**Exhibit13.1**

 

 

 

Landmark National Bank, aBauer 5-Star rated bank, continues the dedication to our customers and theirfuture by providing security, convenience and expertise. Landmark National Bankcontinues its customer-focused philosophy with local decision-makers committedto the 14 Kansas communities they serve.

 

**Contents**

 
| Letter to  Stockholders                                  |   |
|----------------------------------------------------------|--------|
|                                                     |   |
| Selected Financial  and Other Data                       |   |
|                                                     |   |
| Management’s Discussion  and Analysis               |   |
|                                                     |   |
| Report  of Independent Registered Public Accounting Firm |   |
|                                                     |   |
| Consolidated  Financial Statements                       |   |
|                                                     |   |
| Notes to  Consolidated Financial Statements              |   |
|                                                     |   |
| Corporate Information                                    |   |

 

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**To our Stockholders, Customers And Friends**

** **

2004 marked another yearof growth for Landmark Bancorp, Inc. Total assets increased from $334 million at December 31, 2003 to $442million at year end 2004.  Your companyachieved net earnings of $4.3 million in 2004. This profit performance translates into a return on average equity of9.98 percent and a return on average assets of .98 percent.  We declared another 5 percent stock dividendwhich resulted in a 5 percent increase in the cash dividends declared in 2004when compared to 2003.  Additionally, wewere able to repurchase 102 thousand shares of Landmark Bancorp stock at a costof $3.1 million.  While gains on sale ofloans decreased dramatically as mortgage originations and refinancing activityslowed to more normal levels, we experienced significant growth in net interestincome and non-interest income.  In 2004your company continued to expand its footprint across Kansas and providequality financial services to a growing number of communities andcustomers.  We completed the acquisitionof First Kansas Financial Corporation in April. This gives your company a significant market presence in the rapidlygrowing Miami County, Kansas market and strategically positions us to participatein the exciting economic growth that these markets are experiencing.  In the space below I will recap ouraccomplishments of 2004 and our plans to move the company forward in 2005.

 

January 1, 2005 markedthe nine month anniversary of our acquisition of First Kansas FinancialCorporation.  Our associates have done anoutstanding job of assimilating the First Kansas organization into the Landmarksystem and culture in nine short months. We completed the computer conversion of the First Kansas accounts to ourexisting computer system, introduced additional financial services to our newcustomers, and our new associates have made a tremendous effort to effectivelycope with the changes brought about by the merger.  We sold the Beloit and Phillipsburg, Kansasbranches acquired in the First Kansas acquisition due to our strategic decisionto focus our efforts on the Miami County and Ft. Scott markets.  We are beginning to make strides transformingthe First Kansas assets, which were primarily one to four family residentialloans, to a more diverse mix including consumer, commercial, and commercialreal estate loans.  The transition andgrowth of these assets to a more traditional commercial banking mix is a keycomponent in our strategy to have these new markets contribute to our financialperformance and meet the high expectations which we have for them.  We are also focusing upon enhancing ourresidential mortgage loan capabilities in the Miami County market in an effortto further capitalize upon the market growth and expand our retail market sharethrough the cross sale of other banking services.  While much work remains to be accomplishedwithin these new markets, we are extremely optimistic concerning their growthpotential and the contribution we expect them to make to the overall success ofthe company.

 

Your company experiencedoutstanding growth in fees and service charges as this area increased $1.2million in 2004 compared to 2003.  Wehave undertaken an aggressive initiative to increase our retail checking accountsin all of our markets and this effort is beginning to pay dividends.  In 2004, we doubled the number of retailchecking accounts opened, not including the new account openings experienced inthe acquired First Kansas markets.  Thisinitiative is consistent with our efforts to grow and expand core transactiondeposit accounts and capture a larger portion of the total banking relationshipof customer households.  Additionally,other fee income increased significantly, primarily as a result of increasedincome of approximately $140 thousand from the sale of non-deposit investmentand life insurance products.  Theseproducts have been well received by our customers as we increase theconvenience of shopping for the diverse financial services that our customersdesire. Our focus in this area will continue as we look to diversify ourrevenue sources and reduce our dependence upon net interest income.

 

The interest rateenvironment during the last three years has resulted in a large percentage ofmortgage loans being refinanced into lower, fixed rate mortgages.  Your company has adopted a strategy ofcontinuing our leadership role in residential mortgage originations within ourrespective markets.  We continue to sellthese fixed rate mortgage loans to the secondary market on both a servicingretained and servicing released basis. The high level of refinancing and subsequent sale to the secondarymarket resulted in a reduction of residential mortgage loans from $101 millionas of December 31, 2002 to $77 million on March 31, 2004.  With the First Kansas acquisition on April 1,2004 our mortgage loans increased to $150 million.  As of December 31, 2004, mortgage loansdecreased further to $131 million.  Wefelt that it was only prudent to sell our fixed rate residential mortgageoriginations to the secondary market and not maintain these loans on ourbalance sheet during a time of historically low interest rates.  We were concerned that these low fixed rateloans would act like an anvil on our net interest income when interest ratesrose from the relatively low levels of the last few years.  This reduction in residential mortgage loanswithin our portfolio will prove beneficial as interest rates rise and allow usto more effectively manage our net interest income in an increasing interestrate environment.

 

Growth in commerciallending continued in 2004 as commercial and commercial real estate loansincreased from $115 million at December 31, 2003 to $129 million at December31, 2004, an increase of 12 percent.  Ourcontinued success in this effort is imperative as we continue to diversify ourbalance sheet to reduce our dependence upon one to four family residentialloans.  While commercial and commercialreal estate loans have increased by more than $25 million since December 31,2002, we have not been able to

 

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completely offset thedecline in residential mortgage loans discussed above.  We expect that our growth in commercial loansshould begin to exceed our residential mortgage loan repayments as interest ratesrise and refinancing activity slows, which actually began to happen in thelatter part of 2004.  We are proud of ourgrowth in the commercial loan portfolio as this has been accomplished in amanner that emphasized high asset quality and the development of bankingrelationships with our borrowers.  Ourassociates execute our commercial lending efforts in a highly disciplinedmanner in an extremely competitive market. This approach has served us well over the years as losses anddelinquencies have been maintained at levels either below or within industrystandards.  Our commercial lendingefforts are a cornerstone of your company’s success and we intend to continueour aggressive, but disciplined approach to this growth area of our business.

 

Interest rates during thelast few years have been at the lowest levels we have witnessed for a number ofdecades.  Low interest rates havecontributed to economic recovery which has recently translated into economicgrowth.  In June 2004, the Federal OpenMarket Committee of the Federal Reserve Bank began raising short term interestrates.  This process has continued into2005 with short term interest rates increasing 175 basis points through March2005.  While interest rates are stillrelatively low, the recovering economy and increasing interest rate environmenthas created challenges for the banking industry.  The rate of residential mortgage loanrefinancing slowed dramatically in 2004, causing gains on sale of loans todecrease from the historically high levels experienced in 2002 and 2003. As aresult of the slowdown in residential refinancing, our gains on sale of loansdecreased over $1 million dollars in 2004 as compared to 2003.  Economic growth and increasing interest rateshave resulted in a highly competitive environment for deposit dollars, causingcosts of deposits to increase at a pace faster than anticipated.  We expect deposit growth will continue to bea major concern throughout the remainder of 2005.  Our net interest margin decreased from 3.71percent in 2003 to 3.19 percent in 2004. Much of this decrease in net interest margin was caused by theconcentration of relatively low rate residential mortgage loans and higherlevels of Federal Home Loan Bank borrowings in the acquired First Kansas balancesheet.  These pressures are contributingto the challenges your company faces as we work to increase the interest marginon this newly acquired portion of the balance sheet and further improve uponthe remaining balance sheet.

 

Another challenge yourcompany and the industry face in 2005 is increasing regulatory burden.  We are finding it necessary to dedicateincreasing resources to compliance activities in the areas of consumerprotection, the Bank Secrecy Act, Anti-Money Laundering systems, the USA PATRIOTAct, and the Sarbanes-Oxley Act. Regulatory expectations in these areas are high and continue to increase.  Failure to comply with these regulations can causesevere monetary penalties and corporate sanctions.  The Sarbanes-Oxley Act has raised the barsubstantially on internal control documentation and review of financialstatement disclosures.  Your company hasalways taken great pride in our regulatory compliance and accurate financialdisclosure.  However, the regulatoryemphasis in these areas utilizes not only extra internal resources, but alsocreates increased professional fees to meet the new standards.  These activities are burdensome and donothing to enhance the profitability of your organization.  However, if we fall short on our complianceefforts, the results could be severe both financially and strategically.  Therefore, we are working diligently to meetthe increasing regulatory challenges that are being thrust upon our industry.

 

 

We continue to beoptimistic and excited about Landmark Bancorp’s future.  Your company has never been better preparedto take advantage of the opportunities and challenges that await us in2005.  We feel we have a banking teamthat is second to none and focused on delivering quality financial services toour customers and the communities we serve. We have a strong capital base in excess of $40 million and an asset basewhich is both diverse and of high quality. We serve 14 communities within the state of Kansas which providesgeographic diversification.  We feel weare poised to begin capitalizing on the dynamic growth of the new Miami Countymarkets acquired in 2004.  We believethat the future has never been brighter for your company.  We expect to continue to grow and enhance ourmarket presence and strive to increase our profitability.

 

Your support andconfidence are critical to our success.  Wecontinuously strive to enhance shareholder value through the delivery of firstclass financial services to our customers and the communities we serve.  I would like to thank our shareholders foryour continued support and confidence.  Ialso would like to thank my associates for their tireless efforts anddedication to the success of your company. And finally, I thank our customers for their continued confidence andpatronage, which is the focus of our efforts and a requisite for oursuccess.  We look forward to 2005 and thecontinued growth and success of Landmark Bancorp.

 

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

 

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**Selected Financial And Other Data****Of**

 

**Landmark Bancorp, Inc.**

 
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **        | ** ** | **Three**                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------|------------|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **        | ** ** | **months  ended**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **At or  for the years ended December 31,**          | ** ** | **December  31,** | ** ** | **At or  for the years ended September 30,** | ** ** |
| ** **                                                       | ** ** | **2004**                                             | ** ** | **2003**          | ** ** | **2002**                                     | ** ** | **2001**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected  Financial Data:**                                    |       |                                                 |       |              |       |                                         |       |       |       |       |       |       |       |
| Total assets                                                     |       | $442,091                                             |       | $334,046          |       | $341,314                                     |       | $349,700   |       | $200,255   |       | $250,676   |       |
| Loans (1)                                                        |       | 278,260                                              |       | 215,030           |       | 229,112                                      |       | 240,979    |       | 144,473    |       | 191,514    |       |
| Investments  held-to-maturity                                    |       | —                                               |       | —            |       | —                                       |       | —     |       | —     |       | 38,779     |       |
| Investments  available-for-sale                                  |       | 133,604                                              |       | 99,746            |       | 89,296                                       |       | 75,311     |       | 30,889     |       | 9,869      |       |
| Cash and cash  equivalents                                       |       | 7,845                                                |       | 7,708             |       | 11,449                                       |       | 22,163     |       | 20,001     |       | 5,090      |       |
| Deposits                                                         |       | 302,868                                              |       | 253,108           |       | 264,281                                      |       | 273,246    |       | 148,064    |       | 165,325    |       |
| Borrowings                                                       |       | 94,571                                               |       | 33,755            |       | 26,203                                       |       | 28,697     |       | 21,000     |       | 57,000     |       |
| Stockholders’  equity                                       |       | 42,169                                               |       | 42,572            |       | 41,074                                       |       | 40,205     |       | 26,099     |       | 23,662     |       |
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **        | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected  Operating Data:**                                    |       |                                                 |       |              |       |                                         |       |       |       |       |       |       |       |
| Interest income                                                  |       | $19,949                                              |       | $17,276           |       | $19,562                                      |       | $5,224     |       | $16,438    |       | $18,230    |       |
| Interest expense                                                 |       | 7,000                                                |       | 5,655             |       | 7,111                                        |       | 2,475      |       | 9,909      |       | 11,229     |       |
| Net interest  income                                             |       | 12,489                                               |       | 11,622            |       | 12,451                                       |       | 2,749      |       | 6,529      |       | 7,001      |       |
| Provision for  loan losses                                       |       | 460                                                  |       | 240               |       | 182                                          |       | 33         |       | 120        |       | 267        |       |
| Net interest  income after provision for loan losses             |       | 12,489                                               |       | 11,382            |       | 12,269                                       |       | 2,716      |       | 6,409      |       | 6,734      |       |
| Non-interest  income                                             |       | 5,125                                                |       | 4,974             |       | 3,856                                        |       | 1,012      |       | 2,353      |       | 997        |       |
| Severance and  other costs related to merger with MNB Bancshares |       | —                                               |       | —            |       | —                                       |       | 2,705      |       | —     |       | —     |       |
| Non-interest  expense                                            |       | 11,353                                               |       | 9,229             |       | 9,184                                        |       | 4,796      |       | 4,277      |       | 4,056      |       |
| Income (loss)  before income taxes                               |       | 6,261                                                |       | 7,127             |       | 6,941                                        |       | (1,068     | )          | 4,485      |       | 3,655      |       |
| Provision (benefit)  for income taxes                            |       | 2,010                                                |       | 2,275             |       | 2,363                                        |       | (430       | )          | 1,780      |       | 1,272      |       |
| Cumulative effect  of change in accounting principle, net of tax |       | —                                               |       | —            |       | —                                       |       | —     |       | (215       | )          | —     |       |
| Net earnings  (loss)                                             |       | $4,251                                               |       | $4,852            |       | $4,578                                       |       | $(638      | )          | $2,490     |       | $2,383     |       |
| Net earnings  (loss) per share (2):                              |       |                                                 |       |              |       |                                         |       |       |       |       |       |       |       |
| Basic                                                            |       | $1.96                                                |       | $2.20             |       | $1.99                                        |       | $(0.28     | )          | $1.93      |       | $1.81      |       |
| Diluted                                                          |       | 1.95                                                 |       | 2.17              |       | 1.93                                         |       | (0.28      | )          | 1.79       |       | 1.68       |       |
| Dividends per  share (2)                                         |       | 0.65                                                 |       | 0.60              |       | 0.52                                         |       | 0.12       |       | 0.49       |       | 0.49       |       |
| Book value per  common share outstanding (2)                     |       | 19.98                                                |       | 19.42             |       | 18.53                                        |       | 16.70      |       | 19.49      |       | 17.58      |       |
| ** **                                                       | ** ** | ** **                                           | ** ** | ** **        | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  Data:**                                                 |       |                                                 |       |              |       |                                         |       |       |       |       |       |       |       |
| Return on average  assets (3)                                    |       | 0.98                                                 | %          | 1.46              | %          | 1.35                                         | %          | (0.72      | )%         | 1.13       | %          | 0.97       | %          |
| Return on average  equity (3)                                    |       | 9.98                                                 |       | 11.53             |       | 11.31                                        |       | (6.29      | )          | 10.17      |       | 10.23      |       |
| Equity to total  assets                                          |       | 9.54                                                 |       | 12.74             |       | 12.03                                        |       | 11.50      |       | 13.03      |       | 9.44       |       |
| Net interest rate  spread (3)                                    |       | 2.93                                                 |       | 3.35              |       | 3.44                                         |       | 2.82       |       | 2.57       |       | 2.48       |       |
| Net yield on  average interest-earning assets (3)                |       | 3.19                                                 |       | 3.71              |       | 3.86                                         |       | 3.22       |       | 3.09       |       | 2.93       |       |
| Non-performing assets  to total assets                           |       | 0.37                                                 |       | 0.45              |       | 0.41                                         |       | 0.37       |       | 0.50       |       | 0.52       |       |
| Non-performing  loans to net loans                               |       | 0.41                                                 |       | 0.56              |       | 0.42                                         |       | 0.43       |       | 0.53       |       | 0.59       |       |
| Allowance for  loan losses to total loans                        |       | 1.04                                                 |       | 1.07              |       | 1.12                                         |       | 1.10       |       | 0.99       |       | 0.72       |       |
| Dividend payout  ratio                                           |       | 33.33                                                |       | 27.63             |       | 27.57                                        |       | NM         |       | 25.38      |       | 27.31      |       |
| Number of full  service banking offices                          |       | 16                                                   |       | 12                |       | 12                                           |       | 12         |       | 6          |       | 6          |       |

 

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**Ourselected consolidated financial data should be read in conjunction with, and isqualified in its entirety by, our consolidated financial statements, includingthe related notes.

Inconjunction with the October 9, 2001, merger with MNB Bancshares, we changedour fiscal year end from September 30 to December 31.  Our selected consolidated financial datapresented above as of and for the three months ended December 31, 2001, includeour accounts, and commencing October 9, 2001, MNB Bancshares.  The selected consolidated financial data forperiods prior to October 1, 2001, is Landmark Bancshares historical financialdata. (NM: not meaningful)

(1)     Includes loans held for sale totaling$846,000, $734,000, $5.1 million, $5.7 million, $2.5 million, and $8.9 millionat December 31, 2004, 2003, 2002, and 2001, and September 30, 2001, and 2000,respectively.

(2)     All per share amounts have been adjusted togive effect to the 5% stock dividends paid in December 2004, 2003, 2002, and2001.

(3)     Amounts for the three months ended December31, 2001, have been annualized as a result of the merger in 2001 and the changein our fiscal year.

 

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**Management’s Discussion And Analysis****OfFinancial Condition And Results Of Operations**

 

**Corporate Profile and Overview**

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

 

Landmark National Bank isprincipally engaged in the business of attracting deposits from the generalpublic and using such deposits, together with Federal Home Loan Bank (“FHLB”)borrowings and funds from operations, to originate commercial real estate andnon-real estate loans and one-to-four family residential mortgage loans.Landmark National 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 funds as funding sources.

 

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

 

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

 

We are significantlyimpacted by prevailing economic conditions including federal monetary andfiscal policies and federal regulations of financial institutions.  Deposit balances are influenced by numerousfactors such as competing personal investments, the level of personal incomeand the personal rate of savings within our market areas.  Factors influencing lending activitiesinclude the demand for housing and the interest rate pricing competition fromother lending institutions.

 

Currently, our businessconsists of ownership of Landmark National Bank, with its main office inManhattan, Kansas and fifteen branch offices in eastern, central andsouthwestern Kansas.  On April 1, 2004,we moved forward with our plans of growth and expansion when we completed thecash acquisition of First Kansas Financial Corporation (“First Kansas”), whichhad total assets of approximately $150 million, including loans and deposits of$74 million and $84 million, respectively. First Kansas had branches in Osawatomie, Paola, Louisburg, Fort Scott,Beloit, and Phillipsburg, Kansas.  Thisacquisition expanded our presence in high-growth market areas in easternKansas, presenting us with potential for revenue generation and assetgrowth.  Our acquisition of First Kansaswas accounted for using the purchase method of accounting.  The cost in excess of the tangible and identifiableintangible net assets acquired has been recorded as goodwill.  In connection with the acquisition and thesubsequent sale of our branches as described below, we recorded a core depositintangible of $605,000, which is being amortized on an accelerated basis overten years, and goodwill attributable to the acquisition of First Kansas of $5.7million, none of which is deductible for tax purposes.  The results for the year ended December 31,2004, include First Kansas’ results of operations since April 1, 2004.

 

During the third quarterof 2004, we sold our newly acquired Beloit and Phillipsburg branches primarilybecause these small branches were outside our current geographic range ofoperations.  Upon consummation of thetransactions, we sold approximately $7.7 million in deposits and approximately$2.4 million in loans and premises and equipment associated with the Beloitbranch and approximately $4.7 million in deposits and approximately $846,000 inloans and premises and equipment related to the Phillipsburg branch.  The net proceeds received from the buyers ofthese branches were recorded as a reduction of goodwill and the core depositintangible.

 

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**Critical Accounting Policies**

Critical accountingpolicies are those which are both most important to the portrayal of our financialcondition and results of operations, and require our management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain.  Our critical accounting policies relate tothe allowance for loan losses, the valuation of investment securities, andaccounting for income taxes, all of which involve significant judgment by ourmanagement.

 

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.  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.  Fluctuations in the actual outcome of thesefuture tax consequences, including the effects of IRS examinations andexaminations by other state agencies, could materially impact our financialposition and results of operations.

 

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**Comparison Of Operating Results For The Years Ended December 31, 2004And December 31, 2003**

 

**Summary of Performance.**  Net earnings for the year ended December 31,2004, decreased $601,000, or 12.4%, to $4.3 million as compared to the yearended December 31, 2003.  This decline innet earnings was generally attributable to an increase in non-interest expensewhich was offset by an improvement of net interest income.  Also contributing to the decline in netearnings was an increase of our loan loss provision during 2004.  The increases in non-interest expense and theimprovement of net interest income primarily resulted from our acquisition ofFirst Kansas on April 1, 2004, as we incurred additional expenses associatedwith operating these new branches and as our average earning assets increased.  The increase in our loan loss provisionduring the year primarily related to our commercial loan growth.

 

The year ended December31, 2004, resulted in diluted earnings per share of $1.95 compared to $2.17 forthe same period in 2003.  Return onaverage assets was 0.98% for the year ended December 31, 2004, compared to1.46% for the same period in 2003. Return on average stockholders’ equity was 9.98% for the year endedDecember 31, 2004, compared to 11.53% for the same period in 2003.

 

We continued our stockrepurchase program during 2004, resulting in the repurchase of an additional102,338 shares.  As of December 31, 2004,we held 121,630 shares as treasury stock at an average cost per share of$26.36.  We also distributed a 5% stockdividend for the fourth consecutive year in December 2004.  All per share and average share data in thisreport has been restated to reflect the 2004 stock dividend.

 

**Interest Income.** Interest income for the yearended December 31, 2004, increased $2.7 million, or 15.5%, to $19.9 millionfrom $17.3 million for the year ended December 31, 2003.  This increase was primarily the result of theincrease in interest earning assets from the First Kansas acquisition, beingoffset by the decrease in interest rates experienced as interest earning assetsrepriced during 2003 and 2004.  Averageloans for the year ended 2004 increased to $267.0 million from $217.3 millionfor the same period in 2003.  Theincrease in average loans was primarily the result of the acquisition of FirstKansas.  Interest income on loansincreased $1.4 million, or 9.6%, to $15.7 million for the year ended December31, 2004.  Average investment securitiesalso increased as a result of the First Kansas acquisition, from $93.3 millionfor the year ended December 31, 2003, to $135.3 million for the same period of2004.  Interest income on investmentsecurities increased $1.3 million, or 43.9%, to $4.2 million for the year endedDecember 31, 2004.

 

**Interest Expense.** Interest expense for the year ended December 31, 2004, increased to $7.0million from $5.7 million for the year ended December 31, 2003, or 23.8%.  Interest expense on deposits declined to $3.9million, or 11.3%, from $4.4 million during this period, despite an increase inaverage deposits from $254.8 million at December 31, 2003, to $306.1 million atDecember 31, 2004.  The decrease ininterest expense on deposits resulted primarily from the decline in interestrates and the repricing of maturing deposits at these lower rates.  Interest expense on borrowings increased $1.8million, or 152.8%.  The increase ininterest expense on borrowings resulted primarily from additional advances fromthe FHLB of approximately $56.4 million which we assumed through theacquisition of First Kansas, the $8.2 million in trust preferred securities thatwe issued in December 2003, and the $7.0 million that we borrowed in April 2004to consummate the acquisition of First Kansas.

 

**Net Interest Income.** Net interest income represents the difference between income derivedfrom interest-earning assets and the expense incurred on interest-bearingliabilities.  Net interest income isaffected by both the difference between the rates of interest earned oninterest-earnings assets and the rates paid on interest-bearing liabilities (“interestrate spread”) as well as the relative amounts of interest-earning assets andinterest-bearing liabilities.

 

Net interest income forthe year ended December 31, 2004, totaled $12.9 million, a 11.4% increase, ascompared to $11.6 million for the year ended December 31, 2003, primarily as aresult of the First Kansas acquisition. Average earning assets also increased for the year ended December 31,2004, as a result of the acquisition of First Kansas, increasing to $405.9million from $313.2 million for the same period of 2003.  The net interest margin on earning assets was3.19% for the year ended December 31, 2004, down from 3.71% for the same periodof 2003.  The refinancings and paydownsin the residential mortgage portfolio exceeded the commercial loan growth during2003, resulting in the excess liquidity being invested into lower yieldinginvestment securities.  In addition, theprolonged low-rate environment has caused the net interest margin to compressas assets have continued to reprice with little room left for liabilityrepricing.  We believe the increase inFederal Funds rates in the second half of 2004 and in the beginning of 2005 bythe Federal Open Market Committee will have a positive impact on our netinterest margin in 2005 as our prime rates have increased as a result.

 

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**Provision For Loan losses.**  We maintain, and our Board of Directorsmonitors, an allowance for losses on loans. The allowance is established based upon management’s periodic evaluationof known and inherent risks in the loan portfolio, review of significantindividual loans and collateral, review of delinquent loans, past lossexperience, adverse situations that may affect the borrowers’ ability to repay,current and expected market conditions, and other factors management deemsimportant.  Determining the appropriatelevel of reserves involves a high degree of management judgment and is basedupon historical and projected losses in the loan portfolio and the collateralvalue of specifically 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 $460,000 during the year ended December 31, 2004, comparedto $240,000 for the year ended December 31, 2003.  Our continuous review of the loan portfolioprompted an increase in our provision, relating primarily to our commercialloan growth.  First Kansas had anallowance for loan losses approximating $352,000, or 0.47% of outstandingloans, at March 31, 2004, which increased our allowance following theacquisition.  At December 31, 2004, theallowance for loan losses was $2.9 million, or 1.0% of gross loans outstanding,compared to $2.3 million, or 1.1% of gross loans outstanding, at December 31,2003.  For further discussion of theprovision for loan losses, refer to the “Asset Quality and Distribution”section.

 

**Non-Interest Income.** Non-interest income remained relatively flat, increasing $151,000, or3.0%, for the year ended December 31, 2004, to $5.1 million compared to $5.0million for the year ended December 31, 2003. The increase in non-interest income reflected an increase of $1.2million, or 60.0%, in fees and service charges from $2.0 million for the yearended December 31, 2003, to $3.3 million for the same period of 2004.  This significant increase in fees and servicecharges was the result of substantially increasing the number of our retailchecking accounts opened through new marketing initiatives that were introducedin early 2004 and through the acquisition of First Kansas on April 1,2004.  Also contributing to the increasein non-interest income was a $174,000 increase in other fee income for the yearended December 31, 2004, as compared to the same period of 2003, primarilyresulting from the sale of non-deposit investment and life insuranceproducts.  We plan to continue to growour sales of non-deposit investment and life insurance products as we seek todiversify our revenue sources and reduce our dependency upon net interestincome.  We estimate that our acquisitionof First Kansas will continue to positively impact our non-interest income for2005 as we continue to grow these new markets and expand our retail marketshare through the cross selling of other banking services.  Offsetting the increases in fees and servicecharges and other income experienced during 2004 were decreases in gains onsale of loans and gains on sale of investments. Our gains on sale of loans declined $1.1 million, or 51.6%, from $2.0million for the year ended December 31, 2003, to $987,000 for the year endedDecember 31, 2004, as residential mortgage financing activity slowed.  Mortgage refinancing and prepayments weremuch lower during 2004 as compared to 2003, as expected, as many mortgageholders had already taken advantage of the low interest rates favorable formortgage refinancing and because mortgage rates have risen in the second halfof 2004.  We expect this trend tocontinue in 2005.

 

The gains on sale ofinvestments decreased $193,000, or 35.0%, for the year ended December 31, 2004,as compared to the same period of 2003, and resulted from fewer equitysecurities sales from our holding company’s investment portfolio.  We periodically sell equity securities basedon performance and other indicators, and we may sell additional equitysecurities in future periods.

 

**Non-Interest Expense.** Non-interest expense increased$2.1 million, or 23.0%, to $11.4 million for the year ended December 31, 2004,as compared to the year ended December 31, 2003.  The increase in non-interest expense for 2004as compared to 2003 resulted primarily from a $1.0 million increase incompensation and benefits, a $358,000 increase in occupancy and equipment and a$104,000 increase in data processing expenses, all of which was associatedprimarily with the operations of the branches acquired from First Kansas.  The acquisition of First Kansas added over 40employees to our staff.  Alsocontributing to the increase in non-interest expense for the year endedDecember 2004, was an increase of $122,000 in advertising expenses related toour new marketing initiative that was introduced in early 2004.  Offsetting these increases in non-interestexpense was a $52,000 decrease in amortization expense and a $41,000 decreasein professional fees for the year ended December 31, 2004, compared to the yearended December 31, 2003.  Amortizationexpense decreased as prepayment speeds on our mortgage servicing portfolio haveslowed.  Professional fees were higher in2003 as we incurred an increase in legal fees relating to our intellectualproperty rights and trade name.

 

**Income Taxes.** Income tax expense decreased $265,000,or 11.7%, to $2.0 million for the year ended December 31, 2004, from $2.3million for the year ended December 31, 2003. The decrease in income tax expense for the year ended December 31, 2004,resulted primarily from a decrease in taxable income.  The effective tax rate for the year endedDecember 31, 2004, was 32.1% as compared to 31.9% the same period of 2003.

 

8

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**Average Assets/Liabilities.**  The following table sets forth informationrelating to average balances of interest-earning assets and interest-bearingliabilities for the years ended December 31, 2004, 2003 and 2002.  The assets and liabilities of First Kansaswere recorded at their respective fair market values at the acquisitiondate.  Based on the relatively lowinterest rates prevailing at the acquisition date, the effective yields onFirst Kansas’ interest-earning assets and rates on First Kansas’ interestbearing liabilities were significantly reduced, thus causing our postacquisition blended yields and cost of funds to decline in comparison to theperiods presented prior to the acquisition. This table reflects the average yields on assets and average costs ofliabilities for the periods indicated (derived by dividing income or expense bythe monthly average balance of assets or liabilities, respectively) as well asthe “net interest margin” (which reflects the effect of the net earningsbalance) for the periods shown (dollars in thousands).

 

**Average Balance Sheets — AverageYields And Rates**

 
| ** **                                                                          | ** ** | **Year  ended December 31, 2004** | ** ** | **Year  ended December 31, 2003** | ** ** | **Year  ended December 31, 2002** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                          | ** ** | **Average**                       | ** ** | ** **                        | ** ** | **Average**                       | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                                          | ** ** | **Balance**                       | ** ** | **Interest**                      | ** ** | **Yield/Rate**                    | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| **Assets**                                                                          |       |                              |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                           |       |                              |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                          |       | $                                 | 139,008    |                              | $          | 4,276                             |       | 3.08 | % | $ | 95,923 |   | $ | 2,973 |   | 3.10 | % | $ | 89,393 |   | $ | 2,911 |   | 3.26 | % |
| Loans receivable,  net (2)                                                          |       | 266,938                           |       | 15,673                            |       | 5.87                              | %          | 217,327 |   | 14,303 |   | 6.58 | % | 233,311 |   | 16,650 |   | 7.14 | % |
| Total  interest-earning assets                                                      |       | 405,946                           |       | 19,949                            |       | 4.91                              | %          | 313,250 |   | 17,276 |   | 5.52 | % | 322,704 |   | 19,561 |   | 6.06 | % |
| Non-interest-earning  assets                                                        |       | 27,766                            |       |                              |       |                              |       | 17,899 |   |   |   |   |   | 15,861 |   |   |   |   |   |
| Total                                                                               |       | $                                 | 433,712    |                              |       |                              |       |   | $ | 331,149 |   |   |   |   |   | $ | 338,565 |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                      |       |                              |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                      |       |                              |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                            |       | $                                 | 160,251    |                              | $          | 2,849                             |       | 1.78 | % | $ | 141,877 |   | $ | 3,706 |   | 2.61 | % | $ | 152,407 |   | $ | 4,578 |   | 3.00 | % |
| Money market and  NOW accounts                                                      |       | 93,640                            |       | 811                               |       | 0.87                              | %          | 76,316 |   | 678 |   | 0.89 | % | 74,032 |   | 1,026 |   | 1.39 | % |
| Savings accounts                                                                    |       | 20,304                            |       | 285                               |       | 1.40                              | %          | 15,033 |   | 62 |   | 0.41 | % | 17,201 |   | 169 |   | 0.98 | % |
| FHLB advances and  other borrowings                                                 |       | 80,109                            |       | 3,055                             |       | 3.81                              | %          | 27,887 |   | 1,209 |   | 4.34 | % | 28,164 |   | 1,338 |   | 4.75 | % |
| Total  interest-bearing liabilities                                                 |       | 354,304                           |       | 7,000                             |       | 1.98                              | %          | 261,113 |   | 5,655 |   | 2.17 | % | 271,804 |   | 7,111 |   | 2.62 | % |
| Non-interest-bearing  liabilities                                                   |       | 36,796                            |       |                              |       |                              |       | 27,603 |   |   |   |   |   | 26,267 |   |   |   |   |   |
| Stockholders’  equity                                                          |       | 42,612                            |       |                              |       |                              |       | 42,433 |   |   |   |   |   | 40,494 |   |   |   |   |   |
| Total                                                                               |       | $                                 | 433,712    |                              |       |                              |       |   | $ | 331,149 |   |   |   |   |   | $ | 338,565 |   |   |   |   |   |
|                                                                                |       |                              |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                                |       |                              |       | $                                 | 12,949     |                              |       |   |   |   | $ | 11,621 |   |   |   |   |   | $ | 12,450 |   |   |   |
| Interest rate  spread (3)                                                           |       |                              |       |                              |       | 2.93                              | %          |   |   |   |   | 3.35 | % |   |   |   |   | 3.44 | % |
| Net interest  margin (4)                                                            |       |                              |       |                              |       | 3.19                              | %          |   |   |   |   | 3.71 | % |   |   |   |   | 3.86 | % |
| Ratio of average  interest- earning assets to average interest- bearing liabilities |       |                              |       | 114.58                            | %          |                              |       |   |   | 119.97 | % |   |   |   |   | 118.73 | % |   |   |

 

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(1)     Income on investmentsecurities includes all securities and interest bearing deposits in otherfinancial institutions.

(2)     Includes loans classified asnon-accrual.

(3)     Interest rate spreadrepresents the difference between the average yield on interest-earning assetsand the average cost of interest-bearing liabilities.

(4)     Net interest marginrepresents net interest income divided by average interest-earning assets.

 

9

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**Comparison Of Operating Results For The Years Ended December 31, 2003 AndDecember 31, 2002**

 

**Summary of Performance.**  Net earnings for the year ended December 31,2003, increased $274,000, or 6.0%, to $4.9 million as compared to the yearended December 31, 2002.  Thisimprovement in net earnings was generally attributable to an increase innon-interest income including increased gains on sale of investments, increasedfees and service charges, and increased gains on sale of loans which was offsetby a reduction of net interest income.  Alsocontributing to improved net earnings was non-interest expense which remainedflat at $9.2 million for the years ended December 31, 2003 and 2002.

 

The year ended December31, 2003, resulted in diluted earnings per share of $2.17 compared to $1.93 forthe same period in 2002.  Return on averageassets was 1.46% for the year ended December 31, 2003, compared to 1.35% forthe same period in 2002.  Return onaverage stockholders’ equity was 11.53% for the year ended December 31, 2003,compared to 11.31% for the same period in 2002.

 

We continued our stockrepurchase program during 2003, resulting in the repurchase of an additional72,228 shares.  As of December 31, 2003,we held 119,657 shares as treasury stock at an average cost per share of$23.34.  We also distributed a 5% stockdividend for the third consecutive year in December 2003.

 

**Interest Income.**Interest income for the year ended December 31, 2003, decreased $2.3million, or 11.7%, to $17.3 million from $19.6 million for the year endedDecember 31, 2002.  Interest income onloans decreased $2.3 million, or 14.1%, for the year ended December 31, 2003,compared to the same time period of 2002. This decrease was related in part to the decrease in interest ratesexperienced as interest earning assets repriced downward during 2002 and continuedthroughout 2003.  A continued decline inaverage loans during 2003, which were $217.3 million, at December 31, 2003,compared to $233.3 million at December 31, 2002, also contributed to thedecrease in interest income.  The declinein average loans primarily resulted from refinancings and paydowns in ourresidential mortgage portfolio. Offsetting the decrease in total interest income on loans was anincrease in interest earned on investment securities to $2.9 million for theyear ended December 31, 2003, from $2.8 million for the same period of2002.  The increase in interest income oninvestment securities was due primarily to an increase in average investmentsecurities from $93.3 million at December 31, 2003, compared to $84.3 millionat December 31, 2002, which was offset by a decline in interest rates on theseinvestments.

 

**Interest Expense.** Interest expense for the year ended December 31, 2003, decreased to $5.7million from $7.1 million for the year ended December 31, 2002, or 20.5%.  Interest expense on deposits declined to $4.4million, or 23.0%, from $5.8 million during this period as a result of thedecline in interest rates and a reduction in average deposits from $263.9million at December 31, 2002, to $254.8 million at December 31, 2003.  Interest expense on borrowings, consistingmostly of advances from the FHLB, decreased $129,000, or 9.7%, to $1.2 millionfor the year ended December 31, 2003, as compared to the year ended December31, 2002.  The decrease in interestexpense on borrowings resulted from scheduled principal payments and thedecline in interest rates.  The interestexpense related to the $8.2 million in subordinated debentures that we issuedin mid-December 2003 was nominal.  Theinterest expense associated with the subordinated debentures will be higher for2004 as we incur twelve months of expense.

 

**Net Interest Income.** Net interest income for the year ended December 31, 2003, totaled $11.6million, a 6.7% decrease, as compared to $12.5 million for the year endedDecember 31, 2002.  Average earningassets for 2003 totaled $313.2 million as compared to $322.7 million for2002.  The net interest margin on earningassets was 3.71% for the year ended December 31, 2003, down from 3.86% for thesame period of 2002.  The refinancingsand paydowns in our residential mortgage portfolio exceeded our commercial loangrowth during 2002 and 2003, resulting in the excess liquidity being investedinto lower yielding investment securities. In addition, the prolonged low-rate environment caused the net interestmargin to compress as assets continued to reprice downward with little roomleft for liability repricing.

 

Between 2001 and 2003,the Federal Open Market Committee lowered the target for the Federal Funds rateon twelve occasions, decreasing the rate from 6.5% on January 1, 2001, to 1.00%by the end of the first quarter of 2003, for a total decline of 550 basispoints.  These actions caused acorresponding decrease in our prime loan rates which declined from 9.5% to4.00%.  Since the first quarter of 2003,the Federal Funds rate held steady for the remainder of 2003.  This environment had an adverse affect on ournet interest margin during 2003 as our interest earning assets continued toreprice downward and caught up with our interest bearing liabilities which hadalready repriced downward.

 

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**Provision For Loan losses.**  The provision for loan losses increased to$240,000 during the year ended December 31, 2003, compared to $181,500 for theyear ended December 31, 2002.  Ourcontinuous review of the loan portfolio prompted an increase in our provision,primarily as a result of the loan portfolio’s increased percentage ofcommercial loans and some deterioration in the asset quality of the commercialand consumer loan portfolios as a result of weak economic conditions.  One measure of the adequacy of the allowancefor estimated losses on loans is the ratio of the allowance to the total loanportfolio.  At December 31, 2003, theallowance for loan losses was $2.3 million, or 1.1% of gross loans outstanding,compared to $2.6 million, or 1.1% of gross loans outstanding, at December 31,2002.  For further discussion of theprovision for loan losses, refer to the “Asset Quality and Distribution” section.

 

**Non-Interest Income.** Non-interest income increased $1.1 million, or 29.0%, for the year endedDecember 31, 2003, to $5.0 million compared to $3.9 million for the year endedDecember 31, 2002.  The increase innon-interest income reflected an improvement in gains on sale of loans from$1.6 million for the year ended December 31, 2002, to $2.0 million for the yearended December 31, 2003, as residential mortgage financing activity increaseddue to low home mortgage rates.  Mortgagerefinancing activity slowed down during the fourth quarter of 2003 and isexpected to continue at lower levels during 2004 as many mortgage holders havealready taken advantage of the low interest rates favorable for mortgageoriginations and as mortgage rates increase. Also contributing to the increase in non-interest income was increasedfees and service charges from $1.9 million for the year ended December 31,2002, to $2.0 million for the year ended December 31, 2003, relating primarilyto the enhancement of our fee-based services and product offerings during thesecond half of 2002.  The increase innon-interest income also reflected a $427,000 increase in gains on sale ofinvestments for the year ended December 31, 2003, as compared to the sameperiod of 2002.  This increase in gainson sale of investments resulted from equity security sales from our holdingcompany’s investment portfolio.  We sellequity securities based on performance and other indicators.

 

**Non-Interest Expense.**  Non-interest expense increased $45,000, or0.5%, to $9.2 million for the year ended December 31, 2003, as compared to theyear ended December 31, 2002.  Theincrease in non-interest expense was primarily related to an increase of$61,000 in professional fees, a $52,000 increase in occupancy and equipmentexpense and an increase of $38,000 in amortization expense for the year endedDecember 31, 2003, compared to the year ended December 31, 2002.  The increase in professional fees includedlegal fees of approximately $25,000 incurred related to securing our “Landmark”trade name.  The increase in occupancyand equipment expense was primarily related to the depreciation of our enhancedcomputer system while amortization expense increased as prepayments in ourmortgage servicing portfolio have accelerated.

 

**Income Taxes.**  Incometax expense decreased $87,000, or 3.7%, to $2.3 million for the year endedDecember 31, 2003, from $2.4 million for the year ended December 31, 2002.  The effective tax rate for the year endedDecember 31, 2003, was 31.9% as compared to 34.0% the same period of 2003.  The decrease in income tax expense and theeffective rate for the year ended December 31, 2003, resulted primarily fromthe utilization of investment tax credits.

 

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**Landmark Bancorp, Inc. andSubsidiaryQuarterly Results of Operations**

** **
| ** **                                           | ** ** | **Fiscal 2004 Quarters Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **March 31**                   | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                              | 4,047,166  |   | $ | 5,346,342 |   | $ | 5,325,004 |   | $ | 5,230,694 |   |
| Interest expense                                     |       | 1,282,245                      |       | 1,915,993 |   | 1,911,855 |   | 1,890,203 |   |
| Net interest  income                                 |       | 2,764,921                      |       | 3,430,349 |   | 3,413,149 |   | 3,340,491 |   |
| Provision for  loan losses                           |       | 60,000                         |       | 120,000 |   | 130,000 |   | 150,000 |   |
| Net interest  income after provision for loan losses |       | 2,704,921                      |       | 3,310,349 |   | 3,283,149 |   | 3,190,491 |   |
| Non-interest  income                                 |       | 946,808                        |       | 1,294,185 |   | 1,378,711 |   | 1,505,717 |   |
| Non-interest  expense                                |       | 2,257,321                      |       | 3,000,461 |   | 2,982,473 |   | 3,113,093 |   |
| Earnings before  income taxes                        |       | 1,394,408                      |       | 1,604,073 |   | 1,679,387 |   | 1,583,115 |   |
| Provision for  income taxes                          |       | 445,647                        |       | 529,286 |   | 543,456 |   | 491,836 |   |
| Net earnings                                         |       | $                              | 948,761    |   | $ | 1,074,787 |   | $ | 1,135,931 |   | $ | 1,091,279 |   |
| Earnings per  share(1):                              |       |                           |       |   |   |   |   |   |   |
| Basic                                                |       | $                              | 0.43       |   | $ | 0.50 |   | $ | 0.52 |   | $ | 0.51 |   |
| Diluted                                              |       | 0.43                           |       | 0.49 |   | 0.52 |   | 0.51 |   |

 
| ** **                                           | ** ** | **Fiscal 2003 Quarters Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **March 31**                   | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                              | 4,635,165  |   | $ | 4,311,598 |   | $ | 4,132,953 |   | $ | 4,196,586 |   |
| Interest expense                                     |       | 1,549,418                      |       | 1,454,050 |   | 1,350,762 |   | 1,300,342 |   |
| Net interest  income                                 |       | 3,085,747                      |       | 2,857,548 |   | 2,782,191 |   | 2,896,244 |   |
| Provision for  loan losses                           |       | 60,000                         |       | 60,000 |   | 60,000 |   | 60,000 |   |
| Net interest  income after provision for loan losses |       | 3,025,747                      |       | 2,797,548 |   | 2,722,191 |   | 2,836,244 |   |
| Non-interest  income                                 |       | 1,341,228                      |       | 1,245,056 |   | 1,297,633 |   | 1,090,274 |   |
| Non-interest  expense                                |       | 2,353,190                      |       | 2,290,000 |   | 2,191,014 |   | 2,394,551 |   |
| Earnings before  income taxes                        |       | 2,013,785                      |       | 1,752,604 |   | 1,828,810 |   | 1,531,967 |   |
| Provision for  income taxes                          |       | 690,252                        |       | 537,198 |   | 597,168 |   | 450,851 |   |
| Net earnings                                         |       | $                              | 1,323,533  |   | $ | 1,215,406 |   | $ | 1,231,642 |   | $ | 1,081,116 |   |
| Earnings per  share(1):                              |       |                           |       |   |   |   |   |   |   |
| Basic                                                |       | $                              | 0.60       |   | $ | 0.55 |   | $ | 0.56 |   | $ | 0.49 |   |
| Diluted                                              |       | 0.59                           |       | 0.54 |   | 0.55 |   | 0.49 |   |

 

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

 

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**Financial Condition**

 

**Asset Quality And Distribution.**  Total assets increased to $442.1 million atDecember 31, 2004, compared to $334.0 million at December 31, 2003.  This increase was primarily attributable tothe acquisition of First Kansas consummated on April 1, 2004.  Our primary ongoing sources of funds aredeposits, proceeds from principal and interest payments on loans and investmentsecurities and proceeds from the sale of mortgage loans and investmentsecurities.  While maturities andscheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interest rates,economic conditions, competition, and the restructuring of the financialservices industry.

 

Net loans, excludingloans held for sale, increased $63.1 million to $277.4 million as of December31, 2004, from $214.3 million as of December 31, 2003.  This increase was primarily the result of theacquisition of First Kansas on April 1, 2004, which had net loans of $74.1million.  The majority of loans acquiredfrom First Kansas were one-to-four family residential loans.  As of December 31, 2004, our one-to-fourfamily residential loans comprised 46.8% of totals loans.  We anticipate continuing to diversify ourloan portfolio composition through our continued planned expansion ofcommercial lending activities.

 

Our primary investingactivities are the origination of mortgage, consumer, and commercial loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  We do notoriginate and warehouse these fixed-rate residential loans for resale in orderto speculate on interest rates.  As ofDecember 31, 2004, our residential mortgage loan portfolio consisted of $39.8million with fixed rates and $91.3 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.

 

We believe that thequality of the loan portfolio continues to be strong as evidenced by our lowlevels of past due and non-accrual loans. Loans past due more than one month and less than 90 days as of December31, 2004, totaled $1.7 million.  As ofDecember 31, 2004, loans with a balance of $1.1 million were on non-accrualstatus, or 0.41% of total loans, compared to a balance of $1.2 million loans onnon-accrual status, or 0.55% of total loans, as of December 31, 2003.  In addition, the ratio of non-performingassets as a percentage of total assets decreased to 0.36% at December 31, 2004,compared to 0.45% at December 31, 2003.

 

Residential home loanscomprised 70.7% of the $1.1 million non-accrual balance at December 31,2004.  These loans have been underwrittenaccording to our residential lending policies and are well secured by realestate collateral, and in many instances, private mortgage insurance orgovernment guarantees.  We havehistorically incurred minimal losses on mortgage loans based on collateralvalues and underlying insurance or guarantees. Net charge offs were $234,000 for the year ended December 31, 2004,compared to net charge offs of $489,000 for the year ended December 31, 2003.

 

A slowdown in economicactivity beginning in 2001 severely impacted several major industries as wellas the economy as a whole.  We arepleased that there appear to be numerous indications of emerging strength inthe economy, including the Federal Open Market Committee raising the target forthe Federal Funds rate by 175 basis points since the June 30, 2004,meeting.  The outlook of the economy for2005, however, depends on whether the strengthening will be sustainable and howquickly consumer confidence responds to the positive effects, if any, on theeconomy.  Based on the outcomes, theseevents could adversely affect cash flows for both commercial and individualborrowers, as a result of which, we could experience increases in problemassets, delinquencies and losses on loans. Many financial institutions have experienced an increase innon-performing assets during the recent difficult economic period, as evenwell-established business borrowers developed cash flow, profitability andother business-related problems.  We believethat the allowance for losses on loans at December 31, 2004, was adequate.  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 $49.8 million to$302.9 million at December 31, 2004, from $253.1 million at December 31, 2003,resulting primarily from the acquisition of First Kansas on April 1, 2004.  Borrowings increased $60.8 million to $94.6million at December 31, 2004, from $33.8 million at December 31, 2003,resulting primarily

 

13

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from $56.4 million ofFHLB advances that were assumed through the First Kansas acquisition and the$7.0 million that we borrowed to consummate that acquisition.

 

Non-interest bearingdeposits at December 31, 2004, were $28.5 million, or 9.4% of deposits,compared to $20.5 million, or 8.1% of deposits, at December 31, 2003.  Money market and NOW deposit accounts were31.9% of the portfolio and totaled $96.6 million at December 31, 2004, comparedto $77.0 million, or 30.4% of deposits, at December 31, 2003.  Savings accounts increased to $23.2 million,or 7.7% of deposits, at December 31, 2004, from $14.8 million, or 5.9% ofdeposits, at December 31, 2003.  Certificatesof deposit increased to $154.5 million, or 51.0% of deposits, at December 31,2004, from $140.8 million, or 55.6% of deposits, at December 31, 2003.

 

Certificates of depositat December 31, 2004, which were scheduled to mature in one year or less,totaled $117.6 million.  Historically,maturing deposits have generally remained with our Bank and we believe that asignificant portion of the deposits maturing in one year or less will remainwith us upon maturity.

 

**Cash Flows.** During the year ended December 31, 2004, our cash and cash equivalentsincreased by $137,000.  Our operatingactivities during 2004 provided us net cash of $4.7 million.  Our investing activities in 2004 provided us netcash of $15.8 million, primarily from the maturities and prepayments ofinvestment securities of $32.9 million. Also contributing to the cash provided by investing activities was $1.4million in proceeds from the sales of premises and equipment and foreclosedassets and $972,000 in proceeds from the sales of investment securities.  These inflows of cash for investing purposeswere offset by net cash of $9.1 million paid in the First Kansas acquisition,net cash of $8.7 million paid in the Beloit and Phillipsburg branch sales, thepurchase of investment securities of $6.5 million, and by a $1.2 million netincrease in the purchase of premises and equipment.  We used net cash of $20.4 million infinancing activities during 2004, primarily due to a $21.6 million decrease inour deposits portfolio, the purchase of $3.1 million in treasury stock, thepayment of $1.4 million in dividends, and the payment of $83.1 million of debtwhich was offset by $88.4 million in borrowings.  These outflows of cash for financingactivities were also offset by $357,000 of proceeds from the issuance of commonstock associated with the exercise of stock options.

 

During the year endedDecember 31, 2003, our cash and cash equivalents decreased $3.7 million.  Our operating activities during 2003 providedus net cash of $5.5 million.  We used netcash of $3.2 million in investing activities in 2003, primarily for thepurchase of investment securities of $66.5 million and the purchase ofequipment of $338,000, net of retirements. These outflows of cash for investing purposes were offset by thematurities and prepayments of investment securities of $52.6 million and a netdecrease in our loan portfolio of $9.3 million, the proceeds from sales ofinvestment securities of $1.2 million, and the proceeds from sale of other realestate and premises and equipment of $434,000. We used net cash of $6.0 million in financing activities during 2003,primarily due to an $11.2 million decrease in our deposits portfolio, thepurchase of $1.9 million in treasury stock, the payment of $1.3 million individends, and the payment of $78.2 million of debt which was offset by $85.9million in borrowings.  The $85.9 millionin borrowings during 2003 included the issuance of $8.2 million of subordinateddebentures.  These outflows of cash forfinancing activities were also offset by $721,000 of proceeds from the issuanceof common stock associated with the exercise of stock options.

 

**Contractual Obligations and Commercial Commitments.**  The following table presents contractualobligations, defined as operating lease obligations and principal payments dueon non-deposit obligations with maturities in excess of one year as of December31, 2004, for the periods indicated.

 
| **Contractual cash**           | ** ** | ** ** | ** ** | **One year** | ** ** | **One to**      | ** ** | **Four to**    | ** ** | **More than**  | ** ** |
|--------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| **obligations**                | ** ** | **Total**  | ** ** | **or less**  | ** ** | **three years** | ** ** | **five years** | ** ** | **five years** | ** ** |
|                           |       |       |       |         |       |            |       |           |       |           |       |   |   |   |   |   |
| Operating leases               |       | $          | 295,839    |         | $          | 78,449          |       | $              | 103,632    |           | $          | 103,632 |   | $ | 10,126 |   |
| Service  contracts             |       | 2,275,000  |       | 780,000      |       | 1,495,000       |       | —         |       | —         |       |
| FHLB advances                  |       | 81,053,321 |       | 13,500,000   |       | 1,000,000       |       | 42,319,791     |       | 24,233,530     |       |
| Other borrowings               |       | 13,268,000 |       | —       |       | —          |       | 5,020,000      |       | 8,248,000      |       |
| Total  contractual obligations |       | $          | 96,892,160 |         | $          | 14,358,449      |       | $              | 2,598,632  |           | $          | 47,443,423 |   | $ | 32,491,656 |   |

 

14

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**Liquidity.**  Ourmost liquid assets are cash and cash equivalents and investment securitiesavailable for sale.  The level of theseassets is dependent on our operating, financing, lending and investingactivities during any given period.  AtDecember 31, 2004 and 2003, the carrying value of these liquid assets totaled$141.4 million and $107.5 million, respectively.  During periods in which we are not able tooriginate a sufficient amount of loans and/or periods of high principalprepayments, we increase our liquid assets by investing in short-term U.S.Government and agency securities or high-grade municipal securities.

 

Liquidity management isboth a daily and long-term function of our strategy.  Excess funds are generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare available through the use of FHLB advances, a line of credit with the FHLBor through sales of securities.  AtDecember 31, 2004, we had outstanding FHLB advances of $77.6 million and hadborrowings of $3.5 million on our line of credit with the FHLB.  At December 31, 2004, our total borrowingcapacity with the FHLB was $105.9 million. We also had other borrowings of $13.5 million at December 31, 2004,which included $8.2 million of subordinated debentures, $5.0 million oflong-term debt and $250,000 in repurchase agreements.

 

As a provider offinancial services, we routinely issue financial guarantees in the form offinancial 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 by us,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 $2.2 million at December 31, 2004.

 

At December 31, 2004, wehad outstanding loan commitments, excluding standby letters of credit, of $38.5million.  We anticipate that sufficientfunds will be available to meet current loan commitments.  These commitments consist of letters ofcredit, unfunded lines of credit and commitments to finance real estate loans.

 

**Capital.**  TheFederal Reserve has established capital requirements for bank holding companieswhich generally parallel the capital requirements for national banks under theOffice of the Comptroller of the Currency regulations.  The regulations provide that such standardswill generally be applied on a consolidated (rather than a bank-only) basis inthe case of a bank holding company with more than $150 million in totalconsolidated assets.

 

At December 31, 2004, wecontinued to maintain a sound leverage capital ratio of 15% and a total riskbased capital ratio of 16%.  As shown bythe following table, our capital exceeded the minimum capital requirements atDecember 31, 2004 (dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Percent**  | ** ** | **Amount**   | ** ** |
| Leverage                  |       | $          | 41,673     |        | 15         | %            | 4          | %            | $          | 10,858 |   |
| Tier 1 capital            |       | $          | 41,673     |        | 9          | %            | 4          | %            | $          | 17,714 |   |
| Total risk based  capital |       | $          | 44,567     |        | 16         | %            | 8          | %            | $          | 21,716 |   |

 

At December 31, 2004, oursubsidiary bank continued to maintain a sound leverage ratio of 17% and a totalrisk based capital ratio of 18%.  Asshown by the following table, Landmark National Bank’s capital exceeded theminimum capital requirements at December 31, 2004 (dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Percent**  | ** ** | **Amount**   | ** ** |
| Leverage                  |       | $          | 45,806     |        | 17         | %            | 4          | %            | $          | 10,836 |   |
| Tier 1 capital            |       | $          | 45,806     |        | 10         | %            | 4          | %            | $          | 17,624 |   |
| Total risk based  capital |       | $          | 48,700     |        | 18         | %            | 8          | %            | $          | 21,673 |   |

 

Banks and bank holding companiesare generally expected to operate at or above the minimum capital requirements. The above ratios are well in excess ofregulatory minimums and should allow us to operate without capital adequacyconcerns.  The Federal Deposit InsuranceCorporation Improvement Act of 1991 establishes a bank rating system based onthe capital levels of banks.  As ofDecember 31, 2004 and 2003, we were rated “well capitalized”, which is thehighest rating available under this capital-based rating system.  During December 2003, we obtained $8.2million in trust preferred securities. In accordance with current capital guidelines, this amount has beenincluded in our Tier 1 capital ratios as of December 31, 2004.  Cash distributions on the securities arepayable quarterly, are deductible for income tax purposes and are included ininterest expense in the consolidated financial statements.

 

15

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On March 1, 2005, theBoard 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 the Companyplaced its currently outstanding trust preferred securities did not require thededuction of goodwill.  The rule alsoprovides that amounts of qualifying trust preferred securities and certainminority interests in excess of the 25% limit may be included in Tier 2 capitalbut will be limited, together with subordinated debt and limited-life preferredstock, to 50% of Tier 1 capital.  Thefinal rule provides a five-year transition period for bank holding companies tomeet these quantitative limitations. While management does not anticipate that the final rule will have animpact on the Company when the five-year transition period expires, it is notpossible to predict the final impact of the rule on the Company.

 

**Dividends**

During the year endedDecember 31, 2004, we paid quarterly cash dividends of $0.17 per share to ourstockholders.  Additionally, wedistributed a 5% stock dividend for the fourth consecutive year on December 31,2004.

 

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. As described above, Landmark National Bankexceeded its minimum capital requirements under applicable guidelines as ofDecember 31, 2004.  The National Bank Actimposes limitations on the amount of dividends that a national bank may paywithout prior regulatory approval. Generally, the amount is limited to the bank’scurrent year’s net earnings plus the adjusted retained earnings for the twopreceding years.  As of December 31,2004, approximately $2.3 million was available to be paid as dividends toLandmark Bancorp by Landmark National Bank without prior regulatory approval.

 

**Recent Accounting Developments**

In December 2003, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN46R), *Consolidation of Variable Interest Entities.*  FIN 46R clarified the requirements thatinvestments in variable interest entities (VIE) be consolidated by the entitythat has a variable interest that will absorb a majority of the VIE’s expectedlosses if they occur, receive a majority of the VIE’s expected returns, orboth.  Public companies were required toapply the unmodified provisions of the Interpretation to “special-purposeentities” by the end of the first reporting period ending after December 15,2003.  Public companies, other than smallbusiness issuers, were required to apply the revised Interpretation by the endof the first reporting period beginning after December 15, 2003, to allentities that were not special-purpose entities.  The adoption of this Interpretation did nothave a material impact on the Company’s consolidated financial statements.

 

In December 2003, theAccounting Standards Executive Committee of the American Institute of CertifiedPublic Accountants issued Statement of Position (SOP) 03-03, *Accounting for Certain Loans and Debt Securities Acquired in aTransfer.*  SOP 03-03 addressesthe accounting for acquired loans that show evidence of having deteriorated interms of credit quality since their origination (i.e. impaired loans).  SOP 03-03 requires acquired loans to berecorded as their fair value defined as the present value of future cashflows.  SOP 03-03 prohibits the carryoverof an allowance for loan loss on certain acquired loans as credit losses areconsidered in the future cash flows assessment. SOP 03-03 is effective for loans that are acquired in fiscal yearsbeginning after December 15, 2004.  The Companywill evaluate the applicability of the SOP for all prospective loans acquired infiscal years beginning after December 15, 2004. The Company does not anticipate this Statement will have a materialimpact on its consolidated financial statements.

 

In March 2004, theSecurities and Exchange Commission staff issued Staff Accounting Bulletin No.105, *Application of Accounting Principles to LoanCommitments* (SAB 105).  SAB105 provides additional guidance in determining the fair market value ofmortgage loan commitments.  The newguidance prohibits the inclusion of the expected cash flows related to theassociated servicing of the loan when determining the fair value of the loancommitment.  This change in accountingtends to reduce the fair market value of the loan commitment and defers theincome recognition resulting from the valuation of the commitment.  SAB 105 was effective for loan commitmentsaccounted for as derivatives and entered into on or after April 1, 2004, atwhich time the Company began excluding these expected cash flows in itsdetermination of fair value.  The effectof the change was not material to the Company’s consolidated financialstatements.

 

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 123 (revised), *Shared-Based Payment.* The revision disallows the expense recognitionalternatives permitted in the original statement and requires entities torecognize stock-based compensation cost in their statements of income.  The revision contains additional guidance inseveral areas including award modifications and

 

16

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forfeitures, measuringfair value, classifying an award as equity or as a liability, and attributingcompensation cost to reporting periods. It also contains additional disclosure requirements.  The Company does not expect that adoption ofthe revised Statement in 2005 will have a material impact on its consolidatedfinancial statements.

 

**Effects Of Inflation**

Our consolidatedfinancial statements and accompanying footnotes have been prepared inaccordance with U.S. generally accepted accounting principles, which generallyrequires the measurement of financial position and operating results in termsof historical dollars without consideration for changes in the relativepurchasing power of money over time due to inflation. The impact of inflationcan be found in the increased cost of our operations because our assets andliabilities are primarily monetary and interest rates have a greater impact onour performance than do the effects of inflation.

 

**Quantitative And Qualitative Disclosures About Market Risk**

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

 

Our Asset/LiabilityManagement Committee monitors the interest rate sensitivity of our balancesheet using earnings simulation models and interest sensitivity GAP analysis.  We have set policy limits of interest raterisk to be assumed in the normal course of business and monitor such limitsthrough our simulation process.

 

We have been successfulin meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months,including using rates at December 31, 2004, and forecasting volumes for thetwelve month projection.  This positionis then subjected to a shift in interest rates of 100 and 200 basis pointsrising and 100 basis points falling with an impact to our net interest incomeon a one year horizon as follows:

 
| ** **               | ** ** | **$ change in net** | ** ** | **% of net**        | ** ** |
|--------------------------|------------|--------------------------|------------|---------------------|------------|
| **Scenario**             | ** ** | **interest income**      | ** ** | **interest income** | ** ** |
| 100 basis point  rising  |       | $                        | 810,000    |                | 6.2        | % |
| 200 basis point  rising  |       | $                        | 1,596,000  |                | 12.3       | % |
| 100 basis point  falling |       | $                        | (965,000   | )                   | (7.4       | )% |

 

We believe that nosignificant changes in our interest rate sensitivity position have occurredsince December 31, 2004.  We believe weare appropriately positioned for future interest rate movements, although wemay experience some fluctuations in net interest income due to short termtiming differences between the repricing of assets and liabilities.

 

**Asset/Liability Management**

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

 

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

 

Certificates of depositreflect contractual maturities only. Money market accounts are rate sensitive and accordingly, a higherpercentage of the accounts have been included as repricing immediately in the firstperiod.  Savings and NOW accounts are notas rate sensitive as money market accounts and for that reason a significantpercentage of the accounts are reflected in the more than 1 to 5 yearscategory.

 

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

 

17

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**Interest-Earning Assets AndInterest-Bearing LiabilitiesRepricing Schedule (“Gap” Table)**

 

**At December 31, 2004**

 
| ** **                                                                                       | ** ** | **3 months**               | ** ** | **More than**      | ** ** | **More than**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                                                       | ** ** | **or less**                | ** ** | **3 to 12 months** | ** ** | **1 to 5 years** | ** ** | **Over 5 years** | ** ** | **Total**  | ** ** |
| ** **                                                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning  assets:                                                                        |       |                       |       |               |       |             |       |             |       |       |       |
| Overnight  investments                                                                           |       | $                          | 4,935      |               | $          | —           |       | $                | —     |       | $          | — |   | $ | 4,935 |   |
| Investment  securities                                                                           |       | 31,374                     |       | 40,868             |       | 56,602           |       | 4,760            |       | 133,604    |       |
| Loans                                                                                            |       | 63,401                     |       | 92,691             |       | 111,428          |       | 12,840           |       | 280,360    |       |
| Total  interest-earning assets                                                                   |       | $                          | 99,710     |               | $          | 133,559          |       | $                | 168,030    |       | $          | 17,600 |   | $ | 418,899 |   |
|                                                                                             |       |                       |       |               |       |             |       |             |       |       |       |
| Interest-bearing  liabilities:                                                                   |       |                       |       |               |       |             |       |             |       |       |       |
| Certificates of  deposit                                                                         |       | $                          | 49,519     |               | $          | 68,049           |       | $                | 36,712     |       | $          | 210 |   | $ | 154,490 |   |
| Money market and  NOW accounts                                                                   |       | 17,801                     |       | 46,510             |       | 32,416           |       | —           |       | 96,727     |       |
| Savings accounts                                                                                 |       | 3,038                      |       | 8,468              |       | 11,715           |       | —           |       | 23,221     |       |
| Borrowed money                                                                                   |       | 22,018                     |       | 5,000              |       | 40,000           |       | 27,553           |       | 94,571     |       |
| Total  interest-bearing liabilities                                                              |       | $                          | 92,376     |               | $          | 128,027          |       | $                | 120,843    |       | $          | 27,763 |   | $ | 369,009 |   |
|                                                                                             |       |                       |       |               |       |             |       |             |       |       |       |
| Interest  sensitivity gap per period                                                             |       | $                          | 7,334      |               | $          | 5,532            |       | $                | 47,187     |       | $          | (10,163 | ) | $ | 49,890 |   |
| Cumulative  interest sensitivity gap                                                             |       | $                          | 7,334      |               | $          | 12,866           |       | $                | 60,053     |       | $          | 49,890 |   |   |   |
| Cumulative gap  as a percent of total interest-earning assets                                    |       | 1.75                       | %          | 3.07               | %          | 14.34            | %          | 11.91            | %          |       |       |
| Cumulative  interest sensitive assets as a percent of cumulative interest sensitive  liabilities |       | 107.94                     | %          | 105.84             | %          | 117.60           | %          | 113.52           | %          |       |       |

 

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**Safe harbor Statement Under The Private Securities litigation ReformAct Of 1995**

 

**Forward-Looking Statements**

 

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,expectations and assumptions of our management and on information currentlyavailable to management, 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 thisdocument, including forward-looking statements, speak only as of the date theyare made, and we undertake no obligation to update any statement in light ofnew information or future events.

 

Our ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain.  Factors which could have amaterial adverse effect on operations and future prospects by us and oursubsidiaries include, but are not limited to, the following:

 

•                  Thestrength of the United States economy in general and the strength of the localeconomies in which we conduct our operations which may be less favorable thanexpected and may result in, among other things, a deterioration in the creditquality and value of our assets.

 

•                  Theeconomic impact of past and any future terrorist attacks, acts of war orthreats thereof, and the response of the United States to any such threats andattacks.

 

•                  Theeffects of, and changes in, federal, state and local laws, regulations andpolicies affecting banking, securities, insurance and monetary and financialmatters.

 

•                  Theeffects of changes in interest rates (including the effects of changes in therate of prepayments of our assets) and the policies of the Board of Governorsof the Federal Reserve System.

 

•                  Ourability to compete with other financial institutions as effectively as wecurrently intend due to increases in competitive pressures in the financialservices sector.

 

•                  Ourinability to obtain new customers and to retain existing customers.

 

•                  Thetimely development and acceptance of products and services, including productsand services offered through alternative delivery channels such as the Internet.

 

•                  Technologicalchanges implemented by us and by other parties, including third party vendors,which may be more difficult or more expensive than anticipated or which mayhave unforeseen consequences to us and our customers.

 

•                  Ourability to develop and maintain secure and reliable electronic systems.

 

•                  Ourability to retain key executives and employees and the difficulty that we mayexperience in replacing key executives and employees in an effective manner.

 

•                  Consumerspending and saving habits which may change in a manner that affects ourbusiness adversely.

 

•                  Businesscombinations and the integration of acquired businesses which may be moredifficult or expensive than expected.

 

•                  Thecosts, effects and outcomes of existing or future litigation.

 

•                  Changesin accounting policies and practices, as may be adopted by state and federalregulatory agencies and the Financial Accounting Standards Board.

 

•                  Ourability to manage the risks associated with the foregoing as well asanticipated.

 

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

 

**Controls 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 operations of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgated under theSecurities and Exchange Act of 1934, as amended) as of December 31, 2004.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures wereeffective.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls.

 

19

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**Report of Independent Registered Public Accounting Firm**

 

 

The Board of Directors

Landmark Bancorp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Landmark Bancorp, Inc. and subsidiary(the Company) as of December 31, 2004 and 2003, and the related consolidatedstatements of earnings, stockholders’ equity and comprehensive income, and cashflows for each of the years in the three-year period ended December 31,2004.  These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Oversight Board (UnitedStates). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso 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 31,2004 and 2003, and the results of their operations and their cash flows foreach of the years in the three year period ended December 31, 2004, inconformity with U.S. generally accepted accounting principles.

 

 
| /s/ KPMG LLP          |   |
|-----------------------|--------|
| Kansas City, Missouri |
| March 17, 2005        |

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**Consolidated Balance Sheets**

 
| ** **                                                                                           | ** ** | **December 31,** | ** **  | **December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|-------------|
| ** **                                                                                           | ** ** | **2004**         | ** **  | **2003**         | ** **  |
| **Assets**                                                                                           | ** ** | ** **       | ** **  | ** **       | ** **  |
| Cash and cash  equivalents:                                                                          |       |             |        |             |        |
| Cash                                                                                                 |       | $                | 2,910,297   |             | 1,768,914   |   |
| Interest-bearing  deposits in other financial institutions                                           |       | 4,935,141        |        | 5,939,201        |        |
| Total cash and  cash equivalents                                                                     |       | 7,845,438        |        | 7,708,115        |        |
| Investment  securities available-for-sale                                                            |       | 133,604,335      |        | 99,746,365       |        |
| Loans, net                                                                                           |       | 277,413,963      |        | 214,295,940      |        |
| Loans held for  sale                                                                                 |       | 846,003          |        | 734,456          |        |
| Premises and equipment, net                                                                          |       | 5,864,258        |        | 3,631,102        |        |
| Goodwill                                                                                             |       | 7,651,892        |        | 1,971,178        |        |
| Other intangible  assets, net                                                                        |       | 1,339,832        |        | 959,532          |        |
| Accrued interest  and other assets                                                                   |       | 7,525,173        |        | 4,999,601        |        |
| Total assets                                                                                         |       | $                | 442,090,894 |             | 334,046,289 |   |
| ** **                                                                                           |       |             |        |             |        |
| **Liabilities  and Stockholders’ Equity**                                                       |       |             |        |             |        |
| Liabilities:                                                                                         |       |             |        |             |        |
| Deposits:                                                                                            |       |             |        |             |        |
| Non-interest  bearing demand                                                                         |       | $                | 28,549,224  |             | 20,538,514  |   |
| Money market and  NOW                                                                                |       | 96,607,511       |        | 76,990,610       |        |
| Savings                                                                                              |       | 23,221,065       |        | 14,801,950       |        |
| Time, $100,000  and greater                                                                          |       | 31,121,564       |        | 28,294,325       |        |
| Time, other                                                                                          |       | 123,368,357      |        | 112,482,821      |        |
| Total deposits                                                                                       |       | 302,867,721      |        | 253,108,220      |        |
| Federal Home  Loan Bank borrowings                                                                   |       | 81,053,321       |        | 25,257,104       |        |
| Other borrowings                                                                                     |       | 13,518,000       |        | 8,498,000        |        |
| Accrued interest  and expenses, taxes, and other liabilities                                         |       | 2,482,875        |        | 4,610,862        |        |
| Total  liabilities                                                                                   |       | 399,921,917      |        | 291,474,186      |        |
|                                                                                                 |       |             |        |             |        |
| Commitments and  contingencies                                                                       |       |             |        |             |        |
|                                                                                                 |       |             |        |             |        |
| Stockholders’  equity:                                                                          |       |             |        |             |        |
| Common stock,  $0.01 par. Authorized 3,000,000 shares; issued 2,232,218 and 2,207,807,  respectively |       | 22,322           |        | 22,078           |        |
| Additional  paid-in capital                                                                          |       | 19,969,551       |        | 19,332,130       |        |
| Retained  earnings                                                                                   |       | 25,228,826       |        | 25,213,188       |        |
| Treasury stock,  at cost; 121,630 and 119,657 shares, respectively                                   |       | (3,205,823       | )           | (2,792,225       | )           |
| Accumulated  other comprehensive income                                                              |       | 154,101          |        | 796,932          |        |
| Total  stockholders’ equity                                                                     |       | 42,168,977       |        | 42,572,103       |        |
| Total  liabilities and stockholders’ equity                                                     |       | $                | 442,090,894 |             | 334,046,289 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARYConsolidated Statements of Earnings**

 
| ** **                                             | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest income:                                       |       |                         |       |   |   |   |   |
| Loans                                                  |       | $                            | 15,672,834 |   | 14,303,182 |   | 16,649,738 |   |
| Investment  securities                                 |       | 4,237,362                    |       | 2,945,302 |   | 2,809,559 |   |
| Other                                                  |       | 39,010                       |       | 27,818 |   | 102,229 |   |
| Total interest  income                                 |       | 19,949,206                   |       | 17,276,302 |   | 19,561,526 |   |
| Interest  expense:                                     |       |                         |       |   |   |   |   |
| Deposits                                               |       | 3,945,344                    |       | 4,446,050 |   | 5,773,331 |   |
| Borrowings                                             |       | 3,054,952                    |       | 1,208,522 |   | 1,337,868 |   |
| Total interest  expense                                |       | 7,000,296                    |       | 5,654,572 |   | 7,111,199 |   |
| Net interest  income                                   |       | 12,948,910                   |       | 11,621,730 |   | 12,450,327 |   |
| Provision for  loan losses                             |       | 460,000                      |       | 240,000 |   | 181,500 |   |
| Net interest  income after provision for loan losses   |       | 12,488,910                   |       | 11,381,730 |   | 12,268,827 |   |
| Non-interest  income:                                  |       |                         |       |   |   |   |   |
| Fees and service  charges                              |       | 3,270,509                    |       | 2,048,482 |   | 1,903,454 |   |
| Gains on sales  of loans                               |       | 986,864                      |       | 2,039,102 |   | 1,588,296 |   |
| Gains (losses)  on sales of investment securities, net |       | 358,385                      |       | 551,038 |   | 124,333 |   |
| Other                                                  |       | 509,663                      |       | 335,569 |   | 239,933 |   |
| Total  non-interest income                             |       | 5,125,421                    |       | 4,974,191 |   | 3,856,016 |   |
| Non-interest  expense:                                 |       |                         |       |   |   |   |   |
| Compensation and  benefits                             |       | 5,844,352                    |       | 4,834,982 |   | 4,849,011 |   |
| Occupancy and  equipment                               |       | 1,607,804                    |       | 1,250,212 |   | 1,198,710 |   |
| Amortization of  intangibles                           |       | 374,758                      |       | 426,442 |   | 388,568 |   |
| Professional  fees                                     |       | 301,870                      |       | 343,208 |   | 281,949 |   |
| Advertising                                            |       | 300,006                      |       | 177,899 |   | 183,072 |   |
| Data processing                                        |       | 415,175                      |       | 311,364 |   | 347,900 |   |
| Other                                                  |       | 2,509,383                    |       | 1,884,648 |   | 1,934,981 |   |
| Total  non-interest expense                            |       | 11,353,348                   |       | 9,228,755 |   | 9,184,191 |   |
| Earnings before  income taxes                          |       | 6,260,983                    |       | 7,127,166 |   | 6,940,652 |   |
| Income tax  expense                                    |       | 2,010,225                    |       | 2,275,469 |   | 2,362,739 |   |
| Net earnings                                           |       | $                            | 4,250,758  |   | 4,851,697 |   | 4,577,913 |   |
|                                                   |       |                         |       |   |   |   |   |
| Earnings per  share:                                   |       |                         |       |   |   |   |   |
| Basic                                                  |       | $                            | 1.96       |   | 2.20 |   | 1.99 |   |
| Diluted                                                |       | $                            | 1.95       |   | 2.17 |   | 1.93 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY****Consolidated Statements of Stockholders’ Equityand Comprehensive Income**

**Years ended December 31, 2004,2003 and 2002**

 
| ** **                                                                                                         | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Unearned  employee  benefits** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                                                                                               |       |              |       |                             |       |                   |       |                |       |                             |       |                                                 |       |       |       |
| Balance at  December 31, 2001                                                                                      |       | $                 | 20,827     |                             | 17,075,297 |                   | 23,073,530 |                | (43,940    | )                                | (344,099   | )                                                    | 423,138    |       | 40,204,753 |   |
| Comprehensive  income:                                                                                             |       |              |       |                             |       |                   |       |                |       |                             |       |                                                 |       |       |       |
| Net earnings                                                                                                       |       | —            |       | —                           |       | 4,577,913              |       | —              |       | —                           |       | —                                               |       | 4,577,913  |       |
| Change in fair  value of investment  securities  available-for-sale, net of tax                               |       | —            |       | —                           |       | —                 |       | —              |       | —                           |       | 1,475,832                                            |       | 1,475,832  |       |
| Total  comprehensive income                                                                                        |       | —            |       | —                           |       | 4,577,913              |       | —              |       | —                           |       | 1,475,832                                            |       | 6,053,745  |       |
| Dividends paid  ($0.52 per share)                                                                                  |       | —            |       | —                           |       | (1,239,819             | )          | —              |       | —                           |       | —                                               |       | (1,239,819 | )          |
| Amortization of  unearned employee benefits                                                                        |       | —            |       | 151,104                          |       | —                 |       | —              |       | 198,892                          |       | —                                               |       | 349,996    |       |
| Exercise of stock  options, 75,184 shares  including tax  benefit of $313,383                                 |       | 751               |       | 1,045,564                        |       | —                 |       | —              |       | —                           |       | —                                               |       | 1,046,315  |       |
| Stock-based  compensation                                                                                          |       | —            |       | 4,307                            |       | —                 |       | —              |       | —                           |       | —                                               |       | 4,307      |       |
| Purchase of  242,409 treasury shares                                                                               |       | —            |       | —                           |       | —                 |       | (5,345,522          | )          | —                           |       | —                                               |       | (5,345,522 | )          |
| 5% stock  dividend, 96,684 shares                                                                                  |       | —            |       | (6,690                           | )          | (2,116,413             | )          | 2,123,103           |       | —                           |       | —                                               |       | —     |       |
| Balance at  December 31, 2002                                                                                      |       | 21,578            |       | 18,269,582                       |       | 24,295,211             |       | (3,266,359          | )          | (145,207                         | )          | 1,898,970                                            |       | 41,073,775 |       |
| Net earnings                                                                                                       |       | —            |       | —                           |       | 4,851,697              |       | —              |       | —                           |       | —                                               |       | 4,851,697  |       |
| Change in fair  value of investment securities available-for-sale, net of tax                                      |       | —            |       | —                           |       | —                 |       | —              |       | —                           |       | (1,102,038                                           | )          | (1,102,038 | )          |
| Total  comprehensive income                                                                                        |       | —            |       | —                           |       | 4,851,697              |       | —              |       | —                           |       | (1,102,038                                           | )          | 3,749,659  |       |
| Dividends paid  ($0.60 per share)                                                                                  |       | —            |       | —                           |       | (1,331,146             | )          | —              |       | —                           |       | —                                               |       | (1,331,146 | )          |
| Amortization of  unearned employee benefits                                                                        |       | —            |       | 82,731                           |       | —                 |       | —              |       | 145,207                          |       | —                                               |       | 227,938    |       |
| Exercise of stock  options, 49,942 shares, including tax benefit of $241,775                                       |       | 500               |       | 720,857                          |       | —                 |       | —              |       | —                           |       | —                                               |       | 721,357    |       |
| Stock-based  compensation                                                                                          |       | —            |       | 1,727                            |       | —                 |       | —              |       | —                           |       | —                                               |       | 1,727      |       |
| Purchase of  72,228 treasury shares                                                                                |       | —            |       | —                           |       | —                 |       | (1,871,207          | )          | —                           |       | —                                               |       | (1,871,207 | )          |
| 5% stock  dividend, 100,602 shares                                                                                 |       | —            |       | 257,233                          |       | (2,602,574             | )          | 2,345,341           |       | —                           |       | —                                               |       | —     |       |
| Balance at  December 31, 2003                                                                                      |       | 22,078            |       | 19,332,130                       |       | 25,213,188             |       | (2,792,225          | )          | —                           |       | 796,932                                              |       | 42,572,103 |       |
| Comprehensive  income:                                                                                             |       |              |       |                             |       |                   |       |                |       |                             |       |                                                 |       |       |       |
| Net earnings                                                                                                       |       | —            |       | —                           |       | 4,250,758              |       | —              |       | —                           |       | —                                               |       | 4,250,758  |       |
| Change in fair  value of investment  securities  available-for-sale and  interest rate  swap, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | —                           |       | (642,831                                             | )          | (642,831   | )          |
| Total  comprehensive income                                                                                        |       | —            |       | —                           |       | 4,250,758              |       | —              |       | —                           |       | (642,831                                             | )          | 3,607,927  |       |
| Dividends paid  ($0.65 per share)                                                                                  |       | —            |       | —                           |       | (1,420,885             | )          | —              |       | —                           |       | —                                               |       | (1,420,885 | )          |
| Stock-based  compensation                                                                                          |       | —            |       | 107,975                          |       | —                 |       | —              |       | —                           |       | —                                               |       | 107,975    |       |
| Exercise of stock  options, 24,411 shares, including tax benefit of $135,511                                       |       | 244               |       | 356,818                          |       | —                 |       | —              |       | —                           |       | —                                               |       | 357,062    |       |
| Purchase of  102,338 treasury shares                                                                               |       | —            |       | —                           |       | —                 |       | (3,055,205          | )          | —                           |       | —                                               |       | (3,055,205 | )          |
| 5% stock  dividend, 100,365 shares                                                                                 |       | —            |       | 172,628                          |       | (2,814,235             | )          | 2,641,607           |       | —                           |       | —                                               |       | —     |       |
| Balance at December  31, 2004                                                                                      |       | $                 | 22,322     |                             | 19,969,551 |                   | 25,228,826 |                | (3,205,823 | )                                | —     |                                                 | 154,101    |       | 42,168,977 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARYConsolidated Statements of Cash Flows**

 
| ** **                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from  operating activities:                                                      |       |                         |       |   |   |   |   |
| Net earnings                                                                                |       | $                            | 4,250,758  |   | 4,851,697 |   | 4,577,913 |   |
| Adjustments to  reconcile net earnings to net cash  provided  by operating activities: |       |                         |       |   |   |   |   |
| Provision for  loan losses                                                                  |       | 460,000                      |       | 240,000 |   | 181,500 |   |
| Amortization of  intangibles                                                                |       | 374,758                      |       | 426,442 |   | 388,568 |   |
| Depreciation                                                                                |       | 650,082                      |       | 461,836 |   | 462,458 |   |
| Stock-based  compensation                                                                   |       | 107,975                      |       | 1,727 |   | 4,307 |   |
| Deferred income  taxes                                                                      |       | 625,904                      |       | 364,465 |   | 83,674 |   |
| Net gains on  sales of investment securities, premises and equipment, and foreclosed assets |       | (502,114                     | )          | (561,155 | ) | (120,364 | ) |
| Net gain on  sales of loans                                                                 |       | (986,864                     | )          | (2,039,102 | ) | (1,588,296 | ) |
| Proceeds from  sale of loans                                                                |       | 39,598,536                   |       | 97,351,328 |   | 71,268,001 |   |
| Origination of  loans held for sale                                                         |       | (38,723,219                  | )          | (90,996,079 | ) | (69,076,231 | ) |
| Changes in  assets and liabilities:                                                         |       |                         |       |   |   |   |   |
| Accrued interest  and other assets                                                          |       | 1,200,310                    |       | 63,920 |   | 1,182,652 |   |
| Accrued  expenses, taxes, and other liabilities                                             |       | (2,318,289                   | )          | (4,689,368 | ) | 1,617,213 |   |
| Net cash  provided by operating activities                                                  |       | 4,737,837                    |       | 5,475,711 |   | 8,981,395 |   |
| Cash flows from  investing activities:                                                      |       |                         |       |   |   |   |   |
| Net decrease in  loans                                                                      |       | 6,104,388                    |       | 9,304,074 |   | 10,445,920 |   |
| Maturities and  prepayments of investment securities                                        |       | 32,936,261                   |       | 52,601,851 |   | 27,067,374 |   |
| Net cash paid in  First Kansas acquisition                                                  |       | (9,140,845                   | )          | — |   | — |   |
| Net cash paid in  Beloit and Phillipsburg branch sales                                      |       | (8,714,311                   | )          | — |   | — |   |
| Purchases of  investment securities                                                         |       | (6,502,342                   | )          | (66,450,936 | ) | (40,587,495 | ) |
| Proceeds from  sale of investment securities                                                |       | 971,571                      |       | 1,203,725 |   | 437,604 |   |
| Proceeds from  sales of premises and equipment  and  foreclosed assets                 |       | 1,419,456                    |       | 433,969 |   | 569,330 |   |
| Purchases of  premises and equipment, net                                                   |       | (1,232,019                   | )          | (337,967 | ) | (759,993 | ) |
| Other investing  activity, net                                                              |       | —                       |       | — |   | (992 | ) |
| Net cash  provided by (used in) investing activities                                        |       | 15,842,159                   |       | (3,245,284 | ) | (2,828,252 | ) |
| Cash flows from  financing activities:                                                      |       |                         |       |   |   |   |   |
| Net decrease in  deposits                                                                   |       | (21,606,877                  | )          | (11,172,650 | ) | (8,965,415 | ) |
| Federal Home  Loan Bank borrowings                                                          |       | 78,800,000                   |       | 77,400,000 |   | 34,055,000 |   |
| Federal Home  Loan Bank repayments                                                          |       | (78,536,768                  | )          | (78,215,350 | ) | (36,418,276 | ) |
| Proceeds from  other borrowings                                                             |       | 9,555,000                    |       | 8,498,000 |   | — |   |
| Repayments on  other borrowings                                                             |       | (4,535,000                   | )          | — |   | — |   |
| Proceeds from  issuance of common stock under stock option plans                            |       | 221,551                      |       | 479,582 |   | 732,932 |   |
| Net tax benefit  related to stock option plans                                              |       | 135,511                      |       | 241,775 |   | 313,383 |   |
| Payment of dividends                                                                        |       | (1,420,885                   | )          | (1,331,146 | ) | (1,239,819 | ) |
| Purchase of  treasury stock                                                                 |       | (3,055,205                   | )          | (1,871,207 | ) | (5,345,522 | ) |
| Net cash used in  financing activities                                                      |       | (20,442,673                  | )          | (5,970,996 | ) | (16,867,717 | ) |
| Net increase  (decrease) in cash and cash equivalents                                       |       | 137,323                      |       | (3,740,569 | ) | (10,714,574 | ) |
| Cash and cash  equivalents at beginning of year                                             |       | 7,708,115                    |       | 11,448,684 |   | 22,163,258 |   |
| Cash and cash  equivalents at end of year                                                   |       | $                            | 7,845,438  |   | 7,708,115 |   | 11,448,684 |   |
| Supplemental  disclosure of cash flow information:                                          |       |                         |       |   |   |   |   |
| Cash paid during  the year for income taxes                                                 |       | $                            | 1,494,000  |   | 1,985,000 |   | 1,403,000 |   |
| Cash paid during  the year for interest                                                     |       | 6,652,000                    |       | 5,690,000 |   | 7,195,000 |   |
| Supplemental  schedule of noncash investing and financing activities:                       |       |                         |       |   |   |   |   |
| Transfer of  loans to real estate owned                                                     |       | 1,044,000                    |       | 303,000 |   | 717,000 |   |
| First Kansas  acquisition:                                                                  |       |                         |       |   |   |   |   |
| Fair value of  liabilities assumed                                                          |       | 140,619,000                  |       | — |   | — |   |
| Fair value of  assets acquired, including goodwill                                          |       | 149,760,000                  |       | — |   | — |   |
| Beloit and  Phillipsburg branch sales:                                                      |       |                         |       |   |   |   |   |
| Fair value of  liabilities transferred                                                      |       | (12,489,000                  | )          | — |   | — |   |
| Fair value of  assets sold                                                                  |       | (3,774,000                   | )          | — |   | — |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY****Notes toConsolidated Financial Statements****December 31, 2004, 2003, and 2002**

 

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

 

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

 

The accompanyingconsolidated financial statements include the accounts of the Landmark Bancorp,Inc. (the Company) and its wholly owned subsidiary, Landmark National Bank (theBank). Intercompany balances and transactions have been eliminated inconsolidation. The Bank is principally engaged in the business of attractingdeposits from the general public and using such deposits, together withborrowings and other funds, to originate commercial real estate and non-realestate loans, one-to-four family residential mortgage loans, consumer loans,home equity loans, and one-to-four family residential mortgage loans.

 

***(b)******           InvestmentSecurities***

 

The Company classifiesits investment securities portfolio as available-for-sale, which are recordedat fair value, determined principally based on quoted market prices, withunrealized gains and losses excluded from earnings and reported in a separatecomponent of stockholders’ equity until realized. Purchased premiums anddiscounts on investment securities are amortized/accreted into interest incomeover the estimated lives of the securities using a method which approximatesthe interest method.  Declines in thefair 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. The relatedwrite-downs are included in earnings as realized losses.  Gains and losses on sales ofavailable-for-sale securities are recorded on a trade date basis and arecalculated using the specific identification method.

 

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

 

Loans receivable thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding principal balances,net of undisbursed loan proceeds, the allowance for loan losses, and anydeferred fees or costs on originated loans.

 

Mortgage loans originatedand intended for sale in the secondary market are carried at the lower of costor estimated fair value. Net unrealized losses are recognized through avaluation allowance by charges to income. Origination fees received on suchloans are deferred and recognized in income as part of the gain or loss onsale. Origination fees received on other loans held in portfolio in excess ofamounts representing the estimated costs of origination are deferred andcredited to interest income using the interest method.

 

The Company maintains anallowance to absorb probable loan losses inherent in the portfolio.  The allowance for loan losses is increased bycharges to income and decreased by charge-offs (net of recoveries). Management’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 evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available.

 

A loan is consideredimpaired when, based on current information and events, it is probable that theBank will be unable to collect the scheduled payments of principal or interestwhen due according to the contractual terms of the loan agreement. Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments when due. Loans that experience insignificant payment delaysand payment shortfalls generally are not classified as impaired. Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstances surroundingthe loan and the borrower, including the length

 

25

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of the delay, the reasonsfor the delay, the borrower’s prior payment record, and the amount of theshortfall in relation to the principal and interest owed. Impairment ismeasured on a loan-by-loan basis for commercial, commercial real estate andconstruction loans by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smallerindividual balance homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment disclosures.

 

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

 

All interest accrued butnot collected for loans that are placed on nonaccrual or charged off isreversed against interest income. The interest on these loans is accounted foron the cash-basis or cost-recovery method, until qualifying for return to accrual.Loans are returned to accrual status when all the principal and interestamounts contractually due are brought current and future payments arereasonably assured.

 

***(d)******           Premisesand Equipment***

 

Premises and equipmentare stated at cost less accumulated depreciation. Depreciation is providedusing the straight-line or accelerated methods over the estimated useful livesof the assets. The estimated useful lives of the assets are as follows:

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

 

Major replacements andbetterments are capitalized while maintenance and repairs are charged toexpense when incurred. Gains or losses on dispositions are reflected inoperations as incurred.

 

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

 

The Company’s goodwilland core deposit intangible resulted from the acquisition of MNB Bancshares,Inc. (MNB) by Landmark Bancorp, Inc. on October 9, 2001, and from theacquisition of First Kansas Financial Corporation (First Kansas) on April 1,2004.  Goodwill resulting from the mergerwith MNB and from the acquisition of First Kansas is not amortized; however, itis tested for impairment. When facts and circumstances indicate potentialimpairment of amortizable intangible assets, the Company will evaluate therecoverability of the asset carrying value, using estimates of undiscountedfuture cash flows over the remaining asset life. Any impairment loss ismeasured by the excess of carrying value over fair value. Goodwill impairmenttests are performed at each calendar year end or when events or circumstancesdictate.  The Company’s impairment testperformed as of December 31, 2004, indicated that there was no impairment.

 

Intangible assets thathave finite useful lives, such as core deposit intangibles and mortgageservicing rights, continue to be amortized over their useful lives. The coredeposit intangible is being amortized over ten years on an accelerated basis.Amortization expense related to the core deposit intangible asset was $194,000,$124,000, and $138,000 for the years ended December 31, 2004, 2003, and 2002,respectively.

 

Mortgage servicing assetsare recognized as separate assets when rights are acquired through the sale offinancial assets. Capitalized servicing rights are reported in other intangibleassets and are amortized into non-interest expense in proportion to, and overthe period of, the estimated future net servicing income of the underlyingfinancial assets. Servicing assets are recorded at the lower of cost or fairvalue, and are evaluated for impairment based upon the fair value of the rightsas compared to amortized cost. Amortization expense related to the mortgage servicing assets was$181,000, $302,000, and $250,000 for the years ended December 31, 2004, 2003,and 2002, respectively.

 

26

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***(f)******            IncomeTaxes***

 

Amounts provided forincome tax expense are based on income reported for financial statementpurposes and do not necessarily represent amounts currently payable under taxlaws. Deferred tax assets and liabilities are recorded for the future taxconsequences attributable to differences between the consolidated financialstatement carrying amounts of existing assets and liabilities and their respectiveincome tax basis. Deferred tax assets and liabilities are measured usingenacted tax rates applied to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities, of a change in tax rates, is recognized inincome in the period that includes the enactment date.

 

***(g)******           Useof Estimates***

 

Management of the Companyhas made a number of estimates and assumptions relating to the reporting of assetsand liabilities and the disclosure of contingent assets and liabilities toprepare these consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America. Actual resultscould differ from those estimates.

 

***(h)******           ComprehensiveIncome***

 

The Company’s othercomprehensive income (loss) consists of unrealized holding gains and losses on available-for-salesecurities and an unrealized gain on an interest rate swap as shown below:

 
| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                               |       |                         |       |   |   |   |   |
| Unrealized  holding gains (losses) on securities                   |       | $                            | (736,440   | ) | (1,226,442 | ) | 2,504,707 |   |
| Less  reclassification adjustment for gains included in net income |       | 358,385                      |       | 551,038 |   | 124,333 |   |
|                                                               |       |                         |       |   |   |   |   |
| Net unrealized  gains (losses) on securities                       |       | (1,094,825                   | )          | (1,777,480 | ) | 2,380,374 |   |
| Unrealized gain  on interest rate swap                             |       | 58,000                       |       | — |   | — |   |
| Income tax  expense (benefit)                                      |       | (393,994                     | )          | (675,442 | ) | 904,542 |   |
|                                                               |       |                         |       |   |   |   |   |
| Other  comprehensive income (loss)                                 |       | $                            | (642,831   | ) | (1,102,038 | ) | 1,475,832 |   |

 

***(i)******            Foreclosedassets***

 

Assets acquired through,or in lieu of, foreclosure are to be sold and are initially recorded at thedate of foreclosure, at the lower of carrying value or fair value, establishinga new cost basis. Subsequent to foreclosure, management periodically performsvaluations, and an allowance for losses is established by a charge tooperations if the carrying value of a property exceeds the fair value lessestimated costs to sell. Revenue and expenses from operations and changes inthe valuation allowance are included in other non-interest expense on theincome statement.

 

***(j)******            StockBased Compensation***

 

The Company has astock-based employee compensation plan, which is described more fully in note11. The Company utilizes the fair value recognition provisions of Statement ofFinancial Accounting Standard (SFAS) Statement No. 123, *Accountingfor Stock-Based Compensation.* SFAS 123 establishes a fair-valuemethod of accounting for employee stock options or similar equity instruments.The fair value of stock-based awards to employees is calculated through the useof option pricing models.  These modelsalso require subjective assumptions, including future stock price volatilityand expected time to exercise, which greatly affect the calculated values. TheCompany uses the Black-Scholes option pricing model to estimate the grant datefair value of its stock options. The fair value is recognized as additionalcompensation expense over the option vesting period, which is typically fiveyears.

 

27

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In December 2004, TheFinancial Accounting Standards Board issued SFAS No. 123 (revised), *Shared-Based Payment.* The revision disallows the expense recognition alternatives permitted inthe original statement and requires entities to recognize stock-basedcompensation cost in their statements of earnings.  The revision contains additional guidance inseveral areas including award modifications and forfeitures, measuring fairvalue, classifying an award as equity or as a liability, and attributingcompensation cost to reporting periods. It also contains additional disclosure requirements.  The Company does not expect that adoption ofthe revised Statement in 2005 will have a material effect on its consolidatedfinancial statements.

 

***(k)******           Earningsper Share***

 

Basic earnings per sharerepresents net earnings divided by the weighted average number of common sharesoutstanding 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. Potential common shares that may be issued by theCompany relate solely to outstanding stock options and are determined using thetreasury stock method. Earnings per share for all periods presented have beenadjusted to give effect to the 5% stock dividends paid by the Company inDecember 2004, 2003, and 2002.

 

The shares used in thecalculation of basic and diluted earnings per share, which have been restatedfor the 5% stock dividends paid in December 2004, 2003, and 2002, are shownbelow:

 
| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Weighted average  common shares outstanding – basic   |       | 2,169,612                    |       | 2,208,068 |   | 2,297,600 |   |
| Stock options                                              |       | 13,117                       |       | 30,598 |   | 64,486 |   |
| Weighted average  common shares outstanding – diluted |       | 2,182,729                    |       | 2,238,666 |   | 2,362,086 |   |

 

***(l)******            TreasuryStock***

 

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

 

***(m)******          Cashand cash equivalents***

 

Cash and cash equivalentsinclude cash on hand, amounts due from banks, interest-bearing deposits, andfed funds sold.

 

***(n)******           Derivatives***

 

The Company is exposed tomarket risk, including changes in interest rates and currency exchangerates.  To manage the volatility relatingto these exposures, the Company’s risk management policies permit its use ofderivative products.  The Company usesderivatives on a limited basis mainly to stabilize interest rate margins.  The Company more often manages normal assetand liability positions by altering the terms of the products it offers.

 

Statement of FinancialAccounting Standard No. 133, *Accounting for DerivativeInstruments and Hedging Activities,* as amended, requires that allderivative financial instruments be recorded on the balance sheet at fairvalue, with the adjustment to fair value recorded in current earnings.  Derivatives that qualify under the Statementin a hedging relationship are designated, based on the exposure being hedged,as fair value or cash flow hedges.  Underthe cash flow hedging model, the effective portion of the gain or loss relatedto the derivative is recognized as a component of other comprehensiveincome.  The ineffective portion isrecognized in current earnings.

 

***(o)******           Reclassifications***

 

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

 

28

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**(2)****           Acquisition of First Kansas FinancialCorporation**

 

On April 1, 2004, theCompany acquired all of the outstanding stock of First Kansas FinancialCorporation (“First Kansas”) for cash of $19 per share.  First Kansas was a single thrift holdingcompany based in Osawatomie, Kansas.  Thethrift was merged into the Company’s wholly-owned subsidiary, Landmark NationalBank, immediately following the acquisition. This acquisition expanded the Company’s presence in high-growth marketareas, presenting the Company with potential for revenue generation and assetgrowth.  At March 31, 2004, First Kansashad total assets of approximately $150 million, including loans and deposits ofapproximately $74 million and $84 million, respectively.  The acquisition cost in excess of thetangible and identifiable intangible net assets acquired has been recorded asgoodwill.  In connection with theacquisition and the subsequent sale of two branches as described below, theCompany recorded a core deposit intangible of $605,000, which is beingamortized on an accelerated basis over ten years, and goodwill of approximately$5.7 million, none of which is deductible for tax purposes.

 

The Company sold itsbranches in Beloit and Phillipsburg, Kansas on August 13, 2004, and September10, 2004, respectively.  These brancheshad been acquired in the acquisition of First Kansas.  Upon consummation of these transactions, theCompany sold approximately $7.7 million in deposits and approximately $2.4million in loans and premises and equipment associated with the Beloit branchand approximately $4.7 million in deposits and approximately $846,000 in loansand premises and equipment related to the Phillipsburg branch.  The net proceeds received were recorded as anadjustment to the fair value of the assets acquired from First Kansas,resulting in a reduction of goodwill and the core deposit intangible.

 

The accompanyingconsolidated financial statements for the year ended December 31, 2004 includethe accounts of the Company and, commencing April 1, 2004 First Kansas.  Pro forma information, as if the acquisitionwas consummated January 1, 2003, is as follows:

 
| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| Revenue                     |       | $                            | 26,903     |   | 29,932 |   |
| Net earnings                |       | 4,329                        |       | 5,280 |   |
| Basic earnings  per share   |       | 2.00                         |       | 2.51 |   |
| Diluted earnings  per share |       | 1.98                         |       | 2.48 |   |
|                             |            |                              |            |  |  |  |

 

**(3)****           Investment Securities Available-for-Sale**

 

A summary of investmentsecurities information is as follows:

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

 

29

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| ** **                              | ** ** | **December 31, 2003** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Amortized  cost**   | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| U.S. Government  and agency obligations |       | $                     | 32,341,892 |   | 326,624 |   | (52,249 | ) | 32,616,267 |   |
| Municipal  obligations                  |       | 13,577,760            |       | 462,791 |   | (20,231 | ) | 14,020,320 |   |
| Mortgage-backed  securities             |       | 46,379,211            |       | 515,246 |   | (331,014 | ) | 46,563,443 |   |
| Federal Home  Loan Bank stock           |       | 2,543,600             |       | — |   | — |   | 2,543,600 |   |
| Common stocks                           |       | 280,310               |       | 384,197 |   | (2,114 | ) | 662,393 |   |
| Federal Reserve  Bank stock             |       | 805,050               |       | — |   | — |   | 805,050 |   |
| Corporate bonds                         |       | 50,000                |       | 2,125 |   | — |   | 52,125 |   |
| Other  investments                      |       | 2,483,167             |       | — |   | — |   | 2,483,167 |   |
| Total                                   |       | $                     | 98,460,990 |   | 1,690,983 |   | (405,608 | ) | 99,746,365 |   |

 

Included in investmentsecurities available-for-sale are restricted stock investments in the FederalHome Loan Bank  (“FHLB”) and FederalReserve Bank (“FRB”) that are required to be maintained by the Bank forregulatory purposes and borrowing availability. The cost of such investmentsrepresents their redemption value.

 

The tables above showthat some of the securities in the available for sale investment portfolio hadunrealized losses, or were temporarily impaired, as of December 31, 2004 and2003. This temporary impairment represents the amount of loss that would berealized if the securities were sold at valuation date. Securities which weretemporarily impaired at December 31, 2004 are shown below, along with thelength of the impairment period.

 
| ** **                               | ** ** | **Less  than 12 month** | ** ** | **12  months or longer** | ** ** | **Total**       | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------|------------|
| ** **                               | ** ** | **Fair  Value**         | ** ** | **Unrealized  Losses**   | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U. S. Government  and agency obligations |       | $                       | 20,865,795 |                     | (180,698   | )               | 7,424,355  |   | (95,759 | ) | 28,290,150 |   | (276,457 | ) |
| Municipal  obligations                   |       | 1,972,236               |       | (58,821                  | )          | 2,915,038       |       | (23,803 | ) | 4,887,274 |   | (82,624 | ) |
| Mortgage-backed  securities              |       | 17,389,387              |       | (596,728                 | )          | 26,257,900      |       | (300,570 | ) | 43,647,287 |   | (897,298 | ) |
| Corporate bonds                          |       | 1,762,779               |       | (27,375                  | )          | —          |       | — |   | 1,762,779 |   | (27,375 | ) |
| Common stock                             |       | —                  |       | —                   |       | 2,932           |       | (754 | ) | 2,932 |   | (754 | ) |
| Total                                    |       | $                       | 41,990,197 |                     | (863,622   | )               | 36,600,225 |   | (420,886 | ) | 78,590,422 |   | (1,284,508 | ) |

 

At December 31, 2004, thetotal investment portfolio consisted of over 370 securities. The table aboveincludes 88 securities that were in an unrealized loss position.  The decrease in market value of thesecurities in an unrealized loss position is related to interest ratechanges.  None of the unrealized lossesare related to credit deterioration. The Company has the intent and ability tohold these securities until market values recover.

 

Maturities of investmentsecurities at December 31, 2004 are as follows:

 
| ** **                                                                              | ** ** | **Amortized  cost** | ** **  | **Estimated  fair value** | ** **  |
|-----------------------------------------------------------------------------------------|------------|---------------------|-------------|---------------------------|-------------|
| Due in less than  one year                                                              |       | $                   | 15,067,132  |                      | 15,087,293  |   |
| Due after one  year but within five years                                               |       | 29,149,304          |        | 29,034,237                |        |
| Due after five  years                                                                   |       | 5,079,021           |        | 5,121,581                 |        |
| Mortgage-backed  securities, FHLB stock, FRB stock, common stock, and other investments |       | 84,118,328          |        | 84,361,224                |        |
| Total                                                                                   |       | $                   | 133,413,785 |                      | 133,604,335 |   |

 

For mortgage-backedsecurities, actual maturities will differ from contractual maturities becauseborrowers have the right to prepay obligations with or without prepaymentpenalties.  At December 31, 2004, theCompany’s mortgage-backed securities portfolio consisted of securitiespredominantly underwritten to the standards and guaranteed by thegovernment-sponsored agencies of FHLMC, FNMA and GNMA.

 

30

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

 
| ** **      | ** ** | **Years ended December 31,** | ** ** |
|-----------------|------------|------------------------------|------------|
| ** **      | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Realized gains  |       | $                            | 358,385    |   | 551,038 |   | 124,333 |   |
| Realized losses |       | —                       |       | — |   | — |   |
| Total           |       | $                            | 358,385    |   | 551,038 |   | 124,333 |   |

 

At December 31, 2004 and2003, securities pledged to secure public funds on deposit had a carrying valueof approximately $84.2 million and $70.3 million, respectively. Except for U.S. government and agency obligations, no investment in a single issuer exceeded10% of stockholders’ equity.

 

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

 

Loans consist of the following:

 
| ** **                               | ** ** | **December 31,  2004** | ** **  | **December 31,  2003** | ** **  |
|------------------------------------------|------------|------------------------|-------------|------------------------|-------------|
|                                     |       |                   |        |                   |        |
| Real estate  loans:                      |       |                   |        |                   |        |
| One-to-four  family residential          |       | $                      | 131,077,310 |                   | 82,093,729  |   |
| Commercial                               |       | 77,207,618             |        | 65,728,619             |        |
| Construction                             |       | 11,233,964             |        | 9,171,510              |        |
| Commercial loans                         |       | 51,826,283             |        | 50,053,993             |        |
| Consumer loans                           |       | 9,014,411              |        | 9,566,650              |        |
| Total                                    |       | 280,359,586            |        | 216,614,501            |        |
|                                     |       |                   |        |                   |        |
| Less:                                    |       |                   |        |                   |        |
| Deferred loan  fees and loans in process |       | 52,020                 |        | 2,691                  |        |
| Allowance for  loan losses               |       | 2,893,603              |        | 2,315,870              |        |
| Loans, net                               |       | $                      | 277,413,963 |                   | 214,295,940 |   |

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet customers’ financing needs. These financial instrumentsconsist principally of commitments to extend credit. The Company uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments. The Company’s exposure to credit loss in theevent of nonperformance by the other party is represented by the contractualamount of those instruments. In the normal course of business, there arevarious commitments and contingent liabilities, such as guarantees, commitmentsto extend credit, letters of credit, and lines of credit, which are properlynot recorded in the accompanying consolidated financial statements. The Companygenerally requires collateral or other security on unfunded loan commitmentsand irrevocable letters of credit. Unfunded commitments to extend credit,excluding standby letters of credit, aggregated $38.5 million and $25.6 millionat December 31, 2004 and 2003, respectively. Standby letters of credit totaled$2.2 million and $2.4 at December 31, 2004 and 2003, respectively.

 

The Company is exposed tovarying risks associated with concentrations of credit relating primarily tolending activities in specific geographic areas. The Company’s principallending area consists of the cities of Manhattan, Auburn, Dodge City, GardenCity, Great Bend, Hoisington, LaCrosse, Osage City, Topeka, Wamego, Paola,Osawatomie, Louisburg, and Fort Scott, Kansas and the surrounding communities,and substantially all of the Company’s loans are to residents of or secured byproperties located in its principal lending area. Accordingly, the ultimatecollectibility of the Company’s loan portfolio is dependent in part upon marketconditions in those areas. These geographic concentrations are considered inmanagement’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,** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of year |       | $                            | 2,315,870  |   | 2,565,201 |   | 2,640,288 |   |
| Allowance of  acquired bank   |       | 352,113                      |       | — |   | — |   |
| Provision for  loan losses    |       | 460,000                      |       | 240,000 |   | 181,500 |   |
| Charge-offs                   |       | (294,624                     | )          | (553,768 | ) | (318,557 | ) |
| Recoveries                    |       | 60,244                       |       | 64,437 |   | 61,970 |   |
| Balance at end  of year       |       | $                            | 2,893,603  |   | 2,315,870 |   | 2,565,201 |   |

 

31

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At December 31, 2004 and2003, impaired loans, including nonaccrual loans, aggregated $1.1 million and$1.2 million, respectively. The net amount of interest income recorded on suchloans during their impairment periods was not significant. There were no loans 90days delinquent and still accruing interest at December 31, 2004 and 2003.  Average impaired loans were $1.5 million for2004 and $1.1 million for 2003.  Specificreserves related to these impaired loans at December 31, 2004 and 2003, werenot significant.

 

The Company servicedloans for others with outstanding principal balances of $111.1 million and$107.2 million at December 31, 2004 and 2003, respectively. Gross service feeincome related to such loans was $277,000, $274,000, and $253,000 for the yearsended December 31, 2004, 2003, and 2002, respectively.

 

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

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of year |       | $                            | 477,350    |   | 525,311 |   | 524,247 |   |
| Additions                     |       | 150,058                      |       | 254,390 |   | 251,362 |   |
| Amortization                  |       | (181,076                     | )          | (302,351 | ) | (250,298 | ) |
| Balance at end  of year       |       | $                            | 446,332    |   | 477,350 |   | 525,311 |   |

 

The Company had loans todirectors and officers at December 31, 2004, which carry terms similar to thosefor other loans. Management believes such outstanding loans do not representmore than a normal risk of collection. A summary of such loans is as follows:

 
| Balance at  December 31, 2003 |   | $          | 5,823,718 |   |
|-------------------------------|--------|------------|-----------|--------|
| New loans                     |   | 3,682,627  |      |
| Repayments                    |   | (3,937,248 | )         |
| Balance at  December 31, 2004 |   | $          | 5,569,097 |   |

 

 

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

 

Premises and equipmentconsisted of the following:

 
| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|
| Land                               |       | $                      | 1,306,023  |                   | 651,778    |   |
| Work in progress                   |       | 179,620                |       | —                 |       |
| Office buildings  and improvements |       | 5,498,984              |       | 4,286,586              |       |
| Furniture and  equipment           |       | 4,304,450              |       | 3,661,110              |       |
| Automobiles                        |       | 258,855                |       | 203,683                |       |
| Total                              |       | 11,547,932             |       | 8,803,157              |       |
| Less accumulated  depreciation     |       | 5,683,674              |       | 5,172,055              |       |
| Total                              |       | $                      | 5,864,258  |                   | 3,631,102  |   |

 

The Company hasmulti-year operating lease agreements for several of its branch locations.  The following is the Company’s minimum leasecommitments for the years ending December 31:

 
| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2005     |       | $          | 78,449     |   |
| 2006     |       | 51,816     |       |
| 2007     |       | 51,816     |       |
| 2008     |       | 51,816     |       |
| 2009     |       | 51,816     |       |
| Total    |       | $          | 285,713    |   |

 

Total rent expense forthe years ended December 31, 2004, 2003 and 2002 was $125,000, $117,000 and$69,000, respectively, and was included in occupancy and equipment on theconsolidated statements of earnings.

 

32

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

 

Maturities of timedeposits were as follows at December 31, 2004:

 
| **Year**   | ** ** | **Amount** | ** **  |
|------------|------------|------------|-------------|
| 2005       |       | $          | 117,568,019 |   |
| 2006       |       | 22,019,000 |        |
| 2007       |       | 8,703,000  |        |
| 2008       |       | 3,813,000  |        |
| 2009       |       | 2,177,000  |        |
| Thereafter |       | 209,902    |        |
| Total      |       | $          | 154,489,921 |   |

 

Regulations of theFederal Reserve System require reserves to be maintained by all bankinginstitutions according to the types and amounts of certain deposit liabilities.These requirements restrict a portion of the amounts shown as consolidated cashand due from banks from everyday usage in operation of the banks. The minimumreserve requirements for the Bank totaled $25,000 at December 31, 2004.

 

**(7)****           Federal Home Loan Bank Borrowings**

 

Advances from the FHLB atDecember 31, 2004 and 2003, amounted to $77,553,321 and $23,057,104,respectively. Maturities of such borrowings at December 31, 2004, aresummarized as follows:

 
| **Year ending December 31:** | ** ** | **Amount** | ** ** | **Rates**        | ** **       |
|------------------------------|------------|------------|------------|------------------|------------------|
| 2005                         |       | $          | 10,000,000 |             | 6.02%–6.18% |   |
| 2006                         |       | 1,000,000  |       | 5.5%–5.62%  |             |
| 2007                         |       | —     |       | —           |             |
| 2008                         |       | 4,000,000  |       | 2.11%–4.74% |             |
| 2009                         |       | 38,319,791 |       | 4.44%–5.77% |             |
| Thereafter                   |       | 24,233,530 |       | 4.44%–6.37% |             |
| Total                        |       | $          | 77,553,321 |             |             |   |
|                              |            |            |            |                  |                  |  |  |

 

Additionally, the Bankalso has a line of credit, renewable annually each September, with the FHLBunder which there were outstanding borrowings of $3.5 million and $2.2 millionat December 31, 2004 and 2003, respectively. Interest on any outstandingbalances on the line of credit accrues at the federal funds rate plus 0.15%(2.47% at December 31, 2004).

 

Included in the tableabove is a $2.0 million advance with the FHLB which has a variable rate,adjustable quarterly, and matures in 2008 with no prepayment penalties.  All of the Bank’s remaining advances with theFHLB have fixed rates and prepayment penalties. However, certain borrowingscontain a convertible provision at which date the FHLB may exercise an optionto convert the borrowing to a variable rate equal to the FHLB one monthshort-term advance rate. The Bank would then have the option to prepay theadvances without penalty. Interest would adjust monthly upon conversion. TheBank may refinance the advance at each respective conversion date if the FHLBfirst exercises its option to convert the fixed-rate borrowing.

 

Although no loans arespecifically pledged, the FHLB requires the Bank to maintain eligiblecollateral (qualifying loans and investment securities) that has a lendingvalue at least equal to its required collateral. At December 31, 2004, the Bank’stotal borrowing capacity with the FHLB was approximately $105.9 million.

 

33

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**(8)****           Other Borrowings**

 

In 2003, the Companyissued $8.2 million of subordinated debentures. These debentures, which are duein 2034 and are redeemable beginning in 2009, were issued to a wholly ownedgrantor trust (“the Trust”) formed to issue preferred securities representingundivided beneficial interests in the assets of the Trust. The Trust theninvested the gross proceeds of such preferred securities in the debentures. TheTrust’s preferred securities and the subordinated debentures require quarterlyinterest payments and have variable rates, adjustable quarterly.  After the first quarter of 2004, interest hasaccrued at LIBOR plus 2.85%. The interest rates at December 31, 2004 and 2003,were 5.01% and 1.17%, respectively. While the Trust is accounted for as an unconsolidated equity investmentunder the requirements of Financial Accounting Interpretation No. 46R, *Consolidation of Variable Interest Entities,* a portion ofthe trust preferred securities issued by the Trust qualifies as Tier 1 Capitalfor regulatory purposes.

 

During the first quarterof 2004, the Company obtained $9.0 million in loan commitments from anunrelated financial institution.  OnApril 1, 2004, the Company borrowed $7.0 million against these commitments toconsummate the acquisition of First Kansas. The $9.0 million commitment was comprised of a $6.0 million line ofcredit and a $3.0 million loan, both of which mature on March 31, 2009 with aninterest rate adjusting daily based on the prime rate less 0.50%.  The balance of the line of credit at December31, 2004, was $2.0 million and is included in other borrowings.  The remaining unused balance on this line ofcredit at December 31, 2004, was $3.6 million.

 

At December 31, 2004, theCompany had an interest rate swap in place effectively fixing the interest rateon $3.0 million of the variable rate debt to a rate of 5.68%.  This contract expires on March 31, 2009,however, the Company maintains a put option on the swap whereby they can settlethe outstanding balance of the swap. During 2004, this agreement resulted in additional interest expense of$39,000.  The Company has applied cashflow hedge accounting to the swap agreement, and therefore, its fair value,aggregating $58,000, is recorded as a component of other assets in theaccompanying balance sheet.  Also,included in accumulated other comprehensive income is approximately $36,000related to the swap at December 31, 2004.

 

Additionally, the Bankhad $250,000 in repurchase agreements outstanding and included in otherborrowings at December 31, 2004 and 2003.

 

**(9)****           Income Taxes**

 

Income tax expenseattributable to income from operations consisted of:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current    |       | $                            | 1,384,321  |   | 1,911,004 |   | 2,279,065 |   |
| Deferred   |       | 625,904                      |       | 364,465 |   | 83,674 |   |
|       |       | $                            | 2,010,225  |   | 2,275,469 |   | 2,362,739 |   |
| Federal    |       | $                            | 1,733,031  |   | 1,994,836 |   | 2,065,038 |   |
| State      |       | 277,194                      |       | 280,633 |   | 297,701 |   |
|       |       | $                            | 2,010,225  |   | 2,275,469 |   | 2,362,739 |   |

 

Total income tax expense,including amounts allocated directly to stockholder’s equity, was as follows:

 
| ** **                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income from  operations                                                                                                       |       | $                            | 2,010,225  |   | 2,275,469 |   | 2,362,739 |   |
| Stockholders’  equity, recognition of tax benefit for stock options exercised                                            |       | (135,511                     | )          | (241,775 | ) | (313,383 | ) |
| Stockholders’  equity, recognition of unrealized (losses)/gains on available-for-sale  securities and interest rate swap |       | (393,994                     | )          | (675,442 | ) | 904,542 |   |
|                                                                                                                          |       | $                            | 1,480,720  |   | 1,358,252 |   | 2,953,898 |   |

 

34

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

 
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Computed  “expected” tax expense            |       | $                            | 2,128,734  |   | 2,423,236 |   | 2,359,822 |   |
| Increase  (reduction) in income taxes resulting from: |       |                         |       |   |   |   |   |
| Tax-exempt  interest income, net                      |       | (189,782                     | )          | (156,473 | ) | (162,637 | ) |
| Contributions to  employee stock ownership plan       |       | —                       |       | 28,129 |   | 51,375 |   |
| State income  taxes, not of federal benefit           |       | 182,496                      |       | 186,586 |   | 196,483 |   |
| Investment tax  credits                               |       | (75,000                      | )          | (125,000 | ) | (42,000 | ) |
| Other, net                                            |       | (36,223                      | )          | (81,009 | ) | (40,304 | ) |
|                                                  |       | $                            | 2,010,225  |   | 2,275,469 |   | 2,362,739 |   |

 

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

 
| ** **                                                                          | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Deferred tax  assets:                                                               |       |                   |       |                   |       |
| Carrying value  of FHLB advances                                                    |       | $                      | 1,881,218  |                   | —     |   |
| Carrying value  of loans, including allowance for loan losses                       |       | 670,284                |       | 744,360                |       |
| Net operating  loss carry forwards                                                  |       | 700,824                |       | —                 |       |
| Deferred  compensation agreements                                                   |       | 355,624                |       | 332,082                |       |
| State taxes                                                                         |       | 86,806                 |       | 47,463                 |       |
| Accrued expenses                                                                    |       | 74,601                 |       | 69,487                 |       |
| Total deferred  tax assets                                                          |       | 3,769,357              |       | 1,193,392              |       |
| Deferred tax  liabilities:                                                          |       |                   |       |                   |       |
| Unrealized gain  on investment securities available-for-sale and interest rate swap |       | 94,449                 |       | 488,443                |       |
| FHLB stock  dividends                                                               |       | 590,392                |       | 353,816                |       |
| Carrying value  of investments                                                      |       | 261,045                |       | 53,386                 |       |
| Carrying value  of intangible assets                                                |       | 211,245                |       | —                 |       |
| Carrying value  of premises and equipment, net of depreciation                      |       | 182,194                |       | 103,940                |       |
| Other, net                                                                          |       | 3,731                  |       | 43,856                 |       |
| Total deferred  tax liabilities                                                     |       | 1,343,056              |       | 1,043,441              |       |
| Net deferred tax  asset                                                             |       | $                      | 2,426,301  |                   | 149,951    |   |

 

The Company has recordeddeferred taxes for temporary differences related to loans, investmentsecurities, deposits, and borrowings of First Kansas at the date of acquisition.  In addition, the Company has also recorded adeferred tax asset for the future benefit of First Kansas’ net operating lossand alternative minimum tax credit carry forwards.  The net operating loss carry forwards willexpire, if not utilized, between 2014 and 2024. The alternative minimum tax credit carry forward does not expire.  A valuation allowance related to deferred taxassets has not been provided because management believes it is more likely thannot that the results of future operations will generate sufficient taxableincome to realize the deferred tax assets.

 

Retained earnings atDecember 31, 2004 and 2003, included approximately $6.3 million and $5.6million, respectively, for which no provision for federal income tax had beenmade. This amount represents allocations of income to bad debt deductions inyears prior to 1988 for tax purposes only. Reduction of amounts allocated forpurposes other than tax bad debt losses will create income for tax purposesonly, which will be subject to the then current corporate income tax rate.

 

35

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**(10)****         Employee Benefit Plans**

 

***EmployeeRetirement Plan***

 

Substantially allemployees are covered under 401(k) defined contribution savings plans.Contributions of $104,000, $78,000 and $91,000 were charged to operations forthe years ended December 31, 2004, 2003, and 2002, respectively.

 

***DeferredCompensation and Retirement Agreements***

 

The Company entered intodeferred compensation and retirement agreements with certain key employees thatprovided for cash payments to be made after their retirement. The liabilitiesunder these arrangements have been recorded at the present values of accruedbenefits using a 2% discount rate.  TheCompany has also entered into agreements with certain directors and officers todefer portions of their compensation. The balance of estimated accrued benefitsunder all of these arrangements was $993,000 and $977,000 at December 31, 2004and 2003, respectively, and was included as a component of other liabilities inthe accompanying balance sheets. To assist in funding benefits under each ofthese plans, the Bank has purchased certain assets including life insurancepolicies on covered employees in which the Bank is the beneficiary. At December31, 2004 and 2003, the cash surrender values on the policies and other assetswere $3.0 million and $1.2 million, respectively, and were included in otherassets in the accompanying consolidated balance sheets.

 

***EmployeeStock Ownership Plan (ESOP)***

 

The Company establishedan ESOP in connection with its formation in 1994. The original acquisition ofstock by the plan was funded by a loan from the Company to the ESOP.  The loan, together with interest, was repaidover a ten-year period through annual contributions by the Bank. The Bank madeannual contributions to the ESOP equal to the ESOP’s debt service lessdividends received by the ESOP. All dividends received by the ESOP were used topay debt service. The ESOP shares initially were pledged as collateral for itsdebt. As the debt was repaid, shares were released from the collateral andallocated to active employees based on the proportion of debt service paid ineach year.

 

The Company and the Bankaccount for the ESOP shares in accordance with AICPA Statement of Position No.93-6. Accordingly, the ESOP indebtedness of $344,000 at December 31, 2001, isshown as a deduction from stockholders’ equity. The note was fully repaid in 2003. As shares are released fromcollateral, the Company reports compensation expense equal to the currentmarket price of the shares, and the shares become outstanding for earnings pershare computations. Dividends on allocated ESOP shares are recorded as areduction of retained earnings; dividends on unallocated ESOP shares arerecorded as compensation expense. All shares were fully allocated at December31, 2003. ESOP compensation expense was $70,000 and $267,000 for the yearsended December 31, 2003, and 2002, respectively.

 

**(11)****         Stock Option Plan**

 

The Company has a stockoption plan, the purpose of which is to provide additional incentive to certainofficers, directors, and key employees by facilitating their purchase of astock interest in the Company. The plan is administered by the board ofdirectors who will select employees to whom options are granted and the numberof shares granted. The option price may not be less than 100% of the fairmarket value of the shares on the date of the grant, and no option shall beexercisable after the expiration of ten years from the grant date. In the caseof any employee who owns more than 10% of the outstanding common stock at thetime the option is granted, the option price may not be less than 110% of thefair market value of the shares on the date of the grant, and the option shallnot be exercisable after the expiration of ten years from the grant date.Options outstanding at December 31, 2004, were exercisable at prices rangingfrom $12.54 to $28.71.

 

The Company records thefair value of options issued under the plan as expense in accordance with SFASNo. 123, *Accounting for Stock Based Compensation.*The compensation cost that has been charged to compensation and benefitsexpense for the plan was $108,000, $1,700 and $4,300 for the years endedDecember 31, 2004, 2003, and 2002, respectively. The fair value of each optiongrant is estimated on the date of grant. The fair value of options granted in2004 were estimated utilizing the following assumptions:  dividend rate of 4.8%, volatility of 19.0%,risk-free interest rate of 3.2%, and expected lives of five years, resulting ina fair value of $3.14 per option at grant date. The fair value of options granted in 2002 were estimated utilizing thefollowing assumptions: dividend of 4.7%, volatility of 20.8%, risk-freeinterest rate of 4.5%, and expected lives of five years, resulting in a fairvalue of $3.03 per option at grant date. There were no options granted in 2003.

 

36

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Certain informationrelative to stock options is as follows:

 
| ** **                                            | ** ** | **Year  ended  December 31, 2004** | ** ** | **Year  ended  December 31, 2003**     | ** ** | **Year  ended  December 31, 2002** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **Shares**                         | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares**                         | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
| Outstanding at  beginning of year                     |       | 61,366                             |       | $                                      | 13.17      |                               | 109,274    |   | $ | 11.97 |   | 179,781 |   | $ | 11.48 |   |
| Granted                                               |       | 87,996                             |       | 29.20                                  |       | —                             |       | — |   | 2,625 |   | 16.78 |   |
| Effect of 5%  stock dividend                          |       | 6,336                              |       | —                                 |       | 3,289                              |       | — |   | 5,202 |   | — |   |
| Expired                                               |       | —                             |       | —                                 |       | (1,255                             | )          | 16.76 |   | (3,150 | ) | 22.14 |   |
| Exercised                                             |       | (24,411                            | )          | 9.08                                   |       | (49,942                            | )          | 9.60 |   | (75,184 | ) | 9.59 |   |
| Outstanding at  end of year                           |       | 131,287                            |       | $                                      | 24.04      |                               | 61,366     |   | $ | 13.17 |   | 109,274 |   | $ | 11.97 |   |
| Exercisable at  end of year                           |       | 37,921                             |       | $                                      | 15.07      |                               | 59,977     |   | $ | 13.10 |   | 107,510 |   | $ | 11.89 |   |
| Weighted-average  contractual remaining life in years |       |                               |       | 7.98                                   |       |                               |       | 3.94 |   |   |   | 3.54 |   |

 

The number of sharesavailable for future grants at December 31, 2004 was 264,604.

 

**(12)****         Fair Value of Financial Instruments**

 

Fair value estimates ofthe Company’s financial instruments as of December 31, 2004 and 2003, includingmethods and assumptions utilized, are set forth below:

 
| ** **                                                  | ** ** | **December  31, 2004** | ** **  | **December  31, 2003**    | ** **  |
|-------------------------------------------------------------|------------|------------------------|-------------|---------------------------|-------------|
| ** **                                                  | ** ** | **Carrying  amount**   | ** **  | **Estimated  fair value** | ** **  | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
| Cash and cash  equivalents                                  |       | $                      | 7,845,438   |                      | 7,845,000   |   | 7,708,115 |   | 7,708,000 |   |
| Investment  securities                                      |       | $                      | 133,604,335 |                      | 133,604,000 |   | 99,746,365 |   | 99,746,000 |   |
| Loans, net of  unearned fees and allowances for loan losses |       | $                      | 277,413,963 |                      | 274,823,000 |   | 214,295,940 |   | 215,802,000 |   |
| Loans held for  sale                                        |       | $                      | 846,003     |                      | 862,000     |   | 734,456 |   | 750,000 |   |
| Non-interest  bearing demand deposits                       |       | $                      | 28,549,224  |                      | 28,549,000  |   | 20,538,514 |   | 20,539,000 |   |
| Money market and  NOW deposits                              |       | 96,607,511             |        | 96,608,000                |        | 76,990,610 |   | 76,991,000 |   |
| Savings deposits                                            |       | 23,221,065             |        | 23,221,000                |        | 14,801,950 |   | 14,802,000 |   |
| Time deposits                                               |       | 154,489,921            |        | 154,870,000               |        | 140,777,146 |   | 141,819,000 |   |
| Total deposits                                              |       | $                      | 302,867,721 |                      | 303,248,000 |   | 253,108,220 |   | 254,151,000 |   |
| FHLB advances                                               |       | $                      | 81,053,321  |                      | 79,963,000  |   | 25,257,104 |   | 26,745,000 |   |
| Other borrowings                                            |       | $                      | 13,518,000  |                      | 13,518,000  |   | 8,498,000 |   | 8,498,000 |   |

 

***Off-BalanceSheet Financial Instruments***

 

The fair value of lettersof credit and commitments to extend credit is based on the fees currentlycharged to enter into similar agreements. The aggregate of these fees is not material.  These instruments are also discussed in note 17on “Commitments, Contingencies and Guarantees.”

 

***Methodsand Assumptions Utilized***

 

The carrying amount ofcash and cash equivalents, repurchase agreements, federal funds sold, andaccrued interest receivable and payable are considered to approximate fairvalue.

 

The estimated fair valueof investment securities, except certain obligations of states and politicalsubdivisions, is based on bid prices published in financial newspapers or bidquotations received from securities dealers. The fair value of certainobligations of states and political subdivisions is not readily availablethrough market sources other than dealer quotations, so fair value estimatesare based upon quoted market prices of similar instruments, adjusted fordifferences between the quoted instruments and the instruments being valued.

 

37

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The estimated fair valueof the Company’s loan portfolio is based on the segregation of loans bycollateral type, interest terms, and maturities. In estimating the fair valueof each category of loans, the carrying amount of the loan is reduced by anallocation of the allowance for loan losses. Such allocation is based onmanagement’s loan classification system which is designed to measure the creditrisk inherent in each classification category. The estimated fair value ofperforming variable rate loans is the carrying value of such loans, reduced byan allocation of the allowance for loan losses. The estimated fair value ofperforming fixed rate loans is calculated by discounting scheduled cash flowsthrough the estimated maturity using estimated market discount rates thatreflect the interest rate risk inherent in the loan, reduced by an allocationof the allowance for loan losses. The estimate of maturity is based on theCompany’s historical experience with repayments for each loan classification,modified, as required, by an estimate of the effect of current economic andlending conditions. The fair value for nonperforming loans is the estimatedfair value of the underlying collateral based on recent external appraisals orother available information, which generally approximates carrying value,reduced by an allocation of the allowance for loan losses.

 

The fair value of loansheld for sale is estimated utilizing forward sales commitments or dealerquotations.

 

The estimated fair valueof deposits with no stated maturity, such as non-interest bearing demanddeposits, savings, money market accounts, and NOW accounts, is equal to theamount payable on demand. The fair value of interest-bearing time deposits isbased on the discounted value of contractual cash flows of such deposits. Thediscount rate is estimated using the rates currently offered for deposits ofsimilar remaining maturities.

 

The fair value ofadvances from the FHLB is estimated using current rates offered for similarborrowings.  The fair values of othervariable rate borrowings approximate the carrying value.

 

***Limitations***

 

Fair value estimates aremade at a specific point in time based on relevant market information andinformation about the financial instruments. These estimates do not reflect anypremium or discount that could result from offering for sale at one time the Company’sentire holdings of a particular financial instrument. Because no market existsfor a significant portion of the Company’s financial instruments, fair valueestimates are based on judgments regarding future loss experience, currenteconomic conditions, risk characteristics of various financial instruments, andother factors. These estimates are subjective in nature and involveuncertainties and matters of significant judgment, and, therefore, cannot bedetermined with precision. Changes in assumptions could significantly affectthe estimates. Fair value estimates are based on existing balance sheetfinancial instruments without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments.

 

**(13)****         Regulatory CapitalRequirements**

 

Current regulatorycapital regulations require financial institutions to meet certain regulatorycapital requirements. Institutions are required to have minimum leveragecapital equal to 4% of total average assets and total qualifying capital equalto 8% of total risk-weighted assets in order to be considered “adequatelycapitalized.” As of December 31, 2004 and 2003, the Company and the Bank wererated “well capitalized,” which is the highest rating available under thiscapital-based rating system. Management believes that as of December 31, 2004,the Company and the Bank meet all capital adequacy requirements to which theyare subject. The following is a comparison of the Bank’s regulatory capital tominimum capital requirements at December 31, 2004 and 2003, (dollars inthousands):

 
| ** **                                | ** ** | **Actual** | ** ** | **For  capital  adequacy purposes** | ** ** | **To be  well -  capitalized under prompt  corrective action provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December  31, 2004:                 |       |       |       |                                |       |                                                                      |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets)  |       | $          | 48,700     |                                | 18         | %                                                                         | $          | > 21,673 |   | > 8 | % | $ | > 27,091 |   | > 10 | % |
| Tier 1 capital  (to risk weighted assets) |       | 45,806     |       | 17                                  |       | > 10,836                                                               |       | > 4 |   | > 16,255 |   | > 6 |   |
| Tier 1 capital  (to average assets)       |       | 45,806     |       | 10                                  |       | > 17,624                                                               |       | > 4 |   | > 22,030 |   | > 5 |   |
|                                      |       |       |       |                                |       |                                                                      |       |   |   |   |   |   |   |
| As of December  31, 2003:                 |       |       |       |                                |       |                                                                      |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets)  |       | $          | 37,091     |                                | 17         | %                                                                         | $          | > 17,029 |   | > 8 | % | $ | > 21,286 |   | > 10 | % |
| Tier 1 capital  (to risk weighted assets) |       | 34,775     |       | 16                                  |       | > 8,514                                                                |       | > 4 |   | > 12,772 |   | > 6 |   |
| Tier 1 capital  (to average assets)       |       | 34,775     |       | 10                                  |       | > 13,223                                                               |       | > 4 |   | > 16,528 |   | > 5 |   |

 

38

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Thefollowing is a comparison of the Company’s regulatory capital to minimumcapital requirements at December 31, 2004, and 2003 (dollars in thousands):

 
| ** **                                | ** ** | **Actual** | ** ** | **For  capital  adequacy purposes** | ** ** | **To be  well-  capitalized under prompt  corrective action provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                               | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of December  31, 2004:                 |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets)  |       | $          | 44,567     |                                | 16         | %                                                                        | $          | > 21,716 |   | > 8 | % | $ | > 27,146 |   | > 10 | % |
| Tier 1 capital  (to risk weighted assets) |       | 41,673     |       | 15                                  |       | > 10,858                                                              |       | > 4 |   | > 16,287 |   | > 6 |   |
| Tier 1 capital  (to average assets)       |       | 41,673     |       | 9                                   |       | > 17,714                                                              |       | > 4 |   | > 22,143 |   | > 5 |   |
|                                      |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| As of December  31, 2003:                 |       |       |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets)  |       | $          | 49,838     |                                | 23         | %                                                                        | $          | > 17,097 |   | > 8 | % | $ | > 21,371 |   | > 10 | % |
| Tier 1 capital  (to risk weighted assets) |       | 47,522     |       | 22                                  |       | > 8,548                                                               |       | > 4 |   | > 12,823 |   | > 6 |   |
| Tier 1 capital  (to average assets)       |       | 47,522     |       | 14                                  |       | > 13,273                                                              |       | > 4 |   | > 16,591 |   | > 5 |   |

 

**(14)****         Parent Company Condensed Financial Statements**

 

The following iscondensed financial information of the parent company as of December 31, 2004and 2003, and for years ended December 31, 2004, 2003 and 2002 (dollars inthousands):

 

***CondensedBalance Sheets***

 
| ** **                                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **Assets**                                       |       |                   |       |                   |       |
| Cash                                             |       | $                      | 40         |                   | 10,162     |   |
| Investment  securities                           |       | 1,065                  |       | 1,109                  |       |
| Investment in  Bank                              |       | 54,261                 |       | 37,834                 |       |
| Other                                            |       | 571                    |       | 1,732                  |       |
| Total assets                                     |       | $                      | 55,937     |                   | 50,837     |   |
|                                             |       |                   |       |                   |       |
| **Liabilities  and Stockholders’ Equity**   |       |                   |       |                   |       |
| Borrowed funds                                   |       | $                      | 13,268     |                   | 8,248      |   |
| Other                                            |       | 500                    |       | 17                     |       |
| Stockholders’  equity                       |       | 42,169                 |       | 42,572                 |       |
| Total liabilities  and stockholders’ equity |       | $                      | 55,937     |                   | 50,837     |   |

 

***Condensed Statements of Earnings***

 
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividends from  Bank                                      |       | $                            | 5,105      |   | 3,424 |   | 2,649 |   |
| Interest income                                           |       | 70                           |       | 75 |   | 90 |   |
| Other income                                              |       | 316                          |       | 559 |   | 131 |   |
| Interest expense                                          |       | (542                         | )          | (4 | ) | — |   |
| Other expense,  net                                       |       | (196                         | )          | (198 | ) | (167 | ) |
| Earnings before  equity in undistributed earnings of Bank |       | 4,753                        |       | 3,856 |   | 2,703 |   |
| (Decrease)/increase  in undistributed equity of Bank      |       | (625                         | )          | 1,097 |   | 1,881 |   |
| Earnings before  income taxes                             |       | 4,128                        |       | 4,953 |   | 4,584 |   |
| Income tax  (benefit)/expense                             |       | (123                         | )          | 101 |   | 6 |   |
| Net earnings                                              |       | $                            | 4,251      |   | 4,852 |   | 4,578 |   |

 

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***CondensedStatements of Cash Flows***

 
| ** **                                                                      | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from  operating activities:                                          |       |                         |       |   |   |   |   |
| Net earnings                                                                    |       | $                            | 4,251      |   | 4,852 |   | 4,578 |   |
| (Decrease)/increase  in undistributed equity of Bank                            |       | 625                          |       | (1,097 | ) | (1,881 | ) |
| Other                                                                           |       | 1,364                        |       | (1,789 | ) | 193 |   |
| Net cash  provided by operating activities                                      |       | 6,240                        |       | 1,966 |   | 2,890 |   |
|                                                                            |       |                         |       |   |   |   |   |
| Cash flows from  investing activities:                                          |       |                         |       |   |   |   |   |
| Purchase of  investment securities available-for-sale                           |       | (551                         | )          | — |   | — |   |
| Proceeds from  sales and maturities of investment securities available-for-sale |       | 926                          |       | 1,252 |   | 287 |   |
| Cash paid in  acquisition of First Kansas                                       |       | (17,502                      | )          | — |   | — |   |
| Net cash  provided by/(used in) investing activities                            |       | (17,127                      | )          | 1,252 |   | 287 |   |
|                                                                            |       |                         |       |   |   |   |   |
| Cash flows from  financing activities:                                          |       |                         |       |   |   |   |   |
| Issuance of  shares under stock option plan                                     |       | 221                          |       | 479 |   | 733 |   |
| Proceeds from  other borrowings                                                 |       | 9,555                        |       | 8,248 |   | — |   |
| Repayments on  other borrowings                                                 |       | (4,535                       | )          | — |   | — |   |
| Purchase of  treasury stock                                                     |       | (3,055                       | )          | (1,871 | ) | (5,345 | ) |
| Payment of  dividends                                                           |       | (1,421                       | )          | (1,331 | ) | (1,240 | ) |
| Net cash  provided by /(used in) financing activities                           |       | 765                          |       | 5,525 |   | (5,852 | ) |
| Net  (decrease)/increase in cash                                                |       | (10,122                      | )          | 8,743 |   | (2,675 | ) |
|                                                                            |       |                         |       |   |   |   |   |
| Cash at  beginning of year                                                      |       | 10,162                       |       | 1,419 |   | 4,094 |   |
| Cash at end of  year                                                            |       | $                            | 40         |   | 10,162 |   | 1,419 |   |

 

Dividends paid by theCompany are provided through subsidiary bank dividends. At December 31, 2004,the Bank could distribute dividends of up to $2.3 million without regulatoryapprovals.

 

**(15)****         Stockholders’ Rights Plan**

 

On October 11, 2001, theCompany’s board of directors adopted a stockholders’ rights plan (the RightsPlan). The Rights Plan provided for the distribution of one right on February13, 2002, for each share of the Company’s outstanding common stock as ofFebruary 1, 2002. The rights have no immediate economic value to stockholdersbecause they cannot be exercised unless and until a person, group or entityacquires 15% or more of the Company’s common stock or announces a tender offer.The Rights Plan also permits the Company’s board of directors to redeem eachright for one cent under various circumstances. In general, the Rights Planprovides that if a person, group or entity acquires a 15% or larger stake inthe Company or announces a tender offer, and the Company’s board of directorschooses not to redeem the rights, all holders of rights, other than the 15%stockholder or the tender offeror, will be able to purchase a certain amount ofthe Company’s common stock for half of its market price.

 

**(16)****         Intangible Assets**

 

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

 
| ** **                     | ** ** | **December 31, 2004**       | ** ** | **December 31, 2003**         | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| Amortizing  intangible assets: |       |                        |       |                          |       |   |   |   |   |
| Core deposit  premium          |       | $                           | 1,385,000  |                          | (491,501   | ) | 780,000 |   | (297,818 | ) |
| Mortgage  servicing rights     |       | 766,891                     |       | (320,559                      | )          | 727,158 |   | (249,808 | ) |
| Total                          |       | $                           | 2,151,891  |                          | (812,060   | ) | 1,507,158 |   | (547,626 | ) |

 

40

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Aggregate amortizationexpense for the years ended December 31, 2004, 2003 and 2002, was $375,000,$426,000 and $389,000, respectively.  Thefollowing is estimated amortization expense for the years ending December 31:

 
| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2005     |       | $          | 377,000    |   |
| 2006     |       | 352,000    |       |
| 2007     |       | 233,000    |       |
| 2008     |       | 122,000    |       |
| 2009     |       | 97,000     |       |
|          |            |            |            |  |

 

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

 

Commitments to extendcredit are legally binding agreements to lend to a borrower providing there areno violations of any conditions established in the contract. The Company, as aprovider of financial services, routinely issues financial guarantees in theform of financial and performance commercial and standby letters of credit. Asmany of the commitments are expected to expire without being drawn upon, thetotal commitment does not necessarily represent future cash requirements (seeNote 4).

 

The Company guaranteespayments to holders of certain trust preferred securities issued by a whollyowned grantor trust. The securities are due in 2034 and are redeemablebeginning in 2009. The maximum potential future payments guaranteed by theCompany, which includes future interest and principal payments throughmaturity, was approximately $21.9 million at December 31, 2004. At December 31,2004, the Company had a recorded liability of $8.3 million of principal andaccrued interest to date, representing amounts owed to the Trust.

 

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.

 

41

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**CorporateInformation**

 
| **Directors Of landmark Bancorp, Inc. and Landmark  National Bank** |
|---------------------------------------------------------------------|
|                                                                |
| Larry Schugart,  Chairman                                           |
| Former President and  Chief Executive Officer                       |
| Landmark Bancshares,  Inc.                                          |
|                                                                |
| Patrick L. Alexander                                                |
| President and Chief  Executive Officer                              |
| Landmark Bancorp, Inc.  and Landmark National Bank                  |
|                                                                |
| Richard A. Ball                                                     |
| CPA                                                                 |
| Adams, Brown, Beran  & Ball, Chtd.                              |
|                                                                |
| Brent A. Bowman                                                     |
| President                                                           |
| Brent Bowman and                                                    |
| Associates  Architects, P.A.                                        |
|                                                                |
| Joseph L. Downey                                                    |
| Retired Senior Vice  President, Director and Executive Officer      |
| Dow Chemical Company                                                |
|                                                                |
| Jim W. Lewis                                                        |
| Owner, Various  Automobile Dealerships                              |
|                                                                |
| Jerry R. Pettle                                                     |
| Retired Dentist                                                     |
| Dental Associates of  Manhattan, P.A.                               |
|                                                                |
| Susan E. Roepke                                                     |
| Retired Vice President,  Secretary and Treasurer,                   |
| MNB  Bancshares, Inc.                                               |
| Retired Senior Vice  President/Secretary/Cashier,                   |
| Security  National Bank                                             |
|                                                                |
| C. Duane Ross                                                       |
| President                                                           |
| High Plains Publishers,  Inc.                                       |
|                                                                |
| David H. Snapp                                                      |
| Law Partner                                                         |
| Waite, Snapp & Doll                                             |

 
| **Executive Officers Of****Landmark Bancorp, Inc.**     |
|---------------------------------------------------------|
|                                                    |
| Patrick L. Alexander                                    |
| President and Chief  Executive Officer                  |
|                                                    |
| Mark A. Herpich                                         |
| Chief Financial  Officer, Vice President, Secretary and |
| Treasurer                                               |
|                                                    |
| **Executive officers Of  landmark National Bank**       |
|                                                    |
| Patrick L. Alexander                                    |
| President and Chief  Executive Officer                  |
|                                                    |
| Mark A. Herpich                                         |
| Executive Vice  President, Secretary and Cashier        |
|                                                    |
| Michael E. Scheopner                                    |
| Executive Vice  President, Credit Risk Manager          |
|                                                    |
| Mark J. Oliphant                                        |
| Market President -  Dodge City                          |
|                                                    |
| Dean R. Thibault                                        |
| Market President -  Manhattan                           |

 

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**Stock Price Information**

 

Our common stock hastraded on the Nasdaq National Market System under the symbol “LARK” since 2001.At December 31, 2004, the Company had approximately 1,090 stockholders,consisting of approximately 450 owners of record and approximately 640beneficial owners of our common stock. Set forth below are the reported highand low bid prices of the common stock and dividends paid during the past twoyears.  Information presented below has beenrestated to give effect to the 5% stock dividends paid in December 2004 and2003.

 

**YearEnded December 31, 2004**

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  Dividends** | ** ** |
|----------------|------------|----------|------------|---------|------------|---------------------|------------|
| First Quarter  |       | $        | 29.26      |    | $          | 25.90               |       | $ | 0.1619 |   |
| Second Quarter |       | 29.86    |       | 26.67   |       | 0.1619              |       |
| Third Quarter  |       | 29.86    |       | 26.50   |       | 0.1619              |       |
| Fourth Quarter |       | 29.54    |       | 26.96   |       | 0.1619              |       |
|                |            |          |            |         |            |                     |            |  |  |  |

 

**YearEnded December 31, 2003**

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  Dividends** | ** ** |
|----------------|------------|----------|------------|---------|------------|---------------------|------------|
| First Quarter  |       | $        | 22.04      |    | $          | 21.00               |       | $ | 0.1451 |   |
| Second Quarter |       | 25.17    |       | 21.54   |       | 0.1451              |       |
| Third Quarter  |       | 26.24    |       | 22.40   |       | 0.1542              |       |
| Fourth Quarter |       | 26.56    |       | 22.28   |       | 0.1542              |       |
|                |            |          |            |         |            |                     |            |  |  |  |

 

**Corporate Headquarters**

800 Poyntz Avenue

Manhattan, Kansas 66502

 

**Annual Meeting**

The annual meeting ofstockholders will be held at the Kansas State University Alumni Center, 17thand Anderson Avenue, Manhattan, Kansas, on Wednesday, May 18, 2005 at 2:00 PM.

 

**Form 10-K**

A copy of the AnnualReport on Form 10-K filed with the Securities and Exchange Commission (SEC) maybe obtained by stockholders without charge on written request to Patrick L.Alexander, President and Chief Executive Officer, Landmark Bancorp, Inc., P.O.Box 308, Manhattan, Kansas 66505-0308, or by accessing our website at www.landmarkbancorpinc.comor the SEC’s website at www.sec.gov.

 

**Registrar and Transfer Agent**

Registrar and TransferCompany

10 Commerce Drive

Cranford, NJ 07016-3572

 

**Independent Registered**

**Public Accounting Firm**

KPMG LLP

1000 Walnut, Suite 1000

Kansas City, Missouri64199

 

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**Mission Statement**

 

Weare dedicated to providing quality financial services to customers in a mannerthat exceeds customer expectations. These services will be delivered byoutgoing, professional, and knowledgeable associates that are focused on askingfor the business and establishing long-term banking relationships. Thesebanking relationships will have a foundation of personal service and qualityproducts that are delivered in a convenient manner that meet our customers’needs at a fair and competitive price.

 

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