**Exhibit 13.1**

 

To our Stockholders, Customers and Friends

 

Landmark Bancorp, Inc.continued its tradition of growth in 2005 as total assets equaled $465 millionat year end compared to $442 million in 2004. Net earnings of $3.9 millionresulted in a return on average equity of 9.0 percent and a return on averageassets of .87 percent. Fully diluted earnings per share were $1.75 for 2005with book value per share equaling $19.78 at year end. We continued our annualpractice of a five percent stock dividend which has effectively increased ourdeclared cash dividend by five percent in 2005 compared to 2004. We acquiredtwo bank branches in Great Bend, Kansas which dramatically increased our marketshare and simultaneously upgraded our bank facilities within that community. InSeptember 2005, we announced a definitive agreement to acquire FirstManhattan Bancorporation, Inc., which has banking offices in Manhattan,Lawrence, and Junction City, Kansas. Landmark is poised to continue its trackrecord of growth and we are well positioned to leverage our past successes intocontinued growth and enhanced financial performance in 2006 and beyond. In thefollowing paragraphs, I will recap the challenges and success we experienced in2005 and describe the opportunities that lie before us in 2006.

 

We were not satisfied tosee net earnings in 2005 of $3.9 million compared to $4.3 million in 2004.However, there were some significant factors that contributed to this 8.3percent decline in net earnings and reason to be optimistic about enhancedperformance in the future. Gains on sale of loans decreased approximately $348thousand in 2005 compared to 2004 as residential mortgage refinancing activitycontinued to slow to a more normal level. Additionally, we witnessed a decline of$312 thousand in gain on sale of investments compared to 2004 due to decreasedsale of equity investments in your company’s bank stock portfolio. On thepositive side, we experienced a $293 thousand increase in net interest incomeafter provision for loan losses in 2005 compared to 2004. At the same time,fees and service charges increased 6.6 percent, or $216 thousand, in 2005compared to 2004. Our balance sheet structure was improved in the third quarterwhen we prepaid $10 million in higher cost funding associated with Federal HomeLoan Bank borrowings acquired in the First Kansas transaction. Our net interestmargin increased from 3.16 percent in the fourth quarter of 2004 to 3.28percent in the fourth quarter of 2005. We plan on continuing to study and takeadvantage of opportunities when appropriate to further restructure our balancesheet to eliminate low yielding assets and high cost liabilities in a mannerwhich will enhance earnings and net interest margin going forward. Finally, wehave been able to reduce our effective income tax rate from 32 percent to 30percent through the increased utilization of tax exempt investment securitiesand  investment tax credits. We alwayswelcome the opportunity to take advantage of extraordinary levels of gains onsale of loans and gains on sale of investments as we did in 2004. However, weare focused on continuing to increase the core earnings that come from thebasic banking principles of increased net interest income, increased incomefrom fees and service charges, controlled expense levels, and prudent use oftax exempt investments. We made significant progress on these fundamentals in2005.

 

Short term interest ratescontinued to increase in 2005 as long term interest rates remained relativelystable. This flattening of the yield curve has continued to the degree that wehave even seen the beginning of an inverted yield curve in the early part of2006. This type of environment has typically not been favorable for bankearnings as most deposits are relatively short term and banks traditionallyhave made many of their loans with maturities in the one to five year range. Aflat or inverted yield curve has the effect of compressing net interest marginsas the cost of deposits increase and the opportunity to pass this increasedcost along to borrowers is difficult due to rates on intermediate maturitiesnot increasing as much as the shorter term rates. In spite of this movement ininterest rates, we were able to increase our net interest margin from 3.16percent in the fourth quarter of 2004 to 3.28 percent in the fourth quarter of2005. Our efforts to continue to expand core deposit transaction accounts hascontinued to be successful as non-interest demand deposits increased from $28.5million in 2004 to $38.4 million in 2005. At the same time, money market andNOW deposits increased from $96.6 million in 2004 to $103.7 million in 2005.Savings accounts increased from $23.2 million in 2004 to $26.1 million in 2005.Increases in these core deposit accounts make us less susceptible to interestrate fluctuations and enhance our liquidity management capabilities. Continuedgrowth in core deposit transaction accounts also fuels growth in non-interestincome from fees and service charges. Our continued efforts in this area shouldpay dividends when the yield curve reverts back to a more traditional upwardslope.

 

Your company continues tofocus its efforts on the generation of commercial and consumer loans andreduction of the concentration of one to four family residential loans withinits loan portfolio. Commercial loans increased from $51.8 million at December 31,2004 to $63.5 million at December 31, 2005. Commercial and agriculturalreal estate loans increased from $88.4 million to $90.4 million in the sametime period. At the same time, residential mortgage loans decreased from $131.1million to $114.9 million. While total loans decreased approximately $2.6million due to the runoff of residential loans, we continued our

 

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long term plan to expandcommercial lending assets and achieved significant progress in that area.Activity in our markets appears to be strong and we anticipate that we willcontinue to see this growth as we go forward in 2006. We have been able to growour commercial lending portfolio and, at the same time, maintain our highstandards for credit quality. This credit quality is reflected with net loancharge-offs in 2005 equaling $127 thousand compared to $234 thousand in 2004.Even with our focus to expand our commercial loan portfolio, we remain a leaderwithin our markets in the origination of residential mortgage loans, themajority of which are sold into the secondary market.

 

Considerable effortsexpended in 2005 leave your company poised for additional growth and enhancedfinancial performance in 2006. Effective January 1, 2006 we completed theacquisition of First Manhattan Bancorporation, Inc. the holding company ofFirst Savings Bank F.S.B. First Savings Bank was a Manhattan, Kansas basedfinancial institution with banking offices located in Manhattan, Lawrence, andJunction City, Kansas. This acquisition presents numerous opportunities foryour company. We are consolidating our main banking office and branch bank inManhattan with the former First Savings Bank facilities which will allow ussignificant savings in occupancy, operational, and personnel expenses. Weanticipate these expense savings will be approximately $1.2 million beforetaxes. Because of the consolidation, we were able to sell our former mainbanking facility in Manhattan and the transaction should provide a gain ofapproximately $600 thousand upon closing. The acquisition doubles our marketshare in the Manhattan market and further complements our Manhattan and Wamego,Kansas locations with a banking facility in Junction City, Kansas. TheManhattan, Wamego and Junction City communities are experiencing significantgrowth in both non military and military population with the recentannouncement of the expansion of the U.S. Army’s Fort Riley militaryinstallation and the relocation of the First Armored Division headquarters toFort Riley accompanied by a planned increase of troops stationed at theinstallation. Additionally, the acquisition gives us a banking presence inLawrence, Kansas, home of the University of Kansas, a rapidly growing communityof approximately 80,000 people strategically located on Interstate 70 betweenKansas City and Topeka, Kansas. This transaction simultaneously enhances ourmarket share in the Manhattan market area, compliments our existing bankingnetwork, and provides the opportunity for significant expense reductions. Atthe same time, we were able to add to our team of associates several skilledand experienced bankers dedicated to the continuing success of the company. Weare very excited about the expanded opportunities this strategic addition toyour company presents for us.

 

Last year I spoke of theincreasing regulatory burden we face as an industry. This burden has not abatednor do we expect it to relax. The Bank Secrecy Act, The USA Patriot Act, theSarbanes-Oxley Act and other consumer protection legislation continue to be inthe forefront and command significant management attention in order to meetregulatory expectations. We have expanded our efforts and resources in theareas of consumer compliance and internal audit. Internal controls have beenfurther enhanced in order to meet the growth and regulatory needs of yourcompany. These efforts have served us well and enabled us to meet the requirementswithin the industry. This will be an area that will continue to demandattention and resources as we grow. It is not inexpensive to meet the needs andexpectations in these areas, but it is imperative that we continue to focus onthese efforts in order to continue our strategic direction of being a leadingfinancial institution within our market area.

 

Your company hasexperienced robust growth over the last four plus years. In September 2001,our asset size was approximately $200 million. As recently as March 2004,our asset size was right at $330 million. Since that time, we have grown toapproximately $600 million effective January 1, 2006. We have never beenstronger than we are now in the areas of personnel and systems. Over the lastyear, we have expanded our market share significantly in both the Manhattan andGreat Bend markets. We have gained a presence in the dynamic Lawrence, Kansasmarket and are gathering momentum in Miami County. We intend to capitalize onthese strengths in the months ahead. We will be looking internally at how we dobusiness and ways in which we can improve our processes. We will also continueto explore better ways to serve our customers and maximize the services ourcustomers utilize. Through business development efforts, we will be able toexpand our customer base with individuals and businesses looking to takeadvantage of the benefits we can deliver. All of these efforts will paydividends and allow us to continue to grow and enhance our financialperformance.

 

It is an exciting timefor your company. We are well positioned to take advantage of the opportunitiesthat lie before us. We have a team of banking associates that is first class andfocused on delivering quality financial services to our customers. We have a strongcapital base in excess of $40 million and a growing asset base which is diverseand of high quality. We are located within 16 Kansas communities that areeconomically diverse and with many of them experiencing periods of excitingeconomic growth. The future is bright and we

 

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are looking forward tocontinued growth and profitability.

 

I would like to thank ourshareholders for your continued support and confidence. We are continuallystriving to enhance our profitability and shareholder value. I am also indebtedto my associates for all of their efforts throughout the years. They haveworked tirelessly to improve the company and meet the needs of our customers.It is through their efforts that we have been able to enjoy the success we haveaccomplished over the past several years. And finally, I must thank ourcustomers for their confidence, support, and patronage. We will continue towork to deliver quality financial services to enable you to succeed and prosperin your business and personal endeavors. We look forward to 2006 and thecontinued growth and success of Landmark Bancorp.

 
|   | Sincerely,                             |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | Patrick L.  Alexander                  |
|   | President and  Chief Executive Officer |

 

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**SELECTEDFINANCIAL AND OTHER DATA OF LANDMARK BANCORP, INC.**

 
| ** **                                                       | ** ** | **At or for the years ended December 31,**       | ** ** | **At or for the three months  ended  Dec. 31,** | ** ** | **At or for  the year  ended  Sept. 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                              | ** ** | **2004**                                             | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** | **2001** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands, except  per share amounts)** | ** ** |
| **Selected Financial Data:**                                     |       |                                                  |       |                                                 |       |                                      |       |   |   |   |   |   |   |
| Total assets                                                     |       | $                                                     | 465,110    |                                                 | $          | 442,091                                   |       | $ | 334,046 |   | $ | 341,314 |   | $ | 349,700 |   | $ | 200,255 |   |
| Loans (1)                                                        |       | 275,729                                               |       | 278,260                                              |       | 215,030                                   |       | 229,112 |   | 240,979 |   | 144,473 |   |
| Investments available-for-sale                                   |       | 140,131                                               |       | 133,604                                              |       | 99,746                                    |       | 89,296 |   | 75,311 |   | 30,889 |   |
| Cash and cash equivalents                                        |       | 21,491                                                |       | 7,845                                                |       | 7,708                                     |       | 11,449 |   | 22,163 |   | 20,001 |   |
| Deposits                                                         |       | 331,273                                               |       | 302,868                                              |       | 253,108                                   |       | 264,281 |   | 273,246 |   | 148,064 |   |
| Borrowings                                                       |       | 85,258                                                |       | 94,571                                               |       | 33,755                                    |       | 26,203 |   | 28,697 |   | 21,000 |   |
| Stockholders’ equity                                        |       | 44,073                                                |       | 42,169                                               |       | 42,572                                    |       | 41,074 |   | 40,205 |   | 26,099 |   |
| **Selected Operating Data:**                                     |       |                                                  |       |                                                 |       |                                      |       |   |   |   |   |   |   |
| Interest income                                                  |       | $                                                     | 22,125     |                                                 | $          | 19,949                                    |       | $ | 17,276 |   | $ | 19,562 |   | $ | 5,224 |   | $ | 16,438 |   |
| Interest expense                                                 |       | 8,957                                                 |       | 7,000                                                |       | 5,655                                     |       | 7,111 |   | 2,475 |   | 9,909 |   |
| Net interest income                                              |       | 13,167                                                |       | 12,949                                               |       | 11,622                                    |       | 12,451 |   | 2,749 |   | 6,529 |   |
| Provision for loan losses                                        |       | 385                                                   |       | 460                                                  |       | 240                                       |       | 182 |   | 33 |   | 120 |   |
| Net interest income after provision for loan losses              |       | 12,782                                                |       | 12,489                                               |       | 11,382                                    |       | 12,269 |   | 2,716 |   | 6,409 |   |
| Non-interest income                                              |       | 5,056                                                 |       | 5,125                                                |       | 4,974                                     |       | 3,856 |   | 1,012 |   | 2,353 |   |
| Severance and other costs related to merger with MNB  Bancshares |       | —                                                |       | —                                               |       | —                                    |       | — |   | 2,705 |   | — |   |
| Non-interest expense                                             |       | 12,282                                                |       | 11,353                                               |       | 9,229                                     |       | 9,184 |   | 4,796 |   | 4,277 |   |
| Income (loss) before income taxes                                |       | 5,556                                                 |       | 6,261                                                |       | 7,127                                     |       | 6,941 |   | (1,068 | ) | 4,485 |   |
| Provision (benefit) for income taxes                             |       | 1,659                                                 |       | 2,010                                                |       | 2,275                                     |       | 2,363 |   | (430 | ) | 1,780 |   |
| Cumulative effect of change in accounting principle,  net of tax |       | —                                                |       | —                                               |       | —                                    |       | — |   | — |   | (215 | ) |
| Net earnings (loss)                                              |       | $                                                     | 3,897      |                                                 | $          | 4,251                                     |       | $ | 4,852 |   | $ | 4,578 |   | $ | (638 | ) | $ | 2,490 |   |
| Net earnings (loss) per share (2):                               |       |                                                  |       |                                                 |       |                                      |       |   |   |   |   |   |   |
| Basic                                                            |       | $                                                     | 1.75       |                                                 | $          | 1.87                                      |       | $ | 2.09 |   | $ | 1.90 |   | $ | (0.27 | ) | $ | 1.84 |   |
| Diluted                                                          |       | 1.75                                                  |       | 1.85                                                 |       | 2.06                                      |       | 1.84 |   | (0.27 | ) | 1.70 |   |
| Dividends per share (2)                                          |       | 0.65                                                  |       | 0.62                                                 |       | 0.57                                      |       | 0.50 |   | 0.11 |   | 0.47 |   |
| Book value per common share  outstanding (2)                     |       | 19.78                                                 |       | 19.03                                                |       | 18.50                                     |       | 17.64 |   | 15.90 |   | 18.56 |   |
| **Other Data:**                                                  |       |                                                  |       |                                                 |       |                                      |       |   |   |   |   |   |   |
| Return on average assets (3)                                     |       | 0.87                                                  | %          | 0.98                                                 | %          | 1.46                                      | %          | 1.35 | % | (0.72 | )% | 1.13 | % |
| Return on average equity (3)                                     |       | 9.04                                                  |       | 9.98                                                 |       | 11.53                                     |       | 11.31 |   | (6.29 | ) | 10.17 |   |
| Equity to total assets                                           |       | 9.48                                                  |       | 9.54                                                 |       | 12.74                                     |       | 12.03 |   | 11.50 |   | 13.03 |   |
| Net interest rate spread (3)                                     |       | 2.89                                                  |       | 2.93                                                 |       | 3.35                                      |       | 3.44 |   | 2.82 |   | 2.57 |   |
| Net yield on average interest-earning  assets (3)                |       | 3.16                                                  |       | 3.19                                                 |       | 3.71                                      |       | 3.86 |   | 3.22 |   | 3.09 |   |
| Non-performing assets to total assets                            |       | 0.88                                                  |       | 0.37                                                 |       | 0.45                                      |       | 0.41 |   | 0.37 |   | 0.50 |   |
| Non-performing loans to net loans                                |       | 1.21                                                  |       | 0.41                                                 |       | 0.56                                      |       | 0.42 |   | 0.43 |   | 0.53 |   |
| Allowance for loan losses to total loans                         |       | 1.14                                                  |       | 1.04                                                 |       | 1.07                                      |       | 1.12 |   | 1.10 |   | 0.99 |   |
| Dividend payout ratio                                            |       | 37.14                                                 |       | 33.33                                                |       | 27.63                                     |       | 27.57 |   | NM |   | 25.38 |   |
| Number of full service banking offices                           |       | 17                                                    |       | 16                                                   |       | 12                                        |       | 12 |   | 12 |   | 6 |   |

 

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

 

(1)          Includesloans held for sale totaling $1.2 million, $846,000, $734,000, $5.1 million, $5.7million, and $2.5 million at December 31, 2005, 2004, 2003, 2002, and2001, and September 30, 2001, respectively.

 

(2)          Allper share amounts have been adjusted to give effect to the 5% stock dividendspaid in December 2005, 2004, 2003, 2002, and 2001.

 

(3)          Amountsfor the three months ended December 31, 2001 have been annualized as aresult of the merger in 2001 and the change in our fiscal year.

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**CORPORATEPROFILE AND OVERVIEW**

 

Landmark Bancorp, Inc.is a one-bank holding company incorporated under the laws of the State ofDelaware and is engaged in the banking business through its wholly-ownedsubsidiary, Landmark National Bank. Landmark Bancorp is listed on the NasdaqStock Market under the symbol “LARK”. Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities. Ourstrategy includes continuing a tradition of quality assets while growing ourcommercial and commercial real estate loan portfolios. We are committed todeveloping relationships with our borrowers and providing a total bankingservice.

 

Landmark National Bank isprincipally engaged in the business of attracting deposits from the generalpublic and using such deposits, together with Federal Home Loan Bank (“FHLB”) 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 notour primary business function, we do invest in certain investment andmortgage-related securities using deposits and other funds 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. Net interest income is affected by regulatory,economic and competitive factors that influence interest rates, loan demand anddeposit flows. In addition, we are subject to interest rate risk to the degreethat our interest-earning assets mature or reprice at different times, or atdifferent 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 and investments. Ouroperating expenses, aside from interest expense, principally consist ofcompensation and employee benefits, occupancy costs, federal deposit insurancecosts, data processing expenses and provisions for potential loan losses.

 

We are significantlyimpacted by prevailing economic conditions including federal monetary andfiscal policies and federal regulations of financial institutions. Depositbalances are influenced by numerous factors such as competing personalinvestments, the level of personal income and the personal rate of savingswithin our market areas. Factors influencing lending activities include thedemand for housing and the interest rate pricing competition from other lendinginstitutions.

 

Currently, including theacquisition of First Manhattan Bancorporation, Inc. (“FMB”), our businessconsists of ownership of Landmark National Bank, with its main office inManhattan, Kansas and eighteen branch offices in eastern, central andsouthwestern Kansas.

 

On August 19, 2005,the Company acquired two branch locations in Great Bend, Kansas from UMBFinancial Corporation. Pursuant to the purchase agreement, the Company assumedapproximately $33.3 million in deposits and acquired the related branchpremises and equipment. The Company received cash of approximately $30.4million. The Company recorded a core deposit intangible of $1.4 million whichis not deductible for tax purposes. On January 1, 2006, we moved forwardwith our plans of growth and expansion when we completed the cash acquisitionof FMB. FMB was a single thrift holding company based in Manhattan, Kansas,with locations in Manhattan, Junction City and Lawrence, Kansas.

 

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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 eastern Kansas,presenting us with potential for revenue generation and asset growth. The costin excess of the tangible and identifiable intangible net assets acquired hasbeen recorded as goodwill. In connection with the acquisition and thesubsequent sale of our branches as described below, we recorded a core depositintangible of $605,000, which is being amortized on an accelerated basis overten years, and goodwill attributable to the acquisition of First Kansas of $5.7million, none of which is deductible for tax purposes. The results for the yearended December 31, 2004, include First Kansas’ results of operations sinceApril 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. Uponconsummation of the transactions, we sold approximately $7.7 million indeposits and approximately $2.4 million in loans and premises and equipmentassociated with the Beloit branch and approximately $4.7 million in depositsand approximately $846,000 in loans and premises and equipment related to the Phillipsburgbranch. The net proceeds received from the buyers of these branches wererecorded as a reduction of goodwill and the core deposit intangible.

 

**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 inherently uncertain. Ourcritical accounting policies relate to the allowance for loan losses, thevaluation of investment securities, and accounting for income taxes, all ofwhich involve significant judgment by our management.

 

We perform periodicand systematic detailed reviews of our lending portfolio to assess overallcollectability. The level of the allowance for loan losses reflects ourestimate of the collectability of the loan portfolio. While these estimates arebased on substantive methods for determining allowance requirements,nevertheless, actual outcomes may differ significantly from estimatedresults. Additional explanation of the methodologies used in establishing thisreserve is provided in the “Asset Quality and Distribution” section.

 

We report our available forsale investment securities at estimated fair values based on readilyascertainable values which are obtained from independent sources. Ourmanagement performs periodic reviews of the investment securities to determineif any investment securities have declined in value which might be consideredother than temporary. Although we believe that our estimates of the fair valuesof investment securities to be reasonable, economic and market factors may affectthe amounts that will ultimately be realized from these investments.

 

The objectives ofaccounting for income taxes are to recognize the amount of taxes payable orrefundable for the current year and deferred tax liabilities and assets for thefuture tax consequences of events that have been recognized in an entity’sfinancial statements or tax returns. Judgment is required in assessing thefuture tax consequences of events that have been recognized in our financialstatements or tax returns. Fluctuations in the actual outcome of these futuretax consequences, including the effects of IRS examinations and examinations byother state agencies, could materially impact our financial position andresults of operations.

 

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31,2004**

 

**SUMMARYOF PERFORMANCE.**Netearnings for 2005 decreased $354,000, or 8.3%, to $3.9 million as compared to2004. 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. The gains on sales of loans decreased asresidential mortgage refinancing activity continues to slow as interest rateshave increased since the beginning of 2004. The increases in non-interestexpense and the improvement of net interest income primarily resulted from ouracquisition of First Kansas on April 1, 2004, as we incurred additionalexpenses associated with operating these new branches and as our averageearning assets increased.

 

Theyear ended December 31, 2005 resulted in diluted earnings per share of $1.75compared to $1.85 for 2004. Return on average assets was 0.87% for 2005,compared to 0.98% for 2004. Return on average stockholders’ equity was 9.04%for 2005, compared to 9.98% for 2004.

 

Wedistributed a 5% stock dividend for the fifth consecutive year in December 2005.All per share and average share data in this section reflects the 2005stock dividend.

 

**INTERESTINCOME.**Interestincome for 2005 increased $2.2 million, or 10.9%, to $22.1 million from $19.9million for 2004. This increase was partially the result of the increase ininterest earning assets as 2005 was the first full year for the First Kansasacquisition in addition to the rise in interest rates experienced during 2005. Averageloans for 2005 increased to $275.2 million from $267.0 million for the sameperiod in 2004. Interest income on loans increased $1.6 million, or 10.3%, to$17.3 million for 2005. Average investment securities increased from $135.3million for 2004, to $138.8 million for 2005. Interest income on investmentsecurities increased $483,000, or 11.4%, to $4.7 million for 2005, due to theincrease in interest rates which allowed the yields on our investmentspurchased in 2005 to exceed the yields on our maturing investments.

 

**INTERESTEXPENSE.**Interestexpense for 2005 increased to $9.0 million from $7.0 million for 2004, or 28.0%.Interest expense on deposits increased to $5.6 million, or 41.2%, from $3.9million in 2005 as average deposits increased from $306.1 million at December 31,2004, to $313.4 million at December 31, 2005. The increase in interestexpense on deposits resulted primarily from the increase in interest rates andthe repricing of maturing deposits at these higher rates. Interest expense onborrowings increased $331,000, or 10.8%. The increase in interest expense onborrowings resulted primarily from additional advances from the FHLB of approximately$56.4 million which we assumed through the acquisition of First Kansas, and the$7.0 million that we borrowed in April 2004 to consummate the acquisitionof First Kansas. These increases were partially offset by the repayment of$10.0 million of FHLB advances prior to their scheduled maturities in August 2005.

 

**NETINTEREST INCOME.**Net interest income represents thedifference between income derived from interest-earning assets and the expenseincurred on interest-bearing liabilities. Net interest income is affected byboth the difference between the rates of interest earned on interest-earningsassets and the rates paid on interest-bearing liabilities (“interest ratespread”) as well as the relative amounts of interest-earning assets and interest-bearingliabilities.

 

Netinterest income for 2005 totaled $13.2 million, a 1.7% increase, as compared to$12.9 million for 2004, due primarily to a higher level of net interest earningassets obtained through  the First Kansasacquisition in April 2004. Average earning assets increased during 2005 to$417.0 million from $405.9 million for 2004. The net interest margin on earningassets was 3.16% for 2005, down from 3.19% for the same period of 2004. The

 

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declinein our net interest margin was primarily the result of the increased FHLBadvances acquired with the First Kansas acquisition which are priced relativelyhigher than deposit rates. Additionally, the residential mortgage loansacquired with the First Kansas acquisition are also at rates that arerelatively lower than the average of our loan portfolio prior to theacquisition. Also contributing to the decline in the net interest margin was acontinued reduction in loans arising from payoffs and refinancing in theone-to-four family residential loan portfolio exceeding our ability to generatenew commercial and consumer loans. We believe the increase in Federal Fundsrates over the past two years by the Federal Open Market Committee will have apositive impact on our net interest margin during 2006 as our interest rates onearning assets reprice to higher rates and at a faster rate than ourliabilities reprice. We have already experienced the improvement as our netinterest margin increased from 3.16% in the fourth quarter of 2004 to 3.28% inthe fourth quarter of 2005.

 

**PROVISIONFOR LOAN LOSSES.**We maintain, and our Board of Directors monitors, an allowance for losseson loans. The allowance is established based upon management’s periodicevaluation of known and inherent risks in the loan portfolio, review ofsignificant individual loans and collateral, review of delinquent loans, pastloss experience, adverse situations that may affect the borrowers’ abilityto repay, current and expected market conditions, and other factors managementdeems important. Determining the appropriate level of reserves involves a highdegree of management judgment and is based upon historical and projected lossesin the loan portfolio and the collateral value of specifically identifiedproblem loans. Additionally, allowance strategies and policies are subject toperiodic review and revision in response to a number of factors, includingcurrent market conditions, actual loss experience and management’sexpectations.

 

Theprovision for loan losses decreased to $385,000 for 2005, compared to $460,000for 2004. Our continuous review of the loan portfolio prompted a decrease inour provision, primarily as a result of improvement in the assetquality of the commercial loan portfolio. At December 31, 2005, the allowance for loanlosses was $3.2 million, or 1.1% of gross loans outstanding, compared to $2.9million, or 1.0% of gross loans outstanding, at December 31, 2004. Forfurther discussion of the provision for loan losses, refer to the “AssetQuality and Distribution” section.

 

**NON-INTERESTINCOME.**Non-interestincome remained relatively flat, decreasing $69,000, or 1.4%, for 2005 to $5.1million. The decrease in non-interest income reflected a 35.3% decline in thegains on sale of loans from $987,000 for 2004, to $639,000 for 2005 as ourresidential mortgage financing activities slowed to a more normal level. Alsocontributing to this decrease was decreased gains on sale of investments of$312,000 for 2005 as compared to the same period of 2004, resulting from fewerequity security sales from our holding company’s investment portfolio. Offsettingthese decreases in non-interest income was a $407,000 gain on the repayment of$10.0 million of FHLB advances. Also offsetting this decrease was increasedfees and service charges of $216,000 for 2005, as compared to 2004, relatingprimarily to increased deposit service charges associated with increased retailchecking accounts.

 

**NON-INTERESTEXPENSE.**Non-interestexpense increased $929,000, or 8.2%, to $12.3 million for 2005, as compared to2004. The increase in non-interest expense for 2005 as compared to 2004resulted primarily from a $276,000 increase in compensation and benefits, a $155,000increase in occupancy and equipment, a $128,000 increase in data processingexpenses, and a $75,000 increase in amortization expense, all of which wasassociated primarily with the operations of the branches acquired from FirstKansas 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.

 

**INCOMETAXES.**Income tax expense decreased $351,000, or 17.5%, to $1.7million for 2005, from $2.0 million for 2004. The decrease in income taxexpense for 2005, resulted primarily from a decrease in taxable

 

9

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income along with anincrease in the utilization of tax exempt investments. The effective tax ratefor 2005, was 29.9% as compared to 32.1% for 2004.

 

10

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31,2003**

 

**SUMMARYOF PERFORMANCE.**Netearnings for 2004, decreased $601,000, or 12.4%, to $4.3 million as compared to2003. This decline in net earnings was generally attributable to an increase innon-interest expense which was offset by an improvement   of net interest income. Also contributing to thedecline in net earnings was an increase of our loan loss provision during 2004.The increases in non-interest expense and the improvement of net interestincome primarily resulted from our acquisition of First Kansas on April 1,2004, as we incurred additional expenses associated with operating these newbranches and as our average earning assets increased. The increase in our loanloss provision during the year primarily related to our commercial loan growth.

 

Theyear ended December 31, 2004, resulted in diluted earnings per share of $1.85compared to $1.97 for 2003. Return on average assets was 0.98% for 2004,compared to 1.46% for 2003. Return on average stockholders’ equity was 9.98%for 2004, compared to 11.53% for 2003.

 

Wecontinued our stock repurchase program during 2004, resulting in the repurchaseof an additional 102,338 shares. As of December 31, 2004, we held 121,630shares as treasury stock at an average cost per share of $26.36. We alsodistributed a 5% stock dividend for the fourth consecutive year in December 2004.All per share and average share data in this section reflects the 2004stock dividend.

 

**INTERESTINCOME.**Interestincome for 2004, increased $2.7 million, or 15.5%, to $19.9 million from $17.3million for 2003. This increase was primarily the result of the increase ininterest earning assets from the First Kansas acquisition, being offset by thedecrease in interest rates experienced as interest earning assets repricedduring 2003 and 2004. Average loans for 2004 increased to $267.0 million from $217.3million for 2003. The increase in average loans was primarily the result of theacquisition of First Kansas. Interest income on loans increased $1.4 million,or 9.6%, to $15.7 million for 2004. Average investment securities alsoincreased as a result of the First Kansas acquisition, from $93.3 million for2003, to $135.3 million for 2004. Interest income on investment securitiesincreased $1.3 million, or 43.9%, to $4.2 million for 2004.

 

**INTERESTEXPENSE.**Interestexpense for 2004, increased to $7.0 million from $5.7 million for 2003, or 23.8%.Interest expense on deposits declined to $3.9 million, or 11.3%, from $4.4million during this period, despite an increase in average deposits from $254.8million at December 31, 2003, to $306.1 million at December 31, 2004.The decrease in interest expense on deposits resulted primarily from thedecline in interest rates and the repricing of maturing deposits at these lowerrates. Interest expense on borrowings increased $1.8 million, or 152.8%. 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, the $8.2 million in trust preferred securitiesthat we issued in December 2003, and the $7.0 million that we borrowed in April 2004to consummate the acquisition of First Kansas.

 

**NET INTEREST INCOME.**Net interest income for 2004, totaled $12.9 million, a 11.4% increase,as compared to $11.6 million for 2003, primarily as a result of the FirstKansas acquisition. Average earning assets also increased for 2004, as a resultof the acquisition of First Kansas, increasing to $405.9 million from $313.2million for 2003. The net interest margin on earning assets was 3.19% for 2004,down from 3.71% for 2003. The refinancings and paydowns in the residentialmortgage portfolio exceeded the commercial loan growth during 2003, resultingin the excess liquidity being invested into lower yielding investmentsecurities. In addition, the prolonged low-rate environment has caused the netinterest margin to compress as assets have continued to reprice with little room leftfor liability repricing.

 

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**PROVISIONFOR LOAN LOSSES.**Theprovision for loan losses increased to $460,000 during 2004, compared to $240,000for 2003. Our continuous review of the loan portfolio prompted an increase inour provision, relating primarily to our commercial loan growth. FirstKansas had an allowance for loan losses approximating $352,000, or 0.47% ofoutstanding loans, at March 31, 2004, which increased our allowancefollowing the acquisition. At December 31, 2004, the allowance for loan losses was $2.9million, or 1.0% of gross loans outstanding, compared to $2.3 million, or 1.1%of gross loans outstanding, at December 31, 2003. For further discussionof the provision for loan losses, refer to the “Asset Quality and Distribution”section.

 

**NON-INTERESTINCOME.**Non-interest incomeremained relatively flat, increasing $151,000, or 3.0%, for 2004, to $5.1million compared to $5.0 million for 2003. The increase in non-interest incomereflected an increase of $1.2 million, or 60.0%, in fees and service chargesfrom $2.0 million for  2003, to $3.3million for 2004. This significant increase in fees and service charges was theresult of substantially increasing the number of our retail checking accountsopened through new marketing initiatives that were introduced in early 2004 andthrough the acquisition of First Kansas on April 1, 2004. Alsocontributing to the increase in non-interest income was a $174,000 increase inother fee income for 2004, as compared to 2003, primarily resulting from thesale of non-deposit investment and life insurance products.

 

Offsettingthe increases in fees and service charges and other income experienced during2004 were decreases in gains on sale of loans and gains on sale of investments.Our gains on sale of loans declined $1.1 million, or 51.6%, from $2.0 million for2003, to $987,000 for 2004, as residential mortgage financing activity slowed. Mortgagerefinancing and prepayments were much lower during 2004 as compared to 2003, asexpected, as many mortgage holders had already taken advantage of the lowinterest rates favorable for mortgage refinancing and because mortgage rates rosein the second half of 2004.

 

Thegains on sale of investments decreased $193,000, or 35.0%, for 2004, ascompared to 2003, and resulted from fewer equity securities sales from ourholding company’s investment portfolio. We periodically sell equity securitiesbased on performance and other indicators, and we may sell additionalequity securities in future periods.

 

**NON-INTERESTEXPENSE.**Non-interestexpense increased $2.1 million, or 23.0%, to $11.4 million for 2004, as comparedto 2003. The increase in non-interest expense for 2004 as compared to 2003resulted primarily from a $1.0 million increase in compensation and benefits, a$400,000 increase in occupancy and equipment and a $104,000 increase in dataprocessing expenses, all of which was associated primarily with the operationsof the branches acquired from First Kansas. The acquisition of First Kansasadded over 40 employees to our staff. Also contributing to the increase innon-interest expense for 2004, was an increase of $122,000 in advertisingexpenses related to our new marketing initiative that was introduced in early2004. Offsetting these increases in non-interest expense was a $52,000 decreasein amortization expense and a $41,000 decrease in professional fees for 2004,compared to 2003. Amortization expense decreased as prepayment speeds on ourmortgage servicing portfolio have slowed. Professional fees were higher in 2003as we incurred an increase in legal fees relating to our intellectual propertyrights and trade name.

 

**INCOMETAXES.**Income tax expense decreased $265,000, or 11.7%, to $2.0million for 2004, from $2.3 million for 2003. The decrease in income taxexpense for 2004, resulted primarily from a decrease in taxable income. Theeffective tax rate for 2004, was 32.1% as compared to 31.9% for 2003.

 

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**AVERAGEASSETS/LIABILITIES.**The following table sets forthinformation relating to average balances of interest-earning assets andinterest-bearing liabilities for the years ended December 31, 2005, 2004and 2003. The assets and liabilities of First Kansas were recorded at theirrespective fair market values at the acquisition date. Based on the relativelylow interest rates prevailing at the acquisition date, the effective yields onFirst Kansas’ interest-earning assets and rates on First Kansas’ interestbearing liabilities were significantly reduced, thus causing our postacquisition blended yields and cost of funds to decline in comparison to theperiods presented prior to the acquisition. 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.

 

**AVERAGE BALANCE SHEETS – AVERAGE YIELD AND RATES**

 
| ** **                                                                         | ** ** | **Year Ended December 31,  2005** | ** ** | **Year ended December 31,  2004** | ** ** | **Year ended December 31, 2003** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **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)                                                          |       | $                                      | 141,790    |                                   | $          | 4,830                                 |       | 3.41 | % | $ | 139,008 |   | $ | 4,276 |   | 3.08 | % | $ | 95,923 |   | $ | 2,973 |   | 3.10 | % |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable, net (2)                                                          |       | 275,183                                |       | 17,294                                 |       | 6.28                                  | %          | 266,938 |   | 15,673 |   | 5.87 | % | 217,327 |   | 14,303 |   | 6.58 | % |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                     |       | 416,973                                |       | 22,124                                 |       | 5.31                                  | %          | 405,946 |   | 19,949 |   | 4.91 | % | 313,250 |   | 17,276 |   | 5.52 | % |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                                                       |       | 32,347                                 |       |                                   |       |                                  |       | 27,766 |   |   |   |   |   | 17,899 |   |   |   |   |   |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                              |       | $                                      | 449,320    |                                   |       |                                  |       |   | $ | 433,712 |   |   |   |   |   | $ | 331,149 |   |   |   |   |   |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity**                                      |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                         |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                     |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit                                                            |       | $                                      | 162,442    |                                   | $          | 4,369                                 |       | 2.69 | % | $ | 160,251 |   | $ | 2,849 |   | 1.78 | % | $ | 141,877 |   | $ | 3,706 |   | 2.61 | % |
| Money market and NOW accounts                                                      |       | 95,010                                 |       | 1,129                                  |       | 1.19                                  | %          | 93,640 |   | 811 |   | 0.87 | % | 76,316 |   | 678 |   | 0.89 | % |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                                                   |       | 24,520                                 |       | 73                                     |       | 0.30                                  | %          | 20,304 |   | 285 |   | 1.40 | % | 15,033 |   | 62 |   | 0.41 | % |
| FHLB advances and other borrowings                                                 |       | 88,599                                 |       | 3,386                                  |       | 3.82                                  | %          | 80,109 |   | 3,055 |   | 3.81 | % | 27,887 |   | 1,209 |   | 4.34 | % |
| Total  interest-bearing liabilities                                                |       | 370,571                                |       | 8,957                                  |       | 2.42                                  | %          | 354,304 |   | 7,000 |   | 1.98 | % | 261,113 |   | 5,655 |   | 2.17 | % |
| Non-interest-bearing  liabilities                                                  |       | 35,644                                 |       |                                   |       |                                  |       | 36,796 |   |   |   |   |   | 27,603 |   |   |   |   |   |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                                         |       | 43,105                                 |       |                                   |       |                                  |       | 42,612 |   |   |   |   |   | 42,433 |   |   |   |   |   |
| Total                                                                              |       | $                                      | 499,320    |                                   |       |                                  |       |   | $ | 433,712 |   |   |   |   |   | $ | 331,149 |   |   |   |   |   |
|                                                                               |       |                                   |       |                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                               |       |                                   |       | $                                      | 13,167     |                                  |       |   |   |   | $ | 12,949 |   |   |   |   |   | $ | 11,621 |   |   |   |
| Interest rate  spread (3)                                                          |       |                                   |       |                                   |       | 2.89                                  | %          |   |   |   |   | 2.93 | % |   |   |   |   | 3.35 | % |
| Net interest  margin (4)                                                           |       |                                   |       |                                   |       | 3.16                                  | %          |   |   |   |   | 3.19 | % |   |   |   |   | 3.71 | % |
| Ratio of average interest- earning assets to average  interest-bearing liabilities |       |                                   |       |                                   |       | 112.52                                | %          |   |   |   |   | 114.58 | % |   |   |   |   | 119.97 | % |

 

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(1)          Incomeon investment securities includes all securities and interest bearing depositsin other financial institutions.

(2)          Includesloans classified as non-accrual.

(3)          Interestrate spread represents the difference between the average yield oninterest-earning assets and the average cost of interest-bearing liabilities

(4)          Netinterest margin represents net interest income divided by average interest-earningassets.

 

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**Quarterly Results ofOperations**

** **
| ** **                                           | ** ** | **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 |   |
| Provision for  income taxes                          |       | 349,591                                       |       | 431,775 |   | 544,377 |   | 333,174 |   |
| Net earnings                                         |       | $                                             | 803,376    |   | $ | 949,664 |   | $ | 1,233,256 |   | $ | 910,868 |   |
| Earnings per  share(1):                              |       |                                          |       |   |   |   |   |   |   |
| Basic                                                |       | $                                             | 0.36       |   | $ | 0.43 |   | $ | 0.55 |   | $ | 0.41 |   |
| Diluted                                              |       | 0.36                                          |       | 0.43 |   | 0.55 |   | 0.41 |   |

 

**Quarterly Results ofOperations**

** **
| ** **                                           | ** ** | **Fiscal 2004 Quarters Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **March 31**              | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                              | 4,047,166  |   | $ | 5,346,342 |   | $ | 5,325,004 |   | $ | 5,230,694 |   |
| Interest expense                                     |       | 1,282,245                      |       | 1,915,993 |   | 1,911,855 |   | 1,890,203 |   |
| Net interest  income                                 |       | 2,764,921                      |       | 3,430,349 |   | 3,413,149 |   | 3,340,491 |   |
| Provision for  loan losses                           |       | 60,000                         |       | 120,000 |   | 130,000 |   | 150,000 |   |
| Net interest  income after provision for loan losses |       | 2,704,921                      |       | 3,310,349 |   | 3,283,149 |   | 3,190,491 |   |
| Non-interest  income                                 |       | 946,808                        |       | 1,294,185 |   | 1,378,711 |   | 1,505,717 |   |
| Non-interest  expense                                |       | 2,257,321                      |       | 3,000,461 |   | 2,982,473 |   | 3,113,093 |   |
| Earnings before  income taxes                        |       | 1,394,408                      |       | 1,604,073 |   | 1,679,387 |   | 1,583,115 |   |
| Provision for  income taxes                          |       | 445,647                        |       | 529,286 |   | 543,456 |   | 491,836 |   |
| Net earnings                                         |       | $                              | 948,761    |   | $ | 1,074,787 |   | $ | 1,135,931 |   | $ | 1,091,279 |   |
| Earnings per  share(1):                              |       |                           |       |   |   |   |   |   |   |
| Basic                                                |       | $                              | 0.41       |   | $ | 0.48 |   | $ | 0.49 |   | $ | 0.48 |   |
| Diluted                                              |       | 0.41                           |       | 0.47 |   | 0.49 |   | 0.48 |   |

 

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(1) All per shareamounts have been adjusted to give effect to the 5% stock dividend in December 2005.

 

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**FINANCIALCONDITION**

 

**ASSETQUALITY AND DISTRIBUTION.**Total assets increased to $465.1million at December 31, 2005, compared to $442.1 million at December 31,2004. Our primary ongoingsources of funds are deposits, proceeds from principal and interest payments onloans and investment securities and proceeds from the sale of mortgage loansand investment securities. While maturities and scheduled amortization of loansare a predictable source of funds, deposit flows and mortgage prepayments aregreatly influenced by general interest rates, economic conditions, competition,and the restructuring of the financial services industry.

 

Net loans, excludingloans held for sale, decreased $2.8 million to $274.6 million as of December 31,2005 from $277.4 million as of December 31, 2004. The decline wasprimarily the result of refinancings and paydowns in our residential mortgageportfolio as a result of the increases in interest rates over the past twoyears. As of December 31,2005, our one-to-four family residential loans comprised 41.4% of total loans,down from 46.8% at December 31, 2004. We anticipate continuing todiversify our loan portfolio composition through our continued plannedexpansion of commercial lending activities. The acquisition of FMB effective January 1,2006 will increase our one-to-four family residential loan totals as themajority of FMB’s loans were residential loans.

 

Our primary investingactivities are the origination of mortgage, consumer, and commercial loans andthe purchase of investment and mortgage-backed securities. Generally, weoriginate fixed-rate, residential mortgage loans with maturities in excess often years for sale in the secondary market. We do not originate and warehousethese fixed-rate residential loans for resale in order to speculate on interestrates. As of December 31, 2005, our residential mortgage loan portfolioconsisted of $38.2 million with fixed rates and $76.7 million with variablerates.

 

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 ofall loans with respect to which full collectibility may not be reasonablyassured, considers the fair value of the underlying collateral, economicconditions, historical loan loss experience, level of classified loans andother factors that warrant recognition in providing for an adequate allowancefor 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 monthand less than 90 days as of December 31, 2005, totaled $1.5 million. As ofDecember 31, 2005, loans with a balance of $3.3 million were onnon-accrual status, or 1.21% of total loans, compared to a balance of $1.1million loans on non-accrual status, or 0.41% of total loans, as of December 31,2004. This increase was primarily related to a $1.6 million commercial realestate loan past due for payments in excess of 90 days at December 31,2005. Given the collateral value associated with the loan, management does notanticipate any significant loss exposure. The ratio of non-performing assets asa percentage of total assets remained low at 0.88% at December 31, 2005and 0.36% at December 31, 2004. Net charge offs were $127,000 for 2005,compared to net charge offs of $234,000 for 2004.

 

Residential home loanscomprised 35.6% of the $3.3 million non-accrual balance at December 31,2005. These loans have been underwritten according to our residential lendingpolicies and are well secured by real estate collateral, and in many instances,private mortgage insurance or government guarantees. We have historicallyincurred minimal losses on mortgage loans based on collateral values andunderlying insurance or guarantees.

 

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Weare pleased that there appears to be numerous indications of emerging strengthin the economy, including the Federal Open Market Committee raising the targetfor the Federal Funds rate by 350 basis points since June 30, 2004. Theoutlook of the economy for 2006, however, depends on whether the strengtheningwill be sustainable and how quickly consumer confidence responds to thepositive effects, if any, on the economy. Based on the outcomes, these eventscould adversely affect cash flows for both commercial and individual borrowers,as a result of which, we could experience increases in problem assets,delinquencies and losses on loans. Many financial institutions have experiencedan increase in non-performing assets during the recent difficult economicperiod, as even well-established business borrowers developed cash flow,profitability and other business-related problems. We believe that theallowance for losses on loans at December 31, 2005, was adequate, however,there can be no assurances that losses will not exceed the estimated amounts. Whilewe believe that we use the best information available to determine theallowance for losses on loans, unforeseen market conditions could result inadjustment to the allowance for losses on loans. In addition, net earningscould be significantly affected if circumstances differ substantially from theassumptions used in establishing the allowance for losses on loans.

 

**LIABILITYDISTRIBUTION.**Total deposits increased $28.4 million to $331.3million at December 31, 2005 from $302.9 million at December 31, 2004,resulting primarily from the acquisition of two branch locations in Great Bendon August 19, 2005. Borrowings decreased $9.3 million to $85.3 million at December 31,2005 from $94.6 million at December 31, 2004, resulting primarily from thedeposits purchased from UMB offset by $8.2 million borrowed at December 31,2005 to fund the First Manhattan acquisition on January 1, 2006.

 

Non-interest bearingdeposits at December 31, 2005 were $38.4 million, or 11.6% of deposits,compared to $28.5 million, or 9.4% of deposits, at December 31, 2004. Moneymarket and NOW deposit accounts were 31.3% of the portfolio and totaled $103.7million at December 31, 2005, compared to $96.6 million, or 31.9% ofdeposits, at December 31, 2004. Savings accounts increased to $26.1million, or 7.9% of deposits, at December 31, 2005, from $23.2 million, or7.7% of deposits, at December 31, 2004. Certificates of deposit increasedto $163.1 million, or 49.2% of deposits, at December 31, 2005, from $154.5million, or 51% of deposits, at December 31, 2004.

 

Certificates of depositat December 31, 2005 which were scheduled to mature in one year or lesstotaled $124.8 million. Historically, maturing deposits have generally remainedwith our Bank and we believe that a significant portion of the depositsmaturing in one year or less will remain with us upon maturity.

 

**CASHFLOWS.**During the year ended December 31, 2005, our cashand cash equivalents increased by $13.6 million. Our operating activitiesduring 2005 provided us net cash of $5.8 million. Our investing activities in2005 provided us net cash of $21.7 million, primarily from the cash received inthe acquisition of two branch locations in Great Bend, Kansas. Offsetting thiswas $8.7 million of cash outflows relating to the purchase of investmentsecurities. We used net cash of $13.9 million in financing activities during2005, primarily due to a $4.9 million decrease in our deposits portfolio, thepayment of $1.4 million in dividends, and the payment of $27.8 million of debtwhich was offset by $20.0 million in borrowings. These outflows of cash forfinancing activities were also offset by $233,000 of proceeds from the issuanceof common stock associated with the exercise of stock options.

 

16

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**CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS.**The following tablepresents contractual obligations, defined as operating lease obligations andprincipal payments due on non-deposit obligations with maturities in excess ofone year as of December 31, 2005, for the periods indicated.

 
| **Contractual Cash**           | ** ** | ** ** | ** ** | **One Year** | ** ** | **One to**      | ** ** | **Four to**    | ** ** | **More than**  | ** ** |
|--------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| **Obligations**                | ** ** | **Total**  | ** ** | **or Less**  | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | ** **   | ** ** | ** **      | ** ** | ** **     | ** ** | ** **     | ** ** |
| Operating leases               |       | $          | 214,200    |         | $          | 55,760          |       | $              | 101,520    |           | $          | 56,920 |   | $ | — |   |
| Service  contracts             |       | 1,965,333  |       | 1,056,000    |       | 909,333         |       | —         |       | —         |       |
| FHLB advances                  |       | 63,212,318 |       | 5,500,000    |       | 4,000,000       |       | 48,228,750     |       | 5,483,568      |       |
| Other borrowings               |       | 22,046,000 |       | 2,250,000    |       | —          |       | 3,300,000      |       | 16,496,000     |       |
| Total  contractual Obligations |       | $          | 87,437,851 |         | $          | 8,861,760       |       | $              | 5,010,853  |           | $          | 51,585,670 |   | $ | 21,979,568 |   |

 

**LIQUIDITY.**Our most liquid assets are cash and cash equivalents andinvestment securities available for sale. The level of these assets isdependent on our operating, financing, lending and investing activities duringany given period. At December 31, 2005 and 2004, the carrying value of theseliquid assets totaled $161.6 million and $141.4 million, respectively. During periodsin which we are not able to originate a sufficient amount of loans and/orperiods of high principal prepayments, we increase our liquid assets byinvesting in short-term U.S. Government and agency securities or high-grademunicipal securities.

 

Liquidity management isboth a daily and long-term function of our strategy. Excess funds are generallyinvested in short-term investments. In the event we require funds beyond ourability to generate them internally, additional funds are available through theuse of FHLB advances, a line of credit with the FHLB or through sales ofsecurities. At December 31, 2005, we had outstanding FHLB advances of $63.2million and had no borrowings on our line of credit with the FHLB. At December 31,2005, our total borrowing capacity with the FHLB was $89.2 million. We also hadother borrowings of $22.0 million at December 31, 2005, which included $16.5million of subordinated debentures, $3.3 million of long-term debt and $2.2million in repurchase agreements.

 

Asa provider of financial services, we routinely issue financial guarantees inthe form of financial and performance standby letters of credit. Standbyletters of credit are contingent commitments issued by us generally toguarantee the payment or performance obligation of a customer to a third party.While these standby letters of credit represent a potential outlay by us, asignificant amount of the commitments may expire without being drawn upon.We have recourse against the customer for any amount the customer is requiredto pay to a third party under a standby letter of credit. The letters of creditare subject to the same credit policies, underwriting standards and approvalprocess as loans made by us. Most of the standby letters of credit are secured,and in the event of nonperformance by the customers, we have the right to theunderlying collateral, which could include commercial real estate, physicalplant 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 $2.9 million at December 31,2005.

 

At December 31, 2005,we had outstanding loan commitments, excluding standby letters of credit, of $54.1million. 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.

 

17

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**CAPITAL.**TheFederal Reserve has established capital requirements for bank holding companieswhich generally parallel the capital requirements for national banks under theOffice of the Comptroller of the Currency regulations. The regulations providethat such standards will generally be applied on a consolidated (rather than abank-only) basis in the case of a bank holding company with more than $150million in total consolidated assets.

 

AtDecember 31, 2005, we continued to maintain a sound leverage capital ratioof 17% and a total risk based capital ratio of 19%. As shown by the followingtable, our capital exceeded the minimum capital requirements at December 31,2005 (dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Percent**  | ** ** | **Amount**   | ** ** |
| Leverage                  |       | $          | 51,678     |        | 17         | %            | 4          | %            | $          | 11,823 |   |
| Tier 1 Capital            |       | $          | 51,678     |        | 12         | %            | 4          | %            | $          | 17,800 |   |
| Total Risk Based  Capital |       | $          | 54,829     |        | 19         | %            | 8          | %            | $          | 23,647 |   |

 

At December 31, 2005, our subsidiary bankcontinued to maintain a sound leverage ratio of 15% and a total risk basedcapital ratio of 16%. As shown by the following table, Landmark National Bank’scapital exceeded the minimum capital requirements at December 31, 2005(dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Percent**  | ** ** | **Amount**   | ** ** |
| Leverage                  |       | $          | 44,920     |        | 15         | %            | 4          | %            | $          | 11,784 |   |
| Tier 1 Capital            |       | $          | 44,920     |        | 10         | %            | 4          | %            | $          | 17,728 |   |
| Total Risk Based  Capital |       | $          | 48,071     |        | 16         | %            | 8          | %            | $          | 23,568 |   |

 

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, 2005 and2004, we were rated “well capitalized”, which is the highest rating availableunder this capital-based rating system. During December 2005, we obtained$8.2 million in trust preferred securities in addition to $8.2 million existingtrust preferred securities. In accordance with current capital guidelines, thisamount has been included in our Tier 1 capital ratios as of December 31,2005. Cash distributions on the securities are payable quarterly, aredeductible for income tax purposes and are included in interest expense in theconsolidated financial statements.

 

OnMarch 1, 2005, the Board of Governors of the Federal Reserve System issueda final rule regarding the continued inclusion of trust preferredsecurities in the Tier 1 capital of bank holding companies, subject to stricterstandards. As a result of the final rule, the Federal Reserve will limit theaggregate amount of a bank holding company’s cumulative perpetual preferredstock, trust preferred securities and other minority interests to 25% of acompany’s core capital elements, net of goodwill. Regulations in place at thetime the Company placed its currently outstanding trust preferred securitiesdid not require the deduction of goodwill. The rule also provides thatamounts of qualifying trust preferred securities and certain minority interestsin excess of the 25% limit may be included in Tier 2 capital but willbe limited, together with subordinated debt and limited-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 not anticipate that the final rule will

 

18

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havean impact on the Company when the five-year transition period expires, it isnot possible to predict the final impact of the rule on the Company.

 

#### **DIVIDENDS**

#### ** **

During the year ended December 31,2005, we paid quarterly cash dividends of $0.17 per share to our stockholders. Additionally,we distributed a 5% stock dividend for the fifth consecutive year on December 31,2005.

 

Thepayment of dividends by any financial institution or its holding company isaffected by the requirement to maintain adequate capital pursuant to applicablecapital adequacy guidelines and regulations. As described above, LandmarkNational Bank exceeded its minimum capital requirements under applicableguidelines as of December 31, 2005. The National Bank Act imposeslimitations on the amount of dividends that a national bank may paywithout prior regulatory approval. Generally, the amount is limited to the bank’scurrent year’s net earnings plus the adjusted retained earnings for the twopreceding years. As of December 31, 2005, approximately $2.3 million wasavailable to be paid as dividends to Landmark Bancorp by Landmark National Bankwithout prior regulatory approval.

 

#### **RECENT ACCOUNTINGDEVELOPMENTS**

 

InDecember 2003, the Accounting Standards Executive Committee of the AmericanInstitute of Certified Public Accountants issued Statement of Position (SOP)03-03, *Accounting for Certain Loans and Debt SecuritiesAcquired in a Transfer*. SOP 03-03 addresses the accounting foracquired loans that show evidence of having deteriorated in terms of creditquality since their origination (i.e. impaired loans). SOP 03-03 requiresacquired loans to be recorded as their fair value defined as the present valueof future cash flows. SOP 03-03 prohibits the carryover of an allowance forloan loss on certain acquired loans as credit losses are considered in thefuture cash flows assessment. SOP 03-03 is effective for loans that areacquired in fiscal years beginning after December 15, 2004. The adoptionof this Statement did not have a material impact on its consolidated financialstatements. The Company will evaluate the applicability of the SOP for allprospective loans acquired.

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123 (revised), *Shared-BasedPayment*. The revision disallows the expense recognition alternativespermitted in the original statement and requires entities to recognizestock-based compensation cost in their statements of income. The revisioncontains additional guidance in several areas including award modifications andforfeitures, measuring fair value, classifying an award as equity or as aliability, and attributing compensation cost to reporting periods. It alsocontains additional disclosure requirements. The Company does not expect thatadoption of the revised Statement in 2006 will have a material impact on itsconsolidated financial statements.

 

In March 2004, the Emerging Issues Task Force (“EITF”)reached a consensus on criteria to evaluate whether to record a loss anddisclose additional information about unrealized losses relating to debt andequity securities under EITF Issue No. 03-1,*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments.* The consensus applies to investments in debtand marketable equity securities that are accounted under FAS 115,*Accounting for Certain Investments in Debt andEquity Securities*. After many organizations, including banks, whichcould be impacted by this guidance, asked for clarification on the meaning ofother-than-temporary impairment and its application to certain investments, theFASB postponed the implementation. In July 2005, the FASB decided not toprovide additional guidance on the meaning of other-than-temporary impairment,but instead issued FASB staff position (“FSP”) EITF 03-1-a,*Implementation Guidance for the Application ofParagraph 16 of EITF Issue No. 03-1*, as final. The finalposition supersedes several previously issued EITF topics and replaces guidanceset forth in several others. The final position, titled FAS 115-1,*The*

 

19

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*Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments,* codifiesguidance set forth in EITF Topic D-44,*Recognition of Other-Than-Temporary Impairment upon the Planned Sale of aSecurity Whose Cost Exceeds Fair Value*, and clarifies that aninvestor should recognize an impairment loss no later than when the impairmentis deemed other than temporary, even if a decision to sell has not been made.The effective date of the FSP will be reporting periods beginning after December 15,2005. The Company does not expect that adoption of 115-1 will have a materialeffect on its consolidated financial statements.

 

In May 2005, the FASB issued Statement of FinancialAccounting Standards No. 154, “Accounting Changes and Error Corrections”.The Statement changes the requirements for the accounting for and reporting ofa change in accounting principle. This Statement requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. This statement applies to allvoluntary changes in accounting principle. It also applies to changes requiredby an accounting pronouncement in the unusual instance that the pronouncementdoes not include specific transition provisions. The Statement carries forwardpreviously issued guidance on reporting changes in accounting estimate (whichshall be accounted for in the period of change and future periods, if affected)and errors in previously issued financial statements (which shall be reportedas a prior period adjustment by restating the prior period financialstatements). For calendar year companies, the Statement is effective foraccounting changes and corrections of errors made after January 1, 2006.The Company does not expect that adoption of the Statement will have a materialeffect on its consolidated financial statements.

 

**EFFECTS ON INFLATION**

 

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

 

## **QUANTITATIVE AND QUALITATIVEDISCLOSURES 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. Interest rates in the financial markets affectour decision on pricing our assets and liabilities which impacts our netinterest income, a significant cash flow source for us. As a result, asubstantial portion of our risk management activities relates to managinginterest rate risk.

 

Our Asset/LiabilityManagement Committee monitors the interest rate sensitivity of our balancesheet using earnings simulation models and interest sensitivity GAP analysis. Wehave set policy limits of interest rate risk to be assumed in the normal courseof business and monitor such limits through our simulation process.

 

We have been successfulin meeting the interest rate sensitivity objectives set forth in our policy. Simulationmodels are prepared to determine the impact on net interest income for thecoming twelve months, including using rates at December 31, 2005, andforecasting volumes for the twelve month projection. 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:

 

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| **Scenario**             | ** ** | **$ change in net  interest income** | ** ** | **% of net  interest income** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-------------------------------|------------|
| 100 basis point  rising  |       | $                                         | 459,000    |                          | 3.3        | % |
| 200 basis point  rising  |       | $                                         | 903,000    |                          | 6.4        | % |
| 100 basis point  falling |       | $                                         | (655,000   | )                             | (4.7       | )% |
| 200 basis point  falling |       | $                                         | (1,646,000 | )                             | (11.7      | )% |

 

We believe that nosignificant changes in our interest rate sensitivity position have occurredsince December 31, 2005. We believe we are appropriately positioned forfuture interest rate movements, although we may experience some fluctuationsin net interest income due to short term timing differences between therepricing of assets and liabilities.

 

#### **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 acommon, though imperfect, measure of interest rate risk which measures therelative dollar amounts of interest-earning assets and interest bearingliabilities which reprice within a specific time period, either throughmaturity or rate adjustment. The “gap” is the difference between the amounts ofsuch assets and liabilities that are subject to such repricing. A “positive”gap for a given period means that the amount of interest-earning assetsmaturing or otherwise repricing within that period exceeds the amount ofinterest-bearing liabilities maturing or otherwise repricing during that sameperiod. In a rising interest rate environment, an institution with a positivegap would generally be expected, absent the effects of other factors, toexperience a greater increase in the yield of its assets relative to the costof its liabilities. Conversely, the cost of funds for an institution with apositive gap would generally be expected to decline less quickly than the yieldon its assets in a falling interest rate environment. Changes in interest ratesgenerally have the opposite effect on an institution with a “negative” gap.

 

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

 

Certificates of depositreflect contractual maturities only. Money market accounts are rate sensitiveand accordingly, a higher percentage of the accounts have been included asrepricing immediately in the first period. Savings and NOW accounts are not asrate sensitive as money market accounts and for that reason a significantpercentage of the accounts are reflected in the more than 1 to 5 yearscategory.

 

We have been successfulin meeting the interest sensitivity objectives set forth in our policy. Thishas been accomplished primarily by managing the assets and liabilities whilemaintaining our traditional high credit standards.

 

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

 

**At December 31, 2005**

 
| ** **                                                                                      | ** ** | **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:                                                                       |       |                       |       |                           |       |                        |       |              |       |      |       |
| Overnight investments                                                                           |       | $                          | 17,393     |                           | $          | —                      |       | $                 | —     |      | $          | — |   | $ | 17,393 |   |
| Investment securities                                                                           |       | 21,084                     |       | 27,662                         |       | 49,799                      |       | 41,586            |       | 140,131   |       |
| Loans                                                                                           |       | 67,568                     |       | 99,503                         |       | 95,583                      |       | 15,058            |       | 277,712   |       |
| Total interest-earning assets                                                                   |       | $                          | 106,045    |                           | $          | 127,165                     |       | $                 | 145,382    |      | $          | 56,644 |   | $ | 435,236 |   |
|                                                                                            |       |                       |       |                           |       |                        |       |              |       |      |       |
| Interest-bearing  liabilities:                                                                  |       |                       |       |                           |       |                        |       |              |       |      |       |
| Certificates of deposit                                                                         |       | $                          | 44,701     |                           | $          | 80,147                      |       | $                 | 39,978     |      | $          | 255 |   | $ | 163,081 |   |
| Money market and NOW accounts                                                                   |       | 23,579                     |       | —                         |       | 80,149                      |       | —            |       | 103,728   |       |
| Savings accounts                                                                                |       | 4,959                      |       | —                         |       | 21,139                      |       | —            |       | 26,098    |       |
| Borrowed money                                                                                  |       | 16,555                     |       | 5,027                          |       | 52,148                      |       | 11,528            |       | 85,258    |       |
| Total interest-bearing liabilities                                                              |       | $                          | 89,794     |                           | $          | 85,174                      |       | $                 | 191,414    |      | $          | 11,783 |   | $ | 378,165 |   |
|                                                                                            |       |                       |       |                           |       |                        |       |              |       |      |       |
| Interest  sensitivity gap per period                                                            |       | $                          | 16,251     |                           | $          | 41,991                      |       | $                 | (46,032    | )         | $          | 44,861 |   | $ | 57,071 |   |
| Cumulative  interest sensitivity gap                                                            |       | $                          | 16,251     |                           | $          | 58,242                      |       | $                 | 12,210     |      | $          | 57,071 |   |   |   |
|                                                                                            |       |                       |       |                           |       |                        |       |              |       |      |       |
| Cumulative gap  as a percent of total interest-earning assets                                   |       | 3.73                       | %          | 13.38                          | %          | 2.81                        | %          | 13.11             | %          |      |       |
|                                                                                            |       |                       |       |                           |       |                        |       |              |       |      |       |
| Cumulative interest sensitive assets as a percent of  cumulative interest sensitive liabilities |       | 118.10                     | %          | 133.29                         | %          | 103.33                      | %          | 115.09            | %          |      |       |

 

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**SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995**

 

**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 of1995, with respect to our financial condition, results of operations, plans,objectives, future performance and business. Forward-looking statements, which may bebased upon beliefs, expectations and assumptions of our management and oninformation currently available to management, are generally identifiable bythe 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-looking statements, speakonly as of the date they are made, and we undertake no obligation to update anystatement in light of new information or future events.

 

Our ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. Factors which could have a material adverseeffect on operations and future prospects by us and 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 resultin, among other things, a deterioration in the credit quality and value of ourassets.

 

•                                         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 keyexecutives and employees in an effective manner.

 

23

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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 thanexpected.

 

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

 

•                                         Changes in accounting policies and practices,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 and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements. Additional information concerning us and our business, includingother factors that could materially affect our financial results, is includedin our filings with the Securities and Exchange Commission, including the “RiskFactors” section in our Form 10-K.

 

**CONTROLS AND PROCEDURES.**

 

Disclosure Controls and Procedures. Anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operations of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of December 31,2005. Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective.

 

Changes in Internal Control OverFinancial Reporting. There have been nosignificant changes in the Company’s internal control over financial reportingduring the quarter ending December 31, 2005 that materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

24

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**Report ofIndependent Registered Public Accounting Firm**

** **

TheBoard of DirectorsLandmark Bancorp, Inc.:

 

We have audited the accompanying consolidated balance sheets ofLandmark Bancorp, Inc. and subsidiary (the Company) as ofDecember 31, 2005 and 2004, and the related consolidated statements ofearnings, stockholders’ equity and comprehensive income, and cash flows foreach of the years in the three-year period ended December 31, 2005.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred toabove, present fairly, in all material respects, the financial position of theCompany as of December 31, 2005 and 2004, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles.

 
| /s/ KPMG LLP |   |
|--------------|--------|

Kansas City, MissouriMarch 29, 2006

 

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**LANDMARKBANCORP, INC.**

**ANDSUBSIDIARY**

Consolidated Balance Sheets

December 31, 2005 and 2004

 
| ** **                                                                                           | ** ** | **2005**    | ** **  | **2004**    | ** **  |
|------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|-------------|
| **Assets**                                                                                           |       |        |        |        |        |
|                                                                                                 |       |        |        |        |        |
| Cash and cash equivalents:                                                                           |       |        |        |        |        |
| Cash                                                                                                 |       | $           | 4,097,402   |        | 2,910,297   |   |
| Interest-bearing  deposits in other financial institutions                                           |       | 17,393,110  |        | 4,935,141   |        |
| Total cash and  cash equivalents                                                                     |       | 21,490,512  |        | 7,845,438   |        |
| Investment securities available-for-sale                                                             |       | 140,130,512 |        | 133,604,335 |        |
| Loans, net                                                                                           |       | 274,565,855 |        | 277,413,963 |        |
| Loans held for sale                                                                                  |       | 1,163,211   |        | 846,003     |        |
| Premises and equipment, net                                                                          |       | 8,412,235   |        | 5,864,258   |        |
| Goodwill                                                                                             |       | 7,535,584   |        | 7,651,892   |        |
| Other intangible assets, net                                                                         |       | 2,418,213   |        | 1,339,832   |        |
| Accrued interest and other assets                                                                    |       | 9,393,839   |        | 7,525,173   |        |
| Total assets                                                                                         |       | $           | 465,109,961 |        | 442,090,894 |   |
|                                                                                                 |       |        |        |        |        |
| **Liabilities and Stockholders’ Equity**                                                        |       |        |        |        |        |
|                                                                                                 |       |        |        |        |        |
| Liabilities:                                                                                         |       |        |        |        |        |
| Deposits:                                                                                            |       |        |        |        |        |
| Non-interest  bearing demand                                                                         |       | $           | 38,365,040  |        | 28,549,224  |   |
| Money market and  NOW                                                                                |       | 103,728,104 |        | 96,607,511  |        |
| Savings                                                                                              |       | 26,098,127  |        | 23,221,065  |        |
| Time, $100,000  and greater                                                                          |       | 42,540,949  |        | 31,121,564  |        |
| Time, other                                                                                          |       | 120,540,511 |        | 123,368,357 |        |
| Total deposits                                                                                       |       | 331,272,731 |        | 302,867,721 |        |
| Federal Home  Loan Bank borrowings                                                                   |       | 63,212,318  |        | 81,053,321  |        |
| Other borrowings                                                                                     |       | 22,046,000  |        | 13,518,000  |        |
| Accrued interest  and expenses, taxes, and other liabilities                                         |       | 4,506,305   |        | 2,482,875   |        |
| Total  liabilities                                                                                   |       | 421,037,354 |        | 399,921,917 |        |
|                                                                                                 |       |        |        |        |        |
| Commitments and contingencies                                                                        |       |        |        |        |        |
|                                                                                                 |       |        |        |        |        |
| Stockholders’ equity:                                                                           |       |        |        |        |        |
| Common stock,  $0.01 par. Authorized 5,000,000 shares;  issued 2,244,327 and 2,232,218, respectively |       | 22,443      |        | 22,322      |        |
| Additional  paid-in capital                                                                          |       | 19,868,567  |        | 19,969,551  |        |
| Retained  earnings                                                                                   |       | 25,322,019  |        | 25,228,826  |        |
| Treasury stock,  at cost; 15,736 and 121,630 shares, respectively                                    |       | (414,514    | )           | (3,205,823  | )           |
| Accumulated  other comprehensive income (loss)                                                       |       | (725,908    | )           | 154,101     |        |
| Total  stockholders’ equity                                                                     |       | 44,072,607  |        | 42,168,977  |        |
| Total  liabilities and stockholders’ equity                                                     |       | $           | 465,109,961 |        | 442,090,894 |   |

 

See accompanyingnotes to consolidated financial statements.

 

26

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**LANDMARKBANCORP, INC.**

**ANDSUBSIDIARY**

Consolidated Statements ofEarnings

Years ended December 31,2005, 2004, and 2003

 
| ** **                                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income:                                     |       |       |       |       |       |       |       |
| Loans                                                |       | $          | 17,294,186 |       | 15,672,834 |       | 14,303,182 |   |
| Investment  securities                               |       | 4,720,266  |       | 4,237,362  |       | 2,945,302  |       |
| Other                                                |       | 110,163    |       | 39,010     |       | 27,818     |       |
| Total interest  income                               |       | 22,124,615 |       | 19,949,206 |       | 17,276,302 |       |
| Interest expense:                                    |       |       |       |       |       |       |       |
| Deposits                                             |       | 5,571,410  |       | 3,945,344  |       | 4,446,050  |       |
| Borrowings                                           |       | 3,385,864  |       | 3,054,952  |       | 1,208,522  |       |
| Total interest  expense                              |       | 8,957,274  |       | 7,000,296  |       | 5,654,572  |       |
| Net interest  income                                 |       | 13,167,341 |       | 12,948,910 |       | 11,621,730 |       |
| Provision for loan losses                            |       | 385,000    |       | 460,000    |       | 240,000    |       |
| Net interest  income after provision for loan losses |       | 12,782,341 |       | 12,488,910 |       | 11,381,730 |       |
| Non-interest income:                                 |       |       |       |       |       |       |       |
| Fees and service  charges                            |       | 3,486,923  |       | 3,270,509  |       | 2,048,482  |       |
| Gains on sales  of loans                             |       | 638,780    |       | 986,864    |       | 2,039,102  |       |
| Gains on sales  of investment securities             |       | 46,865     |       | 358,385    |       | 551,038    |       |
| Gains on  prepayments of FHLB borrowings             |       | 406,572    |       | —     |       | —     |       |
| Other                                                |       | 476,921    |       | 509,663    |       | 335,569    |       |
| Total  non-interest income                           |       | 5,056,061  |       | 5,125,421  |       | 4,974,191  |       |
| Non-interest expense:                                |       |       |       |       |       |       |       |
| Compensation and  benefits                           |       | 6,120,365  |       | 5,844,352  |       | 4,834,982  |       |
| Occupancy and  equipment                             |       | 2,010,875  |       | 1,855,542  |       | 1,455,799  |       |
| Amortization of  intangibles                         |       | 449,460    |       | 374,758    |       | 426,442    |       |
| Professional  fees                                   |       | 322,587    |       | 301,870    |       | 343,208    |       |
| Advertising                                          |       | 401,701    |       | 300,006    |       | 177,899    |       |
| Data processing                                      |       | 542,780    |       | 415,175    |       | 311,364    |       |
| Other                                                |       | 2,434,553  |       | 2,261,645  |       | 1,679,061  |       |
| Total  non-interest expense                          |       | 12,282,321 |       | 11,353,348 |       | 9,228,755  |       |
| Earnings before  income taxes                        |       | 5,556,081  |       | 6,260,983  |       | 7,127,166  |       |
| Income tax expense                                   |       | 1,658,917  |       | 2,010,225  |       | 2,275,469  |       |
| Net earnings                                         |       | $          | 3,897,164  |       | 4,250,758  |       | 4,851,697  |   |
| Earnings per share:                                  |       |       |       |       |       |       |       |
| Basic                                                |       | $          | 1.75       |       | 1.87       |       | 2.09       |   |
| Diluted                                              |       | $          | 1.75       |       | 1.85       |       | 2.06       |   |

 

See accompanyingnotes to consolidated financial statements.

 

27

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**LANDMARK BANCORP, INC.**

**AND SUBSIDIARY**

Consolidated Statementsof Stockholders’ Equity and Comprehensive Income

Years ended December 31,2005, 2004, and 2003

 
| ** **                                                                                            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | **other**         | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | **Unearned** | ** ** | **comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | **Common** | ** ** | **paid-in**    | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **employee** | ** ** | **income**        | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | **stock**  | ** ** | **capital**    | ** ** | **earnings** | ** ** | **stock**    | ** ** | **benefits** | ** ** | **(loss)**        | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2002                                                                         |       | 21,578     |       | 18,269,582     |       | 24,295,211   |       | (3,266,359   | )          | (145,207     | )          | 1,898,970         |       | 41,073,775 |       |
| Comprehensive  income:                                                                                |       |       |       |           |       |         |       |         |       |         |       |              |       |       |       |
| Net income                                                                                            |       | —     |       | —         |       | 4,851,697    |       | —       |       | —       |       | —            |       | 4,851,697  |       |
| Change in fair  value of investment securities available-for-sale, net of tax                         |       | —     |       | —         |       | —       |       | —       |       | —       |       | (1,102,038        | )          | (1,102,038 | )          |
| Total  comprehensive income                                                                           |       | —     |       | —         |       | 4,851,697    |       | —       |       | —       |       | (1,102,038        | )          | 3,749,659  |       |
| Dividends paid  ($0.57 per share)                                                                     |       | —     |       | —         |       | (1,331,146   | )          | —       |       | —       |       | —            |       | (1,331,146 | )          |
| Amortization of  unearned employee benefits                                                           |       | —     |       | 82,731         |       | —       |       | —       |       | 145,207      |       | —            |       | 227,938    |       |
| Exercise of stock  options, 49,942 shares, including tax benefit of $241,775                          |       | 500        |       | 720,857        |       | —       |       | —       |       | —       |       | —            |       | 721,357    |       |
| Stock-based  compensation                                                                             |       | —     |       | 1,727          |       | —       |       | —       |       | —       |       | —            |       | 1,727      |       |
| Purchase of  72,228 treasury shares                                                                   |       | —     |       | —         |       | —       |       | (1,871,207   | )          | —       |       | —            |       | (1,871,207 | )          |
| 5% stock  dividend, 100,602 shares                                                                    |       | —     |       | 257,233        |       | (2,602,574   | )          | 2,345,341    |       | —       |       | —            |       | —     |       |
| Balance at  December 31, 2003                                                                         |       | 22,078     |       | 19,332,130     |       | 25,213,188   |       | (2,792,225   | )          | —       |       | 796,932           |       | 42,572,103 |       |
| 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  ($0.62 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  ($0.65 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 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

28

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**LANDMARKBANCORP, INC.**

**ANDSUBSIDIARY**

Consolidated Statements ofCash Flows

Years ended December 31,2005, 2004, and 2003

 
| ** **                                                                                  | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Cash flows from operating activities:                                                       |       |        |       |        |       |        |       |
| Net earnings                                                                                |       | $           | 3,897,164  |        | 4,250,758  |        | 4,851,697  |   |
| Adjustments to reconcile  net earnings to net cash provided by operating activities:        |       |        |       |        |       |        |       |
| Provision for  loan losses                                                                  |       | 385,000     |       | 460,000     |       | 240,000     |       |
| Amortization of  intangibles                                                                |       | 449,460     |       | 374,758     |       | 426,442     |       |
| Depreciation                                                                                |       | 700,789     |       | 650,082     |       | 461,836     |       |
| Stock-based  compensation                                                                   |       | 97,826      |       | 107,975     |       | 1,727       |       |
| Deferred income  taxes                                                                      |       | 879,613     |       | 625,904     |       | 364,465     |       |
| Net gains on  sales of investment securities, premises and equipment, and foreclosed assets |       | (113,032    | )          | (502,114    | )          | (561,155    | )          |
| Net gain on  sales of loans                                                                 |       | (638,780    | )          | (986,864    | )          | (2,039,102  | )          |
| Proceeds from  sale of loans                                                                |       | 34,325,244  |       | 39,598,536  |       | 97,351,328  |       |
| Origination of  loans held for sale                                                         |       | (34,003,672 | )          | (38,723,219 | )          | (90,996,079 | )          |
| Gains on  prepayments of FHLB borrowings                                                    |       | (406,572    | )          | —      |       | —      |       |
| Changes in  assets and liabilities:                                                         |       |        |       |        |       |        |       |
| Accrued interest  and other assets                                                          |       | (1,523,646  | )          | 1,200,310   |       | 63,920      |       |
| Accrued  expenses, taxes, and other liabilities                                             |       | 1,773,946   |       | (2,318,289  | )          | (4,689,368  | )          |
| Net cash  provided by operating activities                                                  |       | 5,823,340   |       | 4,737,837   |       | 5,475,711   |       |
| Cash flows from investing activities:                                                       |       |        |       |        |       |        |       |
| Net decrease in  loans                                                                      |       | 1,553,190   |       | 6,104,388   |       | 9,304,074   |       |
| Maturities and  prepayments of investment securities                                        |       | 46,035,450  |       | 32,936,261  |       | 52,601,851  |       |
| Net cash  received in branch acquisitions                                                   |       | 30,410,720  |       |        |       |        |       |
| Net cash paid in  First Kansas acquisition                                                  |       | —      |       | (9,140,845  | )          | —      |       |
| Net cash paid in  branch sales                                                              |       | —      |       | (8,714,311  | )          | —      |       |
| Purchases of  investment securities                                                         |       | (54,933,641 | )          | (6,502,342  | )          | (66,450,936 | )          |
| Proceeds from  sale of investment securities                                                |       | 160,235     |       | 971,571     |       | 1,203,725   |       |
| Proceeds from sales  of premises and equipment and foreclosed assets                        |       | 445,467     |       | 1,419,456   |       | 433,969     |       |
| Purchases of  premises and equipment, net                                                   |       | (1,921,843  | )          | (1,232,019  | )          | (337,967    | )          |
| Net cash  provided by (used in) investing activities                                        |       | 21,749,578  |       | 15,842,159  |       | (3,245,284  | )          |
| Cash flows from financing activities:                                                       |       |        |       |        |       |        |       |
| Net decrease in  deposits                                                                   |       | (4,867,797  | )          | (21,606,877 | )          | (11,172,650 | )          |
| Federal Home  Loan Bank advance borrowings                                                  |       | 8,000,000   |       | —      |       | —      |       |
| Federal Home  Loan Bank advance repayments                                                  |       | (20,876,696 | )          | (1,036,768  | )          | (3,015,350  | )          |
| Federal Home  Loan Bank line of credit, net                                                 |       | (3,500,000  | )          | 1,300,000   |       | 2,200,000   |       |
| Proceeds from  other borrowings                                                             |       | 11,998,000  |       | 9,555,000   |       | 8,498,000   |       |
| Repayments on  other borrowings                                                             |       | (3,470,000  | )          | (4,535,000  | )          | —      |       |
| Proceeds from  issuance of common stock under stock option plans                            |       | 196,088     |       | 221,551     |       | 479,582     |       |
| Net tax benefit  related to stock option plans                                              |       | 37,344      |       | 135,511     |       | 241,775     |       |
| Payment of  dividends                                                                       |       | (1,444,252  | )          | (1,420,885  | )          | (1,331,146  | )          |
| Purchase of  treasury stock                                                                 |       | (531        | )          | (3,055,205  | )          | (1,871,207  | )          |
| Net cash used in  financing activities                                                      |       | (13,927,844 | )          | (20,442,673 | )          | (5,970,996  | )          |
| Net increase  (decrease) in cash and cash equivalents                                       |       | 13,645,074  |       | 137,323     |       | (3,740,569  | )          |
| Cash and cash equivalents at beginning of year                                              |       | 7,845,438   |       | 7,708,115   |       | 11,448,684  |       |
| Cash and cash equivalents at end of year                                                    |       | $           | 21,490,512 |        | 7,845,438  |        | 7,708,115  |   |
| Supplemental disclosure of cash flow information:                                           |       |        |       |        |       |        |       |
| Cash paid during  the year for income taxes                                                 |       | $           | —     |        | 1,494,000  |        | 1,985,000  |   |
| Cash paid during  the year for interest                                                     |       | 8,583,000   |       | 6,652,000   |       | 5,690,000   |       |
| Supplemental schedule of noncash investing and  financing activities:                       |       |        |       |        |       |        |       |
| Transfer of  loans to real estate owned                                                     |       | 649,000     |       | 1,044,000   |       | 303,000     |       |
| Acquisition of  branches:                                                                   |       |        |       |        |       |        |       |
| Fair value of  liabilities assumed                                                          |       | 33,299,000  |       | —      |       | —      |       |
| Fair value of  assets acquired                                                              |       | 2,888,000   |       | —      |       | —      |       |
| First Kansas  acquisition:                                                                  |       |        |       |        |       |        |       |
| Fair value of  liabilities assumed                                                          |       | —      |       | 140,619,000 |       | —      |       |
| Fair value of  assets acquired, including goodwill                                          |       | —      |       | 149,760,000 |       | —      |       |
| Branch sales:                                                                               |       | —      |       |        |       |        |       |
| Fair value of  liabilities transferred                                                      |       | —      |       | (12,489,000 | )          | —      |       |
| Fair value of  assets sold                                                                  |       | —      |       | (3,774,000  | )          | —      |       |

 

See accompanying notes toconsolidated financial statements.

 

29

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**LANDMARKBANCORP, INC.**

**ANDSUBSIDIARY**

 

Notes to Consolidated FinancialStatements.

December 31, 2005, 2004, and2003

 

**(1)****         Summary ofSignificant Accounting Policies**

 

***(a)******                      Principlesof Consolidation***

 

The accompanying consolidated financial statements include the accountsof the Landmark Bancorp, Inc. (the Company) and its wholly owned subsidiary,Landmark National Bank (the Bank). All intercompany balances andtransactions have been eliminated in consolidation. The Bank, considered asingle segment, is principally engaged in the business of attracting depositsfrom the general public and using such deposits, together with borrowings andother funds, to originate commercial real estate and non-real estate loans,one-to-four family residential mortgage loans, consumer loans, and home equityloans.

 

***(b)***                      InvestmentSecurities

 

The Company classifies its investment securities portfolio as available-for-sale,which are recorded at fair value, determined principally based on quoted marketprices, with unrealized gains and losses excluded from earnings and reported ina 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 individualsecurities below their cost that are deemed to be other than temporary resultin write-downs of individual securities to their estimated fair value,and a new cost basis is established. The related write-downs are includedin earnings as realized losses. Gains and losses on sales of available-for-salesecurities are recorded on a trade date basis and are calculated using thespecific identification method.

 

***(c)***                       Loans andAllowance for Loan Losses

 

Loans receivable that management has the intent and ability to hold forthe foreseeable future or until maturity or pay-off are reported at theiroutstanding principal balances, net of undisbursed loan proceeds, the allowancefor loan losses, and any deferred fees or costs on originated loans.

 

Mortgage loans originated and intended for sale in the secondary marketare carried at the lower of cost or estimated fair value, determined on anaggregate basis. Net unrealized losses are recognized through a valuationallowance by charges to income. Origination fees and costs received on suchloans are deferred and recognized in income as part of the gain or loss onsale. 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.

 

The Company maintains an allowance to absorb probable loan lossesinherent 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 the adequacy of the allowance is based onthe Bank’s past loan loss experience, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral, the current level ofnonperforming assets, and current economic conditions. This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

30

----

 

A loan is considered impaired when, based on current information andevents, it is probable that the Bank will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement. Factors considered by management in determiningimpairment include payment status, collateral value, and the probability ofcollecting scheduled principal and interest payments when due. Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired. Management determines the significance of paymentdelays and payment 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. Impairment is measured on a loan-by-loanbasis for commercial, commercial real estate and construction loans by eitherthe present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

 

Large groups of smaller individual balance homogeneous loans that areconsidered impaired are collectively evaluated for impairment. Accordingly, theCompany does not separately identify individual consumer and residential loansfor impairment disclosures.

 

The accrual of interest on nonperforming loans is discontinued at thetime the loan is ninety days delinquent, unless the credit is well-securedand in process of collection. Loans are placed on non-accrual or are chargedoff at an earlier date if collection of principal or interest is considereddoubtful.

 

All interest accrued but not collected for loans that are placed onnonaccrual or charged off is reversed against interest income. The interest onthese loans is accounted for on the cash-basis or cost-recoverymethod, until qualifying for return to accrual. Loans are evaluatedindividually and are returned to accrual status when all the principal andinterest amounts contractually due are brought current and future payments arereasonably assured.

 

***(d)***                      Premises andEquipment

*** ***

Premises and equipment are stated at cost less accumulateddepreciation. Depreciation is provided using the straight-line oraccelerated methods over the estimated useful lives of the assets. Theestimated useful lives of the assets are as follows:

 

| Buildings and improvements         |   | 10 – 50 years |
|------------------------------------|--------|--------------------|
| Furniture, fixtures, and equipment |   | 1 – 15 years  |
| Automobiles                        |   | 2 – 5 years   |

 

Major replacements and betterments are capitalized while maintenance andrepairs are charged to expense when incurred. Gains or losses on dispositionsare reflected in operations as incurred.

 

31

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***(e)***                       Goodwilland Intangible Assets

 

The Company’s goodwill and core deposit intangible resulted from theacquisition of MNB Bancshares, Inc. (MNB) by Landmark Bancorp, Inc. onOctober 9, 2001, the acquisition of First Kansas Financial Corporation(First Kansas) on April 1, 2004, and from the acquisition of two branches inGreat Bend, Kansas on August 19, 2005. Goodwill resulting from the merger withMNB and from the acquisition of First Kansas is not amortized; however, it istested for impairment. During 2005, goodwill associated with the MNBacquisition was reduced by $116,000 realted to the resolution of outstandingtax matters. Goodwill impairment tests areperformed at each calendar year end or when events or circumstances dictate. TheCompany’s impairment test performed as of December 31, 2005 indicated thatthere was no impairment.

 

The core deposit intangibles are being amortized over their estimateduseful life of ten years on an accelerated basis. When facts and circumstances indicate potential impairment of amortizableintangible assets, the Company will evaluate the recoverability of the assetcarrying value, using estimates of undiscounted future cash flows over theremaining asset life. Any impairment loss is measured by the excess of carryingvalue over fair value. Amortization expense related to the core depositintangible asset was $283,000, $194,000, and $124,000 for the years endedDecember 31, 2005, 2004, and 2003, respectively.

 

Mortgage servicing assets are recognized as separate assets when rightsare acquired through the sale of financial assets. Capitalized servicing rightsare reported in other intangible assets and are amortized into non-interestexpense in proportion to, and over the period of, the estimated future netservicing income of the underlying financial assets. Servicing assets arerecorded at the lower of cost or fair value, and are evaluated for impairmentbased upon the fair value of the retained rights as compared to amortized cost.Amortization expense related to the mortgage servicing assets was $166,000,$181,000, and $302,000 for the years ended December 31, 2005, 2004, and2003, respectively.

 

***(f)***                         IncomeTaxes

 

Amounts provided for income tax expense are based on income reportedfor financial statement purposes and do not necessarily represent amountscurrently payable under tax laws. Deferred tax assets and liabilities arerecorded for the future tax consequences attributable to differences betweenthe consolidated financial statement carrying amounts of existing assets andliabilities and their respective income tax basis. Deferred tax assets andliabilities are measured using enacted tax rates applied to taxable income inthe years in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities, of a change in taxrates, is recognized in income in the period that includes the enactment date.

 

***(g)***                      Use ofEstimates

 

Management of the Company has made a number of estimates andassumptions relating to the reporting of assets and liabilities and thedisclosure of contingent assets and liabilities to prepare these consolidatedfinancial statements in conformity with U.S. generally accepted accountingprinciples. Actual results could differ from those estimates.

 

32

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***(h)***                      ComprehensiveIncome

*** ***

The Company’s othercomprehensive income (loss) consists of unrealized holding gains and losses onavailable-for-sale securities and an unrealized gain on an interestrate swap as shown below:

 
| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Unrealized holding losses on securities                            |       | $                            | (1,450,504 | ) | (736,440 | ) | (1,226,442 | ) |
| Less  reclassification adjustment for gains included in net income |       | 46,865                       |       | 358,385 |   | 551,038 |   |
| Net unrealized  losses on securities                               |       | (1,497,369                   | )          | (1,094,825 | ) | (1,777,480 | ) |
| Unrealized gain on interest rate swap                              |       | 78,000                       |       | 58,000 |   | — |   |
| Income tax benefit                                                 |       | (539,360                     | )          | (393,994 | ) | (675,442 | ) |
| Other  comprehensive loss                                          |       | $                            | (880,009   | ) | (642,831 | ) | (1,102,038 | ) |

 

***(i)***                         ForeclosedAssets

 

Assets acquired through, or in lieu of, foreclosure are to be sold andare initially recorded at the date of foreclosure at the lower of carryingvalue or fair value through a charge to the allowance for loan losses,establishing a new cost basis. Subsequent to foreclosure, managementperiodically performs valuations, and an allowance for losses is established bya charge to operations if the carrying value of a property exceeds the fairvalue less estimated costs to sell. Revenue and expenses from operations andchanges in the valuation allowance are included in other non-interest expenseon the income statement.

 

***(j)***                         StockBased Compensation

*** ***

The Company has a stock-based employee compensation plan, which isdescribed more fully in note 11. The Company utilizes the fair valuerecognition provisions of Statement of Financial Accounting Standard (SFAS)Statement No. 123, *Accounting for Stock-BasedCompensation*. SFAS 123 establishes a fair-value method of accountingfor employee stock options or similar equity instruments. The fair value ofstock-based awards to employees is calculated through the use of option pricingmodels. These models also require subjective assumptions, including futurestock price volatility and expected time to exercise, which greatly affect thecalculated values. The Company uses the Black-Scholes option pricing model toestimate the grant date fair value of its stock options. The fair value isrecognized as additional compensation expense, on an accelerated method overthe option vesting period, which is typically five years.

 

In December 2004, The Financial Accounting Standards Board issued SFASNo. 123 (revised), *Shared-Based Payment*.The revision disallows the expense recognition alternatives permitted in theoriginal statement and requires entities to recognize stock-based compensationcost in their

 

33

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statements of earnings. The revision 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 disclosurerequirements. The Company does not expect the adoption of the revised SFAS No.123 in January 2006 to have a material effect on its consolidated financialstatements.

 

***(k)***                      Earnings perShare

*** ***

Basic earnings per share represents net earnings divided by theweighted average number of common shares outstanding 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. Potentialcommon shares that may be issued by the Company relate solely to outstandingstock options and are determined using the treasury stock method. Earnings pershare for all periods presented have been adjusted to give effect to the 5%stock dividends paid by the Company in December 2005, 2004, and 2003.

 

The shares used in thecalculation of basic and diluted earnings per share, which have been adjustedfor the 5% stock dividends declared in December 2005, 2004, and 2003, are shownbelow:

 
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average common shares outstanding - basic    |       | 2,222,996                    |       | 2,278,093 |   | 2,318,471 |   |
| Stock options                                         |       | 9,764                        |       | 13,772 |   | 32,128 |   |
| Weighted average  common shares outstanding - diluted |       | 2,232,760                    |       | 2,291,865 |   | 2,350,599 |   |

 

***(l)***                         TreasuryStock

*** ***

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

 

***(m)***                   Cash and cashequivalents

*** ***

Cash and cash equivalents include cash on hand, amounts due from banks,interest-bearing deposits, and fed funds sold.

 

***(n)***                      Derivatives

*** ***

The Company is exposed to market risk, including changes in interestrates and currency exchange rates. To manage the volatility relating to theseexposures, the Company’s risk management policies permit its use of derivativeproducts. The Company uses derivatives on a limited basis mainly to stabilizeinterest rate margins. The Company more often manages normal asset andliability positions by altering the terms of the products it offers.

 

34

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Statement of Financial Accounting Standard No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended, requires that all derivative financial instruments be recorded onthe balance sheet at fair value, with the adjustment to fair value recorded incurrent earnings. Derivatives that qualify under the Statement in a hedgingrelationship are designated, based on the exposure being hedged, as fair valueor cash flow hedges. Under the cash flow hedging model, the effective portionof the gain or loss related to the derivative is recognized as a component ofother comprehensive income. The ineffective portion is recognized in currentearnings. The Company had one outstanding interest rate swap accounted for as acash flow hedge of December 31, 2005 and 2004.

 

***(o)***                      Reclassifications

*** ***

Certain reclassifications to prior year amounts have been made toconform to the current year presentation.

 

**(2)**                     Acquisitions

** **

OnApril 1, 2004, the Company acquired all of the outstanding stock of FirstKansas Financial Corporation (“First Kansas”) for cash of $19.00 per share. FirstKansas was a single thrift holding company based in Osawatomie, Kansas. Thethrift was merged into the Company’s wholly-owned subsidiary, Landmark NationalBank, immediately following the acquisition. This acquisition expanded theCompany’s presence in high-growth market areas, presenting the Company withpotential for revenue generation and asset growth. At March 31, 2004, FirstKansas had total assets of approximately $150 million, including loans anddeposits of approximately $74 million and $84 million, respectively. Theacquisition cost in excess of the tangible and identifiable intangible netassets acquired has been recorded as goodwill. In connection with theacquisition and the subsequent sale of two branches as described below, theCompany recorded a core deposit intangible asset of $605,000, which is beingamortized on an accelerated basis over ten years, and goodwill of approximately$5.7 million, none of which is deductible for tax purposes.

 

TheCompany sold its branches in Beloit and Phillipsburg, Kansas on August 13,2004, and September 10, 2004, respectively. These branches had been acquired inthe acquisition of First Kansas. Upon consummation of these transactions, theCompany sold approximately $7.7 million in deposits and approximately $2.4million in loans and premises and equipment associated with the Beloit branchand approximately $4.7 million in deposits and approximately $846,000 in loansand premises and equipment related to the Phillipsburg branch. The net proceedsreceived were recorded as an adjustment to the fair value of the net assetsacquired from First Kansas, resulting in a reduction of goodwill and the coredeposit intangible.

 

On August 19, 2005, theCompany acquired two bank branches in Great Bend, Kansas resulting in theassumption of approximately $33.3 million in deposits and the related branchpremises and equipment. The Company recorded a core deposit intangible asset ofapproximately $1.4 million, which is being amortized on an accelerated basisover 10 years.

 

35

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

 

A summary of investmentsecurities information is as follows:

 
| ** **                              | ** ** | **December 31, 2005** | ** **  |
|-----------------------------------------|------------|-----------------------|-------------|
| ** **                              | ** ** | ** **            | ** **  | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Amortized**         | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **Estimated** | ** ** |
| ** **                              | ** ** | **cost**              | ** **  | **gains** | ** ** | **losses** | ** ** | **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 |   |

 
| ** **                              | ** ** | **December 31, 2004** | ** **  |
|-----------------------------------------|------------|-----------------------|-------------|
| ** **                              | ** ** | ** **            | ** **  | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Amortized**         | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **Estimated** | ** ** |
| ** **                              | ** ** | **cost**              | ** **  | **gains** | ** ** | **losses** | ** ** | **fair value** | ** ** |
| U. S. Government and agency obligations |       | $                     | 33,703,700  |   | 38,250 |   | (276,457 | ) | 33,465,493 |   |
| Municipal obligations                   |       | 13,801,603            |        | 295,860 |   | (82,624 | ) | 14,014,839 |   |
| Mortgage-backed securities              |       | 74,667,732            |        | 733,185 |   | (897,298 | ) | 74,503,619 |   |
| Federal Home Loan Bank stock            |       | 5,413,000             |        | — |   | — |   | 5,413,000 |   |
| Common stocks                           |       | 302,646               |        | 407,763 |   | (754 | ) | 709,655 |   |
| Federal Reserve Bank stock              |       | 1,341,600             |        | — |   | — |   | 1,341,600 |   |
| Corporate bonds                         |       | 1,790,154             |        | — |   | (27,375 | ) | 1,762,779 |   |
| Other investments                       |       | 2,393,350             |        | — |   | — |   | 2,393,350 |   |
| Total                                   |       | $                     | 133,413,785 |   | 1,475,058 |   | (1,284,508 | ) | 133,604,335 |   |
|                                         |            |                       |             |  |  |  |  |  |  |  |  |

 

Included in investment securities available-for-sale are restrictedstock investments in the Federal Home Loan Bank (“FHLB”) and Federal ReserveBank (“FRB”) that are required to be maintained by the Bank for regulatorypurposes and borrowing availability. The cost of such investments representstheir redemption value.

 

36

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The tables above show that some of the securities in the available forsale investment portfolio had unrealized losses, or were temporarily impaired,as of December 31, 2005. This temporary impairment represents the estimatedamount of loss that would be realized if the securities were sold on the valuationdate. Securities which were temporarily impaired at December 31, 2005 are shownbelow, along with the length of the impairment period. 

 
| ** **                               | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total**      | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                               | ** ** | ** **              | ** ** | **Unrealized**          | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **Fair Value**          | ** ** | **Losses**              | ** ** | **Fair Value** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **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 | ) |

 

At December 31, 2005, thetotal investment portfolio consisted of over 430 securities. The table aboveincludes 209 securities that were in an unrealized loss position. The decreasein fair value of the securities in an unrealized loss position is related tointerest rate changes. None of the unrealized losses are related to creditdeterioration. The Company has the intent and ability to hold these securitiesuntil market values recover, including up to the maturity date.

 

Maturities of investmentsecurities at December 31, 2005 are as follows:

 
| ** **                                                                              | ** ** | **Amortized** | ** **  | **Estimated**  | ** **  |
|-----------------------------------------------------------------------------------------|------------|---------------|-------------|----------------|-------------|
| ** **                                                                              | ** ** | **cost**      | ** **  | **fair value** | ** **  |
| Due in less than one year                                                               |       | $             | 22,543,137  |           | 22,348,466  |   |
| Due after one year but within five years                                                |       | 33,667,275    |        | 33,227,646     |        |
| Due after five years                                                                    |       | 23,920,604    |        | 23,466,969     |        |
| Mortgage-backed  securities, FHLB stock, FRB stock, common stock, and other investments |       | 61,306,314    |        | 61,087,431     |        |
| Total                                                                                   |       | $             | 141,437,330 |           | 140,130,512 |   |

 

For mortgage-backed securities, actual maturities will differ fromcontractual maturities because borrowers have the right to prepay obligationswith or without prepayment penalties. At December 31, 2005, the Company’smortgage-backed securities portfolio consisted of securities predominantlyunderwritten to the standards and guaranteed by the government-sponsoredagencies of FHLMC, FNMA and GNMA.

 

37

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

 
| ** **      | ** ** | **Years ended December 31,** | ** ** |
|-----------------|------------|------------------------------|------------|
| ** **      | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Realized gains  |       | $                            | 47,075     |   | 358,385 |   | 551,038 |   |
| Realized losses |       | (210                         | )          | — |   | — |   |
| Total           |       | $                            | 46,865     |   | 358,385 |   | 551,038 |   |

 

At December 31, 2005and 2004, securities pledged to secure public funds on deposit had a carryingvalue of approximately $84.0 million and $84.2 million, respectively.Except for U. S. government and agency obligations, no investment in a singleissuer exceeded 10% of stockholders’ equity.

 

**(4)**                     Loans

 

Loans consist of thefollowing:

 
| ** **                               | ** ** | **December 31,** | ** **  | **December 31,** | ** **  |
|------------------------------------------|------------|------------------|-------------|------------------|-------------|
| ** **                               | ** ** | **2005**         | ** **  | **2004**         | ** **  |
| Real estate loans:                       |       |             |        |             |        |
| One-to-four  family residential          |       | $                | 114,935,068 |             | 131,077,310 |   |
| Commercial                               |       | 78,085,127       |        | 77,207,618       |        |
| Construction                             |       | 12,355,759       |        | 11,233,964       |        |
| Commercial loans                         |       | 63,494,252       |        | 51,826,283       |        |
| Consumer loans                           |       | 8,841,766        |        | 9,014,411        |        |
| Total                                    |       | 277,711,972      |        | 280,359,586      |        |
|                                     |       |             |        |             |        |
| Less:                                    |       |             |        |             |        |
| Deferred loan  fees and loans in process |       | (5,256           | )           | 52,020           |        |
| Allowance for  loan losses               |       | 3,151,373        |        | 2,893,603        |        |
| Loans, net                               |       | $                | 274,565,855 |             | 277,413,963 |   |

 

The Company is a party to financial instruments with off-balancesheet risk in the normal course of business to meet customers’ financing needs.These financial instruments consist principally of commitments to extendcredit. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance sheet instruments. TheCompany’s exposure to credit loss in the event of nonperformance by the otherparty is represented by the contractual amount of those instruments. In thenormal course of business, there are various commitments and contingentliabilities, such as guarantees, commitments to extend credit, letters ofcredit, and lines of credit, which are properly not recorded in theaccompanying consolidated financial statements. The Company generally requirescollateral or other security on unfunded loan commitments and irrevocableletters of credit. Unfunded commitments to extend credit, excluding standbyletters of credit, aggregated $54.1 million and

 

38

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$38.5 million at December 31, 2005 and 2004, respectively.Standby letters of credit totaled $2.9 million and $2.2 at December 31, 2005and 2004, respectively.

 

The Company is exposed to varying risks associated with concentrationsof credit relating primarily to lending activities in specific geographicareas. The Company’s principal lending area consists of the cities ofManhattan, Auburn, Dodge City, Garden City, Great Bend, Hoisington, LaCrosse,Osage City, Topeka, Wamego, Paola, Osawatomie, Louisburg, and Fort Scott,Kansas and the surrounding communities, and substantially all of the Company’sloans are to residents of or secured by properties located in its principallending area. Accordingly, the ultimate collectibility of the Company’s loanportfolio is dependent in part upon market conditions in those areas. Thesegeographic concentrations are considered in management’s establishment of theallowance for loan losses.

 

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

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at beginning of year |       | $                            | 2,893,603  |   | 2,315,870 |   | 2,565,201 |   |
| Allowance of acquired bank   |       | —                       |       | 352,113 |   | — |   |
| Provision for loan losses    |       | 385,000                      |       | 460,000 |   | 240,000 |   |
| Charge-offs                  |       | (222,379                     | )          | (294,624 | ) | (553,768 | ) |
| Recoveries                   |       | 95,149                       |       | 60,244 |   | 64,437 |   |
| Balance at end of year       |       | $                            | 3,151,373  |   | 2,893,603 |   | 2,315,870 |   |

 

At December 31, 2005 and 2004, impaired loans, includingnonaccrual loans, aggregated $3.3 million and $1.1 million, respectively. Theamount of interest income recorded on such loans during their impairmentperiods was not significant. There were no loans 90 days delinquent and stillaccruing interest at December 31, 2005 and 2004. Average impaired loans were$2.0 million for 2005, $1.5 million for 2004, and $1.1 million for 2003. Specificreserves related to these impaired loans at December 31, 2005, 2004, and 2003were $264,000, $157,000, and 120,000, respectively.

 

The Company serviced loans for others with outstanding principalbalances of $107.2 million and $111.1 million at December 31,2005 and 2004, respectively. Gross service fee income related to such loans was$276,000, $277,000, and $274,000 for the years ended December 31, 2005,2004, and 2003, respectively, and is included in fees and service charges inthe consolidated statements of earnings.

 

39

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The following is ananalysis of the changes in mortgage servicing rights:

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at beginning of year |       | $                            | 446,332    |   | 477,350 |   | 525,311 |   |
| Additions                    |       | 94,240                       |       | 150,058 |   | 254,390 |   |
| Amortization                 |       | (166,373                     | )          | (181,076 | ) | (302,351 | ) |
| Balance at end of year       |       | $                            | 374,199    |   | 446,332 |   | 477,350 |   |

 

The Company had loans todirectors and officers at December 31, 2005 and 2004, which carry termssimilar to those for other loans. Management believes such outstanding loans donot represent more than a normal risk of collection. A summary of such loans isas follows:

 
| Balance at  December 31, 2004 |   | $        | 5,569,097 |   |
|-------------------------------|--------|----------|-----------|--------|
| New loans                     |   | 64,802   |      |
| Repayments                    |   | (662,500 | )         |
| Balance at December 31, 2005  |   | $        | 4,971,399 |   |

 

**(5)**                     Premises andEquipment

 

Premises and equipmentconsisted of the following:

 
| ** **                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| Land                              |       | $                | 1,608,351  |             | 1,306,023  |   |
| Work in progress                  |       | 1,801,835        |       | 179,620          |       |
| Office buildings and improvements |       | 6,418,709        |       | 5,498,984        |       |
| Furniture and equipment           |       | 4,378,271        |       | 4,304,450        |       |
| Automobiles                       |       | 260,199          |       | 258,855          |       |
| Total                             |       | 14,467,365       |       | 11,547,932       |       |
| Less accumulated depreciation     |       | 6,055,130        |       | 5,683,674        |       |
| Total                             |       | $                | 8,412,235  |             | 5,864,258  |   |

 

40

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The Company hasmulti-year operating lease agreements for several of its branch locations. Thefollowing is the Company’s minimum lease commitments for the years endingDecember 31: 

 
| **Year:** | ** ** | **Amount** | ** ** |
|-----------|------------|------------|------------|
| 2006      |       | $          | 55,760     |   |
| 2007      |       | 50,760     |       |
| 2008      |       | 50,760     |       |
| 2009      |       | 50,760     |       |
| 2010      |       | 6,160      |       |
| Total     |       | $          | 214,200    |   |

 

Total rent expense for the years ended December 31, 2005, 2004 and 2003was $134,000, $125,000, and $117,000, respectively, and was included inoccupancy and equipment on the consolidated statements of earnings.

 

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

 

Maturities of timedeposits were as follows at December 31, 2005:

 

| **Year:**  | ** ** | **Amount** | ** **  |
|------------|------------|------------|-------------|
| 2006       |       | $          | 124,846,655 |   |
| 2007       |       | 17,163,698 |        |
| 2008       |       | 14,685,641 |        |
| 2009       |       | 3,012,031  |        |
| 2010       |       | 3,115,887  |        |
| Thereafter |       | 257,548    |        |
| Total      |       | $          | 163,081,460 |   |

 

Regulations of the Federal Reserve System require reserves to bemaintained by all banking institutions according to the types and amounts ofcertain deposit liabilities. These requirements restrict a portion of theamounts shown as consolidated cash and due from banks from everyday usage inoperation of the banks. The minimum reserve requirements for the Bank totaled$25,000 at December 31, 2005.

 

41

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**(7)**                     Federal HomeLoan Bank Borrowings

 

Advances from the FHLB atDecember 31, 2005 and 2004, amounted to $63,212,318 and $77,553,321,respectively. Maturities of such borrowings at December 31, 2005, aresummarized as follows:

 
| ** **                              | ** ** | **Amount** | ** ** | **Rates**        | ** **       |
|-----------------------------------------|------------|------------|------------|------------------|------------------|
| Year ending December 31: | ** ** | ** ** | ** ** | ** **       | ** **       |
| 2006                                    |       | $          | 5,500,000  |             | 4.25%– 5.62 | % |
| 2007                                    |       | —     |       | —           |             |
| 2008                                    |       | 4,000,000  |       | 4.36%– 4.74 | %                |
| 2009                                    |       | 37,178,293 |       | 2.74%– 5.77 | %                |
| 2010                                    |       | 11,050,457 |       | 2.47%– 2.47 | %                |
| Thereafter                              |       | 5,483,568  |       | 3.76%– 6.37 | %                |
|                                    |       | $          | 63,212,318 |             |             |   |

 

Additionally, the Bank also has a line of credit, renewable annuallyeach September, with the FHLB under which there were outstanding borrowings of$0 and $3.5 million at December 31, 2005 and 2004, respectively. Intereston any outstanding balances on the line of credit accrues at the federal fundsrate plus 0.15% (4.40% at December 31, 2005).

 

Included in the table above is a $2.0 million advance with the FHLBwhich has a variable rate, adjustable quarterly, and matures in 2008 with noprepayment penalties. All of the Bank’s remaining advances with the FHLB havefixed rates and prepayment penalties. However, certain borrowings contain aconvertible provision at which date the FHLB may exercise an option to convertthe borrowing to a variable rate equal to the FHLB one month short-term advancerate. The Bank would then have the option to prepay the advances withoutpenalty. Interest would adjust monthly through maturity upon conversion. TheBank may refinance the advance at each respective conversion date if the FHLBfirst exercises its option to convert the fixed-rate borrowing.

 

On August 22, 2005, the Company repaid FHLB advances with $10 millionin outstanding principal acquired in the First Kansas acquisition prior totheir scheduled maturities. The repayment resulted in $407,000 of gains on therepayment of borrowings as an adjustment to the fair value adjustment recordedon the date of acquisition from First Kansas. On September 26, 2005, theCompany repaid another $5.0 million FHLB advance according to its scheduledmaturity, resulting in no gain or loss.

 

Although no loans are specifically pledged, the FHLB requires the Bankto maintain eligible collateral (qualifying loans and investment securities)that has a lending value at least equal to its required collateral. AtDecember 31, 2005, the Bank’s total borrowing capacity with the FHLB wasapproximately $89.2 million.

 

**(8)**                     OtherBorrowings

 

In 2003, the Company issued $8.2 million of subordinated debentures.These debentures, which are due in 2034 and are redeemable beginning in 2009,were issued to a wholly owned grantor trust (“the Trust”) formed to issuepreferred securities representing undivided beneficial interests in the assetsof the Trust.

 

42

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The Trust then invested the gross proceeds of such preferred securitiesin the debentures. The Trust’s preferred securities and the subordinateddebentures require quarterly interest payments and have variable rates,adjustable quarterly. Interest accrues at LIBOR plus 2.85%. The interest ratesat December 31, 2005 and 2004 were 7.09% and 5.01%, respectively.

 

In 2005, the Company issued an additional $8.2 million of subordinateddebentures. These debentures, which are due in 2036 and are redeemablebeginning in 2011, were issued to a wholly owned grantor trust (“Trust II”)formed to issue preferred securities representing undivided beneficialinterests in the assets of Trust II. Trust II then invested the gross proceedsof such preferred securities in the debentures. Trust II’s preferred securitiesand the subordinated debentures require quarterly interest payments and havevariable rates, adjustable quarterly. Interest accrues at LIBOR plus 1.34% on$5.2 million of the subordinated debentures, while the remaining $3.0 millionof the subordinated debentures has a fixed rate of 6.17%. The blended interestrate at December 31, 2005 was 5.98%.

 

While these Trusts are accounted for as unconsolidated equityinvestments under the requirements of Financial Accounting Interpretation No.46R, *Consolidation of Variable Interest Entities,*aportion of the trust preferred securities issued by the Trust qualifies as Tier1 Capital for regulatory purposes.

 

The Company has a $9.0 million loan commitment from an unrelatedfinancial institution. On April 1, 2004, the Company borrowed $7.0 millionagainst this commitment to consummate the acquisition of First Kansas. The $9.0million commitment was comprised of a $6.0 million line of credit and a $3.0million term note with the interest rate adjusting daily based on the primerate less 0.50%, both of which mature on March 31, 2009. In December 2005, theline of credit was amended to accrue interest at prime rate less 0.75%. Thebalance of the line of credit at December 31, 2005 and 2004, was $300,000 and$2.0 million, respectively, and is included in other borrowings. The remainingunused balance on this line of credit at December 31, 2005 was $5.7 million.

 

The Company has an interest rate swap in place effectively fixing theinterest rate on $3.0 million of the variable rate term debt to a rate of5.68%. This contract expires on March 31, 2009. During 2005 and 2004, thisagreement resulted in additional interest expense of $0 and $39,000,respectively. The Company has applied cash flow hedge accounting to the swapagreement. Its fair value, aggregating $136,000 and $58,000 at December 31,2005 and 2004, respectively, is recorded as a component of other assets in theaccompanying consolidated balance sheet. Also, included in accumulated othercomprehensive income is approximately $84,000 and $36,000 related to the swap,net of taxes, at December 31, 2005 and 2004.

 

Additionally, the Bank had $2,250,000 and $250,000 in repurchase agreementsoutstanding and included in other borrowings at December 31, 2005 and 2004.

 

43

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**(9)**                      Income Taxes

** **

Income tax expenseattributable to income from operations consisted of:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current    |       | $                            | 779,304    |   | 1,384,321 |   | 1,911,004 |   |
| Deferred   |       | 879,613                      |       | 625,904 |   | 364,465 |   |
|       |       | $                            | 1,658,917  |   | 2,010,225 |   | 2,275,469 |   |
| Federal    |       | $                            | 1,401,319  |   | 1,733,031 |   | 1,994,836 |   |
| State      |       | 257,598                      |       | 277,194 |   | 280,633 |   |
|       |       | $                            | 1,658,917  |   | 2,010,225 |   | 2,275,469 |   |

 

Total income tax expense,including amounts allocated directly to stockholders equity, was as follows:

 
| ** **                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from operations                                                                                                        |       | $                            | 1,658,917  |   | 2,010,225 |   | 2,275,469 |   |
| Stockholders’  equity, recognition of tax benefit for stock options exercised                                            |       | (37,344                      | )          | (135,511 | ) | (241,775 | ) |
| Stockholders’  equity, recognition of unrealized (losses)/gains on available-for-sale  securities and interest rate swap |       | (539,360                     | )          | (393,994 | ) | (675,442 | ) |
|                                                                                                                          |       | $                            | 1,082,213  |   | 1,480,720 |   | 1,358,252 |   |

 

The reasons for thedifference between actual income tax expense and expected income tax expenseattributable to income from operations at the 34% statutory federal income taxrate were as follows:

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Computed “expected” tax expense            |       | $                            | 1,889,067  |   | 2,128,734 |   | 2,423,236 |   |
| Increase (reduction) in income taxes resulting from: |       |                         |       |   |   |   |   |
| Tax-exempt  interest income, net                     |       | (294,489                     | )          | (189,782 | ) | (156,473 | ) |
| Contributions to  employee stock ownership plan      |       | —                       |       | — |   | 28,129 |   |
| State income  taxes, net of federal benefit          |       | 170,015                      |       | 182,496 |   | 186,586 |   |
| Investment tax  credits                              |       | (125,000                     | )          | (75,000 | ) | (125,000 | ) |
| Other, net                                           |       | 19,324                       |       | (36,223 | ) | (81,009 | ) |
|                                                 |       | $                            | 1,658,917  |   | 2,010,225 |   | 2,275,469 |   |

 

44

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The tax effects oftemporary differences that give rise to the significant portions of thedeferred tax assets and liabilities at the following dates were as follows:

 
| ** **                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                          | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| Deferred tax assets:                                                                |       |             |       |             |       |
| FHLB advances                                                                       |       | $                | 1,097,775  |             | 1,881,218  |   |
| Loans, including  allowance for loan losses                                         |       | 821,574          |       | 670,284          |       |
| Unrealized loss  on investment securities available-for-sale and interest rate swap |       | 444,911          |       | —           |       |
| Net operating  loss carry forwards                                                  |       | 500,103          |       | 762,886          |       |
| Deferred  compensation arrangements                                                 |       | 315,223          |       | 355,624          |       |
| State taxes                                                                         |       | 63,230           |       | 86,806           |       |
| Accrued expenses                                                                    |       | 47,469           |       | 74,601           |       |
| Total deferred  tax assets                                                          |       | 3,290,285        |       | 3,831,419        |       |
| Less valuation  allowance                                                           |       | 105,919          |       | 62,062           |       |
| Net deferred tax  assets                                                            |       | 3,184,366        |       | 3,769,357        |       |
| Deferred tax liabilities:                                                           |       |             |       |             |       |
| Unrealized gain on investment securities available-for-sale  and interest rate swap |       | —           |       | 94,449           |       |
| FHLB stock dividends                                                                |       | 672,740          |       | 590,392          |       |
| Investments                                                                         |       | 113,817          |       | 261,045          |       |
| Intangible assets                                                                   |       | 167,215          |       | 211,245          |       |
| Premises and equipment, net of depreciation                                         |       | 138,889          |       | 182,194          |       |
| Other, net                                                                          |       | 5,658            |       | 3,731            |       |
| Total deferred tax liabilities                                                      |       | 1,098,318        |       | 1,343,056        |       |
| Net deferred tax asset                                                              |       | $                | 2,086,048  |             | 2,426,301  |   |

 

The Company has recorded deferred taxes for temporary differencesrelated to fair value adjustments on loans, investment securities, deposits,and borrowings recorded at the date of acquisition. 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 operatingloss carry forwards will expire, if not utilized, between 2014 and 2024. Thealternative minimum tax credit carry forward does not expire. The Company hasrecorded a valuation allowance to reduce certain state net operating loss carryforwards which expire at various times through 2024. At December 31, 2005 and2004, the Company believes it is more likely than not that these items will notbe realized. A valuation allowance related to the remaining deferred tax assetshas not been provided because management believes it is more likely than notthat the results of future operations will generate sufficient taxable incometo realize the deferred tax assets.

 

Retained earnings at December 31, 2005 and 2004, includesapproximately $6.3 million for which no provision for federal income tax hadbeen made. This amount represents allocations of income to bad debt deductionsin years prior to 1988 for tax purposes only. Reduction of amounts allocatedfor purposes other

 

45

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than tax bad debt losses will create income for tax purposes only,which will be subject to the then current corporate income tax rate.

 

**(10)**              Employee BenefitPlans

 

***Employee Retirement Plan***

*** ***

Substantially all employees are covered under 401(k) definedcontribution savings plan. Contributions of $190,000, $104,000 and $78,000 werecharged to operations for the years ended December 31, 2005, 2004, and2003, respectively.

 

***Deferred Compensation andRetirement Agreements***

*** ***

The Company entered into deferred compensation and retirementagreements with certain key employees that provided for cash payments to bemade after their retirement. The liabilities under these arrangements have beenrecorded at the present values of accrued benefits using a 2% discount rate. TheCompany has also entered into agreements with certain directors and officers todefer portions of their compensation. The balance of estimated accrued benefitsunder all of these arrangements was $943,000 and $993,000 at December 31,2005 and 2004, respectively, and was included as a component of otherliabilities in the accompanying consolidated balance sheets. To assist infunding benefits under each of these plans, the Bank has purchased certainassets including life insurance policies on covered employees in which the Bankis the beneficiary. At December 31, 2005 and 2004, the cash surrendervalues on the policies and other assets were $2.9 million and $3.0 million,respectively, and were included in other assets in the accompanyingconsolidated balance sheets.

 

***Employee Stock OwnershipPlan (ESOP)***

*** ***

The Company established an ESOP in connection with its formation in1994. The original acquisition of stock by the ESOP was funded by a loan fromthe Company to the ESOP. The loan, together with interest, was repaid over aten-year period through annual contributions by the Bank. The Bank madeannual contributions to the ESOP equal to the ESOP’s debt service lessdividends received by the ESOP. All dividends received by the ESOP were used topay debt service. The ESOP shares initially were pledged as collateral for itsdebt. As the debt was repaid, shares were released from the collateral andallocated to active employees based on the proportion of debt service paid ineach year. ESOP compensation expense was $70,000 for the year ended December31, 2003. The debt was fully repaid in 2003. Effective January 1, 2005, the ESOPwas merged into the Company’s 401(k) defined contribution savings plan.

 

**(11)**              Stock Option Plan

 

The Company has a stock option plan, the purpose of which is to provideadditional incentive to certain officers, directors, and key employees byfacilitating their purchase of a stock interest in the Company. The plan isadministered by the board of directors who selects employees to whom optionsare granted and the number of shares granted. The option price may not be lessthan 100% of the fair market value of the shares on the date of the grant, andno option shall be exercisable after the expiration of ten years from thegrant date. In the case of any employee who owns more than 10% of theoutstanding common stock at the time the option is granted, the option pricemay not be less than 110% of the fair market value of the shares on the date ofthe grant, and the option shall not be exercisable after the expiration often years from the

 

46

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grant date. Options outstanding at December 31, 2005 wereexercisable at prices ranging from $11.94 to $27.74.

 

The Company records the fair value of options issued under the plan asexpense in accordance with SFAS No. 123, *Accountingfor Stock Based Compensation*. The compensation cost that has beencharged to compensation and benefits expense for the plan was $98,000, $108,000and $1,700 for the years ended December 31, 2005, 2004, and 2003,respectively. The fair value of each option grant is estimated on the date ofgrant. The fair value of options granted in 2005 were estimated utilizing thefollowing assumptions: dividend rate of 4.8%, volatility of 18.0%, risk-freeinterest rate of 4.3%, and expected lives of five years, resulting in a fairvalue of $3.40 per option at grant date. The fair value of options granted in2004 were estimated utilizing the following assumptions: dividend rate of 4.8%,volatility of 19.0%, risk-free interest rate of 3.2%, and expected lives offive years, resulting in a fair value of $3.14 per option at grant date. Therewere no options granted in 2003.

 

Certain informationrelative to stock options is as follows:

 
| ** **                                            | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
| ** **                                            | ** ** | ** **            | ** ** | **Weighted**          | ** ** | ** **            | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                            | ** ** | ** **            | ** ** | **average**           | ** ** | ** **            | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                            | ** ** | ** **            | ** ** | **exercise**          | ** ** | ** **            | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                                            | ** ** | **Shares**            | ** ** | **price**             | ** ** | **Shares**            | ** ** | **price** | ** ** | **Shares** | ** ** | **price** | ** ** |
| Outstanding at  beginning of year                     |       | 131,287               |       | $                     | 24.04      |                  | 61,366     |   | $ | 13.17 |   | 109,274 |   | $ | 11.97 |   |
| Granted                                               |       | 2,100                 |       | 29.13                 |       | 87,996                |       | 29.20 |   | — |   | — |   |
| Effect of 5%  stock dividend                          |       | 6,062                 |       | —                |       | 6,336                 |       | — |   | 3,289 |   | — |   |
| Expired                                               |       | —                |       | —                |       | —                |       | — |   | (1,255 | ) | 16.76 |   |
| Exercised                                             |       | (12,109               | )          | 16.19                 |       | (24,411               | )          | 9.08 |   | (49,942 | ) | 9.60 |   |
| Outstanding at  end of year                           |       | 127,340               |       | $                     | 23.73      |                  | 131,287    |   | $ | 24.04 |   | 61,366 |   | $ | 13.17 |   |
| Exercisable at  end of year                           |       | 47,016                |       | $                     | 19.07      |                  | 37,921     |   | $ | 15.07 |   | 59,977 |   | $ | 13.10 |   |
| Weighted-average  contractual remaining life in years |       |                  |       | 7.38                  |       |                  |       | 7.98 |   |   |   | 3.94 |   |

 

The number of shares available for future grants at December 31, 2005was 274,645.

 

47

----

 

**(12)**              Fair Value ofFinancial Instruments

 

Fair value estimates ofthe Company’s financial instruments as of December 31, 2005 and 2004,including methods and assumptions utilized, are set forth below:

 
| ** **                                                 | ** ** | **December 31,  2005** | ** **  | **December 31,  2004** | ** **  |
|------------------------------------------------------------|------------|------------------------|-------------|------------------------|-------------|
| ** **                                                 | ** ** | **Carrying**           | ** **  | **Estimated**          | ** **  | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                                 | ** ** | **amount**             | ** **  | **fair value**         | ** **  | **amount** | ** ** | **fair value** | ** ** |
| Cash and cash equivalents                                  |       | $                      | 21,490,512  |                   | 21,491,000  |   | 7,845,438 |   | 7,845,000 |   |
| Investment securities                                      |       | $                      | 140,130,512 |                   | 140,131,000 |   | 133,604,335 |   | 133,604,000 |   |
| Loans, net of  unearned fees and allowance for loan losses |       | $                      | 274,565,855 |                   | 275,979,000 |   | 277,413,963 |   | 274,823,000 |   |
| Loans held for sale                                        |       | $                      | 1,163,211   |                   | 1,177,000   |   | 846,003 |   | 862,000 |   |
| Non-interest bearing demand deposits                       |       | $                      | 38,365,040  |                   | 38,365,000  |   | 28,549,224 |   | 28,549,000 |   |
| Money market and NOW deposits                              |       | 103,728,104            |        | 103,728,000            |        | 96,607,511 |   | 96,608,000 |   |
| Savings deposits                                           |       | 26,098,127             |        | 26,098,000             |        | 23,221,065 |   | 23,221,000 |   |
| Time deposits                                              |       | 163,081,460            |        | 162,595,000            |        | 154,489,921 |   | 154,870,000 |   |
| Total deposits                                             |       | $                      | 331,272,731 |                   | 330,786,000 |   | 302,867,721 |   | 303,248,000 |   |
| FHLB advances                                              |       | $                      | 63,212,318  |                   | 63,281,000  |   | 81,053,321 |   | 79,963,000 |   |
| Other borrowings                                           |       | $                      | 22,046,000  |                   | 22,046,000  |   | 13,518,000 |   | 13,518,000 |   |

 

***Off-BalanceSheet Financial Instruments***

 

The fair value of lettersof credit and commitments to extend credit is based on the fees currentlycharged to enter into similar agreements. The aggregate of these fees is notmaterial. These instruments are also discussed in note 17 on “Commitments,Contingencies and Guarantees.”

 

***Methods and AssumptionsUtilized***

*** ***

The carrying amount of cash and cash equivalents, repurchaseagreements, federal funds sold, and accrued interest receivable and payable areconsidered to approximate fair value.

 

The estimated fair value of investment securities, except certainobligations of states and political subdivisions, is based on bid pricespublished in financial newspapers or bid quotations received from securitiesdealers. The fair value of certain obligations of states and politicalsubdivisions is not readily available through market sources other than dealerquotations, so fair value estimates are based upon quoted market prices ofsimilar instruments, adjusted for differences between the quoted instrumentsand the instruments being valued.

 

48

----

 

The estimated fair value of the Company’s loan portfolio is based onthe segregation of loans by collateral type, interest terms, and maturities. Inestimating the fair value of each category of loans, the carrying amount of theloan is reduced by an allocation of the allowance for loan losses. Suchallocation is based on management’s loan classification system which is designedto measure the credit risk inherent in each classification category. Theestimated fair value of performing variable rate loans is the carrying value ofsuch loans, reduced by an allocation of the allowance for loan losses. Theestimated fair value of performing fixed rate loans is calculated bydiscounting scheduled cash flows through the estimated maturity using estimatedmarket discount rates that reflect the interest rate risk inherent in the loan,reduced by an allocation of the allowance for loan losses. The estimate ofmaturity is based on the Company’s historical experience with repayments foreach loan classification, modified, as required, by an estimate of the effectof current economic and lending conditions. The fair value for nonperformingloans is the estimated fair value of the underlying collateral based on recentexternal appraisals or other available information, which generallyapproximates carrying value, reduced by an allocation of the allowance for loanlosses.

 

The fair value of loans held for sale is estimated utilizing forwardsales commitments or dealer quotations.

 

The estimated fair value of deposits with no stated maturity, such asnon-interest bearing demand deposits, savings, money market accounts, and NOWaccounts, is equal to the amount payable on demand. The fair value of interest-bearingtime deposits is based on the discounted value of contractual cash flows ofsuch deposits. The discount rate is estimated using the rates currently offeredfor deposits of similar remaining maturities.

 

The fair value of advances from the FHLB is estimated using currentrates offered for similar borrowings. The fair values of other variable rateborrowings approximate the carrying value.

 

***Limitations***

 

Fair value estimates are made at a specific point in time based onrelevant market information and information about the financial instruments.These estimates do not reflect any premium or discount that could result fromoffering for sale at one time the Company’s entire holdings of a particularfinancial instrument. Because no market exists for a significant portion of theCompany’s financial instruments, fair value estimates are based on judgmentsregarding future loss experience, current economic conditions, riskcharacteristics of various financial instruments, and other factors. Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment, and, therefore, cannot be determined with precision.Changes in assumptions could significantly affect the estimates. Fair valueestimates are based on existing balance sheet financial instruments withoutattempting to estimate the value of anticipated future business and the valueof assets and liabilities that are not considered financial instruments.

 

**(13)**              Regulatory CapitalRequirements

 

Current regulatorycapital regulations require financial institutions to meet certain regulatorycapital requirements. Institutions are required to have minimum leveragecapital equal to 4% of total average assets and total qualifying capital equalto 8% of total risk-weighted assets in order to be considered “adequatelycapitalized.” As of December 31, 2005 and 2004, the Company and the Bank wererated “well capitalized,” which is the highest rating available under thiscapital-based rating system. Management

 

49

----

 

believes that as ofDecember 31, 2005, the Company and the Bank meet all capital adequacyrequirements to which they are subject. The following is a comparison of the Bank’sregulatory capital to minimum capital requirements at December 31, 2005and 2004, (dollars in thousands):

 
| ** **                                | ** ** | ** ** | ** ** | ** **                 | ** ** | **For capital**             | ** ** | **To be well-  capitalized under prompt** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Actual** | ** ** | **adequacy purposes** | ** ** | **corrective action provisions** | ** ** |
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                       | ** ** | **Ratio**                                 | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| 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 |   |
|                                      |       |       |       |                       |       |                             |       |                                      |       |   |   |   |   |
| As of December 31, 2004:                  |       |       |       |                       |       |                             |       |                                      |       |   |   |   |   |
| Total capital  (to risk-weighted assets)  |       | $          | 48,700     |                       | 17.98      | %                                | $          | >21,673                                | >  | 8 | % | $ | >27,091 | >  | 10 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 45,806     |       | 16.91                      | %          | >10,836                       | >  | 4                                         |       | >16,255 | >  | 6 |   |
| Tier 1 capital  (to average assets)       |       | 45,806     |       | 10.40                      | %          | >17,624                       | >  | 4                                         |       | >22,030 | >  | 5 |   |

 

The following is acomparison of the Company’s regulatory capital to minimum capital requirementsat December 31, 2005 and 2004 (dollars in thousands):

 
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **                       | ** ** | ** **                   | ** ** | **To be well-** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------|------------|----------------------------------|------------|------------------------------|------------|-----------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | **For capital**                  | ** ** | **capitalized under prompt** | ** ** |
| ** **                               | ** ** | **Actual** | ** ** | **adequacy purposes** | ** ** | **corrective action provisions** | ** ** |
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**                       | ** ** | **Ratio**                    | ** ** | **Amount**      | ** ** | **Ratio** | ** ** |
| 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 |   |
|                                     |       |       |       |                  |       |                             |       |                         |       |            |       |   |   |
| As of December 31, 2004:                 |       |       |       |                  |       |                             |       |                         |       |            |       |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 44,567     |                  | 16.42      | %                                | $          | >21,716                   | >  | 8               | %          | $ | >27,146 | >  | 10 | % |
| Tier 1 capital (to risk-weighted assets) |       | 41,673     |       | 15.35                 | %          | >10,858                       | >  | 4                            |       | >16,287      | >  | 6 |   |
| Tier 1 capital (to average assets)       |       | 41,673     |       | 9.41                  | %          | >17,714                       | >  | 4                            |       | >22,143      | >  | 5 |   |
|                                          |            |            |            |                       |            |                                  |            |                              |            |                 |            |  |  |  |  |  |  |  |

 

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**(14)**              Parent CompanyCondensed Financial Statements

** **

The following is condensed financial information of the parent companyas of December 31, 2005 and 2004, and for years ended December 31, 2005,2004, and 2003 (dollars in thousands):

 

***Condensed BalanceSheets***

 
| ** **                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2005**         | ** ** | **2004**         | ** ** |
| **Assets**                                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash                                             |       | $                | 8,011      |             | 40         |   |
| Investment securities                            |       | 1,133            |       | 1,065            |       |
| Investment in Bank                               |       | 53,432           |       | 54,261           |       |
| Other                                            |       | 1,800            |       | 571              |       |
| Total assets                                     |       | $                | 64,376     |             | 55,937     |   |
| **Liabilities and Stockholders’ Equity**    |       |             |       |             |       |
| Borrowed funds                                   |       | $                | 19,796     |             | 13,268     |   |
| Other                                            |       | 507              |       | 500              |       |
| Stockholders’ equity                        |       | 44,073           |       | 42,169           |       |
| Total  liabilities and stockholders’ equity |       | $                | 64,376     |             | 55,937     |   |

 

***CondensedStatements of Earnings***

 
| ** **                                              | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividends from Bank                                     |       | $                            | 4,457      |   | 5,105 |   | 3,424 |   |
| Interest income                                         |       | 43                           |       | 70 |   | 75 |   |
| Other income                                            |       | 53                           |       | 316 |   | 559 |   |
| Interest expense                                        |       | (770                         | )          | (542 | ) | (4 | ) |
| Other expense, net                                      |       | (189                         | )          | (196 | ) | (198 | ) |
|                                                    |       |                         |       |   |   |   |   |
| Income before  equity in undistributed earnings of Bank |       | 3,594                        |       | 4,753 |   | 3,856 |   |
| (Decrease)/increase in undistributed equity of Bank     |       | 6                            |       | (625 | ) | 1,097 |   |
| Earnings before  income taxes                           |       | 3,600                        |       | 4,128 |   | 4,953 |   |
| Income tax (benefit)/expense                            |       | (297                         | )          | (123 | ) | 101 |   |
| Net earnings                                            |       | $                            | 3,897      |   | 4,251 |   | 4,852 |   |

 

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***CondensedStatements of Cash Flows***

 
| ** **                                                                      | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                           |       |                         |       |   |   |   |   |
| Net earnings                                                                    |       | $                            | 3,897      |   | 4,251 |   | 4,852 |   |
| Decrease/(increase)  in undistributed equity of Bank                            |       | (6                           | )          | 625 |   | (1,097 | ) |
| Other                                                                           |       | (1,247                       | )          | 1,364 |   | (1,789 | ) |
| Net cash  provided by operating activities                                      |       | 2,644                        |       | 6,240 |   | 1,966 |   |
| Cash flows from investing activities:                                           |       |                         |       |   |   |   |   |
| Purchase of  investment securities available-for-sale                           |       | (112                         | )          | (551 | ) | — |   |
| Proceeds from  sales and maturities of investment securities available-for-sale |       | 160                          |       | 926 |   | 1,252 |   |
| Cash paid in  acquisition of First Kansas                                       |       | —                       |       | (17,502 | ) | — |   |
| Net cash  provided by/(used in) investing activities                            |       | 48                           |       | (17,127 | ) | 1,252 |   |
| Cash flows from financing activities:                                           |       |                         |       |   |   |   |   |
| Issuance of  shares under stock option plan                                     |       | 196                          |       | 221 |   | 479 |   |
| Proceeds from  other borrowings                                                 |       | 9,998                        |       | 9,555 |   | 8,248 |   |
| Repayments on  other borrowings                                                 |       | (3,470                       | )          | (4,535 | ) | — |   |
| Purchase of  treasury stock                                                     |       | (1                           | )          | (3,055 | ) | (1,871 | ) |
| Payment of  dividends                                                           |       | (1,444                       | )          | (1,421 | ) | (1,331 | ) |
| Net cash  provided by financing activities                                      |       | 5,279                        |       | 765 |   | 5,525 |   |
| Net  (decrease)/increase in cash                                                |       | 7,971                        |       | (10,122 | ) | 8,743 |   |
| Cash at beginning of year                                                       |       | 40                           |       | 10,162 |   | 1,419 |   |
| Cash at end of year                                                             |       | $                            | 8,011      |   | 40 |   | 10,162 |   |

 

Dividends paid by the Company are provided through subsidiary bankdividends. At December 31, 2005, the Bank could distribute dividends of upto $478,000 without regulatory approvals.

 

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**(15)**              Stockholders’ RightsPlan

 

On October 11, 2001, the Company’s board of directors adopted astockholders’ rights plan (the Rights Plan). The Rights Plan provided for thedistribution of one right on February 13, 2002, for each share of theCompany’s outstanding common stock as of February 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 theCompany’s common stock or announces a tender offer. The Rights Plan alsopermits the Company’s board of directors to redeem each right for one centunder various circumstances. In general, the Rights Plan provides that if aperson, 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 rights, all holders of rights, other than the 15% stockholder or thetender offeror, will be able to purchase a certain amount of the Company’scommon stock for half of its market price.

 

**(16)**              Intangible Assets

 

The following tablepresents information about the Company’s intangible assets:

 
| ** **                    | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **Gross**             | ** ** | ** **            | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **carrying**          | ** ** | **Accumulated**       | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                    | ** ** | **amount**            | ** ** | **amortization**      | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortizing intangible assets: |       |                  |       |                  |       |   |   |   |   |
| Core deposit  premium         |       | $                     | 2,818,602  |                  | (774,588   | ) | 1,385,000 |   | (491,501 | ) |
| Mortgage  servicing rights    |       | 775,666               |       | (401,467              | )          | 766,891 |   | (320,559 | ) |
| Total                         |       | $                     | 3,594,268  |                  | (1,176,055 | ) | 2,151,891 |   | (812,060 | ) |

 

Aggregate amortizationexpense for the years ended December 31, 2005, 2004 and 2003, was $449,000,$375,000 and $426,000, respectively. The following is estimated amortizationexpense for the years ending December 31:

 

| **Year:** | ** ** | **Amount** | ** ** |
|-----------|------------|------------|------------|
| 2006      |       | $          | 604,000    |   |
| 2007      |       | 553,000    |       |
| 2008      |       | 336,000    |       |
| 2009      |       | 271,000    |       |
| 2010      |       | 219,000    |       |
|           |            |            |            |  |

 

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

 

Commitments to extend credit are legally bindingagreements to lend to a borrower providing there are no violations of anyconditions 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 of the commitments are expected to expirewithout being drawn upon, the total commitment does not necessarily representfuture cash requirements (see Note 4).

 

The Company guarantees payments to holders of certaintrust preferred securities issued by wholly 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 $48.2 million at December 31, 2005. At December 31, 2005, theCompany had a recorded liability of $16.6 million of principal and accruedinterest 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. While the ultimate outcome of current legalproceedings cannot be predicted with certainty, it is the opinion of managementthat the resolution of these legal actions should not have a material effect onthe Company’s consolidated financial position or results of operations.

 

**(18)****               PendingAcquisition**

 

The Company announced the completion of theacquisition of First Manhattan Bancorporation, Inc. (FMB) effective January 1,2006. The thrift was merged into the Company’s wholly-owned subsidiary,Landmark National Bank, immediately following the acquisition. This acquisitionexpanded our market share in Manhattan and further expanded the Company’spresence in higher-growth market areas. At December 31, 2005, FMB had totalassets of $129 million, including loans and deposits of $109 million and $107million, respectively. The Company paid $12.9 million for all of theoutstanding stock of FMB. In connection with the acquisition, the Companyrecorded a core deposit intangible asset of $2.6 million, which is beingamortized on an accelerated basis over 10 years, and goodwill of approximately$5.5 million, none of which is deductible for tax purposes. Pro formainformation for the year ended December 31, 2005, as if the acquisition wasconsummated January 1, 2005 is as follows (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  |   |

 

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**CORPORATEINFORMATION**

 

**DIRECTORSOF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK**

 

Larry Schugart, Chairman

Former President andChief Executive Officer

Landmark Bancshares, Inc.

 

Patrick L. Alexander

President and ChiefExecutive Officer

Landmark Bancorp, Inc.and Landmark National Bank

 

Richard A. Ball

CPA

Ball Consulting Group,Ltd.

 

Brent A. Bowman

Vice President

Bowman Bowman and Novick, Inc.

   Architectsand Landscape Architects

 

Joseph L. Downey

Retired Senior VicePresident, Director and Executive Officer

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, MNB Bancshares, 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

 

55

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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

 

#### **STOCK PRICE INFORMATION**

 

Our common stock hastraded on the Nasdaq National Market System under the symbol “LARK” since 2001.At December 31, 2005, the Company had approximately 1,090 stockholders,consisting of approximately 450 owners of record and approximately 640beneficial owners of our common stock. Set forth below are the reported highand low bid prices of the common stock and dividends paid during the past twoyears. Information presented below has been adjusted to give effect to the 5%stock dividends declared in December 2005 and 2004.

 
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Cash**      | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| **Year Ended December 31, 2005** | ** ** | **High**   | ** ** | **Low**    | ** ** | **Dividends** | ** ** |
| First Quarter                         |       | $          | 29.04      |       | $          | 27.14         |       | $ | 0.1619 |   |
| Second Quarter                        |       | 29.05      |       | 23.43      |       | 0.1619        |       |
| Third Quarter                         |       | 25.20      |       | 22.63      |       | 0.1619        |       |
| Fourth Quarter                        |       | 24.95      |       | 21.00      |       | 0.1619        |       |
|                                       |            |            |            |            |            |               |            |  |  |  |

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Cash**      | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| **Year Ended December 31, 2004** | ** ** | **High**   | ** ** | **Low**    | ** ** | **Dividends** | ** ** |
| First Quarter                                        |       | $          | 27.87      |       | $          | 24.67         |       | $ | 0.1542 |   |
| Second Quarter                                       |       | 28.44      |       | 25.40      |       | 0.1542        |       |
| Third Quarter                                        |       | 28.44      |       | 25.24      |       | 0.1542        |       |
| Fourth Quarter                                       |       | 28.13      |       | 25.68      |       | 0.1542        |       |
|                                                      |            |            |            |            |            |               |            |  |  |  |

 

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**CORPORATEHEADQUARTERS**

 

701Poyntz Avenue

Manhattan,Kansas 66502

 

**ANNUALMEETING**

 

Theannual meeting of stockholders will be held at the Kansas State UniversityAlumni Center, 17th and Anderson Avenue, Manhattan, Kansas, onWednesday, May 17, 2006 at 2:00 PM.

 

**FORM 10-K**

 

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

 

**REGISTRARAND TRANSFER AGENT**

 

Registrarand Transfer Company

10Commerce Drive

Cranford,NJ 07016-3572

 

**INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

KPMGLLP

1000Walnut, Suite 1000

KansasCity, Missouri 64106

 

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