**EXHIBIT 13.1**

 

**TO OUR STOCKHOLDERS, CUSTOMERS,AND FRIENDS**

 

Landmark Bancorp, Inc.reported net earnings of $5.4 million in 2007 with total assets equaling $606million at year end in what will be remembered as a very difficult year for thebanking industry.  Fully diluted earningsper share were $2.20 per share.  Thisfinancial performance translated to a 10.78% return on average equity and a..90% return on average assets.  Wecontinued our practice of declaring a 5 percent stock dividend.  Our cash dividend paid in 2007, adjusted togive effect to the 5 percent stock dividend, increased approximately 14 percentcompared to 2006 to 72.4 cents.  All ofthese accomplishments occurred against an industry backdrop of severe problemsin the residential housing market caused by deterioration in residential realestate market values and loan portfolio credit quality, particularly in thesubprime mortgage sector.  Your companyhas steered clear of the problems caused by this type of lending and finds itsresidential mortgage loan and mortgage backed security portfolios are still ofhigh quality and not showing evidence of the stresses that many otherinstitutions within our industry are experiencing.  While we have not been completely immune fromthe effects of the decline and turbulence in the housing market, your companycontinues to have a high quality asset base and solid earnings.  We anticipate that our efforts to run a highquality financial institution with a sound asset base will continue to create astrong foundation for continued growth and profitability.  In the following paragraphs I will outlineboth the challenges and the successes we experienced in 2007 and describe theopportunities that lie before us in 2008.

 

We are disappointed thatearnings declined to $5.4 million in 2007 compared to $6.0 million the prioryear.  Several factors impacted theseresults.  Our net interest margindecreased approximately 15 basis points to 3.47 percent for the year 2007.  This was due primarily to loan yields notincreasing as much as liability costs increased in 2007 when compared to2006.  In fact, during the latter part of2007 when the Federal Reserve began lowering interest rates, loan yieldsdecreased at a faster rate relative to liability costs which did not decreaseas rapidly.  Declining loan yields may belargely attributed to increasing competitive pressures resulting from a slowingeconomy, deteriorating loan pricing, and relatively fewer lendingopportunities.  Also contributing to theearnings decline was a reduction in non interest income of approximately $1.0million.  The primary cause of thisdecline was the sale in 2006 of our former main banking facility in Manhattanand other properties resulting in a gain of approximately $717 thousand.  We also saw a decrease of approximately $306thousand in fees and service charges, primarily in the area of loan fees.  However, on the positive side, we were ableto reduce non interest expense by approximately $706 thousand as we were ableto achieve the cost savings we had anticipated with the acquisition of FirstManhattan Bancorporation, Inc. and continue to create efficiencies in ourdaily operations.  Finally, we were ableto reduce our effective tax rate from 25.7 percent to 19.4 percent as a resultof increases in non taxable income from increased investments in tax exemptmunicipal bonds and bank owned life insurance. We continued our balance sheet transition with an increase of $21.6million in commercial and commercial real estate loans which partially offset adecline of $24.8 million in one to four family residential loans.  This is consistent with our strategy tocontinue to reduce portfolio reliance on residential mortgage loans, most ofwhich have been acquired in previous acquisitions, and increasing our loanportfolio in the area of commercial lending. We expect to continue this strategy in 2008 and will work to furtherincrease our efforts to grow the commercial and commercial real estate loanportfolios and capture the banking relationships associated with these loans.

 

2007 was marked by manyindustry reports of large losses related to sub prime residential mortgageloans that were originated over the past few years.  These loans were made under relaxedunderwriting standards that allowed debtors to purchase homes that they wouldnot otherwise qualify for under conventional underwriting standards.  These lax underwriting practices includedlending to borrowers with poor credit histories, little or no cash equity,excessive debt to income ratios, extended loan amortizations that includedlittle or no principal reductions, poor loan structure, and an underlyingassumption that property values would always increase.  It is folly to expect that borrowers who havenot historically paid their debts will somehow decide they should pay a loanback when they have no cash equity in the home and home values aredecreasing.  The influx of buyers whowere enabled by these lax lending practices to purchase homes contributed significantlyto the residential asset pricing bubble that has now burst, resulting in lowerresidential property prices. Additionally, a large portion of consumer spending which has fueled theeconomy the last several years has been attributed to increasing propertyvalues and consumers continuing to borrow against the equity in their homes andspending those funds for other consumer goods. Your 

 

 

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company has notparticipated in these practices of lax lending standards and the assumptionthat property values will always increase. We have continued with our standards of originating quality loans withsound underwriting principles guiding the approval process.  While it is difficult for any financialinstitution not to feel the impact of the problems in the residential propertymarket, we are confident that our loan and security portfolio is of highquality and will withstand the turbulence of the adverse developments in thereal estate market.  We are proud of ourlending standards and practices, we expect they will serve us well over thelong term, and we will continue to keep your company strong.  This should allow us to take advantage ofopportunities that will arise in the upcoming year.

 

Earlier I spoke of thefact that our net interest margin decreased by 15 basis points in 2007 comparedto 2006 as the average yield on loans for the year did not increase as much asthe average cost of liabilities.  I alsomentioned that loan pricing has deteriorated due to competitive forces in themarket place.  The monetary policyenacted by the Board of Governors of the Federal Reserve over the last severalyears has had a focus of enhanced monetary system liquidity and low interestrates in an effort to keep the economy stimulated and growing.  This combination of increased systemicliquidity and low rates has contributed to fierce competition within thebanking and financial market place for loans and other assets that produce asatisfactory yield.  This competitivepressure has been exacerbated by a slowing economy with fewer lendingopportunities.  The cumulative effect hasresulted in an environment in which the financial community has not adequatelyassessed risk, has relaxed lending covenants and standards, and has not pricedrisk accordingly in the pursuit of satisfactory yields.  These pressures are evident in the relativelylower yields we have experienced in our loan portfolio over this past yearcompared to our cost of funds.  Thesilver lining in the sub prime mortgage loan crisis is that hopefully, if thegovernment lets the free market run its course, there will be enoughunfortunate pain and losses endured by institutions throughout the financialsystem that proper risk assessment, loan structuring,  and risk based pricing will re-emerge as keycomponents within the credit process.  Weare already seeing this happen in many of the credit sectors and expect thetrends to continue.  Long term this couldbe a favorable development for net interest margins and overall portfolioperformance.  We have introducedadditional controls and tools into our loan evaluation process to assist us inour pricing efforts and help insure that we are able to obtain yields on ourloans commensurate with the associated risk.

 

The economic developmentsof the past year have not dampened our enthusiasm or expectations for2008.  We have added to and enhanced ourcommercial lending staff in an effort to increase our growth in commerciallending.  In today’s environment weunderstand that we need to continue to adhere to our sound lending practicesand will need to look at a greater number of lending opportunities to find theones that will match our criteria. Toward that end we have enhanced our business development efforts andare already beginning to see the rewards of those efforts.  We continue to focus on the origination oftraditional conforming residential mortgages for sale into the secondarymarket.  This activity resulted inapproximately $1.0 million in gains on sale of these loans last year and wehope to exceed that level this year.  Wehave made significant strides in our efforts to sell non depository investmentproducts and expect to see significant benefits from those efforts thisyear.  We are exploring other productsand ways to further enhance non-interest income.  We continue to search for ways to improveefficiencies within our current operation and reduce non-interest expenses asevidenced by the $700 thousand reduction achieved in 2007.  Our staff is committed to enhancing ourlevels of customer service and developing relationships with our customers thatwill further differentiate your company from the competition.  2008 will continue to be a year where wefocus on the basics of sound credit practices, rational risk based loanpricing, customer relationships, enhanced non-interest income, and control ofoperating expenses and overhead.

 

The markets within whichwe operate have remained strong economically. The agricultural sector throughout the state did very well in 2007.  Our communities in southwest Kansas participatedin this outstanding year in the agriculture sector and confidence is high.  Commodity prices remain strong, and in spiteof rising input costs, a good year is expected in 2008 given normal weatherconditions.  The Manhattan and JunctionCity markets continue to grow as a result of the expansion of the Fort Rileymilitary base and other economic development initiatives within the area.  The Topeka, Lawrence, and Miami Countymarkets remain stable with a sound diversified economic base that, while it hasnot grown significantly in the current economic environment, continues to beviable without significant signs of economic distress.  The geographic diversification of yourcompany across the state of Kansas is serving us well and contributes to ourdiversified balance sheet.  This diversification,coupled with our credit underwriting practices and the economies within ourmarkets should serve us well in 2008.

 

 

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We are well positioned tocontinue the tradition of growth and profitability we have enjoyed over thehistory of your company.  We have astrong capital base of $52 million.  Ourmanagement team is strong and we continue to enhance it with seasoned, provenadditions to our staff.  Our associatesare dedicated to delivering top quality financial services to ourcustomers.  Together, we strive tooperate the company in a way that continually positions us for the long termand provides a satisfactory return in the short run.  We realize that there are no shortcuts tosuccess and profitability.  It entailshard work, sound decisions, and disciplined risk management.  We are dedicated to these values.

 

I would like to thank ourshareholders for your continued support and confidence.  We are constantly focused on ways to enhanceshareholder value and reward your investment with a strong, profitableorganization you can take pride in.  I amespecially proud of my associates who work tirelessly toward the success of ourcustomers and your company.  Theirefforts are the reason for our success and progress over the years.  Finally, I must thank our customers for theirconfidence, support and patronage.  Wewill continue to work to deliver quality financial services to enable you tosucceed and prosper in your business and personal endeavors.  We look forward to 2008 and are anxious tocontinue the Landmark traditions of growth, profitability, financial strength,and success.

 

Sincerely,

 

Patrick L. Alexander

President and ChiefExecutive Officer

 

 

 

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**CORPORATEINFORMATION**

 

**DIRECTORS OF LANDMARK BANCORP,INC. AND LANDMARK NATIONAL BANK**

 

Larry Schugart, Chairman

Former President andChief Executive Officer

Landmark Bancshares, Inc.

 

Patrick L. Alexander

President and ChiefExecutive Officer

Landmark Bancorp, Inc.and Landmark National Bank

 

Richard A. Ball

CPA

Ball Consulting Group, Ltd.

 

Brent A. Bowman

Vice President

Bowman Bowman and Novick, Inc.

Architects and LandscapeArchitects

 

Joseph L. Downey

Retired Senior VicePresident, Director and Executive Officer

Dow Chemical Company

 

Jim W. Lewis

Owner, Lewis AutomotiveGroup

 

Jerry R. Pettle

Retired Dentist

Dental Associates ofManhattan, P.A.

 

Susan E. Roepke

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

Retired Senior VicePresident/Secretary/Cashier, Security National Bank

 

C. Duane Ross

Publisher Emeritus

High Plains Publishers, Inc.

 

David H. Snapp

Law Partner

Waite, Snapp &Doll

 

 

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**CORPORATEHEADQUARTERS**

701 Poyntz Avenue

Manhattan, Kansas 66502

 

**ANNUALMEETING**

                The annual meeting of stockholders will be held at the Kansas StateAlumni Center, 17th and Anderson Avenue, Manhattan, Kansas, onWednesday, May 21, 2008 at 2:00 PM.

 

**FORM 10-K**

                A copy of the Annual Report on Form 10-K filed with the Securitiesand Exchange Commission may be obtained by stockholders without charge onwritten request to Patrick L. Alexander, President and Chief Executive Officer,Landmark Bancorp, Inc., P.O. Box 308, Manhattan, Kansas 66505-0308,or by accessing our website at www.landmarkbancorpinc.com or the SEC’s websiteat www.sec.gov.

 

**REGISTRARAND TRANSFER AGENT**

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016-3572

 

**INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

KPMG LLP

1000 Walnut, Suite 1000

Kansas City, Missouri 64106

 

 

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