation and services to packing plants in the central United States. Mr. Sundberg is a CPA and a member of the AICPA and Kansas Society of CPAs. He is past president of Finney County Big Brothers/Big Sisters, served as a school Board member of USD 457 and has served as a member of various city boards for the City of Garden City, Kansas. Gary L. Watkins, age 46, has been employed by the Bank since 1985 and is currently a Senior Vice President, Chief Operating Officer, and Secretary of the Company and Bank. He is also a member of the Kiwanis and the Board of Directors of Trinity Association. Mr. Watkins is a past Vice President of the Dodge City Area Chamber of Commerce. Item 11. Executive Compensation Summary Compensation Table The following table sets forth for the three fiscal years ended September 30, 2001, certain information as to the total remuneration received by Larry Schugart, the President and the Chief Executive Officer of the Company, and Gary L. Watkins, Secretary and Chief Operating Officer of the Company. Mr. Watkins has been employed by the Bank since 1985. Fiscal year 2000 was the first year Mr. Watkin's total cash compensation (consisting of salary and bonus) exceeded $100,000. No other executive officer of the Company during such periods received total cash compensation in excess of $100,000. nnual CompensationAwards Name and Fiscal Other Annual Principal Position Year Salary Bonus Compensation(1) Larry Schugart, 2001 $151,538 $24,750 $24,397 President and 2000 $145,000 $18,600 $41,254 Chief Executive Officer 1999 $133,085 $13,695 $19,054 Gary L. Watkins, 2001 $93,231 $12,950 $4,805 Secretary and 2000 $90,000 $12,400 $8,718 Chief Operating Officer Long Term Compensation Awards Securities Underlying All Other Options/SARs(#) Compensation(2)(3) -- $45,296 -- $42,997 5,000 $33,086 -- $32,067 -- $30,866 (1) Mr. Shugart's other annual compensation included director's fees of $12,000 during the fiscal years ended September 30, 2001, 2000 and 1999, respectively. Mr. Watkin's other annual compensation included $4,805 and $4,758 in employer payments of health, disability and life insurance premiums during the fiscal years ended September 30, 2001 and 2000, respectively. (2) For Mr. Schugart, includes Company's contribution to his account under a 401(k) Plan of $4,438, $4,800 and $3,996 during the fiscal years ended September 30, 2001, 2000 and 1999, respectively. For Mr. Watkins, includes Company's contribution to his account under a 401(k) Plan of $3,116 and $3,037 during the fiscal years ended September 30, 2001 and 2000, respectively. (3) For Mr. Schugart, includes 2,117 shares valued at $19.30 per share, 2,093 shares valued at $18.25 per share and 1,847 shares valued at $15.75 per share at the closing share price on September 30, 2001, 2000 and 1999, respectively, allocated through the ESOP. For Mr. Watkins, includes 1,500 shares valued at $19.30 per share and 1,526 shares valued at $18.25 per share at the closing share price on September 30, 2001 and 2000, respectively, allocated through the ESOP. Compensation deferred at the election of Mr. Schugart for a deferred compensation plan for directors is included under other annual compensation in this chart. Employment Agreement In May 1998, the Company entered into a three year employment agreement with Mr. Schugart as President and Chief Executive Officer. The base salary under this agreement for calendar year 2001 is $150,000. The agreement is terminable by the Company for just cause. Just cause is defined in the agreement as termination by reason of personal dishonesty; incompetence; willful misconduct; breach of a fiduciary duty involving personal profit; intentional failure to perform stated duties; willful violation of any law, rule, regulation (other than traffic violations or similar offenses); entering into a final cease-and-desist order; or material breach of any provision of the agreement. If the agreement is terminated for just cause, the employee only receives his salary up to the date of termination. If the Company terminates the agreement without just cause, the employee is entitled to a continuation of salary from the date of termination through the remaining term of the agreement. Each year the employment agreement may be extended for an additional one year period beyond the expiration date, so that the remaining term of the agreement may remain at three years. The agreement provides that in the event of involuntary termination of employment in connection with, or within eighteen months after, any change in control of the Company or Bank, the employee will be paid a lump sum or, at his option in periodic payments, a payment equal to 2.99 times the average annual taxable compensation paid during the five years prior to the change in control. If a lump sum payment had been made as of September 30, 2001, Mr. Schugart would have received a payment of approximately $729,180. That payment would be an expense to the Bank, reducing net income and the Bank's capital by that amount. The agreement is renewed annually if the Board of Directors determines that the executive has met its requirements and standards. Benefits Long Term Incentive Plans. The Company does not presently sponsor any long-term incentive plans nor did it make any awards or payouts under such plans during the fiscal year ended September 30, 2000. The following table sets forth the year end value of options previously granted to the chief executive officer. Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR Values Shares Acquired on Exercise Value Name (#) Realized($)(1) Larry Schugart 15,539 $139,375 Number of Securities Underlying Unexercised Value of Unexercised Options/SARs at In-The-Money Options/SARs FY-End (#) at FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable(2) 44,494 / 0 $367,294 / $0 (1) Calculated by using the market value on the date of exercise, 11/09/00, 2001,(equal to market closing price of $18.81)minus the $10.00 exercise price. (2) Calculated by using the market value at fiscal 2001 year-end (equal to market closing price of $19.30) minus the $10.00 exercise price and excluding 5,000 out-of-the-money options. Director Compensation Each member of the Board of Directors receives a fee of $1,000 per month. No additional fees are paid for committee meetings other than the Audit Committee, for which the members receive $100 for each meeting attended. The Chairman of the Audit Committee receives $100 per month. For the fiscal year ended September 30, 2001, total fees paid to directors were $62,400. Director Deferred Compensation. The Company has established a non-qualified deferred compensation plan for directors by which individual directors may defer payment of director fee compensation. At the election of the director, fees will be invested with an unrelated insurance company rather than paid to the director. Such deferred compensation will be paid to the director upon retirement or upon their request. Other Compensation. Directors Ross, Schugart, Snapp and Lewis have received awards of restricted stock under the Management Stock Bonus Plans which plans were approved at the Special Meeting of Stockholders held on June 22, 1994. All awards under these plans were fully vested prior to the 2001 fiscal year. Compensation Committee Report on Executive Compensation The Compensation Committee (the "Committee") reviewed the performance of senior management including the Chief Executive Officer of the Company and the Bank. The Committee reviewed salary surveys from Heartland Community Bankers Association and the America's Community Bankers. The Committee also reviewed comparative data gleaned from the prospectus of recently converted savings institutions. The salary surveys were reviewed for comparison purposes, with particular focus upon the size and geographical location of the peer groups studied. The Committee also reviewed the compensation plans offered to the management team over the past 5 years. The Committee reviewed the purposes and goals of a compensation plan, including loyalty and longevity of management, alignment of the interests of shareholders, with consideration given for current operating results such as return on assets and return on equity. Other factors considered for fiscal 2001 included general management of the Bank, communication with the Board of Directors, productivity of the employees, and the reputation and relationship that the Bank has with its customers and the communities that the Bank serves. After discussion by the committee of all pertinent information reviewed, the base salary of the Chief Executive Officer was set at $150,000 for calendar year 2001. Base salaries for the Chief Operating Officer and Chief Financial Officer were set after consultation with the Chief Executive Officer. To complement the base salaries and provide a direct incentive for management, the Company pays bonuses pursuant to a bonus plan equal to 1.5% of net consolidated earnings per fiscal year, with the actual division of such bonus amount determined by the Committee after consultation with the Chief Executive Officer. Compensation Committee (as of September 30, 2001): Richard A. Ball Jim W. Lewis C. Duane Ross David H. Snapp Stock Performance Table. Set forth below is a stock performance table comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total shareholder return on stocks included in the Nasdaq Stock Market index and (b) the cumulative total shareholder return on stocks included in the Nasdaq Bank index. All three investment comparisons assume the investment of $100 as of September 30, 1996 and the reinvestment of dividends. There can be no assurance that the Company's future stock performance will be the same or similar to the historical stock performance shown in the graph below. The Company neither makes nor endorses any predictions as to stock performance. 9/30/96 9/30/97 9/30/98 9/30/99 9/30/00 9/30/01 Nasdaq U.S. Index $100 $161 $141 $104 $122 $136 Nasdaq Bank Index 100 137 139 228 302 124 Landmark Bancshares, Inc 100 167 165 176 189 214 Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners Based upon reports filed with the Securities and Exchange Commission and information provided by the Company's transfer agent, the following table sets forth, as of the September 30, 2001, certain information as to those persons who were beneficial owners of more than 5% of the outstanding shares of Common Stock, except for Mr. Schugart, whose ownership has been disclosed in Item 10, above. The Common Stock beneficially owned by executive officers and directors of the Company as a group is also disclosed below. The individual ownership of management is incorporated herein by reference to Item 10. Management knows of no persons, other than those set forth below, who owned more than 5% of the outstanding shares of Common Stock at the Record Date. Percent of shares Name and Address Amount and Nature of Common Stock of Beneficial Owner Beneficial Ownership Outstanding Landmark Federal Savings Bank Employee Stock 120,120(1) 10.9% Ownership Plan ("ESOP"), Central and Spruce, Dodge City, Kansas 67801 All Directors and Executive Officers as a Group (7 persons) 298,127(2) 27.1% __________________________________ (1) Reflects shared voting power with respect to 91,912 shares allocated to participating employees, sole voting power with respect to 28,208 shares unallocated to participating employees and sole dispositive power over all shares. The ESOP holds shares for the exclusive benefit of plan participants. A portion of these shares are allocated among ESOP participants annually on the basis of compensation as the debt incurred in the purchase of the shares is repaid. Unallocated shares are held in a suspense account. The ESOP trustees must vote all shares allocated to participant accounts under the ESOP as directed by participants. Unallocated shares and allocated shares for which no timely direction is received are voted by the trustees as directed by the ESOP Committee or the Board. (2) Includes shares of Common Stock held directly as well as by spouses or minor children, in trust and other indirect ownership, over which shares the individuals effectively exercise sole or shared voting or dispositive power. Includes 134,162 shares of Common Stock subject to options that are exercisable within 60 days of the Record Date. Excludes 93,000 shares held by the ESOP (120,120 shares minus 27,120 shares allocated to executive officers) over which certain directors, as members of the ESOP Committee and as trustees to the ESOP exercise shared voting and dispositive power. Such directors disclaim beneficial ownership with respect to these shares. Management of Registrant knows of no arrangements, including any pledge by any person of securities of Registrant, the operation of which may at a subsequent date result in a change in control of Registrant. Section 16(a) beneficial ownership compliance Section 16(a) of the 1934 Act requires the Company's officers and directors, and persons who own more than ten percent of the Common Stock, to file reports of ownership and changes in ownership of the Common Stock, on Forms 3, 4 and 5, with the Securities and Exchange Commission and to provide copies of those Forms 3, 4 and 5 to the Company. Based upon a review of the copies of the forms furnished to the Company and written representations from certain reporting persons that no Forms 5 were required, the Company believes that all Section 16(a) filing requirements applicable to its officers and directors were complied with during the 2001 fiscal year. Item 13. Certain Relationships and Related Transactions The Company and the Bank, like many financial institutions, have followed a policy of granting various types of loans to officers, directors and employees. The loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for the Bank's other customers, and do not involve more than the normal risk of collectibility, nor present other unfavorable features. All loans by the Bank to its directors and executive officers are subject to regulations of the OTS restricting loans and other transactions with affiliated persons of the Bank. In addition, loans to an affiliate must be approved in advance by a disinterested majority of the Board of Directors or be within other guidelines established as a result of OTS regulations. Item 14. Exhibits, Lists and Reports on Form 8-K (a) The following documents are filed as a part of this report: The following financial statements and the report of independent accountants of Registrant included in Registrant's Annual Report to Stockholders are incorporated herein by reference and also in Item 8 hereof. Independent Auditor's Report. Consolidated Balance Sheets as of September 30, 2001 and 2000. Consolidated Statements of Earnings for the Years Ended September 30, 2001, 2000 and 1999. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended September 30, 2001, 2000, and 1999. Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. The following exhibits are included in this Report or incorporated herein by reference: List of Exhibits: 3.1 Articles of Incorporation of Landmark Bancshares, Inc.* 3.2 Bylaws of Landmark Bancshares, Inc.* 10.1 1994 Stock Option Plan of Landmark Bancshares, Inc.** 10.2 Management Stock Bonus Plan and Trust Agreements** 10.3 1991 Deferred Compensation Agreement with Larry Schugart* 10.4 1998 Deferred Compensation Agreement with Larry Schugart*** 10.5 Directors Change in Control Severance Plan*** 10.6 1996 Stock Option Agreement with Richard Ball**** 10.7 Employment Agreement with Larry Schugart****** 10.8 Employment Agreement with Gary Watkins****** 10.9 Employment Agreement with Stephen Sundberg****** 10.10 1998 Stock Option Agreement with Richard Ball*** 10.11 Stock Option Agreement with Larry Schugart***** 10.12 Stock Option Agreement with Gary Watkins***** 10.13 Stock Option Agreement with Stephen Sundberg****** 10.14 Agreement and Plan of Merger by and between the Company and MNB Bancshares, Inc. with and into Landmark Bancorp, Inc******* 21 Subsidiaries of Registrant 99.1 Opinion of Regier Carr & Monroe, L.L.P. _____________________ * Incorporated by reference to the identically numbered exhibit of the registration statement on Form S-1 (File No. 33-72562) declared effective by the SEC on February 9, 1994. ** Incorporated by reference to the exhibits to the proxy statement for a special meeting of stockholders held on June 22, 1994 and filed with the SEC on May 24, 1994 (File No. 0- 23164). *** Incorporated by reference to the identically numbered exhibit of the Annual Report on Form 10- KSB for the fiscal year ended September 30, 1998 (File No. 0- 23164), filed with the SEC. **** Incorporated by reference to Exhibit 10.4 of the Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (File No. 0-23164), filed with the SEC. ***** Incorporated by reference to the identically numbered exhibits of the Annual Report on Form 10- K for the fiscal year ended September 30, 1999 (File No. 0- 23164), filed with the SEC. ****** Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended September 30, 2000, filed with the SEC. ******* Incorporated by reference to Exhibit 99.1 of the Company's current report of Form 8-K filed on April 20, 2001, filed with the SEC. No reports on Form 8-K were filed during the last quarter of the period covered by this report. Independent Auditors' Report The Board of Directors Landmark Bancshares, Inc.: We have audited the accompanying consolidated balance sheet of Landmark Bancshares, Inc. and subsidiary (the Company) as of September 30, 2001, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for the year then ended. The accompanying consolidated financial statements for 2000 and 1999 were audited by other auditors, whose report dated October 26, 2000 expressed an unqualified opinion thereon. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2001, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP Kansas City, Missouri November 2, 2001 LANDMARK BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets September 30, 2001 and 2000 Assets 2001 2000 Cash and cash equivalents: Cash $ 1,026,721 1,335,431 Interest-bearing deposits in other financial institutions 18,974,128 3,754,540 Total cash and cash equivalents 20,000,849 5,089,971 Investment securities: Held-to-maturity - 38,778,903 Available-for-sale 30,888,921 9,869,378 Loans, net 141,987,020 182,659,647 Loans held for sale 2,486,449 8,854,493 Premises and equipment, net of accumulated depreciation 1,464,606 1,635,170 Accrued interest and other assets 3,427,540 3,788,413 Total assets $200,255,385 250,675,975 Liabilities and Stockholders' Equity Liabilities: Deposits: Noninterest bearing demand $ 8,040,520 5,791,798 Money market and NOW 19,751,450 14,786,073 Savings 8,382,663 8,052,345 Time, $100,000 and greater 20,716,486 46,933,583 Time, other 91,172,383 89,761,641 Total deposits 148,063,502 165,325,440 Federal Home Loan Bank borrowings 21,000,000 57,000,000 Accrued interest and expenses, taxes, and other liabilities 5,092,495 4,688,531 Total liabilities 174,155,997 227,013,971 Stockholders' equity: Common stock, $.01 par; 10,000,000 shares authorized; 2,281,312 shares issued in 2001 and 2000 228,131 228,131 Additional paid-in capital 22,368,048 22,475,208 Retained earnings 25,880,695 24,022,616 Treasury stock, at cost, 1,179,374 and 1,173,938 shares at 2001 and 2000, respectively (22,622,838)(22,534,394) Unearned employee benefits (282,084) (418,963) Accumulated other comprehensive income (loss) 527,436 (110,594) Total stockholders' equity 26,099,388 23,662,004 Commitments and contingencies ----------- ---------- Total liabilities and stockholders' equity $ 200,255,385 250,675,975 See accompanying notes to consolidated financial statements. LANDMARK BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Earnings Years ended September 30, 2001, 2000, and 1999 2001 2000 1999 Interest income: Loans $ 13,591,077 14,782,605 14,101,667 Investment securities 1,884,909 2,683,186 1,848,941 Other 962,197 764,817 1,108,444 Total interest income 16,438,183 18,230,608 17,059,052 Interest expense: Deposits 7,781,296 7,340,453 7,515,201 Other borrowings 2,127,900 3,888,907 2,513,394 Total interest expense 9,909,196 11,229,360 10,028,595 Net interest income 6,528,987 7,001,248 7,030,457 Provision for loan losses 120,000 266,970 785,000 Net interest income after provision for loan losses 6,408,987 6,734,278 6,245,457 Noninterest income: Fees and service charges 437,312 455,021 397,741 Gains on sales of loans 763,470 180,979 462,813 Gains on sales of investment securities,net 997,859 50,768 500,123 Other 154,035 290,712 275,384 Total noninterest income $2,352,676 977,480 1,636,061 Noninterest expense: Compensation and benefits $2,674,664 2,338,671 2,500,121 Occupancy and equipment 258,092 259,201 252,790 Amortization 181,262 89,036 90,636 Professional fees 76,100 107,438 79,510 Data processing 145,289 164,622 189,011 Other 941,115 1,097,478 1,079,327 Total noninterest expense 4,276,522 4,056,446 4,191,395 Earnings before income taxes 4,485,141 3,655,312 3,690,123 Income taxes 1,780,394 1,271,947 1,334,553 Net earnings before cumulative effect of change in accounting principle 2,704,747 2,383,365 2,355,570 Cumulative effect of change in accounting principle, net of tax of $125,144 (214,553) - - Net earnings $2,490,194 2,383,365 2,355,570 Earnings per share: Basic: Earnings before cumulative effect of change in accounting principle $ 2.55 2.19 2.06 Cumulative effect of change in accounting principle (0.20) - - $ 2.35 2.19 2.06 Diluted: Earnings before cumulative effect of change in accounting principle $ 2.36 2.04 1.87 Cumulative effect of change in accounting principle (0.18) - - $ 2.18 2.04 1.87 See accompanying notes to consolidated financial statements. LANDMARK BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended September 30, 2001, 2000, and 1999 Accumu- lated other compre- Additional Unearned hensive Common paid-in Retained Treasury employee income stock capital earnings stock benefits (loss) Total Balance at September 30, 1998 $228,131 22,466,144 20,739,642 (17,904,245)(789,241) 283,336 25,023,767 Comprehensive income: Net earnings - - 2,355,570 - - - 2,355,570 Change in fair value of investment securities available-for-sale, net of tax - - - - - (403,829) (403,829) Total comprehensive income - - 2,355,570 - - (403,829) 1,951,741 Dividends paid ($.70 per share)- - (805,072) - - - (805,072) Reduction of unearned employee benefits - 203,481 - - 233,400 - 436,881 Issuance of 10,000 stock options under stock compensation plan - 36,753 - - - - 36,753 Purchase of 196,370 treasury shares - - - (4,239,923) - - (4,239,923) Balance at September 30, 1999 228,131 22,706,378 22,290,140 (22,144,168) (555,841)(120,493) 22,404,147 Comprehensive income: Net earnings - - 2,383,365 - - - 2,383,365 Change in fair value of investment securities available-for-sale, net of tax - - - - - 9,899 9,899 Total comprehensive income - - 2,383,365 - - 9,899 2,393,264 Dividends paid ($.60 per share) - - (650,889) - - - (650,889) Reduction of unearned employee benefits - 59,134 - - 136,878 - 196,012 Exercise of stock options, 35,958 shares - (290,304) - 692,308 - - 402,004 Purchase of 60,148 treasury shares - - - (1,082,534) - - (1,082,534) Balance at September 30, 2000 228,131 22,475,208 24,022,616 (22,534,394)(418,963)(110,594) 23,662,004 Comprehensive income: Net earnings - - 2,490,194 - - - 2,490,194 Change in fair value of investment securities available-for-sale, net of tax - - - - - 638,030 638,030 Total comprehensive income - - 2,490,194 - - 638,030 3,128,224 Dividends paid ($.60 per share)- - (632,115)- - - (632,115) Reduction 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 See accompanying notes to consolidated financial statements. LANDMARK BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended September 30, 2001, 2000, and 1999 2001 2000 1999 Cash flows from operating activities: Net earnings $2,490,194 2,383,365 2,355,570 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting principle 339,697 - - Provision for loan losses 120,000 266,970 785,000 Depreciation and amortization 523,879 445,806 503,140 Deferred income taxes (185,375) (127,684) (43,384) Net gains on sales of investment securities, premises and equipment, and other real estate(918,424)(50,768)(500,123) Net gain on sales of loans (763,470) (180,979) (462,813) Proceeds from sale of loans 35,713,523 8,939,705 23,698,249 Origination of loans held for sale (28,558,331)(9,787,423)(20,482,876) Purchase of loans held for sale (36,000) - (671,690) Changes in assets and liabilities: Accrued interest and other assets 342,134 (104,631) (399,865) Accrued expenses, taxes, and other liabilities 789,833 (117,679) 1,134,894 Net cash provided by operating activities 9,857,660 1,666,682 5,916,102 Cash flows from investing activities: Net (increase) decrease in loans 22,342,678 (13,163,886) (6,211,472) Maturities and prepayments of investment securities held-to-maturity - 3,571,577 (9,009,613) Proceeds from sales of equity investments - 165,525 - Purchases of investment securities available-for-sale (10,000) (825,000) (4,439,929) Proceeds from sale of investment securities available-for-sale, trading 37,211,072 3,328,452 1,478,042 Proceeds from sales of premises and equipment and foreclosed assets 335,209 281,826 231,838 Purchases of premises and equipment, net (38,500) (106,745) (249,886) Other investing activity, net (40,652) (6,574) (221,746) Net cash provided by (used in) investing activities $59,799,807 (6,754,825) (18,422,766) Cash flows from financing activities: Net increase (decrease) in deposits $(17,261,938) 6,389,148 4,143,376 Increase (decrease) in escrow accounts (580,032) 193,240 239,635 Federal Home Loan Bank borrowings (repayments), net (36,000,000) (1,000,000) 16,300,000 Proceeds from issuance of common stock under stock option plan 200,393 359,580 - Payment of dividends (632,115) (650,889) (805,072) Purchase of treasury stock (472,897) (1,082,534) (4,239,923) Other financing activities, net - (6,161) - Net cash provided by (used in) financing activities (54,746,589) 4,202,384 15,638,016 Net increase (decrease) in cash and cash equivalents 14,910,878 (885,759) 3,131,352 Cash and cash equivalents at beginning of year 5,089,971 5,975,730 2,844,378 Cash and cash equivalents at end of year $20,000,849 5,089,971 5,975,730 Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 1,571,841 1,296,186 1,399,718 Cash paid during the year for interest $ 9,759,113 11,409,059 10,228,772 Supplemental schedule of noncash investing and financing activities: Transfer of loans to real estate owned $ 870,799 601,429 685,585 Loans to facilitate sale of foreclosed assets - 115,863 15,606 Net transfer of loans held for investment to held for sale - 7,221,401 1,325,297 Loans securitized and transferred to investment securities 17,786,403 - - See accompanying notes to consolidated financial statements. (1) Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Landmark Bancshares, Inc. (the Company) and its wholly owned subsidiary, Landmark Federal Savings Bank (the Bank). Intercompany balances and transactions have been eliminated in consolidation. (b) Investment Securities The Company classifies its investment securities portfolio as held-to-maturity, which are recorded at amortized cost, available-for- sale, which are recorded at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity until realized, or trading securities, which are held principally for resale and reported at fair value, with unrealized changes in value reported in the Bank's income statement as part of earnings. Effective October 1, 2000, the Company adopted SFAS No. 133. In connection with the adoption, certain investments were reclassified from held-to-maturity to available-for-sale and trading (see note 2). Premiums and discounts are amortized over the estimated lives of the securities using the interest method. Gains and losses on sales are calculated using the specific identification method. Certain securities previously classified as available-for-sale have suffered declines in value which management believes are other than temporary. Accordingly, the unrealized loss on those securities, aggregating $94,957, has been recorded as a part of the 2001 gain on sale of investment securities, net. (c) Loans and Related Earnings Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, any deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Premiums and discounts on purchased residential real estate loans are amortized to income using the interest method over the estimated remaining period to maturity. Loan origination fees and certain direct costs are capitalized and recognized as an adjustment of the yield of the related loan. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value. Net unrealized losses are recognized through a valuation allowance by charges to income. The allowance for loan losses is increased by charges to income and decreased by charge- offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, the current level of nonperforming assets, and current economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash- basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. (d) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line or accelerated methods over the estimated useful lives, ranging from three to fifty years, of the assets. Major replacements and betterments are capitalized while maintenance and repairs are charged to expense when incurred. Gains or losses on dispositions are reflected in current operations. (e) Income Taxes The Company files a consolidated federal income tax return with its subsidiary, and records deferred tax assets and liabilities for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (g) Comprehensive Income The Company's only component of other comprehensive income is the unrealized holding gains and losses on available-for-sale securities as shown below: For the years ended September 30 2001 2000 1999 Unrealized holding gains (losses) $3,170,655 68,528 (160,267) Cumulative effect of a change in accounting principle (see note 2) (1,139,745) - - Less reclassification adjustment for gains included in net income (997,859)(50,768) (500,123) Net unrealized gains (losses) on securities 1,033,051 17,760 (660,390) Income taxes (395,021) (7,861) 256,561 Other comprehensive income (loss) $638,030 9,899 (403,829) (h) Earnings Per Share Basic earnings per share represent income available to common stockholders divided by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and management stock bonus plan (MSBP) shares, and are determined using the treasury stock method. Notes to Consolidated Financial Statements The shares used in the calculation of basic and diluted income per share are shown below: For the years ended September 30 2001 2000 1999 Weighted average common shares outstanding 1,058,826 1,086,528 1,142,222 Stock options and MSBP 84,252 81,318 120,242 1,143,078 1,167,846 1,262,464 (i) Reclassifications Certain reclassifications to prior year amounts have been made to conform with current year presentation. (2) Investment Securities A summary of investment securities information is as follows: September 30, 2001 Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value Available-for-sale: U. S. government and agency obligations $8,500,000 7,630 - 8,507,630 Municipal obligations 985,000 34,443 - 1,019,443 Mortgage-backed securities 15,314,207 589,690 11,754 15,892,143 FHLB stock 3,597,500 - - 3,597,500 Corporate bonds 200,000 - 2,000 198,000 Common stock 1,208,682 288,345 52,586 1,444,441 Other investments 229,764 - - 229,764 Total $30,035,153 920,108 66,340 30,888,921 September 30, 2000 Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value Held-to-maturity: Municipal obligations $1,185,000 12,797 16,220 1,181,577 U. S. government and agency obligations 27,481,885 - 1,399,854 26,082,031 Mortgage-backed securities 10,112,018 38,224 114,389 10,035,853 Total $ 38,778,903 51,021 1,530,463 37,299,461 Available-for-sale: U. S. government and agency obligations $ 2,000,000 - 47,813 1,952,187 FHLB stock 3,800,000 - - 3,800,000 Corporate bonds 200,000 - 18,187 181,813 Common stock 3,756,890 493,186 606,469 3,643,607 Other investments 291,771 - - 291,771 Total $ 10,048,661 493,186 672,469 9,869,378 In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value or cash flows of the asset or liability hedged. The Company adopted SFAS No. 133 on October 1, 2000. As permitted by SFAS No. 133, the Company transferred all of its securities on that date from the held-to-maturity portfolio to the available-for-sale and trading portfolios as follows: Securities transferred Trading Available- Total Total (at fair for-sale (at (at fair (at book Security value) fair value) value) value) Investment securities $9,642,188 17,621,420 27,263,608 28,666,885 Mortgage-backed securities - 10,035,853 10,035,853 10,112,018 Total $9,642,188 27,657,273 37,299,461 38,778,903 All trading securities were sold during 2000. As of October 1, 2000, the effect of the transfer of these securities was reported as a cumulative adjustment from a change in accounting principle, net of tax effect, impacting earnings and other comprehensive income as follows: Adjust- ment to other Adjust- compre- Total ment to hensive adjust- earnings income ments Investment securities $(339,697) (1,063,580) (1,403,277) Mortgage-backed securities - (76,165) (76,165) Pretax loss (339,697) (1,139,745) (1,479,442) Income tax benefit 125,144 419,882 545,026 Net loss $(214,553) (719,863) (934,416) Maturities of investment securities at September 30, 2001 are as follows: Amortized Estimated cost fair value Due in less than one year $ 7,650,000 7,654,474 Due after one year but within five years 350,000 366,914 Due after five years 1,485,000 1,505,685 Mortgage-backed securities, common stock, and other investments 20,550,153 21,361,848 Total $ 30,035,153 30,888,921 Except for U. S. government and agency obligations, no investment in a single issuer exceeded 10% of stockholders' equity. At September 30, 2001 and 2000, securities pledged to secure public funds on deposit had a carrying value of approximately $17 million and $38 million, respectively. (3) Loans Loans consist of the following at September 30: 2001 2000 Real estate loans: One-to-four family residential $106,069,440 147,514,858 Commercial 10,084,314 9,331,198 Construction 3,247,777 857,486 Second mortgage 9,530,999 10,403,434 Commercial loans 7,604,138 7,033,573 Consumer loans 6,926,143 9,050,233 Total 143,462,811 184,190,782 Less: Deferred loan fees 51,662 154,428 Allowance for loan losses 1,424,129 1,376,707 Loans, net $141,987,020 182,659,647 The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments consist principally of commitments to extend credit. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet instruments. The Company's exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. In the normal course of business, there are various commitments and contingent liabilities, such as guarantees, commitments to extend credit, letters of credit, and lines of credit, which are properly not recorded in the accompanying consolidated financial statements. The Company generally requires collateral or other security on unfunded loan commitments and irrevocable letters of credit. Commitments to extend credit and lines of credit aggregated approximately $10 million and $8 million at September 30, 2001 and 2000, respectively. The Company is exposed to varying risks associated with concentrations of credit relating primarily to lending activities in specific geographic areas. The Company's principal lending area consists of the cities of Dodge City, Great Bend, Garden City, LaCrosse, and Hoisington, Kansas and the surrounding communities, and substantially all of the Company's loans are to residents of or secured by properties located in its principal lending area. Accordingly, the ultimate collectibility of the Company's loan portfolio is dependent upon market conditions in those areas. These geographic concentrations are considered in management's establishment of the allowance for loan losses. A summary of the activity in the allowance for loan losses is as follows: For the years ended September 30 2001 2000 1999 Balance at beginning of year $ 1,376,707 1,317,676 1,136,753 Provision 120,000 266,970 785,000 Charge-offs (159,804) (352,390) (657,712) Recoveries 87,226 144,451 53,635 Balance at end of year $ 1,424,129 1,376,707 1,317,676 At September 30, 2001 and 2000, impaired loans, including nonaccrual loans, aggregated $641,000 and $505,000, respectively. The Bank serviced loans for others of $86,585,000 and $58,112,000 at September 30, 2001 and 2000, respectively. The following is an analysis of the changes in mortgage servicing rights during the years ended September 30, 2001, 2000, and 1999: 2001 2000 1999 Balance at beginning of year $ 263,522 318,543 225,835 Additions 403,176 34,015 183,344 Amortization (181,262) (89,036) (90,636) Balance at end of year $ 485,436 263,522 318,543 The Bank had loans to directors and officers at September 30, 2001 which carry terms similar to those for other loans. A summary of such loans is as follows: Balance at beginning of year $ 2,819,652 New loans 1,216,270 Repayments (1,151,300) Balance at end of year $ 2,884,622 (4) Premises and Equipment Premises and equipment consist of the following at September 30: 2001 2000 Land $ 298,366 298,366 Office buildings and improvements 1,947,070 1,958,977 Furniture and equipment 1,240,099 1,241,367 Automobiles 15,000 11,544 Total 3,500,535 3,510,254 Less accumulated depreciation 2,035,929 1,875,084 Total $ 1,464,606 1,635,170 (5) Time Deposits Maturities of time deposits are as follows at September 30, 2001: Year Amount 2002 $ 96,863,474 2003 12,385,241 2004 1,697,041 2005 734,156 2006 192,053 Thereafter 16,904 Total $ 111,888,869 (6) Federal Home Loan Bank Advances Long-term advances from the FHLB at September 30, 2001 and 2000 amount to $21,000,000 and $57,000,000, respectively. Maturities of such advances at September 30, 2001 are summarized as follows: Year ending September 30 Amount Rates 2003 $ 2,000,000 3.66% 2005 10,000,000 6.10% Thereafter 9,000,000 5.07% $ 21,000,000 The Bank has a line of credit, renewable annually in February, with the FHLB under which there were no outstanding borrowings at September 30, 2001 and 2000. Although no loans are specifically pledged, the FHLB requires the Bank to maintain eligible collateral (qualifying loans and investment securities) that has a lending value at least equal to its required collateral. At September 30, 2001, the Bank's total borrowing capacity with the FHLB was approximately $87 million. (7) Income Taxes Total income tax expense for 2001, 2000, and 1999 is allocated as follows: 2001 2000 1999 Income from continuing operations $1,780,394 1,271,947 1,334,553 Income from a change in accounting principle (125,144) - - Stockholders' equity, recognition of unrealized gains/(losses) on AFS securities 395,021 7,861 (256,561) $ 2,050,271 1,279,808 1,077,992 Income tax expense (benefit) attributable to income from continuing operations consists of: 2001 2000 1999 Current $ 1,965,769 1,399,631 1,377,937 Deferred (185,375) (127,684) (43,384) $ 1,780,394 1,271,947 1,334,553 Federal $ 1,598,572 1,128,163 1,174,544 State 181,822 143,784 160,009 $ 1,780,394 1,271,947 1,334,553 Income tax expense attributable to income from continuing operations was $1,780,394, $1,271,947, and $1,334,553 for the years ended September 31, 2001, 2000, and 1999 respectively, The reasons for the difference between actual income tax expense and expected income tax expense allocated to earnings before extraordinary loss at the 34% statutory federal income tax rate are as follows: 2001 2000 1999 Computed 'expected' tax expense $1,524,948 1,242,806 1,254,642 Increase (reduction) in income taxes resulting from: Tax-exempt interest income (17,844) (21,312) (24,331) Contributions to ESOP 10,783 5,985 18,465 State income taxes, net of deferred benefit 120,002 84,072 107,014 Other, net 142,505 (39,604) (21,237) $1,780,394 1,271,947 1,334,553 The tax effects of temporary differences that give rise to the significant portions of the deferred tax assets and liabilities at September 30, 2001 and 2000 are as follows: 2001 2000 Deferred tax assets: Unrealized loss on investment securities available-for-sale $ - 68,690 Allowance for loan losses 431,109 361,891 Deferred compensation arrangements 224,387 183,650 State taxes 31,878 26,461 Other, net 34,500 - Total deferred tax assets 721,874 640,692 Deferred tax liabilities: Unrealized gain on investment securities available-for-sale 326,331 - FHLB stock dividends 395,503 417,769 Other, net - 13,237 Total deferred tax liabilities 721,834 431,006 Net deferred tax asset $ 40 209,686 There was no valuation allowance required for deferred tax assets at December 31, 2001 or 2000. Management believes that it is more likely than not the results of future operations will generate sufficient taxable income to realize the deferred tax assets. Prior to 1996, the Company was allowed to deduct for tax purposes the greater of an experience method bad debt deduction based on actual charge- offs or a statutory bad debt deduction based on a percentage (8%) of taxable income before such deduction. Under the Small Business Job Projection Act (the Act) of 1996, the allowable deduction under the percentage of taxable income method was terminated for tax years beginning after 1995, and will not be available to the Company for future years. The Act also provides that federal income tax bad debt reserves accumulated since 1988 (the base year reserve) must be recaptured and included in taxable income over a six-year inclusion period beginning 1998. Included in the deferred income tax liability at September 30, 2001 and 2000 is $53,095 and $106,190, respectively, for this recapture. Retained earnings at September 30, 2001 and 2000 include approximately $5,585,000 for which no provision for federal income tax has been made. This amount represents allocations of income to bad debt deductions in years prior to 1988 for tax purposes only. Reduction of amounts allocated for purposes other than tax bad debt losses will create income for tax purposes only, which will be subject to the then current corporate income tax rate. (8) Employee Benefit Plans Employee Retirement Plan The Bank has adopted a 401(k) defined contribution savings plan. Substantially all employees are covered under the contributory plan. Pension costs attributable to the years ended September 30, 2001, 2000, and 1999 were $40,000, $38,000, and $36,000, respectively. Deferred Compensation Agreements The Bank has entered into deferred compensation agreements with certain key employees that provide for cash payments to be made after their retirement. The liabilities under the agreements have been recorded at the present values of accrued benefits using a 7% interest rate. The balance of estimated accrued benefits was $420,482 and $235,447 at September 30, 2001 and 2000, respectively. In connection with the deferred compensation agreements, the Bank has purchased life insurance policies on covered employees in which the Bank is the beneficiary to assist in funding benefits. At September 30, 2001 and 2000, the cash surrender values on the policies were $438,849 and $421,759, respectively. Employee Stock Ownership Plan Upon conversion from mutual to stock form, the Bank established an employee stock ownership plan (ESOP). The original acquisition of 136,878 shares of Company stock by the plan was funded by a loan from the Company to the ESOP in the amount of $1,368,780. The loan, together with interest, is being repaid over a ten-year period through annual contributions by the Bank. The Bank makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. All dividends received by the ESOP are used to pay debt service. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from the collateral and will be allocated to active employees based on the proportion of debt service paid in the year. The Bank accounts for its ESOP shares in accordance with Statement of Position No. 93-6. Accordingly, the debt of the ESOP is recorded as debt of the Bank and the shares pledged as collateral are reported as unearned ESOP shares in the Statement of Financial Condition. As of September 30, 2001 and 2000, the balance of indebtedness from the ESOP to the Company was $282,084 and $418,963, respectively, which is shown as a deduction from stockholders' equity on the consolidated balance sheets. The debt, which is accounted for as a liability of the Bank and a receivable for the Company, has been eliminated in consolidation. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as compensation expense. ESOP compensation expense was $169,000, $154,000, and $191,000 for the years ended September 30, 2001, 2000, and 1999, respectively. The remaining 28,208 and 41,896 unallocated shares at September 30, 2001 and 2000 had an estimated market value of $544,000 and $765,000, respectively. Management Stock Bonus Plan In connection with the stock conversion in 1994, the Bank adopted three Management Stock Bonus Plans (collectively, the MSBP), the objective of which was to enable the Bank to retain personnel of experience and ability in key positions of responsibility. The MSBP purchased 91,252 shares of the Company's stock for $965,224. These shares were granted to employees in the form of restricted stock earned over a five-year period at the rate of one- fifth of such shares per year following the date of grant of the award. Compensation expense, equal to the fair market value of the common stock at the date of the grant to the employee, was recognized pro rata over the five years during which the shares were payable. All awards were fully amortized as of March 1999. (9) Stock Option Plan In connection with the stock conversion in 1994, the Bank's Board of Directors also adopted the 1994 Stock Option Plan (the Option Plan). The purpose of the Option Plan is to provide additional incentive to certain officers, directors, and key employees by facilitating their purchase of a stock interest in the Company. The Option Plan provides for the granting of incentive and nonincentive stock options with a duration of ten years, after which no awards may be made, unless earlier terminated by the Board of Directors pursuant to the Option Plan. Stock to be offered under the Option Plan may be authorized by unissued common stock, or previously issued shares that have been reacquired by the Company and held as treasury shares. The Option Plan is administered by a committee of at least three nonemployee directors designated by the Board of Directors (the Option Committee). The Option Committee will select the employees to whom options are to be granted and the number of shares to be granted. The option price may not be less than 100% of the fair market value of the shares on the date of the grant, and no option shall be exercisable after the expiration of ten years from the grant date. In the case of any employee who owns more than 10% of the outstanding common stock at the time the option is granted, the option price may not be less than 110% of the fair market value of the shares on the date of the grant, and the option shall not be exercisable after the expiration of five years from the grant date. The exercise price may be paid in cash, shares of the common stock, or a combination of both. As of the date of conversion, the Option Committee granted 228,131 shares of common stock, at an exercise price of $10 per share. In addition, options for 18,479 shares of common stock, at an exercise price of $16.50 per share, were awarded on November 20, 1996; options for 2,053 shares of common stock, at an exercise price of $23.625 per share, were awarded on January 15, 1998; options for 10,000 shares were awarded on November 18, 1998 and options for 2,500 shares were awarded on April 27, 2000, at an exercise price of $15.125. All such options are exercisable immediately. As of September 30, 2001, 62,842 options have been exercised and 2,000 options have expired, resulting in 196,321 options outstanding. The Company accounts for the fair value of the options issued under the Option Plan subsequent to October 1, 1996 in accordance with SFAS No. 123. The compensation cost that has been charged to compensation and benefits expense for the Option Plan was $0, $48,585, and $36,753 for the years ended September 30, 2001, 2000, and 1999, respectively. In accordance with SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted average assumptions used for grants during the years ended September 30, 2000 and 1999, dividend yield of 2.54%, expected volatility of 25%, risk-free interest rate of 5.5%, and expected life of two years. Common stock options granted during the year ended September 30, 2000 had an exercise price of $15.125 per share and an estimated fair value of $0. No options were granted in the current year. Certain information for the years ended September 30, 2001 and 2000 relative to stock options is as follows: September 30 2001 2000 Weighted Weighted average average exercise exercise Fixed options Shares price Shares price Outstanding at beginning of year 216,360 $11.14 258,663 $11.18 Granted - - 2,500 15.13 Canceled - - (2,000) (23.25) Exercised (20,039) (10.00) (42,803) (11.04) Outstanding at end of year 196,321 11.26 216,360 11.14 Exercisable at end of year 196,321 216,360 Number of shares available for future grant: Beginning of year - - End of year - - (10) Fair Value of Financial Instruments Fair value estimates of the Company's financial instruments as of September 30, 2001 and 2000, including methods and assumptions utilized, are set forth below: 2001 2000 Carrying Estimated Carrying Estimated amount fair value amount fair value Investment securities $30,035,154 30,889,000 48,648,281 47,169,000 Loans, net of unearned fees and allowance for loan losses $141,987,020 142,940,000 182,659,647 181,588,000 Loans held for sale $ 2,486,449 2,486,000 8,854,493 8,912,000 Noninterest bearing demand deposits $ 8,040,520 8,040,000 5,791,798 5,791,000 Money market and NOW deposits 19,751,450 19,751,000 14,786,073 14,786,000 Savings deposits 8,382,663 8,382,000 8,052,345 8,052,000 Time deposits 111,888,869 112,853,000 136,695,224 136,094,000 Total deposits $148,063,502 149,026,000 165,325,440 164,723,000 FHLB advances $ 21,000,000 22,289,000 57,000,000 56,879,000 Methods and Assumptions Utilized The carrying amount of cash and cash equivalents, loans held for sale, federal funds sold, and accrued interest receivable and payable are considered to approximate fair value. The estimated fair value of investment securities, except certain obligations of states and political subdivisions, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain obligations of states and political subdivisions is not readily available through market sources other than dealer quotations, so fair value estimates are based upon quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. The estimated fair value of the Company's loan portfolio is based on the segregation of loans by collateral type, interest terms, and maturities. In estimating the fair value of each category of loans, the carrying amount of the loan is reduced by an allocation of the allowance for loan losses. Such allocation is based on management's loan classification system which is designed to measure the credit risk inherent in each classification category. The estimated fair value of performing variable rate loans is the carrying value of such loans, reduced by an allocation of the allowance for loan losses. The estimated fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the interest rate risk inherent in the loan, reduced by an allocation of the allowance for loan losses. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value for significant nonperforming loans is the estimated fair value of the underlying collateral based on recent external appraisals or other available information, which generally approximates carrying value, reduced by an allocation of the allowance for loan losses. The estimated fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, savings, money market accounts, and NOW accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of advances from the Federal Home Loan Bank are estimated using the rates offered for similar borrowings. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market 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 financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. (11) Regulatory Capital Requirements Current regulatory capital regulations require financial institutions to meet two different regulatory capital requirements. Institutions are required to have minimum leverage capital equal to 4% of total average assets and total qualifying capital equal to 8% of total risk-weighted assets in order to be considered 'adequately capitalized.' Management believes that, as of September 30, 2001, the Company and the Bank meet all capital adequacy requirements to which they are subject. The following is a comparison of the Bank's regulatory capital to minimum capital requirements at September 30, 2001 (dollars in thousands): To be well- For capital capitalized under adequacy prompt corrective Actual purposes action provisions Amount Ratio Amount Ratio Amount Ratio As of September 30, 2001: Total capital (to risk- weighted assets) $20,563 21% $ >7,962 >8% $ >9,953 >10% - - - - Tier 1 capital (to risk- weighted assets) 19,317 19 > > >5,972 >6 - - - - Tier 1 capital (to average assets) 19,317 10 >7,892 >4 > 9,865 >5 - - - - As of September 30, 2000: Total capital (to risk- weighted assets) $21,185 17.1% $ >9,920 >8% $ >12,400 >10% - - - - Tier 1 capital (to risk- weighted assets) 19,809 16.0 > > > 7,440 >6 - - - - Tier 1 capital (to average assets) 19,809 8.0 >9,896 >4 >12,370 >5 - - - - The following is a comparison of the parent company's regulatory capital to minimum capital requirements at September 30, 2001 (dollars in thousands): For capital capitalized under adequacy prompt corrective Actual purposes action provisions Amount Ratio Amount Ratio Amount Ratio As of September 30, 2001: Total capital (to risk- weighted assets) $26,996 27% $ >8,116 >8% $>10,144 >10% - - - - Tier 1 capital (to risk- weighted assets) 25,621 25 > > > 6,087 > 6 - - - - Tier 1 capital (to average assets) 25,621 13 >7,979 >4 > 9,974 > 5 - - - - As of September 30, 2000: Total capital (to risk- weighted assets) $ 25,175 20.0% $ >10,159 >8% $>12,698 >10% - - - - Tier 1 capital (to risk- weighted assets) 23,799 19.0 > > > 7,619 > 6 - - - - Tier 1 capital (to average assets) 23,799 9.0 >10,026 >4 >12,533 > 5 - - - - (12) Parent Company Condensed Financial Statements Following is condensed financial information of the Company as of and for the years ended September 30, 2001 and 2000 (dollars in thousands): Condensed Balance Sheets September 30, 2001 and 2000 Assets 2001 2000 Cash $ 3,927 192 Investment securities 1,643 3,825 Investment in Bank 19,750 19,835 Other 960 1,140 Total assets $ 26,280 24,992 Liabilities and Stockholders' Equity Borrowed funds $ - 1,254 Other 181 76 Stockholders' equity 26,099 23,662 Total liabilities and stockholders' equity $ 26,280 24,992 Condensed Statements of Earnings Years ended September 30, 2001, 2000, and 1999 2001 2000 1999 Dividends from Bank $ 2,700 1,300 5,700 Interest income 226 236 224 Other income 785 77 505 Interest expense (40) (144) (162) Other expense, net (134) (158) (198) Income before equity in undistributed earnings of bank 3,537 1,311 6,069 Increase (decrease) in undistributed equity of Bank (692) 1,032 (3,621) Earnings before income taxes 2,845 2,343 2,448 Income tax benefit (expense) (355) 40 (93) Net earnings $ 2,490 2,383 2,355 Condensed Statements of Cash Flows Years ended September 30, 2001, 2000, and 1999 2001 2000 1999 Cash flows from operating activities: Net earnings $2,490 2,383 2,355 (Increase) decrease in undistributed equity of Bank 692 (1,032) 3,621 Other (179) (191) (343) Net cash provided by operating activities 3,003 1,160 5,633 Cash flows from investing activities: Proceeds from sale of investment securities available-for-sale, net 3,345 870 1,229 Other (171) 303 382 Net cash provided by investing activities 3,174 1,173 1,611 Cash flows from financing activities: Issuance of shares under stock option plan 200 360 - Repayments on note payable (1,537) (1,546) (1,900) Purchase of treasury stock (473) (1,083) (4,240) Payment of dividends (632) (650) (805) Net cash used in financing activities (2,442) (2,919) (6,945) Net increase (decrease) in cash 3,735 (586) 299 Cash at beginning of year 192 778 479 Cash at end of year $3,927 192 778 (13) Restrictions on Retained Earnings The Bank may not declare or pay a cash dividend to the Company if the effect would cause the net worth of the Bank to be reduced below either the amount required for the 'liquidation account' or the net worth requirement imposed by the Office of Thrift Supervision (OTS). If all capital requirements continue to be met, the Bank may not declare or pay a cash dividend in an amount in excess of the Bank's net earnings for the fiscal year in which the dividend is declared plus one-half of the surplus over the capital requirements, without prior approval of the OTS. The OTS regulations require that, upon conversion from mutual to stock form of ownership, a liquidation account be established by restricting a portion of net worth for the benefit of eligible savings account holders who maintain their savings accounts with the Bank after conversion. In the event of complete liquidation (and only in such event), each savings account holder who continues to maintain their savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors but before any liquidation distribution with respect to common stock. The initial liquidation account was established at $15,489,000. This account may be proportionately reduced for any subsequent reduction in the eligible holder's savings accounts. (14) Subsequent Event On October 9, 2001, the Company and MNB Bancshares, Inc. (MNB) and its wholly owned subsidiary, Security National Bank (Security), completed their merger of equals into Landmark Merger Company, which immediately changed its name to Landmark Bancorp, Inc. In addition, the Bank merged with Security and the resulting bank changed its name to Landmark National Bank. Landmark Bancorp, Inc. is a $350 million financial services company with its main office located in Manhattan, Kansas. Landmark Bancorp issued 817,806 shares to the former stockholders of MNB to complete the merger, which will be accounted for as a purchase of MNB by the Company. Total value of the consideration was approximately $15 million. In conjunction with the merger, change in control payments, severance pay, and nonrecurring other costs of approximately $1.6 million, net of tax, will be expensed in the quarter ending December 31, 2001. A condensed unaudited pro forma consolidated balance sheet as of September 30, 2001 is as follows: Investment securities $68,540,000 Loans, net $247,496,000 Total assets $353,759,000 Deposits $277,114,000 Stockholders' equity $39,499,000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Landmark Bancorp, Inc. has duly caused this report to be signed as of December 31, 2001 and filed on behalf of Landmark Bancorp, Inc., its predecessor. Landmark Bancorp, Inc. By: /s/ Patrick L. Alexander Patrick L. Alexander President and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark A. Herpich Mark A. Herpich Chief Financial Officer and Executive Vice President (Principal Financial Officer) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below, on behalf of Landmark Bancshares, Inc., by the following persons representing Landmark Bancorp, Inc., the successor to Landmark Bancshares, Inc., in the capacities indicated as of December 31, 2001. /s/ Patrick L. Alexander /s/ Larry Schugart Patrick L. Alexander Larry Schugart President, Chief Executive Officer Chairman of the Board and Director /s/ Susan E. Roepke /s/ Richard A. Ball Susan E. Roepke Richard A. Ball Director Director /s/ David H. Snapp /s/ C. Duane Ross David H. Snapp C. Duane Ross Director Director /s/ Jim W. Lewis /s/ Jerry R. Pettle Jim W. Lewis Jerry R. Pettle Director Director /s/ Brent A. Bowman /s/ Joseph L. Donney Brent A. Bowman Joseph L. Donney Director Director Exhibit 21 Subsidiaries of Registrant Landmark Bancshares, Inc.'s only subsidiary is Landmark Federal Savings Bank, headquartered in Dodge City, Kansas. Exhibit 99.1 Report of Independent Auditors To the Board of Directors and Stockholders of Landmark Bancshares, Inc. Dodge City, Kansas We have audited the accompanying consolidated balance sheet of Landmark Bancshares, Inc. and subsidiary as of September 30, 2000, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the two years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Landmark Bancshares, Inc. and subsidiary as of September 30, 2000, and the results of their operations and cash flows for each of the two years in the period ended September 30, 2000 in conformity with generally accepted accounting principles. /s/Regier Carr & Monroe, L.L.P. October 26, 2000 Wichita, Kansas

At September 30, ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------- ------------------ ---------------------- ------------------- ------------------ $ % $ % $ % $ % $ % --- --- --- --- --- --- --- --- --- --- (Dollars in Thousands) Type of Loan: (1) ------------ Real estate loans Construction............$ 857 0.45% $ 1,848 1.04% $ 1,386 0.79% $ 1,937 1.22% $ 1,130 0.87% Residential............. 156,370 81.66 138,613 77.94 132,077 75.59 125,961 79.64 105,195 80.98 Commercial.............. 9,331 4.87 9,050 5.09 4,937 2.83 2,666 1.69 1,852 1.43 Second mortgage......... 10,403 5.43 9,716 5.46 10,072 5.76 9,986 6.31 8,140 6.27 Commercial business....... 7,034 3.67 6,531 3.67 8,579 4.91 4,050 2.56 3,601 2.77 Consumer: Savings account......... 488 0.25 660 0.37 588 0.34 574 0.36 555 0.43 Home improvement........ -- -- -- -- - - -- -- -- -- Automobile.............. 8,074 4.22 12,269 6.90 17,623 10.08 13,310 8.42 9,784 7.53 Other................... 488 0.25 650 0.37 837 0.48 968 0.61 643 0.49 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Gross loans............. 193,045 100.80 179,337 100.84 176,099 100.78 159,452 100.81 130,900 100.77 Less: Unamortized premiums (discounts) on loan purchases....... 30 0.02 35 0.02 31 0.02 30 0.02 47 0.04 Loans in process........ -- -- -- -- 24 0.01 (2) -- -- -- Deferred loan origination fees and costs....... (184) (0.10) (214) (0.12) (284) (0.16) (348) (0.22) (304) (0.23) Allowance for loan losses............... (1,377) (0.72) (1,318) (0.74) (1,137) (0.65) (969) (0.61) (740) (0.58) ------- ------ ------- ------ ------- ------ ------- ------- ------- ------ Total loans, net........$191,514 100.00% $177,840 100.00% $174,733 100.00% $158,163 100.00% $129,903 100.00% ======= ====== ======= ====== ======= ====== ======= ======= ======= ======

1-4 Family Other Real Estate Residential Mortgage Commercial Construction Consumer(1) Total -------- ---------- ------------ -------- ----- (In Thousands) Amounts Due: Within 1 year .......... $ 209 $ 3,468 $ 590 $ 2,193 $ 6,460 --------- --------- --------- --------- --------- After 1 year: 1 to 3 years ......... 430 3,594 -- 6,025 10,049 3 to 5 years ......... 663 915 -- 5,373 6,951 5 to 10 years ........ 11,818 4,074 -- 5,328 21,220 10 to 20 years ....... 63,060 6,092 108 535 69,795 Over 20 years ........ 78,411 -- 159 -- 78,570 --------- --------- --------- --------- --------- Total due after one year 154,382 14,675 267 17,261 186,585 --------- --------- --------- --------- --------- Total amount due ....... $ 154,591 $ 18,143 $ 857 $ 19,454 $ 193,045 Less: Unamortized premium on loan purchases ...... 30 -- -- -- 30 Allowance for loan loss (668) (180) -- (529) (1,377) Loans in process ....... -- -- -- -- -- Deferred loan fees ..... (182) -- (2) -- (184) --------- --------- --------- --------- --------- Loans receivable, net $ 153,771 $ 17,963 $ 855 $ 18,925 $ 191,514 ========= ========= ========= ========= =========

At September 30, ------------------------------------------------ 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a non- accrual basis: Mortgage loans: Permanent loan secured by 1-4 dwelling units ........................ $ 418 $ 128 $ 185 $ 78 $ 51 All other mortgage loans ................. -- -- 91 -- -- Non-Mortgage loans: Consumer loans ........................... 73 185 230 294 76 ------ ------ ------ ------ ------ Total ...................................... $ 491 $ 313 $ 506 $ 372 $ 127 ====== ====== ====== ====== ====== Accruing loans that are contractually past due 90 days or more: Mortgage loans: Permanent loans secured by 1-4 dwelling units ..................... $ 634 $ 180 $ 182 $ 50 $ 146 All other mortgage loans ................. -- -- -- -- 44 ------ ------ ------ ------ ------ Total ...................................... $ 634 $ 180 $ 182 $ 50 $ 190 ====== ====== ====== ====== ====== Total non-accrual and 90-day past due accrual loans ................... $1,125 $ 493 $ 688 $ 422 $ 317 ====== ====== ====== ====== ====== Real estate owned .......................... $ 171 $ 147 $ 71 $ 252 $ -- ====== ====== ====== ====== ====== Total non-performing assets ................................... $1,296 $ 640 $ 759 $ 674 $ 317 ====== ====== ====== ====== ====== Total non-accrual and 90-day past due accrual loans to net loans .................................... 0.59% 0.28% 0.39% 0.27% 0.24% ====== ====== ====== ====== ====== Total non-accrual and 90-day past due accrual loans to total assets ................................... 0.45% 0.20% 0.31% 0.19% 0.15% ====== ====== ====== ====== ====== Total non-performing assets to total assets ................... 0.52% 0.26% 0.34% 0.30% 0.15% ====== ====== ====== ====== ======

At September 30, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ----- $ % $ % $ % $ % $ % --- --- --- --- --- --- --- --- --- --- (Dollars in Thousands) Residential real estate $ 668 86.84% $ 689 83.74% $ 689 81.51% $ 603 86.47% $ 523 87.44% Commercial real estate 103 4.83 70 5.05 22 2.80 12 1.67 9 1.42 Commercial business ... 77 3.64 50 3.64 38 4.87 76 2.54 51 2.75 Consumer .............. 529 4.69 509 7.57 388 10.82 278 9.32 157 8.39 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total ................. $1,377 100.00% $1,318 100.00% $1,137 100.00% $ 969 100.00% $ 740 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======

At September 30, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (Dollars in Thousands) Total loans outstanding .... $ 191,514 $ 177,840 $ 174,733 $ 158,163 $ 129,903 ========= ========= ========= ========= ========= Average loans outstanding .. $ 184,269 $ 176,318 $ 167,490 $ 145,395 $ 110,084 ========= ========= ========= ========= ========= Allowance balances (at beginning of period) . 1,318 1,137 969 740 644 --------- --------- --------- --------- --------- Provision (credit): Real estate-mortgage ..... -- -- 75 88 20 Consumer ................. 207 725 130 220 115 Commercial ............... 60 60 60 -- -- --------- --------- --------- --------- --------- 267 785 265 308 135 --------- --------- --------- --------- --------- Charge-offs: Real estate-mortgage ..... (21) -- (2) (17) (19) Consumer ................. (331) (658) (105) (75) (20) --------- --------- --------- --------- --------- (352) (658) (107) (92) (39) --------- --------- --------- --------- --------- Recoveries: Real estate-mortgage ..... -- -- 1 13 -- Consumer ................. 144 54 9 -- -- --------- --------- --------- --------- --------- 144 54 10 13 -- --------- --------- --------- --------- --------- Net (charge-offs) recoveries (208) (604) (97) (79) (39) ========= ========= ========= ========= ========= Allowance balance (at end of period) ....... $ 1,377 $ 1,318 $ 1,137 $ 969 $ 740 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding .............. 0.72% 0.74% 0.65% 0.61% 0.57% ========= ========= ========= ========= ========= Net loans charged off as a percent of average loans outstanding .............. 0.11% 0.34% 0.06% 0.06% 0.04% ========= ========= ========= ========= =========

As of September 30, 2000 ----------------------------------------------------------------------------------------------- More than Total One Year or Less One to Five Years Five to Ten Years Ten Years Investment Securities ---------------- ----------------- ----------------- ---------------- ----------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Investment Securities: U.S. Government Obligations...... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ -- U.S. Agency Obligations...... -- -- 3,000 6.37 21,482 6.53 4,952 7.23 29,434 6.63 28,034 Municipal Obligations...... 200 4.90 400 5.21 585 4.81 -- -- 1,185 4.96 1,182 Corporate Notes and Bonds............ -- -- 141 12.00 -- -- 41 9.00 182 11.25 182 ---- ---- ------ ---- ------- ---- ------ ---- ------- ---- ------- Total............ $200 4.90% $3,541 6.50% $22,067 6.49% $4,993 7.25% $30,801 6.18% $29,398 ==== ==== ====== ==== ======= ==== ====== ==== ======= ==== =======

Weighted Average Rate At September 30, 2000 2000 1999 1998 ------------------ ------ ------ ------ (Dollars in Thousands) Held for Investment: GNMA ARMs............................ --% $ -- $ -- $ -- FNMA ARMs............................ 7.22 4,986 5,901 8,842 FHLMC ARMs........................... 7.88 1,461 1,901 2,815 FHLMC Fixed Rate..................... 8.15 50 80 128 GNMA Fixed Rate...................... 8.00 44 103 230 FNMA Fixed Rate...................... 5.50 305 344 448 CMOs................................. 5.73 3,266 5,160 9,261 ---- ----- ------- ------- Total Held for Investment 6.79% 10,112 13,489 21,724 ==== ------- ------- ------- Held for Sale........................ -- -- -- ------- ------- ------- Total mortgage-backed securities.................... $10,112 $13,489 $21,724 ======= ======= =======

(a) List of Exhibits: 3(i) Articles of Incorporation of Landmark Bancshares, Inc.* 3(ii) Bylaws of Landmark Bancshares, Inc.* 10.1 1994 Stock Option Plan of Landmark Bancshares, Inc.** 10.2 Management Stock Bonus Plan and Trust Agreements** 28 10.3 1991 Deferred Compensation Agreement with Larry Schugart* 10.4 1998 Deferred Compensation Agreement with Larry Schugart*** 10.5 Directors Change in Control Severance Plan*** 10.6 1996 Stock Option Agreement with Richard Ball**** 10.7 Employment Agreement with Larry Schugart 10.8 Employment Agreement with Gary Watkins 10.9 Employment Agreement with Stephen Sundberg 10.10 1998 Stock Option Agreement with Richard Ball*** 10.11 Stock Option Agreement with Larry Schugart***** 10.12 Stock Option Agreement with Gary Watkins***** 10.13 Stock Option Agreement with Stephen Sundberg 13 Annual Report to Stockholders for the fiscal year ended September 30, 2000 21 Subsidiaries of Registrant****** 23 Consent of Regier Carr & Monroe, L.L.P. 27 Financial Data Schedule (electronic filing only)

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