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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| x          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF**         |       |
|------------|-------------------------------------------------------------------------|------------|
|       | **THE SECURITIES AND EXCHANGE ACT OF 1934**                             |       |
| ** ** | **For  fiscal year ended December 31, 2008**                       | ** ** |
| ** ** | **OR**                                                                  | ** ** |
| o          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |       |
|       | **SECURITIES AND EXCHANGE ACT OF 1934**                                 |       |

**For transition period from                    to                    **

 

**Commission File Number 0-33203**

 

**LANDMARK BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **43-1930755**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **701  Poyntz Avenue, Manhattan, Kansas**                       | ** ** | **66505**                                |
| (Address of  principal executive offices)                       |       | (Zip Code)                               |
| **(785)  565-2000**                                             |
| (Registrant’s  telephone number, including area code)      |

 

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

 

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

Yes o    No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

Yes o    No x

 

Indicateby check mark whether the Registrant (1) has filed all reports to be filedby Section 13 or 15(d) of the Securities and Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes x**    **No o

 

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

 

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

 

Largeaccelerated filer o     Accelerated filer  o     Non-accelerated filer  o     Smaller Reporting Company  x

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2).

|   |   |   | Yes  o    No  x |
|--------|--------|--------|-------------------------------------|

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant, based on the last sales price quoted on theNasdaq Global Market on June 30, 2008, the last business day of theregistrant’s most recently completed second fiscal quarter, was approximately$38.6 million.  At February 28,2009, the total number of shares of common stock outstanding was 2,372,250.

 

Portionsof the following documents are incorporated by reference: the Proxy Statementfor the Annual Meeting of Stockholders to be held May 20, 2009, areincorporated by reference in Part III hereof, to the extent indicatedherein.

 

 

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**LANDMARK BANCORP, INC.**

2008 Form 10-KAnnual Report

Table of Contents

 

**PART I**

 
| ITEM 1.    | BUSINESS                                                                                                             | 3      |
|------------|----------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                 |   |
| ITEM 1A.   | RISK FACTORS                                                                                                         | 19     |
|       |                                                                                                                 |   |
| ITEM 1B.   | UNRESOLVED STAFF  COMMENTS                                                                                           | 25     |
|       |                                                                                                                 |   |
| ITEM 2.    | PROPERTIES                                                                                                           | 25     |
|       |                                                                                                                 |   |
| ITEM 3.    | LEGAL PROCEEDINGS                                                                                                    | 25     |
|       |                                                                                                                 |   |
| ITEM 4.    | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                 | 25     |
|       |                                                                                                                 |   |
| ITEM 5.    | MARKET FOR THE  COMPANY’S COMMON STOCK, RELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF  EQUITY SECURITIES | 26     |
|       |                                                                                                                 |   |
| ITEM 6.    | SELECTED FINANCIAL  DATA                                                                                             | 27     |
|       |                                                                                                                 |   |
| ITEM 7.    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          | 28     |
|       |                                                                                                                 |   |
| ITEM 7A.   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                          | 42     |
|       |                                                                                                                 |   |
| ITEM 8.    | FINANCIAL  STATEMENTS AND SUPPLEMENTAL DATA                                                                          | 45     |
|       |                                                                                                                 |   |
| ITEM 9.    | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                | 75     |
|       |                                                                                                                 |   |
| ITEM 9A.   | CONTROLS AND  PROCEDURES                                                                                             | 75     |
|       |                                                                                                                 |   |
| ITEM 9B.   | OTHER INFORMATION                                                                                                    | 75     |
|       |                                                                                                                 |   |
| ITEM 10.   | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                              | 76     |
|       |                                                                                                                 |   |
| ITEM 11.   | EXECUTIVE  COMPENSATION                                                                                              | 76     |
|       |                                                                                                                 |   |
| ITEM 12.   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                      | 77     |
|       |                                                                                                                 |   |
| ITEM 13.   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                            | 77     |
|       |                                                                                                                 |   |
| ITEM 14.   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                              | 78     |
|       |                                                                                                                 |   |
| ITEM 15.   | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES                                                                          | 78     |
|       |                                                                                                                 |   |
| SIGNATURES |                                                                                                                 | 79     |

 

 

 

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**PART I.**

 

**ITEM1.                  BUSINESS**

** **

**The Company**

 

Landmark Bancorp, Inc.(the “Company”) is a bank holding company incorporated under the laws of theState of Delaware.  Currently, theCompany’s business consists solely of the ownership of Landmark National Bank(the “Bank”), which is a wholly-owned subsidiary of the Company.  As of December 31, 2008, the Company had$602.2 million in consolidated total assets.

 

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

 

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

 

Pursuant to the 2006Acquisition, the 2004 Acquisition and the 2001 Merger, the Bank succeeded toall of the assets and liabilities of FMB, First Savings Bank F.S.B., FirstKansas, First Kansas Federal, Landmark Federal Savings Bank and SecurityNational Bank.  The Bank is principallyengaged in the business of attracting deposits from the general public andusing such deposits, together with borrowings and other funds, to originatecommercial, commercial real estate, one-to-four family residential mortgage andconsumer loans in the Bank’s principal market areas, as described below.  Since the 2001 Merger, the Bank has focusedon originating greater numbers and amounts of commercial, commercial realestate and agricultural loans.  Additionally,greater emphasis has been placed on diversification of the deposit mix throughexpansion of core deposit accounts such as checking, savings, and money marketaccounts.  The Bank has also diversifiedits geographical markets as a result of the 2006 Acquisition, the 2004Acquisition and the 2001 Merger.  TheCompany’s main office is in Manhattan, Kansas with branch offices in central,eastern and southwestern Kansas.  TheCompany continues to explore opportunities to expand its banking marketsthrough mergers and acquisitions, as well as branching opportunities.  In January 2009, the Company enteredinto an agreement to purchase a second branch in Lawrence, Kansas.  Completion of the acquisition is subject tocustomary closing conditions.  In lightof the recent turmoil in the financial industry, additional attractiveopportunities may become available to the Company.

 

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

 

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

 

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certain othermatters.  The Bank is a member of theFederal Reserve Bank of Kansas City and the Federal Home Loan Bank (the “FHLB”)of Topeka.

 

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

 

**Market Area**

 

The Bank’s primarydeposit gathering and lending markets are geographically diversified withlocations in eastern, central, and southwestern Kansas.  The primary industries within theserespective markets are also diverse and dependent upon a wide array of industryand governmental activity for their economic base.  The Bank’s markets have not been immune tothe effects of the recent economic downturn. To varying degrees, the Bank’s markets have experienced either flat ordeclining real estate values, falling consumer confidence, increasedunemployment and decreased consumer spending. However, the economic and credit crises has so far been less severe inKansas than many markets across the U.S. have experienced.  A brief description of these three geographicareas and the communities which the Bank serves within these communities issummarized below.

 

Shawnee, Douglas, Miami,Osage, and Bourbon counties are located in eastern Kansas and encompass theBank locations in Topeka, Auburn, Lawrence, Paola, Louisburg, Osawatomie, OsageCity, and Fort Scott.  Shawnee County’smarket, which encompasses the Bank locations in Topeka and Auburn, is stronglyinfluenced by the State of Kansas, City of Topeka, two regional hospitals andseveral major private firms and public institutions.  The Bank’s Lawrence location is located inDouglas County and is significantly impacted by the University of Kansas, thelargest university in Kansas, in addition to several private industries andbusinesses in the community.  In January 2009,the Company entered into an agreement to purchase a second branch in Lawrence,Kansas.  The communities of Paola,Louisburg, and Osawatomie, located within Miami County, are influenced by thegrowth of the Kansas City market resulting in housing growth and small privateindustries and business.  Additionally,the Osawatomie State Hospital is a major government employer within thecounty.  Bourbon and Osage Counties areprimarily agricultural with small private industries and business firms, whileBourbon County is also influenced by a regional hospital and Fort ScottCommunity College.

 

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

 

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

 

**Competition**

 

The Company faces strongcompetition both in attracting deposits and making real estate, commercial andother loans.  Its most direct competitionfor deposits comes from commercial banks and other savings institutions locatedin its principal market areas, including many large financial institutionswhich have greater financial and marketing resources available to them.  The ability of the Company to attract andretain deposits generally depends on its ability to provide a rate of return,liquidity and risk comparable to that offered by competing investment 

 

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opportunities.  The Company competes for loans principallythrough the interest rates and loan fees it charges and the efficiency andquality of services it provides borrowers.

 

**Employees**

 

AtDecember 31, 2008, the Bank had a total of 207 employees (195 full timeequivalent employees).  The Company hasno direct employees.  Employees areprovided with a comprehensive benefits program, including basic and majormedical insurance, life and disability insurance, sick leave, and a 401(k) profit sharingplan.  Employees are not represented byany union or collective bargaining group and the Bank considers its employeerelations to be good.

 

# **LendingActivities**

# ** **

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

 

Residential loans arepriced and originated following global underwriting standards that areconsistent with guidelines established by the major buyers in the secondarymarket.  Commercial and consumer loansgenerally are issued at or above the national prime rate.  While the origination of one-to-four familyresidential loans continues to be a key component of our business, the majorityof these loans are sold in the secondary market.  The Bank is focusing on the generation ofcommercial and commercial real estate loans to grow and diversify the loanportfolio.  The Bank has no potentialnegative amortization loans.  Thefollowing is a brief description of each major category of the Bank’s lendingactivity.

 

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

 

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

 

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

 

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also supported by ananalysis demonstrating the borrower’s ability to repay.  The Bank has been reducing its exposure toconstruction loans over the past two years, from $33.6 million at December 31,2006 to $19.6 million at December 31, 2008.  Residential loans that exceed 80% of theappraised value of the real estate generally are required, by policy, to besupported by private mortgage insurance, although on occasion the Bank willretain non-conforming residential loans to known customers at premium pricing.

 

***Consumer andOther Lending***.  Loans classified as consumer and other loansinclude automobile, boat, student loans, home improvement and home equityloans, the latter two secured principally through second mortgages.  With the exception of home improvement loansand home equity loans, the Bank generally takes a purchase money security interestin collateral for which it provides the original financing.  The terms of the loans typically range fromone to five years, depending upon the use of the proceeds, and generally rangefrom 75% to 90% of the value of the collateral. The majority of these loans are installment loans with fixed interestrates.  Home improvement and home equityloans are generally secured by a second mortgage on the borrower’s personalresidence and, when combined with the first mortgage, limited to 80% of thevalue of the property unless further protected by private mortgageinsurance.  The home improvement loansare generally made for terms of five to seven years with fixed interestrates.  The home equity loans aregenerally made for terms of ten years on a revolving basis with the interestrates adjusting monthly tied to the national prime interest rate.

 

**Loan Origination and Processing**

 

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

 

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

 

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

 

Recent events in the U.S. and global economies, including thedeterioration of the world wide credit markets, have materially impacted ourloan origination and processing. Residential real estate values have either leveled out or declinedslightly in the markets we serve.  Inseveral of our markets there is an oversupply of newly constructed, speculativeresidential real estate properties and developed vacant lots.  As a result of these issues we have severelycurtailed land development and construction lending.  We do not expect this type of lending to beresumed until the economic outlook improves and the supply and demand ofresidential housing and vacant developed lots is in balance.  The economic downturn has also caused us toincrease our underwriting requirements on other types of loans to insureborrowers can meet repayment requirements in the current economic environment.

 

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**SUPERVISION ANDREGULATION**

** **

# **General**

# ** **

Financial institutions,their holding companies and their affiliates are extensively regulated underfederal and state law.  As a result, thegrowth and earnings performance of the Company may be affected not only bymanagement decisions and general economic conditions, but also by therequirements of federal and state statutes and by the regulations and policiesof various bank regulatory authorities, including the OCC, the Board ofGovernors of the Federal Reserve System (the “Federal Reserve”) andthe FDIC.  Furthermore, taxation lawsadministered by the Internal Revenue Service and state taxing authorities andsecurities laws administered by the SEC and state securities authorities havean impact on the business of the Company. The effect of these statutes,regulations and regulatory policies may be significant, and cannot be predictedwith a high degree of certainty.

 

Federal and state lawsand regulations generally applicable to financial institutions regulate, amongother things, the scope of business, the kinds and amounts of investments,reserve requirements, capital levels relative to operations, the nature andamount of collateral for loans, the establishment of branches, mergers andconsolidations and the payment of dividends. This system of supervision andregulation establishes a comprehensive framework for the respective operationsof the Company and its subsidiaries and is intended primarily for theprotection of the FDIC-insured deposits and depositors of the Bank, rather thanstockholders. In addition to this generally applicable regulatory framework,recent turmoil in the credit markets prompted the enactment of unprecedentedlegislation that has allowed the U.S. Treasury Department (the “Treasury”) tomake equity capital available to qualifying financial institutions to helprestore confidence and stability in the U.S. financial markets, which imposesadditional requirements on institutions in which the Treasury invests.

 

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

 

**The Company**

 

***General.**** *TheCompany, as the sole shareholder of the Bank, is a bank holding company.  As a bank holding company, the Company isregistered with, and is subject to regulation by, the Federal Reserve under theBank Holding Company Act of 1956, as amended (the “BHCA”).  In accordance with Federal Reserve policy, theCompany is expected to act as a source of financial strength to the Bank and tocommit resources to support the Bank in circumstances where the Company mightnot otherwise do so.  Under the BHCA, theCompany is subject to periodic examination by the Federal Reserve.  The Company is also required to file with theFederal Reserve periodic reports of the Company’s operations and suchadditional information regarding the Company and its subsidiaries as theFederal Reserve may require.

 

***Acquisitions,Activities and Change in Control.***** **The primary purpose of a bank holding company is tocontrol and manage banks.****The BHCAgenerally requires the prior approval of the Federal Reserve for any mergerinvolving a bank holding company or any acquisition by a bank holding companyof another bank or bank holding company. Subject to certain conditions (including deposit concentration limitsestablished by the BHCA), the Federal Reserve may allow a bank holding companyto acquire banks located in any state of the United States. In approvinginterstate acquisitions, the Federal Reserve is required to give effect toapplicable state law limitations on the aggregate amount of deposits that maybe held by the acquiring bank holding company and its insured depositoryinstitution affiliates in the state in which the target bank is located(provided that those limits do not discriminate against out-of-state depositoryinstitutions or their holding companies) and state laws that require that thetarget bank have been in existence for a minimum period of time (not to exceedfive years) before being acquired by an out-of-state bank holding company.

 

The BHCA generallyprohibits the Company from acquiring direct or indirect ownership or control ofmore than 5% of the voting shares of any company that is not a bank and fromengaging in any business other than that of banking, managing and controllingbanks or furnishing services to banks and their subsidiaries.  This general prohibition is 

 

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subject to a number ofexceptions. The principal exception allows bank holding companies to engage in,and to own shares of companies engaged in, certain businesses found by theFederal Reserve to be “so closely related to banking ... as to be a properincident thereto.”  This authority wouldpermit the Company to engage in a variety of banking-related businesses, includingthe ownership and operation of a thrift, or any entity engaged in consumerfinance, equipment leasing, the operation of a computer service bureau(including software development), and mortgage banking and brokerage. The BHCAgenerally does not place territorial restrictions on the domestic activities ofnon-bank subsidiaries of bank holding companies.

 

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

 

Federal law alsoprohibits any person or company from acquiring “control” of an FDIC-insureddepository institution or its holding company without prior notice to theappropriate federal bank regulator.  “Control”is conclusively presumed to exist upon the acquisition of 25% or more of theoutstanding voting securities of a bank or bank holding company, but may ariseunder certain circumstances between 10% and 24.99% ownership.

 

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

 

The Federal Reserve’scapital guidelines establish the following minimum regulatory capitalrequirements for bank holding companies: (i) a risk-based requirementexpressed as a percentage of total assets weighted according to risk; and (ii) aleverage requirement expressed as a percentage of total assets.  The risk-based requirement consists of aminimum ratio of total capital to total risk-weighted assets of 8% and aminimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  The leverage requirement consists of aminimum ratio of Tier 1 capital to total assets of 3% for the most highly ratedcompanies, with a minimum requirement of 4% for all others.  For purposes of these capital standards, Tier1 capital consists primarily of permanent stockholders’ equity less intangibleassets (other than certain loan servicing rights and purchased credit cardrelationships).  Total capital consistsprimarily of Tier 1 capital plus certain other debt and equity instruments thatdo not qualify as Tier 1 capital and a portion of the Company’s allowance forloan and lease losses.

 

The risk-based andleverage standards described above are minimum requirements. Higher capitallevels could be required by regulatory authorities if warranted by theparticular circumstances or risk profiles of individual banking organizations.  For example, the Federal Reserve’s capitalguidelines contemplate that additional capital may be required to take adequateaccount of, among other things, interest rate risk, or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.  Further, any bankingorganization experiencing or anticipating significant growth would be expectedto maintain capital ratios, including tangible capital positions (*i.e.*, Tier 1 capital less all intangible assets), well abovethe minimum levels.  As of December 31,2008 the Company had regulatory capital in excess of the Federal Reserve’sminimum requirements.

 

***EmergencyEconomic Stabilization Act of 2008.***  Recent eventsin the U.S. and global financial markets, including the deterioration of theworldwide credit markets, have created significant challenges for financialinstitutions such as the Bank.  Dramaticdeclines in the housing market during the past year, marked by falling homeprices and increasing levels of mortgage foreclosures, have resulted insignificant write-downs of asset values by financial institutions, includinggovernment-sponsored entities and major commercial and investment banks.  In addition, many lenders and institutionalinvestors have reduced, and in some cases, ceased to provide funding toborrowers, including other financial institutions, as a result of concern aboutthe stability of the financial markets and the strength of counterparties.

 

 

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In response to the crisesaffecting the U.S. banking system and financial markets and to bolster thedistressed economy and improve consumer confidence in the financial system, on October 3,2008, the U.S. Congress passed, and the President signed into law, theEmergency Economic Stabilization Act of 2008 (the “EESA”).  The EESA authorizes the Secretary of theTreasury to implement various temporary emergency programs designed tostrengthen the capital positions of financial institutions and stimulate theavailability of credit within the U.S. financial system.  Financial institutions participating incertain of the programs established under the EESA will be required to adoptthe Treasury’s standards for executive compensation and corporate governance.

 

***TheTARP Capital Purchase Program***.  On October 14,2008, the Treasury announced that it will provide Tier 1 capital (in the formof perpetual preferred stock) to eligible financial institutions.  This program, known as the TARP CapitalPurchase Program (the “CPP”), allocates $250 billion from the $700 billionauthorized by the EESA to the Treasury for the purchase of senior preferredshares from qualifying financial institutions (the “CPP Preferred Stock”).  Eligible institutions will be able to sellequity interests to the Treasury in amounts equal to between 1% and 3% of theinstitution’s risk-weighted assets.  TheCPP Preferred Stock will generally be non-voting and will pay dividends at therate of 5% per annum for the first five years and thereafter at a rate of 9%per annum.  For public companies, inconjunction with the purchase of the CPP Preferred Stock, the Treasury willreceive warrants to purchase common stock from the participating publicinstitutions with an aggregate market price equal to 15% of the preferred stockinvestment.  Participating financialinstitutions will be required to adopt the Treasury’s standards for executivecompensation and corporate governance for the period during which the Treasuryholds equity issued under the CPP.  TheTreasury will determine specific eligibility and allocations for an interestedfinancial institution after consultation with the appropriate federal banking agency.The deadline for public companies to submit an application to participate inthe CPP was November 14, 2008.

 

The Company filed anapplication to participate in the CPP by issuing to the U.S. Treasuryapproximately $12 million in aggregate amount of CPP Preferred Stock.  The Company’s application to the CPP waspreliminarily approved, however, as previously announced, the Company electednot to participate in the program.  TheCompany’s decision not to participate was based on management’s and the Boardof Directors’ conclusion that it was not in the best interests of thestockholders, or the Bank’s customers, as the costs for the capital outweighedthe benefits to the Company.  Thisconclusion was based, in part, upon the strength of the Company’s capitalposition and management’s belief that the Bank could not efficiently use thecapital in the near term.

 

***DividendPayments.**** *The Company’s ability to pay dividends to itsstockholders may be affected by both general corporate law considerations andpolicies of the Federal Reserve applicable to bank holding companies. As aDelaware corporation, the Company is subject to the limitations of the DelawareGeneral Corporation Law (the “DGCL”). The DGCL allows the Company to paydividends only out of its surplus (as defined and computed in accordance withthe provisions of the DGCL) or if the Company has no such surplus, out of itsnet profits for the fiscal year in which the dividend is declared and/or thepreceding fiscal year. Additionally, policies of the Federal Reserve cautionthat a bank holding company should not pay cash dividends unless its net incomeavailable to common stockholders over the past year has been sufficient tofully fund the dividends and the prospective rate of earnings retention appearsconsistent with its capital needs, asset quality, and overall financialcondition.  The Federal Reserve alsopossesses enforcement powers over bank holding companies and their non-banksubsidiaries to prevent or remedy actions that represent unsafe or unsoundpractices or violations of applicable statutes and regulations.  Among these powers is the ability toproscribe the payment of dividends by banks and bank holding companies.

 

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

 

**The Bank**

 

***General.*** The Bank is a national bank, chartered by the OCC under the NationalBank Act.  The deposit accounts ofthe Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to themaximum extent provided under federal law and FDIC regulations.  The Bank is a member of the Federal ReserveSystem and the Federal Home Loan Bank System. As a national bank, the Bank is subject to the examination, supervision,reporting and enforcement 

 

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requirements of the OCC,the chartering authority for national banks. The FDIC, as administrator of theDIF, also has regulatory authority over the Bank.

 

***DepositInsurance.*** Asan FDIC-insured institution, the Bank is required to pay deposit insurancepremium assessments to the FDIC. The FDIC has adopted a risk-based assessmentsystem whereby FDIC-insured depository institutions pay insurance premiums atrates based on their risk classification. An institution’s risk classification is assigned based on its capitallevels and the level of supervisory concern the institution poses to theregulators.  Under the regulations of theFDIC, as presently in effect, insurance assessments range from 0.12% to 0.50%of total deposits for the first quarter 2009 assessment period only (subject tothe application of assessment credits, if any, issued by the FDIC in2008).  Effective April 1, 2009,insurance assessments will range from 0.07% to 0.78% of total deposits,depending on an institution’s risk classification, its levels of unsecured debtand secured liabilities, and, in certain cases, its level of brokereddeposits.  In addition, the FDIC recentlypassed an interim rule authorizing the FDIC to impose an emergency specialassessment equal to 0.20% of total deposits on June 30, 2009 (that will becollected on September 30, 2009), and further authorizing the FDIC toimpose additional emergency special assessments after June 30, 2009, of upto 0.10% of total deposits, whenever the FDIC estimates that the reserve ratioof the DIF will fall to a level that the FDIC believes would adversely affectpublic confidence in federal deposit insurance or to a level that will be closeto zero or negative at the end of a calendar quarter.  The interim rule, however, is subject to a30-day comment period that will expire on April 2, 2009, and may besubject to change before any special assessments are imposed on insureddepository institutions.  We expect ourFDIC deposit insurance expense to increase approximately $300,000 during 2009as compared to 2008 due to the expiration of our credits and the increasedassessment levels.  This amount does notinclude the emergency special assessment, which would be approximately$900,000, based on the proposed 0.20% of total deposits.  These additional amounts will increasenon-interest expense.

 

***FDICTemporary Liquidity Guarantee Program.*** In connectionwith the recently enacted EESA and in conjunction with the Treasury’s actionsto address the current credit and liquidity crisis in financial markets,  the FDIC announced the Temporary LiquidityGuarantee Program, which will temporarily provide to participating institutionsunlimited deposit insurance coverage for non-interest bearing transaction accountsmaintained at FDIC insured institutions (the “transaction account guaranteeprogram”), and provide a limited guarantee on certain newly-issued seniorunsecured debt (the “debt guarantee program”). For an initial 30-day period, all eligible financial institutions wereautomatically covered under this program without incurring any fees.  Institutions that did not opt out by December 5,2008, will be subject to the following potential assessments for participation:(i) for the debt guarantee program, between 50 and 100 basis points perannum for eligible senior unsecured debt (depending on the maturity date)issued between October 14, 2008 and June 30, 2009; and (ii) forthe transaction account guarantee program, 10 basis points per annum on amountsin excess of $250,000 in non-interest bearing transaction accounts from November 13,2008 through and including December 31, 2009.  The Bank decided to continue to participatein the transaction account guarantee program and did not opt out.  As a result, the Bank expects to incur feesassociated with that program.  However,the Bank decided not to continue to participate in the debt guarantee program,opted out of that program, and will not incur any fees associated therewith.

 

***FICO Assessments.***   The Financing Corporation (“FICO”) is amixed-ownership governmental corporation chartered by the former Federal HomeLoan Bank Board pursuant to the Federal Savings and Loan Insurance CorporationRecapitalization Act of 1987 to function as a financing vehicle for the recapitalizationof the former Federal Savings and Loan Insurance Corporation.  FICO issued 30-year non-callable bonds ofapproximately $8.2 billion that mature by 2019. Since 1996, federal legislation has required that all FDIC-insureddepository institutions pay assessments to cover interest payments on FICO’soutstanding obligations.  These FICOassessments are in addition to amounts assessed by the FDIC for depositinsurance.  During the year ended December 31,2008, the FICO assessment rate was approximately 0.01% of deposits.

 

***SupervisoryAssessments.***  National banks are required to paysupervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculatedusing a formula that takes into account the bank’s size and its supervisorycondition.** **Duringthe year ended December 31, 2008, the Bank paid supervisory assessments tothe OCC totaling $147,000.

 

 

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

 

The capital requirementsdescribed above are minimum requirements. Higher capital levels will be required if warranted by the particularcircumstances or risk profiles of individual institutions as determined by theOCC.  For example, regulations of the OCCprovide that additional capital may be required to take adequate account of,among other things, interest rate risk or the risks posed by concentrations ofcredit, nontraditional activities or securities trading activities.

 

Further, federal law andregulations provide various incentives for financial institutions to maintainregulatory capital at levels in excess of minimum regulatory requirements. Forexample, a financial institution that is “well-capitalized” may qualify forexemptions from prior notice or application requirements otherwise applicableto certain types of activities and may qualify for expedited processing ofother required notices or applications. Additionally, one of the criteria thatdetermines a bank holding company’s eligibility to operate as a financialholding company is a requirement that all of its financial institutionsubsidiaries be “well-capitalized.” Under the regulations of the OCC, in order to be “well-capitalized” afinancial institution must maintain a ratio of total capital to totalrisk-weighted assets of 10% or greater, a ratio of Tier 1 capital to totalrisk-weighted assets of 6% or greater and a ratio of Tier 1 capital to totalassets of 5% or greater.

 

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

 

As of December 31,2008: (i) the Bank was not subject to any directives from the OCC,including any related to increasing its capital to an amount in excess of theminimum regulatory capital requirements; (ii) the Bank exceeded its minimumregulatory capital requirements under OCC capital adequacy guidelines; and (iii) theBank was “well-capitalized,” as defined by OCC regulations.

 

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

 

The payment of dividendsby any financial institution is affected by the requirement to maintainadequate capital pursuant to applicable capital adequacy guidelines andregulations, and a financial institution generally is prohibited from payingany dividends if, following payment thereof, the institution would beundercapitalized.  As described above,the Bank exceeded its minimum capital requirements under applicable guidelinesas of December 31, 2008.  As of December 31,2008, approximately $2.5 million was available to be paid as dividends by theBank.  Notwithstanding the availabilityof funds for dividends, however, the OCC may prohibit the payment of anydividends by the Bank if the OCC determines such payment would constitute anunsafe or unsound practice.

 

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*** ***

***InsiderTransactions.***** **The Bank is subject to certain restrictions imposed byfederal law on extensions of credit to the Company, on investments in the stockor other securities of the Company and the acceptance of the stock or othersecurities of the Company as collateral for loans made by the Bank. Certainlimitations and reporting requirements are also placed on extensions of creditby the Bank to its directors and officers, to the directors and officers of theCompany, to principal stockholders of the Company, and to “related interests”of such directors, officers and principal stockholders.  In addition, federal law and regulations mayaffect the terms upon which any person who is a director or officer of theCompany or the Bank or a principal stockholder of the Company may obtain creditfrom banks with which the Bank maintains correspondent relationships.

 

***Safetyand Soundness Standards.***  The federalbanking agencies have adopted guidelines that establish operational andmanagerial standards to promote the safety and soundness of federally insureddepository institutions.  The guidelinesset forth standards for internal controls, information systems, internal auditsystems, loan documentation, credit underwriting, interest rate exposure, assetgrowth, compensation, fees and benefits, asset quality and earnings.

 

In general, the safetyand soundness guidelines prescribe the goals to be achieved in each area, and eachinstitution is responsible for establishing its own procedures to achieve thosegoals.  If an institution fails to complywith any of the standards set forth in the guidelines, the institution’sprimary federal regulator may require the institution to submit a plan forachieving and maintaining compliance. If an institution fails to submit anacceptable compliance plan, or fails in any material respect to implement acompliance plan that has been accepted by its primary federal regulator, theregulator is required to issue an order directing the institution to cure thedeficiency. Until the deficiency cited in the regulator’s order is cured, theregulator may restrict the institution’s rate of growth, require theinstitution to increase its capital, restrict the rates the institution pays ondeposits or require the institution to take any action the regulator deemsappropriate under the circumstances. Noncompliance with the standardsestablished by the safety and soundness guidelines may also constitute groundsfor other enforcement action by the federal banking regulators, including ceaseand desist orders and civil money penalty assessments.

 

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

 

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

 

***FinancialSubsidiaries. ***Under Federal law and OCC regulations, national banks are authorized toengage, through “financial subsidiaries,” in any activity that is permissiblefor a financial holding company and any activity that the Secretary of theTreasury, in consultation with the Federal Reserve, determines is financial innature or incidental to any such financial activity, except: (i) insuranceunderwriting, (ii) real estate development or real estate investmentactivities (unless otherwise permitted by law), (iii) insurance companyportfolio investments and (iv) merchant banking.  The authority of a national bank to invest ina financial subsidiary is subject to a number of conditions, including, amongother things, requirements that the bank must be well-managed andwell-capitalized (after deducting from capital the bank’s outstandinginvestments in financial subsidiaries). The Bank has not applied for approval to establish any financialsubsidiaries.

 

***FederalReserve System.***  Federal Reserve regulations, as presently ineffect, require depository institutions to maintain reserves against theirtransaction accounts (primarily NOW and regular checking accounts), as follows:for transaction accounts aggregating $44.4 million or less, the reserverequirement is 3% of total transaction accounts; and for transaction accountsaggregating in excess of $44.4 million, the reserve requirement is $1.023million plus 10% of the aggregate amount of total transaction accounts inexcess of $44.4 million.  The first$10.3 million of otherwise reservable balances are exempted from the reserverequirements.  These reserve requirementsare subject 

 

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to annual adjustment bythe Federal Reserve.  As of December 31,2008, the Bank is in compliance with the foregoing requirements.

 

**Company Website**

 

The Companymaintains a corporate website at www.landmarkbancorpinc.com.  The Company makes available free of charge onor through its website the annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of theExchange Act as soon as reasonably practicable after the Company electronicallyfiles such material with, or furnish it to, the SEC.  Many of the Company’s policies, including itscode of ethics, committee charters and other investor information are availableon the web site. The Company will also provide copies of its filings free ofcharge upon written request to our Corporate Secretary at the address listed onthe front of this Form 10-K.

 

**STATISTICAL DATA**

 

The Company has a fiscalyear ending on December 31.  Theinformation presented in this annual report on Form 10-K presentsinformation on behalf of the Company as of and for the year ended December 31,2008.

 

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

 

**I.  Distribution of Assets, Liabilities, andStockholders’ Equity; Interest Rates and Interest Differentials**

 

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

 
| ** **            | ** ** | **Years Ended December 31,**        | ** ** |
|-----------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | **2008 vs 2007**                         | ** ** | **2007 vs 2006** | ** ** |
| ** **            | ** ** | **Increase/(decrease)  attributable to** | ** ** | **Increase/(decrease)  attributable to** | ** ** |
| ** **            | ** ** | **Volume**                               | ** ** | **Rate** | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **            | ** ** | **(Dollars in thousands)**               | ** ** |
| Interest income:      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Investment securities |       | $                                        | 548        |   | $ | (358 | ) | $ | 190 |   | $ | 656 |   | $ | 682 |   | $ | 1,338 |   |
| Loans                 |       | (360                                     | )          | (3,641 | ) | (4,001 | ) | (665 | ) | 855 |   | 190 |   |
| Total                 |       | 188                                      |       | (3,999 | ) | (3,811 | ) | (9 | ) | 1,537 |   | 1,528 |   |
| Interest expense:     |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Deposits              |       | (209                                     | )          | (3,400 | ) | (3,609 | ) | 269 |   | 2,290 |   | 2,559 |   |
| Other borrowings      |       | 654                                      |       | (1,298 | ) | (644 | ) | (447 | ) | 117 |   | (330 | ) |
| Total                 |       | 445                                      |       | (4,698 | ) | (4,253 | ) | (178 | ) | 2,407 |   | 2,229 |   |
| Net interest income   |       | $                                        | (257       | ) | $ | 699 |   | $ | 442 |   | $ | 169 |   | $ | (870 | ) | $ | (701 | ) |

 

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**II.  Investment Portfolio**

 

***InvestmentSecurities****.*  The following table sets forth the carryingvalue of the Company’s investment securities at the dates indicated.  None of the investment securities held as of December 31,2008 was issued by an individual issuer in excess of 10% of the Company’sstockholders’ equity, excluding the securities of U.S. government and federal agencyobligations.  The Company’s federal agencyobligations consist of obligations of U.S. government sponsored enterprises,primarily the FHLB.  The Company’smortgage backed securities portfolio consisted of securities predominantlyunderwritten to the standards and guaranteed by the government-sponsoredagencies of FHLMC, FNMA and GNMA.  TheCompany’s investments in certificates of deposits consisted of FDIC insuredcertificates of deposits with other financial institutions.

 
| ** **                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**  | ** ** |
| Investment  Securities:          |       |                        |       |   |   |   |   |
| U.S. federal  agency obligations |       | $                           | 29,514     |   | $ | 48,708 |   | $ | 46,632 |   |
| Municipal  obligations           |       | 64,309                      |       | 62,113 |   | 55,064 |   |
| Mortgage-backed  securities      |       | 56,582                      |       | 36,216 |   | 32,224 |   |
| FHLB stock                       |       | 7,303                       |       | 7,099 |   | 6,747 |   |
| Common stock                     |       | 1,074                       |       | 1,122 |   | 716 |   |
| FRB stock                        |       | 1,749                       |       | 1,746 |   | 1,741 |   |
| Corporate bonds                  |       | 740                         |       | 2,493 |   | 2,531 |   |
| Certificates of  deposits        |       | 10,026                      |       | 5,227 |   | 229 |   |
| Total                            |       | $                           | 171,297    |   | $ | 164,724 |   | $ | 145,884 |   |

 

The following table sets forthcertain information regarding the carrying values, weighted average yields, andmaturities of the Company’s investment securities portfolio as of December 31,2008.  Yields on tax-exempt obligationshave been computed on a tax equivalent basis, using a 34% federal taxrate.  The table includes scheduledprincipal payments and estimated prepayments for mortgage-backed securities,where actual prepayments will differ from contractual maturities becauseborrowers have the right to prepay obligations with or without prepaymentpenalties.

 
| ** **                       | ** ** | **As of  December 31, 2008** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **One year  or less**             | ** ** | **One to  five years** | ** ** | **Five to  ten years** | ** ** | **More  than ten years** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Carrying**                      | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** |
| ** **                       | ** ** | **value**                         | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** | **value** | ** ** | **yield** | ** ** |
| ** **                       | ** ** | **(Dollars  in thousands)**       | ** ** |
| Investment  securities:          |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. federal  agency obligations |       | $                                 | 16,406     |   | 4.47 | % | $ | 12,023 |   | 5.11 | % | $ | 1,085 |   | 5.50 | % | $ | — |   | — | % | $ | 29,514 |   | 4.77 | % |
| Municipal  obligations           |       | 863                               |       | 4.78 | % | 10,209 |   | 5.24 | % | 29,468 |   | 5.73 | % | 23,769 |   | 6.07 | % | 64,309 |   | 5.76 | % |
| Mortgage-backed  securities      |       | 4,303                             |       | 4.48 | % | 49,048 |   | 4.48 | % | 2,372 |   | 6.16 | % | 859 |   | 5.01 | % | 56,582 |   | 4.56 | % |
| Corporate bonds                  |       | —                            |       | — | % | — |   | — | % | — |   | — | % | 740 |   | 5.12 | % | 740 |   | 5.12 | % |
| Certificates of  deposits        |       | 10,026                            |       | 3.13 | % | — |   | — | % | — |   | — | % | — |   | — | % | 10,026 |   | 3.13 | % |
| Total                            |       | $                                 | 31,598     |   | 4.06 | % | $ | 71,280 |   | 4.70 | % | $ | 32,925 |   | 5.75 | % | $ | 25,368 |   | 6.01 | % | $ | 161,171 |   | 4.99 | % |

 

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**III.  Loan Portfolio**

 

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

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands)**  | ** ** |
| Balance                                          | ** ** | ** **                  | ** ** |
| Real estate  loans:                              |       |                        |       |   |   |   |   |
| One-to-four  family residential                  |       | $                           | 112,814    |   | $ | 126,459 |   | $ | 151,300 |   |
| Commercial                                       |       | 126,977                     |       | 113,209 |   | 98,314 |   |
| Construction                                     |       | 19,618                      |       | 27,936 |   | 33,600 |   |
| Commercial loans                                 |       | 101,976                     |       | 103,099 |   | 90,758 |   |
| Consumer loans                                   |       | 7,937                       |       | 9,164 |   | 9,596 |   |
| Total gross  loans                               |       | 369,322                     |       | 379,867 |   | 383,568 |   |
| Less:                                            |       |                        |       |   |   |   |   |
| Deferred loan  fees/(costs) and loans in process |       | (320                        | )          | (462 | ) | 214 |   |
| Allowance for  loan losses                       |       | 3,871                       |       | 4,172 |   | 4,030 |   |
| Loans, net                                       |       | $                           | 365,771    |   | $ | 376,157 |   | $ | 379,324 |   |
|                                             |       |                        |       |   |   |   |   |
| Percent of total                                 |       |                        |       |   |   |   |   |
| Real estate  loans:                              |       |                        |       |   |   |   |   |
| One-to-four  family residential                  |       | 30.5                        | %          | 33.3 | % | 39.4 | % |
| Commercial                                       |       | 34.4                        | %          | 29.8 | % | 25.6 | % |
| Construction                                     |       | 5.3                         | %          | 7.4 | % | 8.8 | % |
| Commercial loans                                 |       | 27.6                        | %          | 27.1 | % | 23.7 | % |
| Consumer loans                                   |       | 2.2                         | %          | 2.4 | % | 2.5 | % |
| Total gross  loans                               |       | 100.0                       | %          | 100.0 | % | 100.0 | % |

 

The following table setsforth the contractual maturities of loans as of December 31, 2008. Thetable does not include unscheduled prepayments.

 
| ** **                     | ** ** | **£****1 year**       | ** ** | **1-5 years** | ** ** | **>****5 years** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------------------------|------------|---------------|------------|---------------------|------------|-----------|------------|
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:             |       |                       |       |          |       |                |       |      |       |
| One-to-four family residential |       | $                          | 15,791     |          | $          | 48,800              |       | $         | 48,223     |   | $ | 112,814 |   |
| Commercial                     |       | 29,598                     |       | 48,177        |       | 49,202              |       | 126,977   |       |
| Construction                   |       | 19,485                     |       | 133           |       | —              |       | 19,618    |       |
| Commercial                     |       | 67,576                     |       | 30,341        |       | 4,059               |       | 101,976   |       |
| Consumer                       |       | 3,321                      |       | 4,372         |       | 244                 |       | 7,937     |       |
| Total gross loans              |       | $                          | 135,771    |          | $          | 131,823             |       | $         | 101,728    |   | $ | 369,322 |   |

 

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The following table sets forth, as of December 31, 2008, thedollar amount of all loans due after December 31, 2009 and whether suchloans had fixed interest rates or adjustable interest rates:

 
| ** **                     | ** ** | **Fixed**                  | ** ** | **Adjustable** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------|------------|-----------|------------|
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:             |       |                       |       |           |       |      |       |
| One-to-four family residential |       | $                          | 30,631     |           | $          | 66,392    |       | $ | 97,023 |   |
| Commercial                     |       | 24,836                     |       | 72,543         |       | 97,379    |       |
| Construction                   |       | 133                        |       | —         |       | 133       |       |
| Commercial                     |       | 18,210                     |       | 16,190         |       | 34,400    |       |
| Consumer                       |       | 4,152                      |       | 464            |       | 4,616     |       |
| Total gross loans              |       | $                          | 77,962     |           | $          | 155,589   |       | $ | 233,551 |   |

 

***NonperformingAssets****.* The following table sets forthinformation with respect to nonperforming assets, including non-accrual loansand real estate acquired through foreclosure or by deed in lieu of foreclosure(“real estate owned”).  Under theoriginal terms of the Company’s non-accrual loans as of December 31, 2008,interest earned on such loans for the years ended December 31, 2008, 2007and 2006 would have increased interest income by $252,000, $520,000 and$270,000, respectively.

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands)**  | ** ** |
| Total non-accrual loans                          |       | $                           | 5,748      |   | $ | 10,037 |   | $ | 3,567 |   |
| Accruing loans over 90 days past due             |       | —                      |       | — |   | — |   |
| Real estate owned                                |       | 1,934                       |       | 492 |   | 456 |   |
| Total nonperforming assets                       |       | $                           | 7,682      |   | $ | 10,529 |   | $ | 4,023 |   |
|                                             |       |                        |       |   |   |   |   |
| Total nonperforming loans to total loans, net    |       | 1.6                         | %          | 2.7 | % | 0.9 | % |
| Total nonperforming assets to total assets       |       | 1.3                         | %          | 1.7 | % | 0.7 | % |
| Allowance for loan losses to nonperforming loans |       | 67.3                        | %          | 41.5 | % | 113.0 | % |

 

The Company’s non-accrualloans declined to $5.7 million at December 31, 2008 from $10.0 million asof December 31, 2007.  The declinewas primarily the result of the collection of the outstanding balances of twoloan relationships totaling $3.0 million during 2008 and increased charge-offsof balances in non-accrual at December 31, 2007.  Net loan charge-offs for the year ended December 31,2008 were $2.7 million compared to $113,000 for the year ended December 31,2007.  The net loan charge-offs during2008 were primarily related to loans that had a specific loss reserveallocation at December 31, 2007.  Aspart of the Company’s credit risk management, the Company continues toaggressively manage the loan portfolio to identify problem loans and has placedadditional emphasis on its commercial real estate and constructionrelationships.  This loan portfoliomanagement, combined with the current economic recession, has led to anincrease in our real estate owned.  Asdiscussed in more detail in the “Asset Quality and Distribution” section, webelieve the Company’s allowance for loan losses is adequate based on theCompany’s evaluation of the loan portfolio’s inherent risk as of December 31,2008.

 

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**IV.           Summary of Loan Loss Experience**

 

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

 
| ** **                                                               | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**  | ** ** |
| Total gross  loans outstanding                                           |       | $                           | 369,322    |   | $ | 379,867 |   | $ | 383,568 |   |
| Average net  loans outstanding                                           |       | $                           | 375,198    |   | $ | 380,664 |   | $ | 391,010 |   |
|                                                                     |       |                        |       |   |   |   |   |
| Allowance  balances (at beginning of year)                               |       | 4,172                       |       | 4,030 |   | 3,151 |   |
|                                                                     |       |                        |       |   |   |   |   |
| Provision                                                                |       | 2,400                       |       | 255 |   | 235 |   |
|                                                                     |       |                        |       |   |   |   |   |
| Allowance of  merged bank:                                               |       | —                      |       | — |   | 891 |   |
|                                                                     |       |                        |       |   |   |   |   |
| Charge-offs:                                                             |       |                        |       |   |   |   |   |
| Real estate  loans:                                                      |       |                        |       |   |   |   |   |
| One-to-four  family residential                                          |       | (1,443                      | )          | (16 | ) | (23 | ) |
| Commercial                                                               |       | —                      |       | — |   | (55 | ) |
| Construction                                                             |       | (453                        | )          | (29 | ) | — |   |
| Commercial                                                               |       | (728                        | )          | (12 | ) | (3 | ) |
| Consumer                                                                 |       | (145                        | )          | (147 | ) | (258 | ) |
|                                                                     |       | (2,769                      | )          | (204 | ) | (339 | ) |
| Recoveries:                                                              |       |                        |       |   |   |   |   |
| Real estate  loans:                                                      |       |                        |       |   |   |   |   |
| One-to-four  family residential                                          |       | 4                           |       | 4 |   | 5 |   |
| Commercial                                                               |       | —                      |       | — |   | 1 |   |
| Construction                                                             |       | —                      |       | — |   | — |   |
| Commercial                                                               |       | 9                           |       | 25 |   | 25 |   |
| Consumer                                                                 |       | 55                          |       | 62 |   | 61 |   |
|                                                                     |       | 68                          |       | 91 |   | 92 |   |
|                                                                     |       |                        |       |   |   |   |   |
| Net charge-offs                                                          |       | (2,701                      | )          | (113 | ) | (247 | ) |
|                                                                     |       |                        |       |   |   |   |   |
| Allowance  balances (at end of year)                                     |       | $                           | 3,871      |   | $ | 4,172 |   | $ | 4,030 |   |
| Allowance for  loan losses as a percent of total gross loans outstanding |       | 1.05                        | %          | 1.10 | % | 1.05 | % |
| Net loans  charged off as a percent of average net loans outstanding     |       | 0.72                        | %          | 0.03 | % | 0.06 | % |

 

The significant increasein the one-to-four family residential charge-offs is primarily from theliquidation of a pool of non-owner occupied, one-to-four family residentialloans, made to a single entity in the Kansas City, Missouri area.  These loans were located in deterioratingneighborhoods and were originally obtained as part of an acquisition.  As of December 31, 2008 the loans werepartially charged-off and have subsequently been liquidated in 2009 at a pricethat had an immaterial impact on earnings. As mentioned above, these loans were acquired in a prior acquisition andare not representative of the quality and performance of the remainingone-to-four family residential mortgage loan portfolio.

 

 

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

 
| ** **                     | ** ** | **2008**                   | ** ** | **2007**                       | ** ** | **2006**   | ** ** |
|--------------------------------|------------|----------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                     | ** ** | **Amount**                 | ** ** | **% Loan type to total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** | **Amount** | ** ** | **% Loan type to total loans** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:             |       |                       |       |                           |       |       |       |   |   |   |   |   |   |
| One-to-four family residential |       | $                          | 672        |                           | 30.5       | %          | $          | 1,189 |   | 33.3 | % | $ | 827 |   | 39.4 | % |
| Commercial                     |       | 730                        |       | 34.4                           | %          | 640        |       | 29.8 | % | 823 |   | 25.6 | % |
| Construction                   |       | 833                        |       | 5.3                            | %          | 879        |       | 7.4 | % | 834 |   | 8.8 | % |
| Commercial                     |       | 1,507                      |       | 27.6                           | %          | 1,191      |       | 27.1 | % | 1,308 |   | 23.7 | % |
| Consumer                       |       | 129                        |       | 2.2                            | %          | 273        |       | 2.4 | % | 238 |   | 2.5 | % |
| Total                          |       | $                          | 3,871      |                           | 100.0      | %          | $          | 4,172 |   | 100.0 | % | $ | 4,030 |   | 100.0 | % |

 

The decline in theallocation of the allowance for losses on loans to one-to-four familyresidential loans is primarily the result of the charge-off associated with theone loan relationship on a pool of non-owner occupied, one-to-four familyresidential loans in the Kansas City, Missouri area.  Specific reserve allocations of $705,000related to impaired loans at December 31, 2008 was primarily related toone commercial loan relationship.  Theallowance for losses on loans is discussed in more detail in the “NonperformingAssets” and “Asset Quality and Distribution” sections, we believe the Company’sallowance for loan losses continues to be adequate based on the Company’sevaluation of the loan portfolio’s inherent risk as of December 31, 2008.

 

Even though the Company’slevels of non-accrual loans and loans over 90 days past due declined during2008, the current economic problems could result in our levels of nonperformingassets staying elevated, as compared to levels prior to December 31, 2007,for a significant period of time. Further deterioration in the local economy or real estate values maycreate additional problem loans for the Company.

 

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

 

As of December 31,2008, the aggregate amount outstanding of jumbo certificates of deposit(amounts of $100,000 or more) was $50.0 million.  The following table presents the maturitiesof these time certificates of deposit at December 31, 2008:

 
| **(Dollars in thousands)**      | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|
|                            |       |       |       |
| 3 months or less                |       | $          | 17,745     |   |
| Over 3 months through 6 months  |       | 11,126     |       |
| Over 6 months through 12 months |       | 13,524     |       |
| Over 12 months                  |       | 7,570      |       |
| Total                           |       | $          | 49,965     |   |

 

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

 
| ** **               | ** ** | **As of or for the years ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Return on average assets |       | 0.75                                               | %          | 0.90 | % | 1.01 | % |
| Return on average equity |       | 8.98                                               | %          | 10.78 | % | 13.01 | % |
| Equity to total assets   |       | 8.54                                               | %          | 8.62 | % | 8.34 | % |
| Dividend payout ratio    |       | 38.10                                              | %          | 32.70 | % | 26.27 | % |

 

 

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**ITEM 1A.               RISK FACTORS**

 

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

 

**Our business may be adverselyaffected by conditions in the financial markets and economic conditionsgenerally.**

 

The United States hasbeen in a recession since December, 2007. Business activity across a wide range of industries and regions isgreatly reduced and many businesses and local governments are experiencing seriousdifficulty in remaining profitable and providing services due to the lack ofconsumer spending and the lack of liquidity in the credit markets.  Unemployment has increased significantly.  Since mid-2007, and particularly during thesecond half of 2008, the financial services industry and the securities marketsgenerally were materially and adversely affected by significant declines in thevalues of nearly all asset classes and by a serious lack of liquidity. This wasinitially triggered by declines in home prices and the values of subprimemortgages, but spread to all mortgage and real estate asset classes, toleveraged bank loans and to nearly all asset classes, including equities. Theglobal markets have been characterized by substantially increased volatilityand short-selling and an overall loss of investor confidence, initially infinancial institutions, but more recently in companies in a number of otherindustries and in the broader markets.

 

Market conditions havealso led to the failure or merger of a number of prominent financialinstitutions. Financial institution failures or near-failures have resulted infurther losses as a consequence of defaults on securities issued by them anddefaults under contracts entered into with such entities as counterparties.  Furthermore, declining asset values, defaultson mortgages and consumer loans, and the lack of market and investorconfidence, as well as other factors, have all combined to increase creditdefault swap spreads, to cause rating agencies to lower credit ratings, and tootherwise increase the cost and decrease the availability of liquidity, despitevery significant declines in Federal Reserve borrowing rates and othergovernment actions. Some banks and other lenders have suffered significant lossesand have become reluctant to lend, even on a secured basis, due to theincreased risk of default and the impact of declining asset values on the valueof collateral. The foregoing has significantly weakened the strength andliquidity of some financial institutions worldwide.  In 2008, the U.S. government, the FederalReserve and other regulators have taken numerous steps to increase liquidityand to restore investor confidence, including committing to invest at least$250 billion in the equity of other banking organizations, but asset valueshave continued to decline and access to liquidity for many organizationscontinues to be very limited.

 

As a result of thesefinancial economic crises, many lending institutions, including us, haveexperienced declines in the performance of their loans, including commercialloans, commercial real estate loans and consumer loans. Moreover, competitionamong depository institutions for deposits and quality loans has increasedsignificantly. In addition, the values of real estate collateral supportingmany commercial loans and home mortgages have declined and may continue todecline. Bank and bank holding company stock prices have been negativelyaffected, as has the ability of banks and bank holding companies to raise capitalor borrow in the debt markets has become more difficult compared to recentyears.  As a result, there is a potentialfor new federal or state laws and regulations regarding lending and fundingpractices and liquidity standards, and bank regulatory agencies are expected tobe very aggressive in responding to concerns and trends identified inexaminations, including the expected issuance of many formal or informalenforcement actions or orders. The impact of new legislation in response tothose developments, may negatively impact our operations by restricting ourbusiness operations, including our ability to originate or sell loans, andadversely impact our financial performance or our stock price.

 

In addition, furthernegative market developments may affect consumer confidence levels and maycause adverse changes in payment patterns, causing increases in delinquenciesand default rates, which may impact our charge-offs and provision for creditlosses. A worsening of these conditions would likely exacerbate the adverseeffects of these difficult market conditions on us and others in the financialservices industry.

 

Declines in our stockprice, as well as changes to other risk factors discussed herein, could resultin impairment of our goodwill which would have an adverse effect on ourearnings.

 

 

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Overall, during the pastyear, the general business environment has had an adverse effect on ourbusiness, and there can be no assurance that the environment will improve inthe near term. Until conditions improve, we expect our business, financialcondition and results of operations to be adversely affected.

 

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

 

Weestablished our allowance for loan losses and maintain it at a level consideredadequate by management to absorb loan losses that are inherent in the portfolio.  Additionally, our Board of Directorsregularly monitors the adequacy of our allowance for loan loses.  The amount of future loan losses issusceptible to changes in economic, operating and other conditions, includingchanges in interest rates, which may be beyond our control, and such losses mayexceed current estimates.  At December 31,2008 and 2007, our allowance for loan losses as a percentage of total loans was1.05% and 1.10%, respectively, and as a percentage of total non-performingloans was approximately 67.3% and 41.5%, respectively.  Although management believes that theallowance for loan losses is adequate to absorb losses on any existing loansthat may become uncollectible, we cannot predict loan losses with certainty norcan we assure you that our allowance for loan losses will prove sufficient tocover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our business,financial condition and results of operations. The increased levels of provision for loan losses experienced during2008 may continue for some period of time.

 

**Declinesin value may adversely impact the carrying amount of our investment portfolioand result in other-than-temporary impairment charges.**

 

Asof December 31, 2008, we had pooled trust preferred securities with anaggregate book value of $2.5 million and an unrealized loss of approximately$1.7 million.  We may be required torecord impairment charges on our investment securities if they suffer a declinein value that is considered other-than-temporary.  If the credit quality of the securities inour investment portfolio deteriorates, we may also experience a loss ininterest income from the suspension of either interest or dividend payments.  Numerous factors, including lack of liquidityfor resales of certain investment securities, absence of reliable pricinginformation for investment securities, adverse changes in business climate oradverse actions by regulators could have a negative effect on our investmentportfolio in future periods.

 

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

 

One-to-four familyresidential mortgage loans comprised $112.8 million and $126.5 million, or30.5% and 33.3%, of our loan portfolio at December 31, 2008 and 2007,respectively. These loans are secured primarily by properties located in thestate of Kansas.  Our concentration ofthese loans results in lower yields relative to other loan categories withinour loan portfolio.  While these loansgenerally possess higher yields than investment securities, their repaymentcharacteristics are not as well defined and they generally possess a higherdegree of interest rate risk versus other loans and investment securitieswithin our portfolio.  This increasedinterest rate risk is due to the repayment and prepayment options inherent inresidential mortgage loans which are exercised by borrowers based upon theoverall level of interest rates.  Theseresidential mortgage loans are generally made on the basis of the borrower’sability to make repayments from his or her employment and the value of theproperty securing the loan.  Thus, as aresult, repayment of these loans is also subject to general economic andemployment conditions within the communities and surrounding areas where theproperty is located.

 

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

 

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

 

Commercialloans were $102.0 million, or approximately 27.6% of our total loan portfolioas of December 31, 2008, compared to $103.1 million and 27.1% as of December 31,2007.  Our commercial loans are primarilymade based on the identified cash flow of the borrower and secondarily on theunderlying collateral provided by the borrower. 

 

 

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Mostoften, this collateral is accounts receivable, inventory, or machinery.  Credit support provided by the borrower formost of these loans and the probability of repayment is based on theliquidation of the pledged collateral and enforcement of a personal guarantee,if any exists.  As a result, in the caseof loans secured by accounts receivable, the availability of funds for therepayment of these loans may be substantially dependent on the ability of theborrower to collect amounts due from its customers.  The collateral securing other loans maydepreciate over time, may be difficult to appraise and may fluctuate in valuebased on the success of the business.

 

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

 

At December 31, 2008and 2007, agricultural real estateloans totaled $7.2 million and $6.9 million,or 1.9% and 1.8% of our total loan portfolio, respectively.  Agriculturalreal estate lending involves a greater degree of risk and typicallyinvolves larger loans tosingle borrowers than lending on single-familyresidences. Payments on agricultural realestate loans are dependent on theprofitable operation or management of thefarm property securing the loan. Thesuccess of the farm may be affected by manyfactors outside the control of thefarm borrower, including adverse weatherconditions that prevent the planting ofa crop or limit crop yields (such as hail,drought and floods), loss oflivestock due to disease or other factors, declines in market pricesforagriculturalproducts (both domestically and internationally) and the impact ofgovernment regulations(including changes in price supports, subsidies andenvironmental regulations). In addition, manyfarms are dependent on a limitednumber of key individuals whose injury ordeath may significantly affect thesuccessful operation of the farm. If the cashflow from a farming operation isdiminished, the borrower’s ability to repay the loanmay be impaired. Theprimary cropsin our market areas are wheat, corn and soybean. Accordingly, adversecircumstances affectingwheat, corn and soybean crops could have an adverse effect onour agricultural real estateloan portfolio.

 

Wealso originate agricultural operating loans. At December 31, 2008 and 2007, theseloans totaled $36.0 millionand $34.4 million, respectively, or 9.7% and 9.1% respectively, of our totalloan portfolio. Aswithagricultural real estate loans, the repayment of operating loans isdependent on the successfuloperation or management of the farm property.

 

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

 

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

 

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

 

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

 

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

 

 

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·                                          potential exposure to unknown orcontingent liabilities of banks and businesses we acquire;

 

·                                          exposure to potential asset qualityissues of the acquired bank or related business;

 

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

 

·                                          potential disruption to our business;

 

·                                          potential diversion of our management’stime and attention; and

 

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

 

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

 

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

 

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

 

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

 

Our profitability is in part a function of the spread between theinterest rates earned on investments and loans and the interest rates paid ondeposits and other interest-bearing liabilities.  Like most banking institutions, our netinterest spread and margin will be affected by general economic conditions andother factors, including fiscal and monetary policies of the federalgovernment, that influence market interest rates and our ability to respond tochanges in such rates.  At any giventime, our assets and liabilities will be such that they are affecteddifferently by a given change in interest rates.  As a result, an increase or decrease inrates, the length of loan terms or the mix of adjustable and fixed rate loansin our portfolio could have a positive or negative effect on our net income,capital and liquidity.  We measure interest rate risk undervarious rate scenarios and using specific criteria and assumptions.  A summary of this process, along with theresults of our net interest income simulations is presented in the sectionentitled “Management’s Discussion and Analysis of Financial Conditions andResults of Operations.  Although webelieve our current level of interest rate sensitivity is reasonable andeffectively managed, significant fluctuations in interest rates may have anadverse effect on our business, financial condition and results of operations.

 

**We must effectively manage ourcredit risk.**

 

Thereare risks inherent in making any loan, including risks inherent in dealing withindividual borrowers, risks of nonpayment, risks resulting from uncertaintiesas to the future value of collateral and risks resulting from changes ineconomic and industry conditions.  Weattempt to minimize our credit risk through prudent loan application approvalprocedures, careful monitoring of the concentration of our loans within specificindustries and periodic independent reviews of outstanding loans by our creditreview department.  However, we cannotassure you that such approval and monitoring procedures will reduce thesecredit risks.  Most of our loans arecommercial, real estate, or consumer 

 

 

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loans,each of which is subject to distinct types of risk.  To reduce the lending risks we face, wegenerally take a security interest in borrowers’ property for all three typesof loans.  In addition, we sell certainresidential real estate loans to third parties. Nevertheless, the risk of non-payment is inherent in all three types ofloans and if we are unable to collect amounts owed, it may materially affectour operations and financial performance.

 

Fora more complete discussion of our lending activities see Part 1 of Item 1of this Annual Report on Form 10-K.

 

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

 

Realestate lending (including commercial, construction, and residential) is a largeportion of our loan portfolio. These categories were $259.4 million, orapproximately 70.2% of our total loan portfolio as of December 31, 2008,as compared to $267.6 million, or approximately 70.4%, as of December 31,2007.  The market value of real estate can fluctuatesignificantly in a short period of time as a result of market conditions in thegeographic area in which the real estate is located. Although asignificant portion of such loans are secured by real estate as a secondaryform of collateral, adverse developments affecting real estate values in one ormore of our markets could increase the credit risk associated with our loanportfolio.  Additionally, real estatelending typically involves higher loanprincipal amounts and the repayment of theloans generally is dependent, inlarge part, on sufficient income from theproperties securing the loans to coveroperating expenses and debt service. Economicevents or governmental regulationsoutside of the control of the borrower orlender could negatively impact thefuture cash flow and market values of theaffected properties.

 

Ifthe loans that are collateralized by real estate become troubled during a timewhen market conditions are declining or have declined, then we may not be ableto realize the amount of security that we anticipated at the time oforiginating the loan, which could cause us to increase our provision for loanlosses and adversely affect our operating results and financial condition.  In particular, if the problems that have occurred inthe residential real estate and mortgage markets spread to the commercial realestate market, particularly within our market area, the value of collateralsecuring our real estate loans could decline and the demand for our real estateloans could decrease.  We generally havenot experienced a downturn in credit performance by our real estate loancustomers, but in light of the uncertainty that exists in the economy andcredit markets nationally, there can be no guarantee that we will notexperience any deterioration in such performance.

 

**Our continued pace ofgrowth may require us to raise additional capital in the future, but thatcapital may not be available when it is needed.**

 

We are required by federaland state regulatory authorities to maintain adequate levels of capital tosupport our operations.  We anticipatethat our existing capital resources will satisfy our capital requirements forthe foreseeable future and this is a major reason why we did not participate inthe CPP.  However, we may at some pointneed to raise additional capital to support continuing growth.  Our ability to raise additional capital isparticularly important to our strategy of continual growth throughacquisitions.  Our ability to raiseadditional capital, if needed, will depend on conditions in the capital marketsat that time, which are outside our control, and on our financialperformance.  Accordingly, we cannotassure you of our ability to raise additional capital if needed on termsacceptable to us.  If we cannot raiseadditional capital when needed, our ability to further expand our operationsthrough internal growth and acquisitions could be materially impaired.

 

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

 

Muchof our success to date has been influenced strongly by our ability to attract andto retain senior management experienced in banking and financial services andfamiliar with the communities in our market area.  Our ability to retain executive officers, thecurrent management teams, branch managers and loan officers of our operating subsidiarieswill continue to be important to the successful implementation of ourstrategy.  It is also critical, as wegrow, to be able to attract and retain qualified additional management and loanofficers with the appropriate level of experience and knowledge about ourmarket area to implement our community-based operating strategy.  The 

 

 

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unexpectedloss of services of any key management personnel, or the inability to recruitand retain qualified personnel in the future, could have an adverse effect onour business, financial condition and results of operations.

 

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

 

Weoperate in a highly regulated environment and are subject to supervision andregulation by a number of governmental regulatory agencies, including the Boardof Governors of the Federal Reserve System, the FDIC and the OCC.  Regulations adopted by these agencies, whichare generally intended to provide protection for depositors and customersrather than for the benefit of stockholders, govern a comprehensive range ofmatters relating to ownership and control of our shares, our acquisition ofother companies and businesses, permissible activities for us to engage in,maintenance of adequate capital levels and other aspects of our operations.These bank regulators possess broad authority to prevent or remedy unsafe orunsound practices or violations of law. The laws and regulations applicable tothe banking industry could change at any time and in light of the recenteconomic downturn, the industry has experienced a general strengthening ofthese laws and regulations.  Increasedregulation could increase our cost of compliance and adversely affectprofitability.  For example, newlegislation or regulation may limit the manner in which we may conduct ourbusiness, including our ability to offer new products, obtain financing,attract deposits, make loans and achieve satisfactory interest spreads.

 

**We have a continuing need for technological change andwe may not have the resources to effectively implement new technology.**

 

The financial services industry is undergoing rapid technological changeswith frequent introductions of new technology-driven products andservices.  In addition to better servingcustomers, the effective use of technology increases efficiency and enablesfinancial institutions to reduce costs. Our future success will depend in part upon our ability to address theneeds of our customers by using technology to provide products and servicesthat will satisfy customer demands for convenience as well as to createadditional efficiencies in our operations as we continue to grow and expand ourmarket area.  Many of our largercompetitors have substantially greater resources to invest in technologicalimprovements.  As a result, they may beable to offer additional or superior products to those that we will be able tooffer, which would put us at a competitive disadvantage.  Accordingly, we cannot provide you withassurance that we will be able to effectively implement new technology-drivenproducts and services or be successful in marketing such products and servicesto our customers.

 

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

 

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

 

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

 

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

 

 

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successful. In addition,advances in computer capabilities, new discoveries in the field of cryptographyor other developments could result in a compromise or breach of the algorithmswe and our third-party service providers use to encrypt and protect customertransaction data.  A failure of suchsecurity measures could have a material adverse effect on our financialcondition and results of operations.

 

**We aresubject to certain operational risks, including, but not limited to, customeror employee fraud and data processing system failures and errors.**

 

Employee errorsand misconduct could subject us to financial losses or regulatory sanctions andseriously harm our reputation. Misconduct by our employees could include hidingunauthorized activities from us, improper or unauthorized activities on behalfof our customers or improper use of confidential information. It is not alwayspossible to prevent employee errors and misconduct, and the precautions we taketo prevent and detect this activity may not be effective in all cases. Employeeerrors could also subject us to financial claims for negligence.

 

We maintain a systemof internal controls and insurance coverage to mitigate against operationalrisks, including data processing system failures and errors and customer oremployee fraud. Should our internal controls fail to prevent or detect anoccurrence, or if any resulting loss is not insured or exceeds applicableinsurance limits, it could have a material adverse effect on our business,financial condition and results of operations.

 

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

 

Our$16.5 million of subordinated debentures are held by two business trusts thatwe control.  Interest payments on thedebentures must be paid before we pay dividends on our capital stock, includingour common stock.  We have the right todefer interest payments on the debentures for up to 20 consecutivequarters.  However, if we elect to deferinterest payments, all deferred interest must be paid before we may paydividends on our capital stock.  Deferralof interest payments could also cause a decline in the market price of ourcommon stock.

 

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

 

None

 

**ITEM 2.                  PROPERTIES**

 

The Company owns its mainoffice in Manhattan and sixteen branch offices and leases 3 branchoffices.  The Company also leases aparking lot for one of the branch offices it owns.  In January 2009, the Company enteredinto an agreement to purchase a second branch in Lawrence.

 

**ITEM 3.                  LEGALPROCEEDINGS**

 

There are no pendinglegal proceedings to which the Company or the Bank is a party, other thanordinary routine litigation incidental to the Bank’s business.  While the ultimate outcome of current legalproceedings cannot be predicted with certainty, it is the opinion of managementthat the resolution of these legal actions should not have a material effect onthe Company’s consolidated financial position or results of operations.

 

**ITEM 4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matter was submittedto a vote of security holders during the quarter ended December 31, 2008.

 

 

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**PART II.**

 

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

 

 

Our common stock hastraded on the Nasdaq Global Market under the symbol “LARK” since 2001. At December 31,2008, the Company had approximately 1,080 stockholders, consisting ofapproximately 385 owners of record and approximately 695 beneficial owners ofour common stock.   Set forth below arethe reported high and low sale prices of our common stock and dividends paidduring the past two years.  Informationpresented below has been adjusted to give effect to the 5% stock dividendsdeclared in December 2008 and 2007.

 
| **Year ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** | **Cash dividends paid** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| First Quarter                         |       | $        | 24.76      |    | $          | 22.61                   |       | $ | 0.1810 |   |
| Second Quarter                        |       | 23.79    |       | 21.18   |       | 0.1810                  |       |
| Third Quarter                         |       | 21.19    |       | 15.14   |       | 0.1810                  |       |
| Fourth Quarter                        |       | $        | 20.48      |    | $          | 16.67                   |       | $ | 0.1810 |   |

 

 
| **Year  ended December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** | **Cash  dividends paid** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|--------------------------|------------|
| First Quarter                          |       | $        | 26.17      |    | $          | 24.26                    |       | $ | 0.1723 |   |
| Second Quarter                         |       | 25.80    |       | 24.58   |       | 0.1723                   |       |
| Third Quarter                          |       | 26.18    |       | 23.85   |       | 0.1723                   |       |
| Fourth Quarter                         |       | $        | 25.71      |    | $          | 22.97                    |       | $ | 0.1723 |   |

 

The following tableprovides information about purchases by the Company during the quarter ended December 31,2008, of the Company’s equity securities that are registered by the Companypursuant to Section 12 of the Exchange Act:

 
| **Period**                | ** ** | **Total  number of  shares  purchased** | ** ** | **Average  price paid  per share** | ** ** | **Total number of  shares purchased as  part of a publicly  announced plan (1)** | ** ** | **Maximum number of  shares that may yet be  purchased under the  plans (1)** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                      |       |                                    |       |                               |       |                                                                             |       |                                                                          |       |
| October 1-31,  2008  |       | —                                  |       | $                                  | —     |                                                                             | —     |                                                                          | 118,711    |   |
| November 1-30,  2008 |       | 6,405                                   |       | 17.70                              |       | 6,405                                                                            |       | 112,306                                                                       |       |
| December 1-31,  2008 |       | 3,500                                   |       | 19.25                              |       | 3,500                                                                            |       | 108,806                                                                       |       |
| Total                     |       | 9,905                                   |       | $                                  | 18.25      |                                                                             | 9,905      |                                                                          | 108,806    |   |

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(1)                                     In January 2008, our Board ofDirectors announced the approval of a stock repurchase program permitting us torepurchase up to 119,900 shares, or 5% of our outstanding common stock (“January 2008Repurchase Program”), following completion of the 2007 Repurchase Program.  The company completed the 2007 RepurchaseProgram during February 2008.  In May 2008,our Board of Directors announced another a new stock repurchase program,permitting us to repurchase up to 113,400 shares, or 5% of our outstandingcommon stock (“May 2008 Repurchase Program”), following completion of the January 2008Repurchase Program.  The companycompleted the January 2008 Repurchase Program during November 2008.  Unless terminated earlier by resolution ofthe Board of Directors, the May 2008 Repurchase Program will expire whenwe have repurchased all shares authorized for repurchase thereunder.

 

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**ITEM 6.****                ****SELECTED FINANCIAL DATA**

 

** **
| ** **                                           | ** ** | **At or for the years ended December 31,**      | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected  Financial Data:**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                         |       | $                                                    | 602,213    |   | $ | 606,455 |   | $ | 590,568 |   | $ | 465,110 |   | $ | 442,091 |   |
| Loans                                                |       | 365,772                                              |       | 376,157 |   | 379,324 |   | 274,566 |   | 277,414 |   |
| Investment  securities                               |       | 171,297                                              |       | 164,724 |   | 145,884 |   | 140,131 |   | 133,604 |   |
| Cash and cash  equivalents                           |       | 13,788                                               |       | 14,739 |   | 14,752 |   | 21,491 |   | 7,845 |   |
| Deposits                                             |       | 439,546                                              |       | 452,652 |   | 444,485 |   | 331,273 |   | 302,868 |   |
| Borrowings                                           |       | 104,366                                              |       | 93,088 |   | 90,416 |   | 85,258 |   | 94,571 |   |
| Stockholders’  equity                           |       | $                                                    | 51,406     |   | $ | 52,296 |   | $ | 49,236 |   | $ | 44,073 |   | $ | 42,169 |   |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Selected  Operating Data:**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                      |       | $                                                    | 31,647     |   | $ | 35,551 |   | $ | 34,395 |   | $ | 22,124 |   | $ | 19,949 |   |
| Interest expense                                     |       | 13,615                                               |       | 17,868 |   | 15,639 |   | 8,957 |   | 7,000 |   |
| Net interest  income                                 |       | 18,032                                               |       | 17,683 |   | 18,756 |   | 13,167 |   | 12,949 |   |
| Provision for  loan losses                           |       | 2,400                                                |       | 255 |   | 235 |   | 385 |   | 460 |   |
| Net interest income  after provision for loan losses |       | 15,632                                               |       | 17,428 |   | 18,521 |   | 12,782 |   | 12,489 |   |
| Non-interest  income                                 |       | 7,542                                                |       | 5,915 |   | 6,913 |   | 5,056 |   | 5,125 |   |
| Non-interest  expense                                |       | 17,511                                               |       | 16,638 |   | 17,345 |   | 12,282 |   | 11,353 |   |
| Earnings before  income taxes                        |       | 5,663                                                |       | 6,705 |   | 8,089 |   | 5,556 |   | 6,261 |   |
| Income tax  expense                                  |       | 1,110                                                |       | 1,303 |   | 2,079 |   | 1,659 |   | 2,010 |   |
| Net earnings                                         |       | $                                                    | 4,553      |   | $ | 5,402 |   | $ | 6,010 |   | $ | 3,897 |   | $ | 4,251 |   |
| Net earnings per  share (1):                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                                                    | 1.90       |   | $ | 2.12 |   | $ | 2.33 |   | $ | 1.51 |   | $ | 1.61 |   |
| Diluted                                              |       | 1.89                                                 |       | 2.10 |   | 2.32 |   | 1.50 |   | 1.60 |   |
| Dividends per  share (1)                             |       | 0.72                                                 |       | 0.69 |   | 0.60 |   | 0.56 |   | 0.53 |   |
| Book value per  common share outstanding (1)         |       | $                                                    | 21.67      |   | $ | 20.74 |   | $ | 19.13 |   | $ | 17.04 |   | $ | 16.39 |   |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Other  Data:**                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on  average assets                            |       | 0.75                                                 | %          | 0.90 | % | 1.01 | % | 0.87 | % | 0.98 | % |
| Return on average  equity                            |       | 8.98                                                 | %          | 10.78 | % | 13.01 | % | 9.04 | % | 9.98 | % |
| Equity to total  assets                              |       | 8.54                                                 | %          | 8.62 | % | 8.34 | % | 9.48 | % | 9.54 | % |
| Net interest  rate spread (2)                        |       | 3.25                                                 | %          | 3.15 | % | 3.35 | % | 2.99 | % | 2.99 | % |
| Net interest  margin (2)                             |       | 3.51                                                 | %          | 3.47 | % | 3.62 | % | 3.26 | % | 3.24 | % |
| Non-performing  assets to total assets               |       | 1.57                                                 | %          | 1.74 | % | 0.68 | % | 0.88 | % | 0.37 | % |
| Non-performing  loans to net loans                   |       | 2.10                                                 | %          | 2.67 | % | 0.94 | % | 1.21 | % | 0.41 | % |
| Allowance for  loan losses to total loans            |       | 1.05                                                 | %          | 1.10 | % | 1.05 | % | 1.14 | % | 1.04 | % |
| Dividend payout  ratio                               |       | 38.10                                                | %          | 32.70 | % | 26.17 | % | 37.14 | % | 33.33 | % |
| Number of full  service banking offices              |       | 20                                                   |       | 20 |   | 20 |   | 17 |   | 16 |   |

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

 

(1)           All per share amounts have beenadjusted to give effect to the 5% stock dividends paid in December 2008,2007, 2006, 2005 and 2004.

 

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

 

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**ITEM 7.****                ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

 

**CORPORATEPROFILE AND OVERVIEW**

 

Landmark Bancorp, Inc.is a one-bank holding company incorporated under the laws of the State ofDelaware and is engaged in the banking business through its wholly-ownedsubsidiary, Landmark National Bank. Landmark Bancorp is listed on the Nasdaq Global Market under the symbol “LARK”.  Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities.  Our strategy includes continuing a traditionof quality assets while growing our commercial and commercial real estate loanportfolios.  We are committed todeveloping relationships with our borrowers and providing a total 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 borrowingsand funds from operations, to originate commercial real estate and non-realestate loans, as well as one-to-four family residential mortgage loans.Landmark National Bank also originates small business, multi-family residentialmortgage, home equity and consumer loans. Although not our primary business function, we do invest in certaininvestment and mortgage-related securities using deposits and other borrowingsas funding sources.

 

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

 

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

 

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

 

Currently, our businessconsists of ownership of Landmark National Bank, with its main office inManhattan, Kansas and nineteen branch offices in eastern, central andsouthwestern Kansas.  In January 2009,we entered into an agreement to purchase a second branch in Lawrence.  The location is near our planned buildingsite and allows us to expedite the planned expansion more quickly and economically.  The branch acquisition will come withapproximately $7 million in deposits and $4 million in loans.

 

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**CRITICALACCOUNTING POLICIES**

 

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

 

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

 

We report our available-for-saleinvestment securities at fair value, and in accordance with the requirements ofSFAS No. 157 “Fair Value Measurements,” the Company employs valuationtechniques which utilize observable inputs when those inputs areavailable.  These observable inputsreflect assumptions market participants would use in pricing the security,developed based on market data obtained from sources independent of theCompany.  When such information is notavailable, the Company employs valuation techniques which utilize unobservableinputs, or those which reflect the Company’s own assumptions about marketparticipants, based on the best information available in thecircumstances.  These valuation methodstypically involve cash flow and other financial modeling techniques.  Changes in underlying factors, assumptions,estimates, or other inputs to the valuation techniques could have a materialimpact on the Company’s future financial condition and results ofoperations.  SFAS 157, which requiresfair value measurements to be classified as Level 1 (quoted prices), Level 2(based on observable inputs) or Level 3 (based on unobservable inputs) isdiscussed in more detail in Note 12 to the consolidated financialstatements.  Our management performsperiodic reviews of the investment securities to determine if any investmentsecurities have declined in value which might be considered other thantemporary.  If such decline is deemedother than temporary, we would adjust the cost basis of the security by writingdown the security to the estimated fair market value through a charge tocurrent period operations.  The marketvalues of securities are affected by changes in interest rates as well creditspreads associated with the issuers.  TheCompany’s review includes an analysis of the facts and circumstancessurrounding each security including the length and severity of the loss, thecredit of the borrower and our ability and intent to hold the security untilmaturity.  The Company obtains estimatesof the fair value for investments in pooled trust preferred securities frompricing services and by discounting projected cash flows using a risk-adjusteddiscount rate in accordance with FSP FAS No. 157-3,**“**Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active.”  The fair value of the pooled trust preferredsecurities for disclosure purposes is estimated by considering thereasonableness of the range of fair value estimates provided by a pricingservice and the discounted cash values. The Company’s review of investments in pooled trust preferred securitiesis also assessed for the recoverability of cash flows under EITF 99-20-1 “Recognitionof Interest Income and Impairment on Purchased Beneficial Interest.”  Although we believe that our estimates of thefair values of investment securities to be reasonable, economic and marketfactors may affect the amounts that will ultimately be realized from theseinvestments.

 

The objectives ofaccounting for income taxes are to recognize the amount of taxes payable orrefundable for the current year and deferred tax liabilities and assets for thefuture tax consequences of events that have been recognized in an entity’sfinancial statements or tax returns. Judgment is required in assessing the future tax consequences of eventsthat have been recognized in our financial statements or tax returns.  Under FIN 48, an income tax position will berecognized if it is more likely than not that it will be sustained upon IRSexamination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amountof benefit that is greater than 50 percent likely of being realized uponultimate settlement.  We have alsoestablished a valuation allowance on a portion of our deferred tax assetsbecause we believe it is more likely than not that these items will not berealized.  Changes in estimates regardingthe actual outcome of these future tax consequences, including the effects ofIRS examinations and examinations by other state agencies, could materiallyimpact our financial position and results of operations.

 

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We have completed severalbusiness and asset acquisitions, which have generated significant amounts ofgoodwill and intangible assets and related amortization.  The values assigned to goodwill andintangibles, as well as their related useful lives, are subject to judgment andestimation by our management.  Goodwilland intangibles related to acquisitions are determined and based on purchaseprice allocations.  The initial valueassigned to goodwill is the residual of the purchase price over the fair valueof all identifiable assets acquired and liabilities assumed.  If the carrying value of our goodwillexceeded the implied fair value of the goodwill, an impairment loss would berecorded in an amount equal to that excess. Our analysis includes a review of stock price and valuation multiplescompared to recent acquisition multiples in determining our implied fair valueof our goodwill.  Valuation of intangibleassets is generally based on the estimated cash flows related to thoseassets.  Performing such a discountedcash flow analysis involves the use of estimates and assumptions.  Useful lives are determined based on theexpected future period of the benefit of the asset, the assessment of whichconsiders various characteristics of the asset, including the historical cashflows.  Due to the number of estimatesinvolved related to the allocation of purchase price and determining theappropriate useful lives of intangible assets, we have identified purchaseaccounting, and the subsequent impairment testing of goodwill and intangibleassets, as a critical accounting policy.

 

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**COMPARISONOF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31,2007**

 

**SUMMARYOF PERFORMANCE. **Net earningsfor 2008 decreased $849,000, or 15.7%, to $4.6 million as compared to2007.  The decrease in earnings wasprimarily due to a $2.1 million increase in our provision for loan losses.  During 2008 our loan loss analysis indicated it wasnecessary to increase our provision for loan losses based upon our analysis ofour loan portfolio as well as deteriorating market conditions.  Even though our levels of non accrual andpast due loans declined during 2008, increased levels of loan loss provisionwere warranted given the economic environment, the uncertainty regarding thelength and severity of the recession and the loan losses and resultingcharge-offs experienced during 2008.  Wefeel the external risks within the environment which we operate remain presenttoday and will need to be continuously monitored.  We believe that our capital levels, loanportfolio management and our provision for loan losses position us to deal withthe economic uncertainties in this challenging environment.  We will continue to monitor economic eventsclosely, along with the performance of our loan portfolio, and take thenecessary steps required to address any issues that may arise.

 

Partially offsetting the higher provision for loan losses were gains of$497,000 on sales of investment securities and $270,000 of gains on theprepayment of two FHLB advances, as well as an increase of $502,000 in gains onsales of loans.  Market conditions duringthe second quarter of 2008 allowed us to sell longer term, higher yielding U.S.agency obligations while purchasing shorter term, lower yielding mortgage-backedobligations at gains that were higher than the reductions in interest income asa result of the transactions.  During2008, we began a strategy of issuing longer-term, fixed rate FHLB advances andrepaying shorter-term FHLB advances to lengthen our FHLB advance maturitieswhile rates were believed to be at a relatively low point in the ratecycle.  As a result of the prepayment oftwo $10 million advances, we recognized gains of $270,000, which representedthe unamortized fair value adjustment required by purchase accounting for aprior acquisition.  The increase in gainson sales of loans was driven by higher origination volumes of residential realestate loans that were sold in the secondary market.

 

The year ended December 31, 2008 resulted in diluted earnings pershare of $1.89 compared to $2.10 for 2007. Return on average assets was 0.75% for 2008, compared to 0.90% for2007.  Return on average stockholders’equity was 8.98% for 2008, compared to 10.78% for 2007.

 

We distributed a 5% stock dividend for the eighth consecutive year in December 2008.  All per share and average share data in thissection reflects the 2008 and 2007 stock dividends.

 

**INTEREST INCOME. **Interest income for 2008decreased $3.9 million, or 11.0%, to $31.7 million from $35.6 million for 2007,primarily as a result of lower yields on interest-earning assets as a result ofthe dramatic declines in benchmark interest rates during 2008.  Average loans for 2008 decreased to $375.2million from $383.1 million in 2007. Interest income on loans decreased $4.0 million, or 14.2%, to $24.4million for 2008, due to a decrease in the average yield on loans from 7.45%during 2007 to 6.49% during 2008 combined with lower average balances.  Average investment securities increased from$157.4 million for 2007, to $170.0 million for 2008.  The average yield on our investmentsecurities decreased to 4.88% during 2008 from 5.15% during 2007.  Interest income on investment securitiesincreased $124,000, or 1.7%, to $7.2 million for 2008.

 

**INTEREST EXPENSE. **Interest expense for 2008decreased 23.8%, or $4.3 million, to $13.6 million from $17.9 million for2007.  Interest expense on depositsdecreased to $9.9 million, or 26.7%, from $13.5 million in 2007.  Contributing to the decline in interestexpense was a decline in average interest-bearing deposits from $397.7 millionfor 2007, to $391.5 million during 2008, as well as a decline in the averagerate from 3.40% in 2007 to 2.53% in 2008. Interest expense on borrowings decreased $644,000 during 2008 to $3.7million from $4.4 million in 2007.  Thisdecline was the result of lower rates on our average borrowings, which declinedto 3.52% during 2008 from 4.63% in 2007. Offsetting the lower average rates were higher average balances whichincreased from $94.2 million in 2007 to $105.5 million in 2008.

 

**NET INTEREST INCOME. **Net interest income represents the difference betweenincome derived from interest-earning assets and the expense incurred oninterest-bearing liabilities.  Netinterest income is affected by both the difference between the rates ofinterest earned on interest-earnings assets and the rates paid oninterest-bearing 

 

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liabilities (“interestrate spread”) as well as the relative amounts of interest-earning assets andinterest-bearing liabilities.

 

Netinterest income for the year ended December 31, 2008 increased $349,000 to$18.0 million compared to the year ended December 31, 2007, an increase of2.0%.  This increase in net interestincome was due primarily to the decline in our cost of funding outpacing thedecline in our yield on interest earning assets, which resulted in our net interestmargin, on a tax equivalent basis, increasing to 3.51% from 3.47% for 2008 and2007, respectively.  During 2008 we wereable to reduce our cost of deposits and borrowings enough to offset the loweryield on loans in a market that experienced a dramatic decline in benchmarkinterest rates that began in late 2007 and continued throughout 2008.  The lower cost of funding allowed us tomaintain our net interest margin in markets that had considerable competitivepricing pressures.  We expect thesepricing pressures to continue during 2009, which will continue to makemaintaining or increasing our net interest margin difficult.

 

**PROVISION FOR LOAN LOSSES.** We maintain,and our Board ofDirectors monitors, an allowance for losses on loans.  The allowance is established based uponmanagement’s periodic evaluation of known and inherent risks in the loanportfolio, review of significant individual loans and collateral, review ofdelinquent loans, past loss experience, adverse situations that may affect theborrowers’ ability to repay, current and expected market conditions, and otherfactors management deems important. Determining the appropriate level of reserves involves a high degree ofmanagement judgment and is based upon historical and projected losses in theloan portfolio and the collateral value of specifically identified problemloans.  Additionally, allowancestrategies and policies are subject to periodic review and revision in responseto a number of factors, including current market conditions, actual loss experienceand management’s expectations.

 

The provision for loanlosses increased to $2.4 million for 2008, compared to $255,000 for 2007.  We increased our provision for loan lossesbased on our analysis of the loan portfolio as well as deteriorating market conditions.  Even though our levels of non-accrual andpast due loans declined from December 31, 2007 to December 31, 2008,increased levels of loan loss provision were warranted given the economicenvironment and the uncertainty regarding the length and severity of therecession we are currently experiencing. The Company’s non-accrual loans declined to $5.7 million at December 31,2008 from $10.0 million as of December 31, 2007.  The decline was primarily the result of thecollection of the outstanding balances of two loan relationships totaling $3.0million during 2008 and increased charge-offs of balances in non-accrual at December 31,2007.  Net loan charge-offs for the yearended December 31, 2008 were $2.7 million compared to $113,000 for theyear ended December 31, 2007.  At December 31,2008, the allowance for loan losses was $3.9 million, or 1.05% of gross loansoutstanding, compared to $4.2 million, or 1.10% of gross loans outstanding, at December 31,2007.  For further discussion of theprovision for loan losses, refer to the “Asset Quality and Distribution”section.

 

**NON-INTEREST INCOME. **Total non-interest income increased $1.6 million to$7.5 million for 2008, which was primarily attributable to $497,000 in gains onsales of investment securities, a $270,000 gain on the prepayment of FHLBadvances and increases of $502,000 in gains on sales of loans and $228,000 infees and service charges, as compared to 2007. The increase in gains on sales of loans were driven by higherorigination volumes of residential real estate loans that were sold in thesecondary market while the increase in fees and service charges were primarilydeposit related.

 

**NON-INTEREST EXPENSE. **Total non-interest expense increased $872,000, anincrease of 5.2% during 2008 as compared to 2007.  The increase was primarily attributable toincreases of $568,000 in compensation and benefits and $352,000 in othernon-interest expense.  The increase incompensation and benefits was driven primarily by increased staffing levels andgeneral pay increases.  The increasedstaffing levels were primarily related to increased one-to-four familyresidential mortgage loan staff.  Theincrease in other non-interest expenses was primarily the result of $118,000increase in foreclosure and other real estate asset expenses, as well as$66,000 of other than temporary impairment charges on certain investmentsecurities.  During 2008 our FDIC depositinsurance costs were primarily offset by assessment credits that werepreviously received.  However, during2009 these credits will be fully utilized which will cause a substantialincrease in our non-interest expense.  We expect our FDIC deposit insuranceexpense to increase approximately $300,000 during 2009 as compared to 2008 dueto the expiration of the credits and the increased assessment levels.  This amount does not include the proposedemergency special assessment, which would be approximately $900,000.  These additional amounts will increasenon-interest expense.

 

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**INCOME TAXES. **Income tax expense decreased $193,000, or 14.8%, to$1.1 million for 2008, from $1.3 million for 2007.  The decrease in income tax expense for 2008resulted primarily from a decrease in taxable income during 2008 as compared to2007.  The effective tax rate was 19.6%for 2008 as compared to 19.4% for 2007.

 

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

 

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

 

The year ended December 31, 2007 resulted in diluted earnings pershare of $2.10 compared to $2.32 for 2006. Return on average assets was 0.90% for 2007, compared to 1.01% for2006.  Return on average stockholders’equity was 10.78% for 2007, compared to 13.01% for 2006.

 

**INTEREST INCOME. **Interest income for 2007increased $1.2 million, or 3.4%, to $35.6 million from $34.4 million for 2006,primarily as a result of an increase in interest income on investmentsecurities.  Average loans for 2007 decreasedto $383.1 million from $393.7 million in 2006. Despite the decrease in average loans, interest income on loansincreased $171,000, or 0.6%, to $28.5 million for 2007, due primarily to anincrease in the average yield on loans from 7.20% during 2006 to 7.45% during2007.  Average investment securitiesincreased from $144.1 million for 2006, to $157.4 million for 2007.  The average yield on our investmentsecurities increased to 5.15% during 2007 from 4.70% during 2006.  As a result of higher balances and yields,interest income on investment securities increased $1.0 million, or 16.2%, to$7.1 million for 2007.

 

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

 

**NET INTEREST INCOME. **Net interest income for theyear ended December 31, 2007 decreased $1.1 million to $17.7 millioncompared to the year ended December 31, 2006, a decrease of 5.7%.  This decline in net interest income was dueprimarily to the increase in our cost of funding outpacing the increase in ouryield on interest earning assets, which resulted in our net interest margin, ona tax equivalent basis, declining to 3.47% from 3.62% for 2007 and 2006,respectively.  In the latter part of 2007, as theFederal Reserve lowered interest rates, our loan yields decreased at a fasterpace than our deposit costs.  The fasterdecline in loan yields was largely attributed to increasing competitivepressures resulting from a slowing economy, deteriorating loan pricing, andrelatively fewer lending opportunities. At the same time increasing competition for deposits has limited ourability to lower the costs of deposits as quickly as the loans.

 

**PROVISION FOR LOAN LOSSES.** The provision for loan losses increased to$255,000 for 2007, compared to $235,000 for 2006.  Our regular review of the loan portfolioprompted the increase in our provision, primarily as a result ofdecreases in credit quality, slowing economic conditions, increased commerciallending and higher nonperforming asset balances.  At December 31, 2007, the allowance for loanlosses was $4.2 million, or 1.10% of gross loans outstanding, compared to $4.0million, also 1.05% of gross loans outstanding, at December 31, 2006.  For further discussion of the provision forloan losses, refer to the “Asset Quality and Distribution” section.

 

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

 

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

 

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

 

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**AVERAGE ASSETS/LIABILITIES. **The following table sets forth information relating toaverage balances of interest-earning assets and interest-bearing liabilities forthe years ended December 31, 2008, 2007 and 2006.  This table reflects the average yields onassets and average costs of liabilities for the periods indicated (derived bydividing income or expense by the monthly average balance of assets orliabilities, respectively) as well as the “net interest margin” (which reflectsthe effect of the net earnings balance) for the periods shown.

 
| ** **                                                                        | ** ** | **Year  ended December 31, 2008** | ** ** | **Year  ended December 31, 2007** | ** ** | **Year  ended December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **Average  Balance**                   | ** ** | **Interest**                           | ** ** | **Average  Yield/  Rate**              | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Rate** | ** ** |
| **Assets**                                                                        | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                                                         |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                      | 170,011    |                                   | $          | 8,299                                  |       | 4.88 | % | $ | 157,376 |   | $ | 8,109 |   | 5.15 | % | $ | 144,110 |   | $ | 6,771 |   | 4.70 | % |
| Loans receivable,  net (2)                                                        |       | 375,208                                |       | 24,534                                 |       | 6.49                                   | %          | 383,078 |   | 28,535 |   | 7.45 | % | 393,709 |   | 28,345 |   | 7.20 | % |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 548,219                                |       | 32,833                                 |       | 5.99                                   | %          | 540,454 |   | 36,644 |   | 6.78 | % | 537,819 |   | 35,116 |   | 6.53 | % |
| Non-interest-earning  assets                                                      |       | 59,715                                 |       |                                   |       |                                   |       | 60,689 |   |   |   |   |   | 59,573 |   |   |   |   |   |
| Total                                                                             |       | $                                      | 607,934    |                                   |       |                                   |       |   | $ | 601,143 |   |   |   |   |   | $ | 597,392 |   |   |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                    | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  liabilities:                                                    |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                      | 221,412    |                                   | $          | 8,075                                  |       | 3.65 | % | $ | 237,831 |   | $ | 10,656 |   | 4.48 | % | $ | 226,963 |   | $ | 8,570 |   | 3.78 | % |
| Money market and  NOW accounts                                                    |       | 142,968                                |       | 1,741                                  |       | 1.22                                   | %          | 132,813 |   | 2,769 |   | 2.08 | % | 131,470 |   | 2,287 |   | 1.74 | % |
| Savings accounts                                                                  |       | 27,081                                 |       | 81                                     |       | 0.30                                   | %          | 27,048 |   | 81 |   | 0.30 | % | 29,914 |   | 90 |   | 0.30 | % |
| FHLB advances and  other borrowings                                               |       | 105,544                                |       | 3,718                                  |       | 3.52                                   | %          | 94,171 |   | 4,362 |   | 4.63 | % | 103,805 |   | 4,692 |   | 4.52 | % |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 49,7005                                |       | 13,615                                 |       | 2.74                                   | %          | 491,863 |   | 17,868 |   | 3.63 | % | 492,152 |   | 15,639 |   | 3.18 | % |
| Non-interest-bearing  liabilities                                                 |       | 60,211                                 |       |                                   |       |                                   |       | 59,146 |   |   |   |   |   | 59,031 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 50,718                                 |       |                                   |       |                                   |       | 50,134 |   |   |   |   |   | 46,209 |   |   |   |   |   |
| Total                                                                             |       | $                                      | 607,934    |                                   |       |                                   |       |   | $ | 601,143 |   |   |   |   |   | $ | 597,392 |   |   |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                                   |       |                                   |       | 3.25                                   | %          |   |   |   |   | 3.15 | % |   |   |   |   | 3.35 | % |
| Net interest  margin (4)                                                          |       |                                   |       | $                                      | 19,218     |                                   | 3.51       | % |   |   | $ | 18,776 |   | 3.47 | % |   |   | $ | 19,477 |   | 3.62 | % |
| Tax equivalent  interest - imputed                                                |       |                                   |       | 1,186                                  |       |                                   |       |   |   | 1,093 |   |   |   |   |   | 721 |   |   |   |
| Net interest  income                                                              |       |                                   |       | $                                      | 18,032     |                                   |       |   |   |   | $ | 17,683 |   |   |   |   |   | $ | 18,756 |   |   |   |
|                                                                              |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                                   |       | 110.3                                  | %          |                                   |       |   |   | 109.9 | % |   |   |   |   | 109.3 | % |   |   |

----

 

(1)          Income on investment securities includesall securities and interest bearing deposits in other financialinstitutions.  Income on tax exemptinvestment securities is presented on a fully taxable equivalent basis, using a34% federal tax rate.

(2)          Includes loans classified asnon-accrual.  Income on tax exempt loansis presented on a fully taxable equivalent basis, using a 34% federal tax rate.

(3)          Interest rate spread represents thedifference between the average yield on interest-earning assets and the averagecost of interest-bearing liabilities.

(4)          Net interest margin represents netinterest income divided by average interest-earning assets.

 

 

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** **

**QUARTERLYRESULTS OF OPERATIONS**

** **
| ** **                                           | ** ** | **Fiscal 2008 Quarters Ended**  | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **March 31**               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Interest income                                      |       | $                               | 8,494,006  |   | $ | 7,985,034 |   | $ | 7,763,780 |   | $ | 7,403,881 |   |
| Interest expense                                     |       | 4,032,572                       |       | 3,512,165 |   | 3,243,617 |   | 2,826,668 |   |
| Net interest  income                                 |       | 4,461,434                       |       | 4,472,869 |   | 4,520,163 |   | 4,577,213 |   |
| Provision for  loan losses                           |       | 600,000                         |       | 300,000 |   | 500,000 |   | 1,000,000 |   |
| Net interest  income after provision for loan losses |       | 3,861,434                       |       | 4,172,869 |   | 4,020,163 |   | 3,577,213 |   |
| Non-interest  income                                 |       | 1,815,277                       |       | 2,259,732 |   | 1,740,928 |   | 1,726,098 |   |
| Non-interest  expense                                |       | 4,289,452                       |       | 4,262,641 |   | 4,311,096 |   | 4,647,322 |   |
| Earnings before  income taxes                        |       | 1,387,259                       |       | 2,169,960 |   | 1,499,995 |   | 655,989 |   |
| Income tax  expense                                  |       | 320,745                         |       | 593,553 |   | 299,970 |   | (104,449 | ) |
| Net earnings                                         |       | $                               | 1,066,514  |   | $ | 1,576,407 |   | $ | 1,150,025 |   | $ | 760,438 |   |
| Earnings per  share(1):                              |       |                            |       |   |   |   |   |   |   |
| Basic                                                |       | $                               | 0.43       |   | $ | 0.66 |   | $ | 0.49 |   | $ | 0.32 |   |
| Diluted                                              |       | $                               | 0.43       |   | $ | 0.66 |   | $ | 0.48 |   | $ | 0.32 |   |
|                                                 |       |                            |       |   |   |   |   |   |   |
|                                                 |       |                            |       |   |   |   |   |   |   |
|                                                 |       | **Fiscal  2007 Quarters Ended** |       |
|                                                 |       | **March 31**               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** |   |
| Interest income                                      |       | $                               | 8,830,732  |   | $ | 9,001,879 |   | $ | 9,085,905 |   | $ | 8,632,573 |   |
| Interest expense                                     |       | 4,331,532                       |       | 4,535,424 |   | 4,624,993 |   | 4,376,263 |   |
| Net interest  income                                 |       | 4,499,200                       |       | 4,466,455 |   | 4,460,913 |   | 4,256,310 |   |
| Provision for  loan losses                           |       | 65,000                          |       | 60,000 |   | 70,000 |   | 60,000 |   |
| Net interest  income after provision for loan losses |       | 4,434,200                       |       | 4,406,455 |   | 4,390,912 |   | 4,196,310 |   |
| Non-interest  income                                 |       | 1,328,869                       |       | 1,514,358 |   | 1,575,449 |   | 1,496,958 |   |
| Non-interest  expense                                |       | 4,157,393                       |       | 4,157,779 |   | 4,161,454 |   | 4,161,738 |   |
| Earnings before  income taxes                        |       | 1,605,676                       |       | 1,763,034 |   | 1,804,907 |   | 1,531,530 |   |
| Income tax  expense                                  |       | 361,056                         |       | 409,431 |   | 367,341 |   | 165,255 |   |
| Net earnings                                         |       | $                               | 1,244,620  |   | $ | 1,353,603 |   | $ | 1,437,566 |   | $ | 1,366,275 |   |
| Earnings per  share(1):                              |       |                            |       |   |   |   |   |   |   |
| Basic                                                |       | $                               | 0.48       |   | $ | 0.53 |   | $ | 0.57 |   | $ | 0.54 |   |
| Diluted                                              |       | $                               | 0.48       |   | $ | 0.52 |   | $ | 0.56 |   | $ | 0.54 |   |

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(1) All per share amounts have been adjusted to give effect to the5% stock dividend paid during December 2008 and 2007.

 

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**FINANCIALCONDITION**

 

Although the Company hasavoided many of the problems caused by the deterioration in residential realestate market values and loan portfolio credit quality, particularly thesubprime mortgage sector, the Company’s asset quality and 2008 performance hasnonetheless been affected by the declining real estate values, falling consumerconfidence, increased unemployment and decreased consumer spending, which haveall contributed to a slowing economy and a difficult credit market.  Management believes that it continues to havea high quality asset base and solid earnings and anticipates that its effortsto run a high quality financial institution with a sound asset base willcontinue to create a strong foundation for continued growth and profitabilityin the future.

 

**ASSET QUALITY AND DISTRIBUTION.** Total assets decreased to $602.2 million at December 31, 2008,compared to $606.5 million at December 31, 2007.  Our primary ongoing sources of funds are deposits, FHLBborrowings, proceeds from principal and interest payments on loans andinvestment securities and proceeds from the sale of mortgage loans andinvestment securities.  While maturitiesand scheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interest ratesand economic conditions.

 

Net loans, excludingloans held for sale, decreased to $365.8 million as of December 31, 2008from $376.2 million at December 31, 2007. The $10.4 million decline in net loans is primarily the result of therefinancings and paydowns in our one-to-four family residential loan portfolioexceeding our commercial and commercial real estate loan originations.  We have concentrated on generating commercialand commercial real estate loans over the past few years and are pleased thatthis segment of our loan portfolio has grown. Despite the decrease in total loans, we continued our balance sheettransition with a net increase of $12.6 million in commercial and commercialreal estate loans, which partially offset declines of $8.3 million inconstruction loans and $13.6 million in one-to-four family residentialloans.  This is consistent with ourstrategy to continue to reduce portfolio reliance on construction loans andresidential mortgage loans, most of which have been acquired in previousacquisitions, while increasing our loan portfolio in the area of commerciallending.  We plan to continue our effortsto grow our commercial and commercial real estate lending activities, as longas we are able to originate loans that meet our credit and asset qualities.  As of December 31, 2008, our commercialloans, including commercial real estate loans, comprised 62.0% of our loanportfolio, up from 56.9% at December 31, 2007.  As of December 31,2008, our construction loans comprised 5.3% of total loans, down from 7.4% at December 31,2007.  As of December 31,2008, our one-to-four family residential loans comprised 30.5% of total loans,down from 33.3% at December 31, 2007. We anticipate continuing to diversify our loan portfolio compositionthrough our continued planned expansion of commercial and commercial realestate lending activities and continued refinancings and paydowns in ourone-to-four family residential loans.

 

Our primary investingactivities are the origination of commercial, mortgage and consumer loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  These loans aretypically sold soon after the loan closing. We do not originate and warehouse these fixed-rate residential loans forresale in order to speculate on interest rates. As of December 31, 2008, our residential mortgage loan portfolioconsisted of $39.6 million with fixed rates and $73.2 million with variablerates.

 

The allowance for losseson loans is established through a provision for losses on loans based on ourevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of its loan activity.  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 in providingfor an adequate allowance for losses on loans. During 2008 we felt it was necessary to increase our provision for loanlosses based upon our analysis of our loan portfolio as well as deterioratingmarket conditions.  Even though ourlevels of non accrual and past due loans declined during 2008, increased levelsof loan loss provision were warranted given the economic environment, theuncertainty regarding the length and severity of the recession and the loanlosses and resulting charge-offs experienced during 2008.  We feel the external risks within theenvironment which we operate remain present today and will need to becontinuously monitored.  We haveidentified the stresses in our loan portfolio and are working to reduce therisks of certain loan exposures, including significantly reducing our exposureto construction and land development loans. 

 

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We believe that ourcapital levels, loan portfolio management and our provision for loan lossesposition us to deal with the economic uncertainties in this challengingenvironment.  We will continue to monitoreconomic events closely, along with the performance of our loan portfolio, andtake the necessary steps required to address any issues that may arise.

 

As of December 31,2008, loans with aggregate principal balances of $5.7 million were onnon-accrual status, or 1.6% of total loans, compared to a balance of $10.0million loans on non-accrual status, or 2.7% of total loans, as of December 31,2007.  The Company’s non-accrual loansdecreased during 2008 primarily as a result of the collection of outstandingbalances on two loan relationships totaling $3.0 million and from increasedcharge-offs during 2008.  As part of theCompany’s credit risk management, the Company continues to aggressively managethe loan portfolio to identify problem loans and has placed additional emphasison its commercial real estate and construction relationships.  The ratio of nonperforming assets as apercentage of total assets was 1.3% at December 31, 2008 and 1.7% at December 31,2007.  Net loan charge-offs increased to$2.7 million for 2008, compared to $113,000 for 2007.  The increase in net loan charge-offs during2008 was primarily related to loans that had a specific loss reserve allocationat December 31, 2007.  Even thethough our levels of non-accrual loans and loans over 90 days past due declinedduring 2008, the current economic problems could result in our levels ofnonperforming assets staying elevated for a significant period of time.  Further deterioration in the local economy orreal estate values may create additional problem loans for us.

 

Althoughthe current economic recession has created a very difficult environment forfinancial institutions, as well as other businesses, the U.S. government,Federal Reserve and the Treasury Department have already initiated manyprograms to try to stimulate the economy. The economic outlook for 2009 depends on whether the stimulus can offsetany additional stresses that may arise. Many financial institutions, including us, have experienced an increasein non-performing assets during the recent economic period, as even well-establishedbusiness borrowers developed cash flow, profitability and otherbusiness-related problems.  We believethat the allowance for losses on loans at December 31, 2008, was adequate,however, there can be no assurances that losses will not exceed the estimatedamounts.  While we believe that we usethe best information 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 decreased to $439.5 million at December 31,2008 from $452.7 million at December 31, 2007.  Borrowings increased $11.3 million to $104.4million at December 31, 2008 from $93.1 million at December 31,2007.  During 2008 we replaced short-termpublic fund certificate of deposits with longer-term advances through the FHLBin an effort to extend our liabilities while we thought rates were at arelatively low point in the interest rate cycle.

 

Non-interest bearingdeposits at December 31, 2008 were $49.8 million, or 11.3% of deposits,compared to $51.0 million, also 11.3% of deposits, at December 31,2007.  Money market and NOW depositaccounts were 34.2% of the portfolio and totaled $150.1 million at December 31,2008, compared to $139.6 million, or 30.8% of deposits, at December 31,2007.  Savings accounts increased to$26.2 million, or 6.0% of deposits, at December 31, 2008, from $25.9million, or 5.7% of deposits, at December 31, 2007.  Certificates of deposit decreased to $213.4million, or 48.6% of deposits, at December 31, 2008, from $236.2 million,or 52.2% of deposits, at December 31, 2007.

 

Certificates of depositat December 31, 2008 which were scheduled to mature in one year or lesstotaled $168.8 million.  Historically,maturing deposits have generally remained with the Bank and we believe that asignificant portion of the deposits maturing in one year or less will remainwith us upon maturity.

 

**CASHFLOWS. **During the year ended December 31, 2008, our cashand cash equivalents decreased by $952,000. Our operating activities during 2008 provided net cash of $5.3 million,while we used $338,000 in investing activities in 2008.  We purchased $51.5 million of investmentsecurities during 2008 to replace the $45.3 million that either matured or wassold as well as the $5.2 million of cash relating to a net decrease inloans.  Our financing activities used netcash of $5.9 million during 2008 primarily to purchase treasury stock and paydividends.  We increased our FHLBborrowings to offset lower deposit balances.

 

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**LIQUIDITY.** Our most liquid assets are cash and cash equivalents and investmentsecurities available for sale. The level of these assets is dependent on ouroperating, financing, lending and investing activities during any givenperiod.  At December 31, 2008 and2007, the carrying value of these liquid assets totaled $176.0 million and$179.5 million, respectively.  Duringperiods in which we are not able to originate a sufficient amount of loansand/or periods of high principal prepayments, we increase our liquid assets byinvesting in short-term U.S. Government and agency securities or high-grademunicipal securities.

 

Liquidity management isboth a daily and long-term function of our strategy.  Excess funds are generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare available through the use of FHLB advances, a line of credit with the FHLB,other borrowings or through sales of securities.  At December 31, 2008, we had outstandingFHLB advances of $71.3 million and $6.0 million of borrowings on our line ofcredit with the FHLB.  At December 31,2008, our total borrowing capacity with the FHLB, which is based on collateralpledged, was $126.1 million.  We also hadother borrowings of $27.0 million at December 31, 2008, which included$16.5 million of subordinated debentures, $4.8 million borrowed on a revolvingcredit agreement and $5.7 million in repurchase agreements.

 

Asa provider of financial services, we routinely issue financial guarantees inthe form of financial and performance standby letters of credit.  Standby letters of credit are contingentcommitments issued by us generally to guarantee the payment or performanceobligation of a customer to a third party. While these standby letters of credit represent a potential outlay byus, a significant amount of the commitments may expire without being drawnupon.  We have recourse against the customerfor any amount the customer is required to pay to a third party under a standbyletter of credit.  The letters of creditare subject to the same credit policies, underwriting standards and approvalprocess as loans made by us.  Most of thestandby letters of credit are secured, and in the event of nonperformance bythe customers, we have the right to the underlying collateral, which couldinclude commercial real estate, physical plant and property, inventory,receivables, cash and marketable securities. The contract amount of these standby letters of credit, which representsthe maximum potential future payments guaranteed by us, was $2.1 million at December 31,2008.

 

At December 31,2008, we had outstanding loan commitments, excluding standby letters of credit,of $67.3 million. We anticipate that sufficient funds will be available to meetcurrent loan commitments. These commitments consist of unfunded lines of creditand commitments to finance real estate loans.

 

**CAPITAL. **The Federal Reserve has established capitalrequirements for bank holding companies which generally parallel the capitalrequirements for national banks under OCC regulations. The regulations providethat such standards will generally be applied on a consolidated (rather than a bank-only)basis in the case of a bank holding company with more than $500 million intotal consolidated assets.

 

AtDecember 31, 2008, we continued to maintain a sound leverage capital ratioof 9.0% and a total risk based capital ratio of 13.9%.  As shown by the following table, our capitalexceeded the minimum capital requirements at December 31, 2008 (dollars inthousands):

 

| ** **               | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **               | ** ** | **amount** | ** ** | **percent** | ** ** | **percent**  | ** ** | **amount**   | ** ** |
| Leverage                 |       | $          | 52,450     |        | 9.0        | %            | 4.0        | %            | $          | 23,427 |   |
| Tier 1 capital           |       | $          | 52,450     |        | 13.0       | %            | 4.0        | %            | $          | 16,176 |   |
| Total risk based capital |       | $          | 56,321     |        | 13.9       | %            | 8.0        | %            | $          | 32,352 |   |

 

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At December 31, 2008, Landmark National Bankcontinued to maintain a sound leverage ratio of 9.6% and a total risk basedcapital ratio of 14.8%.  As shown by thefollowing table, Landmark National Bank’s capital exceeded the minimum capitalrequirements at December 31, 2008 (dollars in thousands):

 

| ** **               | ** ** | **Actual** | ** ** | **Actual**  | ** ** | **Required** | ** ** | **Required** | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|
| ** **               | ** ** | **amount** | ** ** | **percent** | ** ** | **percent**  | ** ** | **amount**   | ** ** |
| Leverage                 |       | $          | 55,867     |        | 9.6        | %            | 4.0        | %            | $          | 23,351 |   |
| Tier 1 capital           |       | $          | 55,867     |        | 13.8       | %            | 4.0        | %            | $          | 16,141 |   |
| Total risk based capital |       | $          | 59,738     |        | 14.8       | %            | 8.0        | %            | $          | 32,282 |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements. The above ratios are well in excess of regulatory minimums andshould allow us to operate without capital adequacy concerns. The Federal DepositInsurance Corporation Improvement Act of 1991 establishes a bank rating systembased on the capital levels of banks.  Asof December 31, 2008 and 2007, we were rated “well capitalized”, which isthe highest rating available under this capital-based rating system.  We have $16.5 million in trust preferredsecurities and, in accordance with current capital guidelines, this amount hasbeen included in our Tier 1 capital ratios as of December 31, 2008.  Cash distributions on the securities arepayable quarterly, are deductible for income tax purposes and are included ininterest expense in the consolidated financial statements.

 

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

 

**DIVIDENDS**

 

During the year ended December 31,2008, we paid a quarterly cash dividend of $0.181 per share to ourstockholders.   Additionally, we distributeda 5% stock dividend for the eighth consecutive year in December 2008.  The cash dividends have been adjusted to giveeffect to the 5% stock dividend.

 

The payment of dividendsby any financial institution or its holding company is affected by the requirementto maintain adequate capital pursuant to applicable capital adequacy guidelinesand regulations.  As described above,Landmark National Bank exceeded its minimum capital requirements underapplicable guidelines as of December 31, 2008.  The National Bank Act imposes limitations onthe amount of dividends that a national bank may pay without prior regulatoryapproval. Generally, the amount is limited to the bank’s current year’s netearnings plus the adjusted retained earnings for the two preceding years.  As of December 31, 2008, approximately$2.5 million was available to be paid as dividends to Landmark Bancorp byLandmark National Bank without prior regulatory approval.

 

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

 

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#### **RECENT ACCOUNTING DEVELOPMENTS**

#### ** **

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 157, “*Fair ValueMeasurements*”.   ThisStatement defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles, and expands disclosures about fairvalue measurements.  It does not requireany new fair value measurements.  TheCompany adopted this Statement on January 1, 2008.  The adoption of the Statement did not have amaterial effect on our consolidated financial statements.

 

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

 

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

 

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

 

InNovember 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 109,“*Written Loan Commitment Recorded at Fair Valuethrough Earnings*.”  This SABsupersedes SAB 105 and expresses the current view that, consistent with theguidance in SFAS No. 156, *“Accounting for Servicingof Financial Assets”*, and SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities*”, theexpected net future cash flows related to the associated servicing of the loanshould be included in the measurement of all written loan commitments that areaccounted for at fair value through earnings. For calendar year companies, this SAB is effective January 1,2008.  The adoption of SAB 109 did nothave a material effect on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141(revised), “*Business Combinations*.”  The Statement retains the fundamentalrequirements in Statement No. 141 that the acquisition method ofaccounting be used for business combinations, but broadens the scope ofStatement No. 141 and contains improvements to the application of thismethod.  The Statement requires anacquirer to recognize the assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree at the acquisition date, measured attheir fair values as of that date.  Costsincurred to effect the acquisition are to be recognized separately from theacquisition.  Assets and liabilitiesarising from contractual contingencies and contingent considerations must bemeasured at fair value as of the acquisition date.  The Statement also changes the accounting fornegative goodwill arising from a bargain purchase, requiring recognition inearnings instead of allocation to assets acquired.  For calendar year companies, this Statementis applicable to business combinations occurring after January 1, 2009.

 

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Also in December 2007, the FASB issued SFAS No. 160,“*Noncontrolling Interests in Consolidated FinancialStatements — an amendment of ARB No. 51*”.  This statement amends ARB No. 51 toestablish accounting and reporting standards for the noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary.  It also amends certain of ARB No. 51’sconsolidation procedures for consistency with the requirements of SFAS No. 141(revised 2007), *“Business Combinations.”*  The Company adopted this Statement on January 1,2009.  The adoption of this Statement didnot have a material effect on our consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133*”.  This statement requires enhanced disclosuresabout how and why an entity uses derivative instruments, how derivativeinstruments and related hedged items are accounted for, and how these activitiesaffect its financial position, financial performance, and cash flows. TheCompany adopted this Statement on January 1, 2009.  The adoption of this Statement did not have amaterial effect on our consolidated financial statements.

 

In January 2009, the FASB issued Staff Position No. EITF99-20-1, “*Amendments to the Impairment Guidance of EITFIssue No. 99-20*”.The amendment’s purpose is to achieve a more consistent determination ofwhether an other than temporary impairment has occurred on beneficialinterests.  Specifically, the newpronouncement no longer requires the usage of market participant assumptionsabout future cash flows in determining other-than-temporary impairment underthe EITF 99-20 model, and aligns that model’s impairment guidance with SFAS115.  This Statement is applicable to ourinvestments in pooled trust preferred investment securities.

 

**EFFECTS ON INFLATION**

 

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

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

In the past, we have beensuccessful in meeting the interest rate sensitivity objectives set forth in ourpolicy. Simulation models are prepared to determine the impact on net interestincome for the coming twelve months, including using rates at December 31,2008 and forecasting volumes for the twelve month projection. This position isthen subjected to a shift in interest rates of 100 and 200 basis points rising and100 basis points falling with an impact to our net interest income on a oneyear horizon as follows:

 

| **Scenario**             | ** ** | **$000’s change in net  interest income** | ** ** | **% of net  interest income** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|
| 200 basis point  rising  |       | $                                              | 530        |                          | 2.9        | % |
| 100 basis point  rising  |       | $                                              | 357        |                          | 1.9        | % |
| 100 basis point  falling |       | $                                              | (270       | )                             | (1.5       | )% |

 

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

#### ** **

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

 

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

 

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

 

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

 

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

**SCHEDULE(“GAP” TABLE)**

 
| **As of December 31, 2008**                                 | ** ** | **3 months  or less**      | ** ** | **More than  3 to 12  months** | ** ** | **More than  1 to 5 years** | ** ** | **Over 5  years** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|-----------------------------|------------|-------------------|------------|-----------|------------|
| ** **                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning  assets:                                        |       |                       |       |                           |       |                        |       |              |       |      |       |
| Investment  securities                                           |       | $                          | 19,544     |                           | $          | 29,505                      |       | $                 | 59,977     |      | $          | 62,261 |   | $ | 171,297 |   |
| Loans                                                            |       | 105,320                    |       | 119,223                        |       | 130,827                     |       | 11,889            |       | 367,259   |       |
| Total  interest-earning assets                                   |       | 124,874                    |       | 148,728                        |       | 190,804                     |       | 74,150            |       | 538,556   |       |
|                                                             |       |                       |       |                           |       |                        |       |              |       |      |       |
| Interest-bearing  liabilities:                                   |       |                       |       |                           |       |                        |       |              |       |      |       |
| Certificates of  deposit                                         |       | 58,135                     |       | 110,707                        |       | 44,317                      |       | 244               |       | 213,403   |       |
| Money market and  NOW accounts                                   |       | 42,790                     |       | —                         |       | 107,326                     |       | —            |       | 150,116   |       |
| Savings accounts                                                 |       | 5,241                      |       | —                         |       | 20,962                      |       | —            |       | 26,203    |       |
| Borrowed money                                                   |       | 30,056                     |       | 15,027                         |       | 35,182                      |       | 24,101            |       | 104,366   |       |
| Total  interest-bearing liabilities                              |       | 136,222                    |       | 125,734                        |       | 207,787                     |       | 24,345            |       | 494,088   |       |
|                                                             |       |                       |       |                           |       |                        |       |              |       |      |       |
| Interest  sensitivity gap per period                             |       | (11,348                    | )          | 22,994                         |       | (16,983                     | )          | 49,805            |       | 44,468    |       |
|                                                             |       |                       |       |                           |       |                        |       |              |       |      |       |
| Cumulative  interest sensitivity gap                             |       | (11,348                    | )          | 11,646                         |       | (5,337                      | )          | 44,468            |       |      |       |
|                                                             |       |                       |       |                           |       |                        |       |              |       |      |       |
| Cumulative gap  as a percent of total interest-earning assets    |       | (2.1                       | %)         | 2.2                            | %          | (1.0                        | %)         | 8.3               | %          |      |       |
| Cumulative  interest sensitive assets as a percent of cumulative |       |                       |       |                           |       |                        |       |              |       |      |       |
| interest  sensitive liabilities                                  |       | 91.7                       | %          | 104.5                          | %          | 98.9                        | %          | 109.0             | %          |      |       |
|                                                                  |            |                            |            |                                |            |                             |            |                   |            |           |            |  |  |  |  |  |

 

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

 

**Forward-LookingStatements**

** **

** **

This document (includinginformation incorporated by reference) contains, and future oral and writtenstatements by us and our management may contain, forward-looking statements,within the meaning of such term in the Private Securities Litigation Reform Actof 1995, with respect to our financial condition, results of operations, plans,objectives, future performance and business. Forward-looking statements, which may be based upon beliefs,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 predict results or the actual effectof future plans or strategies is inherently uncertain.  Factors which could have a material adverseeffect on operations and future prospects by us and our subsidiaries include,but are not limited to, the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  Our ability to successfully integrateacquired businesses.

 

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

 

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

 

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

 

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

 

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**ITEM 8.****                ****FINANCIAL STATEMENTS ANDSUPPLEMENTAL DATA**

 

**REPORT OFINDEPENDENT REGISTERED**

**PUBLICACCOUNTING FIRM**

 

TheBoard of DirectorsLandmark Bancorp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Landmark Bancorp, Inc. andsubsidiary (the Company) as of December 31, 2008 and 2007, and therelated consolidated statements of earnings, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2008. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

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

 

In our opinion, theconsolidated financial statements referred to above, present fairly, in allmaterial respects, the financial position of Landmark Bancorp, Inc. andsubsidiary as of December 31, 2008 and 2007, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2008, in conformity with U.S. generally acceptedaccounting principles.

 

/s/ KPMG LLP

 

Kansas City, MissouriMarch 27, 2009

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

 

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                      | ** ** | **December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                      | ** ** | **2008**              | ** **  | **2007** | ** ** |
| **Assets**                                                                                                                                      | ** ** | ** **            | ** **  | ** ** | ** ** |
| Cash and cash  equivalents                                                                                                                      |       | $                     | 13,787,640  |   | $ | 14,739,148 |   |
| Investment  securities:                                                                                                                         |       |                  |        |   |   |
| Available-for-sale,  at fair value                                                                                                              |       | 162,244,822           |        | 155,879,231 |   |
| Other securities                                                                                                                                |       | 9,051,900             |        | 8,844,950 |   |
| Loans, net                                                                                                                                      |       | 365,771,707           |        | 376,156,608 |   |
| Loans held for  sale                                                                                                                            |       | 1,487,550             |        | 1,723,687 |   |
| Premises and  equipment, net                                                                                                                    |       | 13,955,625            |        | 14,259,172 |   |
| Goodwill                                                                                                                                        |       | 12,894,167            |        | 12,894,167 |   |
| Other intangible  assets, net                                                                                                                   |       | 2,406,840             |        | 3,144,001 |   |
| Bank owned life  insurance                                                                                                                      |       | 11,995,918            |        | 11,634,535 |   |
| Accrued interest  and other assets                                                                                                              |       | 8,617,317             |        | 7,179,224 |   |
| Total assets                                                                                                                                    |       | $                     | 602,213,486 |   | $ | 606,454,723 |   |
| ** **                                                                                                                                      | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                  | ** ** | ** **            | ** **  | ** ** | ** ** |
| Liabilities:                                                                                                                                    |       |                  |        |   |   |
| Deposits:                                                                                                                                       |       |                  |        |   |   |
| Non-interest  bearing demand                                                                                                                    |       | $                     | 49,823,347  |   | $ | 51,007,859 |   |
| Money market and  NOW                                                                                                                           |       | 150,116,362           |        | 139,557,359 |   |
| Savings                                                                                                                                         |       | 26,202,715            |        | 25,882,935 |   |
| Time, $100,000  and greater                                                                                                                     |       | 49,964,782            |        | 58,980,552 |   |
| Time, other                                                                                                                                     |       | 163,438,570           |        | 177,223,601 |   |
| Total deposits                                                                                                                                  |       | 439,545,776           |        | 452,652,306 |   |
|                                                                                                                                            |       |                  |        |   |   |
| Federal Home  Loan Bank borrowings                                                                                                              |       | 77,319,133            |        | 69,026,525 |   |
| Other borrowings                                                                                                                                |       | 27,046,591            |        | 24,061,554 |   |
| Accrued  interest, taxes, and other liabilities                                                                                                 |       | 6,896,284             |        | 8,418,200 |   |
| Total  liabilities                                                                                                                              |       | 550,807,784           |        | 554,158,585 |   |
|                                                                                                                                            |       |                  |        |   |   |
| Commitments and  contingencies                                                                                                                  |       |                  |        |   |   |
| Stockholders’  equity:                                                                                                                     |       |                  |        |   |   |
| Preferred stock,  $0.01 par. Authorized 200,000 shares; none issued                                                                             |       | —                |        | — |   |
| Common stock,  $0.01 par. Authorized 7,500,000 shares; issued 2,411,412 and 2,409,125  shares, at December 31, 2008 and 2007, respectively |       | 24,114                |        | 24,091 |   |
| Additional  paid-in capital                                                                                                                     |       | 23,872,983            |        | 24,304,144 |   |
| Retained  earnings                                                                                                                              |       | 27,818,594            |        | 27,493,281 |   |
| Treasury stock,  at cost; 39,162 and 7,763 shares at December 31, 2008 and 2007,  respectively                                             |       | (935,214              | )           | (205,894 | ) |
| Accumulated  other comprehensive income                                                                                                         |       | 625,225               |        | 680,516 |   |
| Total  stockholders’ equity                                                                                                                |       | 51,405,702            |        | 52,296,138 |   |
|                                                                                                                                            |       |                  |        |   |   |
| Total  liabilities and stockholders’ equity                                                                                                |       | $                     | 602,213,486 |   | $ | 606,454,723 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Earnings**

** **
| ** **                                                        | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                                  |       |                              |       |   |   |   |   |
| Loans:                                                            |       |                              |       |   |   |   |   |
| Taxable                                                           |       | $24,235,784                       |       | $28,315,686 |   | $28,183,639 |   |
| Tax-exempt                                                        |       | 201,103                           |       | 149,121 |   | 110,302 |   |
| Investment  securities:                                           |       |                              |       |   |   |   |   |
| Taxable                                                           |       | 4,770,865                         |       | 4,675,107 |   | 4,450,838 |   |
| Tax-exempt                                                        |       | 2,394,270                         |       | 2,345,112 |   | 1,511,226 |   |
| Other                                                             |       | 44,679                            |       | 66,063 |   | 138,436 |   |
| Total interest  income                                            |       | 31,646,701                        |       | 35,551,089 |   | 34,394,441 |   |
|                                                              |       |                              |       |   |   |   |   |
| Interest  expense:                                                |       |                              |       |   |   |   |   |
| Deposits                                                          |       | 9,896,805                         |       | 13,505,636 |   | 10,947,064 |   |
| Borrowings                                                        |       | 3,718,217                         |       | 4,362,576 |   | 4,691,820 |   |
| Total interest  expense                                           |       | 13,615,022                        |       | 17,868,212 |   | 15,638,884 |   |
|                                                              |       |                              |       |   |   |   |   |
| Net interest  income                                              |       | 18,031,679                        |       | 17,682,877 |   | 18,755,557 |   |
|                                                              |       |                              |       |   |   |   |   |
| Provision for  loan losses                                        |       | 2,400,000                         |       | 255,000 |   | 235,000 |   |
|                                                              |       |                              |       |   |   |   |   |
| Net interest  income after provision for loan losses              |       | 15,631,679                        |       | 17,427,877 |   | 18,520,557 |   |
|                                                              |       |                              |       |   |   |   |   |
| Non-interest  income:                                             |       |                              |       |   |   |   |   |
| Fees and service  charges                                         |       | 4,232,838                         |       | 4,004,770 |   | 4,310,495 |   |
| Gains on sales  of loans                                          |       | 1,457,252                         |       | 955,289 |   | 1,140,511 |   |
| Gains (losses)  on sales of investment securities                 |       | 497,134                           |       | — |   | (300,256 | ) |
| Gains on sales  of other assets and prepayment of FHLB borrowings |       | 270,294                           |       | — |   | 716,815 |   |
| Bank owned life  insurance                                        |       | 488,184                           |       | 473,682 |   | 397,720 |   |
| Other                                                             |       | 596,333                           |       | 481,893 |   | 647,862 |   |
| Total  non-interest income                                        |       | 7,542,035                         |       | 5,915,634 |   | 6,913,147 |   |
|                                                              |       |                              |       |   |   |   |   |
| Non-interest  expense:                                            |       |                              |       |   |   |   |   |
| Compensation and  benefits                                        |       | 8,794,776                         |       | 8,226,676 |   | 8,725,051 |   |
| Occupancy and  equipment                                          |       | 2,848,081                         |       | 2,860,629 |   | 2,822,695 |   |
| Amortization of  intangibles                                      |       | 791,594                           |       | 915,503 |   | 1,029,424 |   |
| Data processing                                                   |       | 774,315                           |       | 751,010 |   | 724,542 |   |
| Professional  fees                                                |       | 469,357                           |       | 437,335 |   | 497,972 |   |
| Advertising                                                       |       | 447,258                           |       | 415,020 |   | 433,997 |   |
| Other                                                             |       | 3,385,130                         |       | 3,032,191 |   | 3,110,927 |   |
| Total  non-interest expense                                       |       | 17,510,511                        |       | 16,638,364 |   | 17,344,608 |   |
|                                                              |       |                              |       |   |   |   |   |
| Earnings before  income taxes                                     |       | 5,663,203                         |       | 6,705,147 |   | 8,089,096 |   |
| Income tax  expense                                               |       | 1,109,819                         |       | 1,303,083 |   | 2,079,455 |   |
|                                                              |       |                              |       |   |   |   |   |
| Net earnings                                                      |       | $4,553,384                        |       | $5,402,064 |   | $6,009,641 |   |
|                                                              |       |                              |       |   |   |   |   |   |   |   |
| Earnings per  share:                                              |       |                              |       |   |   |   |   |
| Basic                                                             |       | $1.90                             |       | $2.12 |   | $2.33 |   |
| Diluted                                                           |       | $1.89                             |       | $2.10 |   | $2.32 |   |
|                                                                   |            |                                   |            |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

47

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

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

 
| ** **                                                                                          | ** ** | **Common stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                                                                                |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Balance at  December 31, 2005                                                                  |       | $                | 22,443     |                             | $          | 19,868,567             |       | $                   | 25,322,019 |                                                 | $          | (414,514   | )          | $ | (725,908 | ) | $ | 44,072,607 |   |
| Comprehensive  income:                                                                              |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Net income                                                                                          |       | —           |       | —                           |       | 6,009,641              |       | —              |       | —                                               |       | 6,009,641  |       |
| Change in fair  value of investmentsecurities available-for-sale andinterest rate swap, net  of tax |       | —           |       | —                           |       | —                 |       | —              |       | 711,446                                              |       | 711,446    |       |
| Total  comprehensive income                                                                         |       | —           |       | —                           |       | 6,009,641              |       | —              |       | 711,446                                              |       | 6,721,087  |       |
| Dividends paid  ($0.60 per share)                                                                   |       | —           |       | —                           |       | (1,566,656             | )          | —              |       | —                                               |       | (1,566,656 | )          |
| Stock based  compensation                                                                           |       | —           |       | 113,593                          |       | —                 |       | —              |       | —                                               |       | 113,593    |       |
| Exercise of  stock options, 1,867 shares,including tax benefit of $6,999                            |       | 19               |       | 33,871                           |       | —                 |       | —              |       | —                                               |       | 33,890     |       |
| Purchase of  5,000 treasury shares                                                                  |       | —           |       | —                           |       | —                 |       | (138,506            | )          | —                                               |       | (138,506   | )          |
| 5% stock  dividend, 111,286 shares                                                                  |       | 955              |       | 2,591,479                        |       | (3,006,948             | )          | 414,514             |       | —                                               |       | —     |       |
|                                                                                                |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Balance at  December 31, 2006                                                                  |       | 23,417           |       | 22,607,510                       |       | 26,758,056             |       | (138,506            | )          | (14,462                                              | )          | 49,236,015 |       |
| Comprehensive  income:                                                                              |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Net income                                                                                          |       | —           |       | —                           |       | 5,402,064              |       | —              |       | —                                               |       | 5,402,064  |       |
| Change in fair  value of investmentsecurities available-for-sale, net of tax                        |       | —           |       | —                           |       | —                 |       | —              |       | 694,978                                              |       | 694,978    |       |
| Total  comprehensive income                                                                         |       | —           |       | —                           |       | 5,402,064              |       | —              |       | 694,978                                              |       | 6,097,042  |       |
| Dividends paid  ($0.69 per share)                                                                   |       | —           |       | —                           |       | (1,768,105             | )          | —              |       | —                                               |       | (1,768,105 | )          |
| Stock based  compensation                                                                           |       | —           |       | 118,313                          |       | —                 |       | —              |       | —                                               |       | 118,313    |       |
| Exercise of  stock options, 2,374 shares,including tax benefit of $7,543                            |       | 24               |       | 48,637                           |       | —                 |       | —              |       | —                                               |       | 48,661     |       |
| Purchase of  52,240 treasury shares                                                                 |       | —           |       | —                           |       | —                 |       | (1,435,788          | )          | —                                               |       | (1,435,788 | )          |
| 5% stock  dividend, 114,484 shares                                                                  |       | 650              |       | 1,529,684                        |       | (2,898,734             | )          | 1,368,400           |       | —                                               |       | —     |       |
|                                                                                                |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Balance at  December 31, 2007                                                                  |       | 24,091           |       | 24,304,144                       |       | 27,493,281             |       | (205,894            | )          | 680,516                                              |       | 52,296,138 |       |
| Comprehensive  income:                                                                              |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Net income                                                                                          |       | —           |       | —                           |       | 4,553,384              |       | —              |       | —                                               |       | 4,553,384  |       |
| Change in fair  value of investmentsecurities available-for-sale, net of tax                        |       | —           |       | —                           |       | —                 |       | —              |       | (55,291                                              | )          | (55,291    | )          |
| Total  comprehensive income                                                                         |       | —           |       | —                           |       | 4,553,384              |       | —              |       | (55,291                                              | )          | 4,498,093  |       |
| Dividends paid  ($0.72 per share)                                                                   |       | —           |       | —                           |       | (1,754,071             | )          | —              |       | —                                               |       | (1,754,071 | )          |
| Stock based  compensation                                                                           |       | —           |       | 134,310                          |       | —                 |       | —              |       | —                                               |       | 134,310    |       |
| Exercise of  stock options, 2,287 shares,including excess tax benefit of $5,504                     |       | 23               |       | 42,462                           |       | —                 |       | —              |       | —                                               |       | 42,485     |       |
| Purchase of  144,290 treasury shares                                                                |       | —           |       | —                           |       | —                 |       | (3,476,538          | )          | —                                               |       | (3,476,538 | )          |
| 5% stock  dividend, 112,891 shares                                                                  |       | —           |       | (607,933                         | )          | (2,139,285             | )          | 2,747,218           |       | —                                               |       | —     |       |
| Adoption of  Emerging Issues TaskForce Issue 06-4                                                   |       | —           |       | —                           |       | (334,715               | )          | —              |       | —                                               |       | (334,715   | )          |
|                                                                                                |       |             |       |                             |       |                   |       |                |       |                                                 |       |       |       |
| Balance at  December 31, 2008                                                                  |       | $                | 24,114     |                             | $          | 23,872,983             |       | $                   | 27,818,594 |                                                 | $          | (935,214   | )          | $ | 625,225 |   | $ | 51,405,702 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                               |       |                              |       |   |   |   |   |
| Net earnings                                                                         |       | $                                 | 4,553,384  |   | $ | 5,402,064 |   | $ | 6,009,641 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Provision for  loan losses                                                           |       | 2,400,000                         |       | 255,000 |   | 235,000 |   |
| Amortization of  intangibles                                                         |       | 791,594                           |       | 915,503 |   | 1,029,424 |   |
| Depreciation                                                                         |       | 1,050,082                         |       | 882,825 |   | 854,870 |   |
| Stock-based  compensation                                                            |       | 134,310                           |       | 118,313 |   | 113,593 |   |
| Deferred income  taxes                                                               |       | 269,733                           |       | 114,408 |   | 1,632,422 |   |
| Net gains  (losses) on investment securities                                         |       | (431,258                          | )          | — |   | 300,256 |   |
| Net gains on  sales of premises and equipment and foreclosed assets                  |       | (10,365                           | )          | (64,651 | ) | (784,362 | ) |
| Net gain on  sales of loans                                                          |       | (1,457,252                        | )          | (955,289 | ) | (1,140,511 | ) |
| Proceeds from  sale of loans                                                         |       | 85,240,782                        |       | 59,436,855 |   | 65,404,161 |   |
| Origination of  loans held for sale                                                  |       | (83,547,393                       | )          | (58,840,779 | ) | (64,464,913 | ) |
| Gains on  prepayments of FHLB borrowings                                             |       | (270,294                          | )          | — |   | — |   |
| Changes in  assets and liabilities:                                                  |       |                              |       |   |   |   |   |
| Accrued interest  and other assets                                                   |       | (1,568,125                        | )          | (941,024 | ) | (9,311,653 | ) |
| Accrued  expenses, taxes, and other liabilities                                      |       | (1,822,743                        | )          | 1,447,050 |   | (1,498,088 | ) |
| Net cash  provided by (used in) operating activities                                 |       | 5,332,455                         |       | 7,770,275 |   | (1,620,160 | ) |
| Cash flows from  investing activities:                                               |       |                              |       |   |   |   |   |
| Net decrease in  loans                                                               |       | 5,205,909                         |       | 2,379,082 |   | 3,289,992 |   |
| Maturities and  prepayments of investment securities                                 |       | 34,914,561                        |       | 16,489,910 |   | 38,865,258 |   |
| Net cash paid in  FMB acquisition                                                    |       | —                            |       | — |   | (9,147,605 | ) |
| Purchases of  investment securities                                                  |       | (51,530,316                       | )          | (34,279,644 | ) | (50,825,131 | ) |
| Proceeds from  sale of investment securities                                         |       | 10,407,572                        |       | — |   | 17,943,322 |   |
| Proceeds from  sales of premises and equipment and foreclosed assets                 |       | 1,411,909                         |       | 402,777 |   | 2,334,542 |   |
| Purchases of  premises and equipment, net                                            |       | (747,213                          | )          | (1,517,680 | ) | (3,207,482 | ) |
| Net cash used in  investing activities                                               |       | (337,578                          | )          | (16,525,555 | ) | (747,104 | ) |
| Cash flows from  financing activities:                                               |       |                              |       |   |   |   |   |
| Net increase  (decrease) in deposits                                                 |       | (13,106,530                       | )          | 8,268,603 |   | 6,490,795 |   |
| Federal Home  Loan Bank advance borrowings                                           |       | 40,000,000                        |       | — |   | — |   |
| Federal Home  Loan Bank advance repayments                                           |       | (25,536,768                       | )          | (3,036,768 | ) | (5,536,768 | ) |
| Change in  Federal Home Loan Bank line of credit, net                                |       | (5,100,000                        | )          | 11,100,000 |   | (3,400,000 | ) |
| Proceeds from  other borrowings                                                      |       | 6,915,037                         |       | 4,310,000 |   | 12,240,984 |   |
| Repayments on  other borrowings                                                      |       | (3,930,000                        | )          | (8,744,089 | ) | (12,495,073 | ) |
| Proceeds from  issuance of common stock under stock option plans                     |       | 36,981                            |       | 41,118 |   | 26,891 |   |
| Excess tax  benefit related to stock option plans                                    |       | 5,504                             |       | 7,543 |   | 6,999 |   |
| Payment of  dividends                                                                |       | (1,754,071                        | )          | (1,768,105 | ) | (1,566,656 | ) |
| Purchase of  treasury stock                                                          |       | (3,476,538                        | )          | (1,435,788 | ) | (138,506 | ) |
| Net cash  provided by (used in) financing activities                                 |       | (5,946,385                        | )          | 8,742,514 |   | (4,371,334 | ) |
| Net decrease in  cash and cash equivalents                                           |       | (951,508                          | )          | (12,766 | ) | (6,738,598 | ) |
| Cash and cash  equivalents at beginning of year                                      |       | 14,739,148                        |       | 14,751,914 |   | 21,490,512 |   |
| Cash and cash  equivalents at end of year                                            |       | $                                 | 13,787,640 |   | $ | 14,739,148 |   | $ | 14,751,914 |   |
| Supplemental  disclosure of cash flow information:                                   |       |                              |       |   |   |   |   |
| Cash paid during  the year for income taxes                                          |       | $                                 | 953,000    |   | $ | 553,000 |   | $ | 896,000 |   |
| Cash paid during  the year for interest                                              |       | 14,295,999                        |       | 17,946,000 |   | 14,553,000 |   |
| Supplemental  schedule of noncash investing and financing activities:                |       |                              |       |   |   |   |   |
| Transfer of  loans to real estate owned                                              |       | 2,825,000                         |       | 368,000 |   | 293,000 |   |
| FMB acquisition:                                                                     |       |                              |       |   |   |   |   |
| Fair value of  liabilities assumed                                                   |       | —                            |       | — |   | 123,965,000 |   |
| Fair value of  assets acquired, including goodwill                                   |       | —                            |       | — |   | 133,112,000 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**Table ofContents**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

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

** **

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

*** ***

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

 

***(b)***                      Investment Securities

*** ***

The Company has classified its investment securities portfolio asavailable-for-sale, with the exception of certain investments held forregulatory purposes.  The Company carriesits investment securities at fair value and in accordance with the requirementsof Statement of Financial Accounting Standard (“SFAS”) No. 157 “Fair ValueMeasurements,” the Company employs valuation techniques which utilizeobservable inputs when those inputs are available.  These observable inputs reflect assumptionsmarket participants would use in pricing the security, developed based onmarket data obtained from sources independent of the Company.  When such information is not available, theCompany employs valuation techniques which utilize unobservable inputs, orthose which reflect the Company’s own assumptions about market participants,based on the best information available in the circumstances.  These valuation methods typically involvecash flow and other financial modeling techniques.  Changes in underlying factors, assumptions,estimates, or other inputs to the valuation techniques could have a materialimpact on the Company’s future financial condition and results ofoperations.  SFAS 157, which requiresfair value measurements to be classified as Level 1 (quoted prices), Level 2 (basedon observable inputs) or Level 3 (based on unobservable inputs) is discussed inmore detail in Note 12 to the consolidated financial statements.   Available-for-sale securities are recordedat fair value with unrealized gains and losses excluded from earnings andreported as a separate component of stockholders’ equity until realized.  Purchased premiums and discounts oninvestment securities are amortized/accreted into interest income over theestimated lives of the securities using the interest method.  Gains and losses on sales ofavailable-for-sale securities are recorded on a trade date basis and arecalculated using the specific identification method.

 

The Company performs quarterly reviews of the investment portfolio todetermine if investment securities have any declines in fair value which mightbe considered other than temporary.  Theinitial review begins with all securities in an unrealized loss position.  The review includes an analysis of the factsand circumstances surrounding each security including the length and severityof the loss, the credit of the borrower, the ability and intent of the Companyto hold the security until recovery and whether evidence indicates that it isprobable that the Company will not recover the cost of the security.  The Company holds certain pooled trustpreferred securities, the market for which is considered to be inactive.  In order to assess the impairment of thesesecurities, the Company performs the procedures mentioned above as well asutilizes a discounted cash flow model to determine the estimated fair value andwhether the securities are other than temporarily impaired.  Based on these reviews, the Companydetermines if such impairments are other than temporary which results in acharge to earnings, establishing the securities estimated fair value as the newcost basis.

 

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

 

***(c)***                       Loans and Allowance for Loan Losses

*** ***

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

 

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loans held in portfolio and the estimated costs of origination aredeferred and amortized to interest income using the interest method.

 

Mortgage loans originated and intended for sale in the secondary marketare carried at the lower of cost or estimated fair value, determined on anaggregate basis.  Net unrealized lossesare recognized through a valuation allowance as charges against income.  Origination fees and costs received on suchloans are deferred and recognized as a component of the gain or loss on sale.

 

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

 

A loan is considered impaired when, based on current information andevents, it is probable that the Bank will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining if a loan is impaired include paymentstatus and the probability of collecting scheduled principal and interestpayments when due.  Loans that experienceinsignificant payment delays and payment shortfalls generally are notclassified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loanbasis for commercial, commercial real estate and construction loans by eitherthe present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.

 

Large groups of homogeneous loans with smaller individual balances arecollectively evaluated for impairment. Accordingly, the Company generally does not separately identifyindividual consumer and residential loans for impairment disclosures.

 

The accrual of interest on nonperforming loans is discontinued at thetime the loan is ninety days delinquent, unless the credit is well-securedand in process of collection.  Loans areplaced on non-accrual or are charged off at an earlier date if collection ofprincipal or interest is considered doubtful.

 

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

 

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

*** ***

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

 

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

 

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

 

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

*** ***

Goodwill is not amortized; however, it is tested for impairment.  Goodwillimpairment tests are performed at each calendar year end or more frequentlywhen events or circumstances dictate. The impairment test compares the carrying value of goodwill to animplied fair value of the goodwill, which is based on a review of stock priceand valuation multiples of recent, comparable acquisitions.  A goodwill impairment would be recorded forthe amount that the carrying value exceeds the implied fair value.  TheCompany’s impairment test for the Company’s single reporting unit performed asof December 31, 2008 indicated that goodwill as of that date was notimpaired.  The Company can make noassurances that future impairment tests will not result in goodwillimpairments.

 

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

 

***(f)***                         Income Taxes

*** ***

The objectives of accounting for income taxes are to recognize theamount of taxes payable or refundable for the current year and deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the futuretax consequences of events that have been recognized in financial statements ortax returns.  The Company adoptedFinancial Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes*” (“FIN 48”), on January 1, 2007, in which anincome tax position will be recognized only if it is more likely than not thatit will be sustained upon IRS examination, based upon its technicalmerits.  Once that status is met, theamount recorded will be the largest amount of benefit that is greater than 50percent likely of being realized upon ultimate settlement.  The Company also assesses it deferred taxassets to determine if the items are more likely than not be realized and avaluation allowance is established for any amounts that are not more likelythan not to be realized.  Changes inestimates regarding the actual outcome of these future tax consequences,including the effects of IRS examinations and examinations by other stateagencies, could materially impact our financial position and results ofoperations.

 

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

*** ***

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires the Company to make estimates and assumptions that affect the reportedamount of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  Estimates that are particularly susceptibleto significant change include the determination of the allowance for loanlosses, valuation and impairment of investment securities, income taxes andgoodwill.  Actual results could differfrom those estimates.

 

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***(h)***                      Comprehensive Income

*** ***

The Company’s other comprehensive income (loss)consists of unrealized holding gains and losses on available-for-salesecurities and an unrealized gain on an interest rate swap (terminated in 2006)as shown below:

 

| ** **                                                              | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                              |       | $                                 | 4,553,384  |   | $ | 5,402,064 |   | $ | 6,009,641 |   |
| Unrealized  holding gains (losses) on securities and interest rate swap |       | 342,079                           |       | 1,120,932 |   | 952,255 |   |
| Less  reclassification adjustment for gains (losses) included in income |       | 431,258                           |       | — |   | (195,239 | ) |
| Net unrealized  gains (losses)                                          |       | (89,179                           | )          | 1,120,932 |   | 1,147,494 |   |
| Income tax  expense (benefit)                                           |       | (33,888                           | )          | 425,954 |   | 436,048 |   |
| Total  comprehensive income                                             |       | $                                 | 4,498,093  |   | $ | 6,097,042 |   | $ | 6,721,087 |   |

 

Accumulated other comprehensive income related entirely toavailable-for-sale investment securities at December 31, 2008, 2007 and2006.

 

***(i)***                         Foreclosed Assets

*** ***

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

 

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

*** ***

The Company has a stock-based employee compensation plan, which isdescribed more fully in note 11. Prior to January 1, 2006, the Company utilized the fair valuerecognition provisions of SFAS No. 123, “*Accountingfor Stock-Based Compensation*.” SFAS 123 established a fair-value method of accounting for employeestock options or similar equity instruments. The Company’s adoption of therevised Statement on January 1, 2006 using the modified prospective methodof adoption, was limited to a change in the method of accounting forforfeitures, and did not have a material effect on its consolidated financialstatements.

 

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

 

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

*** ***

Basic earnings per share represents net earnings divided by theweighted average number of common shares outstanding during the year.  Diluted earnings per share reflect additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would resultfrom the assumed issuance.  Potentialcommon shares that may be issued by the Company relate solely to outstandingstock options and are determined using the treasury stock method using theaverage market price of the Company’s stock for the respective periods.  Antidilutive stock options were 33,950, 2,076and 16,686 for the years ended December 31, 2008, 2007 and 2006,respectively.

 

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The shares used in the calculation of basic anddiluted earnings per share, which have been adjusted to give effect for the 5% stockdividends paid by the Company in December 2008, 2007 and 2006, are shownbelow:

 

| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings  available to common shareholders             |       | $                                 | 4,553,384  |   | $ | 5,402,064 |   | $ | 6,009,641 |   |
|                                                       |       |                              |       |   |   |   |   |
| Weighted average  common shares outstanding - basic   |       | 2,401,888                         |       | 2,553,475 |   | 2,577,417 |   |
| Assumed exercise  of stock options                         |       | 7,842                             |       | 19,005 |   | 12,864 |   |
| Weighted average  common shares outstanding - diluted |       | 2,409,730                         |       | 2,572,480 |   | 2,590,281 |   |
|                                                       |       |                              |       |   |   |   |   |
| Net earnings per  share                                    |       |                              |       |   |   |   |   |
| Basic                                                      |       | $                                 | 1.90       |   | $ | 2.12 |   | $ | 2.33 |   |
| Diluted                                                    |       | $                                 | 1.89       |   | $ | 2.10 |   | $ | 2.32 |   |

 

***(l)***                         Treasury Stock

*** ***

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

 

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

*** ***

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

 

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

*** ***

The Company is exposed to market risk, primarily relating to changes ininterest rates.  To manage the volatilityrelating to these exposures, the Company’s risk management policies permit itsuse of derivative financial instruments. The Company uses derivatives on a limited basis mainly to stabilizeinterest rate margins.  The Company moreoften manages normal asset and liability positions by altering the terms of theproducts it offers.

 

SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” as amended, requires that allderivative financial instruments be recorded on the balance sheet at fairvalue, with adjustments to fair value recorded in current earnings.  Derivatives that qualify in a hedging relationshipare designated, based on the exposure being hedged, as fair value or cash flowhedges.  Under the cash flow hedgingmodel, the effective portion of the change in the gain or loss related to thederivative is recognized as a component of other comprehensive income, net of taxes.  The ineffective portion is recognized incurrent earnings.  The Company had noderivative financial instruments designated as hedging instruments as of December 31,2008 and 2007.

 

The Company enters into interest rate lock commitments on certain mortgageloans, which are commitments to originate loans whereby the interest rate onthe loan is determined prior to funding. The Company also has corresponding forward sales contracts related tothese interest rate lock commitments. Both the mortgage loan commitments and the related forward salescontracts are accounted for as derivatives and carried at fair value withchanges in fair value recorded in income. The Company adopted Staff Accounting Bulletin No. 109 as of January 1,2008 and as a result, the anticipating servicing value associated with theoriginated loan is included in the fair value of the interest rate lockcommitments.

 

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**(2) **                  Goodwill and Intangible Assets

** **

TheCompany’s goodwill and core deposit intangible assets resulted from severalacquisitions from 2001 through 2006. Goodwill was reduced by $115,000 in 2007 due to the statute oflimitations expiring on certain tax uncertainties acquired from theseacquisitions.

 

The following is an analysis of the changes in coredeposit intangible assets:

 
| ** **                      | ** ** | **Years ended December, 31**  | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Fair value at acquisition** | ** ** | **Accumulated amortization** | ** ** | **Fair value at acquisition** | ** ** | **Accumulated amortization** | ** ** | **Fair value at acquisition** | ** ** | **Accumulated amortization** | ** ** |
| Balance at  beginning of period |       | $                             | 5,396,065  |   | $ | (2,462,256 | ) | $ | 5,396,065 |   | $ | (1,667,478 | ) | $ | 2,818,603 |   | $ | (774,589 | ) |
| Additions                       |       | —                        |       | — |   | — |   | — |   | 2,577,462 |   | — |   |
| Amortization                    |       | —                        |       | (696,675 | ) | — |   | (794,778 | ) | — |   | (892,889 | ) |
| Balance at end  of period       |       | $                             | 5,396,065  |   | $ | (3,158,931 | ) | $ | 5,396,065 |   | $ | (2,462,256 | ) | $ | 5,396,065 |   | $ | (1,667,478 | ) |

 

The following is an analysis of the changes inmortgage servicing rights:

 
| ** **                      | ** ** | **Years ended December, 31** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **2008**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Cost**                     | ** ** | **Accumulated amortization** | ** ** | **Cost** | ** ** | **Accumulated amortization** | ** ** | **Cost** | ** ** | **Accumulated amortization** | ** ** |
| Balance at  beginning of period |       | $                            | 770,172    |   | $ | (559,980 | ) | $ | 791,840 |   | $ | (489,718 | ) | $ | 775,666 |   | $ | (401,467 | ) |
| Additions                       |       | 54,433                       |       | — |   | 28,795 |   | — |   | 64,458 |   | — |   |
| Prepayments/maturities          |       | (53,033                      | )          | 53,033 |   | (50,463 | ) | 50,463 |   | (48,284 | ) | 48,284 |   |
| Amortization                    |       | —                       |       | (94,919 | ) | — |   | (120,725 | ) | — |   | (136,535 | ) |
| Balance at end of  period       |       | $                            | 771,572    |   | $ | (601,866 | ) | $ | 770,172 |   | $ | (559,980 | ) | $ | 791,840 |   | $ | (489,718 | ) |

 

The following is estimated amortization expense forthe years ending December 31:

 

| **Year:**  | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2009       |       | $          | 694,000    |   |
| 2010       |       | 575,000    |       |
| 2011       |       | 402,000    |       |
| 2012       |       | 308,000    |       |
| 2013       |       | 224,000    |       |
| Thereafter |       | $          | 204,000    |   |

** **

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**(3)**                     Investment Securities

** **

A summary ofinvestment securities available-for-sale is as follows:

 
| ** **                        | ** ** | **As of December 31, 2008** | ** **  |
|-----------------------------------|------------|----------------------------------|-------------|
| ** **                        | ** ** | ** **                       | ** **  | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Amortized**                    | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **Estimated** | ** ** |
| ** **                        | ** ** | **cost**                         | ** **  | **gains** | ** ** | **losses** | ** ** | **fair value** | ** ** |
| U. S. federal  agency obligations |       | $                                | 28,565,817  |   | $ | 949,535 |   | $ | (1,706 | ) | $ | 29,513,646 |   |
| Municipal obligations             |       | 63,711,462                       |        | 1,531,807 |   | (933,937 | ) | 64,309,332 |   |
| Mortgage-backed  securities       |       | 55,751,609                       |        | 934,040 |   | (104,036 | ) | 56,581,613 |   |
| Corporate bonds                   |       | 2,487,933                        |        | — |   | (1,747,684 | ) | 740,249 |   |
| Common stocks                     |       | 693,749                          |        | 388,929 |   | (8,520 | ) | 1,074,158 |   |
| Certificates of  deposit          |       | 10,025,824                       |        | — |   | — |   | 10,025,824 |   |
| Total                             |       | $                                | 161,236,394 |   | $ | 3,804,311 |   | $ | (2,795,883 | ) | $ | 162,244,822 |   |

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

 

Thetables above show that some of the securities in the available for saleinvestment portfolio had unrealized losses, or were temporarily impaired, as ofDecember 31, 2008 and 2007.  Thistemporary impairment represents the estimated amount of loss that would berealized if the securities were sold on the valuation date.  Securities which were temporarily impairedare shown below, along with the length of the impairment period. 

 
| ** **                        | ** ** | ** **     | ** ** | **As of December 31, 2008** | ** ** |
|-----------------------------------|------------|----------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **Number**     | ** ** | **Less than 12 months**          | ** ** | **12 months or longer** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **of**         | ** ** | **Fair**                         | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                        | ** ** | **securities** | ** ** | **value**                        | ** ** | **losses** | ** ** | **value** | ** ** | **losses** | ** ** | **value** | ** ** | **losses** | ** ** |
| U. S. federal agency  obligations |       | 3              |       | $                                | 63,973     |   | $ | (394 | ) | $ | 132,663 |   | $ | (1,312 | ) | $ | 196,636 |   | $ | (1,706 | ) |
| Municipal  obligations            |       | 56             |       | 13,282,121                       |       | (466,040 | ) | 8,542,066 |   | (467,897 | ) | 21,824,187 |   | (933,937 | ) |
| Corporate bonds                   |       | 3              |       | —                           |       | — |   | 740,249 |   | (1,747,684 | ) | 740,249 |   | (1,747,684 | ) |
| Mortgage-backed  securities       |       | 80             |       | 12,219,062                       |       | (78,188 | ) | 3,400,414 |   | (25,848 | ) | 15,619,476 |   | (104,036 | ) |
| Common stocks                     |       | 3              |       | 12,893                           |       | (1,670 | ) | 18,150 |   | (6,850 | ) | 31,043 |   | (8,520 | ) |
| Total                             |       | 145            |       | $                                | 25,578,049 |   | $ | (546,292 | ) | $ | 12,833,542 |   | $ | (2,249,591 | ) | $ | 38,411,591 |   | $ | (2,795,883 | ) |

 

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

 

The Company’s assessment of other than temporaryimpairment is based on its reasonable judgment of the specific facts andcircumstances impacting each individual security at the time such assessments aremade.  The Company reviews and considers factual information,including expected cash flows, the structure of the security, the creditquality of the underlying assets and the current and anticipated marketconditions.

 

The receipt of principal, at par, and interest onmortgage-backed securities is guaranteed by the respective government-sponsoredagency guarantor, such that the Company believes that its mortgage-backedsecurities do not expose the Company to credit related losses.  Based on these factors, and the Company’sability and intent to hold until recovery, the Company believes that the mortgage-backedsecurities identified in the tables above were temporarily depressed as of December 31,2008 and 2007.  The Company’s mortgage-backed securities portfolioconsisted of securities predominantly underwritten to the standards andguaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.  The Company also held $20.0 million in debtsecurities of the FHLB, all of which was in an unrealized gain position at December 31,2008.

 

The Company believes that the decline in the value ofcertain municipal obligations was primarily related to an overall widening ofmarket spreads for many types of fixed income products during 2008, reflecting,among other things, reduced liquidity and downgrades on the underlying creditdefault insurance providers.  At December 31, 2008 the Companybelieved that it had the ability and intent to hold each of its municipalobligations in an unrealized loss position, until recovery, which may be attheir maturity.  Due to the issuers’ continued satisfaction of the securities’obligations in accordance with their contractual terms and the expectation thatthey will continue to do so, management’s intent and ability to hold thesesecurities for a period of time sufficient to allow for any anticipatedrecovery in fair value, as well as the evaluation of the fundamentals of theissuers’ financial condition and other objective evidence, the Company believesthat the municipal obligations identified in the tables above were temporarilydepressed as of December 31, 2008 and 2007.

 

At December 31, 2008, the Company owned pooledtrust preferred securities with a cost basis of $2.5 million, classified ascorporate bonds. This portfolio consists of three securities, which representinvestments in pools of debt obligations issued by financial institutions andinsurance companies.  The market forthese securities is considered to be inactive. The Company used a discounted cash flow model to determine the estimatedfair value of its pooled trust preferred securities and to assess other thantemporary impairment.  The assumptionsused in preparing the discounted cash flow model include the following:estimated discount rates (using yields of comparable traded instrumentsadjusted for illiquidity and other risk factors), estimated deferral anddefault rates on collateral, and estimated cash flows.  The discounted cash flow analysis wasperformed in accordance with EITF 99-20-1 and indicated that the Company willbe able to collect all of the principal and interest in accordance with theoriginal terms of the agreements.  Thediscounted cash flow analysis included a review of all issuers within thecollateral pool and incorporated higher deferral and default rates, as comparedto historical rates, in the cash flow projections through maturity.  The Company continues to receive its fullinterest payments.  The Company alsoreviewed a stress test of these securities that indicated they could absorbadditional deferrals or defaults in the collateral pool in excess of what theCompany believes is likely, before the interest payments on the individualsecurity are negatively impacted.  TheCompany has the ability and intent to hold these 

 

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securities to maturity and does not consider theseinvestments to be other than temporarily impaired as of December 31, 2008.

 

It is reasonably possible that the fair values of theCompany’s investment securities could decline in the future if the overalleconomy and the financial condition of some of the issuers continue todeteriorate and the liquidity of these securities remains low.  As a result, there is a risk that other thantemporary impairments may occur in the future and any such amounts could bematerial to the Company’s consolidated statements of earnings.

 

Maturities of investment securities at December 31,2008 are as follows:

 
| ** **                                                      | ** ** | **Amortized** | ** **  | **Estimated**  | ** ** |
|-----------------------------------------------------------------|------------|---------------|-------------|----------------|------------|
| ** **                                                      | ** ** | **cost**      | ** **  | **fair value** | ** ** |
| Due in less than  one year                                      |       | $             | 20,261,536  |           | $          | 19,133,166 |   |
| Due after one  year but within five years                       |       | 20,575,578    |        | 21,310,067     |       |
| Due after five  years                                           |       | 53,928,098    |        | 54,119,994     |       |
| Mortgage-backed  securities, common stock and other investments |       | 66,471,182    |        | 67,681,595     |       |
|                                                            |       |          |        |           |       |
| Total                                                           |       | $             | 161,236,394 |           | $          | 162,244,822 |   |

 

For mortgage-backed securities, actual maturities willdiffer from contractual maturities because borrowers have the right to prepayobligations with or without prepayment penalties.

 

Gross realized gains and losses on sales ofavailable-for-sale securities are as follows:

 
| ** **      | ** ** | **Years ended December 31,** | ** ** |
|-----------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Realized gains  |       | $                                 | 497,134    |   | $ | — |   | $ | 143,541 |   |
| Realized losses |       | —                            |       | — |   | (443,797 | ) |
|            |       |                              |       |   |   |   |   |
| Total           |       | $                                 | 497,134    |   | $ | — |   | $ | (300,256 | ) |

 

At December 31, 2008, securities pledged to securepublic funds on deposit, repurchase agreements and as collateral for theFederal Reserve discount window had a carrying value of approximately$123.0 million.  Except for U. S.government and agency obligations, no investment in a single issuer exceeded10% of stockholders’ equity.

 

Other investment securities include investments inFederal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock.  The carrying value of the FHLB stock at December 31,2008 and 2007 was $7.3 million and $7.1 million, respectively and the carryingvalue of the FRB stock at December 31, 2008 and 2007 was $1.7million.  These securities are notreadily marketable and are required for regulatory purposes and borrowingavailability.  Since there is noavailable market values these securities are carried at cost.  Redemption of these investments is at theoption of the FHLB or FRB.  We haveassessed the ultimate recoverability of these stocks and believe that noimpairment has occurred.

 

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**(4)**                     Loans

** **

Loans consist of thefollowing:

 
| ** **                                    | ** ** | **As of December 31,** | ** **  |
|-----------------------------------------------|------------|-----------------------------|-------------|
| ** **                                    | ** ** | **2008**                    | ** **  | **2007** | ** ** |
| Real estate  loans:                           |       |                        |        |   |   |
| One-to-four  family residential               |       | $                           | 112,814,543 |   | $ | 126,459,081 |   |
| Commercial                                    |       | 126,976,891                 |        | 113,209,220 |   |
| Construction                                  |       | 19,617,910                  |        | 27,936,176 |   |
| Commercial loans                              |       | 101,976,506                 |        | 103,098,695 |   |
| Consumer loans                                |       | 7,936,550                   |        | 9,164,122 |   |
| Total                                         |       | 369,322,400                 |        | 379,867,294 |   |
| Less:                                         |       |                        |        |   |   |
| Net deferred  loan costs and loans in process |       | (320,270                    | )           | (460,981 | ) |
| Allowance for  loan losses                    |       | 3,870,963                   |        | 4,171,667 |   |
| Loans, net                                    |       | $                           | 365,771,707 |   | $ | 376,156,608 |   |

 

The Company is a party to financial instruments withoff-balance sheet risk in the normal course of business to meet customers’financing needs.  These financialinstruments consist principally of commitments to extend credit.  The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetinstruments.  The Company’s exposure tocredit loss in the event of nonperformance by the other party is represented bythe contractual amount of those instruments. In the normal course of business, there are various commitments andcontingent liabilities, such as commitments to extend credit, letters ofcredit, and lines of credit, the balance of which are not recorded in theaccompanying consolidated financial statements. The Company generally requires collateral or other security on unfundedloan commitments and irrevocable letters of credit.  Unfunded commitments to extend credit,excluding standby letters of credit, aggregated $67.3 million and$72.3 million at December 31, 2008 and 2007, respectively, and aregenerally at variable interest rates. Standby letters of credit totaled $2.1 million and $2.0 at December 31,2008 and 2007, respectively.

 

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

 

A summary of the activity in the allowance for loanlosses is as follows:

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance at beginning  of year |       | $                                 | 4,171,667  |   | $ | 4,029,710 |   | $ | 3,151,373 |   |
| Allowance of  acquired bank   |       | —                            |       | — |   | 891,374 |   |
| Provision for  loan losses    |       | 2,400,000                         |       | 255,000 |   | 235,000 |   |
| Charge-offs                   |       | (2,769,368                        | )          | (203,968 | ) | (339,637 | ) |
| Recoveries                    |       | 68,664                            |       | 90,925 |   | 91,600 |   |
| Balance at end  of year       |       | $                                 | 3,870,963  |   | $ | 4,171,667 |   | $ | 4,029,710 |   |

 

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The following table presents information on impairedloans as of December 31:

 

| ** **                                               | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|----------------------------------------------------------|------------|-----------|------------|------------|------------|
| Impaired loans  for which an allowance has been provided |       | $         | 1,867,303  |       | $          | 4,782,563 |   |
| Impaired loans  for which no allowance has been provided |       | 5,191,917 |       | 6,502,312  |       |
| Total impaired  loans                                    |       | 7,059,220 |       | 11,284,875 |       |
| Allowance  related to impaired loans                     |       | $         | 705,371    |       | $          | 1,706,648 |   |

 

Under the original terms of the Company’s impaired loans,interest earned on such loans for the years 2008, 2007 and 2006, would haveincreased interest income by $245,000 and $520,000 and $270,000,respectively.  There were no loans 90days delinquent and still accruing interest at December 31, 2008 and 2007.  Average impaired loans were $6.1 million for2008, $5.7 million for 2007, and $4.2 million for 2006.

 

The Company provides servicing on loans for otherswith outstanding principal balances of $82.0 million and$91.0 million at December 31, 2008 and 2007, respectively.  Gross service fee income related to suchloans was $219,000, $243,000 and $266,000 for the years ended December 31,2008, 2007 and 2006, respectively, and is included in fees and service chargesin the consolidated statements of earnings.

 

The Company had loans to directors and officers at December 31,2008 and 2007, which carry terms similar to those for other loans.  Management believes such outstanding loans donot represent more than a normal risk of collection.  A summary of such loans is as follows:

 

| Balance at  December 31, 2007 |   | $          | 7,296,161 |   |
|------------------------------------|--------|------------|-----------|--------|
| New loans                          |   | 1,204,915  |      |
| Repayments                         |   | (2,404,841 | )         |
| Balance at  December 31, 2008 |   | $          | 6,096,235 |   |

 

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

 

Premises and equipment consisted of the following:

 

| ** **                         | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Land                               |       | $                           | 3,787,696  |   | $ | 3,787,696 |   |
| Office buildings  and improvements |       | 11,266,780                  |       | 11,379,922 |   |
| Furniture and  equipment           |       | 6,177,732                   |       | 5,833,346 |   |
| Automobiles                        |       | 328,971                     |       | 263,509 |   |
| Total                              |       | 21,561,179                  |       | 21,264,473 |   |
| Less accumulated  depreciation     |       | 7,605,554                   |       | 7,005,301 |   |
| Total                              |       | $                           | 13,955,625 |   | $ | 14,259,172 |   |

 

The Company has operating lease agreements for threeof its branch locations and several ATM locations.  The Company has lease commitments on onebranch location and one ATM location, the remaining agreements aremonth-to-month.  The Company may renewsome of these lease agreements, most likely on similar terms.  The following table includes the Company’sminimum lease commitments for the years ending December 31:

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2009     |       | $          | 15,222     |   |
| 2010     |       | 3,520      |       |
| Total    |       | $          | 18,742     |   |

 

 

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Total rent expense for the years ended December 31,2008, 2007 and 2006 was $152,000, $152,000 and $188,000, respectively, and wasincluded in occupancy and equipment on the consolidated statements of earnings.

 

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

 

Maturities of time deposits were as follows at December 31,2008:

 

| **Year**   | ** ** | **Amount** | ** **  |
|------------|------------|------------|-------------|
| 2009       |       | $          | 168,841,531 |   |
| 2010       |       | 19,756,304 |        |
| 2011       |       | 13,478,804 |        |
| 2012       |       | 7,138,433  |        |
| 2013       |       | 3,899,483  |        |
| Thereafter |       | 288,797    |        |
| Total      |       | $          | 213,403,352 |   |

 

Regulations of the Federal Reserve System requirereserves to be maintained by all banking institutions according to the typesand amounts of certain deposit liabilities. These requirements restrict a portion of the amounts shown asconsolidated cash and due from banks from everyday usage in operation of thebanks.  The minimum reserve requirementsfor the Bank totaled $25,000 at December 31, 2008.

 

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

 

Advances from the FHLB, excluding line of creditadvances, at December 31, 2008 and 2007, amounted to $71,319,133 and$57,926,525, respectively.  Maturities ofsuch borrowings at December 31, 2008 and 2007 are summarized as follows:

 
| ** **              | ** ** | **As of December 31,** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| ** **              | ** ** | ** **                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Year**                | ** ** | **Amount**                  | ** ** | **average rates** | ** ** | ** ** | ** ** | **average rates** | ** ** |
| 2008                    |       |                        |       |   |   | $2,000,000 |   | 4.81 | % |
| 2009                    |       | $15,089,022                 |       | 4.91 | % | 35,933,554 |   | 3.42 | % |
| 2010                    |       | 15,356,847                  |       | 4.39 | % | 15,582,939 |   | 3.40 | % |
| Thereafter  (2014-2018) |       | 40,873,264                  |       | 3.38 | % | 4,410,032 |   | 4.36 | % |
| Total                   |       | $71,319,133                 |       |   |   | $57,926,525 |   |   |   |

 

All of the Bank’s advances with the FHLB have fixedrates and prepayment penalties.  However,certain borrowings contain a conversion option, at which on certain dates theFHLB may exercise an option to convert the borrowing to a variable rate equalto the FHLB one month short-term advance rate, adjustable monthly.  The Bank would then have the option to prepaythe advances without penalty.  The Bank mayrefinance the advance at each respective reset date if the FHLB first exercisesits option to convert the fixed-rate borrowing.

 

Additionally, the Bank also has a line of credit,renewable annually each September, with the FHLB under which there were $6.0million of outstanding borrowings as of December 31, 2008.  There was $11.1 million outstanding at December 31,2007.  Interest on any outstandingbalances on the line of credit accrues at the federal funds market rate plus0.15% (0.65% at December 31, 2008).

 

 

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Although no loans are specifically pledged, the FHLBrequires the Bank to maintain eligible collateral (qualifying loans andinvestment securities) that has a lending value at least equal to its requiredcollateral. At December 31, 2008 and 2007, the Bank’s total borrowingcapacity with the FHLB was approximately $126.1 million and$117.9 million, respectively.  Theavailable borrowing capacity with the FHLB of Topeka is collateral based, andthe Bank’s ` ability to borrow is subject to maintaining collateral that meetsthe eligibility requirements.  Theborrowing capacity is not committed and is subject to approval by the FHLB.

 

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

 

In 2003, the Company issued $8.2 million ofsubordinated debentures.  Thesedebentures, which are due in 2034 and are redeemable beginning in 2009, wereissued to a wholly owned grantor trust (“the Trust”) formed to issue preferredsecurities representing undivided beneficial interests in the assets of theTrust.  The Trust then invested the grossproceeds of such preferred securities in the debentures.  The Trust’s preferred securities and thesubordinated debentures require quarterly interest payments and have variablerates, adjustable quarterly.  Interestaccrues at LIBOR plus 2.85%.  Theinterest rates at December 31, 2008 and 2007 were 6.32% and 7.83%,respectively.

 

In 2005, the Company issued an additional $8.2 millionof subordinated debentures.  Thesedebentures, which are due in 2036 and are redeemable beginning in 2011, wereissued to a wholly owned grantor trust (“Trust II”) formed to issue preferredsecurities representing undivided beneficial interests in the assets of TrustII.  Trust II then invested the grossproceeds of such preferred securities in the debentures.  Trust II’s preferred securities and thesubordinated debentures require quarterly interest payments and have variablerates, adjustable quarterly.  Interestaccrues at LIBOR plus 1.34% on $5.2 million of the subordinated debentures,while the remaining $3.0 million of the subordinated debentures has a fixedrate of 6.17%.  The blended interest rateat December 31, 2008 and 2007 was 4.40% and 6.27%, respectively.

 

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

 

The Company has a $9.0 million line of credit from anunrelated financial institution maturing on November 19, 2009, with aninterest rate that adjusts daily based on the prime rate less 0.75%.  This line of credit has covenants specific tocapital and other ratios, which the Company was in compliance with at December 31,2008.  The outstanding balance of theline of credit at December 31, 2008 and 2007, was $4.8 million and $2.7million, respectively, and is included in other borrowings.  Additionally, the Bank had $5,765,591 and$4,880,554 in repurchase agreements outstanding and included in otherborrowings at December 31, 2008 and 2007.

 

At December 31, 2008, the Bank had no borrowingsthrough the Federal Reserve discount window, while our borrowing capacity was$15.7 million.  The Bank also has variousother federal funds agreements, both secured and unsecured, with correspondentbanks totaling approximately $58.7 million. As of December 31, 2008 there were no borrowings through thesecorrespondent bank federal funds agreements.

 

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

 

The Company adopted theprovisions of the FIN 48 on January 1, 2007.  FIN 48 provides a comprehensive model for thefinancial statement recognition, measurement, presentation and disclosure ofuncertain tax positions taken or expected to be taken in income taxreturns.  Unrecognized tax benefitsrepresent tax positions for which reserves have been established.  The Company’s adoption of FIN 48 did not havea significant effect on our consolidated financial statements.  We recognize interest and penalties relatedto unrecognized tax benefits as a component of income tax expense in ourconsolidated statements of earnings.

 

 

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A reconciliation of thebeginning and ending amount of unrecognized tax benefits is as follows:

 

| ** **                                          | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Unrecognized tax  benefits at beginning of year     |       | $                                 | 852,000    |   | $ | 970,000 |   |
| Gross increases  to current year tax positions      |       | 182,000                           |       | 291,000 |   |
| Gross decreases  to prior year’s tax positions |       | (14,000                           | )          | (21,000 | ) |
| Lapse of statute  of limitations                    |       | (210,000                          | )          | (388,000 | ) |
| Unrecognized tax  benefits at end of year           |       | $                                 | 810,000    |   | $ | 852,000 |   |

 

Tax years that remainopen and subject to audit include the years 2005 through 2008 for both federaland state.  We recognized $210,000 and$388,000 of previously unrecognized tax benefits during 2008 and 2007,respectively.  Our gross unrecognized taxbenefits balance of $810,000 and $852,000 at December 31, 2008 and 2007,respectively, would favorably impact our effective tax rate by $535,000 and$563,000, respectively, if recognized. As of December 31, 2008 and 2007 we have accrued interest andpenalties of $212,000 and $190,000, respectively.  We believe that it is reasonably possiblethat a reduction in gross unrecognized tax benefits of up to $162,000 is possibleduring the next 12 months.

 

Income tax expenseattributable to income from operations consisted of:

 

| ** **          | ** ** | **Years ended December 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:            |       |                              |       |   |   |   |   |
| Federal             |       | $                                 | 892,227    |   | $ | 1,084,999 |   | $ | 510,747 |   |
| State               |       | (52,141                           | )          | 103,676 |   | (63,714 | ) |
| Total current       |       | 840,086                           |       | 1,188,675 |   | 447,033 |   |
|                |       |                              |       |   |   |   |   |
| Deferred:           |       |                              |       |   |   |   |   |
| Federal             |       | 163,150                           |       | 109,810 |   | 1,446,828 |   |
| State               |       | 106,583                           |       | 4,598 |   | 185,594 |   |
| Total deferred      |       | 269,733                           |       | 114,408 |   | 1,632,422 |   |
|                |       |                              |       |   |   |   |   |
| Income tax  expense |       | $                                 | 1,109,819  |   | $ | 1,303,083 |   | $ | 2,079,455 |   |

 

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

 

| ** **                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income tax from  operations                                                                                                   |       | $                                 | 1,109,819  |   | $ | 1,303,083 |   | $ | 2,079,455 |   |
| Stockholders’  equity, recognition of tax benefit for stock options exercised                                            |       | (5,504                            | )          | (7,543 | ) | (6,999 | ) |
| Stockholders’  equity, recognition of unrealized (losses)/gains on available-for-sale  securities and interest rate swap |       | (33,888                           | )          | 425,954 |   | 436,048 |   |
|                                                                                                                          |       | $                                 | 1,070,427  |   | $ | 1,721,494 |   | $ | 2,508,504 |   |

 

 

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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,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Computed  “expected” tax expense            |       | $                                 | 1,925,489  |   | $ | 2,279,750 |   | $ | 2,750,293 |   |
| Increase  (reduction) in income taxes resulting from: |       |                              |       |   |   |   |   |
| Tax-exempt  interest income, net                      |       | (783,637                          | )          | (717,012 | ) | (479,686 | ) |
| Bank owned life  insurance                            |       | (140,002                          | )          | (159,802 | ) | (139,138 | ) |
| State income  taxes, net of federal benefit           |       | 35,928                            |       | 71,220 |   | 78,831 |   |
| Investment tax  credits, net of costs                 |       | 20,149                            |       | (149,550 | ) | (130,000 | ) |
| Other, net                                            |       | 51,893                            |       | (21,523 | ) | (845 | ) |
|                                                  |       | $                                 | 1,109,819  |   | $ | 1,303,083 |   | $ | 2,079,455 |   |

 

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:

 

| ** **                                                                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Deferred tax  assets:                                                               |       |                        |       |   |   |
| Loans, including  allowance for loan losses                                         |       | $                           | 1,202,817  |   | $ | 1,105,739 |   |
| Federal  alternative minimum tax credit and low income housing credit carryforwards |       | 1,064,212                   |       | 699,759 |   |
| Net operating  loss carry forwards                                                  |       | 701,353                     |       | 862,154 |   |
| Deferred  compensation arrangements                                                 |       | 261,902                     |       | 306,879 |   |
| State taxes                                                                         |       | 199,547                     |       | 248,034 |   |
| FHLB advances                                                                       |       | 151,595                     |       | 515,607 |   |
| Investment  impairments                                                             |       | 22,398                      |       | — |   |
| Accrued expenses                                                                    |       | 1,657                       |       | 8,284 |   |
| Other, net                                                                          |       | —                      |       | 11,172 |   |
| Total deferred  tax assets                                                          |       | 3,605,481                   |       | 3,757,628 |   |
| Less valuation  allowance                                                           |       | 328,306                     |       | 263,403 |   |
| Net deferred tax  assets                                                            |       | 3,277,175                   |       | 3,494,225 |   |
|                                                                                |       |                        |       |   |   |
| Deferred tax  liabilities:                                                          |       |                        |       |   |   |
| Premises and  equipment, net of depreciation                                        |       | 969,602                     |       | 888,255 |   |
| FHLB stock  dividends                                                               |       | 974,116                     |       | 904,926 |   |
| Intangible  assets                                                                  |       | 454,525                     |       | 617,511 |   |
| Unrealized gain  on investment securities available-for-sale                        |       | 383,203                     |       | 417,091 |   |
| Investments                                                                         |       | 9,101                       |       | 13,205 |   |
| Other, net                                                                          |       | 69,236                      |       | — |   |
| Total deferred  tax liabilities                                                     |       | 2,859,783                   |       | 2,840,988 |   |
| Net deferred tax  asset                                                             |       | $                           | 417,392    |   | $ | 653,237 |   |

 

The Company has deferred taxes for temporarydifferences related to fair value adjustments on loans, investment securities,and FHLB advances related to previous acquisitions.  In addition, the Company has also recorded adeferred tax asset for future benefits of net operating losses and alternativeminimum tax credit carry forwards.  Thenet operating loss carry forwards will expire, if not utilized.  The Company has $1.0 million of federal netoperating loss carry forwards as of December 31, 2008, which expire in2026 and $1.6 

 

 

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million of Kansas privilege tax net operating losscarry forwards as of December 31, 2008, which expire between 2012 and2015.  The Company also has Kansascorporate net operating loss carry forwards totaling $6.7 million as of December 31,2008, which expire between 2009 and 2018. The alternative minimum tax credit carry forward does not expire andtotaled $810,000 as of December 31, 2008. In addition, the Company has low income housing credit carryforwards of$254,000 which expire in varying amounts between 2026 and 2028.  The Company has recorded a valuationallowance to reduce certain Kansas corporate net operating loss carry forwardswhich expire at various times through 2018. The increase in the valuation allowance is related to additional netoperating loss carry forwards generated during 2008.  At December 31, 2008 and 2007, theCompany believes it is more likely than not that these items will not berealized.  A valuation allowance relatedto the remaining deferred tax assets has not been provided because managementbelieves it is more likely than not that the results of future operations willgenerate sufficient taxable income to realize the deferred tax assets.

 

Retained earnings at December 31, 2008 and 2007,includes approximately $6.3 million for which no provision for federal incometax had been made.  This amountrepresents allocations of income to bad debt deductions in years prior to 1988for tax purposes only.  Reduction of amountsallocated for purposes other than tax bad debt losses will create income fortax purposes only, which will be subject to the then current corporate incometax rate.

 

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

 

***Employee Retirement Plan***

 

Substantially all employees are covered under a 401(k) definedcontribution savings plan. Contributions were $290,000, $269,000 and $253,000for the years ended December 31, 2008, 2007 and 2006, respectively.

 

***Deferred Compensation andRetirement Agreements***

 

The Company adopted the Emerging Issues Task Force (“EITF”)Issue 06-4, “*Accounting for Deferred Compensation andpostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*”, on January 1, 2008.  The EITF Issue 06-4 addresses accounting forseparate agreements that split life insurance policy benefits between anemployer and employee, and requires the employer to recognize a liability forfuture benefits payable to an employee under these agreements.  The effect of adoption must be recognizedthrough either a change in accounting principle through an adjustment to equityor through the retrospective application to all prior periods.  Upon adoption, the Company recognized aliability of $335,000, with an offsetting reduction to retained earnings,attributable to the future benefits payable to a former employee pursuant to asplit-dollar life insurance arrangement. At December 31, 2008 the liability was $328,000.  At December 31, 2008 the Company had anasset of $2.0 million recorded representing the net cash surrender value forthe corresponding life insurance arrangement.

 

The Company entered into deferred compensation andother retirement agreements with certain key employees that provides for cashpayments to be made after their retirement. The obligations under these arrangements have been recorded at thepresent value of the accrued benefits. The Company has also entered into agreements with certain directors todefer portions of their compensation. The balance of estimated accrued benefits under all of thesearrangements, including the split-dollar life insurance arrangement, was $1.1million and $940,000 at December 31, 2008 and 2007, respectively, and wasincluded as a component of other liabilities in the accompanying consolidatedbalance sheets.  To assist in fundingbenefits under each of these plans, the Bank has purchased certain assetsincluding life insurance policies on covered employees in which the Bank is thebeneficiary.  At December 31, 2008and 2007, the cash surrender values on these policies established to meet suchobligations were $3.4 million and $3.5 million, respectively.

 

In addition to these policies the Bank purchased $7.5million of bank owned life insurance policies during 2006, which had a cashsurrender value of $8.6 million and $8.1 million at December 31, 2008 and2007, respectively.  These policies arenot related to deferred compensation split-dollar arrangements or otherretirement agreements.

 

 

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**(11)**              StockOption Plan

** **

The Company has a stock based employee compensation plan which allowsfor the issuance of stock options, the purpose of which is to provideadditional incentive to certain officers, directors, and key employees byfacilitating their purchase of a stock interest in the Company.  The plan is administered by the compensationcommittee of the board of directors who selects employees to whom options aregranted and the number of shares granted. The option price may not be less than 100% of the fair market value ofthe shares on the date of the grant, and no option shall be exercisable afterthe expiration of ten years from the grant date.  The Company intends to utilize authorized,but un-issued shares to satisfy option exercises.  The number of shares available for futuregrants under the plan was 61,433 at December 31, 2008.  Compensation expense is recognized over theoption vesting period, which is typically pro-rata over four or fiveyears.  The stock-based compensation costrelated to these awards was $134,000, $118,000 and $114,000 for the years endedDecember 31, 2008, 2007, and 2006, respectively.  The Company recognized tax benefits of $28,000,$31,000 and $24,000 for the years ended December 31, 2008, 2007 and 2006,respectively.

 

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

 

Thefair value of options granted were estimated utilizing the following weightedaverage assumptions:

 

| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Dividend rate                        |       | 5.3                               | %          | n/a |   | 5.0 | % |
| Volatility                           |       | 18.5                              | %          | n/a |   | 19.1 | % |
| Risk-free  interest rate             |       | 2.9                               | %          | n/a |   | 4.9 | % |
| Expected lives                       |       | 5 years                           |       | n/a |   | 5 years |   |
| Fair value per  option at grant date |       | $                                 | 2.10       |   | n/a |   | $ | 3.55 |   |
|                                      |            |                                   |            |  |  |  |  |  |  |

 

A summary of optionactivity during 2008 is presented below:

 
| ** **                                             | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1,  2008                   |       | 239,121    |       | $                                      | 22.99      |                                                | 6.8 years  |                            | $          | 611,000 |   |
| Granted                                                |       | 128,600    |       | $                                      | 21.88      |                                                | —     |                            | n/a        |   |
| Effect of 5%  stock dividend                           |       | 18,692     |       | —                                 |       | —                                              |       | n/a                             |       |
| Forfeited/expired                                      |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Exercised                                              |       | (2,287     | )          | $                                      | 16.17      |                                                | —     |                            | n/a        |   |
| Outstanding at  December 31, 2008                 |       | 394,193    |       | $                                      | 21.97      |                                                | 7.0 years  |                            | $          | 235,000 |   |
| Exercisable at  December 31, 2008                 |       | 197,546    |       | $                                      | 21.56      |                                                | 5.4 years  |                            | $          | 234,000 |   |
| Vested and  expected to vest at December 31, 2008 |       | 376,876    |       | $                                      | 21.93      |                                                | 7.0 years  |                            | $          | 235,000 |   |

 

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Additional information about stock options exercised is presentedbelow:

 

| ** **                                               | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Intrinsic value  of options exercised (on exercise date) |       | $                                 | 16,188     |   | $ | 22,185 |   | $ | 23,584 |   |
| Cash received  from options exercised                    |       | $                                 | 36,981     |   | $ | 41,118 |   | $ | 26,891 |   |
| Excess tax  benefit realized from options exercised      |       | $                                 | 5,504      |   | $ | 7,543 |   | $ | 6,999 |   |

 

As of December 31, 2008, there was $352,000 of total unrecognizedcompensation cost related to outstanding unvested options.  That unrecognized compensation cost isexpected to be recognized over a weighted-average period of approximately 2years.  The total fair value (at vestdate) of shares vested during the years ended December 31, 2008, 2007 and2006 was $66,000, $295,000 and $111,000, respectively.

 

**(12)**              FairValue Measurements

** **

On January 1, 2008,the Company adopted the provisions of SFAS No. 157, which defines fairvalue, establishes a framework for measuring fair value and expands thedisclosures about fair value measurements. SFAS No. 157 requires the use of a hierarchy of fair valuetechniques based upon whether the inputs to those fair values reflectassumptions other market participants would use based upon market data obtainedfrom independent sources or reflect the Company’s own assumptions of marketparticipant valuation.  In accordancewith SFAS No. 157, the fair value hierarchy is as follows:

 

· Level 1: Unadjusted quoted prices in active markets that are accessible at themeasurement date for identical, unrestricted assets or liabilities.

 

· Level 2: Quoted prices for similar assets in active markets, quoted prices inmarkets that are not active or quoted prices that contain observable inputs suchas yield curves, volatilities, prepayment speeds and other inputs derived frommarket data.

 

· Level 3: Quoted prices or valuation techniques that require inputs that are bothsignificant to the fair value measurement and unobservable.

 

The Company’s fair valuedisclosures exclude certain nonfinancial assets and liabilities which aredeferred under the provisions of FASB Staff Position 157-2, *“Effective Date of FASB Statement No. 157.*”  These include foreclosed real estate,long-lived assets, goodwill, and core deposit premium, which are recorded atfair value only upon impairment. The FASB’s deferral is intended to allowadditional time to consider the effect of various implementation issuesrelating to these non-financial instruments, and defers disclosures under SFAS No. 157until January 1, 2009.

 

**Valuation methods for instruments measured at fairvalue on a recurring basis**

 

The Company’s investment securities classified asavailable-for-sale includes agency securities, municipal obligations, mortgage-backedsecurities, corporate bonds, certificates of deposits and common stock.  Quoted exchange prices are available for thecommon stock investments, which are classified as Level 1.  Agency securities and mortgage-backedobligations are priced utilizing industry-standard models that consider variousassumptions, including time value, yield curves, volatility factors, prepaymentspeeds, default rates, loss severity, current market and contractual prices forthe underlying financial instruments, as well as other relevant economicmeasures.  Substantially all of theseassumptions are observable in the marketplace, can be derived from observabledata, or are supported by observable levels at which transactions are executedin the marketplace and are classified as Level 2.  Municipal and corporate securities are valuedusing a type of matrix, or grid, pricing in which securities are benchmarkedagainst the treasury rate based on credit rating.  These model and matrix measurements areclassified as Level 2 in the fair value hierarchy.  The Company’s investments in fixed ratecertificates of deposits are valued using a net present value model thatdiscounts the future cash flows at the current market rates and are classifiedas Level 2.

 

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The following table represents the Company’sinvestment securities that are measured at fair value on a recurring basis at December 31,2008 allocated to the appropriate fair value hierarchy:

 

| ** **                     | ** ** | ** ** | ** **  | **Fair value hierarchy** | ** ** |
|--------------------------------|------------|------------|-------------|--------------------------|------------|
| **Assets (in thousands):**     | ** ** | **Total**  | ** **  | **Level 1**              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Available-for-sale  securities |       | $          | 162,244,822 |                     | $          | 1,014,240 |   | $ | 160,490,333 |   | $ | 740,249 |   |
|                                |            |            |             |                          |            |  |  |  |  |  |  |  |  |

 

At December 31, 2008, the Company changed itsvaluation technique to Level 3 for the corporate bond portfolio.  The corporate bond portfolio consists ofthree investments in pooled trust preferred securities.  Previously the fair value on these securitieswas classified as Level 2 and based on observable market data provided by thirdparty pricing vendors.  At December 31,2008, the Company determined that the observable market data associated withthese assets were not orderly transactions and reflected forced liquidations ordistressed sales.  Based on the lack ofobservable market data, the Company obtained any observable market data thatwas available on these trust preferred securities and estimated fair valuebased on the observable data and reasonable unobservable market data.  The Company estimated fair value based on adiscounted cash flow model which used appropriately adjusted discount ratesreflecting credit and liquidity risks. The change in the valuation technique for these trust preferredsecurities resulted in an initial transfer of $1,713,116 into Level 3financial assets.  There were no gains orlosses for the year included in earnings attributable to the change inunrealized gains or losses relating to assets and liabilities usingLevel 3 still held at December 31, 2008.

 

| ** **                              | ** ** | **Available-for  sale-securities** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| Balance at  January 1, 2008        |       | $                                  | —     |   |
| Transfers into  Level 3                 |       | 1,713,116                          |       |
| Total gains  (losses)                   |       |                               |       |
| Included in  earnings                   |       | —                             |       |
| Included in  other comprehensive income |       | (972,867                           | )          |
| Balance at  December 31, 2008      |       | $                                  | 740,249    |   |

 

Changes in the fair value of available-for-salesecurities are included in other comprehensive income to the extent the changesare not considered other than temporary impairments.  Other than temporary impairment tests areperformed on a quarterly basis and any decline in the fair value of anindividual security below their cost that is deemed to be other than temporaryresults in a write-down to the estimated fair value.  These write-downs are included as a componentof earnings as realized losses.  During2008 the Company recorded a $66,000 impairment charge on two equityinvestments, which is included in other non-interest expense.

 

The Company’s derivative financial instruments consistsolely of interest rate lock commitments and corresponding forward salescontracts on certain mortgage loans.  Thefair values of these derivatives are based on quoted prices for similar loansin the secondary market.  The marketprices are adjusted by a factor, based on the Company’s historical data and itsjudgment about future economic trends, which considers the likelihood that acommitment will ultimately result in a closed loan.  These instruments, which were not significantat December 31, 2008 and not included in the table above, are classifiedas Level 3 based on the unobservable nature of these assumptions.

 

**Valuation methods for instruments measured at fairvalue on a nonrecurring basis**

 

The Company’s other investment securities includeinvestments in FHLB and FRB stock, which are held for regulatory purposes.  These investments generally have restrictionson the sale and/or liquidation of stock and the carrying value is approximatelyequal to fair value.  Fair valuemeasurements for these securities are classified as Level 3 based on theundeliverable nature and related credit risk.

 

The Company does not value its loan portfolio at fairvalue, however adjustments are recorded on certain loans to reflect theimpaired value on the underlying collateral. Collateral values are reviewed on a loan-by-

 

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loan basis through independent appraisals.  Appraised values may be discounted based onmanagement’s historical knowledge, changes in market conditions and/ormanagement’s expertise and knowledge of the client and the client’sbusiness.  Because many of these inputsare unobservable the valuations are classified as Level 3.  The carrying value of the Company’s impairedloans was $7.1 million, with an allocated allowance of $705,000, at December 31,2008.

 

Mortgage loans originated and intended for sale in thesecondary market are carried at the lower of cost or estimated fair value,determined on an aggregate basis.  Themortgage loan valuations are based on quoted secondary market prices forsimilar loans and are classified as Level 2.

 

The Company measures its mortgage servicing rights atthe lower of cost or fair value, and amortizes them over the period equal toestimated net servicing income.  Periodicimpairment assessments are performed based on fair value estimates at thereporting date.  The fair value ofmortgage servicing rights are estimated based on a valuation model whichcalculates the present value of estimated future cash flows associated withservicing the underlying loans.  Themodel incorporates assumptions that market participants use in estimatingfuture net servicing income, including estimated prepayment speeds, market discountrates, cost to service, and other servicing income, including late fees.  The fair value measurements are classified asLevel 3.

 
| ** **                   | ** ** | ** ** | ** ** | **Fair value hierarchy** | ** ** | **Total gains /** | ** ** |
|------------------------------|------------|------------|------------|--------------------------|------------|-------------------|------------|
| **Assets (in thousands):**   | ** ** | **Total**  | ** ** | **Level 1**              | ** ** | **Level 2**       | ** ** | **Level 3** | ** ** | **(losses)** | ** ** |
| Cash and cash  equivalents   |       | $          | 13,787,640 |                     | $          | 13,787,640        |       | — |   | — |   | $ | — |   |
| Other investment  securities |       | 9,051,900  |       | —                   |       | —            |       | $ | 9,051,900 |   | — |   |
| Impaired loans               |       | 6,353,849  |       | —                   |       | —            |       | 6,353,849 |   | — |   |
| Loans held for  sale         |       | 1,749,354  |       | —                   |       | 1,749,354         |       | — |   | — |   |
| Mortgage  servicing rights   |       | $          | 1,007,594  |                     | —     |              | —     |   | $ | 1,007,594 |   | — |   |
|                              |            |            |            |                          |            |                   |            |  |  |  |  |  |  |  |  |

 

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

** **

Fair value estimates ofthe Company’s financial instruments as of December 31, 2008 and 2007,including methods and assumptions utilized, are set forth below:

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| ** **                                                 | ** ** | **(Dollars in thousands)**  | ** ** |
| ** **                                                 | ** ** | **Carrying  amount**        | ** ** | **Estimated  fair value** | ** ** | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
| Cash and cash  equivalents                                 |       | $                           | 13,788     |   | $ | 13,788 |   | $ | 14,739 |   | $ | 14,739 |   |
| Investment  securities                                     |       | 171,297                     |       | 171,297 |   | 164,724 |   | 164,724 |   |
| Loans, net of  unearned fees and allowance for loan losses |       | 365,772                     |       | 368,558 |   | 376,157 |   | 377,189 |   |
| Loans held for  sale                                       |       | 1,488                       |       | 1,749 |   | 1,724 |   | 1,764 |   |
| Mortgage  servicing rights                                 |       | 170                         |       | 1,008 |   | 210 |   | 1,035 |   |
| Non-interest  bearing demand deposits                      |       | 49,823                      |       | 49,823 |   | 51,008 |   | 51,008 |   |
| Money market and  NOW deposits                             |       | 150,116                     |       | 150,116 |   | 139,557 |   | 139,557 |   |
| Savings deposits                                           |       | 26,203                      |       | 26,203 |   | 25,883 |   | 25,883 |   |
| Time deposits                                              |       | 213,403                     |       | 214,859 |   | 236,204 |   | 237,176 |   |
| Total deposits                                             |       | 439,546                     |       | 441,001 |   | 452,652 |   | 453,624 |   |
| FHLB borrowings                                            |       | 77,319                      |       | 81,986 |   | 69,027 |   | 70,653 |   |
| Other borrowings                                           |       | $                           | 27,047     |   | $ | 23,298 |   | $ | 24,062 |   | $ | 25,034 |   |

*** ***

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***Methods andAssumptions Utilized***

*** ***

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

 

A detailed description of the estimated fair value ofinvestment securities, mortgage serving rights and loans held-for-sale isavailable in Note 12.

 

The estimated fair value of the Company’s loanportfolio is based on the segregation of loans by collateral type, interestterms, and maturities.  In estimating thefair value of each category of loans, the carrying amount of the loan isreduced by an allocation of the allowance for loan losses.  Such allocation is based on management’s loanclassification system, which is designed to measure the credit risk inherent ineach classification category.  Theestimated fair value of performing variable rate loans is the carrying value ofsuch loans, reduced by an allocation of the allowance for loan losses.  The estimated fair value of performing fixedrate loans is calculated by discounting scheduled cash flows through theestimated maturity using estimated market discount rates that reflect theinterest rate risk inherent in the loan, reduced by an allocation of theallowance for loan losses.  The estimateof maturity is based on the Company’s historical experience with repayments foreach loan classification, modified, as required, by an estimate of the effectof current economic and lending conditions. The fair value for nonperforming loans is the estimated fair value ofthe underlying collateral based on recent external appraisals or otheravailable information, which generally approximates carrying value, reduced byan allocation of the allowance for loan losses.

 

 The estimatedfair value of deposits with no stated maturity, such as non-interest bearingdemand deposits, savings, money market accounts, and NOW accounts, is equal tothe amount payable on demand.  The fairvalue of interest-bearing time deposits is based on the discounted value ofcontractual cash flows of such deposits. The discount rate is estimated using the rates currently offered fordeposits of similar remaining maturities.

 

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

 

***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 note17 on “Commitments, Contingencies and Guarantees.”

 

***Limitations***

*** ***

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

 

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**(14)**              RegulatoryCapital Requirements

** **

Current regulatorycapital regulations require financial institutions (including banks and bankholding companies) to meet certain regulatory capital requirements. Institutionsare required to have minimum leverage capital equal to 4% of total averageassets and total qualifying capital equal to 8% of total risk-weighted assetsin order to be considered “adequately capitalized.”  As of December 31, 2008 and 2007, theCompany and the Bank were rated “well capitalized,” which is the highest ratingavailable under this capital-based rating system. Management believes that asof December 31, 2008, the Company and the Bank meet all capital adequacyrequirements to which they are subject. The following is a comparison of the Company’s regulatory capital tominimum capital requirements at December 31, 2008 and 2007,(dollars in thousands):

 

| ** **                    | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  Capitalized** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of  December 31, 2008 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                      |       | $          | 52,450     |                               | 9.0        | %                            | $          | 23,427 |   | 4.0 | % | $ | 29,283 |   | 5.0 | % |
| Tier 1 Capital                |       | $          | 52,450     |                               | 13.0       | %                            | $          | 16,176 |   | 4.0 | % | $ | 24,264 |   | 6.0 | % |
| Total Risk Based  Capital     |       | $          | 56,321     |                               | 13.9       | %                            | $          | 32,352 |   | 8.0 | % | $ | 40,440 |   | 10.0 | % |
|                          |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| As of  December 31, 2007 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                      |       | $          | 51,766     |                               | 8.9        | %                            | $          | 23,318 |   | 4.0 | % | $ | 29,147 |   | 5.0 | % |
| Tier 1 Capital                |       | $          | 51,766     |                               | 12.4       | %                            | $          | 16,660 |   | 4.0 | % | $ | 24,990 |   | 6.0 | % |
| Total Risk Based  Capital     |       | $          | 55,938     |                               | 13.4       | %                            | $          | 33,320 |   | 8.0 | % | $ | 41,650 |   | 10.0 | % |

 

The following is acomparison of the Bank’s regulatory capital to minimum capital requirements at December 31,2008 and 2007 (dollars in thousands):

 

| ** **                    | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  Capitalized** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As of  December 31, 2008 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                      |       | $          | 55,867     |                               | 9.6        | %                            | $          | 23,351 |   | 4.0 | % | $ | 29,189 |   | 5.0 | % |
| Tier 1 Capital                |       | $          | 55,867     |                               | 13.8       | %                            | $          | 16,141 |   | 4.0 | % | $ | 24,212 |   | 6.0 | % |
| Total Risk Based  Capital     |       | $          | 59,738     |                               | 14.8       | %                            | $          | 32,282 |   | 8.0 | % | $ | 40,353 |   | 10.0 | % |
|                          |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| As of  December 31, 2007 |       |       |       |                               |       |                         |       |   |   |   |   |   |   |
| Leverage                      |       | $          | 52,737     |                               | 9.1        | %                            | $          | 23,233 |   | 4.0 | % | $ | 29,041 |   | 5.0 | % |
| Tier 1 Capital                |       | $          | 52,737     |                               | 12.7       | %                            | $          | 16,625 |   | 4.0 | % | $ | 24,937 |   | 6.0 | % |
| Total Risk Based  Capital     |       | $          | 56,909     |                               | 13.7       | %                            | $          | 33,250 |   | 8.0 | % | $ | 41,862 |   | 10.0 | % |

 

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

** **

The following is condensed financial information ofthe parent company as of December 31, 2008 and 2007, and for years ended December 31,2008, 2007 and 2006 (in thousands):

 

***Condensed Balance Sheets***

 

| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Assets                                           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Cash                                             |       | $                           | 10         |   | $ | 20 |   |
| Investment  securities                           |       | 1,448                       |       | 1,470 |   |
| Investment in  Bank                              |       | 70,587                      |       | 69,034 |   |
| Other                                            |       | 1,086                       |       | 1,412 |   |
| Total assets                                     |       | 73,131                      |       | 71,936 |   |
| Liabilities and  stockholders’ equity       |       |                        |       |   |   |
| Borrowed funds                                   |       | 21,281                      |       | 19,181 |   |
| Other                                            |       | 444                         |       | 459 |   |
| Stockholders’  equity                       |       | 51,406                      |       | 52,296 |   |
| Total  liabilities and stockholders’ equity |       | $                           | 73,131     |   | $ | 71,936 |   |

*** ***

***Condensed Statements of Earnings***

 
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Dividends from  Bank                                      |       | $                                 | 4,121      |   | $ | 6,507 |   | $ | 6,258 |   |
| Interest income                                           |       | 77                                |       | 73 |   | 66 |   |
| Other income                                              |       | 7                                 |       | 7 |   | 255 |   |
| Interest expense                                          |       | (1,191                            | )          | (1,575 | ) | (1,654 | ) |
| Other expense,  net                                       |       | (271                              | )          | (176 | ) | (188 | ) |
| Earnings before  equity in undistributed earnings of Bank |       | 2,743                             |       | 4,836 |   | 4,737 |   |
| (Decrease)/increase  in undistributed equity of Bank      |       | 1,806                             |       | (18 | ) | 741 |   |
| Earnings before  income taxes                             |       | 4,549                             |       | 4,818 |   | 5,478 |   |
| Income tax  benefit                                       |       | (4                                | )          | (584 | ) | (532 | ) |
| Net earnings                                              |       | $                                 | 4,553      |   | $ | 5,402 |   | $ | 6,010 |   |

*** ***

 

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*** ***

***Condensed Statements ofCash Flows***

 
| ** **                                                   | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                       |       |                              |       |   |   |   |   |
| Net earnings                                                 |       | $                                 | 4,553      |   | $ | 5,402 |   | $ | 6,010 |   |
| Decrease/(increase)  in undistributed equity of Bank         |       | (1,806                            | )          | 18 |   | (741 | ) |
| Loss on  impairment of investment securities                 |       | 66                                |       | — |   | — |   |
| Other                                                        |       | 310                               |       | 208 |   | (59 | ) |
| Net cash  provided by operating activities                   |       | 3,123                             |       | 5,628 |   | 5,210 |   |
|                                                         |       |                              |       |   |   |   |   |
| Cash flows from  investing activities:                       |       |                              |       |   |   |   |   |
| Purchase of  investment securities                           |       | (40                               | )          | (455 | ) | (3 | ) |
| Proceeds from  sales and maturities of investment securities |       | 1                                 |       | — |   | 165 |   |
| Cash paid in acquisitions                                    |       | —                            |       | — |   | (13,080 | ) |
| Net cash used in  investing activities                       |       | (39                               | )          | (455 | ) | (12,918 | ) |
|                                                         |       |                              |       |   |   |   |   |
| Cash flows from  financing activities:                       |       |                              |       |   |   |   |   |
| Issuance of  shares under stock option plan                  |       | 37                                |       | 41 |   | 27 |   |
| Proceeds from  other borrowings                              |       | 6,030                             |       | 4,310 |   | 9,772 |   |
| Repayments on  other borrowings                              |       | (3,930                            | )          | (6,355 | ) | (8,342 | ) |
| Purchase of  treasury stock                                  |       | (3,477                            | )          | (1,436 | ) | (138 | ) |
| Payment of  dividends                                        |       | (1,754                            | )          | (1,768 | ) | (1,567 | ) |
| Net cash used in  financing activities                       |       | (3,094                            | )          | (5,208 | ) | (248 | ) |
| Net decrease in  cash                                        |       | (10                               | )          | (35 | ) | (7,956 | ) |
| Cash at  beginning of year                                   |       | 20                                |       | 55 |   | 8,011 |   |
| Cash at end of  year                                         |       | $                                 | 10         |   | $ | 20 |   | $ | 55 |   |

 

Dividends paid by the Company are provided throughdividends from the Bank. At December 31, 2008, the Bank could distributedividends of up to $2.5 million without regulatory approvals.

 

**(16)**              Stockholders’ Rights Plan

** **

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

 

 

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

** **

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

 

The Company guarantees payments to holders of certaintrust preferred securities issued by wholly owned grantor trusts.  The securities are due in 2034 and 2036 andare redeemable beginning in 2009 and 2011. The maximum potential futurepayments guaranteed by the Company, which includes future interest andprincipal payments through maturity, was approximately $39.7 million at December 31,2008.  At December 31, 2008, theCompany had a recorded liability of $16.6 million of principal and accruedinterest to date, representing amounts owed to the Trust.

 

There are no pending legal proceedings to which theCompany or the Bank is a party other than ordinary routine litigationincidental to the Company’s business. While the ultimate outcome of current legal proceedings cannot bepredicted with certainty, it is the opinion of management that the resolutionof these legal actions should not have a material effect on the Company’sconsolidated financial position or results of operations.

 

 

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**ITEM 9.****                ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

**ITEM 9A.****             ****CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

An evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as of December 31,2008. Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective.

 

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

 

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

 

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

 

Management has made acomprehensive review, evaluation, and assessment of the Company’s internalcontrol over financial reporting as of December 31, 2008.  In making its assessment of the effectivenessof the Company’s internal control over financial reporting, management used theframework issued by the Committee of Sponsoring Organizations of the TreadwayCommission in *Internal Control-Integrated Framework*.  Based on that assessment, managementconcluded that, as of December 31, 2008, the Company’s internal controlover financial reporting was effective.

 

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

 

There were no changes inthe Company’s internal control over financial reporting during the quarterended December 31, 2008 that materially affected or were likely tomaterially affect the Company’s internal control over financial reporting.

 

##### **ITEM 9B.**              OTHER INFORMATION

##### ** **

None

 

 

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**PART III.**

 

**ITEM 10.****             ****DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

**Directors**

 

The Company incorporates by reference the information called for byItem 10 of this Form 10-K regarding directors of the Company from thesections entitled “Election of Directors” and “Corporate Governance and theBoard of Directors” of the Company’s Proxy Statement for the annual meeting ofstockholders to be held May 20, 2009 (the “2009 Proxy Statement”).

 

Section 16(a) ofthe Exchange Act requires that the Company’s executive officers, directors andpersons who own more than 10% of their Company’s common stock file reports ofownership and changes in ownership with the SEC and with the exchange on whichthe Company’s shares of common stock are traded.  Such persons are also required to furnish theCompany with copies of all Section 16(a) forms they file.  Based solely on the Company’s review of thecopies of such forms, the Company is not aware that any of its directors,executive officers or 10% stockholders failed to file on a timely basis reportsrequired by Section 16(a) of the Exchange Act during 2008.

 

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

 
| **Name**             | ** ** | **Age** | ** ** | **Positions with the Company**                                     |
|----------------------|------------|---------|------------|--------------------------------------------------------------------|
|                 |       |    |       |                                                               |
| Patrick L. Alexander |       | 56      |       | President and Chief  Executive Officer                             |
|                 |       |    |       |                                                               |
| Mark A. Herpich      |       | 41      |       | Vice President,  Secretary, Chief Financial Officer

and Treasurer |

 

The executive officers ofthe Bank are identified below:

 
| **Name**             | ** ** | **Age** | ** ** | **Positions with the Bank**                           |
|----------------------|------------|---------|------------|-------------------------------------------------------|
|                 |       |    |       |                                                  |
| Patrick L. Alexander |       | 56      |       | President and Chief  Executive Officer                |
|                 |       |    |       |                                                  |
| Mark A. Herpich      |       | 41      |       | Executive Vice  President and Chief Financial Officer |
|                 |       |    |       |                                                  |
| Michael E. Scheopner |       | 47      |       | Executive Vice  President, Credit Risk Manager        |
|                 |       |    |       |                                                  |
| Dean R. Thibault     |       | 57      |       | Executive Vice  President, Commercial Banking         |
|                 |       |    |       |                                                  |
| Larry R. Heyka       |       | 62      |       | Market President,  Manhattan Region                   |
|                 |       |    |       |                                                  |
| Mark J. Oliphant     |       | 56      |       | Market President,  Southwest Kansas Region            |
|                 |       |    |       |                                                  |
| Bradly L. Chindamo   |       | 40      |       | Market President,  Eastern Kansas Region              |

 

**ITEM 11.**              EXECUTIVE COMPENSATION

** **

The Company incorporatesby reference the information called for by Item 11 of this Form 10-K fromthe sections entitled “Corporate Governance and the Board of Directors,” and “ExecutiveCompensation” of the 2009 Proxy Statement.

 

 

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

** **

The Company incorporatesby reference the information called for by Item 12 of this Form 10-K fromthe section entitled “Security Ownership of Certain Beneficial Owners” of the2009 Proxy Statement.

 

**Equity Compensation PlanInformation**

 

The table below setsforth the following information as of December 31, 2008 for (i) allcompensation plans previously approved by the Company’s stockholders and (ii) allcompensation plans not previously approved by the Company’s stockholders:

 

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

 

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

 

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

 

**EQUITY COMPENSATION PLANINFORMATION**

 
| **Plan category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options (1)** | ** ** | **Weighted-average exercise  price of outstanding options** | ** ** | **Number of securities  remaining available for  future issuance (1)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 394,193                                                                          |       | $                                                           | 21.97      |                                                                   | 61,433     |   |
| Equity  compensation plans not approved by security holders |       | - 0 -                                                                            |       | - 0 -                                                       |       | - 0 -                                                                  |       |
| Total                                                       |       | 394,193                                                                          |       | $                                                           | 21.97      |                                                                   | 61,433     |   |

----

(1) Includes optionsassumed by the Company in 2001 in connection with the mergers of LandmarkBancshares, Inc. and MNB Bancshares, Inc. with the Company.  At the time of the mergers, there wereoptions issued under the previous companies’ plans, each of which was approvedby stockholders of the respective company at the time of their adoption.  All of the options granted under these plansfully vested at the time of the merger and no additional options were availablefor grant after the merger.  As of December 31,2008, there were options outstanding for an aggregate of 23,076 shares of theCompany’s common stock under the prior plans with a weighted average exerciseprice of $11.10.

 

**ITEM 13.               CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS AND DIRECTOR****INDEPENDENCE**

 

The Company incorporatesby reference the information called for by Item 13 of this Form 10-K fromthe sections entitled “Transactions with Directors, Officers and Associates”and “Corporate Governance and Board of Directors” of the 2009 Proxy Statement.

 

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**ITEM 14.**               **PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The Company incorporatesby reference the information called for by Item 14 of this Form 10-K fromthe section entitled “Independent Registered Public Accounting Firm” of the2009 Proxy Statement.

 

**PART IV**

 

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

 

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

 

LANDMARK BANCORP,INC. AND SUBSIDIARIES

LIST OF FINANCIALSTATEMENTS

 

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

 

Report of IndependentRegistered Public Accounting Firm

 

Consolidated BalanceSheets — December 31, 2008 and 2007

 

Consolidated Statementsof Earnings — Years ended December 31, 2008, 2007 and 2006

 

Consolidated Statementsof Stockholders’ Equity and Comprehensive Income — Years ended December 31,2008, 2007 and 2006

 

Consolidated Statementsof Cash Flows — Years ended December 31, 2008, 2007 and 2006

 

Notes to ConsolidatedFinancial Statements

 

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

 

Item 15(a)3.            Exhibits

 

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

 

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

 

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**SIGNATURES**

 

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

 

**LANDMARKBANCORP, INC.**

(Registrant)

 

| By:    | /s/ Patrick L.  Alexander              |   | By:    | /s/ Mark A. Herpich                         |
|--------|----------------------------------------|--------|--------|---------------------------------------------|
|   | Patrick L. Alexander                   |   |   | Mark A. Herpich                             |
|   | President and Chief  Executive Officer |   |   | Principal Financial and  Accounting Officer |

 

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

 
| **SIGNATURE**            | ** ** | ** **           | ** ** | **TITLE**                                        |
|--------------------------|------------|----------------------|------------|--------------------------------------------------|
|                     |       |                 |       |                                             |
| /s/ Patrick L. Alexander |       | March 27,  2009 |       | President, Chief  Executive Officer and Director |
| Patrick L. Alexander     |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Larry L. Schugart    |       | March 27,  2009 |       | Chairman of the Board,  Director                 |
| Larry L. Schugart        |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Richard A. Ball      |       | March 27,  2009 |       | Director                                         |
| Richard A. Ball          |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Brent A. Bowman      |       | March 27,  2009 |       | Director                                         |
| Brent A. Bowman          |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Joseph L. Downey     |       | March 27,  2009 |       | Director                                         |
| Joseph L. Downey         |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Jim W. Lewis         |       | March 27,  2009 |       | Director                                         |
| Jim W. Lewis             |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Jerry R. Pettle      |       | March 27,  2009 |       | Director                                         |
| Jerry R. Pettle          |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ Susan E. Roepke      |       | March 27,  2009 |       | Director                                         |
| Susan E. Roepke          |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ C. Duane Ross        |       | March 27,  2009 |       | Director                                         |
| C. Duane Ross            |       | Date                 |       |                                             |
|                     |       |                 |       |                                             |
| /s/ David H. Snapp       |       | March 27,  2009 |       | Director                                         |
| David H. Snapp           |       | Date                 |       |                                             |

 

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**INDEX TO EXHIBITS**

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

 

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| 10.10  |   | Landmark  Bancorp, Inc. Bonus/Profit Sharing Plan                                                                                                        |   |                                                                                                                                                                      |   | X      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 10.11  |   | Form of  Landmark Bancorp, Inc. Deferred Compensation Agreements                                                                                    |   | the  registrant’s report on Form 10-K for the period ending December 31,  2004, filed with the Commission on March 30, 2005 (SEC file no.  000-33203) |   |   |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 10.12  |   | 2001  Stock Incentive Plan                                                                                                                                    |   | The  registrant’s Registration Statement on form S-8 filed with the Commission on  February 11, 2003                                                            |   |   |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 10.13  |   | Indenture  dated as of December 30, 2005 between the Company and Wilmington Trust  Company                                                               |   | the  registrant’s report on Form 10-K for the period ending December 31,  2005, filed with the Commission on March 29, 2006 (SEC file no.  000-33203) |   |   |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 10.14  |   | Revolving  Credit Agreement, dated November 19, 2008 between Landmark  Bancorp, Inc. and First National Bank of Omaha                               |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 13.1   |   | Letter  to Stockholders and Corporate Information included in 2008 Annual Report to  Stockholders                                                             |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 21.1   |   | Subsidiaries  of the Company                                                                                                                                  |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 23.1   |   | Consent  of KPMG LLP                                                                                                                                          |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                           |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                           |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 32.1   |   | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |   |                                                                                                                                                                      |   | X      |
|   |   |                                                                                                                                                          |   |                                                                                                                                                                      |   |   |
| 32.2   |   | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002  |   |                                                                                                                                                                      |   | X      |

 

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