** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **x**                                             | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND  EXCHANGE ACT OF 1934**     |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
|                                              |       |                                                                                                         |
| **For  fiscal year ended December 31, 2007** |
|                                              |       |                                                                                                         |
| **OR**                                            |
|                                              |       |                                                                                                         |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND  EXCHANGE ACT OF 1934** |

 

**For transition period from                    to**

 

**Commission File Number 0-33203**

 

**LANDMARK BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **43-1930755**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification Number) |

 

**701Poyntz Avenue, Manhattan, Kansas         66505**

(Address ofprincipal executive offices)          (ZipCode)

 

**(785)565-2000**

(Registrant’stelephone number, including area code)

 
| **Securities  registered pursuant to Section 12(b) of the Act:** | ** ** | **Common  Stock, par value $0.01 per share** |
|----------------------------------------------------------------------------|------------|----------------------------------------------|
|                                                                       |       | Preferred Share  Purchase Rights             |
|                                                                       |       |                                         |
| Securities registered  pursuant to Section 12(g) of the Act:     |       | None                                         |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes  o   No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act. Yes  o   No  x

 

Indicateby check mark whether the Registrant (1) has filed all reports to be filedby Section 13 or 15(d) of the Securities and Exchange Act 0f 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  x   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this 10-K or any amendment tothis form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer o |   | Smaller  Reporting Company x |
|----------------------------|--------|----------------------|--------|--------------------------|--------|------------------------------|

                                                                                (Do not check ifa smaller reporting company)

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2).  Yes   o   No  x

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant, based on the last sales price quoted on theNasdaq Global Market on June 30, 2007, the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately$48.0 million.  At February 29,2008, the total number of shares of common stock outstanding was 2,275,577.

 

Portionsof the following documents are incorporated by reference: the Proxy Statementfor the Annual Meeting of Stockholders to be held May 21, 2008, areincorporated by reference in Part III hereof, to the extent indicatedherein.

 

 

 

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**LANDMARKBANCORP, INC.**

2007 Form 10-KAnnual Report

Table of Contents

 
|       | **PART I**                                                                                                     |   |
|------------|---------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                |   |
| ITEM  1.   | BUSINESS                                                                                                            |   |
|       |                                                                                                                |   |
| ITEM 1A.   | RISK FACTORS                                                                                                        |   |
|       |                                                                                                                |   |
| ITEM 1B.   | UNRESOLVED STAFF COMMENTS                                                                                           |   |
|       |                                                                                                                |   |
| ITEM 2.    | PROPERTIES                                                                                                          |   |
|       |                                                                                                                |   |
| ITEM 3.    | LEGAL PROCEEDINGS                                                                                                   |   |
|       |                                                                                                                |   |
| ITEM 4.    | SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                                                |   |
|       |                                                                                                                |   |
| ITEM 5.    | MARKET FOR THE COMPANY’S COMMON STOCK,  RELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |   |
|       |                                                                                                                |   |
| ITEM 6.    | SELECTED FINANCIAL DATA                                                                                             |   |
|       |                                                                                                                |   |
| ITEM 7.    | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         |   |
|       |                                                                                                                |   |
| ITEM 7A.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                         |   |
|       |                                                                                                                |   |
| ITEM 8.    | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA                                                                          |   |
|       |                                                                                                                |   |
| ITEM 9.    | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |   |
|       |                                                                                                                |   |
| ITEM 9A.   | CONTROLS AND PROCEDURES                                                                                             |   |
|       |                                                                                                                |   |
| ITEM 9B.   | OTHER INFORMATION                                                                                                   |   |
|       |                                                                                                                |   |
| ITEM 10.   | DIRECTORS, EXECUTIVE OFFICERS AND  CORPORATE GOVERNANCE                                                             |   |
|       |                                                                                                                |   |
| ITEM 11.   | EXECUTIVE COMPENSATION                                                                                              |   |
|       |                                                                                                                |   |
| ITEM 12.   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                                                     |   |
|       |                                                                                                                |   |
| ITEM 13.   | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS AND DIRECTOR INDEPENDENCE                                           |   |
|       |                                                                                                                |   |
| ITEM 14.   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                              |   |
|       |                                                                                                                |   |
| ITEM 15.   | EXHIBITS AND FINANCIAL STATEMENT  SCHEDULES                                                                         |   |
|       |                                                                                                                |   |
| SIGNATURES |                                                                                                                |   |

 

 

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**PART I.**

 

**ITEM 1.  BUSINESS**

** **

**The Company**

 

Landmark Bancorp, Inc.(the “Company”) is a bank holding company incorporated under the laws of theState of Delaware.  Currently, theCompany’s business consists solely of the ownership of Landmark National Bank(the “Bank”), which is a wholly-owned subsidiary of the Company.  As of December 31, 2007, the Company had$606.5 million in consolidated total assets.

 

The Company isheadquartered in Manhattan, Kansas and has expanded its geographic presencethrough acquisitions in the past several years. Effective January 1, 2006, the Company completed the acquisition ofFirst Manhattan Bancorporation, Inc. (“FMB”), the holding company forFirst Savings Bank F.S.B.  In conjunctionwith the transaction, FMB was merged into the Bank (the “2006 Acquisition”). InAugust 2005, the Company acquired 2 branches in Great Bend, Kansas.Effective April 1, 2004, the Company acquired First Kansas FinancialCorporation (“First Kansas”), the holding company for First Kansas FederalSavings Association (“First Kansas Federal”). In conjunction with the transaction, First Kansas was merged into theBank (the “2004 Acquisition”).  EffectiveOctober 9, 2001, Landmark Bancshares, Inc., the holding company forLandmark Federal Savings Bank, and MNB Bancshares, Inc., the holdingcompany for Security National Bank, completed their merger into Landmark MergerCompany, which immediately changed its name to Landmark Bancorp, Inc. (the“2001 Merger”).  In addition, LandmarkFederal Savings Bank merged with Security National Bank and the resulting bankchanged its name to Landmark National Bank.

 

As a bank holdingcompany, the Company is subject to regulation by the Board of Governors of theFederal Reserve System (the “Federal Reserve”). The Company is also subject to various reporting requirements of theSecurities and Exchange Commission (the “SEC”).

 

Pursuant to the 2006Acquisition, the 2004 Acquisition and the 2001 Merger, the Bank succeeded toall of the assets and liabilities of FMB, First Savings Bank F.S.B., FirstKansas, First Kansas Federal, Landmark Federal Savings Bank and SecurityNational Bank.  The Bank is principallyengaged in the business of attracting deposits from the general public andusing such deposits, together with borrowings and other funds, to originateconsumer, commercial, multi-family, and one-to-four family residential mortgageloans in the Bank’s principal market areas, as described below.  Since the 2001 Merger, the Bank has focusedon originating greater numbers and amounts of consumer, commercial, andagricultural loans.  Additionally,greater emphasis has been placed on diversification of the deposit mix throughexpansion of core deposit accounts such as checking, savings, and money marketaccounts.  The Bank has also diversifiedits geographical markets as a result of the 2006 Acquisition, the 2004Acquisition and the 2001 Merger.  TheCompany’s main office is in Manhattan, Kansas with branch offices in central,eastern and southwestern Kansas.  TheCompany continues to explore opportunities to expand its banking marketsthrough mergers and acquisitions, as well as branching opportunities.

 

The results of operationsof the Bank and the Company are dependent primarily upon net interest incomeand, to a lesser extent, upon other income derived from loan servicing fees andcustomer deposit services.  Additionalexpenses of the Bank include general and administrative expenses such assalaries, employee benefits, federal deposit insurance premiums, dataprocessing, occupancy and related expenses.

 

Deposits of the Bank areinsured by the Deposit Insurance Fund (the “DIF”) of the Federal DepositInsurance Corporation (the “FDIC”) up to the maximum amount allowable underapplicable federal law and regulation. The Bank is regulated by the Office of the Comptroller of the Currency(the “OCC”), as the chartering authority for national banks, and the FDIC, asthe administrator of the DIF.  The Bankis also subject to regulation by the Board of Governors of the Federal ReserveSystem with respect to reserves required to be maintained against deposits andcertain other matters.  The Bank is amember of the Federal Reserve Bank of Kansas City and the Federal Home LoanBank (the “FHLB”) of Topeka.

 

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The Company’s executiveoffice and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan,Kansas 66502.  The telephone number is(785) 565-2000.

 

**Market Area**

 

The Bank’s primarydeposit gathering and lending markets are geographically diversified withlocations in eastern, central, and southwestern Kansas.  The primary industries within theserespective markets are also diverse and dependent upon a wide array of industryand governmental activity for their economic base.  A brief description of these three geographicareas and the communities which the Bank serves within these communities issummarized below.

 

Shawnee, Douglas, Miami,Osage, and Bourbon counties are located in eastern Kansas and encompass theBank locations in Topeka, Auburn, Lawrence, Paola, Louisburg, Osawatomie, OsageCity, and Fort Scott.  Shawnee County’smarket, which encompasses the Bank locations in Topeka and Auburn, is stronglyinfluenced by the State of Kansas, City of Topeka, two regional hospitals andseveral major private firms and public institutions.  The Bank’s Lawrence location is located inDouglas County and is significantly impacted by the University of Kansas, thelargest university in Kansas, in addition to several private industries andbusinesses in the community.  Thecommunities of Paola, Louisburg, and Osawatomie, located within Miami County, areinfluenced by the high growth of the Kansas City market resulting in housinggrowth and small private industries and business.  Additionally, the Osawatomie State Hospitalis a major government employer within the county.  Bourbon and Osage Counties are primarilyagricultural with small private industries and business firms, while BourbonCounty is also influenced by a regional hospital and Fort Scott CommunityCollege.

 

Bank locations withincentral Kansas include the communities of Manhattan within Riley County, Wamegowhich is located within Pottawatomie County, Junction City which is located inGeary County, Great Bend and Hoisington within Barton County, and LaCrosselocated in Rush County.  The Riley,Pottawatomie and Geary County economies are significantly impacted byemployment at Fort Riley Military Base and Kansas State University, the secondlargest university in Kansas, which is located in Manhattan.  Several private industries and businesses arealso located within these counties. Agriculture, oil, and gas are the predominant industries in BartonCounty.  Additionally manufacturing andservice industries also play a key role within this central Kansas market.  LaCrosse, located within Rush County, is primarilyan agricultural community with an emphasis on crop and livestock production.

 

The counties of Ford andFinney were founded on agriculture, which continues to play a major role in theeconomy.  Predominant activities involvecrop production, feed lot operations, and food processing.   Dodge City is known as the “Cowboy Capital ofthe World” and maintains a significant tourism industry.  Both Dodge City and Garden City arerecognized as regional commercial centers within the state with small business,manufacturing, retail, and service industries having a significant influence uponthe local economies.  Additionally, eachcommunity has a community college which also attracts a number of individualsfrom the surrounding area to live within the community to participate ineducational programs and pursue a degree.

 

**Competition**

 

The Company faces strongcompetition both in attracting deposits and making real estate, commercial andother loans.  Its most direct competitionfor deposits comes from commercial banks and other savings institutions locatedin its principal market areas, including many large financial institutionswhich have greater financial and marketing resources available to them.  The ability of the Company to attract andretain deposits generally depends on its ability to provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.  The Company competes forloans principally through the interest rates and loan fees it charges and theefficiency and quality of services it provides borrowers.  Additionally, competition may increase as aresult of the continuing reduction on restrictions on the interstate operationsof financial institutions.  The financialservices industry is also likely to become more competitive as furthertechnological advances enable more companies to provide financialservices.  These technological advancesmay diminish the importance of depository institutions and other financialintermediaries in the transfer of funds between parties.

 

 

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**Employees**

 

AtDecember 31, 2007, the Bank had a total of 203 employees (191 full timeequivalent employees).  The Company hasno direct employees.  Employees areprovided with a comprehensive benefits program, including basic and majormedical insurance, life and disability insurance, sick leave, and a 401(k) profit sharingplan.  Employees are not represented byany union or collective bargaining group and the Bank considers its employeerelations to be good.

 

# **LendingActivities**

# ** **

***General*****.**  The Bankstrives to provide each market area it serves a full range of financialproducts and services to small and medium sized businesses and toconsumers.  The Bank targetsowner-operated businesses and utilizes Small Business Administration and FarmServices Administration lending as a part of its product mix.  Each market has an established loan committeewhich has authority to approve credits, within established guidelines.  Concentrations in excess of those guidelinesmust be approved by either a corporate loan committee comprised of the Bank’sChief Executive Officer, the Credit Risk Manager, and other senior commerciallenders or the bank’s board of directors. When lending to an entity, the Bank generally obtains a guaranty fromthe principals of the entity.  The loanmix is subject to the discretion of the Bank’s board of directors and thedemands of the local marketplace.

 

Residential loans arepriced and originated following underwriting standards that are consistent withguidelines established by the major buyers in the secondary market.  Commercial and consumer loans generally areissued at or above the national prime rate. While the origination of one to four family residential loans continuesto be a key component of our business, the majority of these loans are sold inthe secondary market.  The Bank isfocusing on the generation of commercial and consumer loans to grow anddiversify the loan portfolio.  The Bankhas no potential negative amortization loans. The following is a brief description of each major category of theBank’s lending activity.

 

***CommercialLending***.  Loans in this category include loans toservice, retail, wholesale and light manufacturing businesses, includingagricultural operations.  Commercialloans are made based on the financial strength and repayment ability of theborrower, as well as the collateral securing the loans.  The Bank targets owner-operated businesses asits customers and makes lending decisions based upon a cash flow analysis ofthe borrower as well as a collateral analysis. Accounts receivable loans and loans for inventory purchases aregenerally on a one-year renewable term and loans for equipment generally have aterm of seven years or less.  The Bankgenerally takes a blanket security interest in all assets of the borrower.  Equipment loans are generally limited to 75%of the cost or appraised value of the equipment.  Inventory loans are generally limited to 50%of the value of the inventory, and accounts receivable loans are generallylimited to 75% of a predetermined eligible base.

 

The Bank also providesshort-term credit for operating loans and intermediate term loans for farmproduct, livestock and machinery purchases and other agriculturalimprovements.  Farm product loans havegenerally a one-year term and machinery and equipment and breeding livestockloans generally have five to seven year terms. Extension of credit is based upon the borrower’s ability to repay, aswell as the existence of federal guarantees and crop insurance coverage.  These loans are generally secured by ablanket lien on livestock, equipment, feed, hay, grain and growing crops.  Equipment and breeding livestock loans aregenerally limited to 75% of appraised value.

 

***Real EstateLending***.  Commercial, residential, construction andmulti-family real estate loans represent the largest class of loans of theBank.  Generally, residential loansretained in portfolio are variable rate with adjustment periods of five yearsor less and amortization periods of either 15 or 30 years.  Commercial real estate loans, includingagricultural real estate, generally have amortization periods of 15 or 20years.  The Bank has a security interestin the borrower’s real estate.  The Bankalso generates long term fixed rate residential real estate loans which aresold in the secondary market.  Commercialreal estate, construction and multi-family loans are generally limited, bypolicy, to 80% of the appraised value of the property.  Commercial real estate, includingagricultural real estate loans, are also supported by an analysis demonstratingthe borrower’s ability to repay. Residential loans that exceed 80% of the appraised value of the realestate generally are required, by policy, to be supported by private mortgage 

 

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insurance, although onoccasion the Bank will retain non-conforming residential loans to knowncustomers at premium pricing.

 

***Consumer andOther Lending***.  Loans classified as consumer and other loansinclude automobile, boat, student loans, home improvement and home equityloans, the latter two secured principally through second mortgages.  With the exception of home improvement loansand home equity loans, the Bank generally takes a purchase money securityinterest in collateral for which it provides the original financing.  The terms of the loans typically range fromone to five years, depending upon the use of the proceeds, and generally rangefrom 75% to 90% of the value of the collateral. The majority of these loans are installment loans with fixed interest rates.  Home improvement and home equity loans aregenerally secured by a second mortgage on the borrowers personal residence and,when combined with the first mortgage, limited to 80% of the value of theproperty unless further protected by private mortgage insurance.  The home improvement loans are generally madefor terms of five to seven years with fixed interest rates.  The home equity loans are generally made forterms of ten years on a revolving basis with the interest rates adjustingmonthly tied to the national prime interest rate.

 

**Loan Origination and Processing**

 

Loan originations arederived from a number of sources. Residential loan originations result from real estate broker referrals,direct solicitation by the Bank’s loan officers, present depositors andborrowers, referrals from builders and attorneys, walk in customers and, insome instances, other lenders. Consumer and commercial real estate loanoriginations emanate from many of the same sources. Residential loanapplications are underwritten and closed based upon standards which generallymeet secondary market guidelines.  Theaverage loan is less than $500,000.

 

The loan underwritingprocedures followed by the Bank conform to regulatory specifications and aredesigned to assess both the borrower’s ability to make principal and interestpayments and the value of any assets or property serving as collateral for theloan.  Generally, as part of the process,a loan officer meets with each applicant to obtain the appropriate employmentand financial information as well as any other required loan information.  The Bank then obtains reports with respect tothe borrower’s credit record, and orders, on real estate loans, and reviews anappraisal of any collateral for the loan (prepared for the Bank through anindependent appraiser).

 

Loan applicants are notified promptly of the decision of the Bank.  Prior to closing any long-term loan, theborrower must provide proof of fire and casualty insurance on the propertyserving as collateral, and such insurance must be maintained during the fullterm of the loan.  Title insurance isrequired on loans collateralized by real property.

 

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** **

**SUPERVISION ANDREGULATION**

** **

# **General**

# ** **

Financial institutions,their holding companies and their affiliates are extensively regulated underfederal and state law.  As a result, thegrowth and earnings performance of the Company may be affected not only bymanagement decisions and general economic conditions, but also by the requirementsof federal and state statutes and by the regulations and policies of variousbank regulatory authorities, including the OCC, the Board of Governors of theFederal Reserve System (the “Federal Reserve”) and the FDIC.  Furthermore, taxation laws administered bythe Internal Revenue Service and state taxing authorities and securities lawsadministered by the Securities and Exchange Commission (the “SEC”) andstate securities authorities have an impact on the business of the Company. Theeffect of these statutes, regulations and regulatory policies may besignificant, and cannot be predicted with a high degree of certainty.

 

Federal and state lawsand regulations generally applicable to financial institutions regulate, amongother things, the scope of business, the kinds and amounts of investments,reserve requirements, capital levels relative to operations, the nature andamount of collateral for loans, the establishment of branches, mergers andconsolidations and the payment of dividends. This system of supervision andregulation establishes a comprehensive framework for the respective operationsof the Company and its subsidiaries and is intended primarily for theprotection of the FDIC-insured deposits and depositors of the Bank, rather thanshareholders.

 

The following is asummary of the material elements of the regulatory framework that applies tothe Company and its subsidiaries.  Itdoes not describe all of the statutes, regulations and regulatory policies thatapply, nor does it restate all of the requirements of those statutes,regulations and regulatory policies that are described. As such, the followingis qualified in its entirety by reference to applicable law.  Any change in applicable statutes, regulationsor regulatory policies may have a material effect on the business of theCompany and its subsidiaries.

 

**The Company**

 

***General.**** *TheCompany, as the sole shareholder of the Bank, is a bank holding company.  As a bank holding company, the Company isregistered with, and is subject to regulation by, the Federal Reserve under theBank Holding Company Act of 1956, as amended (the “BHCA”).  In accordance with Federal Reserve policy,the Company is expected to act as a source of financial strength to the Bank andto commit resources to support the Bank in circumstances where the Companymight not otherwise do so.  Under theBHCA, the Company is subject to periodic examination by the FederalReserve.  The Company is also required tofile with the Federal Reserve periodic reports of the Company’s operations andsuch additional information regarding the Company and its subsidiaries as theFederal Reserve may require.

 

***Acquisitions, Activities and Change in Control.***** **The primary purpose of a bankholding company is to control and manage banks.****TheBHCA generally requires the prior approval of the Federal Reserve for anymerger involving a bank holding company or any acquisition by a bank holdingcompany of another bank or bank holding company.  Subject to certain conditions (includingdeposit concentration limits established by the BHCA), the Federal Reserve mayallow a bank holding company to acquire banks located in any state of theUnited States. In approving interstate acquisitions, the Federal Reserve isrequired to give effect to applicable state law limitations on the aggregateamount of deposits that may be held by the acquiring bank holding company andits insured depository institution affiliates in the state in which the targetbank is located (provided that those limits do not discriminate againstout-of-state depository institutions or their holding companies) and state lawsthat require that the target bank have been in existence for a minimum periodof time (not to exceed five years) before being acquired by an out-of-statebank holding company.

 

TheBHCA generally prohibits the Company from acquiring direct or indirectownership or control of more than 5% of the voting shares of any company thatis not a bank and from engaging in any business other than that of banking,managing and controlling banks or furnishing services to banks and theirsubsidiaries.  This general prohibitionis subject to a number of exceptions. The principal exception allows bankholding companies to engage in, and to own shares of companies engaged in,certain businesses found by the Federal Reserve to be “so closely related tobanking ... as to be a proper incident thereto.”  This authority would permit the Company toengage in a variety of banking-related 

 

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businesses,including the operation of a thrift, consumer finance, equipment leasing, theoperation of a computer service bureau (including software development), andmortgage banking and brokerage. The BHCA generally does not place territorialrestrictions on the domestic activities of non-bank subsidiaries of bankholding companies.

 

Additionally,bank holding companies that meet certain eligibility requirements prescribed bythe BHCA and elect to operate as financial holding companies may engage in, orown shares in companies engaged in, a wider range of nonbanking activities,including securities and insurance underwriting and sales, merchant banking andany other activity that the Federal Reserve, in consultation with the Secretaryof the Treasury, determines by regulation or order is financial in nature,incidental to any such financial activity or complementary to any suchfinancial activity and does not pose a substantial risk to the safety orsoundness of depository institutions or the financial system generally.  As of the date of this filing, the Companyhas not applied forapproval to operate as a financial holding company.

 

Federal law alsoprohibits any person or company from acquiring “control” of an FDIC-insureddepository institution or its holding company without prior notice to theappropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25%or more of the outstanding voting securities of a bank or bank holding company,but may arise under certain circumstances at 10% ownership.

 

***CapitalRequirements.***  Bank holding companies are required tomaintain minimum levels of capital in accordance with Federal Reserve capitaladequacy guidelines.  If capital levelsfall below the minimum required levels, a bank holding company, among otherthings, may be denied approval to acquire or establish additional banks ornon-bank businesses.

 

TheFederal Reserve’s capital guidelines establish the following minimum regulatorycapital requirements for bank holding companies: (i) a risk-basedrequirement expressed as a percentage of total assets weighted according torisk; and (ii) a leverage requirement expressed as a percentage of totalassets.  The risk-based requirementconsists of a minimum ratio of total capital to total risk-weighted assets of8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of4%.  The leverage requirement consists ofa minimum ratio of Tier 1 capital to total assets of 3% for the most highly ratedcompanies, with a minimum requirement of 4% for all others.  For purposes of these capital standards, Tier1 capital consists primarily of permanent stockholders’ equity less intangibleassets (other than certain loan servicing rights and purchased credit cardrelationships). Total capital consists primarily of Tier 1 capital plus certainother debt and equity instruments that do not qualify as Tier 1 capital and aportion of the company’s allowance for loan and lease losses.

 

The risk-based andleverage standards described above are minimum requirements. Higher capitallevels will be required if warranted by the particular circumstances or riskprofiles of individual banking organizations. For example, the FederalReserve’s capital guidelines contemplate that additional capital may be requiredto take adequate account of, among other things, interest rate risk, or therisks posed by concentrations of credit, nontraditional activities orsecurities trading activities.  Further,any banking organization experiencing or anticipating significant growth wouldbe expected to maintain capital ratios, including tangible capital positions (*i.e.*, Tier 1 capital less all intangible assets), well abovethe minimum levels.  As of December 31,2007 the Company had regulatory capital in excess of the Federal Reserve’sminimum requirements.

 

***DividendPayments.**** *The Company’s ability to pay dividends to itsstockholders may be affected by both general corporate law considerations andpolicies of the Federal Reserve applicable to bank holding companies*.* As a Delaware corporation, the Company is subject to thelimitations of the Delaware General Corporation Law (the “DGCL”). The DGCLallows the Company to pay dividends only out of its surplus (as defined andcomputed in accordance with the provisions of the DGCL) or if the Company hasno such surplus, out of its net profits for the fiscal year in which thedividend is declared and/or the preceding fiscal year. Additionally, policiesof the Federal Reserve caution that a bank holding company should not pay cashdividends unless its net income available to common stockholders over the pastyear has been sufficient to fully fund the dividends and the prospective rateof earnings retention appears consistent with its capital needs, asset quality,and overall financial condition.  TheFederal Reserve also possesses enforcement powers over bank holding companiesand their non-bank subsidiaries to prevent or remedy actions that representunsafe or unsound practices or violations of applicable statutes andregulations.  Among these powers is theability to proscribe the payment of dividends by banks and bank holdingcompanies.

 

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***FederalSecurities Regulation.***  The Company’scommon stock is registered with the SEC under the Securities Exchange Act of1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxysolicitation, insider trading and other restrictions and requirements of theSEC under the Exchange Act.

 

**The Bank**

 

***General.*** The Bank is a national bank, chartered by the OCC under the NationalBank Act.  The deposit accounts ofthe Bank are insured by the FDIC’s DIFto the maximum extent provided under federal law andFDIC regulations.  The Bank is a member of the Federal ReserveSystem and the Federal Home Loan Bank System. As a national bank, the Bank is subject to the examination, supervision,reporting and enforcement requirements of the OCC, the chartering authority fornational banks. The FDIC, as administrator of the DIF, also has regulatoryauthority over the Bank.

 

***DepositInsurance.*** Asan FDIC-insured institution, the Bank is required to pay deposit insurancepremium assessments to the FDIC. The FDIC has adopted a risk-based assessmentsystem whereby FDIC-insured depository institutions pay insurance premiums atrates based on their risk classification. An institution’s risk classification is assigned based on its capitallevels and the level of supervisory concern the institution poses to theregulators.  Under the regulations of theFDIC, as presently in effect, insurance assessments range from 0.05% to 0.43%of total deposits (subject to adjustment by the FDIC and the application ofassessment credits, if any, issued by the FDIC in 2007).  In 2007, the Bank received a $647,000assessment credit from the FDIC.  Thecredit will be fully utilized during 2009.

 

***FICO Assessments.***   The Financing Corporation (“FICO”) is amixed-ownership governmental corporation chartered by the former Federal HomeLoan Bank Board pursuant to the Federal Savings and Loan Insurance CorporationRecapitalization Act of 1987 to function as a financing vehicle for therecapitalization of the former Federal Savings and Loan InsuranceCorporation.  FICO issued 30-yearnon-callable bonds of approximately $8.2 billion that mature by 2019.  Since 1996, federal legislation has requiredthat all FDIC-insured depository institutions pay assessments to cover interestpayments on FICO’s outstanding obligations. These FICO assessments are in addition to amounts assessed by the FDICfor deposit insurance.  During the yearended December 31, 2007, the FICO assessment rate was approximately 0.01%of deposits.

 

***Supervisory Assessments.***  National banks are required to paysupervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculatedusing a formula that takes into account the bank’s size and its supervisorycondition.** **Duringthe year ended December 31, 2007, the Bank paid supervisory assessments tothe OCC totaling $151,000.

 

***Capital Requirements.***** **Banks are generally required tomaintain capital levels in excess of other businesses. The OCC has establishedthe following minimum capital standards for national banks, such as the Bank: (i) aleverage requirement consisting of a minimum ratio of Tier 1 capital to totalassets of 3% for the most highly-rated banks with a minimum requirement of atleast 4% for all others; and (ii) a risk-based capital requirementconsisting of a minimum ratio of total capital to total risk-weighted assets of8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of4%.  In general, the components of Tier 1capital and total capital are the same as those for bank holding companiesdiscussed below.

 

Thecapital requirements described above are minimum requirements.  Higher capital levels will be required ifwarranted by the particular circumstances or risk profiles of individualinstitutions.  For example, regulationsof the OCC provide that additional capital may be required to take adequateaccount of, among other things, interest rate risk or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.

 

Further, federal law andregulations provide various incentives for financial institutions to maintainregulatory capital at levels in excess of minimum regulatory requirements. Forexample, a financial institution that is “well-capitalized” may qualify forexemptions from prior notice or application requirements otherwise applicable tocertain types of activities and may qualify for expedited processing of otherrequired notices or applications. Additionally, one of the criteria thatdetermines a bank holding company’s eligibility to operate as a financialholding company is a requirement that all of its financial institutionsubsidiaries be “well-capitalized.” Under the regulations of the OCC, in order to be “well-capitalized” afinancial institution must maintain a ratio of total capital to totalrisk-weighted 

 

9

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assets of 10% or greater,a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and aratio of Tier 1 capital to total assets of 5% or greater.

 

Federal law alsoprovides the federal banking regulators with broad power to take promptcorrective action to resolve the problems of undercapitalizedinstitutions.  The extent of theregulators’ powers depends on whether the institution in question is“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”or “critically undercapitalized,” in each case as defined by regulation.  Depending upon the capital category to whichan institution is assigned, the regulators’ corrective powers include: (i) requiringthe institution to submit a capital restoration plan; (ii) limiting theinstitution’s asset growth and restricting its activities; (iii) requiringthe institution to issue additional capital stock (including additional votingstock) or to be acquired; (iv) restricting transactions between the institutionand its affiliates; (v) restricting the interest rate the institution maypay on deposits; (vi) ordering a new election of directors of theinstitution; (vii) requiring that senior executive officers or directorsbe dismissed; (viii) prohibiting the institution from accepting depositsfrom correspondent banks; (ix) requiring the institution to divest certainsubsidiaries; (x) prohibiting the payment of principal or interest onsubordinated debt; and (xi) ultimately, appointing a receiver for the institution.

 

As of December 31,2007: (i) the Bank was not subject to a directive from the OCC to increaseits capital to an amount in excess ofthe minimum regulatory capital requirements; (ii) the Bank exceeded itsminimum regulatory capital requirements under OCC capital adequacy guidelines;and (iii) the Bank was “well-capitalized,” as defined by OCC regulations.

 

***Dividends.*** The primary source of funds for the Company is dividends from the Bank.Under the National Bank Act, a national bank may pay dividends out of itsundivided profits in such amounts and at such times as the bank’s board ofdirectors deems prudent.  Without priorOCC approval, however, a national bank may not pay dividends in any calendaryear that, in the aggregate, exceed the bank’s year-to-date net income plus thebank’s retained net income for the two preceding years.

 

Thepayment of dividends by any financial institution is affected by therequirement to maintain adequate capital pursuant to applicable capitaladequacy guidelines and regulations, and a financial institution generally isprohibited from paying any dividends if, following payment thereof, theinstitution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirementsunder applicable guidelines as of December 31, 2007.  As of December 31, 2007, approximately$729,000 was available to be paid as dividends by the Bank.  Notwithstanding the availability of funds fordividends, however, the OCC may prohibit the payment of any dividends by theBank if the OCC determines such payment would constitute an unsafe or unsoundpractice.

 

***Insider Transactions.***** **The Bank is subject to certainrestrictions imposed by federal law on extensions of credit to the Company, oninvestments in the stock or other securities of the Company and the acceptanceof the stock or other securities of the Company as collateral for loans made bythe Bank. Certain limitations and reporting requirements are also placed onextensions of credit by the Bank to its directors and officers, to thedirectors and officers of the Company, to principal stockholders of theCompany, and to “related interests” of such directors, officers and principalstockholders.  In addition, federal lawand regulations may affect the terms upon which any person who is a director orofficer of the Company or the Bank or a principal stockholder of the Companymay obtain credit from banks with which the Bank maintains correspondentrelationships.

 

***Safety and Soundness Standards.***  The federal banking agencies have adoptedguidelines that establish operational and managerial standards to promote thesafety and soundness of federally insured depository institutions.  The guidelines set forth standards forinternal controls, information systems, internal audit systems, loandocumentation, credit underwriting, interest rate exposure, asset growth,compensation, fees and benefits, asset quality and earnings.

 

Ingeneral, the safety and soundness guidelines prescribe the goals to be achievedin each area, and each institution is responsible for establishing its ownprocedures to achieve those goals.  If aninstitution fails to comply with any of the standards set forth in theguidelines, the institution’s primary federal regulator may require theinstitution to submit a plan for achieving and maintaining compliance. If aninstitution fails to submit an acceptable compliance plan, or fails in anymaterial respect to implement a compliance plan that has been accepted by itsprimary federal regulator, the regulator is required to issue an orderdirecting the institution to cure the deficiency. Until the deficiency cited inthe 

 

10

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regulator’sorder is cured, the regulator may restrict the institution’s rate of growth,require the institution to increase its capital, restrict the rates theinstitution pays on deposits or require the institution to take any action theregulator deems appropriate under the circumstances. Noncompliance with thestandards established by the safety and soundness guidelines may alsoconstitute grounds for other enforcement action by the federal bankingregulators, including cease and desist orders and civil money penaltyassessments.

 

***Branching Authority.*** National banks headquartered in Kansas, suchas the Bank, have the same branching rights in Kansas as banks chartered underKansas law, subject to OCC approval. Kansas law grants Kansas-chartered banks the authority to establishbranches anywhere in the State of Kansas, subject to receipt of all requiredregulatory approvals.

 

Federal law permits stateand national banks to merge with banks in other states subject to: (i) regulatoryapproval; (ii) federal and state deposit concentration limits; and (iii) statelaw limitations requiring the merging bank to have been in existence for aminimum period of time (not to exceed five years) prior to the merger.  The establishment of new interstate branchesor the acquisition of individual branches of a bank in another state (ratherthan the acquisition of an out-of-state bank in its entirety) is permitted onlyin those states the laws of which expressly authorize such expansion.

 

***Financial Subsidiaries. ***Under Federal law and OCC regulations, nationalbanks are authorized to engage, through “financial subsidiaries,” in anyactivity that is permissible for a financial holding company and any activitythat the Secretary of the Treasury, in consultation with the Federal Reserve,determines is financial in nature or incidental to any such financial activity,except: (i) insurance underwriting, (ii) real estate development orreal estate investment activities (unless otherwise permitted by law), (iii) insurancecompany portfolio investments and (iv) merchant banking.  The authority of a national bank to invest ina financial subsidiary is subject to a number of conditions, including, amongother things, requirements that the bank must be well-managed andwell-capitalized (after deducting from capital the bank’s outstandinginvestments in financial subsidiaries). The Bank has not applied for approval to establish any financialsubsidiaries.

 

***Federal Reserve System.***  Federal Reserve regulations, as presently in effect,require depository institutions to maintain non-interest earning reservesagainst their transaction accounts (primarily NOW and regular checkingaccounts), as follows: for transaction accounts aggregating $43.9 million orless, the reserve requirement is 3% of total transaction accounts; and fortransaction accounts aggregating in excess of $43.9 million, the reserverequirement is $1.038 million plus 10% of the aggregate amount of totaltransaction accounts in excess of $43.9 million.  The first $9.3 million of otherwisereservable balances are exempted from the reserve requirements.  These reserve requirements are subject toannual adjustment by the Federal Reserve. The Bank is in compliance with theforegoing requirements.

 

**Company Website**

 

The Company maintains a corporate website atwww.landmarkbancorpinc.com.  The Companymakes available free of charge on or through its website the annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after theCompany electronically files such material with, or furnish it to, theSEC.  Many of the Company’s policies,including its code of ethics, committee charters and other investor informationare available on the web site. The Company will also provide copies of itsfilings free of charge upon written request to our Corporate Secretary at theaddress listed on the front of this Form 10-K.

 

 

11

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**STATISTICAL DATA**

 

The Company has a fiscalyear ending on December 31.  Theinformation presented in this annual report on Form 10-K presentsinformation on behalf of the Company as of and for the year ended December 31,2007.

 

The statistical datarequired by Guide 3 of the Guides for Preparation and Filing of Reports andRegistration Statements under the Exchange Act is set forth in the followingpages.  This data should be read inconjunction with the consolidated financial statements, related notes and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**I.              Distribution of Assets,Liabilities, and Stockholders’ Equity; Interest Rates and InterestDifferentials**

 

The average balancesheets are incorporated by reference from Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations.  The following table describes the extent towhich changes in interest income and interest expense for major components ofinterest-earning assets and interest-bearing liabilities affected the Company’sinterest income and expense during the periods indicated.  The table distinguishes between (i) changesattributable to rate (changes in rate multiplied by prior volume), (ii) changesattributable to volume (changes in volume multiplied by prior rate), and (iii) netchange (the sum of the previous columns). The net changes attributable to the combined effect of volume and rate,which cannot be segregated, have been allocated proportionately to the changedue to volume and the change due to rate.

 
|                   |   | **Years Ended December 31,**        |   |
|------------------------|--------|------------------------------------------|--------|
|                   |   | **2007 vs 2006**                         |   | **2006 vs 2005** |   |
|                   |   | **Increase/(Decrease)  Attributable to** |   | **Increase/(Decrease)  Attributable to** |   |
|                   |   | **Volume**                               |   | **Rate** |   | **Net** |   | **Volume** |   | **Rate** |   | **Net** |   |
| Interest income:       |   | **(Dollars in thousands)**               |   |
| Investment  securities |   | $                                        | 656    |   | $ | 682 |   | $ | 1,338 |   | $ | 86 |   | $ | 1,480 |   | $ | 1,566 |   |
| Loans                  |   | (665                                     | )      | 855 |   | 190 |   | 8,259 |   | 2,739 |   | 10,998 |   |
| Total                  |   | (9                                       | )      | 1,537 |   | 1,528 |   | 8,345 |   | 4,219 |   | 12,564 |   |
| Interest expense:      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Deposits               |   | 269                                      |   | 2,290 |   | 2,559 |   | 2,523 |   | 2,853 |   | 5,376 |   |
| Other borrowings       |   | (47                                      | )      | 117 |   | (330 | ) | 631 |   | 675 |   | 1,306 |   |
| Total                  |   | (178                                     | )      | 2,407 |   | 2,229 |   | 3,154 |   | 3,528 |   | 6,682 |   |
| Net interest income    |   | $                                        | 169    |   | $ | (870 | ) | $ | (701 | ) | $ | 5,191 |   | $ | 691 |   | $ | 5,882 |   |

 

12

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**II.  Investment Portfolio**

 

***InvestmentSecurities****.*  The following table sets forth the carryingvalue of the Company’s investment securities at the dates indicated.  None of the investment securities held as of December 31,2007 was issued by an individual issuer in excess of 10% of the Company’sstockholders’ equity, excluding the securities of U.S. government and federal agencyobligations.

 
| ** **                  | ** ** | **As of December 31,** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(Dollars in thousands)**  | ** ** |
| Investment Securities:      |       |                        |       |   |   |   |   |
| U.S. agency  securities     |       | $                           | 48,708     |   | $ | 46,632 |   | $ | 43,628 |   |
| Municipal  obligations      |       | 62,113                      |       | 55,064 |   | 32,380 |   |
| Mortgage-backed  securities |       | 36,216                      |       | 32,224 |   | 52,893 |   |
| FHLB stock                  |       | 7,099                       |       | 6,747 |   | 5,655 |   |
| Common stock                |       | 1,122                       |       | 716 |   | 775 |   |
| FRB stock                   |       | 1,746                       |       | 1,741 |   | 1,348 |   |
| Corporate bonds             |       | 2,493                       |       | 2,531 |   | 3,035 |   |
| Other  investments          |       | 5,227                       |       | 229 |   | 417 |   |
| Total                       |       | $                           | 164,724    |   | $ | 145,884 |   | $ | 140,131 |   |

 

The following table sets forthcertain information regarding the carrying values, weighted average yields, andmaturities of the Company’s investment securities portfolio as of December 31,2007.  Yields on tax-exempt obligationshave been computed on a tax equivalent basis, using a 34% federal taxrate.  The table includes scheduledprincipal payments and estimated prepayments.
|   |   |   |   |
|--------|--------|--------|--------|

 

 
| ** **                  | ** ** | **As of  December 31, 2007** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **One year  or less**             | ** ** | **One to  five years** | ** ** | **Five to  ten years** | ** ** | **More  than ten years** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **Carrying**                      | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** |
| ** **                  | ** ** | **value**                         | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** |
| Investment securities:      |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. agency  securities     |       | $                                 | 9,294      |   | 4.20 | % | $ | 37,366 |   | 4.94 | % | $ | 2,048 |   | 5.51 | % | $ | — |   | 0.00 | % | $ | 48,708 |   | 4.83 | % |
| Municipal  obligations      |       | 625                               |       | 7.01 | % | 6,899 |   | 5.06 | % | 24,806 |   | 5.65 | % | 29,783 |   | 6.05 | % | 62,113 |   | 5.79 | % |
| Mortgage-backed  securities |       | 4,859                             |       | 4.32 | % | 27,589 |   | 5.14 | % | 2,935 |   | 5.89 | % | 833 |   | 6.22 | % | 36,216 |   | 5.11 | % |
| Corporate bonds             |       | —                            |       | — | % | — |   | — | % | — |   | — | % | 2,493 |   | 6.93 | % | 2,493 |   | 6.93 | % |
| Other                       |       | 5,222                             |       | 4.65 | % | 5 |   | 4.52 | % | — |   | — | % | — |   | — | % | 5,227 |   | 4.65 | % |
| Total                       |       | $                                 | 20,000     |   | 4.43 | % | $ | 71,859 |   | 5.03 | % | $ | 29,789 |   | 5.67 | % | $ | 33,109 |   | 6.12 | % | $ | 154,757 |   | 5.31 | % |

 

13

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**III.  Loan Portfolio**

 

***LoanPortfolio Composition****.*  The following table sets forth thecomposition of the loan portfolio by type of loan at the dates indicated.

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance                                          | ** ** | **(Dollars in thousands)**  | ** ** |
| Real estate  loans:                              |       |                        |       |   |   |   |   |   |   |   |   |
| One-to-four  family residential                  |       | $                           | 126,459    |   | $ | 151,300 |   | $ | 114,935 |   | $ | 131,077 |   | $ | 82,094 |   |
| Commercial                                       |       | 113,209                     |       | 98,314 |   | 78,085 |   | 77,208 |   | 65,729 |   |
| Construction                                     |       | 27,936                      |       | 33,600 |   | 12,356 |   | 11,234 |   | 9,171 |   |
| Commercial loans                                 |       | 103,099                     |       | 90,758 |   | 63,494 |   | 51,826 |   | 50,054 |   |
| Consumer loans                                   |       | 9,164                       |       | 9,596 |   | 8,842 |   | 9,015 |   | 9,567 |   |
| Total gross  loans                               |       | 379,867                     |       | 383,568 |   | 277,712 |   | 280,360 |   | 216,615 |   |
| Less:                                            |       |                        |       |   |   |   |   |   |   |   |   |
| Deferred loan  fees/(costs) and loans in process |       | (462                        | )          | 214 |   | (5 | ) | 52 |   | 3 |   |
| Allowance for  loan losses                       |       | 4,172                       |       | 4,030 |   | 3,151 |   | 2,894 |   | 2,316 |   |
| Loans, net                                       |       | $                           | 376,157    |   | $ | 379,324 |   | $ | 274,566 |   | $ | 277,414 |   | $ | 214,296 |   |
|                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Percent of total                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Real estate  loans:                              |       |                        |       |   |   |   |   |   |   |   |   |
| One-to-four  family residential                  |       | 33.3                        | %          | 39.4 | % | 41.4 | % | 46.8 | % | 37.9 | % |
| Commercial                                       |       | 29.8                        | %          | 25.6 | % | 28.1 | % | 27.5 | % | 30.3 | % |
| Construction                                     |       | 7.4                         | %          | 8.8 | % | 4.4 | % | 4.0 | % | 4.2 | % |
| Commercial loans                                 |       | 27.1                        | %          | 23.7 | % | 22.9 | % | 18.5 | % | 23.1 | % |
| Consumer loans                                   |       | 2.4                         | %          | 2.5 | % | 3.2 | % | 3.2 | % | 4.5 | % |
| Total gross  loans                               |       | 100.0                       | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |

 

The following table setsforth the contractual maturities of loans as of December 31, 2007. Thetable does not include unscheduled prepayments.

 
| ** **                     | ** ** | **Less than 1 year**       | ** ** | **2-5 years** | ** ** | **Over 5 years** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------------------------|------------|---------------|------------|------------------|------------|-----------|------------|
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:             |       |                       |       |          |       |             |       |      |       |
| One-to-four family residential |       | $                          | 18,542     |          | $          | 50,961           |       | $         | 56,956     |   | $ | 126,459 |   |
| Commercial                     |       | 26,193                     |       | 37,841        |       | 49,175           |       | 113,209   |       |
| Construction                   |       | 27,904                     |       | 32            |       | —           |       | 27,936    |       |
| Commercial                     |       | 67,924                     |       | 29,951        |       | 5,224            |       | 103,099   |       |
| Consumer                       |       | 3,936                      |       | 4,972         |       | 256              |       | 9,164     |       |
| Total gross loans              |       | $                          | 144,499    |          | $          | 123,757          |       | $         | 111,611    |   | $ | 379,867 |   |

 

14

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The following table sets forth, as of December 31, 2007, thedollar amount of all loans due after December 31, 2008 and whether suchloans had fixed interest rates or adjustable interest rates:

 
|                           |   | **Fixed**                  |   | **Adjustable** |   | **Total** |   |
|--------------------------------|--------|----------------------------|--------|----------------|--------|-----------|--------|
|                           |   | **(Dollars in thousands)** |   |
| Real estate loans:             |   |                       |   |           |   |      |   |
| One-to-four family residential |   | $                          | 31,527 |           | $      | 76,390    |   | $ | 107,917 |   |
| Commercial                     |   | 14,110                     |   | 72,906         |   | 87,016    |   |
| Construction                   |   | 32                         |   | —         |   | 32        |   |
| Commercial                     |   | 17,046                     |   | 18,129         |   | 35,175    |   |
| Consumer                       |   | 4,701                      |   | 527            |   | 5,228     |   |
| Total gross loans              |   | $                          | 67,416 |           | $      | 167,952   |   | $ | 235,368 |   |

 

***NonperformingAssets****.* The following table sets forthinformation with respect to nonperforming assets, including non-accrual loansand real estate acquired through foreclosure or by deed in lieu of foreclosure(“real estate owned”).  Under theoriginal terms of the Company’s non-accrual loans as of December 31, 2007,interest earned on such loans for the year ended December 31, 2007 wouldhave increased interest income by $520,000.

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**  | ** ** |
| Total non-accrual loans               |       | $                           | 10,037     |   | $ | 3,567 |   | $ | 3,332 |   | $ | 1,145 |   | $ | 1,205 |   |
| Accruing loans over 90 days  past due |       | —                      |       | — |   | — |   | — |   | — |   |
| Real estate owned                     |       | 492                         |       | 456 |   | 749 |   | 479 |   | 281 |   |
| Total nonperforming assets            |       | $                           | 10,529     |   | $ | 4,023 |   | $ | 4,081 |   | $ | 1,624 |   | $ | 1,486 |   |

 
| Total nonperforming loans to  total loans, net    |   | 2.7  | % | 0.9   | % | 1.2  | % | 0.4   | % | 0.6   | % |
|---------------------------------------------------|--------|------|---|-------|---|------|---|-------|---|-------|---|
| Total nonperforming assets to  total assets       |   | 1.7  | % | 0.7   | % | 0.9  | % | 0.4   | % | 0.5   | % |
| Allowance for loan losses to  nonperforming loans |   | 41.5 | % | 113.0 | % | 94.6 | % | 252.8 | % | 192.2 | % |

 

The Company’s non-accrualloans increased during the latter part of 2007 to $10.0 million as of December 31,2007, as compared to $3.6 million as of December 31, 2006.  This increase was primarily related to fourconstruction loan relationships totaling $5.1 million as of December 31,2007.  One of these relationships,comprising $2.4 million, was collected in January of 2008.  Given the collateral associated with theseconstruction loans, the Company does not anticipate any significant lossexposure.  Accordingly, a correspondingincrease in the Company’s allowance for loan losses pertaining to thesenon-accrual construction loans was not considered necessary.  In reviewing the Company’s impaired loans, ofwhich non-accrual loans comprise the majority, $6.5 million of the impairedloans were considered adequately collateralized with no allowance allocatedthereon.  As part of the Company’s creditrisk management, the Company continues to aggressively manage the loanportfolio to identify problem loans and has placed additional emphasis on its commercialreal estate and construction relationships. As discussed in more detail in the “Asset Quality and Distribution”section, we believe the Company’s allowance for loan losses continues to beadequate based on the Company’s evaluation of the loan portfolio’s inherentrisk as of December 31, 2007.

 

 

15

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**IV.****                   ****Summary of Loan Loss Experience**

 

Thefollowing table sets forth information with respect to the Company’s allowancefor loan losses at the dates indicated:

 
| ** **                                                               | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**  | ** ** |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Total gross loans outstanding                                            |       | $                           | 379,867    |   | $ | 383,568 |   | $ | 277,712 |   | $ | 280,360 |   | $ | 216,615 |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Average net loans outstanding                                            |       | $                           | 380,664    |   | $ | 391,010 |   | $ | 273,507 |   | $ | 266,050 |   | $ | 217,730 |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance balances (at beginning of year)                                |       | 4,030                       |       | 3,151 |   | 2,894 |   | 2,316 |   | 2,565 |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Provision                                                                |       | 255                         |       | 235 |   | 385 |   | 460 |   | 240 |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance of merged bank:                                                |       | —                      |       | 891 |   | — |   | 352 |   | — |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Charge-offs:                                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Real estate  loans:                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| One-to-four  family residential                                          |       | (16                         | )          | (23 | ) | (25 | ) | (63 | ) | (29 | ) |
| Commercial                                                               |       | —                      |       | (55 | ) | — |   | — |   | — |   |
| Construction                                                             |       | (29                         | )          | — |   | — |   | — |   | — |   |
| Commercial                                                               |       | (12                         | )          | (3 | ) | (37 | ) | (124 | ) | (362 | ) |
| Consumer                                                                 |       | (147                        | )          | (258 | ) | (160 | ) | (108 | ) | (162 | ) |
|                                                                     |       | (204                        | )          | (339 | ) | (222 | ) | (295 | ) | (553 | ) |
| Recoveries:                                                              |       |                        |       |   |   |   |   |   |   |   |   |
| Real estate  loans:                                                      |       |                        |       |   |   |   |   |   |   |   |   |
| One-to-four  family residential                                          |       | 4                           |       | 5 |   | 5 |   | 16 |   | — |   |
| Commercial                                                               |       | —                      |       | 1 |   | — |   | — |   | — |   |
| Construction                                                             |       | —                      |       | — |   | — |   | — |   | — |   |
| Commercial                                                               |       | 25                          |       | 25 |   | 59 |   | 5 |   | 8 |   |
| Consumer                                                                 |       | 62                          |       | 61 |   | 30 |   | 40 |   | 56 |   |
|                                                                     |       | 91                          |       | 92 |   | 94 |   | 61 |   | 64 |   |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Net charge-offs                                                          |       | (113                        | )          | (247 | ) | (128 | ) | (234 | ) | (489 | ) |
|                                                                     |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance balances (at end of year)                                      |       | $                           | 4,172      |   | $ | 4,030 |   | $ | 3,151 |   | $ | 2,894 |   | $ | 2,316 |   |
| Allowance for  loan losses as a percent of total gross loans outstanding |       | 1.10                        | %          | 1.05 | % | 1.13 | % | 1.03 | % | 1.07 | % |
| Net loans charged off as a percent of average net  loans outstanding     |       | 0.03                        | %          | 0.06 | % | 0.05 | % | 0.09 | % | 0.23 | % |

 

16

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Thedistribution of the Company’s allowance for losses on loans at the datesindicated and the percent of loans in each category to total loans issummarized in the following table.  Thisallocation reflects management’s judgment as to risks inherent in the types ofloans indicated, but the general allowance included in the table are notrestricted and are available to absorb all loan losses.  The amount allocated in the following tableto any category should not be interpreted as an indication of expected actualcharge-offs in that category.

 
| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)**  | ** ** |
| ** **                      | ** ** | **Amount**                  | ** ** | **% Loan type to  total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** |
| Real estate loans:              |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four family  residential |       | $                           | 1,189      |   | 33.3 | % | $ | 827 |   | 39.4 | % | $ | 722 |   | 41.4 | % | $ | 570 |   | 46.8 | % | $ | 320 |   | 37.9 | % |
| Commercial                      |       | 640                         |       | 29.8 | % | 823 |   | 25.6 | % | 882 |   | 28.1 | % | 874 |   | 27.5 | % | 763 |   | 30.3 | % |
| Construction                    |       | 879                         |       | 7.4 | % | 834 |   | 8.8 | % | 384 |   | 4.4 | % | 280 |   | 4.0 | % | 196 |   | 4.2 | % |
| Commercial                      |       | 1,191                       |       | 27.1 | % | 1,308 |   | 23.7 | % | 941 |   | 22.9 | % | 942 |   | 18.5 | % | 831 |   | 23.1 | % |
| Consumer                        |       | 273                         |       | 2.4 | % | 238 |   | 2.5 | % | 222 |   | 3.2 | % | 228 |   | 3.2 | % | 206 |   | 4.5 | % |
| Total                           |       | $                           | 4,172      |   | 100.0 | % | $ | 4,030 |   | 100.0 | % | $ | 3,151 |   | 100.0 | % | $ | 2,894 |   | 100.0 | % | $ | 2,316 |   | 100.0 | % |

 

The allowance for losseson loans is discussed in more detail in the “Nonperforming Assets” and “AssetQuality and Distribution” sections, we believe the Company’s allowance for loanlosses continues to be adequate based on the Company’s evaluation of the loanportfolio’s inherent risk as of December 31, 2007.

 

**V.****                                       ****Deposits**

 

As of December 31,2007, the aggregate amount outstanding of jumbo certificates of deposit(amounts of $100,000 or more) was $59.0 million.  The following table presents the maturitiesof these time certificates of deposit at December 31, 2007:

 
| **(Dollars in thousands)**       |
|----------------------------------|
|                             |   |   |   |
| 3 months or less                 |   | $ | 26,829 |   |
| Over 3 months through 6 months   |   | 15,616 |   |
| Over 6 months through 12  months |   | 11,268 |   |
| Over 12 months                   |   | 5,268 |   |
| Total                            |   | $ | 58,981 |   |

 

###### **VI.**                                Returnon Equity and Assets

 
| ** **               | ** ** | **As of or for the years ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Return on average assets |       | 0.90                                               | %          | 1.01 | % | 0.87 | % | 0.98 | % | 1.46 | % |
| Return on average equity |       | 10.78                                              | %          | 13.01 | % | 9.04 | % | 9.98 | % | 11.53 | % |
| Equity to total assets   |       | 8.62                                               | %          | 8.34 | % | 9.48 | % | 9.54 | % | 12.74 | % |
| Dividend payout ratio    |       | 26.27                                              | %          | 26.27 | % | 37.14 | % | 33.33 | % | 27.63 | % |

 

 

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**ITEM 1A.         RISK FACTORS**

 

In addition to the other information in this AnnualReport on Form 10-K, stockholders or prospective investors shouldcarefully consider the following risk factors:

 

**Ourbusiness is concentrated in and dependent upon the continued growth and welfareof the markets in which we operate, including eastern, central and southwesternKansas.**

 

Weoperate primarily in eastern, central and southwestern Kansas, and as a result,our financial condition, results of operations and cash flows are subject tochanges in the economic conditions in those areas.  Although each market we operate in isgeographically and economically diverse, our success depends upon the business activity,population, income levels, deposits and real estate activity in each of thesemarkets.  Although our customers’business and financial interests may extend well beyond our market area,adverse economic conditions that affect our specific market area could reduceour growth rate, affect the ability of our customers to repay their loans to usand generally affect our financial condition and results of operations. Becauseof our geographic concentration, we are less able than other regional or nationalfinancial institutions to diversify our credit risks across multiple markets.

 

**We may experience difficulties inmanaging our growth and our growth strategy involves risks that may negativelyimpact our net income.**

 

Aspart of our general strategy, we may acquire banks and related businesses thatwe believe provide a strategic fit with our business.  In the past, we have acquired a number oflocal banks and, to the extent that we continue to grow through future acquisitions,we cannot assure you that we will be able to adequately and profitably managethis growth. Acquiring other banks and businesses will involve risks commonlyassociated with acquisitions, including:

 

·                  potential exposure to unknown or contingentliabilities of banks and businesses we acquire;

·                  exposure to potential asset quality issues of theacquired bank or related business;

·                  difficulty and expense of integrating the operationsand personnel of banks and businesses we acquire;

·                  potential disruption to our business;

·                  potential diversion of our management’s time andattention; and

·                  the possible loss of key employees and customers ofthe banks and businesses we acquire.

 

Inaddition to acquisitions, we may expand into additional communities or attemptto strengthen our position in our current markets by undertaking additionalbranch openings.  We believe that itgenerally takes several years for new banking facilities to first achieveoperational profitability, due to the impact of organization and overheadexpenses and the start-up phase of generating loans and deposits.  To the extent that we undertake additionalbranch openings, we are likely to continue to experience the effects of higheroperating expenses relative to operating income from the new operations, whichmay have an adverse effect on our levels of reported net income, return onaverage equity and return on average assets.

 

**We faceintense competition in all phases of our business from other banks andfinancial institutions.**

 

The banking and financialservices business in our market is highly competitive.  Our competitors include large regional banks,local community banks, savings and loan associations, securities and brokeragecompanies, mortgage companies, insurance companies, finance companies, moneymarket mutual funds, credit unions and other non-bank financial serviceproviders, many of which have greater financial, marketing and technologicalresources than us.  Increased competitionin our market may result in a decrease in the amounts of our loans anddeposits, reduced spreads between loan rates and deposit rates or loan termsthat are more favorable to the borrower. Any of these results could have a material adverse effect on our abilityto grow and remain profitable.  Ifincreased competition causes us to significantly discount the interest rates weoffer on loans or increase the amount we pay on deposits, our net interestincome could be adversely impacted.  Ifincreased competition causes us to relax****ourunderwriting standards, we could be exposed to higher losses from lendingactivities.  Additionally, many of ourcompetitors are 

 

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much larger in totalassets and capitalization, have greater access to capital markets and offer abroader range of financial services than we can offer.

 

**Interest rates and otherconditions impact our results of operations.**

 

Ourprofitability is in part a function of the spread between the interest ratesearned on investments and loans and the interest rates paid on deposits andother interest-bearing liabilities.  Likemost banking institutions, our net interest spread and margin will be affectedby general economic conditions and other factors, including fiscal and monetarypolicies of the federal government, that influence market interest rates andour ability to respond to changes in such rates.  At any given time, our assets and liabilitieswill be such that they are affected differently by a given change in interestrates.  As a result, an increase ordecrease in rates, the length of loan terms or the mix of adjustable and fixedrate loans in our portfolio could have a positive or negative effect on our netincome, capital and liquidity.  We measure interest rate risk undervarious rate scenarios and using specific criteria and assumptions.  A summary of this process, along with theresults of our net interest income simulations is presented in the section entitled“Management’s Discussion and Analysis of Financial Conditions and Results ofOperations.  Although we believe ourcurrent level of interest rate sensitivity is reasonable and effectivelymanaged, significant fluctuations in interest rates may have an adverse effecton our business, financial condition and results of operations.

 

**We must effectively manage our credit risk.**

 

There are risks inherent in making anyloan, including risks inherent in dealing with individual borrowers, risks ofnonpayment, risks resulting from uncertainties as to the future value ofcollateral and risks resulting from changes in economic and industryconditions.  We attempt to minimize ourcredit risk through prudent loan application approval procedures, carefulmonitoring of the concentration of our loans within specific industries andperiodic independent reviews of outstanding loans by our credit reviewdepartment.  However, we cannot assureyou that such approval and monitoring procedures will reduce these creditrisks.  Most of our loans are commercial,real estate, or consumer loans, each of which is subject to distinct types ofrisk.  To reduce the lending risks weface, we generally take a security interest in borrowers’ property for allthree types of loans.  In addition, wesell certain residential real estate loans to third parties.  Nevertheless, the risk of non-payment isinherent in all three types of loans and if we are unable to collect amountsowed, it may materially affect our operations and financial performance.

 

For a more complete discussion of ourlending activities see Part 1 of Item 1 of this Annual Report on Form 10-K.

 

**Ourloan portfolio has a large concentration of real estate loans, which involverisks specific to real estate value.**

 

Realestate lending (including commercial, construction, and residential) is a largeportion of our loan portfolio. These categories were $267.6 million, orapproximately 70.4% of our total loan portfolio as of December 31, 2007,as compared to $283.2 million, or approximately 73.8%, as of December 31,2006.  The market value of real estate can fluctuatesignificantly in a short period of time as a result of market conditions in thegeographic area in which the real estate is located. Although asignificant portion of such loans are secured by real estate as a secondaryform of collateral, adverse developments affecting real estate values in one ormore of our markets could increase the credit risk associated with our loanportfolio.  Additionally, real estatelending typically involves higher loanprincipal amounts and the repayment of theloans generally is dependent, inlarge part, on sufficient income from theproperties securing the loans to coveroperating expenses and debt service. Economicevents or governmental regulationsoutside of the control of the borrower orlender could negatively impact thefuture cash flow and market values of theaffected properties.

 

Ifthe loans that are collateralized by real estate become troubled during a timewhen market conditions are declining or have declined, then we may not be ableto realize the amount of security that we anticipated at the time oforiginating the loan, which could cause us to increase our provision for loanlosses and adversely affect our operating results and financial condition.  In particular, if the problems that have occurred inthe residential real estate and mortgage markets spread to the commercial realestate market, particularly within our market area, the value of collateralsecuring our real estate loans could decline and the demand for our real estateloans could decrease.  We generally havenot experienced a downturn in credit performance by our real estate loancustomers, but in light of the 

 

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uncertainty that existsin the economy and credit markets nationally, there can be no guarantee that wewill not experience any deterioration in such performance.

 

**Ourconcentration of one-to-four family residential mortgage loans may result inlower yields and profitability.**

 

One-to-four family residentialmortgage loans comprised $126.5 million and $151.3 million, or 33.3% and 39.4%,of our loan portfolio at December 31, 2007 and 2006, respectively. Theseloans are secured primarily by properties located in the state of Kansas.  Our concentration of these loans results inlower yields relative to other loan categories within our loan portfolio.  While these loans generally possess higheryields than investment securities, their repayment characteristics are not aswell defined and they generally possess a higher degree of interest rate riskversus other loans and investment securities within our portfolio.  This increased interest rate risk is due tothe repayment and prepayment options inherent in residential mortgage loanswhich are exercised by borrowers based upon the overall level of interestrates.  These residential mortgage loansare generally made on the basis of the borrower’s ability to make repaymentsfrom his or her employment and the value of the property securing theloan.  Thus, as a result, repayment ofthese loans is also subject to general economic and employment conditionswithin the communities and surrounding areas where the property is located.

 

The effects of ongoingmortgage market challenges, combined with the ongoing correction in residentialreal estate market prices and reduced levels of home sales, has the potentialto adversely affect our one-to-four family residential mortgage****portfolio in several ways, each of which could adverselyaffect our operating results and/or financial condition.

 

**Commercialloans make up a significant portion of our loan portfolio.**

 

Commercialloans were $103.1 million, or approximately 27.1% of our total loan portfolioas of December 31, 2007, compared to $90.8 million and 23.7% as of December 31,2006.  Our commercial loans are primarilymade based on the identified cash flow of the borrower and secondarily on theunderlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, ormachinery.  Credit support provided bythe borrower for most of these loans and the probability of repayment is basedon the liquidation of the pledged collateral and enforcement of a personalguarantee, if any exists.  As a result,in the case of loans secured by accounts receivable, the availability of fundsfor the repayment of these loans may be substantially dependent on the abilityof the borrower to collect amounts due from its customers.  The collateral securing other loans maydepreciate over time, may be difficult to appraise and may fluctuate in valuebased on the success of the business.

 

**Ouragricultural loans involve a greater degree of risk than other loans, and theability of the borrower to repay may be affected by many factors outside of theborrower’s control.**

 

At December 31, 2007and 2006, agricultural real estateloans totaled $6.9 million and $7.0 million,respectively, or 1.8%, of our total loan portfolio.  Agriculturalreal estate lending involves a greater degree of risk and typicallyinvolves larger loans tosingle borrowers than lending on single-familyresidences. Payments on agricultural realestate loans are dependent on theprofitable operation or management of thefarm property securing the loan. Thesuccess of the farm may be affected by manyfactors outside the control of thefarm borrower, including adverse weatherconditions that prevent the planting ofa crop or limit crop yields (such as hail,drought and floods), loss oflivestock due to disease or other factors, declines in market pricesforagriculturalproducts (both domestically and internationally) and the impact ofgovernment regulations(including changes in price supports, subsidies andenvironmental regulations). In addition, manyfarms are dependent on a limitednumber of key individuals whose injury ordeath may significantly affect thesuccessful operation of the farm. If the cashflow from a farming operation isdiminished, the borrower’s ability to repay the loanmay be impaired. Theprimary cropsin our market areas are wheat, corn and soybean. Accordingly, adversecircumstances affectingwheat, corn and soybean crops could have an adverse effect onour agricultural real estateloan portfolio.

 

Wealso originate agricultural operating loans. At December 31, 2007 and 2006, theseloans totaled $34.4 millionand $26.2 million, respectively, or 9.1% and 6.8% respectively, of our totalloan portfolio. Aswithagricultural real 

 

20

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estateloans, the repayment of operating loans isdependent on the successful operation ormanagement of the farm property.

 

Likewise,agricultural operating loans involve a greater degree of risk thanlending on residentialproperties, particularly in the case of loans that areunsecured or secured by rapidlydepreciating assets such as farm equipment, livestock or crops.  We generally secure agricultural operatingloans with a blanket lien on livestock, equipment, food, hay, grain and crops.  Nevertheless, any repossessedcollateral for a defaultedloan may not provide an adequate source of repaymentof the outstanding loan balance as a resultof the greater likelihood of damage,loss or depreciation.

 

**Ourallowance for loan losses may prove to be insufficient to absorb probablelosses in our loan portfolio.**

 

Weestablished our allowance for loan losses and maintain it at a level consideredadequate by management to absorb probable loan losses that are inherent in theportfolio.  Additionally, our Board ofDirectors regularly monitors the adequacy of our allowance for loan loses.  The amount of future loan losses issusceptible to changes in economic, operating and other conditions, includingchanges in interest rates, which may be beyond our control, and such losses mayexceed current estimates.  At December 31,2007 and 2006, our allowance for loan losses as a percentage of total loans was1.1% and as a percentage of total non-performing loans was approximately 41.5%and 113.0%, respectively.  Althoughmanagement believes that the allowance for loan losses is adequate to absorblosses on any existing loans that may become uncollectible, we cannot predictloan losses with certainty nor can we assure you that our allowance for loanlosses will prove sufficient to cover actual loan losses in the future.  Loan losses in excess of our reserves mayadversely affect our business, financial condition and results of operations.

 

**Ourcontinued pace of growth may require us to raise additional capital in thefuture, but that capital may not be available when it is needed.**

 

Weare required by federal and state regulatory authorities to maintain adequatelevels of capital to support our operations. We anticipate that our existing capital resources will satisfy ourcapital requirements for the foreseeable future.  However, we may at some point need to raiseadditional capital to support continuing growth.  Our ability to raise additional capital isparticularly important to our strategy of continual growth throughacquisitions.  Our ability to raiseadditional capital, if needed, will depend on conditions in the capital marketsat that time, which are outside our control, and on our financialperformance.  Accordingly, we cannotassure you of our ability to raise additional capital if needed on termsacceptable to us.  If we cannot raiseadditional capital when needed, our ability to further expand our operationsthrough internal growth and acquisitions could be materially impaired.

 

**Ourcommunity banking strategy relies heavily on our management team, and theunexpected loss of key managers may adversely affect our operations.**

 

Muchof our success to date has been influenced strongly by our ability to attractand to retain senior management experienced in banking and financial servicesand familiar with the communities in our market area.  Our ability to retain executive officers, thecurrent management teams, branch managers and loan officers of our operatingsubsidiaries will continue to be important to the successful implementation ofour strategy.  It is also critical, as wegrow, to be able to attract and retain qualified additional management and loanofficers with the appropriate level of experience and knowledge about ourmarket area to implement our community-based operating strategy.  The unexpected loss of services of any keymanagement personnel, or the inability to recruit and retain qualifiedpersonnel in the future, could have an adverse effect on our business,financial condition and results of operations.

 

**Government regulation can resultin limitations on our operations.**

 

Weoperate in a highly regulated environment and are subject to supervision andregulation by a number of governmental regulatory agencies, including the Boardof Governors of the Federal Reserve System, the FDIC and the OCC.  Regulations adopted by these agencies, whichare generally intended to provide protection for depositors and customersrather than for the benefit of stockholders, govern a comprehensive range ofmatters relating to ownership and control of our shares, our acquisition of othercompanies and businesses, permissible activities for us to engage in,maintenance of adequate capital levels and other aspects of our operations.These bank regulators 

 

21

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possessbroad authority to prevent or remedy unsafe or unsound practices or violationsof law. The laws and regulations applicable to the banking industry couldchange at any time and we cannot predict the effects of these changes on ourbusiness and profitability. Increased regulation could increase our cost ofcompliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in whichwe may conduct our business, including our ability to offer new products,obtain financing, attract deposits, make loans and achieve satisfactoryinterest spreads.

 

**We have a continuing need for technological change and we maynot have the resources to effectively implement new technology.**

 

Thefinancial services industry is undergoing rapid technological changes withfrequent introductions of new technology-driven products and services.  In addition to better serving customers, theeffective use of technology increases efficiency and enables financialinstitutions to reduce costs.  Our futuresuccess will depend in part upon our ability to address the needs of ourcustomers by using technology to provide products and services that willsatisfy customer demands for convenience as well as to create additionalefficiencies in our operations as we continue to grow and expand our marketarea.  Many of our larger competitorshave substantially greater resources to invest in technologicalimprovements.  As a result, they may beable to offer additional or superior products to those that we will be able tooffer, which would put us at a competitive disadvantage.  Accordingly, we cannot provide you withassurance that we will be able to effectively implement new technology-drivenproducts and services or be successful in marketing such products and servicesto our customers.

 

**There is a limited trading market for our common shares, and you maynot be able to resell your shares at or above the price you paid for them.**

 

Althoughour common shares are listed for trading on the Nasdaq Global Market under thesymbol “LARK”, the trading in our common shares has substantially lessliquidity than many other publicly traded companies.  A public trading market having the desiredcharacteristics of depth, liquidity and orderliness depends on the presence inthe market of willing buyers and sellers of our common shares at any giventime.  This presence depends on theindividual decisions of investors and general economic and market conditionsover which we have no control.  We cannotassure you that volume of trading in our common shares will increase in thefuture.

 

**System failure or breaches of ournetwork security could subject us to increased operating costs as well aslitigation and other liabilities.**

 

The computer systems andnetwork infrastructure we use could be vulnerable to unforeseen problems.  Our operations are dependent upon our abilityto protect our computer equipment against damage from physical theft, fire,power loss, telecommunications failure or a similar catastrophic event, as wellas from security breaches, denial of service attacks, viruses, worms and otherdisruptive problems caused by hackers. Any damage or failure that causes an interruption in our operationscould have a material adverse effect on our financial condition and results ofoperations.  Computer break-ins, phishingand other disruptions could also jeopardize the security of information storedin and transmitted through our computer systems and network infrastructure,which may result in significant liability to us and may cause existing andpotential customers to refrain from doing business with us.  Although we, with the help of third-partyservice providers, intend to continue to implement security technology andestablish operational procedures to prevent such damage, there can be noassurance that these security measures will be successful. In addition,advances in computer capabilities, new discoveries in the field of cryptographyor other developments could result in a compromise or breach of the algorithmswe and our third-party service providers use to encrypt and protect customertransaction data.  A failure of suchsecurity measures could have a material adverse effect on our financialcondition and results of operations.

 

**We are subject to certainoperational risks, including, but not limited to, customer or employee fraudand data processing system failures and errors.**

 

Employee errors andmisconduct could subject us to financial losses or regulatory sanctions andseriously harm our reputation. Misconduct by our employees could include hidingunauthorized activities from us, improper or unauthorized activities on behalfof our customers or improper use of confidential information. It is not always 

 

22

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possible to preventemployee errors and misconduct, and the precautions we take to prevent anddetect this activity may not be effective in all cases. Employee errors couldalso subject us to financial claims for negligence.

 

We maintain a system of internal controlsand insurance coverage to mitigate against operational risks, including dataprocessing system failures and errors and customer or employee fraud. Shouldour internal controls fail to prevent or detect an occurrence, or if anyresulting loss is not insured or exceeds applicable insurance limits, it couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

**Failure to pay interest on our debt may adversely impact ourability to pay dividends.**

 

$16.5million of subordinated debentures are held by two business trusts that wecontrol.  Interest payments on thedebentures must be paid before we pay dividends on our capital stock, includingour common stock.  We have the right todefer interest payments on the debentures for up to 20 consecutive quarters.  However, if we elect to defer interestpayments, all deferred interest must be paid before we may pay dividends on ourcapital stock.  Deferral of interestpayments could also cause a decline in the market price of our common stock.

 

**ITEM 1B.         UNRESOLVED STAFF COMMENTS**

 

None

 

**ITEM 2.            PROPERTIES**

 

The Company owns its mainoffice in Manhattan and sixteen branch offices and leases 3 branchoffices.  The Company also leases aparking lot for one of the branch offices it owns.  During 2007, the Company purchased its branchin Lawrence that had previously been leased.

 

**ITEM 3.            LEGAL PROCEEDINGS**

 

There are no pendinglegal proceedings to which the Company or the Bank is a party, other thanordinary routine litigation incidental 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.

 

**ITEM 4.            SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matter was submittedto a vote of security holders during the quarter ended December 31, 2007.

 

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**PART II.**

 

**ITEM 5.****                                                    ****MARKET FOR THE COMPANY’S COMMONSTOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Our common stock hastraded on the Nasdaq Global Market under the symbol “LARK” since 2001. At December 31,2007, the Company had approximately 1,000 stockholders, consisting ofapproximately 390 owners of record and approximately 610 beneficial owners ofour common stock.  Set forth below arethe reported high and low sale prices of our common stock and dividends paidduring the past two years.  Informationpresented below has been adjusted to give effect to the 5% stock dividendsdeclared in December 2007 and 2006.

 
| **Year ended December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  dividends paid** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|--------------------------|------------|
| First Quarter                         |       | $        | 27.48      |    | $          | 25.48                    |       | $ | 0.1810 |   |
| Second Quarter                        |       | $        | 27.10      |    | $          | 25.81                    |       | $ | 0.1810 |   |
| Third Quarter                         |       | $        | 27.49      |    | $          | 25.05                    |       | $ | 0.1810 |   |
| Fourth Quarter                        |       | $        | 27.00      |    | $          | 24.11                    |       | $ | 0.1810 |   |

 
| **Year ended December 31,  2006** | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  dividends paid** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|--------------------------|------------|
| First Quarter                          |       | $        | 26.67      |    | $          | 23.71                    |       | $ | 0.1542 |   |
| Second Quarter                         |       | $        | 26.90      |    | $          | 25.33                    |       | $ | 0.1542 |   |
| Third Quarter                          |       | $        | 27.19      |    | $          | 24.10                    |       | $ | 0.1542 |   |
| Fourth Quarter                         |       | $        | 28.80      |    | $          | 26.04                    |       | $ | 0.1723 |   |

 

**Performance Graph**

The following graph presents a comparison of theCompany’s performance to the indices named below.

It assumes $100 investedon 12/31/2002 with dividends invested on a total return basis.

 

                                                                                                                                                                ***Source:SNL***

 
| *** ***                | *** *** | **Period Ending** | *** *** |
|-----------------------------|--------------|-------------------|--------------|
| **Index**                   | ** **   | **12/31/02**      | ** **   | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** |
| Landmark Bancorp, Inc. |         | $                 | 100.00       |   | $ | 123.43 |   | $ | 140.22 |   | $ | 131.03 |   | $ | 154.17 |   | $ | 156.04 |   |
| NASDAQ Bank                 |         | 100.00            |         | 129.93 |   | 144.21 |   | 137.97 |   | 153.15 |   | 119.35 |   |
| NASDAQ Composite            |         | 100.00            |         | 150.01 |   | 162.89 |   | 165.13 |   | 180.85 |   | 198.60 |   |
|                             |              |                   |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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The following table provides information about purchases by the Companyduring the quarter ended December 31, 2007, of the Company’s equitysecurities that are registered by the Company pursuant to Section 12 ofthe Exchange Act:

 
| ******Period**           | ** ** | **Total   number of   shares   purchased** | ** ** | **Average   price paid  per share** | ** ** | **Total number of  shares purchased as   part of a publicly   announced plan (1)** | ** ** | **Maximum number of  shares that may yet be  purchased under the   plans (1)** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
|                     |       |                                       |       |                                |       |                                                                               |       |                                                                           |       |
| October 1-31, 2007  |       | —                                     |       | $                                   | —     |                                                                               | —     |                                                                           | 37,559     |   |
| November 1-30, 2007 |       | 10,000                                     |       | 26.50                               |       | 10,000                                                                             |       | 27,559                                                                         |       |
| December 1-31, 2007 |       | 7,763                                      |       | 26.52                               |       | 7,763                                                                              |       | 19,796                                                                         |       |
| Total                    |       | 17,763                                     |       | $                                   | 26.51      |                                                                               | 17,763     |                                                                           | 19,796     |   |

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(1)                                     In November 2004, our Board ofDirectors approved the repurchase of 101,700 shares, of our common stock (“2004Repurchase Program”).  In January 2008,our Board of Directors approved a new stock repurchase program, enabling us torepurchase up to 119,900 shares, or 5% of our outstanding common stock (“2008Repurchase Program”), following completion of the 2004 Repurchase Program.  Unless terminated earlier by resolution ofthe Board of Directors, the current repurchase program will expire when we haverepurchased all shares authorized for repurchase thereunder.

 

 

25

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**ITEM 6.  SELECTEDFINANCIAL DATA**

** **
| ** **                                          | ** ** | **At or for the years ended December 31,**      | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected Financial Data:**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                        |       | $                                                    | 606,455    |   | $ | 590,568 |   | $ | 465,110 |   | $ | 442,091 |   | $ | 334,046 |   |
| Loans                                               |       | 376,157                                              |       | 379,324 |   | 274,566 |   | 277,414 |   | 214,296 |   |
| Investment securities                               |       | 164,724                                              |       | 145,884 |   | 140,131 |   | 133,604 |   | 99,746 |   |
| Cash and cash equivalents                           |       | 14,739                                               |       | 14,752 |   | 21,491 |   | 7,845 |   | 7,708 |   |
| Deposits                                            |       | 452,652                                              |       | 444,485 |   | 331,273 |   | 302,868 |   | 253,108 |   |
| Borrowings                                          |       | 93,088                                               |       | 90,416 |   | 85,258 |   | 94,571 |   | 33,755 |   |
| Stockholders’ equity                           |       | 52,296                                               |       | 49,236 |   | 44,073 |   | 42,169 |   | 42,572 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Selected Operating Data:**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                     |       | $                                                    | 35,551     |   | $ | 34,395 |   | $ | 22,124 |   | $ | 19,949 |   | $ | 17,276 |   |
| Interest expense                                    |       | 17,868                                               |       | 15,639 |   | 8,957 |   | 7,000 |   | 5,654 |   |
| Net interest income                                 |       | 17,683                                               |       | 18,756 |   | 13,167 |   | 12,949 |   | 11,622 |   |
| Provision for loan losses                           |       | 255                                                  |       | 235 |   | 385 |   | 460 |   | 240 |   |
| Net interest income after provision for loan losses |       | 17,428                                               |       | 18,521 |   | 12,782 |   | 12,489 |   | 11,382 |   |
| Non-interest income                                 |       | 5,915                                                |       | 6,913 |   | 5,056 |   | 5,125 |   | 4,974 |   |
| Non-interest expense                                |       | 16,638                                               |       | 17,345 |   | 12,282 |   | 11,353 |   | 9,229 |   |
| Earnings before income taxes                        |       | 6,705                                                |       | 8,089 |   | 5,556 |   | 6,261 |   | 7,127 |   |
| Income tax expense                                  |       | 1,303                                                |       | 2,079 |   | 1,659 |   | 2,010 |   | 2,275 |   |
| Net earnings                                        |       | $                                                    | 5,402      |   | $ | 6,010 |   | $ | 3,897 |   | $ | 4,251 |   | $ | 4,852 |   |
| Net earnings per share (1):                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                               |       | $                                                    | 2.22       |   | $ | 2.45 |   | $ | 1.59 |   | $ | 1.69 |   | $ | 1.89 |   |
| Diluted                                             |       | 2.20                                                 |       | 2.44 |   | 1.58 |   | 1.68 |   | 1.87 |   |
| Dividends per share (1)                             |       | 0.72                                                 |       | 0.63 |   | 0.59 |   | 0.56 |   | 0.51 |   |
| Book value per common share outstanding (1)         |       | 21.78                                                |       | 20.09 |   | 17.89 |   | 17.21 |   | 16.73 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on average assets                            |       | 0.90                                                 | %          | 1.01 | % | 0.87 | % | 0.98 | % | 1.46 | % |
| Return on average equity                            |       | 10.78                                                | %          | 13.01 | % | 9.04 | % | 9.98 | % | 11.53 | % |
| Equity to total assets                              |       | 8.62                                                 | %          | 8.34 | % | 9.48 | % | 9.54 | % | 12.74 | % |
| Net interest rate spread (2)                        |       | 3.15                                                 | %          | 3.35 | % | 2.99 | % | 2.99 | % | 3.42 | % |
| Net interest margin (2)                             |       | 3.47                                                 | %          | 3.62 | % | 3.26 | % | 3.24 | % | 3.78 | % |
| Non-performing assets to total assets               |       | 1.74                                                 | %          | 0.68 | % | 0.88 | % | 0.37 | % | 0.45 | % |
| Non-performing loans to net loans                   |       | 2.67                                                 | %          | 0.94 | % | 1.21 | % | 0.41 | % | 0.56 | % |
| Allowance for loan losses to total loans            |       | 1.10                                                 | %          | 1.05 | % | 1.14 | % | 1.04 | % | 1.07 | % |
| Dividend payout ratio                               |       | 32.70                                                | %          | 26.17 | % | 37.14 | % | 33.33 | % | 27.63 | % |
| Number of full service banking offices              |       | 20                                                   |       | 20 |   | 17 |   | 16 |   | 12 |   |

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** Our selected consolidated financial data shouldbe read in conjunction with, and is qualified in its entirety by, ourconsolidated financial statements, including the related notes.

(1)   All per share amounts have been adjusted togive effect to the 5% stock dividends paid in December 2007, 2006, 2005,2004 and 2003.

(2)   Presented on a taxable equivalent basis,using a 34% federal tax rate.

 

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**ITEM 7.****                                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS 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 Nasdaq Global Market under the symbol“LARK”.  Landmark National Bank isdedicated to providing quality financial and banking services to its localcommunities.  Our strategy includescontinuing a tradition of quality assets while growing our commercial andcommercial real estate loan portfolios. We are committed to developing relationships with our borrowers andproviding a total banking service.

 

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

 

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

 

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

 

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

 

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

 

 

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**CRITICALACCOUNTING POLICIES**

 

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

 

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

 

We report our availablefor sale investment securities at estimated fair values based on readilyascertainable values which are obtained from independent sources.  Our management performs periodic reviews ofthe investment securities to determine if any investment securities havedeclined in value which might be considered other than temporary.  Our most recent review showed that thedecrease in fair value of the securities, resulting in an unrealized lossposition, was related to changes in interest rates and we do not believe thatany of the unrealized losses are related to credit deterioration.  We have the ability and intent to hold thesesecurities until market values recover, including up to the maturity date.  Although we believe that our estimates of thefair values of investment securities to be reasonable, economic and marketfactors may affect the amounts that will ultimately be realized from theseinvestments.

 

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 the future tax consequences of eventsthat have been recognized in our financial statements or tax returns.  Under FIN 48, an income tax position will berecognized if it is more likely than not that it will be sustained upon IRSexamination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amountof benefit that is greater than 50 percent likely of being realized uponultimate settlement.  Changes inestimates regarding the actual outcome of these future tax consequences,including the effects of IRS examinations and examinations by other stateagencies, could materially impact our financial position and results ofoperations.

 

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

 

 

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31,2006**

 

**SUMMARYOF PERFORMANCE. **Net earningsfor 2007 decreased $608,000, or 10.6%, to $5.4 million as compared to2006.  Our decline in earnings for 2007declined from 2006 primarily due to decreases in both net interest income andnon-interest income.

 

The year ended December 31, 2007 resulted in diluted earnings pershare of $2.20 compared to $2.44 for 2006. Return on average assets was 0.90% for 2007, compared to 1.01% for2006.  Return on average stockholders’equity was 10.78% for 2007, compared to 13.01% for 2006.

 

We distributed a 5% stock dividend for the seventh consecutive year in December 2007.  All per share and average share data in thissection reflects the 2007 and 2006 stock dividends.

 

**INTEREST INCOME. **Interest income for 2007increased $1.2 million, or 3.4%, to $35.6 million from $34.4 million for 2006,primarily as a result of an increase in interest income on investmentsecurities.  Average loans for 2007decreased to $383.1 million from $393.7 million in 2006.  Despite the decrease in average loans,interest income on loans increased $171,000, or 0.6%, to $28.5 million for2007, due primarily to an increase in the average yield on loans from 7.20%during 2006 to 7.45% during 2007. Average investment securities increased from $144.1 million for 2006, to$157.4 million for 2007.  The averageyield on our investment securities increased to 5.15% during 2007 from 4.70%during 2006.  As a result of higher balancesand yields, interest income on investment securities increased $1.0 million, or16.2%, to $7.1 million for 2007.

 

**INTEREST EXPENSE. **Interest expense for 2007increased 14.3%, or $2.2 million, to $17.9 million from $15.6 million for2006.  Interest expense on depositsincreased to $13.5 million, or 23.4%, from $10.9 million in 2006 as averagedeposits increased from $439.7 million for 2006, to $448.8 million during2007.  The average rate on ourcertificates of deposit increased from 3.78% in 2006 to 4.48% in 2007.  This increase was due in part to increasedcompetition for deposits and the repricing of lower rate certificates ofdeposits.  The higher average depositsallowed us to decrease our average borrowings for 2007 to $94.2 million from$103.8 million for 2006.  Correspondingwith the decrease in average borrowings for the comparable periods, interestexpense on borrowings decreased $329,000, or 7.0%.  Additionally, offsetting the lower averageborrowings were increased interest rates, as the average rate on our borrowingsincreased from 4.52% in 2006 to 4.63% in 2007.

 

**NET INTEREST INCOME. **Net interest income represents the difference betweenincome derived from interest-earning assets and the expense incurred oninterest-bearing liabilities.  Netinterest income is affected by both the difference between the rates ofinterest earned on interest-earnings assets and the rates paid oninterest-bearing liabilities (“interest rate spread”) as well as the relativeamounts of interest-earning assets and interest-bearing liabilities.

 

Netinterest income for the year ended December 31, 2007 decreased $1.1million to $17.7 million compared to the year ended December 31, 2006, adecrease of 5.7%.  This decline in netinterest income was due primarily to the increase in our cost of fundingoutpacing the increase in our yield on interest earning assets, which resultedin our net interest margin, on a tax equivalent basis, declining to 3.47% from3.62% for 2007 and 2006, respectively.  In the latter part of 2007, as theFederal Reserve lowered interest rates, our loan yields decreased at a fasterpace than our deposit costs.  The fasterdecline in loan yields was largely attributed to increasing competitivepressures resulting from a slowing economy, deteriorating loan pricing, andrelatively fewer lending opportunities. At the same time increasing competition for deposits has limited ourability to lower the costs of deposits as quickly as the loans.

 

**PROVISION FOR LOAN LOSSES.** We maintain,and our Board ofDirectors monitors, an allowance for losses on loans.  The allowance is established based uponmanagement’s periodic evaluation of known and inherent risks in the loanportfolio, review of significant individual loans and collateral, review ofdelinquent loans, past loss experience, adverse situations that may affect theborrowers’ ability to repay, current and expected market conditions, and otherfactors management deems important. Determining the appropriate level of reserves involves a high degree of managementjudgment and is based upon historical and projected losses in the loanportfolio and the 

 

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collateral value ofspecifically identified problem loans. Additionally, allowance strategies and policies are subject to periodicreview and revision in response to a number of factors, including currentmarket conditions, actual loss experience and management’s expectations.

 

The provision for loanlosses increased to $255,000 for 2007, compared to $235,000 for 2006.  Our regular review of the loan portfolioprompted the increase in our provision, primarily as a result ofdecreases in credit quality, slowing economic conditions, increased commerciallending and higher nonperforming asset balances..  At December 31, 2007, the allowance for loanlosses was $4.2 million, or 1.1% of gross loans outstanding, compared to $4.0million, also 1.1% of gross loans outstanding, at December 31, 2006.  For further discussion of the provision forloan losses, refer to the “Asset Quality and Distribution” section.

 

**NON-INTEREST INCOME. **Non-interest incomedecreased $998,000 or 14.4%, during 2007, to $5.9 million compared to2006.  This decrease in 2007 wasgenerally the result of certain items recognized during 2006, including$717,000 in gains on the sale of certain assets, primarily our former mainbanking facility located at 800 Poyntz, Manhattan, Kansas.  These gains in 2006 were partially offset by$300,000 in losses on sale of investments and purchasing higher yielding,longer-term investments during the second quarter of 2006.  Furthering this decline was a decrease ingains on sale of loans of $185,000, or 16.2%, while deposit related incomeremained stable, declining by $3,000.

 

**NON-INTEREST EXPENSE. **Non-interest expensedecreased $706,000, or 4.1%, to $16.6 million for 2007, as compared to2006.  The decrease in non-interestexpense for 2007 resulted primarily from a $498,000 decrease in compensationand benefits, a $114,000 decrease in amortization of intangible assets expense,and the achievement of cost savings resulting from the acquisition of FirstManhattan Bancorporation.

 

**INCOME TAXES. **Income tax expense decreased $776,000, or 37.3%, to$1.3 million for 2007, from $2.1 million for 2006.  The decrease in income tax expense for 2007resulted from a decrease in taxable income during 2007 as compared to 2006 aswell as a decline in the effective tax rate for 2007, which decreased to 19.4%from 25.7% for 2006.  The effective taxrate for 2007 was lower than 2006 primarily because of our increase innon-taxable income related to tax exempt municipal investments, higher incomeon bank owned life insurance and the recognition of $50,000 of previouslyunrecognized tax benefits.

 

 

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31,2005**

 

**SUMMARYOF PERFORMANCE. **Net earningsfor 2006 increased $2.1 million, or 54.2%, to $6.0 million as compared to2005.  Our improved earnings wereattributed primarily to our acquisition of FMB along with continued improvementin our net interest margin.  Theacquisition allowed for continued growth in non-interest income items such asfees and service charges and gains on sale of loans.  At the same time, we were able to realizecost savings associated with the assimilation of the FMB franchise during 2006.

 

The year ended December 31, 2006 resulted in diluted earnings pershare of $2.44 compared to $1.58 for 2005. Return on average assets was 1.01% for 2006, compared to 0.87% for2005.  Return on average stockholders’equity was 13.01% for 2006, compared to 9.04% for 2005.

 

We distributed a 5% stock dividend for the sixth consecutive year in December 2006.  All per share and average share data in thissection reflects the 2006 and 2005 stock dividends.

 

**INTEREST INCOME. **Interest income for 2006increased $12.3 million, or 55.5%, to $34.4 million from $22.1 million for2005.  This increase was primarily theresult of the increase in interest earning assets as a result of theacquisition of FMB at the beginning of 2006. Average loans for 2006 increased to $393.7 million from $275.2 millionin 2005.  Interest income on loansincreased $11.0 million, or 63.6%, to $28.3 million for 2006.  Also contributing to the higher interestincome was an increase in the average yield on loans from 6.30% during 2005 to7.20% during 2006.  Average investmentsecurities increased from $141.8 million for 2005, to $144.1 million for2006.  Interest income on investmentsecurities increased $1.3 million, or 26.3%, to $6.1 million for 2006, due tothe increase in interest rates which allowed the yields on our investmentspurchased in 2006 to exceed the yields on the investments which either maturedor were sold during the past year.  Theaverage yield on our investment securities increased to 4.70% during 2006 from3.67% during 2005.

 

**INTEREST EXPENSE. **Interest expense for 2006increased 74.6%, or $6.7 million, to $15.6 million from $9.0 million for2005.  Interest expense on depositsincreased to $10.9 million, or 96.5%, from $5.6 million in 2005 as averagedeposits increased from $313.4 million for 2005, to $439.7 million during2006.  The increase in interest expenseon deposits resulted from the addition of approximately $106.8 million indeposits that we acquired through the FMB acquisition, as well as from therepricing of deposits due to the rise in interest rates.  The average rate on our certificates ofdeposit increased from 2.69% in 2005 to 3.78% in 2006.  Average borrowings for 2006 increased to$103.8 million from $88.6 million for 2005. The increase in average borrowings related primarily to debt acquired inthe FMB acquisition.  Corresponding withthe increase in average borrowings for the comparable periods, interest expenseon borrowings increased $1.3 million, or 38.6%. Additionally, contributing to the increase in interest expenses onborrowings were increased interest rates, as the average rate on our borrowingsincreased from 3.82% in 2005 to 4.52% in 2006.

 

**NET INTEREST INCOME.**  Net interestincome for the year ended December 31, 2006 increased $5.6 million to$18.8 million compared to the year ended December 31, 2005, an increase of42.4%.  This increase was due primarilyto the higher level of interest earning assets obtained in the acquisition ofFMB and an improvement in the net interest margin, on a tax equivalent basis,to 3.62% for 2006 from 3.26% for 2005. The improvement in our net interest margin was impacted by our balancesheet positioning over the past couple of years, when interest rates were athistorical lows, to maintain a short term repricing strategy for our interestearning assets.  This approach allowedour assets to reprice to higher rates at a faster pace than our liabilitiesrepriced during 2006, as short and intermediate rates increased.  Also contributing to the increase was ourability to continue to diversify our loan portfolio through the growth incommercial loans during 2006.  Althoughthe FMB acquisition increased our one-to-four family residential loan totals,our percentage of one-to-four family residential loans declined from 41.4% at December 31,2005 to 39.5% at December 31, 2006. This reduction in one-to-four family residential loans was due to normalrefinancings and amortization.  Anotherfactor was the restructuring of a part of our investment portfolio whereby wesold some of our lower yielding, short term investments at a loss and purchasedlonger term investments with higher yields during the middle of 2006.

 

 

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

 

**NON-INTEREST INCOME. **Non-interest incomeincreased $1.9 million or 36.7%, during 2006, to $6.9 million compared to 2005.  This improvement was primarily the result ofa $502,000, or 78.6%, increase of gains on sale of loans, and an increase infees and service charges of $913,000, or 26.9%, both of which are primarilyattributable to volume increases associated with the FMB acquisition.  Additionally, total non-interest incomeincluded $717,000 in gains recognized from the sale of other assets, primarilyfrom the sale of our previous headquarters located at 800 Poyntz, Manhattan,Kansas.  Also contributing to theincreased non-interest income during 2006 was a $308,000 increase in bank ownedlife insurance income, which resulted from the purchase of additional policiestotaling $7.5 million in March 2006. Partially offsetting these increases were losses of $300,000 on the saleof investment securities during 2006 compared to a gain of $47,000 for2005.  The losses incurred during 2006were the result of repositioning our investment portfolio by selling somerelatively short term, lower yielding investment securities and purchasinglonger term, higher yielding investment securities.  These increases more than offset the $407,000gain on prepayment of Federal Home Loan Bank borrowings recognized in the thirdquarter of 2005.

 

**NON-INTEREST EXPENSE. **Non-interest expenseincreased $5.1 million, or 41.2%, to $17.3 million for 2006, as compared to2005.  The increase in non-interestexpense for 2006 as compared to 2005 resulted primarily from a $2.6 millionincrease in compensation and benefits, an $812,000 increase in occupancy andequipment, a $580,000 increase in amortization, a $175,000 increase inprofessional fees and a $182,000 increase in data processing expenses.  These increases were primarilyfrom the impact of the FMBacquisition and the late 2005 acquisition of two branches in Great Bend,Kansas.  While we have made significantprogress achieving cost savings by consolidating our personnel, operations andfacilities, the impact of the acquisitions included a net increase in personnel,equipment and facilities and the number of accounts being processed.  Also contributing to the increase innon-interest expense was the opening of a new branch location in Topeka, Kansasduring August 2006.

 

**INCOME TAXES. **Income tax expense increased $421,000, or 25.4%, to$2.1 million for 2006, from $1.7 million for 2005.  The increase in income tax expense for 2006resulted from the increase in taxable income during 2006 as compared to2005.  Offsetting the increase in taxableincome was a decline in the effective tax rate for 2006, which decreased to25.7% from 29.9% for 2005.  The effectivetax rate for 2006 was lower than 2005 primarily because we recognized certainpreviously unrecorded tax benefits due to the resolution of tax uncertainties,along with an increase in non-taxable income related to bank owned lifeinsurance and municipal investments.

 

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**AVERAGE ASSETS/LIABILITIES. **The following table sets forth information relating toaverage balances of interest-earning assets and interest-bearing liabilitiesfor the years ended December 31, 2007, 2006 and 2005.  This table reflects the average yields onassets and average costs of liabilities for the periods indicated (derived bydividing income or expense by the monthly average balance of assets orliabilities, respectively) as well as the “net interest margin” (which reflectsthe effect of the net earnings balance) for the periods shown.

** **
| ** **                                                                        | ** ** | **Year  ended December 31, 2007** | ** ** | **Year  ended December 31, 2006** | ** ** | **Year  ended December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **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)                                                        |       | $                                      | 157,376    |                                   | $          | 8,109                                  |       | 5.15 | % | $ | 144,110 |   | $ | 6,771 |   | 4.70 | % | $ | 141,790 |   | $ | 5,205 |   | 3.67 | % |
| Loans receivable,  net (2)                                                        |       | 383,078                                |       | 28,535                                 |       | 7.45                                   | %          | 393,709 |   | 28,345 |   | 7.20 | % | 275,183 |   | 17,347 |   | 6.30 | % |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 540,454                                |       | 36,644                                 |       | 6.78                                   | %          | 537,819 |   | 35,116 |   | 6.53 | % | 416,973 |   | 22,552 |   | 5.41 | % |
| Non-interest-earning  assets                                                      |       | 60,689                                 |       |                                   |       |                                   |       | 59,573 |   |   |   |   |   | 32,347 |   |   |   |   |   |
| Total                                                                             |       | $                                      | 601,143    |                                   |       |                                   |       |   | $ | 597,392 |   |   |   |   |   | $ | 449,320 |   |   |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity**                                     |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                      | 237,831    |                                   | $          | 10,656                                 |       | 4.48 | % | $ | 226,963 |   | $ | 8,570 |   | 3.78 | % | $ | 162,442 |   | $ | 4,369 |   | 2.69 | % |
| Money market and  NOW accounts                                                    |       | 132,813                                |       | 2,769                                  |       | 2.08                                   | %          | 131,470 |   | 2,287 |   | 1.74 | % | 95,010 |   | 1,129 |   | 1.19 | % |
| Savings accounts                                                                  |       | 27,048                                 |       | 81                                     |       | 0.30                                   | %          | 29,914 |   | 90 |   | 0.30 | % | 24,520 |   | 73 |   | 0.30 | % |
| FHLB advances and  other borrowings                                               |       | 94,171                                 |       | 4,362                                  |       | 4.63                                   | %          | 103,805 |   | 4,692 |   | 4.52 | % | 88,599 |   | 3,386 |   | 3.82 | % |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 491,863                                |       | 17,868                                 |       | 3.63                                   | %          | 492,152 |   | 15,639 |   | 3.18 | % | 370,571 |   | 8,957 |   | 2.42 | % |
| Non-interest-bearing  liabilities                                                 |       | 59,146                                 |       |                                   |       |                                   |       | 59,031 |   |   |   |   |   | 35,644 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 50,134                                 |       |                                   |       |                                   |       | 46,209 |   |   |   |   |   | 43,105 |   |   |   |   |   |
| Total                                                                             |       | $                                      | 601,143    |                                   |       |                                   |       |   | $ | 597,392 |   |   |   |   |   | $ | 449,320 |   |   |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread (3)                                                          |       |                                   |       |                                   |       | 3.15                                   | %          |   |   |   |   | 3.35 | % |   |   |   |   | 2.99 | % |
| Net interest margin (4)                                                           |       |                                   |       | $                                      | 18,776     |                                   | 3.47       | % |   |   | $ | 19,477 |   | 3.62 | % |   |   | $ | 13,595 |   | 3.26 | % |
| Tax equivalent interest - imputed                                                 |       |                                   |       | 1,093                                  |       |                                   |       |   |   | 721 |   |   |   |   |   | 428 |   |   |   |
| Net interest income                                                               |       |                                   |       | $                                      | 17,683     |                                   |       |   |   |   | $ | 18,756 |   |   |   |   |   | $ | 13,167 |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                                   |       | 109.88                                 | %          |                                   |       |   |   | 109.28 | % |   |   |   |   | 112.52 | % |   |   |

----

(1)   Income oninvestment securities includes all securities and interest bearing deposits inother financial institutions.  Income ontax exempt investment securities is presented on a fully taxable equivalentbasis, using a 34% federal tax rate.

(2)   Includesloans classified as non-accrual.  Incomeon tax exempt loans is presented on a fully taxable equivalent basis, using a 34%federal tax rate.

(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 averageinterest-earning assets.

 

33

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** **

**QUARTERLYRESULTS OF OPERATIONS**

** **
| ** **                                          | ** ** | **Fiscal 2007 Quarters Ended**  | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **March 31**               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                     |       | $                               | 8,830,732  |   | $ | 9,001,879 |   | $ | 9,085,905 |   | $ | 8,632,573 |   |
| Interest expense                                    |       | 4,331,532                       |       | 4,535,424 |   | 4,624,993 |   | 4,376,263 |   |
| Net interest income                                 |       | 4,499,200                       |       | 4,466,455 |   | 4,460,913 |   | 4,256,310 |   |
| Provision for loan losses                           |       | 65,000                          |       | 60,000 |   | 70,000 |   | 60,000 |   |
| Net interest income after provision for loan losses |       | 4,434,200                       |       | 4,406,455 |   | 4,390,912 |   | 4,196,310 |   |
| Non-interest income                                 |       | 1,328,869                       |       | 1,514,358 |   | 1,575,449 |   | 1,496,958 |   |
| Non-interest expense                                |       | 4,157,393                       |       | 4,157,779 |   | 4,161,454 |   | 4,161,738 |   |
| Earnings before income taxes                        |       | 1,605,676                       |       | 1,763,034 |   | 1,804,907 |   | 1,531,530 |   |
| Income tax expense                                  |       | 361,056                         |       | 409,431 |   | 367,341 |   | 165,255 |   |
| Net earnings                                        |       | $                               | 1,244,620  |   | $ | 1,353,603 |   | $ | 1,437,566 |   | $ | 1,366,275 |   |
| Earnings per share(1):                              |       |                            |       |   |   |   |   |   |   |
| Basic                                               |       | $                               | 0.51       |   | $ | 0.55 |   | $ | 0.59 |   | $ | 0.57 |   |
| Diluted                                             |       | $                               | 0.50       |   | $ | 0.55 |   | $ | 0.59 |   | $ | 0.56 |   |
|                                                |       |                            |       |   |   |   |   |   |   |
| ** **                                          | ** ** | **Fiscal  2006 Quarters Ended** | ** ** |
| ** **                                          | ** ** | **March 31**               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                     |       | $                               | 8,137,331  |   | $ | 8,346,242 |   | $ | 8,837,471 |   | $ | 9,073,397 |   |
| Interest expense                                    |       | 3,491,944                       |       | 3,799,355 |   | 4,115,091 |   | 4,232,494 |   |
| Net interest income                                 |       | 4,645,387                       |       | 4,546,887 |   | 4,722,380 |   | 4,840,903 |   |
| Provision for loan losses                           |       | 60,000                          |       | 15,000 |   | 80,000 |   | 80,000 |   |
| Net interest income after provision for loan losses |       | 4,585,387                       |       | 4,531,887 |   | 4,642,380 |   | 4,760,903 |   |
| Non-interest income                                 |       | 1,691,541                       |       | 1,941,325 |   | 1,683,077 |   | 1,597,204 |   |
| Non-interest expense                                |       | 4,236,854                       |       | 4,217,154 |   | 4,313,570 |   | 4,577,030 |   |
| Earnings before income taxes                        |       | 2,040,074                       |       | 2,256,058 |   | 2,011,887 |   | 1,781,077 |   |
| Income tax expense                                  |       | 619,160                         |       | 659,968 |   | 548,240 |   | 252,087 |   |
| Net earnings                                        |       | $                               | 1,420,914  |   | $ | 1,596,090 |   | $ | 1,463,647 |   | $ | 1,528,990 |   |
| Earnings per share(1):                              |       |                            |       |   |   |   |   |   |   |
| Basic                                               |       | $                               | 0.58       |   | $ | 0.65 |   | $ | 0.60 |   | $ | 0.62 |   |
| Diluted                                             |       | $                               | 0.58       |   | $ | 0.65 |   | $ | 0.59 |   | $ | 0.62 |   |

----

(1) All per share amounts have been adjusted to give effect to the5% stock dividend paid during December 2007 and 2006.

 

34

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**FINANCIALCONDITION**

 

Although the Company hasavoided many of the problems caused by the deterioration in residential realestate market values and loan portfolio credit quality, particularly thesubprime mortgage sector, the Company’s asset quality and 2007 performance hasnonetheless been affected by the softening in economic conditions andturbulence in the housing market. Management believes that it continues to have a high quality asset baseand solid earnings and anticipates that its efforts to run a high qualityfinancial institution with a sound asset base will continue to create a strongfoundation for continued growth and profitability in the future.

 

**ASSET QUALITY AND DISTRIBUTION.** Total assets increased to $606.5 million at December 31, 2007,compared to $590.6 million at December 31, 2006.  This increase was primarily attributable toincreased balances in our investment portfolio.  Our primary ongoing sources of funds are deposits, FHLBborrowings, proceeds from principal and interest payments on loans andinvestment securities and proceeds from the sale of mortgage loans andinvestment securities.  While maturitiesand scheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interest ratesand economic conditions.

 

Net loans, excludingloans held for sale, decreased to $376.2 million as of December 31, 2007from $379.3 million as of December 31, 2006.  The $3.1 million decline in net loans is a resultof the refinancings and paydowns in our residential portfolio exceeding ourcommercial and commercial real estate loan originations.  We have concentrated on generating commercialloans over the past few years and are pleased that this segment of our loanportfolio has grown.  Despite thedecrease in total loans, we continued our balance sheet transition with anincrease of $21.6 million in commercial and commercial real estate loans, whichpartially offset a decline of $24.8 million in one to four family residentialloans.  This is consistent with ourstrategy to continue to reduce portfolio reliance on residential mortgageloans, most of which have been acquired in previous acquisitions, andincreasing our loan portfolio in the area of commercial lending.  We plan to continue our efforts to grow ourcommercial and commercial real estate lending activities.   As of December 31, 207, our commercialloans, including commercial real estate loans, comprised 64.3% of our loanportfolio, up from 58.1% at December 31, 2006.  As of December 31,2007, our one-to-four family residential loans comprised 33.3% of total loans,down from 39.4% at December 31, 2006. We anticipate continuing to diversify our loan portfolio compositionthrough our continued planned expansion of commercial and commercial realestate lending activities.

 

Our primary investingactivities are the origination of commercial, mortgage and consumer loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  We do notoriginate and warehouse these fixed-rate residential loans for resale in orderto speculate on interest rates.  As of December 31,2007, our residential mortgage loan portfolio consisted of $41.7 million withfixed rates and $84.8 million with variable rates.

 

The allowance for losseson loans is established through a provision for losses on loans based on ourevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of its loan activity.  Suchevaluation, which includes a review of all loans with respect to which fullcollectibility may not be reasonably assured, considers the fair value of theunderlying collateral, economic conditions, historical loan loss experience,level of classified loans and other factors that warrant recognition inproviding for an adequate allowance for losses on loans.

 

As of December 31,2007, loans with a balance of $10.0 million were on non-accrual status, or 2.6%of total loans, compared to a balance of $3.6 million loans on non-accrualstatus, or 0.9% of total loans, as of December 31, 2006.  The Company’s non-accrual loans increasedduring the latter part of 2007 to $10.0 million as of December 31, 2007 ascompared to $3.6 million as of December 31, 2006.  This increase was primarily related to fourconstruction loan relationships totaling $5.1 million at December 31,2007.  One of these relationshipscomprising $2.4 million was collected in January of 2008.  As part of the Company’s credit riskmanagement, the Company continues to aggressively manage the loan portfolio toidentify problem loans and has placed additional emphasis on its commercialreal estate and construction relationships. The ratio of non-performing assets as a percentage of total assets was1.74% at December 31, 2007 and 0.68% at December 31, 2006.  Net charge offs were $113,000 for 2007,compared to net charge offs of $248,000 for 2006.

 

 

35

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Althoughthe economy appears to have slowed, the outlook of the economy for 2008,however, depends on whether the recent reductions in the federal funds ratestimulate the economy or if the economic slowdown continues.  Based on the outcomes, these events couldadversely affect cash flows for both commercial and individual borrowers, as aresult of which, we could experience increases in problem assets, delinquenciesand losses on loans.  Many financialinstitutions, including us, have experienced an increase in non-performingassets during the recent economic period, as even well-established businessborrowers developed cash flow, profitability and other business-relatedproblems.  We believe that the allowancefor losses on loans at December 31, 2007, was adequate, however, there canbe no assurances that losses will not exceed the estimated amounts.  While we believe that we use the bestinformation available to determine the allowance for losses on loans,unforeseen market conditions could result in adjustment to the allowance forlosses on loans.  In addition, netearnings could be significantly affected if circumstances differ substantiallyfrom the assumptions used in establishing the allowance for losses on loans.

 

**LIABILITY DISTRIBUTION. **Total deposits increased to $452.7 million at December 31,2007 from $444.5 million at December 31, 2006.  Borrowings decreased $2.7 million to $93.1million at December 31, 2007 from $90.4 million at December 31, 2006.

 

Non-interest bearingdeposits at December 31, 2007 were $51.0 million, or 11.3% of deposits,compared to $48.4 million, or 10.9% of deposits, at December 31,2006.  Money market and NOW depositaccounts were 30.8% of the portfolio and totaled $139.6 million at December 31,2007, compared to $137.3 million, or 30.9% of deposits, at December 31,2006.  Savings accounts decreased to$25.9 million, or 5.7% of deposits, at December 31, 2007, from $27.7million, or 6.2% of deposits, at December 31, 2006.  Certificates of deposit increased to $236.2million, or 52.1% of deposits, at December 31, 2007, from $231.1 million,or 52.0% of deposits, at December 31, 2006.

 

Certificates of depositat December 31, 2007 which were scheduled to mature in one year or lesstotaled $206.0 million.  Historically,maturing deposits have generally remained with Landmark National Bank and webelieve that a significant portion of the deposits maturing in one year or lesswill remain with us upon maturity.

 

**CASHFLOWS. **During the year ended December 31, 2007, our cashand cash equivalents decreased by $3.0 million. Our operating activities during 2007 provided net cash of $4.8million.  We used $16.5 million ininvesting activities in 2007, primarily from purchasing more investmentsecurities than the amount that matured or prepaid.  Offsetting this was $2.4 million of cashrelating to a net decrease in loans.  Ourfinancing activities provided net cash of $8.7 million in financing activitiesduring 2007, primarily due to an $8.3 million increase in our depositsportfolio and $11.1 million borrowed from our FHLB line of credit.  These financing cash inflows were used toretire $3.0 million of FHLB advances, and $1.1 million of net other borrowings,as well as to pay $1.8 million of dividends and purchase $1.4 million oftreasury stock.

 

**CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS.**  The followingtable presents contractual obligations, defined as operating lease obligationsand principal payments due on non-deposit obligations with maturities in excessof one year as of December 31, 2007, for the periods indicated.  Unrealized tax benefits related to taxuncertainties which are not more likely than not are not included in thefollowing table as the timing and resolution of these unrealized benefits cannot be reasonably estimated.

** **
| **Contractual cash obligations** | ** ** | **Total**  | ** ** | **One year or  less** | ** ** | **One to three  years** | ** ** | **Four to five   years** | ** ** | **More than five   years** | ** ** |
|----------------------------------|------------|------------|------------|-----------------------|------------|-------------------------|------------|--------------------------|------------|----------------------------|------------|
|                             |       |       |       |                  |       |                    |       |                     |       |                       |       |
| Operating leases                 |       | $          | 127,597    |                  | $          | 63,684                  |       | $                        | 63,913     |                       | $          | — |   | $ | — |   |
| Service contracts                |       | 3,990,000  |       | 1,260,000             |       | 2,520,000               |       | 210,000                  |       | —                     |       |
| FHLB advances                    |       | 69,026,525 |       | 13,100,000            |       | 51,516,493              |       | —                   |       | 4,410,032                  |       |
| Other borrowings                 |       | 24,061,554 |       | 4,678,285             |       | 2,887,269               |       | —                   |       | 16,496,000                 |       |
| Total  contractual obligations   |       | $          | 97,205,676 |                  | $          | 19,101,969              |       | $                        | 56,987,675 |                       | $          | 210,000 |   | $ | 20,906,032 |   |

 

 

36

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**LIQUIDITY.** Our most liquid assets are cash and cash equivalents and investmentsecurities available for sale. The level of these assets is dependent on ouroperating, financing, lending and investing activities during any givenperiod.  At December 31, 2007 and2006, the carrying value of these liquid assets totaled $179.5 million and$160.6 million, respectively.  Duringperiods in which we are not able to originate a sufficient amount of loansand/or periods 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 generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare available through the use of FHLB advances, a line of credit with the FHLB,other borrowings or through sales of securities.  At December 31, 2007, we had outstandingFHLB advances of $57.9 million and $11.1 million of borrowings on our line ofcredit with the FHLB.  At December 31,2007, our total borrowing capacity with the FHLB, which is based on collateralpledged, was $117.9 million.  We also hadother borrowings of $24.1 million at December 31, 2007, which included$16.5 million of subordinated debentures, $2.7 million of long-term debt and$4.9 million in repurchase agreements.

 

Asa provider of financial services, we routinely issue financial guarantees inthe form of financial and performance standby letters of credit.  Standby letters of credit are contingentcommitments issued by us generally to guarantee the payment or performanceobligation of a customer to a third party. While these standby letters of credit represent a potential outlay byus, a significant amount of the commitments may expire without being drawnupon.  We have recourse against thecustomer for any amount the customer is required to pay to a third party undera standby letter of credit.  The lettersof credit are subject to the same credit policies, underwriting standards andapproval process as loans made by us. Most of the standby letters of credit are secured, and in the event ofnonperformance by the customers, we have the right to the underlyingcollateral, which could include commercial real estate, physical plant andproperty, inventory, receivables, cash and marketable securities.  The contract amount of these standby lettersof credit, which represents the maximum potential future payments guaranteed byus, was $2.0 million at December 31, 2007.

 

At December 31,2007, we had outstanding loan commitments, excluding standby letters of credit,of $72.3 million. We anticipate that sufficient funds will be available to meetcurrent loan commitments. These commitments consist of unfunded lines of creditand commitments to finance real estate loans.

 

**CAPITAL.**The Federal Reserve has establishedcapital requirements for bank holding companies which generally parallel thecapital requirements for national banks under OCC regulations. The regulationsprovide that such standards will generally be applied on a consolidated (ratherthan a bank-only) basis in the case of a bank holding company with more than$500 million in total consolidated assets.

 

AtDecember 31, 2007, we continued to maintain a sound leverage capital ratioof 8.9% and a total risk based capital ratio of 13.4%.  As shown by the following table, our capitalexceeded the minimum capital requirements at December 31, 2007 (dollars inthousands):

 
| ** **               | ** ** | **Actual  Amount** | ** ** | **Actual**

**percent** | ** ** | **Required  percent** | ** ** | **Required  amount** | ** ** |
|--------------------------|------------|--------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|
| Leverage                 |       | $                  | 51,766     |                    | 8.9        | %                     | 4.0        | %                    | $          | 23,318 |   |
| Tier 1 capital           |       | $                  | 51,766     |                    | 12.4       | %                     | 4.0        | %                    | $          | 16,660 |   |
| Total risk based capital |       | $                  | 55,938     |                    | 13.4       | %                     | 8.0        | %                    | $          | 33,320 |   |

 

37

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At December 31, 2007, Landmark National Bankcontinued to maintain a sound leverage ratio of 9.1% and a total risk basedcapital ratio of 13.7%.  As shown by thefollowing table, Landmark National Bank’s capital exceeded the minimum capitalrequirements at December 31, 2007 (dollars in thousands):

 

| ** **               | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **               | ** ** | **amount** | ** ** | **percent** | ** ** | **percent**  | ** ** | **amount**   | ** ** |
| Leverage                 |       | $          | 52,737     |        | 9.1        | %            | 4.0        | %            | $          | 23,137 |   |
| Tier 1 capital           |       | $          | 52,737     |        | 12.7       | %            | 4.0        | %            | $          | 15,863 |   |
| Total risk based capital |       | $          | 56,909     |        | 13.7       | %            | 8.0        | %            | $          | 31,727 |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements. The above ratios are well in excess of regulatory minimums andshould allow us to operate without capital adequacy concerns. The FederalDeposit Insurance Corporation Improvement Act of 1991 establishes a bank ratingsystem based on the capital levels of banks. As of December 31, 2007 and 2006, we were rated “well capitalized”,which is the highest rating available under this capital-based ratingsystem.  We have $16.5 million in trustpreferred securities and, in accordance with current capital guidelines, thisamount has been included in our Tier 1 capital ratios as of December 31,2007.  Cash distributions on thesecurities are payable quarterly, are deductible for income tax purposes andare included in interest expense in the consolidated financial statements.

 

On March 1, 2005,the Board of Governors of the Federal Reserve System issued a final rule regardingthe continued inclusion of trust preferred securities in the Tier 1 capital ofbank holding companies, subject to stricter standards.  As a result of the final rule, the FederalReserve will limit the aggregate amount of a bank holding company’s cumulativeperpetual preferred stock, trust preferred securities and other minorityinterests to 25% of a company’s core capital elements, net of goodwill.  Regulations in place at the time we placedour currently outstanding trust preferred securities did not require the deductionof goodwill.  The rule also providesthat amounts of qualifying trust preferred securities and certain minorityinterests in excess of the 25% limit may be included in Tier 2 capital butwill be limited, together with subordinated debt and limited-life preferredstock, to 50% of Tier 1 capital. The final rule provides a five-year transition period for bankholding companies to meet these quantitative limitations.  While management does not anticipate that thefinal rule will have an impact on the Company when the five-yeartransition period expires, it is not possible to predict the final impact ofthe rule on us.

 

**DIVIDENDS**

 

During the year ended December 31,2007, we paid a quarterly cash dividend of $0.181 per share to ourstockholders.   Additionally, wedistributed a 5% stock dividend for the seventh consecutive year in December 2007.  The cash dividends have been adjusted to giveeffect to the 5% stock dividend.

 

The payment of dividendsby any financial institution or its holding company is affected by therequirement to maintain adequate capital pursuant to applicable capitaladequacy guidelines and regulations.  Asdescribed above, Landmark National Bank exceeded its minimum capitalrequirements under applicable guidelines as of December 31, 2007.  The National Bank Act imposes limitations onthe amount of dividends that a national bank may pay without prior regulatoryapproval. Generally, the amount is limited to the bank’s current year’s netearnings plus the adjusted retained earnings for the two preceding years.  As of December 31, 2007, approximately$729,000 was available to be paid as dividends to Landmark Bancorp by LandmarkNational Bank without prior regulatory approval.

 

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

 

38

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#### ** **

#### **RECENT ACCOUNTING DEVELOPMENTS**

#### ** **

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements*”.   This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.  It does not require any new fair valuemeasurements.  The Company adopted thisStatement on January 1, 2008.  Theadoption of the Statement did not have a material effect on our consolidatedfinancial statements.

 

In September 2006, the Emerging Issues TaskForce (“EITF”) Issue 06-4, “*Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements*”, was ratified.  This EITF Issue addresses accounting forseparate agreements which split life insurance policy benefits between anemployer and employee.  The Issuerequires the employer to recognize a liability for future benefits payable tothe employee under these agreements.  Theeffects of applying this Issue must be recognized through either a change inaccounting principle through an adjustment to equity or through theretrospective application to all prior periods. The Company adopted this Statement on January 1, 2008.  The adoption of the Issue did not have amaterial effect on our consolidated financial statements.

 

In September 2006, the EITF Issue 06-5, “*Accounting for Purchases of Life Insurance — Determining the AmountThat Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4*”,was ratified.  This EITF Issue addressesaccounting for what could be realized as an asset and provides clarificationregarding additional amounts included in the contractual terms of an individualpolicy in determining the amount that could be realized under the insurancecontract.  The effects of applying thisissue must be recognized through an adjustment to equity or through theretrospective application to all prior periods. The Company adopted this Statement on January 1, 2008.  The adoption of the Issue did not have amaterial effect on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities*.”  SFAS No. 159 allows companies to electfair-value measurement of specified financial instruments and warranty andinsurance contracts when an eligible asset or liability is initially recognizedor when an event, such as a business combination triggers new basis ofaccounting for that asset or liability. The election, called the “fair-value option,” will enable some companiesto reduce the volatility in reported earnings caused by measuring relatedassets and liabilities differently.  Theelection is available for eligible assets or liabilities on a contract-by-contractbasis without electing it for identical assets or liabilities under certainrestrictions.  The Company adopted thisStatement on January 1, 2008.  Theadoption of the Statement did not have a material effect on our consolidatedfinancial statements.

 

InNovember 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 109,“*Written Loan Commitment Recorded at Fair ValueThrough Earnings*.”  This SABsupersedes SAB 105 and expresses the current view that, consistent with theguidance in Statement of Financial Accounting Standards No. 156,Accounting for Servicing of Financial Assets, and Statement of FinancialAccounting Standards No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*”, the expected net futurecash flows related to the associated servicing of the loan should be includedin the measurement of all written loan commitments that are accounted for atfair value through earnings.  Forcalendar year companies, this SAB is effective January 1, 2008.  The adoption of SAB 109 did not have a materialeffect on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141(revised), “*Business Combinations*.”  The Statement retains the fundamentalrequirements in Statement 141 that the acquisition method of accounting be usedfor business combinations, but broadens the scope of Statement 141 and containsimprovements to the application of this method. The Statement requires an acquirer to recognize the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date, measured at their fair values as of that date.  Costs incurred to effect the acquisition areto be recognized separately from the acquisition.  Assets and liabilities arising fromcontractual contingencies and contingent considerations must be measured atfair value as of the acquisition date. The Statement also changes the accounting for negative goodwill arisingfrom a bargain purchase, requiring recognition in earnings instead of allocationto assets acquired.  For calendar yearcompanies, this Statement is applicable to business combinations occurringafter January 1, 2009.

 

 

39

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Also in December 2007, the FASB issued SFAS No. 160,“*Noncontrolling Interests in Consolidated FinancialStatements — an amendment of ARB No. 51*”.  This statement amends ARB 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It also amends certain of ARB 51’s consolidationprocedures for consistency with the requirements of FASB Statement No. 141(revised 2007), Business Combinations. For calendar year companies, this Statement is effective January 1,2009.  We do not expect that adoption ofthe Statement will have a material effect on our consolidated financialstatements.

 

**EFFECTS ON INFLATION**

 

Our consolidated financialstatements and accompanying footnotes have been prepared in accordance withU.S. generally accepted accounting principles, which generally requires themeasurement of financial position and operating results in terms of historicaldollars without consideration for changes in the relative purchasing power ofmoney over time due to inflation.  Theimpact of inflation can be found in the increased cost of our operationsbecause our assets and liabilities are primarily monetary and interest rateshave a greater impact on our performance than do the effects of inflation.

 

**ITEM 7A.               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.  Interestrates in the financial markets affect our decision on pricing our assets andliabilities which impacts our net interest income, a significant cash flowsource for us.  As a result, asubstantial portion of our risk management activities relates to managinginterest rate risk.

 

Our Asset/LiabilityManagement Committee monitors the interest rate sensitivity of our balancesheet using earnings simulation models and interest sensitivity GAPanalysis.  We have set policy limits ofinterest rate risk to be assumed in the normal course of business and monitorsuch limits through our simulation process.

 

In the past, we have beensuccessful in meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months,including using rates at December 31, 2007, and forecasting volumes forthe twelve month projection.  Thisposition is then subjected to a shift in interest rates of 100 and 200 basispoints rising and 100 and 200 basis points falling with an impact to our netinterest income on a one year horizon as follows:

 

| **Scenario**            | ** ** | ** ** | **$000’s change in net  interest income** | ** ** | **% of net  interest income** | ** ** |
|-------------------------|------------|------------|------------------------------------------------|------------|-------------------------------|------------|
| 100 basis point rising  |       | $          | 92                                             |       | 0.5                           | %          |
| 200 basis point rising  |       | $          | 85                                             |       | 0.5                           | %          |
| 100 basis point falling |       | $          | (264                                           | )          | (1.4                          | )%         |
| 200 basis point falling |       | $          | (451                                           | )          | (2.4                          | )%         |

#### ** **

#### **ASSET/LIABILITY MANAGEMENT**

#### ** **

Interest rate “gap”analysis is a common, though imperfect, measure of interest rate risk whichmeasures the relative dollar amounts of interest-earning assets and interestbearing liabilities which reprice within a specific time period, either throughmaturity or rate adjustment.  The “gap”is the difference between the amounts of such assets and liabilities that aresubject 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 rateenvironment, an institution with a positive gap would generally be expected,absent the effects of other factors, to experience a greater increase in theyield of its assets relative to the cost of its liabilities.  Conversely, the cost of funds for aninstitution with a positive gap would generally be expected to decline lessquickly than the yield on its assets in a falling interest rateenvironment.  Changes in interest ratesgenerally have the opposite effect on an institution with a “negative” gap.

 

 

40

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Following is our “staticgap” schedule.  One-to-four family andconsumer loans included prepayment assumptions, while all other loans assume noprepayments.  The mortgage-backed securitiesincluded published prepayment assumptions, while all other investments assumeno prepayments.

 

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

 

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

 

**INTEREST-EARNINGASSETS AND INTEREST-BEARING LIABILITIES REPRICING**

**SCHEDULE(“GAP” TABLE)**

 

Asof December 31, 2007

 
| ** **                                                                                       | ** ** | **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:                                                                         |       |                       |       |                         |       |                             |       |               |       |      |       |
| Investment  securities                                                                           |       | $                          | 23,199     |                         | $          | 20,554                           |       | $                  | 59,867     |      | $          | 61,104 |   | $ | 164,724 |   |
| Loans                                                                                            |       | 89,789                     |       | 154,753                      |       | 124,559                          |       | 8,779              |       | 377,880   |       |
| Total  interest-earning assets                                                                   |       | 112,988                    |       | 175,307                      |       | 184,426                          |       | 69,883             |       | 542,604   |       |
|                                                                                             |       |                       |       |                         |       |                             |       |               |       |      |       |
| Interest-bearing liabilities:                                                                    |       |                       |       |                         |       |                             |       |               |       |      |       |
| Certificates of  deposit                                                                         |       | 72,898                     |       | 133,075                      |       | 29,947                           |       | 284                |       | 236,204   |       |
| Money market and  NOW accounts                                                                   |       | 19,538                     |       | —                       |       | 120,019                          |       | —             |       | 139,557   |       |
| Savings accounts                                                                                 |       | 5,177                      |       | —                       |       | 20,706                           |       | —             |       | 25,883    |       |
| Borrowed money                                                                                   |       | 52,171                     |       | 2,027                        |       | 33,182                           |       | 5,708              |       | 93,088    |       |
| Total  interest-bearing liabilities                                                              |       | 176,203                    |       | 135,102                      |       | 228,443                          |       | 5,992              |       | 545,740   |       |
|                                                                                             |       |                       |       |                         |       |                             |       |               |       |      |       |
| Interest sensitivity gap per period                                                              |       | (36,796                    | )          | 40,205                       |       | (19,428                          | )          | 63,891             |       | 47,872    |       |
| Cumulative interest sensitivity gap                                                              |       | (36,796                    | )          | 3,409                        |       | (16,019                          | )          | 47,872             |       |      |       |
|                                                                                             |       |                       |       |                         |       |                             |       |               |       |      |       |
| Cumulative gap  as a percent of total interest-earning assets                                    |       | (6.8                       | )%         | 0.6                          | %          | (3.0                             | )%         | 8.8                | %          |      |       |
| Cumulative  interest sensitive assets as a percent of cumulative interest sensitive  liabilities |       | 75.4                       | %          | 101.2                        | %          | 96.7                             | %          | 109.7              | %          |      |       |
|                                                                                                  |            |                            |            |                              |            |                                  |            |                    |            |           |            |  |  |  |  |  |

 

41

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

 

**Forward-LookingStatements**

** **

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

 

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

 

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

·                  The 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 of products andservices, including products and services offered through alternative deliverychannels such as the Internet.

·                  Technological changes implemented by us and by otherparties, including third party vendors, which may be more difficult or moreexpensive than anticipated or which may have unforeseen consequences to us andour customers.

·                  Our ability to develop and maintain secure andreliable electronic systems.

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

·                  Consumer spending and saving habits which may changein a manner that affects our business adversely.

·                  Our ability to successfully integrate acquiredbusinesses.

·                  The costs, effects and outcomes of existing or futurelitigation.

·                  Changes in accounting policies and practices, as maybe adopted by state and federal regulatory agencies and the FinancialAccounting Standards Board.

·                  The economic impact of past and any future terroristattacks, acts of war or threats thereof, and the response of the United Statesto any such threats and attacks.

 

Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements.  Additional information concerning us and ourbusiness, including other factors that could materially affect our financialresults is included in the “Risk Factors” section.

 

42

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA**

 

**REPORT OFINDEPENDENT REGISTERED**

**PUBLICACCOUNTING FIRM**

 

The Board of DirectorsLandmark Bancorp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Landmark Bancorp, Inc. andsubsidiary (the Company) as of December 31, 2007 and 2006, and therelated consolidated statements of earnings, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2007. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

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

 

In our opinion, theconsolidated financial statements referred to above, present fairly, in allmaterial respects, the financial position of the Company as of December 31,2007 and 2006, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2007, inconformity with U.S. generally accepted accounting principles.

 

/s/ KPMG LLP

 

Kansas City,MissouriMarch 14, 2008

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                               | ** ** | **December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                               | ** ** | **2007**              | ** **  | **2006** | ** ** |
| **Assets**                                                                                                                               | ** ** | ** **            | ** **  | ** ** | ** ** |
| Cash and cash  equivalents                                                                                                               |       | $                     | 14,739,148  |   | $ | 14,751,914 |   |
| Investment  securities:                                                                                                                  |       |                  |        |   |   |
| Available-for-sale,  at fair value                                                                                                       |       | 155,879,231           |        | 137,395,718 |   |
| Other securities                                                                                                                         |       | 8,844,950             |        | 8,488,450 |   |
| Loans, net                                                                                                                               |       | 376,156,608           |        | 379,323,581 |   |
| Loans held for  sale                                                                                                                     |       | 1,723,687             |        | 1,364,474 |   |
| Premises and  equipment, net                                                                                                             |       | 14,259,172            |        | 13,767,075 |   |
| Goodwill                                                                                                                                 |       | 12,894,167            |        | 13,009,167 |   |
| Other intangible  assets, net                                                                                                            |       | 3,144,001             |        | 4,030,709 |   |
| Bank owned life  insurance                                                                                                               |       | 11,634,535            |        | 11,144,796 |   |
| Accrued interest  and other assets                                                                                                       |       | 7,179,224             |        | 7,292,352 |   |
| Total assets                                                                                                                             |       | $                     | 606,454,723 |   | $ | 590,568,236 |   |
| ** **                                                                                                                               | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                            | ** ** | ** **            | ** **  | ** ** | ** ** |
| Liabilities:                                                                                                                             |       |                  |        |   |   |
| Deposits:                                                                                                                                |       |                  |        |   |   |
| Non-interest  bearing demand                                                                                                             |       | $                     | 51,007,859  |   | $ | 48,397,528 |   |
| Money market and  NOW                                                                                                                    |       | 139,557,359           |        | 137,304,086 |   |
| Savings                                                                                                                                  |       | 25,882,935            |        | 27,702,896 |   |
| Time, $100,000  and greater                                                                                                              |       | 58,980,552            |        | 57,558,624 |   |
| Time, other                                                                                                                              |       | 177,223,601           |        | 173,522,236 |   |
| Total deposits                                                                                                                           |       | 452,652,306           |        | 444,485,370 |   |
|                                                                                                                                     |       |                  |        |   |   |
| Federal Home  Loan Bank borrowings                                                                                                       |       | 69,026,525            |        | 61,920,421 |   |
| Other borrowings                                                                                                                         |       | 24,061,554            |        | 28,495,643 |   |
| Accrued  interest, taxes, and other liabilities                                                                                          |       | 8,418,200             |        | 6,430,787 |   |
| Total  liabilities                                                                                                                       |       | 554,158,585           |        | 541,332,221 |   |
|                                                                                                                                     |       |                  |        |   |   |
| Commitments and contingencies                                                                                                            |       |                  |        |   |   |
| Stockholders’ equity:                                                                                                               |       |                  |        |   |   |
| Preferred stock,  $0.01 par. Authorized 200,000 shares; none issued                                                                      |       | —                |        | — |   |
| Common stock,  $0.01 par. Authorized 5,000,000 shares; issued 2,409,125 and 2,341,744, at  December 31, 2007 and 2006, respectively |       | 24,091                |        | 23,417 |   |
| Additional  paid-in capital                                                                                                              |       | 24,304,144            |        | 22,607,510 |   |
| Retained  earnings                                                                                                                       |       | 27,493,281            |        | 26,758,056 |   |
| Treasury stock,  at cost; 7,763 and 5,000 shares at December 31, 2007 and 2006,  respectively                                       |       | (205,894              | )           | (138,506 | ) |
| Accumulated other comprehensive income (loss)                                                                                            |       | 680,516               |        | (14,462 | ) |
| Total stockholders’  equity                                                                                                         |       | 52,296,138            |        | 49,236,015 |   |
| Total  liabilities and stockholders’ equity                                                                                         |       | $                     | 606,454,723 |   | $ | 590,568,236 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Earnings**

** **
| ** **                                                        | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income:                                                  |       |                              |       |   |   |   |   |
| Loans:                                                            |       |                              |       |   |   |   |   |
| Taxable                                                           |       | $                                 | 28,315,686 |   | $ | 28,183,639 |   | $ | 17,182,314 |   |
| Tax-exempt                                                        |       | 149,121                           |       | 110,302 |   | 111,872 |   |
| Investment  securities:                                           |       |                              |       |   |   |   |   |
| Taxable                                                           |       | 4,675,107                         |       | 4,450,838 |   | 3,901,671 |   |
| Tax-exempt                                                        |       | 2,345,112                         |       | 1,511,226 |   | 818,595 |   |
| Other                                                             |       | 66,063                            |       | 138,436 |   | 110,163 |   |
| Total interest  income                                            |       | 35,551,089                        |       | 34,394,441 |   | 22,124,615 |   |
| Interest  expense:                                                |       |                              |       |   |   |   |   |
| Deposits                                                          |       | 13,505,636                        |       | 10,947,064 |   | 5,571,410 |   |
| Borrowings                                                        |       | 4,362,576                         |       | 4,691,820 |   | 3,385,864 |   |
| Total interest  expense                                           |       | 17,868,212                        |       | 15,638,884 |   | 8,957,274 |   |
| Net interest  income                                              |       | 17,682,877                        |       | 18,755,557 |   | 13,167,341 |   |
| Provision for loan losses                                         |       | 255,000                           |       | 235,000 |   | 385,000 |   |
| Net interest  income after provision for loan losses              |       | 17,427,877                        |       | 18,520,557 |   | 12,782,341 |   |
|                                                              |       |                              |       |   |   |   |   |
| Non-interest income:                                              |       |                              |       |   |   |   |   |
| Fees and service  charges                                         |       | 4,004,770                         |       | 4,310,495 |   | 3,397,050 |   |
| Gains on sales  of loans                                          |       | 955,289                           |       | 1,140,511 |   | 638,780 |   |
| Gains (losses)  on sales of investment securities                 |       | —                            |       | (300,256 | ) | 46,865 |   |
| Gains on sales  of other assets and prepayment of FHLB borrowings |       | —                            |       | 716,815 |   | 423,959 |   |
| Bank owned life  insurance                                        |       | 473,682                           |       | 397,720 |   | 89,873 |   |
| Other                                                             |       | 481,893                           |       | 647,862 |   | 459,534 |   |
| Total  non-interest income                                        |       | 5,915,634                         |       | 6,913,147 |   | 5,056,061 |   |
|                                                              |       |                              |       |   |   |   |   |
| Non-interest expense:                                             |       |                              |       |   |   |   |   |
| Compensation and  benefits                                        |       | 8,226,676                         |       | 8,725,051 |   | 6,120,365 |   |
| Occupancy and  equipment                                          |       | 2,860,629                         |       | 2,822,695 |   | 2,010,875 |   |
| Amortization of  intangibles                                      |       | 915,503                           |       | 1,029,424 |   | 449,460 |   |
| Data processing                                                   |       | 751,010                           |       | 724,542 |   | 542,780 |   |
| Professional  fees                                                |       | 437,335                           |       | 497,972 |   | 322,587 |   |
| Advertising                                                       |       | 415,020                           |       | 433,997 |   | 401,701 |   |
| Other                                                             |       | 3,032,191                         |       | 3,110,927 |   | 2,434,553 |   |
| Total  non-interest expense                                       |       | 16,638,364                        |       | 17,344,608 |   | 12,282,321 |   |
| Earnings before  income taxes                                     |       | 6,705,147                         |       | 8,089,096 |   | 5,556,081 |   |
| Income tax expense                                                |       | 1,303,083                         |       | 2,079,455 |   | 1,658,917 |   |
| Net earnings                                                      |       | $                                 | 5,402,064  |   | $ | 6,009,641 |   | $ | 3,897,164 |   |
|                                                              |       |                              |       |   |   |   |   |
| Earnings per share:                                               |       |                              |       |   |   |   |   |
| Basic                                                             |       | $                                 | 2.22       |   | $ | 2.45 |   | $ | 1.59 |   |
| Diluted                                                           |       | $                                 | 2.20       |   | $ | 2.44 |   | $ | 1.58 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

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

 
| ** **                                                                                             | ** ** | **Common stock** | ** ** | **Additional paid-in capital** | ** ** | **Retained earnings** | ** ** | **Treasury stock** | ** ** | **Accumulated other comprehensive income (loss)** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                                                                                             | ** ** | ** **       | ** ** | ** **                     | ** ** | ** **            | ** ** | ** **         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| 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 ($0.59 per share)                                                                       |       | —           |       | —                         |       | (1,444,252            | )          | —             |       | —                                            |       | (1,444,252 | )          |
| Stock based compensation                                                                               |       | —           |       | 97,826                         |       | —                |       | —             |       | —                                            |       | 97,826     |       |
| Exercise of  stock options, 12,109 shares, including tax benefit of $37,344                            |       | 121              |       | 233,311                        |       | —                |       | —             |       | —                                            |       | 233,432    |       |
| Purchase of 18 treasury shares                                                                         |       | —           |       | —                         |       | —                |       | (531               | )          | —                                            |       | (531       | )          |
| 5% stock dividend, 105,912 shares                                                                      |       | —           |       | (432,121                       | )          | (2,359,719            | )          | 2,791,840          |       | —                                            |       | —     |       |
| Balance at December 31, 2005                                                                      |       | 22,443           |       | 19,868,567                     |       | 25,322,019            |       | (414,514           | )          | (725,908                                          | )          | 44,072,607 |       |
| Comprehensive income:                                                                                  |       |             |       |                           |       |                  |       |               |       |                                              |       |       |       |
| Net income                                                                                             |       | —           |       | —                         |       | 6,009,641             |       | —             |       | —                                            |       | 6,009,641  |       |
| Change in fair  value of investment  securities available-for-sale and  interest-rate swap, net of tax |       | —           |       | —                         |       | —                |       | —             |       | 711,446                                           |       | 711,446    |       |
| Total  comprehensive income                                                                            |       | —           |       | —                         |       | 6,009,641             |       | —             |       | 711,446                                           |       | 6,721,087  |       |
| Dividends paid ($0.63 per share)                                                                       |       | —           |       | —                         |       | (1,566,656            | )          | —             |       | —                                            |       | (1,566,656 | )          |
| Stock based compensation                                                                               |       | —           |       | 113,593                        |       | —                |       | —             |       | —                                            |       | 113,593    |       |
| Exercise of  stock options, 1,867 shares, including tax benefit of $6,999                              |       | 19               |       | 33,871                         |       | —                |       | —             |       | —                                            |       | 33,890     |       |
| Purchase of 5,000 treasury shares                                                                      |       | —           |       | —                         |       | —                |       | (138,506           | )          | —                                            |       | (138,506   | )          |
| 5% stock dividend, 111,286 shares                                                                      |       | 955              |       | 2,591,479                      |       | (3,006,948            | )          | 414,514            |       | —                                            |       | —     |       |
| Balance at December 31, 2006                                                                      |       | 23,417           |       | 22,607,510                     |       | 26,758,056            |       | (138,506           | )          | (14,462                                           | )          | 49,236,015 |       |
| Comprehensive income:                                                                                  |       |             |       |                           |       |                  |       |               |       |                                              |       |       |       |
| Net income                                                                                             |       | —           |       | —                         |       | 5,402,064             |       | —             |       | —                                            |       | 5,402,064  |       |
| Change in fair  value of investment  securities available-for-sale, net of tax                         |       | —           |       | —                         |       | —                |       | —             |       | 694,978                                           |       | 694,978    |       |
| Total  comprehensive income                                                                            |       | —           |       | —                         |       | 5,402,064             |       | —             |       | 694,978                                           |       | 6,097,042  |       |
| Dividends paid ($0.72 per share)                                                                       |       | —           |       | —                         |       | (1,768,105            | )          | —             |       | —                                            |       | (1,768,105 | )          |
| Stock based compensation                                                                               |       | —           |       | 118,313                        |       | —                |       | —             |       | —                                            |       | 118,313    |       |
| Exercise of stock  options, 2,374 shares, including tax benefit of $7,543                              |       | 24               |       | 48,637                         |       | —                |       | —             |       | —                                            |       | 48,661     |       |
| Purchase of 52,240 treasury shares                                                                     |       | —           |       | —                         |       | —                |       | (1,435,788         | )          | —                                            |       | (1,435,788 | )          |
| 5% stock dividend, 114,484 shares                                                                      |       | 650              |       | 1,529,684                      |       | (2,898,734            | )          | 1,368,400          |       | —                                            |       | —     |       |
| Balance at December 31, 2007                                                                      |       | $                | 24,091     |                           | $          | 24,304,144            |       | $                  | 27,493,281 |                                              | $          | (205,894   | )          | $ | 680,516 |   | $ | 52,296,138 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

46

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                |       |                              |       |   |   |   |   |
| Net earnings                                                                         |       | $                                 | 5,402,064  |   | $ | 6,009,641 |   | $ | 3,897,164 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Provision for  loan losses                                                           |       | 255,000                           |       | 235,000 |   | 385,000 |   |
| Amortization of  intangibles                                                         |       | 915,503                           |       | 1,029,424 |   | 449,460 |   |
| Depreciation                                                                         |       | 882,825                           |       | 854,870 |   | 700,789 |   |
| Stock-based  compensation                                                            |       | 118,313                           |       | 113,593 |   | 97,826 |   |
| Deferred income  taxes                                                               |       | 114,408                           |       | 1,632,422 |   | 879,613 |   |
| Net gains on  sales of investments, premises and equipment and foreclosed assets     |       | (64,651                           | )          | (484,106 | ) | (113,032 | ) |
| Net gain on  sales of loans                                                          |       | (955,289                          | )          | (1,140,511 | ) | (638,780 | ) |
| Proceeds from  sale of loans                                                         |       | 59,436,855                        |       | 65,404,161 |   | 34,325,244 |   |
| Origination of  loans held for sale                                                  |       | (58,840,779                       | )          | (64,464,913 | ) | (34,003,672 | ) |
| Gains on  prepayments of FHLB borrowings                                             |       | —                            |       | — |   | (406,572 | ) |
| Changes in  assets and liabilities:                                                  |       |                              |       |   |   |   |   |
| Accrued interest  and other assets                                                   |       | (941,024                          | )          | (9,311,653 | ) | (1,523,646 | ) |
| Accrued  expenses, taxes, and other liabilities                                      |       | 1,447,050                         |       | (1,498,088 | ) | 1,773,946 |   |
| Net cash  provided by (used in) operating activities                                 |       | 7,770,275                         |       | (1,620,160 | ) | 5,823,340 |   |
| Cash flows from investing activities:                                                |       |                              |       |   |   |   |   |
| Net decrease in  loans                                                               |       | 2,379,082                         |       | 3,289,992 |   | 1,553,190 |   |
| Maturities and  prepayments of investment securities                                 |       | 16,489,910                        |       | 38,865,258 |   | 46,035,450 |   |
| Net cash  received in branch acquisitions                                            |       | —                            |       | — |   | 30,410,720 |   |
| Net cash paid in  FMB acquisition                                                    |       | —                            |       | (9,147,605 | ) | — |   |
| Purchases of investment  securities                                                  |       | (34,279,644                       | )          | (50,825,131 | ) | (54,933,641 | ) |
| Proceeds from  sale of investment securities                                         |       | —                            |       | 17,943,322 |   | 160,235 |   |
| Proceeds from  sales of premises and equipment and foreclosed assets                 |       | 402,777                           |       | 2,334,542 |   | 445,467 |   |
| Purchases of  premises and equipment, net                                            |       | (1,517,680                        | )          | (3,207,482 | ) | (1,921,843 | ) |
| Net cash (used  in) provided by investing activities                                 |       | (16,525,555                       | )          | (747,104 | ) | 21,749,578 |   |
| Cash flows from financing activities:                                                |       |                              |       |   |   |   |   |
| Net increase  (decrease) in deposits                                                 |       | 8,268,603                         |       | 6,490,795 |   | (4,867,797 | ) |
| Federal Home  Loan Bank advance borrowings                                           |       | —                            |       | — |   | 8,000,000 |   |
| Federal Home  Loan Bank advance repayments                                           |       | (3,036,768                        | )          | (5,536,768 | ) | (20,876,696 | ) |
| Federal Home  Loan Bank line of credit, net                                          |       | 11,100,000                        |       | (3,400,000 | ) | (3,500,000 | ) |
| Proceeds from other  borrowings                                                      |       | 4,310,000                         |       | 12,240,984 |   | 11,998,000 |   |
| Repayments on  other borrowings                                                      |       | (8,744,089                        | )          | (12,495,073 | ) | (3,470,000 | ) |
| Proceeds from  issuance of common stock under stock option plans                     |       | 41,118                            |       | 26,891 |   | 196,088 |   |
| Net tax benefit  related to stock option plans                                       |       | 7,543                             |       | 6,999 |   | 37,344 |   |
| Payment of  dividends                                                                |       | (1,768,105                        | )          | (1,566,656 | ) | (1,444,252 | ) |
| Purchase of  treasury stock                                                          |       | (1,435,788                        | )          | (138,506 | ) | (531 | ) |
| Net cash  provided by (used in) financing activities                                 |       | 8,742,514                         |       | (4,371,334 | ) | (13,927,844 | ) |
| Net (decrease)  increase in cash and cash equivalents                                |       | (12,766                           | )          | (6,738,598 | ) | 13,645,074 |   |
| Cash and cash equivalents at beginning of year                                       |       | 14,751,914                        |       | 21,490,512 |   | 7,845,438 |   |
| Cash and cash equivalents at end of year                                             |       | $                                 | 14,739,148 |   | $ | 14,751,914 |   | $ | 21,490,512 |   |
| Supplemental disclosure of cash flow information:                                    |       |                              |       |   |   |   |   |
| Cash paid during  the year for income taxes                                          |       | 553,000                           |       | 896,000 |   | — |   |
| Cash paid during  the year for interest                                              |       | 17,946,000                        |       | 14,553,000 |   | 8,583,000 |   |
| Supplemental schedule of noncash investing and  financing activities:                |       |                              |       |   |   |   |   |
| Transfer of  loans to real estate owned                                              |       | 368,000                           |       | 293,000 |   | 649,000 |   |
| Branch acquisitions:                                                                 |       |                              |       |   |   |   |   |
| Fair value of  liabilities assumed                                                   |       | —                            |       | — |   | 33,299,000 |   |
| Fair value of  assets acquired                                                       |       | —                            |       | — |   | 2,888,000 |   |
| FMB acquisition:                                                                     |       |                              |       |   |   |   |   |
| Fair value of  liabilities assumed                                                   |       | —                            |       | 123,965,000 |   | — |   |
| Fair value of  assets acquired, including goodwill                                   |       | —                            |       | 133,112,000 |   | — |   |

 

See accompanying notes toconsolidated financial statements.

 

** **

47

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

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

** **

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

*** ***

The accompanying consolidated financial statements include the accountsof the Landmark Bancorp, Inc. (the Company) and its wholly ownedsubsidiary, Landmark National Bank (the Bank).  All intercompany balances and transactionshave been eliminated in consolidation. The Bank, considered a single operatingsegment, is principally engaged in the business of attracting deposits from thegeneral public and using such deposits, together with borrowings and otherfunds, to originate commercial real estate and non-real estate loans,one-to-four family residential mortgage loans, consumer loans, and home equityloans.

 

***(b)***                      Investment Securities

*** ***

The Company has classified its investment securities portfolio asavailable-for-sale, with the exception of certain investments held forregulatory purposes.  Available-for-salesecurities are recorded at fair value, determined principally based on quotedmarket prices, with unrealized gains and losses excluded from earnings andreported as a separate component of stockholders’ equity until realized.Purchased premiums and discounts on investment securities areamortized/accreted into interest income over the estimated lives of the securitiesusing the interest method.  Declines inthe fair value of individual securities below their cost that are deemed to beother than temporary result in write-downs of individual securities to theirestimated fair value, and a new cost basis is established.  Any such write-downs are included as acomponent of earnings as realized losses. Gains and losses on sales of available-for-sale securities are recordedon a trade date basis and are calculated using the specific identificationmethod.

 

Other investments included in the Company’s investment portfolio areinvestments acquired for regulatory purposes and borrowing availability and areaccounted for at cost.  The cost of suchinvestments represents their redemption value as such investments do not have areadily determinable market value.

 

***(c)***                       Loans and Allowance 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.  Origination fees received on loans held inportfolio and the estimated costs of origination are deferred and amortized tointerest income using the interest method.

 

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 lossesare recognized through a valuation allowance as charges against income.  Origination fees and costs received on suchloans are deferred and recognized as a component of the gain or loss on sale.

 

The Company maintains an allowance to absorb probable loan lossesinherent in the portfolio.  The allowancefor loan losses is increased by charges to income and decreased by charge-offs(net of recoveries).  Management’speriodic evaluation of the adequacy of the allowance is based on the Bank’spast loan loss experience, known and inherent risks in the portfolio, adversesituations that may affect the borrower’s ability to repay, the estimated valueof any underlying collateral, the current level of nonperforming assets, andcurrent economic conditions.  This evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

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.  Factorsconsidered by management in determining if a loan is impaired include paymentstatus, collateral value, and the probability of collecting scheduled principaland interest payments when due.  Loansthat experience insignificant payment delays and payment shortfalls generallyare not classified as impaired. Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all of thecircumstances surrounding the loan and the borrower, 

 

 

48

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including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial,commercial real estate and construction loans by either the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, the loan’sobtainable market price, or the fair value of the collateral if the loan iscollateral dependent.

 

Large groups of homogeneous loans with smaller individual balances arecollectively evaluated for impairment.  Accordingly, the Company generally does notseparately identify individual consumer and residential loans for impairmentdisclosures.

 

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 areplaced on non-accrual or are charged off at an earlier date if collection ofprincipal or interest is considered doubtful.

 

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

 

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

*** ***

Premises and equipment are stated at cost less accumulateddepreciation.  Depreciation is providedon a straight-line basis over the estimated useful lives of the assets asfollows:

 

| Buildings and  improvements         |   | 10 - 50 years |
|-------------------------------------|--------|---------------|
| Furniture, fixtures,  and equipment |   | 3 - 15 years  |
| Automobiles                         |   | 2 - 5 years   |

 

Major replacements and betterments are capitalized while maintenanceand repairs are charged to expense when incurred.  Gains or losses on dispositions are reflectedin operations as incurred.

 

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

*** ***

Goodwill is not amortized; however, it is tested for impairment.  Goodwillimpairment tests are performed at each calendar year end or more frequentlywhen events or circumstances dictate. The Company’s impairment test performed as of December 31, 2007indicated that goodwill as of that date was not impaired.

 

Intangible assets include core deposit intangibles and mortgageservicing rights.  Core depositintangible assets are amortized over their estimated useful life often years on an accelerated basis. Whenfacts and circumstances indicate potential impairment, the Company will evaluatethe recoverability of the intangible asset carrying value, using estimates ofundiscounted future cash flows over the remaining asset life. Any impairmentloss is measured by the excess of carrying value over fair value.  Mortgage servicing assets arerecognized as separate assets when rights are acquired through the sale offinancial assets, primarily one-to-four family real estate loans. Mortgageservicing rights are amortized into non-interest expense in proportion to, andover the period of, the estimated future net servicing income of the underlyingfinancial assets.  Servicing assets arerecorded at the lower of amortized cost or fair value, and are evaluated forimpairment based upon the fair value of the retained rights as compared toamortized cost.

 

***(f)***                         Income Taxes

*** ***

The objectives of accounting for income taxes are to recognize theamount of taxes payable or refundable for the current year and deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the futuretax consequences of events that have been recognized in financial statements ortax returns.  The Company adopted FIN 48,on January 1, 2007, in which an income tax position will be recognizedonly if it is more 

 

 

49

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likely than not that it will be sustained upon IRS examination, basedupon its technical merits.  Once thatstatus is met, the amount recorded will be the largest amount of benefit thatis greater than 50 percent likely of being realized upon ultimatesettlement.  Changes in estimatesregarding the actual outcome of these future tax consequences, including theeffects of IRS examinations and examinations by other state agencies, couldmaterially impact our financial position and results of operations.

 

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

*** ***

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires the Company to make estimates and assumptions that affect the reportedamount of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

***(h)***                      Comprehensive Income

*** ***

The Company’s other comprehensive income (loss) consists of unrealizedholding gains and losses on available-for-sale securities and an unrealizedgain on an interest rate swap (terminated in 2006) as shown below:

 

| ** **                                                              | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Unrealized  holding gains (losses) on securities and interest rate swap |       | $                                 | 1,120,932  |   | $ | 952,255 |   | $ | (1,372,504 | ) |
| Less  reclassification adjustment for gains (losses) included in income |       | —                            |       | (195,239 | ) | 46,865 |   |
| Net unrealized  gains (losses)                                          |       | 1,120,932                         |       | 1,147,494 |   | (1,419,369 | ) |
| Income tax expense (benefit)                                            |       | 425,954                           |       | 436,048 |   | (539,360 | ) |
| Other  comprehensive income (loss)                                      |       | $                                 | 694,978    |   | $ | 711,446 |   | $ | (880,009 | ) |

 

Accumulated other comprehensive income related entirely toavailable-for-sale investment securities at December 31, 2007 and 2006.

 

***(i)***                         Foreclosed Assets

*** ***

Assets acquired through, or in lieu of, foreclosure are to be sold andare initially recorded at the date of foreclosure at fair value through a gainor a charge to the allowance for loan losses, establishing a new costbasis.  Subsequent to foreclosure, theCompany records a charge to operations if the carrying value of a propertyexceeds the fair value less estimated costs to sell.  Revenue and expenses from operations andsubsequent declines in fair value are included in other non-interest expense inthe statement of earnings.

 

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

*** ***

The Company has a stock-based employee compensation plan, which isdescribed more fully in note 11. Prior to January 1, 2006, the Company utilized the fair valuerecognition provisions of Statement of Financial Accounting Standard (SFAS)Statement No. 123, *Accounting for Stock-BasedCompensation*.  SFAS 123established a fair-value method of accounting for employee stock options orsimilar equity instruments.  In December 2004,The Financial Accounting Standards Board issued SFAS No. 123(R), *Shared-Based Payment*. The revision retains the provisions of fair value recognition in SFAS123, however also contains additional guidance in several areas including awardmodifications and forfeitures, measuring fair value, classifying an award asequity or as a liability, and attributing compensation cost to reportingperiods.  It also contains additionaldisclosure requirements.  The Company’sadoption of the revised Statement on January 1, 2006 using the modifiedprospective method of adoption, was limited to a change in the method ofaccounting for forfeitures, and did not have a material effect on itsconsolidated financial statements.

 

 

50

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The fair value of stock options awarded to employees is calculatedthrough the use of an option pricing model, which requires subjectiveassumptions, including future stock price volatility and expected term, whichgreatly affect the calculated values. The Company uses the Black-Scholes option pricing model to estimate thegrant date fair value of its stock options. The grant date fair value is recognized as compensation expense over theoption vesting period, on a straight-line basis, which is typically four orfive years.

 

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

*** ***

Basic earnings per share represents net earnings divided by theweighted average number of common shares outstanding during the year.  Diluted earnings per share reflect additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would resultfrom the assumed issuance.  Potentialcommon shares that may be issued by the Company relate solely to outstandingstock options and are determined using the treasury stock method using theaverage market price of the Company’s stock for the respective periods.

 

The shares used in the calculation of basic and diluted earnings pershare, which have been adjusted to give effect for the 5% stock dividends paidby the Company in December 2007, 2006, and 2005, are shown below:

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings available to common shareholders        |       | $                                 | 5,402,064  |   | $ | 6,009,641 |   | $ | 3,897,164 |   |
|                                                 |       |                              |       |   |   |   |   |
| Weighted average common shares outstanding - basic   |       | 2,431,881                         |       | 2,454,683 |   | 2,448,630 |   |
| Assumed exercise of stock options                    |       | 18,100                            |       | 12,251 |   | 10,252 |   |
| Weighted average common shares outstanding - diluted |       | 2,449,981                         |       | 2,466,934 |   | 2,458,882 |   |
|                                                 |       |                              |       |   |   |   |   |
| Net earnings per share                               |       |                              |       |   |   |   |   |
| Basic                                                |       | $                                 | 2.22       |   | $ | 2.45 |   | $ | 1.59 |   |
| Diluted                                              |       | $                                 | 2.20       |   | $ | 2.44 |   | $ | 1.58 |   |

 

***(l)***                         Treasury Stock

*** ***

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

 

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

*** ***

In the consolidated statements of cash flows, cash and cash equivalentsinclude cash on hand, amounts due from banks and federal funds sold assegregated in the accompanying consolidated balance sheets.

 

***(n)***                      Derivative Financial Instruments

*** ***

The Company is exposed to market risk, primarily relating to changes ininterest rates.  To manage the volatilityrelating to these exposures, the Company’s risk management policies permit itsuse of derivative instruments.  TheCompany uses derivatives on a limited basis mainly to stabilize interest ratemargins.  The Company more often managesnormal asset and liability positions by altering the terms of the products itoffers.

 

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 adjustments to fair value recorded incurrent earnings.  Derivatives thatqualify in a hedging relationship are designated, based on the exposure beinghedged, as fair value or cash flow hedges. Under the cash flow hedging model, the effective portion of the changein the gain or loss related to the derivative is recognized as a component ofother comprehensive income, net of taxes. The ineffective portion is recognized in current earnings.  The Company had no derivative financialinstruments designated as hedging instruments as of December 31, 2007 and2006.

 

 

51

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The Company enters intointerest rate lock commitments on certain mortgage loans, which are commitmentsto originate loans whereby the interest rate on the loan is determined prior tofunding.  The Company also has correspondingforward sales contracts related to these interest rate lock commitments.  Both the mortgage loan commitments and therelated forward sales contracts are accounted for as derivatives and carried atfair value with changes in fair value recorded in income.

 

**(2)****                                ****Goodwill and Intangible Assets**

 

The Company’s goodwilland core deposit intangible assets resulted from the acquisition of MNBBancshares, Inc. (MNB) by Landmark Bancorp, Inc. on October 9,2001, the acquisition of First Kansas Financial Corporation (First Kansas) on April 1,2004, the purchase of two branch locations in Great Bend, Kansas on August 19,2005, and from the acquisition of First Manhattan Bancorporation, Inc.(“FMB”) on January 1, 2006. Goodwill was reduced by $115,000 in 2007 due to the statute oflimitations expiring on certain tax uncertainties acquired from theseacquisitions.

 

The following is ananalysis of the changes in core deposit intangible assets:

 
| ** **                      | ** ** | **Years ended December 31,**     | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **Fair value   at  acquisition** | ** ** | **Accumulated amortization** | ** ** | **Fair value   at  acquisition** | ** ** | **Accumulated amortization** | ** ** | **Fair value   at  acquisition** | ** ** | **Accumulated amortization** | ** ** |
| Balance at  beginning of period |       | $                                | 5,396,065  |   | $ | (1,667,478 | ) | $ | 2,818,603 |   | $ | (774,589 | ) | $ | 1,385,000 |   | $ | (491,501 | ) |
| Additions                       |       | —                           |       | — |   | 2,577,462 |   | — |   | 1,433,603 |   | — |   |
| Amortization                    |       | —                           |       | (794,778 | ) | — |   | (892,889 | ) | — |   | (283,088 | ) |
| Balance at end  of period       |       | $                                | 5,396,065  |   | $ | (2,462,256 | ) | $ | 5,396,065 |   | $ | (1,667,478 | ) | $ | 2,818,603 |   | $ | (774,589 | ) |

 

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

 
|                            |   | **Years ended December 31,** |       |
|---------------------------------|--------|------------------------------|------------|
|                            |   | **2007**                     | ** ** | **2006** |   | **2005** |   |
|                            |   | **Cost**                     | ** ** | **Accumulated amortization** | ** ** | **Cost** | ** ** | **Accumulated amortization** | ** ** | **Cost** | ** ** | **Accumulated amortization** |   |
| Balance at  beginning of period |   | $                            | 791,840    |   | $ | (489,718 | ) | $ | 775,666 |   | $ | (401,467 | ) | $ | 766,891 |   | $ | (320,559 | ) |
| Additions                       |   | 28,795                       |       | — |   | 64,458 |   | — |   | 94,239 |   | — |   |
| Prepayments/maturities          |   | (50,463                      | )          | 50,463 |   | (48,284 | ) | 48,284 |   | (85,464 | ) | 85,464 |   |
| Amortization                    |   | —                       |       | (120,725 | ) | — |   | (136,535 | ) | — |   | (166,372 | ) |
| Balance at end  of period       |   | $                            | 770,172    |   | $ | (559,980 | ) | $ | 791,840 |   | $ | (489,718 | ) | $ | 775,666 |   | $ | (401,467 | ) |

 

The following isestimated amortization expense for the years ending December 31:

 

| **Year:**  | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2008       |       | $          | 817,000    |   |
| 2009       |       | 689,000    |       |
| 2010       |       | 500,000    |       |
| 2011       |       | 402,000    |       |
| 2012       |       | 308,000    |       |
| Thereafter |       | $          | 428,000    |   |

 

52

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**(3)****                                ****Investment Securities**

 

A summary of investmentsecurities available-for-sale is as follows:

 
| ** **                  | ** ** | **As of December 31, 2007** | ** **  |
|-----------------------------|------------|----------------------------------|-------------|
| ** **                  | ** ** | ** **                       | ** **  | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                    | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **Estimated** | ** ** |
| ** **                  | ** ** | **cost**                         | ** **  | **gains** | ** ** | **losses** | ** ** | **fair value** | ** ** |
|                        |       |                             |        |   |   |   |   |   |   |
| U. S. Government and agency |       | $                                | 47,917,353  |   | 803,859 |   | (13,679 | ) | 48,707,533 |   |
| Municipal obligations       |       | 62,238,749                       |        | 235,030 |   | (360,395 | ) | 62,113,384 |   |
| Mortgage-backed securities  |       | 36,153,501                       |        | 248,369 |   | (185,881 | ) | 36,215,989 |   |
| Corporate bonds             |       | 2,498,234                        |        | 1,500 |   | (6,789 | ) | 2,492,945 |   |
| Common stocks               |       | 746,293                          |        | 387,093 |   | (11,500 | ) | 1,121,886 |   |
| Other investments           |       | 5,227,494                        |        | — |   | — |   | 5,227,494 |   |
|                        |       |                             |        |   |   |   |   |   |   |
| Total                       |       | $                                | 154,781,624 |   | 1,675,851 |   | (578,244 | ) | 155,879,231 |   |

 
|                        |   | **As of December 31, 2006** |        |
|-----------------------------|--------|----------------------------------|-------------|
|                        |   | ** **                       |        | **Gross** |   | **Gross** |   |   |   |
|                        |   | **Amortized**                    |        | **unrealized** |   | **unrealized** |   | **Estimated** |   |
|                        |   | **cost**                         |        | **gains** |   | **losses** |   | **fair  value** |   |
|                        |   |                             |        |   |   |   |   |   |   |
| U. S. Government and agency |   | $                                | 46,723,566  |   | 246,621 |   | (338,470 | ) | 46,631,717 |   |
| Municipal obligations       |   | 55,140,998                       |        | 228,981 |   | (306,268 | ) | 55,063,711 |   |
| Mortgage-backed securities  |   | 32,525,591                       |        | 185,324 |   | (487,056 | ) | 32,223,859 |   |
| Corporate bonds             |   | 2,522,187                        |        | 9,313 |   | — |   | 2,531,500 |   |
| Common stocks               |   | 277,713                          |        | 440,480 |   | (2,250 | ) | 715,943 |   |
| Other investments           |   | 228,988                          |        | — |   | — |   | 228,988 |   |
|                        |   |                             |        |   |   |   |   |   |   |
| Total                       |   | $                                | 137,419,043 |   | 1,110,719 |   | (1,134,044 | ) | 137,395,718 |   |

 

The tables above showthat some of the securities in the available for sale investment portfolio hadunrealized losses, or were temporarily impaired, as of December 31,2007.  This temporary impairmentrepresents the estimated amount of loss that would be realized if thesecurities were sold on the valuation date. Securities which were temporarily impaired are shown below, along withthe length of the impairment period.

 
| ** **                               | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Number**                       | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **of**                           | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **securities**                   | ** ** | **value** | ** ** | **losses** | ** ** | **value** | ** ** | **losses** | ** ** | **value** | ** ** | **losses** | ** ** |
| U. S. Government  and agency obligations |       | 12                               |       | $ | 177,345 |   | (812 | ) | 8,760,051 |   | (12,867 | ) | 8,937,396 |   | (13,679 | ) |
| Municipal obligations                    |       | 96                               |       | 11,344,918 |   | (182,297 | ) | 20,375,941 |   | (178,098 | ) | 31,720,859 |   | (360,395 | ) |
| Corporate bonds                          |       | 2                                |       | 1,492,407 |   | (6,789 | ) | — |   | — |   | 1,492,407 |   | (6,789 | ) |
| Mortgage-backed  securities              |       | 40                               |       | 6,819,368 |   | (40,349 | ) | 11,836,832 |   | (145,532 | ) | 18,656,200 |   | (185,881 | ) |
| Common stocks                            |       | 2                                |       | 20,850 |   | (4,150 | ) | 67,650 |   | (7,350 | ) | 88,500 |   | (11,500 | ) |
|                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                    |       | 152                              |       | $ | 19,854,888 |   | (234,397 | ) | 41,040,474 |   | (343,847 | ) | 60,895,362 |   | (578,244 | ) |

 

53

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|                                     |   | **As of December 31, 2006** |       |
|------------------------------------------|--------|----------------------------------|------------|
|                                     |   | **Number**                       | ** ** | **Less than 12 months** | ** ** | **12 months or longer** |   | **Total** |   |
|                                     |   | **of**                           | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** |   |
|                                     |   | **securities**                   | ** ** | **value** | ** ** | **losses** | ** ** | **value** | ** ** | **losses** | ** ** | **value** | ** ** | **losses** |   |
| U. S. Government  and agency obligations |   | 30                               |       | $ | 4,446,999 |   | (19,430 | ) | 22,289,397 |   | (319,049 | ) | 26,736,396 |   | (338,470 | ) |
| Municipal  obligations                   |   | 103                              |       | 9,933,190 |   | (112,694 | ) | 17,927,007 |   | (193,574 | ) | 27,860,976 |   | (306,268 | ) |
| Mortgage-backed  securities              |   | 49                               |       | 2,927,288 |   | (70,005 | ) | 17,045,301 |   | (417,051 | ) | 19,972,589 |   | (487,056 | ) |
| Common stocks                            |   | 1                                |       | 72,750 |   | (2,250 | ) | — |   | — |   | 72,750 |   | (2,250 | ) |
|                                     |   |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                    |   | 183                              |       | $ | 17,380,227 |   | (204,379 | ) | 57,261,705 |   | (929,674 | ) | 74,642,711 |   | (1,134,044 | ) |

 

The decrease in fairvalue of the securities in an unrealized loss position is related to interestrate changes.  None of the unrealizedlosses are related to credit deterioration. The Company has the intent and ability to hold these securities untilmarket values recover, including up to the maturity date.

 

Maturities of investmentsecurities at December 31, 2007 are as follows:

 
| ** **                                                      | ** ** | **Amortized** | ** **  | **Estimated**  | ** **  |
|-----------------------------------------------------------------|------------|---------------|-------------|----------------|-------------|
| ** **                                                      | ** ** | **cost**      | ** **  | **fair value** | ** **  |
| Due in less than one year                                       |       | $             | 13,653,773  |           | 13,651,429  |   |
| Due after one year but within five years                        |       | 42,434,277    |        | 43,175,617     |        |
| Due after five years                                            |       | 56,566,286    |        | 56,486,816     |        |
| Mortgage-backed securities, common stock and other  investments |       | 42,127,288    |        | 42,565,369     |        |
|                                                            |       |          |        |           |        |
| Total                                                           |       | $             | 154,781,624 |           | 155,879,231 |   |

 

For mortgage-backedsecurities, actual maturities will differ from contractual maturities becauseborrowers have the right to prepay obligations with or without prepaymentpenalties.  At December 31, 2007,the Company’s mortgage-backed securities portfolio consisted of securitiespredominantly underwritten to the standards and guaranteed by thegovernment-sponsored agencies of FHLMC, FNMA and GNMA.

 

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

 
| ** **      | ** ** | **Years ended December 31,** | ** ** |
|-----------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Realized gains  |       | $                                 | —     |   | 143,541 |   | 47,075 |   |
| Realized losses |       | —                            |       | (443,797 | ) | (210 | ) |
|            |       |                              |       |   |   |   |   |
| Total           |       | $                                 | —     |   | (300,256 | ) | 46,865 |   |

 

At December 31,2007, securities pledged to secure public funds on deposit had a carrying valueof approximately $106.6 million. Except for U. S. government and agency obligations, no investment in asingle issuer exceeded 10% of stockholders’ equity.

 

Other investmentsecurities include investments in Federal Home Loan Bank (“FHLB”) and FederalReserve Bank (“FRB”) stock.  The value ofthe FHLB stock at December 31, 2007 and 2006 was $7.1 million and $6.8million, respectively and the value of the FRB stock at December 31, 2007and 2006 was $1.7 million.

 

54

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

 

Loans consist of thefollowing:

 
| ** **                                       | ** ** | **December 31,** | ** **  | **December 31,** | ** **  |
|--------------------------------------------------|------------|-----------------------|-------------|-----------------------|-------------|
| ** **                                       | ** ** | **2007**              | ** **  | **2006**              | ** **  |
| Real estate loans:                               |       |                  |        |                  |        |
| One-to-four  family residential                  |       | $                     | 126,459,081 |                  | 151,299,911 |   |
| Commercial                                       |       | 113,209,220           |        | 98,314,119            |        |
| Construction                                     |       | 27,936,176            |        | 33,600,313            |        |
| Commercial loans                                 |       | 103,098,695           |        | 90,758,185            |        |
| Consumer loans                                   |       | 9,164,122             |        | 9,595,428             |        |
|                                             |       |                  |        |                  |        |
| Total                                            |       | 379,867,294           |        | 383,567,956           |        |
|                                             |       |                  |        |                  |        |
| Less:                                            |       |                  |        |                  |        |
| Deferred loan fees/(costs)  and loans in process |       | (460,981              | )           | 214,665               |        |
| Allowance for  loan losses                       |       | 4,171,667             |        | 4,029,710             |        |
|                                             |       |                  |        |                  |        |
| Loans, net                                       |       | $                     | 376,156,608 |                  | 379,323,581 |   |

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course of businessto meet customers’ financing needs. These financial instruments consist principally of commitments to extendcredit.  The Company uses the same creditpolicies in making commitments and conditional obligations as it does foron-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 the normal course of business, there arevarious commitments and contingent liabilities, such as commitments to extendcredit, letters of credit, and lines of credit, the balance of which are notrecorded in the accompanying consolidated financial statements.  The Company generally requires collateral orother security on unfunded loan commitments and irrevocable letters ofcredit.  Unfunded commitments to extendcredit, excluding standby letters of credit, aggregated $72.3 million and$63.2 million at December 31, 2007 and 2006, respectively.  Standby letters of credit totaled $2.0million and $3.0 at December 31, 2007 and 2006, respectively.

 

The Company is exposed tovarying risks associated with concentrations of credit relating primarily tolending activities in specific geographic areas.  The Company’s principal lending area consistsof the cities of Manhattan, Auburn, Dodge City, Garden City, Great Bend,Hoisington, Junction City, LaCrosse, Lawrence, Osage City, Topeka, Wamego,Paola, Osawatomie, Louisburg, and Fort Scott, Kansas and the surroundingcommunities, and substantially all of the Company’s loans are to residents ofor secured by properties located in its principal lending area.  Accordingly, the ultimate collectibility ofthe Company’s loan portfolio is dependent in part upon market conditions inthose areas.  These geographic concentrationsare considered in management’s establishment of the allowance for loan losses.

 

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

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance at beginning of year |       | $                                 | 4,029,710  |   | 3,151,373 |   | 2,893,603 |   |
| Allowance of acquired bank   |       | —                            |       | 891,374 |   | — |   |
| Provision for loan losses    |       | 255,000                           |       | 235,000 |   | 385,000 |   |
| Charge-offs                  |       | (203,968                          | )          | (339,637 | ) | (222,379 | ) |
| Recoveries                   |       | 90,925                            |       | 91,600 |   | 95,149 |   |
| Balance at end of year       |       | $                                 | 4,171,667  |   | 4,029,710 |   | 3,151,373 |   |

 

55

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The following tablepresents information on impaired loans as of December 31:

 
| ** **                                               | ** ** | **2007**  | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|----------|------------|
| Impaired loans for which an allowance has been  provided |       | $         | 4,782,563  |     | 3,567,206  |   |
| Impaired loans for which no allowance has been  provided |       | 6,502,312 |       | —   |       |
| Total impaired loans                                     |       | $         | 11,284,875 |     | 3,567,206  |   |
| Allowance related to impaired loans                      |       | $         | 1,706,648  |     | 274,000    |   |

 

 

Under the original termsof the Company’s impaired loans as of December 31, 2007, interest earnedon such loans for the year ended December 31, 2007 would have increasedinterest income by $520,000.  There wereno loans 90 days delinquent and still accruing interest at December 31,2007 and 2006.  Average impaired loanswere $5.7 million for 2007, $4.2 million for 2006, and $2.0 million for 2005.

 

The Company providesservicing on loans for others with outstanding principal balances of$91.0 million and $101.8 million at December 31, 2007 and 2006,respectively.  Gross service fee incomerelated to such loans was $243,000, $266,000, and $276,000 for the years ended December 31,2007, 2006, and 2005, respectively, and is included in fees and service chargesin the consolidated statements of earnings.

 

The Company had loans todirectors and officers at December 31, 2007 and 2006, which carry termssimilar to those for other loans. Management believes such outstanding loans do not represent more than anormal risk of collection.  A summary ofsuch loans is as follows:

 

| Balance at December 31, 2006 |   | $          | 7,325,065 |   |
|-----------------------------------|--------|------------|-----------|--------|
| New loans                         |   | 7,674,013  |      |
| Repayments                        |   | (7,702,917 | )         |
| Balance at December 31, 2007 |   | $          | 7,296,161 |   |

 

 

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

 

Premises and equipmentconsisted of the following:

 

| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Land                              |       | $                           | 3,787,696  |   | 3,302,696 |   |
| Office buildings and improvements |       | 11,379,922                  |       | 10,870,636 |   |
| Furniture and equipment           |       | 5,833,346                   |       | 5,636,132 |   |
| Automobiles                       |       | 263,509                     |       | 263,509 |   |
| Total                             |       | $                           | 21,264,473 |   | 20,072,973 |   |
| Less accumulated depreciation     |       | 7,005,301                   |       | 6,305,898 |   |
| Total                             |       | $                           | 14,259,172 |   | 13,767,075 |   |

 

The Company hasmulti-year operating lease agreements for several of its branch locations.  The following table includes the Company’sminimum lease commitments for the years ending December 31:

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2008     |       | $          | 63,684     |   |
| 2009     |       | 57,753     |       |
| 2010     |       | 6,160      |       |
| 2011     |       | —     |       |
| 2012     |       | —     |       |
| Total    |       | $          | 127,597    |   |

 

56

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Total rent expense for the years ended December 31,2007, 2006 and 2005 was $152,000, $188,000 and $134,000, respectively, and wasincluded in occupancy and equipment on the consolidated statements of earnings.

 

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

 

Maturities of time deposits were as follows at December 31,2007:

 

| **Year**   | ** ** | **Amount** | ** **  |
|------------|------------|------------|-------------|
| 2008       |       | $          | 205,972,685 |   |
| 2009       |       | 14,360,801 |        |
| 2010       |       | 10,896,406 |        |
| 2011       |       | 1,919,166  |        |
| 2012       |       | 2,416,735  |        |
| Thereafter |       | 638,360    |        |
| Total      |       | $          | 236,204,153 |   |

 

Regulations of the Federal Reserve System requirereserves to be maintained by all banking institutions according to the typesand amounts of certain deposit liabilities. These requirements restrict a portion of the amounts shown asconsolidated cash and due from banks from everyday usage in operation of thebanks.  The minimum reserve requirementsfor the Bank totaled $25,000 at December 31, 2007.

 

**(7)****                                 FederalHome Loan Bank Borrowings**

** **

Advances from the FHLB, excluding line of creditadvances, at December 31, 2007 and 2006, amounted to $57,926,525 and$61,920,421, respectively.  Maturities ofsuch borrowings at December 31, 2007, are summarized as follows:

 

| **Year ending December 31,** | ** ** | **Amount** | ** ** | **Rates**    | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|
| 2008                              |       | $          | 2,000,000  |         | 4.74       | % |
| 2009                              |       | 35,933,554 |       | 2.95% - 5.85 | %          |
| 2010                              |       | 15,582,939 |       | 2.72% - 4.80 | %          |
| 2011                              |       | —     |       | —       |       |
| 2012                              |       | —     |       | —       |       |
| Thereafter                        |       | 4,410,032  |       | 3.81% - 6.46 | %          |
| Total                             |       | $          | 57,926,525 |         |       |   |

 

Included in the table above are $20.0 million inadvances with the FHLB which have a variable rate, tied to one-month short-termadvance rate, adjustable monthly, and mature in 2009 with no prepaymentpenalties.  All of the Bank’s remainingadvances with the FHLB have fixed rates and prepayment penalties.  However, certain borrowings contain aconversion option at which on certain dates the FHLB may exercise an option toconvert the borrowing to a variable rate equal to the FHLB one month short-termadvance rate, adjustable monthly.  TheBank would then have the option to prepay the advances without penalty.  The Bank may refinance the advance at eachrespective reset date if the FHLB first exercises its option to convert thefixed-rate borrowing.

 

Additionally, the Bank also has a line of credit,renewable annually each September, with the FHLB under which there were $11.1million of outstanding borrowings as of December 31, 2007.  There were no outstanding borrowings at December 31,2006.  Interest on any outstandingbalances on the line of credit accrues at the federal funds market rate plus0.15% (4.67% at December 31, 2007).

 

57

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Although no loans are specifically pledged, the FHLBrequires the Bank to maintain eligible collateral (qualifying loans andinvestment securities) that has a lending value at least equal to its requiredcollateral. At December 31, 2007 and 2006, the Bank’s total borrowingcapacity with the FHLB was approximately $117.9 million and$120.8 million, respectively.

 

**(8)****                                 OtherBorrowings**

** **

In 2003, the Company issued $8.2 million ofsubordinated debentures.  Thesedebentures, which are due in 2034 and are redeemable beginning in 2009, wereissued to a wholly owned grantor trust (“the Trust”) formed to issue preferredsecurities representing undivided beneficial interests in the assets of theTrust.  The Trust then invested the grossproceeds of such preferred securities in the debentures.  The Trust’s preferred securities and thesubordinated debentures require quarterly interest payments and have variablerates, adjustable quarterly.  Interest accruesat LIBOR plus 2.85%.  The interest ratesat December 31, 2007 and 2006 were 7.83% and 8.23%, respectively.

 

In 2005, the Company issued an additional $8.2 millionof subordinated debentures.  Thesedebentures, which are due in 2036 and are redeemable beginning in 2011, wereissued to a wholly owned grantor trust (“Trust II”) formed to issue preferredsecurities representing undivided beneficial interests in the assets of TrustII.  Trust II then invested the grossproceeds of such preferred securities in the debentures.  Trust II’s preferred securities and thesubordinated debentures require quarterly interest payments and have variablerates, adjustable quarterly.  Interestaccrues at LIBOR plus 1.34% on $5.2 million of the subordinated debentures,while the remaining $3.0 million of the subordinated debentures has a fixed rateof 6.17%.  The blended interest rate at December 31,2007 and 2006 were 6.27% and 6.50%, respectively.

 

While these Trusts are accounted for as unconsolidatedequity investments under the requirements of Financial AccountingInterpretation No. 46R, *Consolidation of VariableInterest Entities*, a portion of the trust preferred securitiesissued by the Trust qualifies as Tier 1 Capital for regulatory purposes.

 

The Company has an $8.3 million line of credit from anunrelated financial institution maturing on March 31, 2009, with aninterest rate that adjusts daily based on the prime rate less 0.75%.  This line of credit has covenants specific tocapital and other ratios, which the Company was in compliance with at December 31,2007.  The outstanding balance of theline of credit at December 31, 2007 and 2006, was $2.7 million and $4.7million, respectively, and is included in other borrowings.  The Company had an interest rate swap inplace effectively fixing the interest rate on $3.0 million of the variable rateterm debt to a fixed rate of 5.68%.  Netamounts paid or received under the swap were accounted for on an accrual basisand recognized as a component of interest expense.  During 2006 and 2005, this agreement reducedour interest expense by $54,000 and $0, respectively.  The Company applied cash flow hedgeaccounting to the interest rate swap before terminating the instrument in2006.  Upon termination, the fair valueof the swap of $105,000 was reclassified from accumulated other comprehensiveincome (loss), net of taxes, and recorded in other income.  Additionally, the Bank had $4,880,554 and$7,269,643 in repurchase agreements outstanding and included in otherborrowings at December 31, 2007 and 2006.

 

**(9)****                                 IncomeTaxes**

** **

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Financial Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*” (“FIN 48”) on January 1,2007.  FIN 48 provides a comprehensivemodel for the financial statement recognition, measurement, presentation anddisclosure of uncertain tax positions taken or expected to be taken in incometax returns.  Unrecognized tax benefitsrepresent tax positions for which reserves have been established.  The Company’s adoption of FIN 48 did not haveany effect on its consolidated financial statements.  As of the date of adoption, our grossunrecognized tax benefits totaled approximately $970,000.  The anticipated amount of unrecognized taxbenefits that, if recognized, would favorably impact the effective tax rate was$581,000 as of January 1, 2007.  Wealso had accrued interest and penalties of $193,000, as of January 1,2007.  We recognize interest andpenalties related to unrecognized tax benefits as a component of income taxexpense in our consolidated statements of earnings.

 

58

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A reconciliation of the beginning and ending amount ofunrecognized tax benefits is as follows:

 

| Unrecognized tax benefits balance at January 1,  2007   |   | $        | 970,000 |   |
|--------------------------------------------------------------|--------|----------|---------|--------|
| Gross increases to  current year tax positions               |   | 291,000  |    |
| Gross decreases  to prior year’s tax positions          |   | (21,000  | )       |
| Lapse of statute  of limitations                             |   | (388,000 | )       |
| Unrecognized tax benefits balance at  December 31, 2007 |   | $        | 852,000 |   |

 

Tax years that remain open and subject to auditinclude the years 2004 through 2007 for both federal and state.  During 2007 we recognized $388,000 ofpreviously unrecognized tax benefits. Our gross unrecognized tax benefits balance of $852,000, at December 31,2007, would favorably impact our effective tax rate by $563,000 ifrecognized.  As of December 31, 2007we have accrued interest and penalties of $190,000.  We believe that it is reasonably possiblethat a reduction in gross unrecognized tax benefits of up to $210,000 ispossible during the next 12 months.

 

Income tax expense attributable to income fromoperations consisted of:

 

| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current:           |       |                              |       |   |   |   |   |
| Federal            |       | $                                 | 1,084,999  |   | 510,747 |   | 649,306 |   |
| State              |       | 103,676                           |       | (63,714 | ) | 129,998 |   |
| Total current      |       | 1,188,675                         |       | 447,033 |   | 779,304 |   |
|               |       |                              |       |   |   |   |   |
| Deferred:          |       |                              |       |   |   |   |   |
| Federal            |       | 109,810                           |       | 1,446,828 |   | 758,499 |   |
| State              |       | 4,598                             |       | 185,594 |   | 121,114 |   |
| Total deferred     |       | 114,408                           |       | 1,632,422 |   | 879,613 |   |
|               |       |                              |       |   |   |   |   |
| Income tax expense |       | $                                 | 1,303,083  |   | 2,079,455 |   | 1,658,917 |   |

 

 

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

 
| ** **                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income tax from  operations                                                                                                   |       | $                                 | 1,303,083  |   | 2,079,455 |   | 1,658,917 |   |
| Stockholders’ equity,  recognition of tax benefit for stock options exercised                                            |       | (7,543                            | )          | (6,999 | ) | (37,344 | ) |
| Stockholders’ equity,  recognition of unrealized (losses)/gains on available-for-sale securities and  interest rate swap |       | 425,955                           |       | 436,047 |   | (539,360 | ) |
|                                                                                                                          |       | $                                 | 1,721,495  |   | 2,508,503 |   | 1,082,213 |   |

 

59

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The reasons for the difference between actual incometax expense and expected income tax expense attributable to income fromoperations at the 34% statutory federal income tax rate were as follows:

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Computed “expected” tax expense            |       | $                                 | 2,279,750  |   | 2,750,293 |   | 1,889,067 |   |
| Increase (reduction) in income taxes resulting from: |       |                              |       |   |   |   |   |
| Tax-exempt  interest income, net                     |       | (717,012                          | )          | (479,686 | ) | (294,489 | ) |
| Bank owned life  insurance                           |       | (159,802                          | )          | (139,138 | ) | (26,078 | ) |
|                                                 |       |                              |       |   |   |   |   |
| State income  taxes, net of federal benefit          |       | 71,220                            |       | 78,831 |   | 170,015 |   |
| Investment tax  credits                              |       | (115,995                          | )          | (130,000 | ) | (125,000 | ) |
| Other, net                                           |       | (55,078                           | )          | (845 | ) | 45,402 |   |
|                                                 |       | $                                 | 1,303,083  |   | 2,079,455 |   | 1,658,917 |   |

 

The tax effects of temporary differences that giverise to the significant portions of the deferred tax assets and liabilities atthe following dates were as follows:

 
| ** **                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Deferred tax assets:                                         |       |                  |       |                  |       |
| FHLB advances                                                |       | $                     | 515,607    |                  | 841,031    |   |
| Loans, including  allowance for loan losses                  |       | 1,105,739             |       | 713,572               |       |
| Unrealized loss  on investment securities available-for-sale |       | —                |       | 8,863                 |       |
| Net operating  loss carry forwards                           |       | 862,154               |       | 1,032,428             |       |
| Federal  alternative minimum tax credit carryforward         |       | 699,759               |       | 554,733               |       |
| Deferred  compensation arrangements                          |       | 306,879               |       | 324,622               |       |
| State taxes                                                  |       | 248,034               |       | 233,059               |       |
| Accrued expenses                                             |       | 8,284                 |       | 36,016                |       |
| Other, net                                                   |       | 11,172                |       | —                |       |
| Total deferred  tax assets                                   |       | 3,757,628             |       | 3,744,324             |       |
| Less valuation  allowance                                    |       | 263,403               |       | 181,510               |       |
|                                                         |       |                  |       |                  |       |
| Net deferred tax  assets                                     |       | 3,494,225             |       | 3,562,814             |       |
|                                                         |       |                  |       |                  |       |
| Deferred tax  liabilities:                                   |       |                  |       |                  |       |
| FHLB stock  dividends                                        |       | 904,926               |       | 785,144               |       |
| Investments                                                  |       | 13,205                |       | 40,871                |       |
| Intangible  assets                                           |       | 617,511               |       | 813,853               |       |
| Premises and  equipment, net of depreciation                 |       | 888,255               |       | 721,934               |       |
| Unrealized gain  on investment securities available-for-sale |       | 417,091               |       | —                |       |
| Other, net                                                   |       | —                |       | 7,413                 |       |
| Total deferred  tax liabilities                              |       | 2,840,988             |       | 2,369,215             |       |
|                                                         |       |                  |       |                  |       |
| Net deferred tax  asset                                      |       | $                     | 653,237    |                  | 1,193,599  |   |

 

60

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The Company has deferred taxes for temporarydifferences related to fair value adjustments on loans, investment securities,and FHLB advances related to previous acquisitions.  In addition, the Company has also recorded adeferred tax asset for future benefits of net operating losses and alternativeminimum tax credit carry forwards.  Thenet operating loss carry forwards will expire, if not utilized.  As a result of the FMB acquisition, theCompany has $1.5 million of federal net operating loss carry forwards as of December 31,2007, which expire in 2026.  As a resultof the First Kansas and FMB acquisitions, the Company has $2.8 million ofKansas privilege tax net operating loss carry forwards as of December 31,2007, which expire between 2012 and 2015. The Company also has Kansas corporate net operating loss carry forwardstotaling $5.4 million as of December 31, 2007, which expire between 2008and 2017.  The alternative minimum taxcredit carry forward does not expire and totaled $47,000 as of December 31,2007.  The Company has recorded avaluation allowance to reduce certain Kansas corporate net operating loss carryforwards which expire at various times through 2017.  The increase in the valuation allowance isrelated to additional net operating loss carry forwards generated during2007.  At December 31, 2007 and2006, the Company believes it is more likely than not that these items will notbe realized.  A valuation allowancerelated to the remaining deferred tax assets has not been provided becausemanagement believes it is more likely than not that the results of futureoperations will generate sufficient taxable income to realize the deferred taxassets.

 

Retained earnings at December 31, 2007 and 2006,includes approximately $6.3 million for which no provision for federal incometax had been made.  This amountrepresents allocations of income to bad debt deductions in years prior to 1988for tax purposes only.  Reduction ofamounts allocated for purposes other than tax bad debt losses will createincome for tax purposes only, which will be subject to the then currentcorporate income tax rate.

 

**(10)****                          EmployeeBenefit Plans**

** **

***EmployeeRetirement Plan***

 

Substantially all employees are covered under a 401(k) definedcontribution savings plan. Contributions of $269,000, $253,000 and $190,000were expensed for the years ended December 31, 2007, 2006, and 2005,respectively.

 

***DeferredCompensation and Retirement Agreements***

 

The Company entered into deferred compensation andother retirement agreements with certain key employees that provides for cashpayments to be made after their retirement. The obligations under these arrangements have been recorded at thepresent value of the accrued benefits. The Company has also entered into agreements with certain directors todefer portions of their compensation. The balance of estimated accrued benefits under all of thesearrangements was $940,000 and $987,000 at December 31, 2007 and 2006,respectively, and was included as a component of other liabilities in theaccompanying consolidated balance sheets. To assist in funding benefits under each of these plans, the Bank haspurchased certain assets including life insurance policies on covered employeesin which the Bank is the beneficiary.  AtDecember 31, 2007 and 2006, the cash surrender values on these policiesestablished to meet such obligations were $3.5 million and $3.3 million,respectively.

 

In addition to these policies the Bank purchased $7.5million of bank owned life insurance policies during 2006, which had a cashsurrender value of $8.1 million and $7.8 million at December 31, 2007 and2006, respectively.  These policies arenot related to deferred compensation or other retirement agreements.

 

**(11)****                          StockOption Plan**

** **

The Company has a stock based employee compensationplan which allows for the issuance of stock options, the purpose of which is toprovide additional incentive to certain officers, directors, and key employeesby facilitating their purchase of a stock interest in the Company.  The plan is administered by the compensationcommittee of the board of directors who selects employees to whom options aregranted and the number of shares granted. The option price may not be less than 100% of the fair market value ofthe shares on the date of the grant, and no option shall be exercisable afterthe expiration of ten years from the grant date.  In the case of any employee who owns morethan 10% of the outstanding common stock at the time the option is

 

61

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granted, the option price may not be less than 110% of the fair marketvalue of the shares on the date of the grant, and the option shall not beexercisable after the expiration of ten years from the grant date.  The Company intends to utilize authorized,but un-issued shares to satisfy option exercises.  The number of shares available for futuregrants under the plan was 187,029 at December 31, 2007.  Compensation expense is recognized over theoption vesting period, which is typically pro-rata over four or fiveyears.  The stock-based compensation costrelated to these awards was $118,000, $114,000 and $98,000 for the years ended December 31,2007, 2006, and 2005, respectively.  TheCompany recognized tax benefits of $31,000, $24,000 and $14,000 for the yearsended December 31, 2007, 2006, and 2005, respectively.

 

In determining compensation cost, the Black-Scholesoption-pricing model is used to estimate the fair value of options on date ofgrant.  The Black-Scholes model is aclosed-end model that uses the assumptions outlined below.  Expected volatility is based on historicalvolatility of the Company’s stock.  TheCompany uses historical exercise behavior and other qualitative factors toestimate the expected term of the options, which represents the period of timethat the options granted are expected to be outstanding.  The risk-free rate for the expected term isbased on U.S. Treasury rates in effect at the time of grant.

 

TheCompany did not grant any equity awards in 2007.  The fair value of options granted wereestimated utilizing the following weighted average assumptions:

 

| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend rate                       |       | n/a                               |       | 5.0 | % | 4.8 | % |
| Volatility                          |       | n/a                               |       | 19.1 | % | 18.0 | % |
| Risk-free interest rate             |       | n/a                               |       | 4.9 | % | 4.3 | % |
| Expected lives                      |       | n/a                               |       | 5 years |   | 5 years |   |
| Fair value per option at grant date |       | n/a                               |       | $ | 3.55 |   | $ | 3.40 |   |
|                                     |            |                                   |            |  |  |  |  |  |  |

 

A summary of optionactivity during 2007 is presented below:

 

| ** **                                             | ** ** | **Shares** | ** ** | **Weighted   average   exercise   price** | ** ** | **Weighted   average   remaining contractual term** | ** ** | **Aggregate   intrinsic   value** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------|------------|
| Outstanding at January 1, 2007                    |       | 246,226    |       | $                                         | 24.18      |                                                | 7.74 years |                              | n/a        |   |
| Granted                                                |       | —     |       | —                                    |       | —                                              |       | n/a                               |       |
| Effect of 5% stock dividend                            |       | 11,975     |       | —                                    |       | —                                              |       | n/a                               |       |
| Forfeited/expired                                      |       | (6,639     | )          | $                                         | 24.82      |                                                | —     |                              | n/a        |   |
| Exercised                                              |       | (2,374     | )          | $                                         | 17.32      |                                                | —     |                              | n/a        |   |
| Outstanding at December 31, 2007                  |       | 249,188    |       | $                                         | 23.05      |                                                | 6.80 years |                              | $          | 623,000 |   |
| Exercisable at December 31, 2007                  |       | 133,412    |       | $                                         | 21.80      |                                                | 5.90 years |                              | $          | 500,000 |   |
| Vested and expected to vest at December 31,  2007 |       | 239,121    |       | $                                         | 22.99      |                                                | 6.77 years |                              | $          | 611,000 |   |

 

Additional information about stock options exercised is presentedbelow:

 

| ** **                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Intrinsic value of options exercised (on exercise  date) |       | $                                 | 22,185     |   | $ | 23,584 |   | $ | 109,836 |   |
| Cash received from options exercised                     |       | $                                 | 41,118     |   | $ | 26,891 |   | $ | 196,088 |   |
| Excess tax benefit realized from options exercised       |       | $                                 | 7,543      |   | $ | 6,999 |   | $ | 37,344 |   |

 

 

62

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As of December 31, 2007, there was $222,000 of total unrecognizedcompensation cost related to outstanding unvested options.  That unrecognized compensation cost isexpected to be recognized over a weighted-average period of approximately 2years.  The total fair value (at vestdate) of shares vested during the years ended December 31, 2007, 2006 and2005 was $295,000, $111,000 and $98,000, respectively.

 

**(12)**          FairValue of Financial Instruments

** **

Fair value estimates of the Company’s financialinstruments as of December 31, 2007 and 2006, including methods andassumptions utilized, are set forth below:

 

| ** **                                                 | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                 | ** ** | **Carrying   amount**      | ** ** | **Estimated   fair value** | ** ** | **Carrying   amount** | ** ** | **Estimated   fair value** | ** ** |
| Cash and cash equivalents                                  |       | $                          | 14,739,148 |                       | 14,739,000 |   | 14,751,914 |   | 14,752,000 |   |
| Investment securities                                      |       | 164,724,181                |       | 164,724,000                |       | 145,884,168 |   | 145,884,000 |   |
| Loans, net of  unearned fees and allowance for loan losses |       | 376,156,608                |       | 377,189,000                |       | 379,323,581 |   | 377,595,000 |   |
| Loans held for sale                                        |       | 1,723,687                  |       | 1,764,000                  |       | 1,364,474 |   | 1,384,000 |   |
| Mortgage servicing rights                                  |       | 210,192                    |       | 1,035,000                  |       | 302,122 |   | 994,000 |   |
| Non-interest bearing demand deposits                       |       | 51,007,859                 |       | 51,008,000                 |       | 48,397,528 |   | 48,398,000 |   |
| Money market and NOW deposits                              |       | 139,557,359                |       | 139,557,000                |       | 137,304,086 |   | 137,304,000 |   |
| Savings deposits                                           |       | 25,882,935                 |       | 25,883,000                 |       | 27,702,896 |   | 27,703,000 |   |
| Time deposits                                              |       | 236,204,153                |       | 237,176,000                |       | 231,080,860 |   | 231,348,000 |   |
| Total deposits                                             |       | 452,652,306                |       | 453,624,000                |       | 444,485,370 |   | 444,753,000 |   |
| FHLB advances                                              |       | 69,026,525                 |       | 70,653,000                 |       | 61,920,421 |   | 60,414,000 |   |
| Other borrowings                                           |       | $                          | 24,061,554 |                       | 25,034,000 |   | 28,495,643 |   | 28,496,000 |   |

 

***Off-BalanceSheet Financial Instruments***

 

The fair value of letters of credit and commitments toextend credit is based on the fees currently charged to enter into similaragreements.  The aggregate of these feesis not material.  These instruments arealso discussed in note 16 on “Commitments, Contingencies and Guarantees.”

 

***Methodsand Assumptions Utilized***

*** ***

The carrying amount of cash and cash equivalents,repurchase agreements, federal funds sold, and accrued interest receivable andpayable are considered to approximate fair value.

 

The estimated fair value of investment securities,except certain obligations of states and political subdivisions, is based onbid prices published in financial newspapers or bid quotations received fromsecurities dealers.  The fair value ofcertain obligations of states and political subdivisions is not readilyavailable through market sources other than dealer quotations, so fair valueestimates are based upon quoted market prices of similar instruments, adjustedfor differences between the quoted instruments and the instruments beingvalued.

 

The estimated fair value of the Company’s loanportfolio is based on the segregation of loans by collateral type, interestterms, and maturities.  In estimating thefair value of each category of loans, the carrying amount of the loan isreduced by an allocation of the allowance for loan losses.  Such allocation is based on management’s loanclassification system, which is designed to measure the credit risk inherent ineach classification category.  Theestimated fair value of performing variable rate loans is the carrying value of

 

 

63

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such loans, reduced by an allocation of the allowancefor loan losses.  The estimated fairvalue of performing fixed rate loans is calculated by discounting scheduledcash flows through the estimated maturity using estimated market discount ratesthat reflect the interest rate risk inherent in the loan, reduced by anallocation of the allowance for loan losses. The estimate of maturity is based on the Company’s historical experiencewith repayments for each loan classification, modified, as required, by anestimate of the effect of current economic and lending conditions.  The fair value for nonperforming loans is theestimated fair value of the underlying collateral based on recent externalappraisals or other available information, which generally approximatescarrying value, reduced by an allocation of the allowance for loan losses.

 

The fair value of loans held for sale is estimatedutilizing forward sales commitments or dealer quotations.

 

The fair value of the mortgage servicing rights isestimated based upon the net present value of the estimated future cash flowsassociated with servicing the underlying loans. The discount rate is estimated using current market rates while the cashflows are based on current market prepayment estimates.

 

The estimated fair value of deposits with no statedmaturity, such as non-interest bearing demand deposits, savings, money marketaccounts, and NOW accounts, is equal to the amount payable on demand.  The fair value of interest-bearing timedeposits is based on the discounted value of contractual cash flows of suchdeposits.  The discount rate is estimatedusing the rates currently offered for deposits of similar remaining maturities.

 

The fair value of advances from the FHLB is estimatedusing current rates offered for similar borrowings.  The fair values of other borrowings isestimated using current rates offered for similar borrowings.

 

***Limitations***

*** ***

Fair value estimates are made at a specific point intime based on relevant market information and information about the financialinstruments.  These estimates do notreflect any premium or discount that could result from offering for sale at onetime the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significantportion of the Company’s financial instruments, fair value estimates are basedon judgments regarding future loss experience, current economic conditions,risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment, and, therefore,cannot be determined with precision. Changes in assumptions could significantly affect the estimates.  Fair value estimates are based on existingbalance sheet financial instruments without attempting to estimate the value ofanticipated future business and the value of assets and liabilities that arenot considered financial instruments.

 

 

64

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** **

**(13)**              Regulatory Capital Requirements

** **

Current regulatory capital regulations requirefinancial institutions (including banks and bank holding companies) to meetcertain regulatory capital requirements. Institutions are required to haveminimum leverage capital equal to 4% of total average assets and totalqualifying capital equal to 8% of total risk-weighted assets in order to beconsidered “adequately capitalized.”  Asof December 31, 2007 and 2006, the Company and the Bank were rated “wellcapitalized,” which is the highest rating available under this capital-basedrating system. Management believes that as of December 31, 2007, theCompany and the Bank meet all capital adequacy requirements to which they aresubject.  The following is a comparisonof the Company’s regulatory capital to minimum capital requirements at December 31,2007 and 2006, (dollars in thousands):

 

| ** **                   | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  Capitalized** | ** ** |
|------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December 31, 2007 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                     |       | $51,766    |       | 8.88                               | %          | $23,318                      |       | 4.0 | % | $29,147 |   | 5.0 | % |
| Tier 1 Capital               |       | $51,766    |       | 12.43                              | %          | $16,660                      |       | 4.0 | % | $24,990 |   | 6.0 | % |
| Total Risk Based  Capital    |       | $55,938    |       | 13.43                              | %          | $33,320                      |       | 8.0 | % | $41,650 |   | 10.0 | % |
|                         |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| As of December 31, 2006 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                     |       | $48,899    |       | 8.43                               | %          | $23,204                      |       | 4.0 | % | $29,005 |   | 5.0 | % |
| Tier 1 Capital               |       | $48,899    |       | 12.30                              | %          | $15,898                      |       | 4.0 | % | $23,848 |   | 6.0 | % |
| Total Risk Based  Capital    |       | $53,008    |       | 13.34                              | %          | $31,797                      |       | 8.0 | % | $39,746 |   | 10.0 | % |

 

The following is a comparison of the Bank’s regulatorycapital to minimum capital requirements at December 31, 2007 and 2006(dollars in thousands):

 

| ** **                   | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  Capitalized** | ** ** |
|------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December 31, 2007 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                     |       | $52,737    |       | 9.08                               | %          | $23,233                      |       | 4.0 | % | $29,041 |   | 5.0 | % |
| Tier 1 Capital               |       | $52,737    |       | 12.69                              | %          | $16,625                      |       | 4.0 | % | $24,937 |   | 6.0 | % |
| Total Risk Based  Capital    |       | $56,909    |       | 13.69                              | %          | $33,250                      |       | 8.0 | % | $41,562 |   | 10.0 | % |
|                         |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| As of December 31, 2006 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                     |       | $51,710    |       | 8.94                               | %          | $23,137                      |       | 4.0 | % | $28,921 |   | 5.0 | % |
| Tier 1 Capital               |       | $51,710    |       | 13.04                              | %          | $15,863                      |       | 4.0 | % | $23,795 |   | 6.0 | % |
| Total Risk Based  Capital    |       | $55,740    |       | 14.05                              | %          | $31,727                      |       | 8.0 | % | $39,659 |   | 10.0 | % |

 

 

65

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** **

**(14)**              ParentCompany Condensed Financial Statements

** **

The following is condensed financial information ofthe parent company as of December 31, 2007 and 2006, and for years ended December 31,2007, 2006, and 2005 (in thousands):

 

***Condensed Balance Sheets***

 

| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| Assets                                           | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Cash                                             |       | $                           | 20         |   | 55 |   |
| Investment  securities                           |       | 1,470                       |       | 1,077 |   |
| Investment in  Bank                              |       | 69,034                      |       | 68,193 |   |
| Other                                            |       | 1,412                       |       | 1,618 |   |
| Total assets                                     |       | $                           | 71,936     |   | 70,943 |   |
| Liabilities and stockholders’ equity        |       |                        |       |   |   |
| Borrowed funds                                   |       | $                           | 19,181     |   | 21,226 |   |
| Other                                            |       | 459                         |       | 481 |   |
| Stockholders’  equity                       |       | 52,296                      |       | 49,236 |   |
| Total  liabilities and stockholders’ equity |       | $                           | 71,936     |   | 70,943 |   |

*** ***

***Condensed Statements of Earnings***

 

| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividends from Bank                                       |       | $                                 | 6,507      |   | 6,258 |   | 4,457 |   |
| Interest income                                           |       | 73                                |       | 66 |   | 43 |   |
| Other income                                              |       | 7                                 |       | 255 |   | 53 |   |
| Interest expense                                          |       | (1,575                            | )          | (1,654 | ) | (770 | ) |
| Other expense, net                                        |       | (176                              | )          | (188 | ) | (189 | ) |
| Earnings before  equity in undistributed earnings of Bank |       | 4,836                             |       | 4,737 |   | 3,594 |   |
| (Decrease)/increase in undistributed equity of Bank       |       | (18                               | )          | 741 |   | 6 |   |
| Earnings before  income taxes                             |       | 4,818                             |       | 5,478 |   | 3,600 |   |
| Income tax benefit                                        |       | (584                              | )          | (532 | ) | (297 | ) |
| Net earnings                                              |       | 5,402                             |       | 6,010 |   | 3,897 |   |
|                                                           |            |                                   |            |  |  |  |  |  |

 

 

66

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***Condensed Statements of Cash Flows***

 

| ** **                                                   | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                        |       |                              |       |   |   |   |   |
| Net earnings                                                 |       | $                                 | 5,402      |   | 6,010 |   | 3,897 |   |
| Decrease/(increase)  in undistributed equity of Bank         |       | 18                                |       | (741 | ) | (6 | ) |
| Other                                                        |       | 208                               |       | (59 | ) | (1,247 | ) |
| Net cash provided  by operating activities                   |       | 5,628                             |       | 5,210 |   | 2,644 |   |
|                                                         |       |                              |       |   |   |   |   |
| Cash flows from investing activities:                        |       |                              |       |   |   |   |   |
| Purchase of  investment securities                           |       | (455                              | )          | (3 | ) | (112 | ) |
| Proceeds from  sales and maturities of investment securities |       | —                            |       | 165 |   | 160 |   |
| Cash paid in  acquisitions                                   |       | —                            |       | (13,080 | ) | — |   |
| Net cash (used  in) provided by investing activities         |       | (455                              | )          | (12,918 | ) | 48 |   |
|                                                         |       |                              |       |   |   |   |   |
| Cash flows from financing activities:                        |       |                              |       |   |   |   |   |
| Issuance of  shares under stock option plan                  |       | 41                                |       | 27 |   | 196 |   |
| Proceeds from  other borrowings                              |       | 4,310                             |       | 9,772 |   | 9,998 |   |
| Repayments on  other borrowings                              |       | (6,355                            | )          | (8,342 | ) | (3,470 | ) |
| Purchase of  treasury stock                                  |       | (1,436                            | )          | (138 | ) | (1 | ) |
| Payment of  dividends                                        |       | (1,768                            | )          | (1,567 | ) | (1,444 | ) |
| Net cash (used  in) provided by financing activities         |       | (5,208                            | )          | (248 | ) | 5,279 |   |
| Net (decrease)/increase  in cash                             |       | (35                               | )          | (7,956 | ) | 7,971 |   |
| Cash at beginning of year                                    |       | 55                                |       | 8,011 |   | 40 |   |
| Cash at end of year                                          |       | $                                 | 20         |   | 55 |   | 8,011 |   |

 

Dividends paid by the Company are providedthrough  dividends from the Bank. At December 31,2007, the Bank could distribute dividends of up to $729,000 without regulatoryapprovals.

 

**(15)**              Stockholders’Rights Plan

** **

On October 11, 2001, the Company’s board ofdirectors adopted a stockholders’ rights plan (the Rights Plan).  The Rights Plan provided for the distributionof one right on February 13, 2002, for each share of the Company’soutstanding common stock as of February 1, 2002.  The rights have no immediate economic valueto stockholders, because they cannot be exercised unless and until a person,group or entity acquires 15% or more of the Company’s common stock or announcesa 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 a person, group or entity acquires a 15% orlarger stake in the Company or announces a tender offer, and the Company’sboard of directors chooses not to redeem the rights, all holders of rights,other than the 15% stockholder or the tender offeror, will be able to purchasea certain amount of the Company’s common stock for half of its market price.

 

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

** **

Commitmentsto extend credit are legally binding agreements to lend to a borrower providingthere are no violations of any conditions established in the contract.  The Company, as a provider of financialservices, routinely issues financial guarantees in the form of financial andperformance commercial and standby letters of credit.  As many of the commitments are expected toexpire without being drawn upon, the total commitment does not necessarilyrepresent future cash requirements (see Note 4).

 

 

67

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The Company guarantees payments to holders of certaintrust preferred securities issued by wholly owned grantor trusts.  The securities are due in 2034 and 2036 andare redeemable beginning in 2009 and 2011. The maximum potential futurepayments guaranteed by the Company, which includes future interest andprincipal payments through maturity, was approximately $48.2 million at December 31,2007.  At December 31, 2007, theCompany had a recorded liability of $16.7 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 Company’s business. While the ultimate outcome of current legal proceedings cannot bepredicted with certainty, it is the opinion of management that the resolutionof these legal actions should not have a material effect on the Company’sconsolidated financial position or results of operations.

 

**(17)**              Acquisitions

** **

On January 1, 2006,the Company completed the acquisition of all of the outstanding shares ofFMB.  FMB’s subsidiary thrift was mergedinto the Company’s wholly-owned subsidiary, Landmark National Bank, immediatelyfollowing the acquisition.  Thisacquisition expanded our market share in Manhattan and further expanded theCompany’s presence in higher-growth market areas.  At December 31, 2005, FMB had totalassets of $128.9 million, including loans and deposits of $109.4 million and$106.8 million, respectively.  TheCompany paid cash of $12.9 million for all of the outstanding stock of FMB.  In connection with the acquisition, theCompany recognized core deposit intangible assets of $2.6 million, which arebeing amortized on an accelerated basis over the estimated remaining economicuseful life of the depositors of 10 years. The acquisition cost in excess of the net assets and identifiableintangible assets acquired, has been recorded as goodwill of $5.5 million, noneof which is deductible for tax purposes.

 

The accompanyingconsolidated financial statements for the year ended December 31, 2006 includedthe accounts of the Company and, commencing January 1, 2006 FMB.  Unaudited pro forma consolidated operatingresults, for the year ended December 31, 2005, as if the acquisition wasconsummated January 1, 2005, is as follows (in thousands, except per sharedata):

** **

| Revenue                    |   | $     | 29,378 |   |
|----------------------------|--------|-------|--------|--------|
| Net earnings               |   | 4,101 |   |
| Basic earnings per share   |   | $     | 1.75   |   |
| Diluted earnings per share |   | 1.75  |   |

 

 

68

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| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A.               CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

An evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of December 31,2007. 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.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined by Rule 13a-15(f) promulgated under theSecurities and Exchange Act of 1934, as amended).  The Company’s internal control over financialreporting is a process designed under the supervision of the Company’s ChiefExecutive Officer and Chief Financial Officer to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of theCompany’s financial statements for external purposes in accordance with U.S.generally accepted accounting principles.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

Management has made acomprehensive review, evaluation, and assessment of the Company’s internalcontrol over financial reporting as of December 31, 2007.  In making its assessment of the effectivenessof the Company’s internal control over financial reporting, management used theframework issued by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of December 31, 2007, the Company’s internal controlover financial reporting was effective.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the  Company’s registeredpublic accounting firm pursuant to temporary rules of the SEC that permitthe Company to provide only management’s report in the annual report.

 

There were no changes inthe Company’s internal controls over financial reporting during the quarterended December 31, 2007 that materially affected or were likely tomaterially affect the Company’s internal control over financial reporting.

 

##### **ITEM 9B.               OTHERINFORMATION**

##### ** **

None.

 

 

69

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**PART III.**

 

**ITEM 10.               DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

**Directors**

 

The Company incorporates by reference the information called for byItem 10 of this Form 10-K regarding directors of the Company from thesections entitled “Election of Directors” and “Corporate Governance and theBoard of Directors” of the Company’s Proxy Statement for the annual meeting ofstockholders to be held May 21, 2008 (the “2008 Proxy Statement”).

 

Section 16(a) ofthe Exchange Act requires that the Company’s executive officers, directors andpersons who own more than 10% of their Company’s common stock file reports ofownership and changes in ownership with the SEC and with the exchange on whichthe Company’s shares of common stock are traded.  Such persons are also required to furnish theCompany with copies of all Section 16(a) forms they file.  Based solely on the Company’s review of thecopies of such forms, the Company is not aware that any of its directors andexecutive officers or 10% stockholders failed to file on a timely basis reportsrequired by Section 16(a) of the Exchange Act during 2007.

 

The executive officers ofthe Company, each of whom is also currently an executive officer of the Bankand both of whom serve at the discretion of the Board of Directors, areidentified below:

 
| **Name**             | ** ** | **Age** | ** ** | **Positions  with the Company**                                   |
|----------------------|------------|---------|------------|-------------------------------------------------------------------|
|                 |       |    |       |                                                              |
| Patrick L. Alexander |       | 55      |       | President and Chief  Executive Officer                            |
|                 |       |    |       |                                                              |
| Mark A. Herpich      |       | 40      |       | Vice President,  Secretary, Chief Financial Officer and Treasurer |

 

The executive officers ofthe Bank are identified below:

 
| **Name**             | ** ** | **Age** | ** ** | **Positions  with the Bank**                          |
|----------------------|------------|---------|------------|-------------------------------------------------------|
|                 |       |    |       |                                                  |
| Patrick L. Alexander |       | 55      |       | President and Chief  Executive Officer                |
|                 |       |    |       |                                                  |
| Mark A. Herpich      |       | 40      |       | Executive Vice  President and Chief Financial Officer |
|                 |       |    |       |                                                  |
| Michael E. Scheopner |       | 46      |       | Executive Vice  President, Credit Risk Manager        |
|                 |       |    |       |                                                  |
| Dean R. Thibault     |       | 56      |       | Executive Vice  President, Commercial Banking         |
|                 |       |    |       |                                                  |
| Larry R. Heyka       |       | 61      |       | Market President,  Manhattan Region                   |
|                 |       |    |       |                                                  |
| Mark J. Oliphant     |       | 55      |       | Market President,  Southwest Kansas Region            |
|                 |       |    |       |                                                  |
| Bradly L. Chindamo   |       | 39      |       | Market President,  Eastern Kansas Region              |

 

**ITEM 11.               EXECUTIVECOMPENSATION**

** **

The Company incorporatesby reference the information called for by Item 11 of this Form 10-K fromthe sections entitled “Corporate Governance and the Board of Directors,”“Compensation Discussion and Analysis” and “Executive Compensation” of the 2008Proxy Statement.

 

 

70

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**ITEM 12.**                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

** **

The Company incorporatesby reference the information called for by Item 12 of this Form 10-K fromthe section entitled “Security Ownership of Certain Beneficial Owners” of the2008 Proxy Statement.

 

**Equity Compensation PlanInformation**

 

The table below setsforth the following information as of December 31, 2007 for (i) allcompensation plans previously approved by the Company’s stockholders and (ii) allcompensation plans not previously approved by the Company’s stockholders:

 

                                                (a)          the number of securities to be issued upon theexercise of outstanding options, warrants and rights; 

 

                                                (b)         the weighted-average exercise price of suchoutstanding options, warrants and rights; 

 

                                                (c)          other than securities to be issued upon the exerciseof such outstanding options, warrants and rights, the number of securities remainingavailable for future issuance under the plans. 

 
| **EQUITY COMPENSATION PLAN INFORMATION**                       | ** ** |
|----------------------------------------------------------------|------------|
| **Plan category**                                              | ** ** | **Number of securities to be   issued upon exercise of   outstanding options (1)** | ** ** | **Weighted-average exercise  price of outstanding options** | ** ** | **Number of securities   remaining available for   future issuance (1)** | ** ** |
| Equity compensation   plans approved by   security holders     |       | 249,188 |   | $ | 23.05 |   | 187,029 |   |
|                                                           |       |   |   |   |   |   |   |
| Equity compensation   plans not approved by   security holders |       | - 0 - |   | - 0 - |   | - 0 - |   |
|                                                           |       |   |   |   |   |   |   |
| Total                                                          |       | 249,188 |   | $ | 23.05 |   | 187,029 |   |

----

(1) Includes optionsassumed by the Company in 2001 in connection with the mergers of LandmarkBancshares, Inc. and MNB Bancshares, Inc. with the Company.  At the time of the mergers, there wereoptions issued under the previous companies’ plans, each of which was approvedby stockholders of the respective company at the time of their adoption.  All of the options granted under these plansfully vested at the time of the merger and no additional options were availablefor grant after the merger.  As of December 31,2007, there were options outstanding for an aggregate of 24,264 shares of theCompany’s common stock under the prior plans with a weighted average exerciseprice of $12.09.

 

**ITEM 13.               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR****INDEPENDENCE**

 

The Company incorporatesby reference the information called for by Item 13 of this Form 10-K fromthe sections entitled “Transactions with Directors, Officers and Associates”and “Corporate Governance and Board of Directors” of the 2008 Proxy Statement.

 

 

71

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**ITEM 14.**               **PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The Company incorporatesby reference the information called for by Item 14 of this Form 10-K fromthe section entitled “Independent Registered Public Accounting Firm” of the2008 Proxy Statement.

 

**PART IV**

 

**ITEM 15.****                                             ****EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

ITEM 15(a)1 and 2.  Financial Statements and Schedules

 

LANDMARK BANCORP,INC. AND SUBSIDIARIES

LIST OF FINANCIALSTATEMENTS

 

The following auditedConsolidated Financial Statements of the Company and its subsidiaries andrelated notes and auditors’ report are included in Part II, Item 8 of thisReport:

 

Report of IndependentRegistered Public Accounting Firm

 

Consolidated BalanceSheets — December 31, 2007 and 2006

 

Consolidated Statementsof Earnings — Years ended December 31, 2007, 2006 and 2005

 

Consolidated Statementsof Stockholders’ Equity and Comprehensive Income — Years ended December 31,2007, 2006 and 2005

 

Consolidated Statementsof Cash Flows — Years ended December 31, 2007, 2006 and 2005

 

Notes to ConsolidatedFinancial Statements

 

All schedules are omittedbecause they are not required or are not applicable or the required informationis shown in the financial statements incorporated by reference or notesthereto.

 

 

Item 15(a)3.            Exhibits

 

The exhibits required byItem 601 of Regulation S-K are included with this Form 10-K and are listedon the “Index to Exhibits” immediately following the signature page.

 

Upon written request tothe President of the Company, P.O. Box 308, Manhattan, Kansas 66505-0308,copies of the exhibits listed above are available to stockholders of theCompany by specifically identifying each exhibit desired in the request.  The Company’s filings with the Securities andExchange Commission are also available via the Internet at www.sec.gov,www.banklandmark.com or www.landmarkbancorpinc.com .

 

 

72

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| **LANDMARK BANCORP, INC.** |         |
|----------------------------|--------------|
|                       |         |   |
|                       | (Registrant) |   |
|                       |         |   |
|                       | By:          |  /s/ Patrick L. Alexander |   | By: |  /s/ Mark A. Herpich |
|                       |         | Patrick L. Alexander |   |   | Mark A. Herpich |
|                       |         | President and Chief  Executive Officer |   |   | Principal Financial and  Accounting Officer |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

 
| **SIGNATURE**             |   |                 | ** ** | **TITLE**                                        |
|---------------------------|--------|----------------------|------------|--------------------------------------------------|
|                      |   |                 |       |                                             |
| /s/ Patrick L.  Alexander |   | March 14,  2008 |       | President, Chief  Executive Officer and Director |
| Patrick L. Alexander      |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Larry L. Schugart     |   | March 14,  2008 |       | Chairman of the Board,  Director                 |
| Larry L. Schugart         |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Richard A. Ball       |   | March 14,  2008 |       | Director                                         |
| Richard A. Ball           |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Brent A. Bowman       |   | March 14,  2008 |       | Director                                         |
| Brent A. Bowman           |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Joseph L. Downey      |   | March 14,  2008 |       | Director                                         |
| Joseph L. Downey          |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Jim W. Lewis          |   | March 14,  2008 |       | Director                                         |
| Jim W. Lewis              |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Jerry R. Pettle       |   | March 14,  2008 |       | Director                                         |
| Jerry R. Pettle           |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ Susan E. Roepke       |   | March 14,  2008 |       | Director                                         |
| Susan E. Roepke           |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ C. Duane Ross         |   | March 14,  2008 |       | Director                                         |
| C. Duane Ross             |   | Date                 |       |                                             |
|                      |   |                 |       |                                             |
| /s/ David H. Snapp        |   | March 14,  2008 |       | Director                                         |
| David H. Snapp            |   | Date                 |       |                                             |

 

 

73

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**INDEX TOEXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                   |   | **Incorporated by reference to**                                                                                                                                                                | ** ** | **Attached hereto** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| 3.1                       |       | Amended  and Restated Certificate of Incorporation                                                |   | the  registrant’s transition report on Form 10-K for the transition period  ending December 31, 2001, filed with the Commission on March 24,  2002 (SEC file no. 000-33203) |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 3.2                       |       | Bylaws                                                                                            |   | the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)                                                                        |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 4.1                       |       | Form of  stock certificate                                                                   |   | the  registrant’s Form S-4, as amended, filed with the Commission on June 7,  2001 (SEC file no. 333-62466)                                                                      |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.1                      |       | Form of  employment agreement between Larry Schugart and the Company                         |   | the  registrant’s Form S-4, as amended, filed with the Commission on June 7,  2001 (SEC file no. 333-62466)                                                                      |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.2                      |       | Form of  employment agreement between Patrick L. Alexander and the Company                   |   | the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)                                                                        |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.3                      |       | Form of  employment agreement between Mark A. Herpich and the Company                        |   | the  registrant’s Form S-4, as amended, filed with the Commission on June 7,  2001 (SEC file no. 333-62466)                                                                      |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.4                      |       | Form of  employment agreement between Michael E. Scheopner and the Company                   |   | the  registrant’s Form S-4, as amended, filed with the  Commission on June 7, 2001 (SEC file  no. 333-62466)                                                                |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.5                      |       | Form of  employment agreement between Dean R. Thibault and the Company                       |   | the  registrant’s Form S-4, as amended, filed with the Commission on June 7,  2001 (SEC file no. 333-62466)                                                                      |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.6                      |       | Rights  Agreement between the Company and Landmark National Bank                                  |   | the  registrant’s Form 8-K filed with the Commission on January 22, 2002  (SEC file no. 000-33203)                                                                               |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.7                      |       | Indenture  dated as of December 19, 2003 between the Company and Wilmington Trust  Company   |   | the  registrant’s report on Form 10-K for the period ending December 31,  2003, filed with the Commission on March 30, 2004 (SEC file no.  000-33203)                       |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.8                      |       | Form of  employment agreement between Mark J. Oliphant and the Company                       |   | the  registrant’s Form 8-K filed with the Commission on March 9, 2005  (SEC file no. 000-33203)                                                                                  |       |                |
|                      |       |                                                                                              |   |                                                                                                                                                                                            |       |                |
| 10.9                      |       | Form of  2001 Landmark Bancorp, Inc.  Stock  Incentive Plan Option Grant Agreement |   | the  registrant’s report on Form 10-K for the period ending December 31,  2004, filed with the Commission on March 30, 2005 (SEC file no.  000-33203)                       |       |                |

 

 

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|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
| 10.10  |   | Landmark  Bancorp, Inc. Bonus/Profit Sharing Plan                                                                                                        |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 10.11  |   | Form of  Landmark Bancorp, Inc. Deferred Compensation Agreements                                                                                    |   | the  registrant’s report on Form 10-K for the period ending December 31,  2004, filed with the Commission on March 30, 2005 (SEC file no.  000-33203) |   |  

  |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 10.12  |   | 2001  Stock Incentive Plan                                                                                                                                    |   | The  registrant’s Registration Statement on form S-8 filed with the Commission on February 11,  2003                                                            |   |           |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 10.13  |   | Indenture  dated as of December 30, 2005 between the Company and Wilmington Trust  Company                                                               |   | the  registrant’s report on Form 10-K for the period ending December 31,  2005, filed with the Commission on March 29, 2006 (SEC file no.  000-33203) |   |  

  |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 13.1   |   | Letter  to Shareholders and Corporate Information included in 2007 Annual Report to  Shareholders                                                             |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 21.1   |   | Subsidiaries  of the Company                                                                                                                                  |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 23.1   |   | Consent  of KPMG LLP                                                                                                                                          |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                      |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                           |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 32.1   |   | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |                                                                                                                                                                      |   | X              |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |           |
| 32.2   |   | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002  |   |                                                                                                                                                                      |   | X              |

 

 

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