**EXHIBIT 13.1**

**2006 ANNUAL REPORT TO STOCKHOLDERS**

Toour Stockholders, Customers and Friends

Growth and profitabilitywere the key words for Landmark Bancorp, Inc. in 2006.  Total assets grew to $591 million in 2006compared to $465 million the previous year. Net earnings grew to $6.0 million compared to $3.9 million the previousyear.  Earnings per share increased 54%to $2.55 on a fully diluted basis.  Thisgrowth in both earnings and assets translated into a return on average equityof 13.01% and a return on average assets of 1.01%.  Landmark now has twenty banking facilities insixteen communities across the state of Kansas. The cash dividends to stockholders grew 8% to $0.67 per share in 2006and we continued our annual practice of paying a 5% stock dividend to ourstockholders.  Our net yield on interestearning assets increased from 3.16% in 2005 to 3.49% in 2006.  The acquisition of First ManhattanBancorporation was consummated on January 1, 2006 and we assimilated the newfacilities throughout the year.  We areexcited about the progress and growth accomplished in 2006 and look forward to2007.  The space below will outline thechallenges and success we experienced in 2006 and describe the opportunitiesthat lie before us in 2007.

We were pleased to seenet earnings increase from $3.9 million in 2005 to $6.0 million in 2006 anddiluted earnings per share increase from $1.66 to $2.55 for the sameperiod.  A number of factors contributedto this robust increase in net earnings. The acquisition of First Manhattan Bancorporation in January 2006increased our assets by approximately $129 million, which contributedsignificantly to our increased earnings. However, the improvement in earnings performance was the result of morethan just an increase in earning assets. We estimate that we were able to achieve in excess of $1 million inannual operating cost savings due to the assimilation of the First ManhattanBancorporation into the Landmark Bancorp organization.  We were able to eliminate redundant expensesthat resulted from the main banking offices of both organizations being locatedin Manhattan, Kansas.  The close physicalproximity of the four banking offices in Manhattan after the acquisitionallowed us to combine them into two locations. The “in market” nature of the acquisition gave us greater cost savingopportunities than might have otherwise been available.  Further contributing to our increasedearnings was an improvement in the net yield on interest earning assets from3.16 percent in 2005 to 3.49 percent in 2006. We felt very good about this improvement in an interest rate environmentwith an inverted yield curve which is generally hostile to bank interestmargins.  I will discuss this in furtherdetail below.  Additionally, we felt goodabout the increase in our non-interest income as it increased from $5.1 millionin 2005 to $6.9 million in 2006.  Thisincrease was led by a $913 thousand increase in fees and service charges andfurther supplemented by a $502 thousand increase in gains on sale of loans fromour mortgage banking activities.  Theincreases in both the net yield on interest earning assets and non-interestincome exceeded the increase in operating expenses attributable to theacquisition and the increased interest expense resulting from increasedborrowings incurred to finance the acquisition. This year’s results are a significant improvement in financialperformance over the previous year and lay a strong foundation for futureperformance.

We remain in an interestrate environment that historically has not been favorable to bank net interestmargins and earnings.  We haveexperienced an inverted yield curve for approximately one year, where shortterm interest rates are higher than intermediate and long term rates.  Generally, this is particularly adverse tobank earnings due to the fact that most bank deposits and funding sources arerelatively short term and the majority of bank loans and investments havelonger maturities in the one to five year range.  The combined dynamics of a bank’s maturitystructure and an inverted yield curve usually causes bank interest margins tocompress and net interest income to decrease. We were able to withstand these pressures in 2006 and increase our netyield on average interest earning assets by 33 basis points.  Several factors combined to contribute tothis increase.  Over the last few yearswhen interest rates were at historical lows, we refrained from chasing yieldsand locking in loan and investment yields with longer maturities.  This disciplined approach let our balancesheet respond positively from a repricing perspective as short term interestrates increased over the last couple of years. Additionally, we were able to continue to diversify our loan mix out ofone-to-four family residential loans into higher yielding commercial loans thatre-price on a more frequent basis.  Whilewe continue to originate and refinance a significant number of one-to-fourfamily residential loans, many of these loans are sold into the secondarymarket.  In 2006, we saw commercial loansincrease approximately $5.0 million while residential loans decreasedapproximately $12.0 million, due to normal amortization and pre-payments.  Finally, we restructured a portion of ourinvestment portfolio by selling relatively short term investments at a loss andre-investing those proceeds in longer maturity investments at significantlyhigher yields.  We took these steps torestructure the investment portfolio due to a belief that interest rates werenearing a peak in mid-2006 and we did not want to miss the opportunity to lockin higher yielding investments.  We areexcited that we were able to accomplish these improvements within the currentinterest rate environment.

Significant strides weremade in 2006 toward our long term goal of increasing non-interest income.  We

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experienced a 27 percentincrease in fees and service charges due to both the increase in our totalassets and our product offerings and marketing efforts.  We were able to capitalize on our mortgagebanking activities with an increase in gains on sale of loans of $502 thousand,which is an increase of 79 percent over the previous year.  We anticipate continued emphasis on theorigination of owner occupied residential mortgage loans to take advantage ofour strong market position and reputation in this area and the growth that isoccurring in the Manhattan and Junction City markets.  Additionally, we are looking to expand ourmortgage banking efforts in the Topeka and Lawrence market areas.  Increasing non-interest income will continueto be an area of emphasis as we go forward as we strive to reduce ourdependency upon net interest margin in a highly competitive environment.

As we look forward,competition within the banking industry is as strong as it has ever been.  While the number of banks has shrunksignificantly over the past several years, the number of branch banking officeshas continued to increase.  Added to thisincreasing number of banking facilities is a growing number of non-traditionalbank competitors offering banking products. These non-traditional competitors include credit unions, insurance company-ownedbanks, finance companies, internet banks, foreign owned banks, and even quasigovernmental agencies such as Farm Credit Services.  All of these providers are competing fiercelyfor loans and deposits.  Geographicboundaries are becoming less and less of a constraint.  We are experiencing pressure on loan pricingand finding deposits more difficult to attract at what were once consideredreasonable rates within our markets.  Inan environment such as this, it is imperative that we focus our marketing andbusiness development efforts.  We mustprice our products competitively and at the same time insure that we areappropriately rewarded for risk and the operational costs incurred to deliverour services.  It is critical that wecontinue to improve and enhance our level of customer service and buildmeaningful relationships with our customers. We must also strive to be as efficient as possible in order to competewith the wide array of competitors now offering financial services.  We continue to strive for improvement in allof these areas.  This last year we havefocused internally on our business processes and how we do business.  We continue to examine how we can betterserve our customers and at the same time improve the efficiency of ourprocesses.  Along with these efforts we mustcontinue to grow, both internally and by acquisition, in order to spread ourexpense base and the regulatory burden over a larger asset base.

Your company has neverbeen better positioned to take advantage of the opportunities that lie beforeus.  Our capital base has grown to $49.2 million.  The primary markets within which we operateare economically diverse, growing and have strong economies.  We have had a year of record profits.  Our management team continues to strengthenas we grow and add key personnel that have proven track records and skillsets.  Our people demonstrate atremendous desire to serve our customers and our stockholders.  While the competition has never been keener,we have never been as well prepared to compete and succeed as we are now.  We are excited about your company’s prospectsand the future for continued growth and profitability.

I would like to thank ourstockholders for your continued support and confidence.  We continually strive to operate the companyin a way that will enhance stockholder value and reward your investment with astrong, profitable organization of which you can take pride in.  I am especially proud of and indebted to myassociates that have put forth a tireless effort throughout the years and madethe growth, strength, and profitability of the company possible.  Our associates are the backbone of thecompany and our most treasured asset.  Iknow they will continue to strive to improve the way we go about doing businessand further enhance our opportunities for success.  And finally, I must thank our customers fortheir confidence, support, and patronage. We will continue to work to deliver quality financial services to enableyou to succeed and prosper in your business and personal endeavors.  We look forward to 2007 and are anxious tocontinue the Landmark Bancorp, Inc. traditions of growth, profitability,financial strength and success.

 

Sincerely,

Patrick L. Alexander

President andChief Executive Officer

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**SELECTEDFINANCIAL AND OTHER DATA OF LANDMARK BANCORP, INC.**
| ** **                                           | ** ** | **At or for the years ended December 31,**      | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected Financial Data:**                         | ** ** | ** **                                                                         |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | $                                                                                  | 590,568    |   | $ | 465,110 |   | $ | 442,091 |   | $ | 334,046 |   | $ | 341,314 |   |
| Loans (1)                                            |       | 380,688                                                                            |       | 275,729 |   | 278,260 |   | 215,030 |   | 229,112 |   |
| Investments  available-for-sale                      |       | 145,884                                                                            |       | 140,131 |   | 133,604 |   | 99,746 |   | 89,296 |   |
| Cash and cash  equivalents                           |       | 14,752                                                                             |       | 21,491 |   | 7,845 |   | 7,708 |   | 11,449 |   |
| Deposits                                             |       | 444,485                                                                            |       | 331,273 |   | 302,868 |   | 253,108 |   | 264,281 |   |
| Borrowings                                           |       | 90,416                                                                             |       | 85,258 |   | 94,571 |   | 33,755 |   | 26,203 |   |
| Stockholders’ equity                            |       | 49,236                                                                             |       | 44,073 |   | 42,169 |   | 42,572 |   | 41,074 |   |
|                                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Selected Operating Data:**                         |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Interest income                                      |       | $                                                                                  | 34,394     |   | $ | 22,125 |   | $ | 19,949 |   | $ | 17,276 |   | $ | 19,562 |   |
| Interest expense                                     |       | 15,639                                                                             |       | 8,957 |   | 7,000 |   | 5,655 |   | 7,111 |   |
| Net interest income                                  |       | 18,756                                                                             |       | 13,167 |   | 12,949 |   | 11,622 |   | 12,451 |   |
| Provision for loan  losses                           |       | 235                                                                                |       | 385 |   | 460 |   | 240 |   | 182 |   |
| Net interest income  after provision for loan losses |       | 18,521                                                                             |       | 12,782 |   | 12,489 |   | 11,382 |   | 12,269 |   |
| Non-interest income                                  |       | 6,913                                                                              |       | 5,056 |   | 5,125 |   | 4,974 |   | 3,856 |   |
| Non-interest expense                                 |       | 17,345                                                                             |       | 12,282 |   | 11,353 |   | 9,229 |   | 9,184 |   |
| Earnings before income  taxes                        |       | 8,089                                                                              |       | 5,556 |   | 6,261 |   | 7,127 |   | 6,941 |   |
| Income tax expense                                   |       | 2,079                                                                              |       | 1,659 |   | 2,010 |   | 2,275 |   | 2,363 |   |
| Net earnings                                         |       | $                                                                                  | 6,010      |   | $ | 3,897 |   | $ | 4,251 |   | $ | 4,852 |   | $ | 4,578 |   |
| Net earnings per share  (2):                         |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                                                                                  | 2.57       |   | $ | 1.67 |   | $ | 1.78 |   | $ | 1.99 |   | $ | 1.81 |   |
| Diluted                                              |       | 2.55                                                                               |       | 1.66 |   | 1.77 |   | 1.97 |   | 1.76 |   |
| Dividends per share (2)                              |       | 0.67                                                                               |       | 0.62 |   | 0.59 |   | 0.54 |   | 0.48 |   |
| Book value per common  share outstanding (2)         |       | 21.07                                                                              |       | 18.83 |   | 18.12 |   | 17.61 |   | 16.81 |   |
|                                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                      |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Return on average  assets                            |       | 1.01                                                                               | %          | 0.87 | % | 0.98 | % | 1.46 | % | 1.35 | % |
| Return on average  equity                            |       | 13.01                                                                              |       | 9.04 |   | 9.98 |   | 11.53 |   | 11.31 |   |
| Equity to total assets                               |       | 8.34                                                                               |       | 9.48 |   | 9.54 |   | 12.74 |   | 12.03 |   |
| Net interest rate  spread                            |       | 3.22                                                                               |       | 2.89 |   | 2.93 |   | 3.35 |   | 3.44 |   |
| Net yield on average interest-earning  assets        |       | 3.49                                                                               |       | 3.16 |   | 3.19 |   | 3.71 |   | 3.86 |   |
| Non-performing assets  to total assets               |       | 0.68                                                                               |       | 0.88 |   | 0.37 |   | 0.45 |   | 0.41 |   |
| Non-performing loans to  net loans                   |       | 0.94                                                                               |       | 1.21 |   | 0.41 |   | 0.56 |   | 0.42 |   |
| Allowance for loan  losses to total loans            |       | 1.05                                                                               |       | 1.14 |   | 1.04 |   | 1.07 |   | 1.12 |   |
| Dividend payout ratio                                |       | 26.17                                                                              |       | 37.14 |   | 33.33 |   | 27.63 |   | 27.57 |   |
| Number of full service  banking offices              |       | 20                                                                                 |       | 17 |   | 16 |   | 12 |   | 12 |   |

 

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**Our selected consolidated financial data should beread in conjunction with, and is qualified in its entirety by, our consolidatedfinancial statements, including the related notes.
| (1) |   | Includes loans held for sale totaling $1.4 million,  $1.2 million, $846,000, $734,000 and $5.1 million at December 31, 2006, 2005,  2004, 2003 and 2002, respectively. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | All per share amounts have been adjusted to give  effect to the 5% stock dividends paid in December 2006, 2005, 2004, 2003 and  2002.                                  |

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**CORPORATE PROFILE AND OVERVIEW**

Landmark Bancorp, Inc. isa one-bank holding company incorporated under the laws of the State of Delawareand is engaged in the banking business through its wholly-owned subsidiary,Landmark National Bank.  Landmark Bancorpis listed on the Nasdaq Global Market under the symbol “LARK”.  Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities.  Our strategy includes continuing a traditionof quality assets while growing our commercial and commercial real estate loanportfolios.  We are committed todeveloping relationships with our borrowers and providing a total banking service.

Landmark National Bank isprincipally engaged in the business of attracting deposits from the generalpublic and using such deposits, together with Federal Home Loan Bank borrowingsand funds from operations, to originate commercial real estate and non-realestate loans and one-to-four family residential mortgage loans. LandmarkNational Bank also originates consumer loans, small business loans,multi-family residential mortgage loans and home equity loans.  Although not our primary business function,we do invest in certain investment and mortgage-related securities usingdeposits and other borrowings as funding sources.

Our results of operationsare primarily dependent on net interest income, which is the difference betweeninterest income from interest-earning assets and interest expense oninterest-bearing liabilities.  Netinterest income is affected by regulatory, economic and competitive factorsthat influence interest rates, loan demand and deposit flows.  In addition, we are subject to interest raterisk to the degree that our interest-earning assets mature or reprice atdifferent times, or at different speeds, than our interest-bearing liabilities.

Our results of operationsare also affected by non-interest income, such as service charges, loan feesand gains and losses from the sale of newly originated loans andinvestments.  Our operating expenses,aside from interest expense, principally consist of compensation and employeebenefits, occupancy costs, federal deposit insurance costs, data processingexpenses and provisions for potential loan losses.

We are significantlyimpacted by prevailing economic conditions including federal monetary andfiscal policies and federal regulations of financial institutions.  Deposit balances are influenced by numerousfactors such as competing investments, the level of income and the personalrate of savings within our market areas. Factors influencing lending activities include the demand for housingand the interest rate pricing competition from other lending institutions.

Currently, our businessconsists of ownership of Landmark National Bank, with its main office inManhattan, Kansas and nineteen branch offices in eastern, central andsouthwestern Kansas.

We completed the cashacquisition of all of the outstanding equity of First Manhattan Bancorporation,Inc. (“FMB”) effective January 1, 2006. FMB’s subsidiary thrift was merged into Landmark National Bankimmediately following the acquisition. This acquisition expanded our market share in Manhattan and furtherexpanded our presence in higher-growth market areas.  FMB was a single thrift holding company basedin Manhattan, Kansas, with locations in Manhattan, Junction City and Lawrence,Kansas.  At December 31, 2005, FMB hadtotal assets of $129 million, including loans and deposits of $109 million and$107 million, respectively.  We paid cashin the amount of $12.9 million for all of the outstanding stock of FMB.  In connection with the acquisition, werecorded a core deposit intangible asset of $2.6 million, which is being

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amortized on anaccelerated basis over 10 years.  Theacquisition cost in excess of the net assets and identifiable intangible assetsacquired, has been recorded as goodwill of $5.5 million, none of which isdeductible for tax purposes.  The results for the year ended December 31,2006, include FMB’s results of operations since January 1, 2006.

On August 19, 2005, weacquired two branch locations in Great Bend, Kansas from UMB FinancialCorporation.  Pursuant to the purchaseagreement, we assumed approximately $33.3 million in deposits and acquired therelated branch premises and equipment. We received cash of approximately $30.4 million and recorded a coredeposit intangible of $1.4 million, which is not deductible for tax purposes.

On April 1, 2004, wecompleted the cashacquisition of First Kansas Financial Corporation (“First Kansas”), which hadtotal assets of approximately $150 million, including loans and deposits of $74million and $84 million, respectively. First Kansas had branches in Osawatomie, Paola, Louisburg, Fort Scott,Beloit, and Phillipsburg, Kansas.  Thisacquisition expanded our presence in high-growth market areas in easternKansas, presenting us with potential for revenue generation and assetgrowth.  The cost in excess of thetangible and identifiable intangible net assets acquired has been recorded asgoodwill.  In connection with theacquisition and the subsequent sale of our branches as described below, werecorded a core deposit intangible of $605,000, which is being amortized on anaccelerated basis over ten years, and goodwill attributable to the acquisitionof First Kansas of $5.7 million, none of which is deductible for taxpurposes.  The results for the year endedDecember 31, 2004, include First Kansas’ results of operations since April 1,2004.

Duringthe third quarter of 2004, we sold the Beloit and Phillipsburg branches we hadacquired earlier in the First Kansas transaction primarily because these smallbranches were outside our current geographic range of operations.  Upon consummation of the transactions, wesold approximately $7.7 million in deposits and approximately $2.4 million inloans and premises and equipment associated with the Beloit branch andapproximately $4.7 million in deposits and approximately $846,000 in loans andpremises and equipment related to the Phillipsburg branch.  The net proceeds received from the buyers ofthese branches were recorded as a reduction of goodwill and the core depositintangible.

**CRITICALACCOUNTING POLICIES**

Critical accountingpolicies are those which are both most important to the portrayal of ourfinancial condition and results of operations, and require our management’smost difficult, subjective or complex judgments, often as a result of the needto make estimates about the effect of matters that are inherentlyuncertain.  Our critical accountingpolicies relate to the allowance for loan losses, the valuation of investmentsecurities, accounting for income taxes and the accounting related to businessacquisitions, all of which involve significant judgment by our management.

We perform periodic andsystematic detailed reviews of our lending portfolio to assess overallcollectability.  The level of theallowance for loan losses reflects our estimate of the collectability of theloan portfolio.  While these estimatesare based on substantive methods for determining allowance requirements,nevertheless, actual outcomes may differ significantly from estimated results.  Additional explanation of the methodologiesused in establishing this reserve is provided in the “Asset Quality andDistribution” section.

We report our availablefor sale investment securities at estimated fair values based on readilyascertainable values which are obtained from independent sources.  Our management performs periodic reviews ofthe investment securities to determine if any investment securities havedeclined in value which might be considered other than temporary.  Our most recent review showed that thedecrease in fair value of the securities, resulting in an unrealized lossposition, was related to changes in interest rates.  None of the

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unrealized losses arerelated to credit deterioration.  We havethe ability and intent to hold these securities until market values recover,including up to the maturity date. Although we believe that our estimates of the fair values of investmentsecurities to be reasonable, economic and market factors may affect the amountsthat will ultimately be realized from these investments.

The objectives of accountingfor income taxes are to recognize the amount of taxes payable or refundable forthe current year and deferred tax liabilities and assets for the future taxconsequences of events that have been recognized in an entity’s financialstatements or tax returns.  Judgment isrequired in assessing the future tax consequences of events that have beenrecognized in our financial statements or tax returns.  Fluctuations in the actual outcome of thesefuture tax consequences, including the effects of IRS examinations andexaminations by other state agencies, could materially impact our financialposition and results of operations.

We have completed severalbusiness and asset acquisitions which have generated significant amounts ofgoodwill and intangible assets and related amortization.  The values assigned to goodwill andintangibles, as well as their related useful lives, are subject to judgment andestimation by our management.  Goodwilland intangibles related to acquisitions are determined and based on purchaseprice allocations.  Valuation ofintangible assets is generally based on the estimated cash flows related tothose assets, while the initial value assigned to goodwill is the residual ofthe purchase price over the fair value of all identifiable assets acquired andliabilities assumed.  If the carryingvalue of the goodwill exceeded the implied fair value of the goodwill, animpairment loss would be recorded in an amount equal to that excess.  Performing such a discounted cash flowanalysis involves the use of estimates and assumptions.  Useful lives are determined based on theexpected future period of the benefit of the asset, the assessment of whichconsiders various characteristics of the asset, including the historical cashflows.  Due to the number of estimatesinvolved related to the allocation of purchase price and determining theappropriate useful lives of intangible assets, we have identified purchaseaccounting as a critical accounting policy.

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**COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDEDDECEMBER 31, 2006 AND DECEMBER 31, 2005**

**SUMMARYOF PERFORMANCE. **Net earnings for 2006 increased $2.1 million,or 54.2%, to $6.0 million as compared to 2005. Our improved earnings were attributed primarily to our acquisition ofFMB along with continued improvement in our net interest margin.  The acquisition allowed for continued growthin non-interest income items such as fees and service charges and gains on saleof loans.  At the same time, we were ableto realize cost savings associated with the assimilation of the FMB franchiseduring 2006.

The year ended December 31, 2006 resulted in diluted earnings per shareof $2.55 compared to $1.66 for 2005. Return on average assets was 1.01% for 2006, compared to 0.87% for2005.  Return on average stockholders’equity was 13.01% for 2006, compared to 9.04% for 2005.

We distributed a 5% stock dividend for the sixth consecutive year inDecember 2006.  All per share and averageshare data in this section reflects the 2006 and 2005 stock dividends.

**INTEREST INCOME. **Interest income for 2006 increased $12.3 million, or 55.5%, to $34.4million from $22.1 million for 2005. This increase was primarily the result of the increase in interestearning assets as a result of the acquisition of FMB at the beginning of 2006.  Average loans for 2006 increased to $393.7million from $275.2 million in 2005. Interest income on loans increased $11.0 million, or 63.6%, to $28.3million for 2006.  Also contributing tothe higher interest income was an increase in the average yield on loans from6.28% during 2005 to 7.19% during 2006. Average investment securities increased from $141.8 million for 2005, to$144.1 million for 2006.  Interest incomeon investment securities increased $1.3 million, or 26.3%, to $6.1 million for 2006,due to the increase in interest rates which allowed the yields on ourinvestments purchased in 2006 to exceed the yields on the investments whicheither matured or were sold during the past year.  The average yield on our investmentsecurities increased to 4.23% during 2006 from 3.41% during 2005.

**INTEREST EXPENSE. **Interest expense for 2006 increased 74.6%, or $6.7 million, to $15.6million from $9.0 million for 2005. Interest expense on deposits increased to $10.9 million, or 96.5%, from$5.6 million in 2005 as average deposits increased from $313.4 million for2005, to $439.7 million during 2006.  Theincrease in interest expense on deposits resulted from the addition ofapproximately $106.8 million in deposits that we acquired through the FMB acquisition,as well as from the repricing of deposits due to the rise in interestrates.  The average rate on ourcertificates of deposit increased from 2.69% in 2005 to 3.78% in 2006.  Average borrowings for 2006 increased to$103.8 million from $88.6 million for 2005. The increase in average borrowings related primarily to debt acquired inthe FMB acquisition.  Corresponding withthe increase in average borrowings for the comparable periods, interest expenseon borrowings increased $1.3 million, or 38.6%. Additionally, contributing to the increase in interest expenses onborrowings were increased interest rates, as the average rate on our borrowingsincreased from 3.82% in 2005 to 4.52% in 2006.

**NET INTEREST INCOME. **Net interest incomerepresents the difference between income derived from interest-earning assetsand the expense incurred on interest-bearing liabilities.  Net interest income is affected by both thedifference between the rates of interest earned on interest-earnings assets andthe rates paid on interest-bearing liabilities (“interest rate spread”) as wellas the relative amounts of interest-earning assets and interest-bearingliabilities.

Netinterest income for the year ended December 31, 2006 increased $5.6 million to$18.8 million compared to the year ended December 31, 2005, an increase of42.4%.  This increase was due primarilyto the higher level of interest earning assets obtained in the acquisition ofFMB and an improvement in the net interest margin to

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3.49%for 2006 from 3.16% for 2005.  Theimprovement in our net interest margin was impacted by our balance sheetpositioning over the past couple of years, when interest rates were athistorical lows, to maintain a short term repricing strategy for our interestearning assets.  This approach allowedour assets to reprice to higher rates at a faster pace than our liabilitiesrepriced during 2006, as short and intermediate rates increased.  Also contributing to the increase was ourability to continue to diversify our loan portfolio through the growth incommercial loans during 2006.  Althoughthe FMB acquisition increased our one-to-four family residential loan totals,our percentage of one-to-four family residential loans declined from 41.4% atDecember 31, 2005 to 39.5% at December 31, 2006.  This reduction in one-to-four familyresidential loans was due to normal refinancings and amortization.  Another factor was the restructuring of apart of our investment portfolio whereby we sold some of our lower yielding,short term investments at a loss and purchased longer term investments withhigher yields during the middle of 2006.

**PROVISIONFOR LOAN LOSSES.** We maintain, and our Board of Directors monitors, an allowancefor losses on loans.  The allowance isestablished based upon management’s periodic evaluation of known and inherentrisks in the loan portfolio, review of significant individual loans andcollateral, review of delinquent loans, past loss experience, adversesituations that may affect the borrowers’ ability to repay, current andexpected market conditions, and other factors management deems important.  Determining the appropriate level of reservesinvolves a high degree of management judgment and is based upon historical andprojected losses in the loan portfolio and the collateral value of specificallyidentified problem loans.  Additionally,allowance strategies and policies are subject to periodic review and revisionin response to a number of factors, including current market conditions, actualloss experience and management’s expectations.

The provision forloan losses decreased to $235,000 for 2006, compared to $385,000 for 2005.  Our regular review of the loan portfolioprompted a decrease in our provision, primarily as a result ofimprovement in the asset quality of the commercial loan portfolio.  At December 31, 2006, the allowance for loan losseswas $4.0 million, or 1.1% of gross loans outstanding, compared to $3.2 million,or 1.1% of gross loans outstanding, at December 31, 2005.  For further discussion of the provision forloan losses, refer to the “Asset Quality and Distribution” section.

**NON-INTEREST INCOME. **Non-interest income increased $1.9 million or 36.7%, during 2006, to$6.9 million compared to 2005.  Thisimprovement was primarily the result of a $502,000, or 78.6%, increase of gainson sale of loans, and an increase in fees and service charges of $913,000, or26.9%, both of which are primarily attributable to volume increases associatedwith the FMB acquisition.  Additionally,total non-interest income included $717,000 in gains recognized from the saleof other assets, primarily from the sale of our previous headquarters locatedat 800 Poyntz, Manhattan, Kansas.  Alsocontributing to the increased non-interest income during 2006 was a $308,000increase in bank owned life insurance income, which resulted from the purchaseof additional policies totaling $7.5 million in March 2006.  Partially offsetting these increases werelosses of $300,000 on the sale of investment securities during 2006 compared toa gain of $47,000 for 2005.  The lossesincurred during 2006 were the result of repositioning our investment portfolioby selling some relatively short term, lower yielding investment securities andpurchasing longer term, higher yielding investment securities.  These increases more than offset the $407,000gain on prepayment of Federal Home Loan Bank borrowings recognized in the thirdquarter of 2005.

**NON-INTEREST EXPENSE. **Non-interest expense increased $5.1 million, or 41.2%, to $17.3 millionfor 2006, as compared to 2005.  Theincrease in non-interest expense for 2006 as compared to 2005 resultedprimarily from a $2.6 million increase in compensation and benefits, an$812,000 increase in occupancy and equipment, a $580,000 increase inamortization, a $175,000 increase in professional fees and a $182,000 increasein data processing expenses.  Theseincreases were primarily fromthe impact of the FMB acquisition and the late 2005 acquisition of two branchesin Great Bend, Kansas.  While we havemade significant progress

8

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achievingcost savings by consolidating our personnel, operations and facilities, theimpact of the acquisitions included a net increase in personnel, equipment andfacilities and the number of accounts being processed.  Also contributing to the increase innon-interest expense was the opening of a new branch location in Topeka, Kansasduring August 2006.

**INCOME TAXES. **Income tax expenseincreased $421,000, or 25.4%, to $2.1 million for 2006, from $1.7 million for2005.  The increase in income tax expensefor 2006 resulted from the increase in taxable income during 2006 as comparedto 2005.  Offsetting the increase intaxable income was a decline in the effective tax rate for 2006, whichdecreased to 25.7% from 29.9% for 2005. The effective tax rate for 2006 was lower than 2005 primarily because werecognized certain previously unrecorded tax benefits due to the resolution oftax uncertainties, along with an increase in non-taxable income related to bankowned life insurance and municipal investments.

**COMPARISON OF OPERATING RESULTS FOR THE YEARSENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004**

**SUMMARYOF PERFORMANCE. **Net earnings for 2005 decreased $354,000, or8.3%, to $3.9 million as compared to 2004. This decline in net earnings was generally attributable to reduced gainson sales of loans and investments and an increased non-interest expense whichwas partially offset by gains on repayment of FHLB borrowings and animprovement in net interest income.  Thegains on sales of loans decreased as residential mortgage refinancing activitycontinued to slow as interest rates increased from the beginning of 2004.  The increases in non-interest expense and theimprovement of net interest income primarily resulted from our acquisition ofFirst Kansas on April 1, 2004, as we incurred additional expenses associatedwith operating these new branches and as our average earning assets increased.

The year ended December 31, 2005 resulted in diluted earnings per shareof $1.66 compared to $1.77 for 2004. Return on average assets was 0.87% for 2005, compared to 0.98% for2004.  Return on average stockholders’equity was 9.04% for 2005, compared to 9.98% for 2004.

We distributed a 5% stock dividend for the fifth consecutive year inDecember 2005.  All per share and averageshare data in this section reflects the 2006 and 2005 stock dividends.

**INTEREST INCOME. **Interest income for 2005 increased $2.2 million, or 10.9%, to $22.1million from $19.9 million for 2004. This increase was partially the result of the increase in interestearning assets as 2005 was the first full year for the First Kansas acquisitionin addition to the rise in interest rates experienced during 2005.  Average loans for 2005 increased to $275.2million from $267.0 million for the same period in 2004.  Interest income on loans increased $1.6million, or 10.3%, to $17.3 million for 2005. Average investment securities increased from $139.0 million for 2004, to$141.8 million for 2005.  Interest incomeon investment securities increased $554,000, or 13.0%, to $4.8 million for2005, due to the increase in interest rates which allowed the yields on ourinvestments purchased in 2005 to exceed the yields on our maturing investments.

**INTEREST EXPENSE. **Interest expense for 2005 increased to $9.0 million from $7.0 millionfor 2004, or 28.0%.  Interest expense ondeposits increased to $5.6 million, or 41.2%, from $3.9 million in 2005 asaverage deposits increased from $306.1 million at December 31, 2004, to $313.4million at December 31, 2005.  Theincrease in interest expense on deposits resulted primarily from the increasein interest rates and the repricing of maturing deposits at these higherrates.  Interest expense on borrowingsincreased $331,000, or 10.8%.  Theincrease in interest expense on borrowings resulted primarily from additionaladvances from the FHLB of approximately $56.4 million which we assumed throughthe acquisition of First Kansas, and the $7.0 million

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thatwe borrowed in April 2004 to consummate the acquisition of First Kansas.  These increases were partially offset by therepayment of $10.0 million of FHLB advances prior to their scheduled maturitiesin August 2005.

**NET INTEREST INCOME. **Net interest income for 2005 totaled $13.2 million, a 1.7% increase, ascompared to $12.9 million for 2004, due primarily to a higher level of netinterest earning assets obtained through the First Kansas acquisition in April2004.  Average earning assets increasedduring 2005 to $417.0 million from $405.9 million for 2004.  The net interest margin on earning assets was3.16% for 2005, down from 3.19% for the same period of 2004.  The decline in our net interest margin wasprimarily the result of the increased FHLB advances acquired with the First Kansasacquisition which are priced relatively higher than deposit rates.  Additionally, the residential mortgage loansacquired with the First Kansas acquisition were also at rates that wererelatively lower than the average of our loan portfolio prior to theacquisition.  Also contributing to thedecline in the net interest margin was a continued reduction in loans arisingfrom payoffs and refinancing in the one-to-four family residential loanportfolio exceeding our ability to generate new commercial and consumer loans.

**PROVISIONFOR LOAN LOSSES.** The provision for loan losses decreased to$385,000 for 2005, compared to $460,000 for 2004.  Our continuous review of the loan portfolioprompted a decrease in our provision, primarily as a result ofimprovement in the asset quality of the commercial loan portfolio.  At December 31, 2005, the allowance for loan losseswas $3.2 million, or 1.1% of gross loans outstanding, compared to $2.9 million,or 1.0% of gross loans outstanding, at December 31, 2004.  For further discussion of the provision forloan losses, refer to the “Asset Quality and Distribution” section.

**NON-INTEREST INCOME. **Non-interest income remained relatively flat, decreasing $69,000, or1.4%, for 2005 to $5.1 million.  Thedecrease in non-interest income reflected a 35.3% decline in the gains on saleof loans from $987,000 for 2004, to $639,000 for 2005 as our residentialmortgage financing activities slowed to more normal levels.  Also contributing to this decrease wasdecreased gains on sale of investments of $312,000 for 2005 as compared to2004, resulting from fewer equity security sales from our holding company’sinvestment portfolio.  Offsetting thesedecreases in non-interest income was a $407,000 gain on the repayment of $10.0million of FHLB advances.  Alsooffsetting this decrease was increased fees and service charges of $238,000 for2005, as compared to 2004, relating primarily to increased deposit servicecharges associated with increased retail checking accounts.

**NON-INTEREST EXPENSE. **Non-interest expense increased $929,000, or 8.2%, to $12.3 million for2005, as compared to 2004.  The increasein non-interest expense for 2005 as compared to 2004 resulted primarily from a$276,000 increase in compensation and benefits, a $155,000 increase inoccupancy and equipment, a $128,000 increase in data processing expenses, and a$75,000 increase in amortization expense. These increases were primarily associated with the operations of thebranches acquired from First Kansas and the two branches in Great Bend.  Also contributing to the increase innon-interest expense for 2005, was an increase of $102,000 in advertisingexpenses related to a marketing initiative that was introduced during 2004.

**INCOME TAXES. **Income tax expensedecreased $351,000, or 17.5%, to $1.7 million for 2005, from $2.0 million for2004.  The decrease in income tax expensefor 2005, resulted primarily from a decrease in taxable income along with anincrease in the utilization of tax exempt investments.  The effective tax rate for 2005, was 29.9% ascompared to 32.1% for 2004.

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**AVERAGE ASSETS/LIABILITIES. **The following table setsforth information relating to average balances of interest-earning assets andinterest-bearing liabilities for the years ended December 31, 2006, 2005 and2004.  This table reflects the averageyields on assets and average costs of liabilities for the periods indicated(derived by dividing income or expense by the monthly average balance of assetsor liabilities, respectively) as well as the “net interest margin” (whichreflects the effect of the net earnings balance) for the periods shown.

**AVERAGEBALANCE SHEETS – AVERAGE YIELD AND RATES**
| ** **                                                                               | ** ** | **Year ended December 31, 2006** | ** ** | **Year ended December 31, 2005** | ** ** | **Year ended December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **Average  Balance**                                 | ** ** | **Interest**                                         | ** ** | **Average  Yield/Rate**                              | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Rate** | ** ** |
| **Assets**                                                                               |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                                 |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities (1)                                                                |       | $                                                    | 144,110    |                                                 | $          | 6,101                                                |       | 4.23 | % | $ | 141,790 |   | $ | 4,830 |   | 3.41 | % | $ | 139,008 |   | $ | 4,276 |   | 3.08 | % |
| Loans receivable, net (2)                                                                |       | 393,709                                              |       | 28,294                                               |       | 7.19                                                 | %          | 275,183 |   | 17,294 |   | 6.28 | % | 266,938 |   | 15,673 |   | 5.87 | % |
|                                                                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                            |       | 537,819                                              |       | 34,395                                               |       | 6.40                                                 | %          | 416,973 |   | 22,124 |   | 5.31 | % | 405,946 |   | 19,949 |   | 4.91 | % |
| Non-interest-earning assets                                                              |       | 59,573                                               |       |                                                 |       |                                                 |       | 32,347 |   |   |   |   |   | 27,766 |   |   |   |   |   |
|                                                                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                    |       | $                                                    | 597,392    |                                                 |       |                                                 |       |   | $ | 449,320 |   |   |   |   |   | $ | 433,712 |   |   |   |   |   |
|                                                                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                           |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                            |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                                  |       | $                                                    | 226,963    |                                                 | $          | 8,570                                                |       | 3.78 | % | $ | 162,442 |   | $ | 4,369 |   | 2.69 | % | $ | 160,251 |   | $ | 2,849 |   | 1.78 | % |
| Money market and NOW accounts                                                            |       | 131,470                                              |       | 2,287                                                |       | 1.74                                                 | %          | 95,010 |   | 1,129 |   | 1.19 | % | 93,640 |   | 811 |   | 0.87 | % |
| Savings accounts                                                                         |       | 29,914                                               |       | 90                                                   |       | 0.30                                                 | %          | 24,520 |   | 73 |   | 0.30 | % | 20,304 |   | 285 |   | 1.40 | % |
| FHLB advances and other borrowings                                                       |       | 103,805                                              |       | 4,692                                                |       | 4.52                                                 | %          | 88,599 |   | 3,386 |   | 3.82 | % | 80,109 |   | 3,055 |   | 3.81 | % |
|                                                                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                                       |       | 492,152                                              |       | 15,639                                               |       | 3.18                                                 | %          | 370,571 |   | 8,957 |   | 2.42 | % | 354,304 |   | 7,000 |   | 1.98 | % |
| Non-interest-bearing liabilities                                                         |       | 59,031                                               |       |                                                 |       |                                                 |       | 35,644 |   |   |   |   |   | 36,796 |   |   |   |   |   |
| Stockholders’ equity                                                                |       | 46,209                                               |       |                                                 |       |                                                 |       | 43,105 |   |   |   |   |   | 42,612 |   |   |   |   |   |
| Total                                                                                    |       | $                                                    | 597,392    |                                                 |       |                                                 |       |   | $ | 449,320 |   |   |   |   |   | $ | 433,712 |   |   |   |   |   |
|                                                                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                                     |       |                                                 |       | $                                                    | 18,756     |                                                 |       |   |   |   | $ | 13,167 |   |   |   |   |   | $ | 12,949 |   |   |   |
| Interest rate  spread (3)                                                                |       |                                                 |       |                                                 |       | 3.22                                                 | %          |   |   |   |   | 2.89 | % |   |   |   |   | 2.93 | % |
| Net interest  margin (4)                                                                 |       |                                                 |       |                                                 |       | 3.49                                                 | %          |   |   |   |   | 3.16 | % |   |   |   |   | 3.19 | % |
| Ratio of average  interest-earning assets  to average  interest-bearing liabilities |       |                                                 |       | 109.28                                               | %          |                                                 |       |   |   | 112.52 | % |   |   |   |   | 114.58 | % |   |   |

 

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|        | (1) | Income on investment securities includes all  securities and interest bearing deposits in other financial institutions.  Interest on tax exempt investment securities is not presented on a tax  equivalent basis. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Includes loans classified as non-accrual.                                                                                                                                                                          |
|   | (3) | Interest rate spread represents the difference  between the average yield on interest-earning assets and the average cost of  interest-bearing liabilities.                                                        |
|   | (4) | Net interest margin represents net interest income  divided by average interest-earning assets.                                                                                                                    |

 

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**QUARTERLYRESULTS OF OPERATIONS**
| ** **                                           | ** ** | **Fiscal 2006 Quarters Ended** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **March 31**                             | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                                             | 8,137,331  |   | $ | 8,346,242 |   | $ | 8,837,471 |   | $ | 9,073,397 |   |
| Interest expense                                     |       | 3,491,944                                     |       | 3,799,355 |   | 4,115,091 |   | 4,232,494 |   |
| Net interest  income                                 |       | 4,645,387                                     |       | 4,546,887 |   | 4,722,380 |   | 4,840,903 |   |
| Provision for  loan losses                           |       | 60,000                                        |       | 15,000 |   | 80,000 |   | 80,000 |   |
| Net interest  income after provision for loan losses |       | 4,585,387                                     |       | 4,531,887 |   | 4,642,380 |   | 4,760,903 |   |
| Non-interest  income                                 |       | 1,691,541                                     |       | 1,941,325 |   | 1,683,077 |   | 1,597,204 |   |
| Non-interest  expense                                |       | 4,236,854                                     |       | 4,217,154 |   | 4,313,570 |   | 4,577,030 |   |
| Earnings before  income taxes                        |       | 2,040,074                                     |       | 2,256,058 |   | 2,011,887 |   | 1,781,077 |   |
| Income tax expense                                   |       | 619,160                                       |       | 659,968 |   | 548,240 |   | 252,087 |   |
| Net earnings                                         |       | $                                             | 1,420,914  |   | $ | 1,569,090 |   | $ | 1,463,647 |   | $ | 1,528,990 |   |
| Earnings per  share(1):                              |       |                                          |       |   |   |   |   |   |   |
| Basic                                                |       | $                                             | 0.61       |   | $ | 0.68 |   | $ | 0.63 |   | $ | 0.65 |   |
| Diluted                                              |       | 0.60                                          |       | 0.68 |   | 0.62 |   | 0.65 |   |

 
| ** **                                           | ** ** | **Fiscal 2005 Quarters Ended** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **March 31**                             | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                                             | 5,151,585  |   | $ | 5,450,664 |   | $ | 5,717,033 |   | $ | 5,805,333 |   |
| Interest expense                                     |       | 2,040,791                                     |       | 2,230,316 |   | 2,348,756 |   | 2,337,411 |   |
| Net interest  income                                 |       | 3,110,794                                     |       | 3,220,348 |   | 3,368,277 |   | 3,467,922 |   |
| Provision for  loan losses                           |       | 120,000                                       |       | 105,000 |   | 100,000 |   | 60,000 |   |
| Net interest  income after provision for loan losses |       | 2,990,794                                     |       | 3,115,348 |   | 3,268,277 |   | 3,407,922 |   |
| Non-interest  income                                 |       | 1,060,415                                     |       | 1,277,020 |   | 1,584,377 |   | 1,134,249 |   |
| Non-interest  expense                                |       | 2,898,242                                     |       | 3,010,929 |   | 3,075,021 |   | 3,298,129 |   |
| Earnings before  income taxes                        |       | 1,152,967                                     |       | 1,381,439 |   | 1,777,633 |   | 1,244,042 |   |
| Income tax  expense                                  |       | 349,591                                       |       | 431,775 |   | 544,377 |   | 333,174 |   |
| Net earnings                                         |       | $                                             | 803,376    |   | $ | 949,664 |   | $ | 1,233,256 |   | $ | 910,868 |   |
| Earnings per  share(1):                              |       |                                          |       |   |   |   |   |   |   |
| Basic                                                |       | $                                             | 0.34       |   | $ | 0.41 |   | $ | 0.53 |   | $ | 0.39 |   |
| Diluted                                              |       | 0.34                                          |       | 0.41 |   | 0.52 |   | 0.39 |   |

 

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(1) All per shareamounts have been adjusted to give effect to the 5% stock dividend paid duringDecember 2006 and 2005.

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**FINANCIAL CONDITION**

**ASSET QUALITY AND DISTRIBUTION.**  Total assets increased to $590.6 million atDecember 31, 2006, compared to $465.1 million at December 31, 2005, primarilydue to the FMB acquisition.  Our primary ongoing sources of fundsare deposits, FHLB borrowings, proceeds from principal and interest payments onloans and investment securities and proceeds from the sale of mortgage loansand investment securities.  Whilematurities and scheduled amortization of loans are a predictable source offunds, deposit flows and mortgage prepayments are greatly influenced by generalinterest rates and economic conditions.

Net loans, excludingloans held for sale, increased $104.8 million to $379.3 million as of December31, 2006 from $274.5 million as of December 31, 2005.  This increase was primarily the result of theaddition of $109.4 million in loans in the FMB acquisition.  Excluding the acquisition of FMB, our loansdeclined $3.3 million as a result of refinancings and paydowns in ourresidential portfolio, which slightly exceeded our commercial loanoriginations.  We have concentrated ongenerating commercial loans over the past few years and are pleased that thissegment of our loan portfolio has grown. While the FMB acquisition increased our one-to-four family residentialloan totals, as the majority of the acquired loans were residential, we plan tocontinue our efforts to grow our commercial lending activities.  As of December 31, 2006, our one-to-four family residential loanscomprised 39.5% of total loans, down from 41.4% at December 31, 2005.  We anticipate continuing to diversify ourloan portfolio composition through our continued planned expansion ofcommercial lending activities.

Our primary investingactivities are the origination of commercial, mortgage and consumer loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  We do notoriginate and warehouse these fixed-rate residential loans for resale in orderto speculate on interest rates.  As ofDecember 31, 2006, our residential mortgage loan portfolio consisted of $44.6million with fixed rates and $106.7 million with variable rates.

The allowance for losseson loans is established through a provision for losses on loans based on ourevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of its loan activity.  Such evaluation,which includes a review of all loans with respect to which full collectibilitymay not be reasonably assured, considers the fair value of the underlyingcollateral, economic conditions, historical loan loss experience, level ofclassified loans and other factors that warrant recognition in providing for anadequate allowance for losses on loans.

We believe that thequality of the loan portfolio continues to be strong as evidenced by our lowlevels of past due and non-accrual loans. Loans past due more than one month and less than 90 days totaled $4.5million as of December 31, 2006 compared to $1.5 million as of December 31,2005.  While our delinquent loan totalshave increased from the prior year, the increase is partially attributable tothe general increase in our one-to-four family residential loans as a result ofthe FMB acquisition.  We have alsoexperienced a delinquency increase in other loan categories, however given ourassessment of the collateral values associated with these loans, we do notanticipate any significant loss exposure. Despite this increase in delinquent loans, our December 31, 2006 ratioof delinquent loans to total loans remained relatively low at 1.2%.  As of December 31, 2006, loans with a balanceof $3.6 million were on non-accrual status, or 0.94% of total loans, comparedto a balance of $3.3 million loans on non-accrual status, or 1.21% of totalloans, as of December 31, 2005.  Theratio of non-performing assets as a percentage of total assets remained low at0.68% at December 31, 2006 and 0.88% at December 31, 2005.  Net charge offs were $247,000 for 2006,compared to net charge offs of $128,000 for 2005.

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Residential home loanscomprised 50.5% of the $3.6 million non-accrual balance at December 31,2006.  These loans have been underwrittenaccording to our residential lending policies and are well secured by realestate collateral, and in many instances, private mortgage insurance orgovernment guarantees.  We havehistorically incurred minimal losses on mortgage loans based on collateralvalues and underlying insurance or guarantees.

Weare pleased that there appear to be indications of continuing strength in theeconomy.  The outlook of the economy for2007, however, depends on whether the strengthening will be sustainable and howquickly consumer confidence responds to the positive effects, if any, on theeconomy.  Based on the outcomes, theseevents could adversely affect cash flows for both commercial and individualborrowers, as a result of which, we could experience increases in problemassets, delinquencies and losses on loans. Many financial institutions have experienced an increase innon-performing assets during the recent economic period, as evenwell-established business borrowers developed cash flow, profitability andother business-related problems.  Webelieve that the allowance for losses on loans at December 31, 2006, wasadequate, however, there can be no assurances that losses will not exceed theestimated amounts.  While we believe thatwe use the best information available to determine the allowance for losses onloans, unforeseen market conditions could result in adjustment to the allowancefor losses on loans.  In addition, netearnings could be significantly affected if circumstances differ substantiallyfrom the assumptions used in establishing the allowance for losses on loans.

**LIABILITY DISTRIBUTION. **Total deposits increased$113.2 million to $444.5 million at December 31, 2006 from $331.3 million atDecember 31, 2005, resulting primarily from the acquisition of FMB.  Borrowings increased $5.1 million to $90.4million at December 31, 2006 from $85.3 million at December 31, 2005, resultingprimarily from the borrowings used to fund the FMB acquisition.

Non-interest bearingdeposits at December 31, 2006 were $48.4 million, or 10.9% of deposits,compared to $38.4 million, or 11.6% of deposits, at December 31, 2005.  Money market and NOW deposit accounts were30.9% of the portfolio and totaled $137.3 million at December 31, 2006,compared to $103.7 million, or 31.3% of deposits, at December 31, 2005.  Savings accounts increased to $27.7 million,or 6.2% of deposits, at December 31, 2006, from $26.1 million, or 7.9% ofdeposits, at December 31, 2005.  Certificatesof deposit increased to $231.1 million, or 52.0% of deposits, at December 31,2006, from $163.1 million, or 49.2% of deposits, at December 31, 2005.

Certificates of depositat December 31, 2006 which were scheduled to mature in one year or less totaled$183.4 million.  Historically, maturingdeposits have generally remained with Landmark National Bank and we believethat a significant portion of the deposits maturing in one year or less willremain with us upon maturity.

**CASHFLOWS. **During the yearended December 31, 2006, our cash and cash equivalents decreased by $6.7 million.  Our operating activities during 2006 used netcash of $1.6 million.  We used $747,000in investing activities in 2006, primarily from the $9.1 million net cash paidin the FMB acquisition and $3.2 million spent on purchases of premises andequipment.  Offsetting this was $6.0million of cash relating to a net decrease in investment securities and $3.3million net decrease in loans.  We usednet cash of $4.4 million in financing activities during 2006, primarily due toan $8.9 million decrease in our FHLB borrowings, the payment of $1.6 million individends and $139,000 for the purchase of treasury stock.  These outflows of cash for financingactivities were offset by a $6.5 million increase in our deposits portfolio and$34,000 of proceeds from the issuance of common stock associated with theexercise of stock options.

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**CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS.**  The following table presents contractualobligations, defined as operating lease obligations and principal payments dueon non-deposit obligations with maturities in excess of one year as of December31, 2006, for the periods indicated.
| Contractual cash obligations | ** ** | **Total**  | ** ** | **One year or  less** | ** ** | **One to three  years** | ** ** | **Four to five  years** | ** ** | **More than five  years** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------|------------|-----------------------------------|------------|------------------------------|------------|-------------------------------------|------------|
|                                   |       |       |       |                            |       |                              |       |                         |       |                                |       |
| Operating leases                       |       | $          | 311,206    |                            | $          | 102,132                           |       | $                            | 193,602    |                                | $          | 15,472 |   | $ | — |   |
| Service  contracts                     |       | 5,250,000  |       | 1,260,000                       |       | 2,520,000                         |       | 1,470,000                    |       | —                              |       |
| FHLB advances                          |       | 61,920,421 |       | —                          |       | 41,306,250                        |       | 16,167,371                   |       | 4,446,800                           |       |
| Other borrowings                       |       | 28,495,643 |       | 7,269,643                       |       | 4,730,000                         |       | —                       |       | 16,496,000                          |       |
| Total  contractual obligations         |       | $          | 95,977,270 |                            | $          | 8,631,775                         |       | $                            | 48,749,852 |                                | $          | 17,652,843 |   | $ | 20,942,800 |   |

 

**LIQUIDITY.**  Our most liquid assets are cash and cashequivalents and investment securities available for sale. The level of theseassets is dependent on our operating, financing, lending and investingactivities during any given period.  AtDecember 31, 2006 and 2005, the carrying value of these liquid assets totaled$160.6 million and $161.6 million, respectively.  During periods in which we are not able tooriginate a sufficient amount of loans and/or periods of high principalprepayments, we increase our liquid assets by investing in short-term U.S.Government and agency securities or high-grade municipal securities.

Liquidity management isboth a daily and long-term function of our strategy.  Excess funds are generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare available through the use of FHLB advances, a line of credit with the FHLB,other borrowings or through sales of securities.  At December 31, 2006, we had outstanding FHLBadvances of $61.9 million and had no borrowings on our line of credit with theFHLB.  At December 31, 2006, our totalborrowing capacity with the FHLB, which is based on collateral pledged, was$120.8 million.  We also had otherborrowings of $28.5 million at December 31, 2006, which included $16.5 millionof subordinated debentures, $4.7 million of long-term debt and $7.3 million inrepurchase agreements.

Asa provider of financial services, we routinely issue financial guarantees inthe form of financial and performance standby letters of credit.  Standby letters of credit are contingentcommitments issued by us generally to guarantee the payment or performanceobligation of a customer to a third party. While these standby letters of credit represent a potential outlay byus, a significant amount of the commitments may expire without being drawn upon.  We have recourse against the customer for anyamount the customer is required to pay to a third party under a standby letterof credit.  The letters of credit aresubject to the same credit policies, underwriting standards and approvalprocess as loans made by us.  Most of thestandby letters of credit are secured, and in the event of nonperformance bythe customers, we have the right to the underlying collateral, which couldinclude commercial real estate, physical plant and property, inventory, receivables,cash and marketable securities.  Thecontract amount of these standby letters of credit, which represents themaximum potential future payments guaranteed by us, was $3.0 million atDecember 31, 2006.

At December 31, 2006, wehad outstanding loan commitments, excluding standby letters of credit, of $63.2million. We anticipate that sufficient funds will be available to meet currentloan commitments. These commitments consist of letters of credit, unfundedlines of credit and commitments to finance real estate loans.

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**CAPITAL.**TheFederal Reserve has established capital requirements for bank holding companieswhich generally parallel the capital requirements for national banks under OCCregulations. The regulations provide that such standards will generally beapplied on a consolidated (rather than a bank-only) basis in the case of a bankholding company with more than $500 million in total consolidated assets.

AtDecember 31, 2006, we continued to maintain a sound leverage capital ratio of8% and a total risk based capital ratio of 13%. As shown by the following table, our capital exceeded the minimumcapital requirements at December 31, 2006 (dollars in thousands):
|                           | ** ** | **Actual  Amount ** | ** ** | **Actual  Percent ** | ** ** | **Required  Percent ** | ** ** | **Required  Amount ** | ** ** |
|---------------------------|------------|--------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Leverage                  |       | $                        | 48,899     |                      | 8          | %                           | 4          | %                          | $          | 23,204 |   |
| Tier 1 Capital            |       | $                        | 48,899     |                      | 12         | %                           | 4          | %                          | $          | 15,898 |   |
| Total Risk Based  Capital |       | $                        | 53,008     |                      | 13         | %                           | 8          | %                          | $          | 31,797 |   |

 

At December 31, 2006,Landmark National Bank continued to maintain a sound leverage ratio of 9% and atotal risk based capital ratio of 14%. As shown by the following table, Landmark National Bank’s capitalexceeded the minimum capital requirements at December 31, 2006 (dollars inthousands):
|                           | ** ** | **Actual  Amount** | ** ** | **Actual  Percent** | ** ** | **Required  Percent** | ** ** | **Required  Amount** | ** ** |
|---------------------------|------------|--------------------|------------|---------------------|------------|-----------------------|------------|----------------------|------------|
| Leverage                  |       | $                  | 51,710     |                | 9          | %                     | 4          | %                    | $          | 23,137 |   |
| Tier 1 Capital            |       | $                  | 51,710     |                | 13         | %                     | 4          | %                    | $          | 15,863 |   |
| Total Risk Based  Capital |       | $                  | 55,740     |                | 14         | %                     | 8          | %                    | $          | 31,727 |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements. The above ratios are well in excess of regulatory minimums andshould allow us to operate without capital adequacy concerns. The FederalDeposit Insurance Corporation Improvement Act of 1991 establishes a bank ratingsystem based on the capital levels of banks. As of December 31, 2006 and 2005, we were rated “well capitalized”,which is the highest rating available under this capital-based ratingsystem.  We have $16.5 million in trustpreferred securities and, in accordance with current capital guidelines, thisamount has been included in our Tier 1 capital ratios as of December 31,2006.  Cash distributions on thesecurities are payable quarterly, are deductible for income tax purposes andare included in interest expense in the consolidated financial statements.

OnMarch 1, 2005, the Board of Governors of the Federal Reserve System issueda final rule regarding the continued inclusion of trust preferred securities inthe Tier 1 capital of bank holding companies, subject to stricterstandards.  As a result of the finalrule, the Federal Reserve will limit the aggregate amount of a bank holdingcompany’s cumulative perpetual preferred stock, trust preferred securities andother minority interests to 25% of a company’s core capital elements, net ofgoodwill.  Regulations in place at thetime we placed our currently outstanding trust preferred securities did notrequire the deduction of goodwill.  Therule also provides that amounts of qualifying trust preferred securities andcertain minority interests in excess of the 25% limit may be included inTier 2 capital but will be limited, together with subordinated debt andlimited-life preferred stock, to 50% of Tier 1 capital.  The final rule provides a five-yeartransition period for bank holding companies to meet these quantitativelimitations.  While management does notanticipate that the final rule will have an impact on the Company when thefive-year transition period expires, it is not possible to predict the finalimpact of the rule on us.

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#### **DIVIDENDS**

During the year endedDecember 31, 2006, we paid a quarterly cash dividend of $0.1619 per share toour stockholders for the first, second and third quarters.  The cash dividend was increased to $0.181 pershare in the fourth quarter of 2006, which represented a 12% increase over theamount paid in the previous quarter.  Additionally, we distributed a 5% stock dividend for the sixthconsecutive year in December 2006.  Thecash dividends have been adjusted to give effect to the 5% stock dividend.

The payment ofdividends by any financial institution or its holding company is affected bythe requirement to maintain adequate capital pursuant to applicable capitaladequacy guidelines and regulations.  Asdescribed above, Landmark National Bank exceeded its minimum capitalrequirements under applicable guidelines as of December 31, 2006.  The National Bank Act imposes limitations onthe amount of dividends that a national bank may pay without prior regulatoryapproval. Generally, the amount is limited to the bank’s current year’s netearnings plus the adjusted retained earnings for the two preceding years.  As of December 31, 2006, approximately$122,000 was available to be paid as dividends to Landmark Bancorp by LandmarkNational Bank without prior regulatory approval.

Additionally, ourability to pay dividends is limited by the subordinated debentures that areheld by two business trusts that we control. Interest payments on the debentures must be paid before we pay dividendson our capital stock, including our common stock.  We have the right to defer interest paymentson the debentures for up to 20 consecutive quarters.  However, if we elect to defer interest payments,all deferred interest must be paid before we may pay dividends on our capitalstock.

#### **RECENTACCOUNTING DEVELOPMENTS**

In February 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.155, “*Accounting for Certain Hybrid Financial Instruments- an amendment of FASB Statements No. 133 and 140*”.  The Statement permits fair valueremeasurement for certain hybrid financial instruments containing embeddedderivatives, and clarifies the derivative accounting requirements for interestand principal-only strip securities and interests in securitized financialassets.  It also clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives and eliminates a previous prohibition on qualifying special-purposeentities from holding certain derivative financial instruments.  For calendar year companies, this statementis effective for all financial instruments acquired or issued after January 1,2007.  We do not expect that adoption ofthe Statement will have a material effect on our consolidated financialstatements.

In March 2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial Assets — an amendment of FASBStatement No. 140*”.  TheStatement specifies under what situations servicing assets and servicingliabilities must be recognized.  Itrequires these assets and liabilities to be initially measured at fair valueand specifies acceptable measurement methods subsequent to theirrecognition.  Separate presentation inthe financial statements and additional disclosures are also required.  For calendar year companies, this statementis effective beginning January 1, 2007. We do not expect that adoption of the Statement will have a materialeffect on our consolidated financial statements.

Also in March 2006, the FASB issued Staff Position85-4-1, which provides initial and subsequent measurement guidance andfinancial statement presentation and disclosure guidance for investments bythird-party investors in life settlement contracts.  The investments must be accounted for by either(a) recognizing the initial investment at transaction price plus directexternal costs and capitalizing continuing costs, with no gain recognized inearnings until the insured dies, or (b) recognizing the initial investment attransaction price and

17

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remeasuring the investment at fair value at eachreporting period, with fair value changes recognized in earnings as theyoccur.  For calendar year companies, theguidance in this staff position must be applied beginning January 1, 2007.  We do not expect that adoption of the StaffPosition will have a material effect on our consolidated financial statements.

In June 2006, the FASB issued FinancialInterpretation No. 48, “*Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109*”, whichprescribes the recognition threshold and measurement attribute necessary forrecognition in the financial statements of a tax position taken, or expected tobe taken, in a tax return.  Under FIN 48,an income tax position will be recognized if it is more likely than not that itwill be sustained upon IRS examination, based upon its technical merits.  Once that status is met, the amount recordedwill be the largest amount of benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement. It also provides guidance onderecognition, classification, interest and penalties, interim periodaccounting, disclosure, and transition requirements.  For calendar year companies, this Interpretationis effective January 1, 2007.  The adoptionof FIN 48 did not have a material effect on our financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin (“SAB”) No. 108, *“Considering the Effects of Prior Year Misstatements in Current Year FinancialStatements.”*   SAB No. 108provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment.  Prior yearmisstatements must be considered in quantifying misstatements in current yearfinancial statements and if the effect of those misstatements is material tothe current year, the prior year financial statements must be corrected eventhough such revision previously was and continues to be immaterial to the prioryear financial statements.  Our analysisunder SAB No. 108 of prior year and current year misstatements did not resultin any adjustment to prior year or current year financial statements.

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*”. This Statement defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  It doesnot require any new fair value measurements. For calendar year companies, the Statement is effective beginningJanuary 1, 2008.  We do not expect thatadoption of the Statement will have a material effect on our consolidatedfinancial statements.

In September 2006, the Emerging Issues Task Force (“EITF”)Issue 06-4, “*Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*”, was ratified. This EITF Issue addresses accounting for separate agreements which splitlife insurance policy benefits between an employer and employee.  The Issue requires the employer to recognizea liability for future benefits payable to the employee under theseagreements.  The effects of applying thisIssue must be recognized through either a change in accounting principlethrough an adjustment to equity or through the retrospective application to allprior periods. For calendar year companies, the Issue is effective beginningJanuary 1, 2008.  We do not expect thatadoption of the Issue will have a material effect on our consolidated financialstatements.

In September 2006, the EITF Issue 06-5, “*Accounting for Purchases of Life Insurance – Determining the AmountThat Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4*”,was ratified.  This EITF Issue addressesaccounting for what could be realized as an asset and provides clarificationregarding additional amounts included in the contractual terms of an individualpolicy in determining the amount that could be realized under the insurancecontract.  The effects of applying thisissue must be recognized through an adjustment to equity or through theretrospective application to all prior periods. For calendar year companies, the Issue is effective beginning January 1,2008.  We do not expect that adoption ofthe Issue will have a material effect on our consolidated financial statements.

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In February 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets and Financial Liabilities*.”  SFAS No. 159 allows companies to electfair-value measurement of specified financial instruments and warranty andinsurance contracts when an eligible asset or liability is initially recognizedor when an event, such as a business combination triggers new basis ofaccounting for that asset or liability. The election, called the “fair-value option,” will enable some companiesto reduce the volatility in reported earnings caused by measuring relatedassets and liabilities differently.  Theelection is available for eligible assets or liabilities on acontract-by-contract basis without electing it for identical assets orliabilities under certain restrictions. The effective date of Statement will be reporting periods beginningafter November 15, 2007.  We do notexpect that adoption of the Statement will have a material effect on ourconsolidated financial statements.

**EFFECTS ON INFLATION**

Ourconsolidated financial statements and accompanying footnotes have been preparedin accordance with U.S. generally accepted accounting principles, whichgenerally requires the measurement of financial position and operating resultsin terms of historical dollars without consideration for changes in therelative purchasing power of money over time due to inflation.  The impact of inflation can be found in theincreased cost of our operations because our assets and liabilities areprimarily monetary and interest rates have a greater impact on our performancethan do the effects of inflation.

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

Our assets andliabilities are principally financial in nature and the resulting net interestincome thereon is subject to changes in market interest rates and the mix ofvarious assets and liabilities.  Interestrates in the financial markets affect our decision on pricing our assets andliabilities which impacts our net interest income, a significant cash flowsource for us.  As a result, asubstantial portion of our risk management activities relates to managing interestrate risk.

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

We have been successfulin meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months, includingusing rates at December 31, 2006, and forecasting volumes for the twelve monthprojection.  This position is thensubjected to a shift in interest rates of 100 and 200 basis points rising and100 and 200 basis points falling with an impact to our net interest income on aone year horizon as follows:
| Scenario                 | ** ** | **$ change in net  interest income** | ** ** | **% of net  interest income** | ** ** |
|--------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------|------------|
| 100 basis point  rising  |       | $                                                        | 181,000    |                                         | 1.0        | % |
| 200 basis point  rising  |       | 109,000                                                  |       | 0.6                                          | %          |
| 100 basis point  falling |       | (494,000                                                 | )          | (2.6                                         | )%         |
| 200 basis point falling  |       | (1,096,000                                               | )          | (5.9                                         | )%         |
|                          |            |                                                          |            |                                              |            |  |

 

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#### **ASSET/LIABILITYMANAGEMENT**

We are emphasizing theorigination of adjustable rate mortgages for portfolio retention along withshorter-term consumer and commercial loans to reduce the sensitivity of ourearnings to interest rate fluctuations. Interest rate “gap” analysis is a common, though imperfect, measure ofinterest rate risk which measures the relative dollar amounts ofinterest-earning assets and interest bearing liabilities which reprice within aspecific time period, either through maturity or rate adjustment.  The “gap” is the difference between theamounts of such assets and liabilities that are subject to such repricing.  A “positive” gap for a given period meansthat the amount of interest-earning assets maturing or otherwise repricingwithin that period exceeds the amount of interest-bearing liabilities maturingor otherwise repricing during that same period. In a rising interest rate environment, an institution with a positivegap would generally be expected, absent the effects of other factors, toexperience a greater increase in the yield of its assets relative to the costof its liabilities.  Conversely, the costof funds for an institution with a positive gap would generally be expected todecline less quickly than the yield on its assets in a falling interest rateenvironment.  Changes in interest ratesgenerally have the opposite effect on an institution with a “negative” gap.

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

Certificates of depositreflect contractual maturities only. Money market accounts are rate sensitive and accordingly, a higherpercentage of the accounts have been included as repricing immediately in thefirst period.  Savings and NOW accountsare not as rate sensitive as money market accounts and for that reason asignificant percentage of the accounts are reflected in the more than 1 to 5years category.

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

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**INTEREST-EARNINGASSETS AND INTEREST-BEARING LIABILITIES REPRICING SCHEDULE (“GAP” TABLE)**

Asof December 31, 2006
| ** **                                                                                      | ** ** | **3 months  or less**      | ** ** | **More than  3 to 12 months** | ** ** | **More than  1 to 5 years** | ** ** | **Over 5 years** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                                                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning  assets:                                                                       |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Federal funds  sold                                                                             |       | $                                    | 2,000      |                                              | $          | —                                          |       | $                          | —     |      | $          | — |   | $ | 2,000 |   |
| Investment  securities                                                                          |       | 16,192                               |       | 12,726                                            |       | 60,600                                          |       | 56,366                     |       | 145,884   |       |
| Loans                                                                                           |       | 87,116                               |       | 167,120                                           |       | 121,814                                         |       | 4,638                      |       | 380,688   |       |
| Total  interest-earning assets                                                                  |       | $                                    | 105,308    |                                              | $          | 179,846                                         |       | $                          | 182,414    |      | $          | 61,004 |   | $ | 528,572 |   |
|                                                                                            |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Interest-bearing  liabilities:                                                                  |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Certificates of  deposit                                                                        |       | $                                    | 53,298     |                                              | $          | 130,068                                         |       | $                          | 47,015     |      | $          | 700 |   | $ | 231,081 |   |
| Money market and  NOW accounts                                                                  |       | 7,339                                |       | 22,015                                            |       | 104,450                                         |       | 3,500                      |       | 137,304   |       |
| Savings accounts                                                                                |       | 1,316                                |       | 3,947                                             |       | 22,440                                          |       | —                     |       | 27,703    |       |
| Borrowed money                                                                                  |       | 48,505                               |       | 27                                                |       | 38,682                                          |       | 3,202                      |       | 90,416    |       |
| Total  interest-bearing liabilities                                                             |       | $                                    | 110,458    |                                              | $          | 156,057                                         |       | $                          | 212,587    |      | $          | 7,402 |   | $ | 486,504 |   |
|                                                                                            |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Interest  sensitivity gap per period                                                            |       | $                                    | (5,150     | )                                                 | $          | 23,789                                          |       | $                          | (30,173    | )         | $          | 53,602 |   | $ | 42,068 |   |
| Cumulative  interest sensitivity gap                                                            |       | (5,150                               | )          | 18,639                                            |       | (11,534                                         | )          | 42,068                     |       |      |       |
|                                                                                            |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Cumulative gap  as a percent of total interest-earning assets                                   |       | (0.97                                | )%         | 3.53                                              | %          | (2.18                                           | )%         | 7.96                       | %          |      |       |
|                                                                                            |       |                                 |       |                                              |       |                                            |       |                       |       |      |       |
| Cumulative interest  sensitive assets as a percent of cumulative interest sensitive liabilities |       | 95.34                                | %          | 106.99                                            | %          | 97.59                                           | %          | 108.65                     | %          |      |       |

 

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**SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

**Forward-Looking Statements**

This document (including informationincorporated by reference) contains, and future oral and written statements byus and our management may contain, forward-looking statements, within themeaning of such term in the Private Securities Litigation Reform Act of 1995,with respect to our financial condition, results of operations, plans,objectives, future performance and business. Forward-looking statements, which may be based upon beliefs, expectationsand assumptions of our management and on information currently available tomanagement, are generally identifiable by the use of words such as “believe,” “expect,”“anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should”or other similar expressions. Additionally, all statements in this document, including forward-lookingstatements, speak only as of the date they are made, and we undertake noobligation to update any statement in light of new information or futureevents.

Our ability topredict results or the actual effect of future plans or strategies isinherently uncertain.  Factors whichcould have a material adverse effect on operations and future prospects by usand our subsidiaries include, but are not limited to, the following:

·                                         The strength of the United States economyin general and the strength of the local economies in which we conduct ouroperations which may be less favorable than expected and may result in, amongother things, a deterioration in the credit quality and value of our assets.

·                                         The economic impact of past and anyfuture terrorist attacks, acts of war or threats thereof, and the response ofthe United States to any such threats and attacks.

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

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

·                                         Our ability to compete with otherfinancial institutions as effectively as we currently intend due to increasesin competitive pressures in the financial services sector.

·                                         Our inability to obtain new customers andto retain existing customers.

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

·                                         Technological changes implemented by usand by other parties, including third party vendors, which may be moredifficult or more expensive than anticipated or which may have unforeseenconsequences to us and our customers.

·                                         Our ability to develop and maintainsecure and reliable electronic systems.

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

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·                                         Consumer spending and saving habits whichmay change in a manner that affects our business adversely.

·                                         Business combinations and the integrationof acquired businesses which may be more difficult or expensive than expected.

·                                         The costs, effects and outcomes ofexisting or future litigation.

·                                         Changes in accounting policies andpractices, as may be adopted by state and federal regulatory agencies and theFinancial Accounting Standards Board.

·                                         Our ability to manage the risksassociated with the foregoing as well as anticipated.

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.  Additional information concerning us and ourbusiness, including other factors that could materially affect our financialresults, is included in our filings with the Securities and ExchangeCommission, including the “Risk Factors” section in our Form 10-K.

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**Report of Independent Registered Public AccountingFirm**

The Board of DirectorsLandmark Bancorp, Inc.:

We have audited theaccompanying consolidated balance sheets of Landmark Bancorp, Inc. andsubsidiary (the Company) as of December 31, 2006 and 2005, and therelated consolidated statements of earnings, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2006. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above, present fairly, in allmaterial respects, the financial position of the Company as ofDecember 31, 2006 and 2005, and the results of their operations and theircash flows for each of the years in the three-year period endedDecember 31, 2006, in conformity with U.S. generally accepted accountingprinciples.

/s/ KPMG LLP Kansas City, MissouriMarch 29, 2007

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**LANDMARK BANCORP, INC.**

**AND SUBSIDIARY**

Consolidated Balance Sheets

December 31, 2006 and 2005
| ** **                                                                                           | ** ** | **2006**    | ** **  | **2005**    | ** **  |
|------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|-------------|
| **Assets**                                                                                           | ** ** | ** **  |        | ** **  | ** **  |
| Cash and due from banks                                                                              |       | $           | 12,751,914  |        | 10,590,512  |   |
| Federal funds sold                                                                                   |       | 2,000,000   |        | 10,900,000  |        |
| Total cash and  cash equivalents                                                                     |       | 14,751,914  |        | 21,490,512  |        |
|                                                                                                 |       |        |        |        |        |
| Investment securities  available-for-sale                                                            |       | 145,884,168 |        | 140,130,512 |        |
| Loans, net                                                                                           |       | 379,323,581 |        | 274,565,855 |        |
| Loans held for sale                                                                                  |       | 1,364,474   |        | 1,163,211   |        |
| Premises and equipment,  net                                                                         |       | 13,767,075  |        | 8,412,235   |        |
| Goodwill                                                                                             |       | 13,009,167  |        | 7,535,584   |        |
| Other intangible  assets, net                                                                        |       | 4,030,709   |        | 2,418,213   |        |
| Bank owned life  insurance                                                                           |       | 11,144,796  |        | 2,874,353   |        |
| Accrued interest and  other assets                                                                   |       | 7,292,352   |        | 6,519,486   |        |
| Total assets                                                                                         |       | $           | 590,568,236 |        | 465,109,961 |   |
|                                                                                                 |       |        |        |        |        |
| **Liabilities and Stockholders’  Equity**                                                       |       |        |        |        |        |
| Liabilities:                                                                                         |       |        |        |        |        |
| Deposits:                                                                                            |       |        |        |        |        |
| Non-interest  bearing demand                                                                         |       | $           | 48,397,528  |        | 38,365,040  |   |
| Money market and  NOW                                                                                |       | 137,304,086 |        | 103,728,104 |        |
| Savings                                                                                              |       | 27,702,896  |        | 26,098,127  |        |
| Time, $100,000  and greater                                                                          |       | 57,558,624  |        | 42,540,949  |        |
| Time, other                                                                                          |       | 173,522,236 |        | 120,540,511 |        |
| Total deposits                                                                                       |       | 444,485,370 |        | 331,272,731 |        |
|                                                                                                 |       |        |        |        |        |
| Federal Home  Loan Bank borrowings                                                                   |       | 61,920,421  |        | 63,212,318  |        |
| Other borrowings                                                                                     |       | 28,495,643  |        | 22,046,000  |        |
| Accrued  interest, taxes, and other liabilities                                                      |       | 6,430,787   |        | 4,506,305   |        |
| Total liabilities                                                                                    |       | 541,332,221 |        | 421,037,354 |        |
|                                                                                                 |       |        |        |        |        |
| Commitments and  contingencies                                                                       |       |        |        |        |        |
|                                                                                                 |       |        |        |        |        |
| Stockholders’ equity:                                                                           |       |        |        |        |        |
| Common stock,  $0.01 par. Authorized 5,000,000 shares; issued 2,341,744 and 2,244,327,  respectively |       | 23,417      |        | 22,443      |        |
| Additional  paid-in capital                                                                          |       | 22,607,510  |        | 19,868,567  |        |
| Retained  earnings                                                                                   |       | 26,758,056  |        | 25,322,019  |        |
| Treasury stock,  at cost; 5,000 and 15,736 shares, respectively                                      |       | (138,506    | )           | (414,514    | )           |
| Accumulated  other comprehensive loss                                                                |       | (14,462     | )           | (725,908    | )           |
| Total  stockholders’ equity                                                                     |       | 49,236,015  |        | 44,072,607  |        |
| Total liabilities and  stockholders’ equity                                                     |       | $           | 590,568,236 |        | 465,109,961 |   |

 

See accompanying notes to consolidated financial statements.

25

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**LANDMARK BANCORP, INC.**

**AND SUBSIDIARY**

Consolidated Statements of Earnings

Years ended December 31, 2006, 2005, and 2004

 
| ** **                                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income:                                                   |       |       |       |       |       |       |       |
| Loans                                                              |       | $          | 28,293,941 |       | 17,294,186 |       | 15,672,834 |   |
| Investment securities                                              |       | 5,962,064  |       | 4,720,266  |       | 4,237,362  |       |
| Other                                                              |       | 138,436    |       | 110,163    |       | 39,010     |       |
| Total interest income                                              |       | 34,394,441 |       | 22,124,615 |       | 19,949,206 |       |
| Interest  expense:                                                 |       |       |       |       |       |       |       |
| Deposits                                                           |       | 10,947,064 |       | 5,571,410  |       | 3,945,344  |       |
| Borrowings                                                         |       | 4,691,820  |       | 3,385,864  |       | 3,054,952  |       |
| Total interest expense                                             |       | 15,638,884 |       | 8,957,274  |       | 7,000,296  |       |
| Net interest income                                                |       | 18,755,557 |       | 13,167,341 |       | 12,948,910 |       |
| Provision for loan  losses                                         |       | 235,000    |       | 385,000    |       | 460,000    |       |
| Net interest income after provision for loan losses                |       | 18,520,557 |       | 12,782,341 |       | 12,488,910 |       |
| Non-interest  income:                                              |       |       |       |       |       |       |       |
| Fees and service charges                                           |       | 4,310,495  |       | 3,397,050  |       | 3,159,125  |       |
| Gains on sales of loans                                            |       | 1,140,511  |       | 638,780    |       | 986,864    |       |
| Gains (losses) on sales of investment securities                   |       | (300,256   | )          | 46,865     |       | 358,385    |       |
| Gains on sales of other assets and prepayment of  FHLB borrrowings |       | 716,815    |       | 423,959    |       | 35,771     |       |
| Bank owned life insurance                                          |       | 397,720    |       | 89,873     |       | 111,384    |       |
| Other                                                              |       | 647,862    |       | 459,534    |       | 473,892    |       |
| Total non-interest income                                          |       | 6,913,147  |       | 5,056,061  |       | 5,125,421  |       |
| Non-interest  expense:                                             |       |       |       |       |       |       |       |
| Compensation and benefits                                          |       | 8,725,051  |       | 6,120,365  |       | 5,844,352  |       |
| Occupancy and equipment                                            |       | 2,822,695  |       | 2,010,875  |       | 1,855,542  |       |
| Amortization of intangibles                                        |       | 1,029,424  |       | 449,460    |       | 374,758    |       |
| Data processing                                                    |       | 724,542    |       | 542,780    |       | 415,175    |       |
| Professional fees                                                  |       | 497,972    |       | 322,587    |       | 301,870    |       |
| Advertising                                                        |       | 433,997    |       | 401,701    |       | 300,006    |       |
| Other                                                              |       | 3,110,927  |       | 2,434,553  |       | 2,261,645  |       |
| Total non-interest expense                                         |       | 17,344,608 |       | 12,282,321 |       | 11,353,348 |       |
| Earnings before income taxes                                       |       | 8,089,096  |       | 5,556,081  |       | 6,260,983  |       |
| Income tax  expense                                                |       | 2,079,455  |       | 1,658,917  |       | 2,010,225  |       |
| Net earnings                                                       |       | $          | 6,009,641  |       | 3,897,164  |       | 4,250,758  |   |
| Earnings per  share:                                               |       |       |       |       |       |       |       |
| Basic                                                              |       | $          | 2.57       |       | 1.67       |       | 1.78       |   |
| Diluted                                                            |       | $          | 2.55       |       | 1.66       |       | 1.77       |   |

 

See accompanying notes to consolidated financial statements.

26

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**LANDMARK BANCORP, INC.**

**AND SUBSIDIARY**

Consolidated Statements of Stockholders’ Equity and ComprehensiveIncome

Years ended December 31, 2006, 2005, and 2004
| ** **                                                                                           | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income  (loss)** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Balance at  December 31, 2003                                                                        |       | $                 | 22,078     |                             | 19,332,130 |                   | 25,213,188 |                | (2,792,225 | )                                                     | 796,932    |       | 42,572,103 |   |
| Comprehensive  income:                                                                               |       |              |       |                             |       |                   |       |                |       |                                                  |       |       |       |
| Net income                                                                                           |       | —            |       | —                           |       | 4,250,758              |       | —              |       | —                                                |       | 4,250,758  |       |
| Change in fair value of investment securities  available-for-sale and interest-rate swap, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | (642,831                                              | )          | (642,831   | )          |
| Total comprehensive income                                                                           |       | —            |       | —                           |       | 4,250,758              |       | —              |       | (642,831                                              | )          | 3,607,927  |       |
| Dividends paid  ($0.59 per share)                                                                    |       | —            |       | —                           |       | (1,420,885             | )          | —              |       | —                                                |       | (1,420,885 | )          |
| Stock based  compensation                                                                            |       | —            |       | 107,975                          |       | —                 |       | —              |       | —                                                |       | 107,975    |       |
| Exercise of  stock options, 24,411 shares, including tax benefit of $135,511                         |       | 244               |       | 356,818                          |       | —                 |       | —              |       | —                                                |       | 357,062    |       |
| Purchase of  102,338 treasury shares                                                                 |       | —            |       | —                           |       | —                 |       | (3,055,205          | )          | —                                                |       | (3,055,205 | )          |
| 5% stock  dividend, 100,365 shares                                                                   |       | —            |       | 172,628                          |       | (2,814,235             | )          | 2,641,607           |       | —                                                |       | —     |       |
| Balance at  December 31, 2004                                                                        |       | $                 | 22,322     |                             | 19,969,551 |                   | 25,228,826 |                | (3,205,823 | )                                                     | 154,101    |       | 42,168,977 |   |
| Comprehensive  income:                                                                               |       |              |       |                             |       |                   |       |                |       |                                                  |       |       |       |
| Net income                                                                                           |       | —            |       | —                           |       | 3,897,164              |       | —              |       | —                                                |       | 3,897,164  |       |
| Change in fair value of investment securities  available-for-sale and interest-rate swap, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | (880,009                                              | )          | (880,009   | )          |
| Total comprehensive income                                                                           |       | —            |       | —                           |       | 3,897,164              |       | —              |       | (880,009                                              | )          | 3,017,155  |       |
| Dividends paid  ($0.62 per share)                                                                    |       | —            |       | —                           |       | (1,444,252             | )          | —              |       | —                                                |       | (1,444,252 | )          |
| Stock based  compensation                                                                            |       | —            |       | 97,826                           |       | —                 |       | —              |       | —                                                |       | 97,826     |       |
| Exercise of  stock options, 12,109 shares, including tax benefit of $37,344                          |       | 121               |       | 233,311                          |       | —                 |       | —              |       | —                                                |       | 233,432    |       |
| Purchase of 18  treasury shares                                                                      |       | —            |       | —                           |       | —                 |       | (531                | )          | —                                                |       | (531       | )          |
| 5% stock  dividend, 105,912 shares                                                                   |       | —            |       | (432,121                         | )          | (2,359,719             | )          | 2,791,840           |       | —                                                |       | —     |       |
| Balance at  December 31, 2005                                                                        |       | $                 | 22,443     |                             | 19,868,567 |                   | 25,322,019 |                | (414,514   | )                                                     | (725,908   | )          | 44,072,607 |   |
| Comprehensive  income:                                                                               |       |              |       |                             |       |                   |       |                |       |                                                  |       |       |       |
| Net income                                                                                           |       | —            |       | —                           |       | 6,009,641              |       | —              |       | —                                                |       | 6,009,641  |       |
| Change in fair value of investment securities  available-for-sale and interest-rate swap, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | 711,446                                               |       | 711,446    |       |
| Total comprehensive income                                                                           |       | —            |       | —                           |       | 6,009,641              |       | —              |       | 711,446                                               |       | 6,721,087  |       |
| Dividends paid  ($0.67 per share)                                                                    |       | —            |       | —                           |       | (1,566,656             | )          | —              |       | —                                                |       | (1,566,656 | )          |
| Stock based  compensation                                                                            |       | —            |       | 113,593                          |       | —                 |       | —              |       | —                                                |       | 113,593    |       |
| Exercise of  stock options, 1,867 shares, including tax benefit of $6,999                            |       | 19                |       | 33,871                           |       | —                 |       | —              |       | —                                                |       | 33,890     |       |
| Purchase of  5,000 treasury shares                                                                   |       | —            |       | —                           |       | —                 |       | (138,506            | )          | —                                                |       | (138,506   | )          |
| 5% stock  dividend, 111,286 shares                                                                   |       | 955               |       | 2,591,479                        |       | (3,006,948             | )          | 414,514             |       | —                                                |       | —     |       |
| Balance at December 31,  2006                                                                        |       | $                 | 23,417     |                             | 22,607,510 |                   | 26,758,056 |                | (138,506   | )                                                     | (14,462    | )          | 49,236,015 |   |

 

See accompanying notes to consolidated financial statements.

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**LANDMARK BANCORP, INC.**

**AND SUBSIDIARY**

Consolidated Statements of Cash Flows

Years ended December 31, 2006, 2005, and 2004
| ** **                                                                                               | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Cash flows from  operating activities:                                                                   |       |        |       |        |       |        |       |
| Net earnings                                                                                             |       | $           | 6,009,641  |        | 3,897,164  |        | 4,250,758  |   |
| Adjustments to reconcile net earnings to net cash provided  by (used in) operating activities: |       |        |       |        |       |        |       |
| Provision for loan losses                                                                                |       | 235,000     |       | 385,000     |       | 460,000     |       |
| Amortization of intangibles                                                                              |       | 1,029,424   |       | 449,460     |       | 374,758     |       |
| Depreciation                                                                                             |       | 854,870     |       | 700,789     |       | 650,082     |       |
| Stock-based compensation                                                                                 |       | 113,593     |       | 97,826      |       | 107,975     |       |
| Deferred income taxes                                                                                    |       | 1,612,392   |       | 879,613     |       | 625,904     |       |
| Net gains on sales of investment securities, premises  and equipment, and foreclosed assets              |       | (484,106    | )          | (113,032    | )          | (502,114    | )          |
| Net gain on sales of loans                                                                               |       | (1,140,511  | )          | (638,780    | )          | (986,864    | )          |
| Proceeds from sale of loans                                                                              |       | 65,404,161  |       | 34,325,244  |       | 39,598,536  |       |
| Origination of loans held for sale                                                                       |       | (64,464,913 | )          | (34,003,672 | )          | (38,723,219 | )          |
| Gains on prepayments of FHLB borrowings                                                                  |       | —      |       | (406,572    | )          | —      |       |
| Changes in assets and liabilities:                                                                       |       |        |       |        |       |        |       |
| Accrued interest and other assets                                                                        |       | (9,311,653  | )          | (1,523,646  | )          | 1,200,310   |       |
| Accrued expenses, taxes, and other liabilities                                                           |       | (1,478,058  | )          | 1,773,946   |       | (2,318,289  | )          |
| Net cash provided by (used in) operating activities                                                      |       | (1,620,160  | )          | 5,823,340   |       | 4,737,837   |       |
| Cash flows from  investing activities:                                                                   |       |        |       |        |       |        |       |
| Net decrease in loans                                                                                    |       | 3,289,992   |       | 1,553,190   |       | 6,104,388   |       |
| Maturities and prepayments of investment securities                                                      |       | 38,865,258  |       | 46,035,450  |       | 32,936,261  |       |
| Net cash received (paid) in branch acquisitions  (sales)                                                 |       | —      |       | 30,410,720  |       | (8,714,311  | )          |
| Net cash paid in FMB acquisition                                                                         |       | (9,147,605  | )          | —      |       | —      |       |
| Net cash paid in First Kansas acquisition                                                                |       | —      |       | —      |       | (9,140,845  | )          |
| Purchases of investment securities                                                                       |       | (50,825,131 | )          | (54,933,641 | )          | (6,502,342  | )          |
| Proceeds from sale of investment securities                                                              |       | 17,943,322  |       | 160,235     |       | 971,571     |       |
| Proceeds from sales of premises and equipment and  foreclosed assets                                     |       | 2,334,542   |       | 445,467     |       | 1,419,456   |       |
| Purchases of premises and equipment, net                                                                 |       | (3,207,482  | )          | (1,921,843  | )          | (1,232,019  | )          |
| Net cash provided by (used in) investing activities                                                      |       | (747,104    | )          | 21,749,578  |       | 15,842,159  |       |
| Cash flows from  financing activities:                                                                   |       |        |       |        |       |        |       |
| Net increase (decrease) in deposits                                                                      |       | 6,490,795   |       | (4,867,797  | )          | (21,606,877 | )          |
| Federal Home Loan Bank advance borrowings                                                                |       | —      |       | 8,000,000   |       | —      |       |
| Federal Home Loan Bank advance repayments                                                                |       | (5,536,768  | )          | (20,876,696 | )          | (1,036,768  | )          |
| Federal Home Loan Bank line of credit, net                                                               |       | (3,400,000  | )          | (3,500,000  | )          | 1,300,000   |       |
| Proceeds from other borrowings                                                                           |       | 12,240,984  |       | 11,998,000  |       | 9,555,000   |       |
| Repayments on other borrowings                                                                           |       | (12,495,073 | )          | (3,470,000  | )          | (4,535,000  | )          |
| Proceeds from issuance of common stock under stock  option plans                                         |       | 26,891      |       | 196,088     |       | 221,551     |       |
| Net tax benefit related to stock option plans                                                            |       | 6,999       |       | 37,344      |       | 135,511     |       |
| Payment of dividends                                                                                     |       | (1,566,656  | )          | (1,444,252  | )          | (1,420,885  | )          |
| Purchase of treasury stock                                                                               |       | (138,506    | )          | (531        | )          | (3,055,205  | )          |
| Net cash used in financing activities                                                                    |       | (4,371,334  | )          | (13,927,844 | )          | (20,442,673 | )          |
| Net increase (decrease) in cash and cash equivalents                                                     |       | (6,738,598  | )          | 13,645,074  |       | 137,323     |       |
| Cash and cash  equivalents at beginning of year                                                          |       | 21,490,512  |       | 7,845,438   |       | 7,708,115   |       |
| Cash and cash  equivalents at end of year                                                                |       | $           | 14,751,914 |        | 21,490,512 |        | 7,845,438  |   |
| Supplemental  disclosure of cash flow information:                                                       |       |        |       |        |       |        |       |
| Cash paid during the year for income taxes                                                               |       | $           | 896,000    |        | —     |        | 1,494,000  |   |
| Cash paid during the year for interest                                                                   |       | 14,553,000  |       | 8,583,000   |       | 6,652,000   |       |
| Supplemental  schedule of noncash investing and financing activities:                                    |       |        |       |        |       |        |       |
| Transfer of loans to real estate owned                                                                   |       | 293,000     |       | 649,000     |       | 1,044,000   |       |
| Branch acquisitions (sales):                                                                             |       |        |       |        |       |        |       |
| Fair value of liabilities assumed (transferred)                                                          |       | —      |       | 33,299,000  |       | (12,489,000 | )          |
| Fair value of assets acquired (sold)                                                                     |       | —      |       | 2,888,000   |       | (3,774,000  | )          |
| FMB acquisition:                                                                                         |       |        |       |        |       |        |       |
| Fair value of liabilities assumed                                                                        |       | 123,965,000 |       | —      |       | —      |       |
| Fair value of assets acquired, including goodwill                                                        |       | 133,112,000 |       | —      |       | —      |       |
| First Kansas acquisition:                                                                                |       |        |       |        |       |        |       |
| Fair value of liabilities assumed                                                                        |       | —      |       | —      |       | 140,619,000 |       |
| Fair value of  assets acquired, including goodwill                                                       |       | —      |       | —      |       | 149,760,000 |       |

 

See accompanying notes to consolidated financial statements.

28

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**(1)**                     Summary ofSignificant Accounting Policies

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

The accompanyingconsolidated financial statements include the accounts of the Landmark Bancorp,Inc. (the Company) and its wholly owned subsidiary, Landmark National Bank(the Bank).  All intercompanybalances and transactions have been eliminated in consolidation. The Bank,considered a single operating segment, is principally engaged in the businessof attracting deposits from the general public and using such deposits, togetherwith borrowings and other funds, to originate commercial real estate andnon-real estate loans, one-to-four family residential mortgage loans, consumerloans, and home equity loans.

***(b)***                      Investment Securities

The Company classifiesits investment securities portfolio as available-for-sale, whichare recorded at fair value, determined principally based on quoted marketprices, with unrealized gains and losses excluded from earnings and reported asa separate component of stockholders’ equity until realized. Purchased premiumsand discounts on investment securities are amortized/accreted into interestincome over the estimated lives of the securities using a method whichapproximates the interest method. Declines in the fair value of the individual securities below their costthat are deemed to be other than temporary result in write-downs ofindividual securities to their estimated fair value, and a new cost basis isestablished.  Any such write-downsare included as a component of earnings as realized losses.  Gains and losses on sales ofavailable-for-sale securities are recorded on a trade date basis and arecalculated using the specific identification method.

***(c)***                       Loans and Allowance for LoanLosses

Loans receivable thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding principalbalances, net of undisbursed loan proceeds, the allowance for loan losses, andany deferred fees or costs on originated loans. Origination fees received on other loans held in portfolio in excess ofamounts representing the estimated costs of origination are deferred andcredited to interest income using the interest method.

Mortgage loans originatedand intended for sale in the secondary market are carried at the lower of costor estimated fair value, determined on an aggregate basis.  Net unrealized losses are recognized througha valuation allowance as charges against income.  Origination fees and costs received on suchloans are deferred and recognized as part of the gain or loss on sale.

The Company maintains anallowance to absorb probable loan losses inherent in the portfolio.  The allowance for loan losses is increased bycharges to income and decreased by charge-offs (net of recoveries).  Management’s periodic evaluation of theadequacy of the allowance is based on the Bank’s past loan loss experience,known and inherent risks in the portfolio, adverse situations that may affectthe borrower’s ability to repay, the estimated value of any underlyingcollateral, the current level of nonperforming assets, and current economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

A loan is consideredimpaired when, based on current information and events, it is probable that theBank will be unable to collect the scheduled payments of principal or interestwhen due according to the contractual terms of the loan agreement.  Factors considered by management indetermining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments whendue.  Loans that experience insignificantpayment delays and payment shortfalls generally are not classified asimpaired.  Management determines thesignificance

29

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of payment delays andpayment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed.  Impairmentis measured on a loan-by-loan basis for commercial, commercial realestate and construction loans by either the present value of expected futurecash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.

Large groups ofhomogeneous loans with smaller individual balances are collectively evaluatedfor impairment.  Accordingly, the Companydoes not separately identify individual consumer and residential loans forimpairment disclosures.

The accrual of intereston nonperforming loans is discontinued at the time the loan is ninety daysdelinquent, unless the credit is well-secured and in process ofcollection.  Loans are placed onnon-accrual or are charged off at an earlier date if collection of principal orinterest is considered doubtful.

All interest accrued butnot collected for loans that are placed on nonaccrual or charged off isreversed against interest income.  Theinterest on these loans is accounted for on the cash-basis or cost-recoverymethod, until qualifying for return to accrual. Loans are evaluated individually and are returned to accrual status whenall principal and interest amounts contractually due are brought current andfuture payments are reasonably assured.

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

Premises and equipmentare stated at cost less accumulated depreciation.  Depreciation is provided using the straight-lineover the estimated useful lives of the assets as follows:
| Buildings and improvements          |   | 10 – 50 years |   |
|-------------------------------------|--------|--------------------|--------|
| Furniture,  fixtures, and equipment |   | 3 – 15 years  |   |
| Automobiles                         |   | 2 – 5 years   |   |

 

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

***(e)***                       Goodwill and Intangible Assets

Goodwill is notamortized; however, it is tested for impairment.  Goodwillimpairment tests are performed at each calendar year end or more frequentlywhen events or circumstances dictate. The Company’s impairment test performed as of December 31, 2006indicated that goodwill as of that date was not impaired.

Intangible assets includecore deposit intangibles and mortgage servicing rights.  Core deposit intangible assets are amortizedover their estimated useful life of ten years on an accelerated basis. When facts and circumstances indicate potentialimpairment, the Company will evaluate the recoverability of the asset carryingvalue, using estimates of undiscounted future cash flows over the remainingasset life. Any impairment loss is measured by the excess of carrying valueover fair value.  Mortgageservicing assets are recognized as separate assets when rights are acquiredthrough the sale of financial assets. Mortgage servicing rights are amortizedinto non-interest expense in proportion to, and over the period of, theestimated future net servicing income of the underlying financial assets.  Servicing assets are recorded at the lower ofcost or fair value, and are evaluated for impairment based upon the fair valueof the retained rights as compared to amortized cost.

30

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***(f)***                         Income Taxes

Amounts provided forincome tax expense are based on income reported for financial statementpurposes and do not necessarily represent amounts currently payable under taxlaws.  Deferred tax assets and liabilitiesare recorded for the future tax consequences attributable to differencesbetween the consolidated financial statement carrying amounts of existingassets and liabilities and their respective income tax basis.  Deferred tax assets and liabilities are measuredusing enacted tax rates applied to taxable income in the years in which thosetemporary differences are expected to be recovered or settled.  The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income in the period thatincludes the enactment date.

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

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

***(h)***                      Comprehensive Income

TheCompany’s other comprehensive income (loss) consists of unrealized holdinggains and losses on available-for-sale securities and arealized/unrealized gain on an interest rate swap as shown below:
|                                                                                | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Unrealized holding  gains (losses) on securities and interest rate swap        |       | $                                      | 952,255    |   | (1,372,504 | ) | (678,440 | ) |
| Less reclassification  adjustment for gains (losses)  included  in income |       | (195,238                                    | )          | 46,865 |   | 358,385 |   |
| Net unrealized  gains (losses)                                                 |       | 1,147,493                                   |       | (1,419,369 | ) | (1,036,825 | ) |
| Income tax expense  (benefit)                                                  |       | 436,047                                     |       | (539,360 | ) | (393,994 | ) |
| Other  comprehensive income (loss)                                             |       | $                                           | 711,446    |   | (880,009 | ) | (642,831 | ) |

 

Accumulated othercomprehensive income related entirely to investment securities at December 31,2006.  The components at December 31,2005 were $84,000 in cash flow hedging activities and ($964,000) in investmentsecurities.

***(i)***                         Foreclosed Assets

Assets acquired through,or in lieu of, foreclosure are to be sold and are initially recorded at thedate of foreclosure at the lower of carrying value or fair value through acharge to the allowance for loan losses, establishing a new cost basis.  Subsequent to foreclosure, managementperiodically performs valuations, and records a charge to operations if thecarrying value of a property exceeds the fair value less estimated costs tosell.  Revenue and expenses fromoperations and changes in the valuation are included in other non-interestexpense on the statement of earnings.

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

The Company has astock-based employee compensation plan, which is described more fully innote 12.  Prior to January 1, 2006,the Company utilized the fair value recognition provisions of

31

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Statement of FinancialAccounting Standard (SFAS) Statement No. 123, *Accountingfor Stock-Based Compensation*. SFAS 123 established a fair-value method of accounting for employeestock options or similar equity instruments. In December 2004, The Financial Accounting Standards Board issued SFASNo. 123(R), *Shared-Based Payment*.  The revision retains the provisions of fairvalue recognition in SFAS 123, however also contains additional guidance inseveral areas including award modifications and forfeitures, measuring fairvalue, classifying an award as equity or as a liability, and attributingcompensation cost to reporting periods. It also contains additional disclosure requirements.  The Company’s adoption of the revisedStatement on January 1, 2006 was limited to a change in the method ofaccounting for forfeitures, and did not have a material effect on itsconsolidated financial statements.

The fair value of stockoptions awarded to employees is calculated through the use of option pricingmodels.  These models require subjectiveassumptions, including future stock price volatility and expected term, whichgreatly affect the calculated values. The Company uses the Black-Scholes option pricing model to estimate thegrant date fair value of its stock options. The grant date fair value is recognized as additional compensationexpense over the option vesting period, which is typically four or five years.

***(k)***                      Earnings per Share

Basic earnings per sharerepresents net earnings divided by the weighted average number of common sharesoutstanding during the year.  Dilutedearnings per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed issuance.  Potential common shares that may be issued bythe Company relate solely to outstanding stock options and are determined usingthe treasury stock method using the average market price of the Company’s stockfor the respective periods.

Theshares used in the calculation of basic and diluted earnings per share, whichhave been adjusted to give effect for the 5% stock dividends paid by theCompany in December 2006, 2005, and 2004, are shown below:
|                                                       | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings available  to common shareholders        |       | $                                           | 6,009,641  |   | $ | 3,897,164 |   | $ | 4,250,758 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Weighted average common  shares outstanding - basic   |       | 2,340,199                                   |       | 2,334,146 |   | 2,391,997 |   |
| Assumed exercise of  stock options                    |       | 12,251                                      |       | 10,252 |   | 14,462 |   |
| Weighted average common  shares outstanding - diluted |       | 2,352,450                                   |       | 2,344,398 |   | 2,406,459 |   |
|                                                  |       |                                        |       |   |   |   |   |
| Net earnings per share                                |       |                                        |       |   |   |   |   |
| Basic                                                 |       | $                                           | 2.57       |   | $ | 1.67 |   | $ | 1.78 |   |
| Diluted                                               |       | $                                           | 2.55       |   | $ | 1.66 |   | $ | 1.77 |   |

 

***(l)***                         Treasury Stock

Purchases of the Company’scommon stock are recorded at cost.  Uponreissuance, treasury stock is reduced based upon the average cost basis ofshares held.

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***(m)***                   Cash and cash equivalents

In the consolidatedstatements of cash flows, cash and cash equivalents include cash on hand,amounts due from banks and federal funds sold as segregated in the accompanyingbalance sheets.

***(n)***                      Derivatives

The Company is exposed tomarket risk, primarily changes in interest rates.  To manage the volatility relating to theseexposures, the Company’s risk management policies permit its use of derivativeproducts.  The Company uses derivativeson a limited basis mainly to stabilize interest rate margins.  The Company more often manages normal assetand liability positions by altering the terms of the products it offers.

Statement of FinancialAccounting Standard No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, requires that allderivative financial instruments be recorded on the balance sheet at fairvalue, with adjustments to fair value recorded in current earnings.  Derivatives that qualify in a hedgingrelationship are designated, based on the exposure being hedged, as fair valueor cash flow hedges.  Under the cash flowhedging model, the effective portion of the change in the gain or loss relatedto the derivative is recognized as a component of other comprehensive income,net of taxes.  The ineffective portion isrecognized in current earnings.  TheCompany had no derivatives as of December 31, 2006 and one outstanding interestrate swap accounted for as a cash flow hedge as of December 31, 2005.

The Company enters intointerest rate lock commitments on mortgage loans, which are commitments tooriginate loans whereby the interest rate on the loan is determined prior tofunding.  The Company also hascorresponding forward sales contracts related to these interest rate lockcommitments.  Both the mortgage loancommitments and the related sales contracts are accounted for as derivativesand carried at fair value with changes in fair value recorded in income.

***(o)***                      Reclassifications

Certain reclassificationsto prior year amounts have been made to conform to the current yearpresentation.

**(2)**                     Acquisitions

On January 1, 2006, the Company completed theacquisition of all of the outstanding shares of First Manhattan Bancorporation,Inc. (FMB).  FMB’s subsidiary thrift wasmerged into the Company’s wholly-owned subsidiary, Landmark National Bank,immediately following the acquisition. This acquisition expanded our market share in Manhattan and furtherexpanded the Company’s presence in higher-growth market areas.  At December 31, 2005, FMB had total assets of$128.9 million, including loans and deposits of $109.4 million and $106.8million, respectively.  The Company paidcash of $12.9 million for all of the outstanding stock of FMB.  In connection with the acquisition, theCompany recognized core deposit intangible assets of $2.6 million, which arebeing amortized on an accelerated basis over the estimated remaining economicuseful life of the depositors of 10 years. The acquisition cost in excess of the net assets and identifiableintangible assets acquired, has been recorded as goodwill of $5.5 million, noneof which is deductible for tax purposes.

33

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The following table summarizes the assets andliabilities of FMB at the acquisition date of January 1, 2006 (in thousands):
|                                                       | ** ** | **Historical  FMB** | ** ** | **Purchase  accounting** | ** ** | **As adjusted  FMB** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|--------------------------|------------|---------------------------|------------|
| Assets:                                               |       |                |       |                     |       |                      |       |
| Cash and cash  equivalents                            |       | $                   | 4,369      |                     | $          | (4,369                    | )          | $ | — |   |
| Investment  securities                                |       | 11,015              |       | (1                       | )          | 11,014                    |       |
| Loans  receivable, net                                |       | 109,396             |       | (405                     | )          | 108,991                   |       |
| Premises and  equipment, net                          |       | 2,868               |       | 1,058                    |       | 3,926                     |       |
| Goodwill                                              |       | —              |       | 5,474                    |       | 5,474                     |       |
| Other  intangibles, net                               |       | —              |       | 2,577                    |       | 2,577                     |       |
| Other assets                                          |       | 1,211               |       | (80                      | )          | 1,131                     |       |
| Total assets                                          |       | $                   | 128,859    |                     | $          | 4,254                     |       | $ | 133,113 |   |
|                                                  |       |                |       |                     |       |                      |       |
| Liabilities:                                          |       |                |       |                     |       |                      |       |
| Deposits                                              |       | $                   | 106,779    |                     | $          | 146                       |       | $ | 106,925 |   |
| Federal Home  Loan Bank advances and other borrowings |       | 15,104              |       | 202                      |       | 15,306                    |       |
| Other  liabilities                                    |       | 1,332               |       | 402                      |       | 1,734                     |       |
| Total liabilities                                     |       | $                   | 123,215    |                     | $          | 750                       |       | $ | 123,965 |   |

 

The accompanying consolidated financial statements forthe year ended December 31, 2006 included the accounts of the Company and,commencing January 1, 2006 FMB. Unaudited pro forma consolidated operating results, for the year endedDecember 31, 2005, as if the acquisition was consummated January 1, 2005, is asfollows (in thousands,except per share data):
| Revenue                     |   | $ | 29,378 |   |
|-----------------------------|--------|---|--------|--------|
| Net earnings                |   | $ | 4,101  |   |
| Basic earnings per  share   |   | $ | 1.84   |   |
| Diluted earnings per  share |   | $ | 1.84   |   |

 

On August 19,2005, the Company purchased two bank branch locations in Great Bend, Kansasresulting in the assumption of approximately $33.3 million in customer depositsand the related branch premises and equipment. The Company recognized core deposit intangible assets of approximately$1.4 million, which are being amortized on an accelerated basis over theremaining economic life of the depositors of 10 years.

**(3)**                     Goodwill andIntangible Assets

The Company’s goodwilland core deposit intangible assets resulted from the acquisition of MNBBancshares, Inc. (MNB) by Landmark Bancorp, Inc. on October 9, 2001, theacquisition of First Kansas Financial Corporation (First Kansas) on April 1,2004, the purchase of two branch locations in Great Bend, Kansas on August 19,2005, and from the acquisition of FMB on January 1, 2006.  During 2005, goodwill associated with the MNBacquisition was reduced by $116,000 related to the resolution of outstanding taxmatters.

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Thefollowing is an analysis of the changes in core deposit intangible assets:
|                               | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at beginning of  year |       | $                                           | 2,044,014  |   | 893,499 |   | 482,182 |   |
| Additions                     |       | 2,577,462                                   |       | 1,433,603 |   | 605,000 |   |
| Amortization                  |       | (892,889                                    | )          | (283,088 | ) | (193,683 | ) |
|                          |       |                                        |       |   |   |   |   |
| Balance at end of year        |       | $                                           | 3,728,587  |   | 2,044,014 |   | 893,499 |   |

 

Thefollowing is an analysis of the changes in mortgage servicing rights:
|                              | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at beginning of year |       | $                            | 374,199    |   | 446,332 |   | 477,350 |   |
| Additions                    |       | 64,458                       |       | 94,239 |   | 150,057 |   |
| Amortization                 |       | (136,535                     | )          | (166,372 | ) | (181,075 | ) |
|                         |       |                         |       |   |   |   |   |
| Balance at end of year       |       | $                            | 302,122    |   | 374,199 |   | 446,332 |   |

 

Accumulatedamortization for core deposit intangible assets was $1.7 million and $775,000at December 31, 2006 and 2005, respectively. Accumulated amortization for the mortgage servicing rights was $490,000and $401,000 at December 31, 2006 and 2005, respectively.  Aggregate amortization expense for the yearsended December 31, 2006, 2005, and 2004, was $1,029,000, $449,000 and $375,000,respectively.  The following is estimatedamortization expense for the years ending December 31:
|            | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| Year:      |       |       |       |
| 2007       |       | $          | 930,000    |   |
| 2008       |       | 832,000    |       |
| 2009       |       | 631,000    |       |
| 2010       |       | 500,000    |       |
| 2011       |       | 402,000    |       |
| Thereafter |       | 736,000    |       |
|            |            |            |            |  |

 

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**(4)**                     InvestmentSecurities Available-for-Sale

A summary of investmentsecurities is as follows:
|                                          | ** ** | **December 31, 2006** | ** **  |
|------------------------------------------|------------|---------------------------------|-------------|
| ** **                               | ** ** | **Amortized  cost**             | ** **  | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| U. S. Government and  agency obligations |       | $                          | 46,723,566  |   | 246,621 |   | (338,470 | ) | 46,631,717 |   |
| Municipal obligations                    |       | 55,140,998                      |        | 228,981 |   | (306,268 | ) | 55,063,711 |   |
| Mortgage-backed  securities              |       | 32,525,591                      |        | 185,324 |   | (487,056 | ) | 32,223,859 |   |
| Federal Home Loan Bank  stock            |       | 6,747,000                       |        | — |   | — |   | 6,747,000 |   |
| Federal Reserve Bank  stock              |       | 1,741,450                       |        | — |   | — |   | 1,741,450 |   |
| Corporate bonds                          |       | 2,522,187                       |        | 9,313 |   | — |   | 2,531,500 |   |
| Common stocks                            |       | 277,713                         |        | 440,480 |   | (2,250 | ) | 715,943 |   |
| Other investments                        |       | 228,988                         |        | — |   | — |   | 228,988 |   |
| Total                                    |       | $                               | 145,907,493 |   | 1,110,719 |   | (1,134,044 | ) | 145,884,168 |   |

 
|                                          | ** ** | **December 31, 2005** | ** **  |
|------------------------------------------|------------|---------------------------------|-------------|
| ** **                               | ** ** | **Amortized  cost**             | ** **  | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| U. S. Government and  agency obligations |       | $                          | 44,231,752  |   | 1,739 |   | (605,646 | ) | 43,627,845 |   |
| Municipal obligations                    |       | 32,834,778                      |        | 103,053 |   | (557,732 | ) | 32,380,099 |   |
| Mortgage-backed  securities              |       | 53,587,668                      |        | 259,285 |   | (954,090 | ) | 52,892,863 |   |
| Federal Home Loan Bank  stock            |       | 5,655,200                       |        | — |   | — |   | 5,655,200 |   |
| Common stocks                            |       | 298,826                         |        | 484,247 |   | (8,325 | ) | 774,748 |   |
| Federal Reserve Bank  stock              |       | 1,347,850                       |        | — |   | — |   | 1,347,850 |   |
| Corporate bonds                          |       | 3,064,486                       |        | 6,065 |   | (35,414 | ) | 3,035,137 |   |
| Other investments                        |       | 416,770                         |        | — |   | — |   | 416,770 |   |
| Total                                    |       | $                               | 141,437,330 |   | 854,389 |   | (2,161,207 | ) | 140,130,512 |   |

 

Included in investmentsecurities available-for-sale are restricted stock investments in the FederalHome Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) that are required tobe maintained by the Bank for regulatory purposes and borrowing availability.The cost of such investments represents their redemption value as suchinvestments do not have a ready market value.

The tables above showthat some of the securities in the available for sale investment portfolio hadunrealized losses, or were temporarily impaired, as of December 31, 2006.  This temporary impairment represents theestimated amount of loss that would be realized if the securities were sold onthe valuation date.  Securities whichwere temporarily impaired are shown below, along with the length of theimpairment period.

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|                                          | ** ** | **December 31, 2006**                         | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 months**                  | ** ** | **12 months or longer** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **   Fair Value   ** | ** ** | **  Unrealized    Losses** | ** ** | **   Fair Value   ** | ** ** | **  Unrealized    Losses** | ** ** | **    Fair Value    ** | ** ** | **  Unrealized    Losses** | ** ** |
| U. S. Government and agency  obligations |       | $                                                  | 2,961,255  |   | (23,488 | ) | 23,775,141 |   | (314,982 | ) | 26,736,396 |   | (338,470 | ) |
| Municipal obligations                    |       | 467,383                                                 |       | (9,643 | ) | 28,017,783 |   | (296,625 | ) | 28,485,166 |   | (306,268 | ) |
| Mortgage-backed  securities              |       | 324,163                                                 |       | (58,129 | ) | 19,648,426 |   | (428,927 | ) | 19,972,589 |   | (487,056 | ) |
| Common stocks                            |       | 72,750                                                  |       | (2,250 | ) | — |   | — |   | 72,750 |   | (2,250 | ) |
| Total                                    |       | $                                                       | 3,825,551  |   | (93,510 | ) | 71,441,350 |   | (1,040,534 | ) | 75,266,901 |   | (1,134,044 | ) |

 
|                                          | ** ** | **December 31, 2005**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| U. S. Government and agency  obligations |       | $                                 | 23,181,123 |   | (344,658 | ) | 19,050,775 |   | (260,988 | ) | 42,231,898 |   | (605,646 | ) |
| Municipal obligations                    |       | 22,637,470                             |       | (494,056 | ) | 2,814,241 |   | (63,676 | ) | 25,451,711 |   | (557,732 | ) |
| Mortgage-backed  securities              |       | 13,108,237                             |       | (207,556 | ) | 25,010,609 |   | (746,534 | ) | 38,118,846 |   | (954,090 | ) |
| Corporate bonds                          |       | —                                 |       | — |   | 506,307 |   | (35,414 | ) | 506,307 |   | (35,414 | ) |
| Common stocks                            |       | 75,000                                 |       | (8,325 | ) | — |   | — |   | 75,000 |   | (8,325 | ) |
| Total                                    |       | $                                      | 59,001,830 |   | (1,054,595 | ) | 47,381,932 |   | (1,106,612 | ) | 106,383,762 |   | (2,161,207 | ) |

 

AtDecember 31, 2006, the total investment portfolio consisted of over 460 securities.The tables above include 184 and 430 securities that were in an unrealized lossposition at December 31, 2006 and 2005, respectively.  The decrease in fair value of the securitiesin an unrealized loss position is related to interest rate changes.  None of the unrealized losses are related tocredit deterioration.  The Company hasthe intent and ability to hold these securities until market values recover,including up to the maturity date.

Maturitiesof investment securities at December 31, 2006 are as follows:
|                                                                                              | ** ** | **Amortized  cost** | ** **  | **Estimated  fair value ** | ** **  |
|----------------------------------------------------------------------------------------------|------------|---------------------|-------------|--------------------------------------|-------------|
| Due in less than one  year                                                                   |       | $                   | 12,728,698  |                                 | 12,687,982  |   |
| Due after one year but  within five years                                                    |       | 41,937,421          |        | 41,863,572                           |        |
| Due after five years                                                                         |       | 49,720,632          |        | 49,675,373                           |        |
| Mortgage-backed  securities, FHLB stock, FRB stock, common stock, and other investments |       | 41,520,742          |        | 41,657,241                           |        |
| Total                                                                                        |       | $                   | 145,907,493 |                                 | 145,884,168 |   |

 

For mortgage-backedsecurities, actual maturities will differ from contractual maturities becauseborrowers have the right to prepay obligations with or without prepaymentpenalties.  At December 31, 2006, theCompany’s mortgage-backed securities portfolio consisted of securitiespredominantly underwritten to the standards and guaranteed by thegovernment-sponsored agencies of FHLMC, FNMA and GNMA.

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Grossrealized gains and losses on sales of available-for-sale securities are asfollows:
|                 | ** ** | **Years ended December 31,** | ** ** |
|-----------------|------------|---------------------------------------------|------------|
| ** **      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Realized gains  |       | $                                           | 143,541    |   | 47,075 |   | 358,385 |   |
| Realized losses |       | (443,797                                    | )          | (210 | ) | — |   |
| Total           |       | $                                           | (300,256   | ) | 46,865 |   | 358,385 |   |

 

At December 31, 2006 and 2005, securities pledged to secure publicfunds on deposit had a carrying value of approximately $97.2 million and$84.0 million, respectively.  Exceptfor U. S. government and agency obligations, no investment in a single issuerexceeded 10% of stockholders’ equity.

**(5)**                     Loans

Loansconsist of the following:
|                                          | ** ** | **December 31,  2006** | ** **  | **December 31,  2005** | ** **  |
|------------------------------------------|------------|-----------------------------|-------------|-----------------------------|-------------|
| Real estate loans:                       |       |                        |        |                        |        |
| One-to-four family  residential          |       | $                           | 151,299,911 |                        | 114,935,068 |   |
| Commercial                               |       | 98,314,119                  |        | 78,085,127                  |        |
| Construction                             |       | 33,600,313                  |        | 12,355,759                  |        |
| Commercial loans                         |       | 90,758,185                  |        | 63,494,252                  |        |
| Consumer loans                           |       | 9,595,428                   |        | 8,841,766                   |        |
| Total                                    |       | 383,567,956                 |        | 277,711,972                 |        |
| Less:                                    |       |                        |        |                        |        |
| Deferred loan  fees and loans in process |       | 214,665                     |        | (5,256                      | )           |
| Allowance for  loan losses               |       | 4,029,710                   |        | 3,151,373                   |        |
| Loans, net                               |       | $                           | 379,323,581 |                        | 274,565,855 |   |

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet customers’ financing needs. These financial instruments consist principally of commitments to extendcredit.  The Company uses the same creditpolicies in making commitments and conditional obligations as it does for on-balancesheet instruments.  The Company’sexposure to credit loss in the event of nonperformance by the other party isrepresented by the contractual amount of those instruments.  In the normal course of business, there arevarious commitments and contingent liabilities, such as guarantees, commitmentsto extend credit, letters of credit, and lines of credit, which are properlynot recorded in the accompanying consolidated financial statements.  The Company generally requires collateral orother security on unfunded loan commitments and irrevocable letters ofcredit.  Unfunded commitments to extendcredit, excluding standby letters of credit, aggregated $63.2 million and$54.1 million at December 31, 2006 and 2005, respectively.  Standby letters of credit totaled $3.0million and $2.9 at December 31, 2006 and 2005, respectively.

The Company is exposed tovarying risks associated with concentrations of credit relating primarily tolending activities in specific geographic areas.  The Company’s principal lending area consistsof the cities of Manhattan, Auburn, Dodge City, Garden City, Great Bend,Hoisington, Junction City, LaCrosse, Lawrence, Osage City, Topeka, Wamego,Paola, Osawatomie, Louisburg, and Fort Scott, Kansas and the

38

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surrounding communities,and substantially all of the Company’s loans are to residents of or secured byproperties located in its principal lending area.  Accordingly, the ultimate collectibility ofthe Company’s loan portfolio is dependent in part upon market conditions inthose areas.  These geographic concentrationsare considered in management’s establishment of the allowance for loan losses.

Asummary of the activity in the allowance for loan losses is as follows:
|                               | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at beginning of  year |       | $                                           | 3,151,373  |   | 2,893,603 |   | 2,315,870 |   |
| Allowance of acquired  bank   |       | 891,374                                     |       | — |   | 352,113 |   |
| Provision for loan  losses    |       | 235,000                                     |       | 385,000 |   | 460,000 |   |
| Charge-offs                   |       | (339,637                                    | )          | (222,379 | ) | (294,624 | ) |
| Recoveries                    |       | 91,600                                      |       | 95,149 |   | 60,244 |   |
| Balance at end of year        |       | $                                           | 4,029,710  |   | 3,151,373 |   | 2,893,603 |   |

 

At December 31, 2006and 2005, impaired loans, including nonaccrual loans, aggregated $3.6 millionand $3.3 million, respectively.  Theamount of interest income recorded on such loans during their impairment periodswas not significant. There were no loans 90 days delinquent and still accruinginterest at December 31, 2006 and 2005. Average impaired loans were $4.2 million for 2006, $2.0 million for2005, and $1.5 million for 2004. Allowance for loan losses specifically allocated to these impaired loansat December 31, 2006, 2005, and 2004 were $274,000, $264,000, and 157,000,respectively.

The Company providesservicing on loans for others with outstanding principal balances of$101.8 million and $107.2 million at December 31, 2006 and 2005,respectively.  Gross service fee incomerelated to such loans was $266,000, $276,000, and $277,000 for the years endedDecember 31, 2006, 2005, and 2004, respectively, and is included in feesand service charges in the consolidated statements of earnings.

TheCompany had loans to directors and officers at December 31, 2006 and 2005,which carry terms similar to those for other loans.  Management believes such outstanding loans donot represent more than a normal risk of collection.  A summary of such loans is as follows:
| Balance at December 31, 2005  |   | $          | 4,971,399 |   |
|-------------------------------|--------|------------|-----------|--------|
| New loans                     |   | 10,609,340 |      |
| Repayments                    |   | (8,255,674 | )         |
| Balance at December 31,  2006 |   | $          | 7,325,065 |   |

 

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**(6)**                     Premises andEquipment

Premisesand equipment consisted of the following:
|                                   | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land                              |       | $                           | 3,302,696  |                        | 1,608,351  |   |
| Construction in progress          |       | —                      |       | 1,801,835                   |       |
| Office buildings and improvements |       | 10,870,636                  |       | 6,418,709                   |       |
| Furniture and equipment           |       | 5,636,132                   |       | 4,378,271                   |       |
| Automobiles                       |       | 263,509                     |       | 260,199                     |       |
| Total                             |       | 20,072,973                  |       | 14,467,365                  |       |
| Less accumulated depreciation     |       | 6,305,898                   |       | 6,055,130                   |       |
| Total                             |       | $                           | 13,767,075 |                        | 8,412,235  |   |

 

The Company has multi-year operating lease agreementsfor several of its branch locations.  Thefollowing is the Company’s minimum lease commitments for the years endingDecember 31: 
|       | ** ** | **Amount** | ** ** |
|-------|------------|------------|------------|
| Year: |       |       |       |
| 2007  |       | $          | 102,132    |   |
| 2008  |       | 100,932    |       |
| 2009  |       | 92,670     |       |
| 2010  |       | 15,472     |       |
| 2011  |       | —     |       |
| Total |       | $          | 311,206    |   |

 

Totalrent expense for the years ended December 31, 2006, 2005 and 2004 was $188,000,$134,000 and $125,000, respectively, and was included in occupancy andequipment on the consolidated statements of earnings. 

**(7)****                     Deposits**

Maturitiesof time deposits were as follows at December 31, 2006:
|            | ** ** | **Amount** | ** **  |
|------------|------------|------------|-------------|
| Year:      |       |       |        |
| 2007       |       | $          | 183,366,325 |   |
| 2008       |       | 28,773,449 |        |
| 2009       |       | 9,342,978  |        |
| 2010       |       | 6,595,599  |        |
| 2011       |       | 1,510,381  |        |
| Thereafter |       | 1,492,128  |        |
| Total      |       | $          | 231,080,860 |   |

 

Regulationsof the Federal Reserve System require reserves to be maintained by all bankinginstitutions according to the types and amounts of certain depositliabilities.  These requirements restricta portion of the amounts shown as consolidated cash and due from banks fromeveryday usage in operation of the banks. The minimum reserve requirements for the Bank totaled $25,000 atDecember 31, 2006.

40

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**(8)****                     Federal HomeLoan Bank Borrowings**

Advancesfrom the FHLB at December 31, 2006 and 2005, amounted to $61,920,421 and$63,212,318, respectively.  Maturities ofsuch borrowings at December 31, 2006, are summarized as follows:
|                           | ** ** | **Amount** | ** ** | **Rates**          | ** ** |
|---------------------------|------------|------------|------------|--------------------|------------|
|                      |       |       |       |               |       |
| Year ending December  31: |       |       |       |               |       |
| 2007                      |       | $          | —     |               | —     |   |
| 2008                      |       | 4,000,000  |       | 4.74% – 5.41% |       |
| 2009                      |       | 36,555,924 |       | 2.82% – 5.77% |       |
| 2010                      |       | 15,917,697 |       | 2.57% – 4.69% |       |
| 2011                      |       | 1,000,000  |       | 5.41% – 5.41% |       |
| Thereafter                |       | 4,446,800  |       | 3.76% – 6.37% |       |
|                      |       | $          | 61,920,421 |               |       |   |

 

Includedin the table above are $24.0 million in advances with the FHLB which have avariable rate, adjustable quarterly, and mature in 2008, 2009 and 2010 with noprepayment penalties.  All of the Bank’sremaining advances with the FHLB have fixed rates and prepaymentpenalties.  However, certain borrowingscontain a convertible provision at which date the FHLB may exercise an optionto convert the borrowing to a variable rate equal to the FHLB one monthshort-term advance rate.  The Bank wouldthen have the option to prepay the advances without penalty.  The Bank may refinance the advance at eachrespective conversion date if the FHLB first exercises its option to convertthe fixed-rate borrowing.

Additionally,the Bank also has a line of credit, renewable annually each September, with theFHLB under which there were no outstanding borrowings as of December 31, 2006and 2005, respectively.  Interest on anyoutstanding balances on the line of credit accrues at the federal funds marketrate plus 0.15% (5.47% at December 31, 2006).

OnAugust 22, 2005, the Company repaid FHLB advances with $10.0 million inoutstanding principal prior to their scheduled maturities.  The repayment resulted in a $407,000 gainresulting from the fair value adjustment recorded on the date of acquisitionfrom First Kansas.

Althoughno loans are specifically pledged, the FHLB requires the Bank to maintaineligible collateral (qualifying loans and investment securities) that has alending value at least equal to its required collateral. At December 31,2006 and 2005, the Bank’s total borrowing capacity with the FHLB wasapproximately $120.8 million and $89.2 million, respectively.

**(9)****                     OtherBorrowings**

In2003, the Company issued $8.2 million of subordinated debentures.  These debentures, which are due in 2034 andare redeemable beginning in 2009, were issued to a wholly owned grantor trust (“theTrust”) formed to issue preferred securities representing undivided beneficialinterests in the assets of the Trust. The Trust then invested the gross proceeds of such preferred securitiesin the debentures.  The Trust’s preferredsecurities and the subordinated debentures require quarterly interest paymentsand have variable rates, adjustable quarterly. Interest accrues at LIBOR plus 2.85%. The interest rates at December 31, 2006 and 2005 were 8.23% and 7.09%,respectively.

In2005, the Company issued an additional $8.2 million of subordinateddebentures.  These debentures, which aredue in 2036 and are redeemable beginning in 2011, were issued to a wholly ownedgrantor trust (“Trust II”) formed to issue preferred securities representingundivided beneficial interests in the assets of Trust II.  Trust II then invested the gross proceeds ofsuch preferred securities in the debentures. Trust II’s

41

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preferredsecurities and the subordinated debentures require quarterly interest paymentsand have variable rates, adjustable quarterly. Interest accrues at LIBOR plus 1.34% on $5.2 million of the subordinateddebentures, while the remaining $3.0 million of the subordinated debentures hasa fixed rate of 6.17%.  The blendedinterest rate at December 31, 2006 and 2005 were 6.50% and 5.98%, respectively.

Whilethese Trusts are accounted for as unconsolidated equity investments under therequirements of Financial Accounting Interpretation No. 46R, *Consolidation of Variable Interest Entities,*a portion ofthe trust preferred securities issued by the Trust qualifies as Tier 1 Capitalfor regulatory purposes.

TheCompany had a $9.0 million loan commitment, as of December 31, 2005, from anunrelated financial institution comprised of a $6.0 million line of credit anda $3.0 million term note with the interest rate adjusting daily based on theprime rate less 0.75%.  In December 2006,the Company repaid the $3.0 million term note and increased the line of creditto $9.0 million.  The outstanding balanceof the line of credit at December 31, 2006 and 2005, was $4.7 million and$300,000, respectively, and is included in other borrowings.  The Company had an interest rate swap inplace effectively fixing the interest rate on $3.0 million of the variable rateterm debt to a fixed rate of 5.68%.  Netamounts paid or received under the swap were accounted for on an accrual basisand recognized as a component of interest expense.  During 2006 and 2005, this agreement reducedour interest expense by $54,000 and $0, respectively.  The Company applied cash flow hedgeaccounting to the interest rate swap before terminating the instrument inDecember 2006.  Upon termination, thefair value of the swap of $105,000 was reclassified from accumulated othercomprehensive income (loss), net of taxes, and recorded in other income.  Its fair value, aggregating $136,000 atDecember 31, 2005 was recorded as a component of other assets in theaccompanying consolidated balance sheet.

Additionally,the Bank had $7,269,643 and $2,250,000 in repurchase agreements outstanding andincluded in other borrowings at December 31, 2006 and 2005.

42

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**(10)****              Income Taxes**

Incometax expense attributable to income from operations consisted of:
|                    | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:           |       |                                        |       |   |   |   |   |
| Federal            |       | $                                           | 530,777    |   | 649,306 |   | 1,156,968 |   |
| State              |       | (63,714                                     | )          | 129,998 |   | 227,353 |   |
| Total current      |       | 467,063                                     |       | 779,304 |   | 1,384,321 |   |
|               |       |                                        |       |   |   |   |   |
| Deferred:          |       |                                        |       |   |   |   |   |
| Federal            |       | 1,426,798                                   |       | 758,499 |   | 576,062 |   |
| State              |       | 185,594                                     |       | 121,114 |   | 49,842 |   |
| Total deferred     |       | 1,612,392                                   |       | 879,613 |   | 625,904 |   |
|               |       |                                        |       |   |   |   |   |
| Income tax expense |       | $                                           | 2,079,455  |   | 1,658,917 |   | 2,010,225 |   |

 

Totalincome tax expense, including amounts allocated directly to stockholdersequity, was as follows:
|                                                                                                                               | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from operations                                                                                                        |       | $                                           | 2,079,455  |   | 1,658,917 |   | 2,010,225 |   |
| Stockholders’ equity,  recognition of tax benefit for stock options exercised                                            |       | (6,999                                      | )          | (37,344 | ) | (135,511 | ) |
| Stockholders’ equity,  recognition of unrealized (losses)/gains on available-for-sale securities and  interest rate swap |       | 436,047                                     |       | (539,360 | ) | (393,994 | ) |
|                                                                                                                          |       | $                                           | 2,508,503  |   | 1,082,213 |   | 1,480,720 |   |

 

Thereasons for the difference between actual income tax expense and expectedincome tax expense attributable to income from operations at the 34% statutoryfederal income tax rate were as follows:
|                                                       | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Computed “expected” tax  expense            |       | $                                           | 2,750,293  |   | 1,889,067 |   | 2,128,734 |   |
| Increase (reduction) in  income taxes resulting from: |       |                                        |       |   |   |   |   |
| Tax-exempt  interest income, net                      |       | (479,686                                    | )          | (294,489 | ) | (189,782 | ) |
| Bank owned life  insurance                            |       | (139,138                                    | )          | (26,078 | ) | (37,291 | ) |
| State income  taxes, net of federal benefit           |       | 78,831                                      |       | 170,015 |   | 182,496 |   |
| Investment tax  credits                               |       | (130,000                                    | )          | (125,000 | ) | (75,000 | ) |
| Other, net                                            |       | (845                                        | )          | 45,402 |   | 1,068 |   |
|                                                  |       | $                                           | 2,079,455  |   | 1,658,917 |   | 2,010,225 |   |

 

43

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Thetax effects of temporary differences that give rise to the significant portionsof the deferred tax assets and liabilities at the following dates were asfollows:

|                                                                                          | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax assets:                                                                     |       |                        |       |                        |       |
| FHLB advances                                                                            |       | $                           | 841,031    |                        | 1,097,775  |   |
| Loans, including  allowance for loan losses                                              |       | 713,572                     |       | 821,574                     |       |
| Unrealized loss  on investment securities available-for-sale and interest rate swap |       | 8,864                       |       | 444,911                     |       |
| Net operating  loss carry forwards                                                       |       | 949,918                     |       | 500,103                     |       |
| Federal  alternative minimum tax credit carryforward                                     |       | 554,733                     |       | —                      |       |
| Deferred  compensation arrangements                                                      |       | 324,622                     |       | 315,223                     |       |
| State taxes                                                                              |       | 41,689                      |       | 63,230                      |       |
| Accrued expenses                                                                         |       | 36,017                      |       | 47,469                      |       |
| Total deferred  tax assets                                                               |       | 3,470,446                   |       | 3,290,285                   |       |
| Less valuation  allowance                                                                |       | 181,510                     |       | 105,919                     |       |
| Net deferred tax  assets                                                                 |       | 3,288,936                   |       | 3,184,366                   |       |
|                                                                                     |       |                        |       |                        |       |
| Deferred tax  liabilities:                                                               |       |                        |       |                        |       |
| FHLB stock  dividends                                                                    |       | 785,144                     |       | 672,740                     |       |
| Investments                                                                              |       | 40,871                      |       | 113,817                     |       |
| Intangible  assets                                                                       |       | 813,853                     |       | 167,215                     |       |
| Premises and  equipment, net of depreciation                                             |       | 721,934                     |       | 138,889                     |       |
| Other, net                                                                               |       | 7,413                       |       | 5,657                       |       |
| Total deferred  tax liabilities                                                          |       | 2,369,215                   |       | 1,098,318                   |       |
| Net deferred tax  asset                                                                  |       | $                           | 919,721    |                        | 2,086,048  |   |

 

The Company has recordeddeferred taxes for temporary differences related to fair value adjustments onloans, investment securities, deposits, and borrowings recorded at the date ofacquisition.  In addition, the Companyhas also recorded a deferred tax asset for future benefits of net operatinglosses and alternative minimum tax credit carry forwards.  The net operating loss carry forwards willexpire, if not utilized, between 2014 and 2024. The alternative minimum tax credit carry forward does not expire.  The Company has recorded a valuationallowance to reduce certain state net operating loss carry forwards whichexpire at various times through 2024. The increase in the valuation allowance is related to additional netoperating loss carry forwards generated during 2006.  At December 31, 2006 and 2005, the Companybelieves it is more likely than not that these items will not be realized.  A valuation allowance related to the remainingdeferred tax assets has not been provided because management believes it ismore likely than not that the results of future operations will generatesufficient taxable income to realize the deferred tax assets.

Retained earnings atDecember 31, 2006 and 2005, includes approximately $6.3 million for whichno provision for federal income tax had been made.  This amount represents allocations of incometo bad debt deductions in years prior to 1988 for tax purposes only.  Reduction of amounts allocated for purposesother than tax bad debt losses will create income for tax purposes only, whichwill be subject to the then current corporate income tax rate.

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**(11)****              EmployeeBenefit Plans**

***EmployeeRetirement Plan***

Substantially allemployees are covered under a 401(k) defined contribution savings plan.Contributions of $253,000, $190,000 and $104,000 were charged to operations forthe years ended December 31, 2006, 2005, and 2004, respectively.

***DeferredCompensation and Retirement Agreements***

The Company entered intodeferred compensation and other retirement agreements with certain key employeesthat provides for cash payments to be made after their retirement.  The obligations under these arrangements havebeen recorded at the present value of the accrued benefits using a 2% discountrate.  The Company has also entered intoagreements with certain directors and officers to defer portions of theircompensation.  The balance of estimatedaccrued benefits under all of these arrangements was $987,000 and $943,000 atDecember 31, 2006 and 2005, respectively, and was included as a componentof other liabilities in the accompanying consolidated balance sheets.  To assist in funding benefits under each ofthese plans, the Bank has purchased certain assets including life insurancepolicies on covered employees in which the Bank is the beneficiary.  At December 31, 2006 and 2005, the cashsurrender values on these policies and other assets established to meet suchobligations were $3.3 million and $2.9 million, respectively.  In addition to these policies the Bankpurchased $7.5 million of bank owned life insurance policies during 2006, whichhad a cash surrender value of $7.8 million at December 31, 2006.  These policies are not related to deferredcompensation or other retirement agreements.

**(12)****              StockOption Plan**

The Company has a stockbased employee compensation plan which allows for the issuance of stockoptions, the purpose of which is to provide additional incentive to certainofficers, directors, and key employees by facilitating their purchase of astock interest in the Company.  The planis administered by the compensation committee of the board of directors whoselects employees to whom options are granted and the number of sharesgranted.  The option price may not beless 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 thegrant date.  In the case of any employeewho owns more than 10% of the outstanding common stock at the time the optionis granted, the option price may not be less than 110% of the fair market valueof the shares on the date of the grant, and the option shall not be exercisableafter the expiration of ten years from the grant date.  The Company intends to utilize authorized,but un-issued shares to satisfy option exercises.  The number of shares available for futuregrants was 171,593 at December 31, 2006. Compensation expense is recognized over the option vesting period, whichis typically pro-rata over four or five years. The stock-based compensation cost related to these awards was $114,000,$98,000 and $108,000 for the years ended December 31, 2006, 2005, and 2004,respectively.  The Company recognized taxbenefits of $24,000, $14,000 and $16,000 for the years ended December 31, 2006,2005, and 2004, respectively.

In determiningcompensation cost, the Black-Scholes option-pricing model is used to estimatethe fair value of options on date of grant. The Black-Scholes model is a closed-end model that uses the assumptionsoutlined below.  Expected volatility isbased on historical volatility of the Company’s stock.  The Company uses historical exercise behaviorand other qualitative factors to estimate the expected term of the options,which represents the period of time that the options granted are expected to beoutstanding.  The risk-free rate for theexpected term is based on U.S. Treasury rates in effect at the time ofgrant.  The fair value of each optiongrant is estimated on the date of grant. The fair value of options granted were estimated utilizing the followingweighted average assumptions:

45

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|                                      | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend rate                        |       | 5.0                                         | %          | 4.8 | % | 4.8 | % |
| Volatility                           |       | 19.1                                        | %          | 18.0 | % | 19.0 | % |
| Risk-free interest rate              |       | 4.9                                         | %          | 4.3 | % | 3.2 | % |
| Expected lives                       |       | 5 years                                     |       | 5 years |   | 5 years |   |
| Fair value per option  at grant date |       | $                                           | 3.55       |   | $ | 3.40 |   | $ | 3.14 |   |
|                                      |            |                                             |            |  |  |  |  |  |  |  |

 

A summary of option activity during 2006 is presentedbelow:
|                                                   | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **average**  | ** ** | **remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **exercise** | ** ** | **contractual** | ** ** | **intrinsic** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **price**    | ** ** | **term**        | ** ** | **value**     | ** ** |
| Outstanding at  January 1, 2006                   |       | 127,340    |       | $            | 23.73      |            | 7.38 years |          | n/a        |   |
| Granted                                           |       | 109,025    |       | 27.15        |       | —          |       | n/a           |       |
| Effect of 5%  stock dividend                      |       | 11,728     |       | —       |       | —          |       | n/a           |       |
| Cancelled                                         |       | —     |       | —       |       | —          |       | n/a           |       |
| Exercised                                         |       | (1,867     | )          | 14.40        |       | —          |       | n/a           |       |
| Outstanding at  December 31, 2006                 |       | 246,226    |       | $            | 24.18      |            | 7.77 years |          | $          | 755,000 |   |
| Exercisable at  December 31, 2006                 |       | 79,429     |       | $            | 21.06      |            | 5.88 years |          | $          | 492,000 |   |
| Vested and expected to  vest at December 31, 2006 |       | 236,196    |       | $            | 24.12      |            | 7.74 years |          | $          | 738,000 |   |

 

 

Additional information about stock options exercisedis presented below:  
|                                                          | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Intrinsic value of  options exercised (on exercise date) |       | $                                           | 23,584     |   | $ | 109,836 |   | $ | 507,180 |   |
| Cash received from  options exercised                    |       | $                                           | 26,891     |   | $ | 196,088 |   | $ | 221,552 |   |
| Excess tax benefit  realized from options exercised      |       | $                                           | 6,999      |   | $ | 37,344 |   | $ | 135,511 |   |

 

As ofDecember 31, 2006, there was $349,000 of total unrecognized compensation costrelated to outstanding unvested options. That cost is expected to be recognized over a weighted-average period of4 years.  The total fair value (at vestdate) of shares vested during the years ended December 31, 2006, 2005 and 2004was $111,000, $98,000 and $8,000, respectively.

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**(13)****              Fair Value ofFinancial Instruments**

Fairvalue estimates of the Company’s financial instruments as of December 31,2006 and 2005, including methods and assumptions utilized, are set forth below:
|                                                                 | ** ** | **December 31,  2006** | ** **  | **December 31,  2005**    | ** **  |
|-----------------------------------------------------------------|------------|-----------------------------|-------------|--------------------------------|-------------|
| ** **                                                      | ** ** | **Carrying  amount**        | ** **  | **Estimated  fair value** | ** **  | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
| Cash and cash  equivalents                                      |       | $                           | 14,751,914  |                           | 14,752,000  |   | 21,490,512 |   | 21,491,000 |   |
| Investment securities                                           |       | $                           | 145,884,168 |                           | 145,884,000 |   | 140,130,512 |   | 140,131,000 |   |
| Loans, net of unearned  fees and allowance for loan losses |       | $                      | 379,323,581 |                           | 377,595,000 |   | 274,565,855 |   | 275,979,000 |   |
| Loans held for sale                                             |       | $                           | 1,364,474   |                           | 1,384,000   |   | 1,163,211 |   | 1,177,000 |   |
| Non-interest bearing  demand deposits                           |       | $                      | 48,397,528  |                           | 48,398,000  |   | 38,365,040 |   | 38,365,000 |   |
| Money market and NOW deposits                                   |       | 137,304,086                 |        | 137,304,000                    |        | 103,728,104 |   | 103,728,000 |   |
| Savings deposits                                                |       | 27,702,896                  |        | 27,703,000                     |        | 26,098,127 |   | 26,098,000 |   |
| Time deposits                                                   |       | 231,080,860                 |        | 231,348,000                    |        | 163,081,460 |   | 162,595,000 |   |
| Total deposits                                                  |       | $                           | 444,485,370 |                           | 444,753,000 |   | 331,272,731 |   | 330,786,000 |   |
| FHLB advances                                                   |       | $                           | 61,920,421  |                           | 60,414,000  |   | 63,212,318 |   | 63,281,000 |   |
| Other borrowings                                                |       | $                           | 28,495,643  |                           | 28,496,000  |   | 22,046,000 |   | 22,046,000 |   |

 

***Off-Balance Sheet Financial Instruments***

Thefair value of letters of credit and commitments to extend credit is based onthe fees currently charged to enter into similar agreements.  The aggregate of these fees is not material.  These instruments are also discussed in note17 on “Commitments, Contingencies and Guarantees.”

***Methods and Assumptions Utilized***

Thecarrying amount of cash and cash equivalents, repurchase agreements, federalfunds sold, and accrued interest receivable and payable are considered toapproximate fair value.

Theestimated fair value of investment securities, except certain obligations ofstates and political subdivisions, is based on bid prices published infinancial newspapers or bid quotations received from securities dealers.  The fair value of certain obligations ofstates and political subdivisions is not readily available through marketsources other than dealer quotations, so fair value estimates are based uponquoted market prices of similar instruments, adjusted for differences betweenthe quoted instruments and the instruments being valued.

Theestimated fair value of the Company’s loan portfolio is based on thesegregation of loans by collateral type, interest terms, and maturities.  In estimating the fair value of each categoryof loans, the carrying amount of the loan is reduced by an allocation of theallowance for loan losses.  Suchallocation is based on management’s loan classification system which isdesigned to measure the credit risk inherent in each classificationcategory.  The estimated fair value ofperforming variable rate loans is the carrying value of

47

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suchloans, reduced by an allocation of the allowance for loan losses.  The estimated fair value of performing fixedrate loans is calculated by discounting scheduled cash flows through the estimatedmaturity using estimated market discount rates that reflect the interest raterisk inherent in the loan, reduced by an allocation of the allowance for loanlosses.  The estimate of maturity isbased on the Company’s historical experience with repayments for each loanclassification, modified, as required, by an estimate of the effect of currenteconomic and lending conditions.  Thefair value for nonperforming loans is the estimated fair value of the underlyingcollateral based on recent external appraisals or other available information,which generally approximates carrying value, reduced by an allocation of theallowance for loan losses.

Thefair value of loans held for sale is estimated utilizing forward salescommitments or dealer quotations.

Theestimated fair value of deposits with no stated maturity, such as non-interestbearing demand deposits, savings, money market accounts, and NOW accounts, isequal to the amount payable on demand. The fair value of interest-bearing time deposits is based on thediscounted value of contractual cash flows of such deposits.  The discount rate is estimated using therates currently offered for deposits of similar remaining maturities.

Thefair value of advances from the FHLB is estimated using current rates offeredfor similar borrowings.  The fair valuesof other variable rate borrowings approximate the carrying value.

***Limitations***

Fairvalue estimates are made at a specific point in time based on relevant marketinformation and information about the financial instruments.  These estimates do not reflect any premium ordiscount that could result from offering for sale at one time the Company’sentire holdings of a particular financial instrument.  Because no market exists for a significantportion of the Company’s financial instruments, fair value estimates are basedon judgments regarding future loss experience, current economic conditions,risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involveuncertainties and matters of significant judgment, and, therefore, cannot bedetermined with precision.  Changes inassumptions could significantly affect the estimates.  Fair value estimates are based on existingbalance sheet financial instruments without attempting to estimate the value ofanticipated future business and the value of assets and liabilities that arenot considered financial instruments.

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**(14)****              Regulatory CapitalRequirements**

Currentregulatory capital regulations require financial institutions to meet certainregulatory capital requirements. Institutions are required to have minimumleverage capital equal to 4% of total average assets and total qualifyingcapital equal to 8% of total risk-weighted assets in order to beconsidered “adequately capitalized.”  Asof December 31, 2006 and 2005, the Company and the Bank were rated “wellcapitalized,” which is the highest rating available under this capital-basedrating system. Management believes that as of December 31, 2006, theCompany and the Bank meet all capital adequacy requirements to which they aresubject.  The following is a comparisonof the Bank’s regulatory capital to minimum capital requirements atDecember 31, 2006 and 2005, (dollars in thousands):
|                                            | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized under prompt  corrective action provisions** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December 31, 2006:                   |       |       |       |                                         |       |                                                                                                  |       |   |   |   |   |   |   |
| Total capital (to  risk- weighted assets)  |       | $          | 55,740     |                                         | 14.05      | %                                                                                                     | $          | >  | 31,727 |   | >  | 8 | % | $ | >  | 39,659 |   | >  | 10 | % |
| Tier 1 capital  (to risk- weighted assets) |       | 51,710     |       | 13.04                                        |       |                                                                                                  | >  | 15,863 |   | >  | 4 |   |   | >  | 23,795 |   | >  | 6 |   |
| Tier 1 capital  (to average assets)        |       | 51,710     |       | 8.94                                         |       |                                                                                                  | >  | 23,137 |   | >  | 4 |   |   | >  | 28,921 |   | >  | 5 |   |
|                                       |       |       |       |                                         |       |                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As of December 31, 2005:                   |       |       |       |                                         |       |                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to  risk- weighted assets)  |       | $          | 48,071     |                                         | 16.32      | %                                                                                                     | $          | >  | 23,568 |   | >  | 8 | % | $ | >  | 29,461 |   | >  | 10 | % |
| Tier 1 capital  (to risk- weighted assets) |       | 44,920     |       | 15.25                                        |       |                                                                                                  | >  | 11,784 |   | >  | 4 |   |   | >  | 17,676 |   | >  | 6 |   |
| Tier 1 capital  (to average assets)        |       | 44,920     |       | 10.14                                        |       |                                                                                                  | >  | 17,728 |   | >  | 4 |   |   | >  | 22,160 |   | >  | 5 |   |

 

Thefollowing is a comparison of the Company’s regulatory capital to minimumcapital requirements at December 31, 2006 and 2005 (dollars inthousands):
|                                            | ** ** | **Actual**                      | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized under prompt  corrective action provisions** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Amount**                      | ** ** | **Ratio**                          | ** ** | **Amount**                                                              | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December 31, 2006:                   |       |                            |       |                               |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-  weighted assets)  |       | $    53,008 |       | 13.34                              | %          | $                                                                       | >  | 31,797 |   | >  | 8 | % | $ | >  | 39,746 |   | >  | 10 | % |
| Tier 1 capital (to risk- weighted  assets) |       | 48,899                          |       | 12.30                              |       |                                                                    | >  | 15,898 |   | >  | 4 |   |   | >  | 23,848 |   | >  | 6 |   |
| Tier 1 capital (to  average assets)        |       | 48,899                          |       | 8.43                               |       |                                                                    | >  | 23,204 |   | >  | 4 |   |   | >  | 29,005 |   | >  | 5 |   |
|                                       |       |                            |       |                               |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As of December 31, 2005:                   |       |                            |       |                               |       |                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-  weighted assets)  |       | $    54,829 |       | 18.55                              | %          | $                                                                       | >  | 23,647 |   | >  | 8 | % | $ | >  | 29,559 |   | >  | 10 | % |
| Tier 1 capital (to risk- weighted  assets) |       | 51,678                          |       | 17.48                              | %          |                                                                    | >  | 11,823 |   | >  | 4 |   |   | >  | 17,735 |   | >  | 6 |   |
| Tier 1 capital (to  average assets)        |       | 51,678                          |       | 11.61                              |       |                                                                    | >  | 17,800 |   | >  | 4 |   |   | >  | 22,250 |   | >  | 5 |   |

 

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**(15)****              Parent CompanyCondensed Financial Statements**

Thefollowing is condensed financial information of the parent company as ofDecember 31, 2006 and 2005, and for years ended December 31, 2006, 2005,and 2004 (in thousands):

***Condensed Balance Sheets***
|                                                  | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                       | ** ** | ** **                  |       |                        |       |
| Cash                                             |       | $                           | 55         |                        | 8,011      |   |
| Investment securities                            |       | 1,077                       |       | 1,133                       |       |
| Investment in Bank                               |       | 68,192                      |       | 53,432                      |       |
| Other                                            |       | 1,620                       |       | 1,800                       |       |
| Total assets                                     |       | $                           | 70,944     |                        | 64,376     |   |
| **Liabilities and Stockholders’  Equity**   |       |                        |       |                        |       |
| Borrowed funds                                   |       | $                           | 21,226     |                        | 19,796     |   |
| Other                                            |       | 482                         |       | 507                         |       |
| Stockholders’ equity                        |       | 49,236                      |       | 44,073                      |       |
| Total  liabilities and stockholders’ equity |       | $                           | 70,944     |                        | 64,376     |   |

 

*** Condensed Statements of Earnings***
|                                                         | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividends from Bank                                     |       | $                                           | 6,258      |   | 4,457 |   | 5,105 |   |
| Interest income                                         |       | 66                                          |       | 43 |   | 70 |   |
| Other income                                            |       | 255                                         |       | 53 |   | 316 |   |
| Interest expense                                        |       | (1,654                                      | )          | (770 | ) | (542 | ) |
| Other expense, net                                      |       | (188                                        | )          | (189 | ) | (196 | ) |
| Income before  equity in undistributed earnings of Bank |       | 4,737                                       |       | 3,594 |   | 4,753 |   |
| (Decrease)/increase in  undistributed equity of Bank    |       | 741                                         |       | 6 |   | (625 | ) |
| Earnings before  income taxes                           |       | 5,478                                       |       | 3,600 |   | 4,128 |   |
| Income tax benefit                                      |       | (532                                        | )          | (297 | ) | (123 | ) |
| Net earnings                                            |       | $                                           | 6,010      |   | 3,897 |   | 4,251 |   |

 

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***Condensed Statements ofCash Flows***
|                                                                                 | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                          |       |                                        |       |   |   |   |   |
| Net earnings                                                                    |       | $                                           | 6,010      |   | 3,897 |   | 4,251 |   |
| Decrease/(increase)  in undistributed equity of Bank                            |       | (741                                        | )          | (6 | ) | 625 |   |
| Other                                                                           |       | (59                                         | )          | (1,247 | ) | 1,364 |   |
| Net cash  provided by operating activities                                      |       | 5,210                                       |       | 2,644 |   | 6,240 |   |
| Cash flows from  investing activities:                                          |       |                                        |       |   |   |   |   |
| Purchase of  investment securities available-for-sale                           |       | (3                                          | )          | (112 | ) | (551 | ) |
| Proceeds from  sales and maturities of investment securities available-for-sale |       | 165                                         |       | 160 |   | 926 |   |
| Cash paid in  acquisitions                                                      |       | (13,080                                     | )          | — |   | (17,502 | ) |
| Net cash  provided by/(used in) investing activities                            |       | (12,918                                     | )          | 48 |   | (17,127 | ) |
| Cash flows from  financing activities:                                          |       |                                        |       |   |   |   |   |
| Issuance of  shares under stock option plan                                     |       | 27                                          |       | 196 |   | 221 |   |
| Proceeds from other  borrowings                                                 |       | 9,772                                       |       | 9,998 |   | 9,555 |   |
| Repayments on  other borrowings                                                 |       | (8,342                                      | )          | (3,470 | ) | (4,535 | ) |
| Purchase of  treasury stock                                                     |       | (138                                        | )          | (1 | ) | (3,055 | ) |
| Payment of  dividends                                                           |       | (1,567                                      | )          | (1,444 | ) | (1,421 | ) |
| Net cash (used)  provided by financing activities                               |       | (248                                        | )          | 5,279 |   | 765 |   |
| Net  (decrease)/increase in cash                                                |       | (7,956                                      | )          | 7,971 |   | (10,122 | ) |
| Cash at beginning of  year                                                      |       | 8,011                                       |       | 40 |   | 10,162 |   |
| Cash at end of year                                                             |       | $                                           | 55         |   | 8,011 |   | 40 |   |

 

Dividends paid bythe Company are provided through subsidiary bank dividends. AtDecember 31, 2006, the Bank could distribute dividends of up to $122,000without regulatory approvals.

**(16)****              Stockholders’ RightsPlan**

OnOctober 11, 2001, the Company’s board of directors adopted a stockholders’rights plan (the Rights Plan).  TheRights Plan provided for the distribution of one right on February 13,2002, for each share of the Company’s outstanding common stock as ofFebruary 1, 2002.  The rights haveno immediate economic value to stockholders, because they cannot be exercisedunless and until a person, group or entity acquires 15% or more of the Company’scommon stock or announces a tender offer. The Rights Plan also permits the Company’s board of directors to redeemeach right for one cent under various circumstances.  In general, the Rights Plan provides that ifa person, group or entity acquires a 15% or larger stake in the Company orannounces a tender offer, and the Company’s board of directors chooses not toredeem the

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rights, allholders of rights, other than the 15% stockholder or the tender offeror, willbe able to purchase a certain amount of the Company’s common stock for half ofits market price.

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

Commitments toextend credit are legally binding agreements to lend to a borrower providingthere are no violations of any conditions established in the contract.  The Company, as a provider of financialservices, routinely issues financial guarantees in the form of financial andperformance commercial and standby letters of credit.  As many ofthe commitments are expected to expire without being drawn upon, the totalcommitment does not necessarily represent future cash requirements (see Note5).

The Companyguarantees payments to holders of certain trust preferred securities issued bywholly owned grantor trusts.  Thesecurities are due in 2034 and 2036 and are redeemable beginning in 2009 and2011. The maximum potential future payments guaranteed by the Company, whichincludes future interest and principal payments through maturity, wasapproximately $50.8 million at December 31, 2006.  At December 31, 2006, the Company had arecorded liability of $16.7 million of principal and accrued interest to date,representing amounts owed to the Trust.

There are no pending legal proceedings to which theCompany or the Bank is a party other than ordinary routine litigationincidental to the Bank’s business.  Whilethe ultimate outcome of current legal proceedings cannot be predicted withcertainty, it is the opinion of management that the resolution of these legalactions should not have a material effect on the Company’s consolidatedfinancial position or results of operations.

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**CORPORATEINFORMATION**

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

Larry Schugart, Chairman

Former President and Chief Executive Officer

Landmark Bancshares, Inc.

Patrick L. Alexander

President and Chief Executive 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.

  Architectsand Landscape Architects

Joseph L. Downey

Retired Senior Vice President, Director and ExecutiveOfficer

Dow Chemical Company

Jim W. Lewis

Owner, Various AutomobileDealerships

Jerry R. Pettle

Retired Dentist

Dental Associates ofManhattan, P.A.

Susan E. Roepke

Retired Vice President, Secretary and Treasurer, MNBBancshares, Inc.

Retired Senior VicePresident/Secretary/Cashier, Security National Bank

C. Duane Ross

President

High Plains Publishers,Inc.

David H. Snapp

Law Partner

Waite, Snapp & Doll

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**EXECUTIVEOFFICERS OF LANDMARK BANCORP, INC.**

Patrick L. Alexander

President and ChiefExecutive Officer

Mark A. Herpich

Chief Financial Officer,Vice President, Secretary and Treasurer

**EXECUTIVEOFFICERS OF LANDMARK NATIONAL BANK**

Patrick L. Alexander

President and ChiefExecutive Officer

Mark A. Herpich

Executive Vice President,Secretary and Cashier

Michael E. Scheopner

Executive Vice President,Credit Risk Manager

Dean R. Thibault

Executive Vice President,Commercial Lending

Larry R. Heyka

Market President,Manhattan

Mark J. Oliphant

Market President, DodgeCity

#### **STOCKPRICE INFORMATION**

Our common stock hastraded on the Nasdaq Global Market under the symbol “LARK” since 2001. AtDecember 31, 2006, the Company had approximately 1,150 stockholders, consistingof approximately 420 owners of record and approximately 730 beneficial ownersof our common stock.   Set forth beloware the reported high and low sale prices of the common stock and dividendspaid during the past two years.  Informationpresented below has been adjusted to give effect to the 5% stock dividendsdeclared in December 2006 and 2005.
| Year Ended December 31, 2006 | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  Dividends** | ** ** |
|--------------------------------------------------|------------|----------|------------|---------|------------|---------------------|------------|
| First Quarter                                    |       | $        | 26.67      |    | $          | 23.71               |       | $ | 0.1619 |   |
| Second Quarter                                   |       | 26.90    |       | 25.33   |       | 0.1619              |       |
| Third Quarter                                    |       | 27.19    |       | 24.10   |       | 0.1619              |       |
| Fourth Quarter                                   |       | 28.80    |       | 26.04   |       | 0.1810              |       |
|                                                  |            |          |            |         |            |                     |            |  |  |  |

 
| Year Ended December 31, 2005 | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  Dividends** | ** ** |
|--------------------------------------------------|------------|----------|------------|---------|------------|---------------------|------------|
| First Quarter                                    |       | $        | 27.66      |    | $          | 25.85               |       | $ | 0.1542 |   |
| Second Quarter                                   |       | 27.67    |       | 22.31   |       | 0.1542              |       |
| Third Quarter                                    |       | 24.00    |       | 21.36   |       | 0.1542              |       |
| Fourth Quarter                                   |       | 23.76    |       | 20.00   |       | 0.1542              |       |
|                                                  |            |          |            |         |            |                     |            |  |  |  |

 

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**CORPORATE HEADQUARTERS**

701 Poyntz Avenue

Manhattan,Kansas 66502

**ANNUAL MEETING**

The annual meeting ofstockholders will be held at the Manhattan Union Pacific Depot, 120 Fort RileyBoulevard, Manhattan, Kansas, on Wednesday, May 23, 2007 at 2:00 PM.

**FORM 10-K**

A copy of the AnnualReport on Form 10-K filed with the Securities and Exchange Commission may beobtained by stockholders without charge on written 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 atwww.landmarkbancorpinc.com or the SEC’s website at www.sec.gov.

**REGISTRAR AND TRANSFER AGENT**

Registrar and TransferCompany

10 Commerce Drive

Cranford,NJ 07016-3572

**INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

KPMG LLP

1000 Walnut, Suite 1000

KansasCity, Missouri 64106

**PERFORMANCE GRAPH**
| **COMPARE 5-YEAR CUMULATIVE TOTAL RETURN**    | ** ** |
|-----------------------------------------------|------------|
| **AMONG LANDMARK BANCORP, INC.,**             | ** ** |
| **NASDAQ MARKET INDEX AND NASDAQ BANK INDEX** | ** ** |

 

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