UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES AND EXCHANGE ACT OF 1934


For
fiscal year ended December 31, 2009


OR


 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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 sharePreferred Share Purchase RightsSecurities registered pursuant to Section 12(g) of the Act:
                      None


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


Yes  ̈   No
x


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


Yes  ̈   No
x


Indicate
by check mark whether the Registrant (1) has filed all reports to be filed by
Section 13 or 15(d) of the Securities and Exchange Act 0f 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x   No
 ̈


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  ̈   No
 ̈


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this form
10-K.   ̈


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


Non-accelerated
filer ̈ (do
not check if a smaller reporting company) Smaller Reporting
Company  x


Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).


Yes  ̈   No
x


The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq Global Market on June 30, 2009, the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately $38.2
million.  At March 24, 2010, the total number of shares of common
stock outstanding was 2,504,265.


Portions
of the Proxy Statement for the Annual Meeting of Stockholders to be held May 19,
2010, are incorporated by reference in Part III hereof, to the extent indicated
herein.





LANDMARK
BANCORP, INC.


2009 Form
10-K Annual Report


Table of
Contents





PART
I





ITEM
      1.
                BUSINESS
                
                3ITEM
      1A.
                RISK
      FACTORS
                
                20ITEM
      1B.
                UNRESOLVED
      STAFF COMMENTS
                
                27ITEM
      2.
                PROPERTIES
                
                27ITEM
      3.
                LEGAL
      PROCEEDINGS
                
                27ITEM
      4.
                RESERVED
                
                27ITEM
      5.
                MARKET
      FOR THE COMPANY’S COMMON STOCK, RELATED STOCK HOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                
                28ITEM
      6.
                SELECTED
      FINANCIAL DATA
                
                29ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                30ITEM
      7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                44ITEM
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                
                47ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                
                82ITEM
      9A.
                CONTROLS
      AND PROCEDURES
                
                82ITEM
      9B.
                OTHER
      INFORMATION
                
                82ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                
                83ITEM
      11.
                EXECUTIVE
      COMPENSATION
                
                83ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED
      STOCKHOLDER MATTERS
                
                84ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                
                84ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                
                84ITEM
      15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                
                85SIGNATURES
                
                
                86


2


PART
I.





ITEM
      1.
            BUSINESS





The
Company





Landmark
Bancorp, Inc. (the “Company”) is a bank holding company incorporated under the
laws of the State of Delaware.  Currently, the Company’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, 2009,
the Company had $584.2 million in consolidated total assets.





The
Company is headquartered in Manhattan, Kansas and has expanded its geographic
presence through acquisitions in the past several years.  In May 2009,
the Company acquired a second branch in Lawrence, Kansas.  Effective
January 1, 2006, the Company completed the acquisition of First Manhattan
Bancorporation, Inc. (“FMB”), the holding company for First Savings Bank
F.S.B.  In conjunction with the transaction, FMB was merged into the
Bank (the “2006 Acquisition”). In August 2005, the Company acquired 2 branches
in Great Bend, Kansas. Effective April 1, 2004, the Company acquired First
Kansas Financial Corporation (“First Kansas”), the holding company for First
Kansas Federal Savings Association (“First Kansas Federal”).  In
conjunction with the transaction, First Kansas was merged into the Bank (the
“2004 Acquisition”).  Effective October 9, 2001, Landmark Bancshares,
Inc., the holding company for Landmark Federal Savings Bank, and MNB Bancshares,
Inc., the holding company for Security National Bank, completed their merger
into Landmark Merger Company, which immediately changed its name to Landmark
Bancorp, Inc. (the “2001 Merger”).  In addition, Landmark Federal
Savings Bank merged with Security National Bank and the resulting bank changed
its name to Landmark National Bank.





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





Pursuant
to the 2006 Acquisition, the 2004 Acquisition and the 2001 Merger, the Bank
succeeded to all of the assets and liabilities of FMB, First Savings Bank
F.S.B., First Kansas, First Kansas Federal, Landmark Federal Savings Bank and
Security National Bank.  The Bank is principally engaged in the
business of attracting deposits from the general public and using such deposits,
together with borrowings and other funds, to originate commercial, commercial
real estate, one-to-four family residential mortgage and consumer loans in the
Bank’s principal market areas, as described below.  Since the 2001
Merger, the Bank has focused on originating greater numbers and amounts of
commercial, commercial real estate and agricultural
loans.  Additionally, greater emphasis has been placed on
diversification of the deposit mix through expansion of core deposit accounts
such as checking, savings, and money market accounts.  The Bank has
also diversified its geographical markets as a result of the 2006 Acquisition,
the 2004 Acquisition and the 2001 Merger.  The Company’s main office
is in Manhattan, Kansas with branch offices in central, eastern and southwestern
Kansas.  The Company continues to explore opportunities to expand its
banking markets through mergers and acquisitions, as well as branching
opportunities.  In light of the recent turmoil in the financial
industry, additional attractive opportunities may become available to the
Company.





The
results of operations of the Bank and the Company are dependent primarily upon
net interest income and, to a lesser extent, upon other income derived from loan
servicing fees and customer deposit services.  Additional expenses of
the Bank include general and administrative expenses such as salaries, employee
benefits, federal deposit insurance premiums, data processing, occupancy and
related expenses.





Deposits
of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the Federal
Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowable
under applicable 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, as the administrator of the
DIF.  The Bank is also subject to regulation by the Board of Governors
of the Federal Reserve System with respect to reserves required to be maintained
against deposits and certain other matters.  The Bank is a member of
the Federal Reserve Bank of Kansas City and the Federal Home Loan Bank (the
“FHLB”) of Topeka.


3





The
Company’s executive office 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 primary deposit gathering and lending markets are geographically
diversified with locations in eastern, central, and southwestern
Kansas.  The primary industries within these respective markets are
also diverse and dependent upon a wide array of industry and governmental
activity for their economic base.  The Bank’s markets have not been
immune to the effects of the recent economic downturn.  To varying
degrees, the Bank’s markets have experienced either flat or declining real
estate values, falling consumer confidence, increased unemployment, and
decreased consumer spending.  However, the economic and credit crises
have so far been less severe in Kansas than many markets across the U.S. have
experienced.  A brief description of these three geographic areas and
the communities which the Bank serves within these communities is summarized
below.





Shawnee,
Douglas, Miami, Osage, and Bourbon counties are located in eastern Kansas and
encompass the Bank locations in Topeka, Auburn, Lawrence, Paola, Louisburg,
Osawatomie, Osage City, and Fort Scott.  Shawnee County’s market,
which encompasses the Bank locations in Topeka and Auburn, is strongly
influenced by the State of Kansas, City of Topeka, two regional hospitals and
several major private firms and public institutions.  The Bank’s
Lawrence locations are located in Douglas County and are significantly impacted
by the University of Kansas, the largest university in Kansas, in addition to
several private industries and businesses in the community.  The
communities of Paola, Louisburg, and Osawatomie, located within Miami County,
are influenced by the Kansas City market resulting in housing growth and small
private industries and business.  Additionally, the Osawatomie State
Hospital is a major government employer within the county.  Bourbon
and Osage Counties are primarily agricultural with small private industries and
business firms, while Bourbon County is also influenced by a regional hospital
and Fort Scott Community College.





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





The
Bank’s southwestern Kansas branches are located in the cities of Dodge City and
Garden City, which reside in Ford County and Finney County,
respectively.  The counties of Ford and Finney were founded on
agriculture, which continues to play a major role in the
economy.  Predominant activities involve crop production, feed lot
operations, and food processing.   Dodge City is known as the
“Cowboy Capital of the World” and maintains a significant tourism
industry.  Both Dodge City and Garden City are recognized as regional
commercial centers within the state with small business, manufacturing, retail,
and service industries having a significant influence upon the local
economies.  Additionally, each community has a community college which
also attracts a number of individuals from the surrounding area to live within
the community to participate in educational programs and pursue a
degree.





Competition





The
Company faces strong competition both in attracting deposits and making real
estate, commercial and other loans.  Its most direct competition for
deposits comes from commercial banks and other savings institutions located in
its principal market areas, including many large financial institutions which
have greater financial and marketing resources available to them.  The
ability of the Company to attract and retain deposits generally depends on its
ability to provide a rate of return, liquidity and risk comparable to that
offered by competing investment opportunities.  The Company competes
for loans principally through the interest rates and loan fees it charges and
the efficiency and quality of services it provides borrowers.


4





Employees





At
December 31, 2009, the Bank had a total of 223 employees (208 full time
equivalent employees).  The Company has no direct
employees.  Employees are provided with a comprehensive benefits
program, including basic and major medical insurance, life and disability
insurance, sick leave, and a 401(k) profit sharing plan.  Employees
are not represented by any union or collective bargaining group and the Bank
considers its employee relations to be good.





Lending
Activities





General.  The Bank strives
to provide each market area it serves a full range of financial products and
services to small and medium sized businesses and to consumers.  The
Bank targets owner-operated businesses and utilizes Small Business
Administration and Farm Services Administration lending as a part of its product
mix.  Each market has an established loan committee which has
authority to approve credits, within established
guidelines.  Concentrations in excess of those guidelines must be
approved by either a corporate loan committee comprised of the Bank’s Chief
Executive Officer, the Credit Risk Manager, and other senior commercial lenders
or the Bank’s board of directors.  When lending to an entity, the Bank
generally obtains a guaranty from the principals of the entity.  The
loan mix is subject to the discretion of the Bank’s board of directors and the
demands of the local marketplace.





Residential
loans are priced and originated following global underwriting standards that are
consistent with guidelines established by the major buyers in the secondary
market.  Commercial and consumer loans generally are issued at or
above the national prime rate.  While the origination of one-to-four
family residential loans continues to be a key component of our business, the
majority of these loans are sold in the secondary market.  The Bank is
focusing on the generation of commercial and commercial real estate loans to
grow and diversify the loan portfolio.  The Bank has no potential
negative amortization loans.  The following is a brief description of
each major category of the Bank’s lending activity.





Commercial
Lending.  Loans in this category include loans to service,
retail, wholesale and light manufacturing businesses, including agricultural
operations.  Commercial loans are made based on the financial strength
and repayment ability of the borrower, as well as the collateral securing the
loans.  The Bank targets owner-operated businesses as its customers
and makes lending decisions based upon a cash flow analysis of the borrower as
well as a collateral analysis.  Accounts receivable loans and loans
for inventory purchases are generally on a one-year renewable term and loans for
equipment generally have a term of seven years or less.  The Bank
generally 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
generally limited to 75% of a predetermined eligible base.





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





Real Estate
Lending.  Commercial, residential, construction and
multi-family real estate loans represent the largest class of loans of the
Bank.  Generally, residential loans retained in portfolio are variable
rate with adjustment periods of five years or less and amortization periods of
either 15 or 30 years.  Commercial real estate loans, including
agricultural real estate, generally have amortization periods of 15 or 20
years.  The Bank has a security interest in the borrower’s real
estate.  The Bank also generates long-term, fixed-rate residential
real estate loans which are sold in the secondary market.  Commercial
real estate, construction and multi-family loans are generally limited, by
policy, to 80% of the appraised value of the property.  Commercial
real estate, including agricultural real estate loans, are also supported by an
analysis demonstrating the borrower’s ability to repay.  Residential
loans that exceed 80% of the appraised value of the real estate generally are
required, by policy, to be supported by private mortgage insurance, although on
occasion the Bank will retain non-conforming residential loans to known
customers at premium pricing.


5





Consumer and
Other Lending.  Loans classified as consumer and other loans
include automobile, boat, home improvement and home equity loans, the latter two
secured principally through second mortgages.  With the exception of
home improvement loans and home equity loans, the Bank generally takes a
purchase money security interest in collateral for which it provides the
original financing.  The terms of the loans typically range from one
to five years, depending upon the use of the proceeds, and generally range from
75% to 90% of the value of the collateral.  The majority of these
loans are installment loans with fixed interest rates.  Home
improvement and home equity loans are generally secured by a second mortgage on
the borrower’s personal residence and, when combined with the first mortgage,
limited to 80% of the value of the property unless further protected by private
mortgage insurance.  The home improvement loans are generally made for
terms of five to seven years with fixed interest rates.  The home
equity loans are generally made for terms of ten years on a revolving basis with
the interest rates adjusting monthly tied to the national prime interest
rate.





Loan
Origination and Processing





Loan
originations are derived from a number of sources.  Residential loan
originations result from real estate broker referrals, direct solicitation by
the Bank’s loan officers, present depositors and borrowers, referrals from
builders and attorneys, walk-in customers and, in some instances, other lenders.
Consumer and commercial real estate loan originations emanate from many of the
same sources. Residential loan applications are underwritten and closed based
upon standards which generally meet secondary market guidelines.  The
average loan is less than $500,000.





The loan
underwriting procedures followed by the Bank conform to regulatory
specifications and are designed to assess both the borrower’s ability to make
principal and interest payments and the value of any assets or property serving
as collateral for the loan.  Generally, as part of the process, a loan
officer meets with each applicant to obtain the appropriate employment and
financial information as well as any other required loan
information.  The Bank then obtains reports with respect to the
borrower’s credit record, and orders, on real estate loans, and reviews an
appraisal of any collateral for the loan (prepared for the Bank through an
independent appraiser).





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





The
difficult economic and credit environments experienced in 2009 and 2008 have
materially impacted our commercial and commercial real estate loan origination
and processing as a result of decreased loan demand that met our credit
standards.  In several of our markets there is an oversupply of newly
constructed, speculative residential real estate properties and developed vacant
lots.  As a result of these issues we have severely curtailed land
development and construction lending.  We do not expect this type of
lending to be resumed until the economic outlook improves and the supply and
demand of residential housing and vacant developed lots is in
balance.  The economic downturn has also caused us to increase our
underwriting requirements on other types of loans to insure borrowers can meet
repayment requirements in the current economic environment.





6


SUPERVISION
AND REGULATION




General




Financial
institutions, their holding companies and their affiliates are extensively
regulated under federal and state law.  As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the OCC, the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) and the FDIC.  Furthermore,
taxation laws administered by the Internal Revenue Service and state taxing
authorities and securities laws administered by the SEC and state securities
authorities have an impact on the business of the Company. The effect of these
statutes, regulations and regulatory policies may be significant, and cannot be
predicted with a high degree of certainty.




Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of
investments, reserve requirements, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system of
supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of FDIC-insured deposits and depositors of the
Bank, rather than stockholders.  In addition to this generally
applicable regulatory framework, turmoil in the credit markets in recent years
has prompted the enactment of unprecedented legislation that has allowed the
U.S. Department of the Treasury (the “Treasury”) to make equity capital
available to qualifying financial institutions to help restore confidence and
stability in the U.S. financial markets, which imposes additional requirements
on institutions in which the Treasury invests.




The
following is a summary of the material elements of the regulatory framework that
currently applies to the Company and its subsidiaries.  It does not
describe all of the statutes, regulations and regulatory policies that apply,
nor does it restate all of the requirements of those that are
described.  Additionally, in response to the global financial crisis
that began in 2007, various legislative and regulatory proposals have been
issued addressing, among other things, the restructuring of the federal bank
regulatory system, more stringent regulation of consumer products such as
mortgages and credit cards, and safe and sound compensation practices. At this
time, the Company is unable to determine whether any of these proposals will be
adopted as proposed.  As such, the following is qualified in its
entirety by reference to applicable law.  Any change in statutes,
regulations or regulatory policies may have a material effect on the business of
the Company and its subsidiaries.




The
Company




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




Acquisitions,
Activities and Change in Control.  The primary purpose of a
bank holding company is to control and manage banks. The BHCA generally requires
the prior approval of the Federal Reserve for any merger involving a bank
holding company or any acquisition by a bank holding company of another bank or
bank holding company.  Subject to certain conditions (including
deposit concentration limits established by the BHCA), the Federal Reserve may
allow a bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is required to
give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the target bank is
located (provided that those limits do not discriminate against out-of-state
depository institutions or their holding companies) and state laws that require
that the target bank have been in existence for a minimum period of time (not to
exceed five years) before being acquired by an out-of-state bank holding
company.


7


The BHCA
generally prohibits the Company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than that of banking, managing and
controlling banks, or furnishing services to banks and their
subsidiaries.  This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be “so closely related to banking ... as to be a proper
incident thereto.”  This authority would permit the Company to engage
in a variety of banking-related businesses, including the ownership and
operation of a thrift, or any entity engaged in consumer finance, equipment
leasing, the operation of a computer service bureau (including software
development), and mortgage banking and brokerage. The BHCA generally does not
place territorial restrictions on the domestic activities of non-bank
subsidiaries of bank holding companies.




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




Federal
law also prohibits any person or company from acquiring “control” of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator.  “Control” is conclusively
presumed to exist upon the acquisition of 25% or more of the outstanding voting
securities of a bank or bank holding company, but may arise under certain
circumstances between 10% and 24.99% ownership.




Capital
Requirements.  Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines.  If capital levels fall below the minimum required levels,
a bank holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.




The
Federal Reserve’s capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: (i) a risk-based requirement
expressed as a percentage of total assets weighted according to risk; and (ii) a
leverage requirement expressed as a percentage of total assets.  The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%.  The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with a minimum requirement of 4% for all others.  For
purposes of these capital standards, Tier 1 capital consists primarily of
permanent stockholders’ equity less intangible assets (other than certain loan
servicing rights and purchased credit card relationships). Total capital
consists primarily of Tier 1 capital plus Tier 2 capital, which consists of
other non-permanent capital items such as certain other debt and equity
instruments that do not qualify as Tier 1 capital and a portion of the Company’s
allowance for loan and lease losses.




The
risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve’s capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.  Further, any banking organization
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (i.e., Tier 1 capital less
all intangible assets), well above the minimum levels.  As of December
31, 2009, the Company had regulatory capital in excess of the Federal Reserve’s
minimum requirements.


8





Emergency
Economic Stabilization Act of 2008.  Events in the U.S. and
global financial markets over the past several years, including the
deterioration of the worldwide credit markets, have created significant
challenges for financial institutions throughout the country.  In
response to this crisis affecting the U.S. banking system and financial markets,
on October 3, 2008, the U.S. Congress passed, and the President signed into law,
the Emergency Economic Stabilization Act of 2008 (the “EESA”).  The
EESA authorized the Secretary of the Treasury to implement various temporary
emergency programs designed to strengthen the capital positions of financial
institutions and stimulate the availability of credit within the U.S. financial
system.  Financial institutions participating in certain of the
programs established under the EESA are required to adopt the Treasury’s
standards for executive compensation and corporate governance.




The TARP Capital
Purchase Program.  On October 14, 2008, the Treasury announced
that it would provide Tier 1 capital (in the form of perpetual preferred stock)
to eligible financial institutions.  This program, known as the TARP
Capital Purchase Program (the “CPP”), allocated $250 billion from the $700
billion authorized by the EESA to the Treasury for the purchase of senior
preferred shares from qualifying financial institutions.  Under the
program, eligible institutions were able to sell equity interests to the
Treasury in amounts equal to between 1% and 3% of the institution’s
risk-weighted assets.  The Company was preliminarily approved but
elected not to participate in the CPP.




Dividend
Payments.  The Company’s ability to pay dividends to its
stockholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. As a
Delaware corporation, the Company is subject to the limitations of the Delaware
General Corporation Law (the “DGCL”). The DGCL allows the Company to pay
dividends only out of its surplus (as defined and computed in accordance with
the provisions of the DGCL) or if the Company has no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.




Additionally,
as a bank holding company, the Company’s ability to declare and pay dividends is
subject to the guidelines of the Federal Reserve regarding capital adequacy and
dividends.  The Federal Reserve guidelines generally require the
Company to review the effects of the cash payment of dividends on common stock
and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust
preferred securities) in light of the Company’s earnings, capital adequacy and
financial condition.  As a general matter, the Federal Reserve
indicates that the board of directors of a bank holding company should
eliminate, defer or significantly reduce the dividends if:  (i) the
company’s net income available to stockholders for the past four quarters, net
of dividends previously paid during that period, is not sufficient to fully fund
the dividends; (ii) the prospective rate of earnings retention is inconsistent
with the company’s capital needs and overall current and prospective financial
condition; or (iii) the company will not meet, or is in danger of not meeting,
its minimum regulatory capital adequacy ratios.  The Federal Reserve
also possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations.  Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies.




Federal
Securities Regulation.  The Company’s common stock is
registered with the SEC under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  Consequently, the Company is subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under the Exchange Act.




The
Bank




General.  The
Bank is a national bank, chartered by the OCC under the National Bank
Act.  The deposit accounts of the Bank are insured by the FDIC’s
Deposit Insurance Fund (the “DIF”) to the maximum extent provided under federal
law and FDIC regulations.  The Bank is a member of the Federal Reserve
System and the Federal Home Loan Bank System.  As a national bank, the
Bank is subject to the examination, supervision, reporting and enforcement
requirements of the OCC, the chartering authority for national banks. The FDIC,
as administrator of the DIF, also has regulatory authority over the
Bank.




Deposit
Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC.  The FDIC has
adopted a risk-based assessment system whereby FDIC-insured depository
institutions pay insurance premiums at rates based on their risk
classification.  An institution’s risk classification is assigned
based on its capital levels and the level of supervisory concern the institution
poses to the regulators.  Under the regulations of the FDIC, as
presently in effect, insurance assessments range from 0.07% to 0.78% of total
deposits, depending on an institution’s risk classification, its levels of
unsecured debt and secured liabilities, and, in certain cases, its level of
brokered deposits.


9


Furthermore,
as a result of the increased volume of bank failures in 2008 and 2009, on May
22, 2009, the FDIC approved a final rule imposing a special assessment on all
depository institutions whose deposits are insured by the FDIC.  This
one-time special assessment was imposed on institutions in the second quarter,
and was collected on September 30, 2009.  Pursuant to the final rule,
the FDIC imposed on the Bank a special assessment in the amount of $277,000,
which was due and payable on September 30, 2009.




On
November 12, 2009, the FDIC adopted a final rule that required insured
depository institutions to prepay on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011, and 2012.  On December 30, 2009, the Bank paid the FDIC
$2.8 million in prepaid assessments.  The FDIC determined each
institution’s prepaid assessment based on the institution’s: (i) actual
September 30, 2009 assessment base, increased quarterly by a five percent annual
growth rate through the fourth quarter of 2012; and (ii) total base assessment
rate in effect on September 30, 2009, increased by an annualized three basis
points beginning in 2011.  The FDIC will begin to offset prepaid
assessments on March 30, 2010, representing payment of the regular quarterly
risk-based deposit insurance assessment for the fourth quarter of
2009.  Any prepaid assessment not exhausted after collection of the
amount due on June 30, 2013, will be returned to the institution.




FDIC Temporary
Liquidity Guarantee Program.  In conjunction with Treasury’s
actions to address the credit and liquidity crisis in financial markets, on
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee
Program.  One component of the Temporary Liquidity Guarantee Program
is the Transaction Account Guarantee Program, which temporarily provides
participating institutions with unlimited deposit insurance coverage for
non-interest bearing and certain low-interest bearing transaction accounts
maintained at FDIC insured institutions.  All institutions that did
not opt out of the Transaction Account Guarantee Program were subject to a 10
basis point per annum assessment on amounts in excess of $250,000 in covered
transaction accounts through December 31, 2009.  On August 26, 2009,
the FDIC extended the Transaction Account Guarantee Program for an additional
six months through June 30, 2010.  Beginning January 1, 2010, the
assessment levels increased to 15 basis points, 20 basis points or 25 basis
points per annum, based on the risk category to which an institution is assigned
for purposes of the risk-based premium system.  The Bank did not opt
out of the six-month extension of the Transaction Account Guarantee
Program.  As a result, the Bank, like every other FDIC-insured
depository institution in the United States that did not opt out of the
Transaction Account Guarantee Program, is incurring fees on amounts in excess of
$250,000 in covered transaction accounts.




FICO
Assessments.  The Financing Corporation (“FICO”) is a
mixed-ownership governmental corporation chartered by the former Federal Home
Loan Bank Board pursuant to the Federal Savings and Loan Insurance Corporation
Recapitalization Act of 1987 to function as a financing vehicle for the
recapitalization of the former Federal Savings and Loan Insurance
Corporation.  FICO issued 30-year non-callable bonds of approximately
$8.2 billion that mature by 2019.  Since 1996, federal legislation has
required that all FDIC-insured depository institutions pay assessments to cover
interest payments on FICO’s outstanding obligations.  These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance.  During 2009, the FICO assessment rate was approximately
0.01% of deposits.




Supervisory
Assessments.  National banks are required to pay supervisory
assessments to the OCC to fund the operations of the OCC.  The amount
of the assessment is calculated using a formula that takes into account the
bank’s size and its supervisory condition.  During 2009, the Bank paid
supervisory assessments to the OCC totaling $149,000.




Capital
Requirements.  Banks are generally required to maintain capital
levels in excess of other businesses.  Under federal regulations, the
Bank is subject to the following minimum capital standards: (i) a leverage
requirement consisting of a minimum ratio of Tier 1 capital to total assets of
3% for the most highly-rated banks with a minimum requirement of at least 4% for
all others; and (ii) a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8% and a minimum ratio
of Tier 1 capital to total risk-weighted assets of 4%.  In general,
the components of Tier 1 capital and total capital are the same as those for
bank holding companies discussed above.


10


The
capital requirements described above are minimum requirements.  Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions.  For example, OCC
regulations provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.




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




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




As of
December 31, 2009: (i) the Bank was not subject to a directive from the OCC to
increase its capital to an amount in excess of the minimum regulatory capital
requirements; (ii) the Bank exceeded its minimum regulatory capital requirements
under OCC capital adequacy guidelines; and (iii) the Bank was
“well-capitalized,” as defined by OCC regulations.




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




The
payment of dividends by any financial institution is affected by the requirement
to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying
any dividends if, following payment thereof, the institution would be
undercapitalized.  As described above, the Bank exceeded its minimum
capital requirements under applicable guidelines as of December 31,
2009.  As of December 31, 2009, approximately $3.0 million was
available to be paid as dividends by the Bank.  Notwithstanding the
availability of funds for dividends, however, the OCC may prohibit the payment
of any dividends by the Bank if the OCC determines such payment would constitute
an unsafe or unsound practice.




Insider
Transactions.  The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company, on investments in
the stock or other securities of the Company and the acceptance of the stock or
other securities of the Company as collateral for loans made by the
Bank.  Certain limitations and reporting requirements are also placed
on extensions of credit by the Bank to its directors and officers, to directors
and officers of the Company, to principal stockholders of the Company, and to
“related interests” of such directors, officers and principal
stockholders.  In addition, federal law and regulations may affect the
terms upon which any person who is a director or officer of the Company or the
Bank or a principal stockholder of the Company may obtain credit from banks with
which the Bank maintains a correspondent relationship.


11


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




In
general, the safety and soundness guidelines prescribe the goals to be achieved
in each area, and each institution is responsible for establishing its own
procedures to achieve those goals.  If an institution fails to comply
with any of the standards set forth in the guidelines, the institution’s primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator may
restrict the institution’s rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.




Branching
Authority.  National banks headquartered in Kansas, such as the
Bank, have the same branching rights in Kansas as banks chartered under Kansas
law, subject to OCC approval.  Kansas law grants Kansas-chartered
banks the authority to establish branches anywhere in the State of Kansas,
subject to receipt of all required regulatory approvals.




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




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




Federal Reserve
System.  Federal Reserve regulations, as presently in effect,
require depository institutions to maintain reserves against their transaction
accounts (primarily NOW and regular checking accounts), as follows: for
transaction accounts aggregating $55.2 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $55.2 million, the reserve requirement is $1.335 million plus 10% of
the aggregate amount of total transaction accounts in excess of $55.2
million.  The first $10.7 million of otherwise reservable balances are
exempted from the reserve requirements.  These reserve requirements
are subject to annual adjustment by the Federal Reserve.  As of
December 31, 2099, the Bank was in compliance with the foregoing
requirements.


12


Company
Website





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





STATISTICAL
DATA





The
Company has a fiscal year ending on December 31.  The information
presented in this annual report on Form 10-K presents information on behalf of
the Company as of and for the year ended December 31, 2009.





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





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





The
following table describes the extent to which changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities affected the Company’s interest income and expense
during the periods indicated.  The table distinguishes between (i)
changes attributable to rate (changes in rate multiplied by prior volume), (ii)
changes attributable to volume (changes in volume multiplied by prior rate), and
(iii) net change (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 change due to volume and
the change due to rate.





Years Ended December 31,2009 vs 2008
                  
                  
                  2008 vs 2007Increase/(decrease) attributable to
                  
                  
                  Increase/(decrease) attributable
      toVolume
                  
                  
                  Rate
                  
                  
                  Net
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  Net(Dollars in thousands)Interest
      income:Investment
      securities
                  
                  $
                  979
                  
                  
                  $
                  (1,402
                  )
                  
                  $
                  (423
                  )
                  
                  $
                  548
                  
                  
                  $
                  (358
                  )
                  
                  $
                  190Loans
                  
                  
                  (1,144
                  )
                  
                  
                  (2,700
                  )
                  
                  
                  (3,844
                  )
                  
                  
                  (360
                  )
                  
                  
                  (3,641
                  )
                  
                  
                  (4,001
                  )Total
                  
                  
                  (165
                  )
                  
                  
                  (4,102
                  )
                  
                  
                  (4,267
                  )
                  
                  
                  188
                  
                  
                  
                  (3,999
                  )
                  
                  
                  (3,811
                  )Interest
      expense:Deposits
                  
                  
                  194
                  
                  
                  
                  (4,271
                  )
                  
                  
                  (4,077
                  )
                  
                  
                  (209
                  )
                  
                  
                  (3,400
                  )
                  
                  
                  (3,609
                  )Other
      borrowings
                  
                  
                  (452
                  )
                  
                  
                  -
                  
                  
                  
                  (452
                  )
                  
                  
                  654
                  
                  
                  
                  (1,298
                  )
                  
                  
                  (644
                  )Total
                  
                  
                  (258
                  )
                  
                  
                  (4,271
                  )
                  
                  
                  (4,529
                  )
                  
                  
                  445
                  
                  
                  
                  (4,698
                  )
                  
                  
                  (4,253
                  )Net
      interest income
                  
                  $
                  93
                  
                  
                  $
                  169
                  
                  
                  $
                  262
                  
                  
                  $
                  (257
                  )
                  
                  $
                  699
                  
                  
                  $
                  442


13





The
following table sets forth information relating to average balances of
interest-earning assets and interest-bearing liabilities for the years ended
December 31, 2009, 2008 and 2007.  This table reflects the average
yields on assets and average costs of liabilities for the periods indicated
(derived by dividing income or expense by the monthly average balance of assets
or liabilities, respectively) as well as the "net interest margin" (which
reflects the effect of the net earnings balance) for the periods
shown.





Year
      ended December 31, 2009
                                
                                
                                Year
      ended December 31, 2008
                                
                                
                                Year
      ended December 31, 2007Average
                                  balance
                                
                                
                                Interest
                                
                                
                                Average
                                  yield/rate
                                
                                
                                Average
                                  balance
                                
                                
                                Interest
                                
                                
                                Average
                                  yield/rate
                                
                                
                                Average
                                  balance
                                
                                
                                Interest
                                
                                
                                Average
                                  yield/rate(Dollars
      in thousands)AssetsInterest-earning
      assets:Investment
      securities (1)
                                
                                $
                                185,578
                                
                                
                                $
                                7,876
                                
                                
                                
                                4.24
                                %
                                
                                $
                                170,011
                                
                                
                                $
                                8,299
                                
                                
                                
                                4.88
                                %
                                
                                $
                                157,376
                                
                                
                                $
                                8,109
                                
                                
                                
                                5.15
                                %Loans
      receivable, net (2)
                                
                                
                                359,940
                                
                                
                                
                                20,690
                                
                                
                                
                                5.75
                                %
                                
                                
                                375,208
                                
                                
                                
                                24,534
                                
                                
                                
                                6.49
                                %
                                
                                
                                383,078
                                
                                
                                
                                28,535
                                
                                
                                
                                7.45
                                %Total
      interest-earning assets
                                
                                
                                545,518
                                
                                
                                
                                28,566
                                
                                
                                
                                5.24
                                %
                                
                                
                                548,219
                                
                                
                                
                                32,833
                                
                                
                                
                                5.99
                                %
                                
                                
                                540,454
                                
                                
                                
                                36,644
                                
                                
                                
                                6.78
                                %Non-interest-earning
      assets
                                
                                
                                61,135
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                59,715
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                60,689Total
                                
                                $
                                606,653
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                607,934
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                601,143Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Certificates
      of deposit
                                
                                $
                                215,159
                                
                                
                                $
                                5,101
                                
                                
                                
                                2.37
                                %
                                
                                $
                                221,412
                                
                                
                                $
                                8,075
                                
                                
                                
                                3.65
                                %
                                
                                $
                                237,831
                                
                                
                                $
                                10,656
                                
                                
                                
                                4.48
                                %Money
      market and NOW accounts
                                
                                
                                155,142
                                
                                
                                
                                643
                                
                                
                                
                                0.41
                                %
                                
                                
                                142,968
                                
                                
                                
                                1,741
                                
                                
                                
                                1.22
                                %
                                
                                
                                132,813
                                
                                
                                
                                2,769
                                
                                
                                
                                2.08
                                %Savings
      accounts
                                
                                
                                28,684
                                
                                
                                
                                76
                                
                                
                                
                                0.26
                                %
                                
                                
                                27,081
                                
                                
                                
                                81
                                
                                
                                
                                0.30
                                %
                                
                                
                                27,048
                                
                                
                                
                                81
                                
                                
                                
                                0.30
                                %FHLB
      advances and other borrowings
                                
                                
                                92,855
                                
                                
                                
                                3,266
                                
                                
                                
                                3.52
                                %
                                
                                
                                105,544
                                
                                
                                
                                3,718
                                
                                
                                
                                3.52
                                %
                                
                                
                                94,171
                                
                                
                                
                                4,362
                                
                                
                                
                                4.63
                                %Total
      interest-bearing liabilities
                                
                                
                                491,840
                                
                                
                                
                                9,086
                                
                                
                                
                                1.85
                                %
                                
                                
                                497,005
                                
                                
                                
                                13,615
                                
                                
                                
                                2.74
                                %
                                
                                
                                491,863
                                
                                
                                
                                17,868
                                
                                
                                
                                3.63
                                %Non-interest-bearing
      liabilities
                                
                                
                                61,852
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                60,211
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                59,146Stockholders'
      equity
                                
                                
                                52,961
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                50,718
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                50,134Total
                                
                                $
                                606,653
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                607,934
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                601,143Interest
      rate spread (3)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.39
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.25
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.15
                                %Net
      interest margin (4)
                                
                                
                                
                                
                                
                                $
                                19,480
                                
                                
                                
                                3.57
                                %
                                
                                
                                
                                
                                
                                $
                                19,218
                                
                                
                                
                                3.51
                                %
                                
                                
                                
                                
                                
                                $
                                18,776
                                
                                
                                
                                3.47
                                %Tax
      equivalent interest - imputed
                                
                                
                                
                                
                                
                                
                                1,300
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,186
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,093Net
      interest income
                                
                                
                                
                                
                                
                                $
                                18,180
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                18,032
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                17,683Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                
                                
                                
                                
                                
                                
                                111
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                110
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                110
                                %





(1)
            Income
      on investment securities includes all securities and interest bearing
      deposits in other financial institutions.  Income on tax exempt
      investment securities is presented on a fully taxable equivalent basis,
      using a 34% federal tax rate.


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


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


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


14





II.
            Investment
      Portfolio





Investment
Securities.  The following
table sets forth the carrying value of the Company’s investment securities at
the dates indicated.  None of the investment securities held as of
December 31, 2009 were issued by an individual issuer in excess of 10% of the
Company’s stockholders’ equity, excluding the securities of U.S. federal agency
obligations.  The Company’s federal agency obligations consist of
obligations of U.S. government sponsored enterprises, primarily the
FHLB.  The Company’s mortgage backed securities portfolio consisted of
securities predominantly underwritten to the standards and guaranteed by the
government-sponsored agencies of FHLMC, FNMA and GNMA.  The Company’s
investments in certificates of deposits consisted of FDIC insured certificates
of deposits with other financial institutions.





As of December 31,2009
                    
                    
                    2008
                    
                    
                    2007(Dollars in thousands)Investment
      Securities:U.S.
      federal agency obligations
                    
                    $
                    19,090
                    
                    
                    $
                    29,514
                    
                    
                    $
                    48,708Municipal
      obligations tax-exempt
                    
                    
                    68,859
                    
                    
                    
                    64,309
                    
                    
                    
                    62,113Municipal
      obligations taxable
                    
                    
                    1,343
                    
                    
                    
                    -
                    
                    
                    
                    -Mortgage-backed
      securities
                    
                    
                    64,695
                    
                    
                    
                    56,582
                    
                    
                    
                    36,216Common
      stock
                    
                    
                    865
                    
                    
                    
                    1,074
                    
                    
                    
                    1,122Pooled
      trust preferred securities
                    
                    
                    261
                    
                    
                    
                    740
                    
                    
                    
                    2,493Certificates
      of deposits
                    
                    
                    6,515
                    
                    
                    
                    10,026
                    
                    
                    
                    5,227Total
      available-for-sale, at fair value
                    
                    $
                    161,628
                    
                    
                    $
                    162,245
                    
                    
                    $
                    155,879FHLB
      stock
                    
                    
                    6,237
                    
                    
                    
                    7,303
                    
                    
                    
                    7,099FRB
      stock
                    
                    
                    1,754
                    
                    
                    
                    1,749
                    
                    
                    
                    1,746Total
      other securities, at cost
                    
                    $
                    7,991
                    
                    
                    $
                    9,052
                    
                    
                    $
                    8,845





The
following table sets forth certain information regarding the carrying values,
weighted average yields, and maturities of the Company's investment securities
portfolio, excluding common stocks, as of December 31, 2009.  Yields
on tax-exempt obligations have been computed on a tax equivalent basis, using a
34% federal tax rate.  The table includes scheduled principal payments
and estimated prepayments for mortgage-backed securities, where actual
prepayments will differ from contractual maturities because borrowers have the
right to prepay obligations with or without prepayment penalties.




As of December 31, 2009One year or less
                  
                  
                  One to five years
                  
                  
                  Five to ten years
                  
                  
                  More than ten years
                  
                  
                  TotalCarrying
                  
                  
                  Average
                  
                  
                  Carrying
                  
                  
                  Average
                  
                  
                  Carrying
                  
                  
                  Average
                  
                  
                  Carrying
                  
                  
                  Average
                  
                  
                  Carrying
                  
                  
                  Averagevalue
                  
                  
                  yield
                  
                  
                  value
                  
                  
                  yield
                  
                  
                  value
                  
                  
                  yield
                  
                  
                  value
                  
                  
                  yield
                  
                  
                  value
                  
                  
                  yield(Dollars
      in thousands)Investment
      securities:U.S.
      federal agency obligations
                  
                  $
                  10,972
                  
                  
                  
                  4.01
                  %
                  
                  $
                  7,060
                  
                  
                  
                  2.67
                  %
                  
                  $
                  1,058
                  
                  
                  
                  5.50
                  %
                  
                  $
                  -
                  
                  
                  
                  0.00
                  %
                  
                  $
                  19,090
                  
                  
                  
                  3.60
                  %Municipal
      obligations tax exempt
                  
                  
                  1,706
                  
                  
                  
                  5.03
                  %
                  
                  
                  17,369
                  
                  
                  
                  5.11
                  %
                  
                  
                  29,303
                  
                  
                  
                  5.76
                  %
                  
                  
                  20,481
                  
                  
                  
                  6.15
                  %
                  
                  
                  68,859
                  
                  
                  
                  5.69
                  %Municipal
      obligations taxable
                  
                  
                  110
                  
                  
                  
                  3.25
                  %
                  
                  
                  1,233
                  
                  
                  
                  2.31
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  1,343
                  
                  
                  
                  2.39
                  %Mortgage-backed
      securities
                  
                  
                  5,415
                  
                  
                  
                  4.10
                  %
                  
                  
                  56,876
                  
                  
                  
                  3.97
                  %
                  
                  
                  1,249
                  
                  
                  
                  4.38
                  %
                  
                  
                  1,155
                  
                  
                  
                  3.27
                  %
                  
                  
                  64,695
                  
                  
                  
                  3.98
                  %Pooled
      trust preferred securities
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  261
                  
                  
                  
                  2.05
                  %
                  
                  
                  261
                  
                  
                  
                  2.05
                  %Certificates
      of deposits
                  
                  
                  265
                  
                  
                  
                  2.35
                  %
                  
                  
                  6,250
                  
                  
                  
                  1.54
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %
                  
                  
                  6,515
                  
                  
                  
                  1.57
                  %Total
                  
                  $
                  18,468
                  
                  
                  
                  4.10
                  %
                  
                  $
                  88,788
                  
                  
                  
                  3.90
                  %
                  
                  $
                  31,610
                  
                  
                  
                  5.70
                  %
                  
                  $
                  21,897
                  
                  
                  
                  5.95
                  %
                  
                  $
                  160,763
                  
                  
                  
                  4.55
                  %


15


III.
              Loan
      Portfolio





Loan Portfolio
Composition.  The following
table sets forth the composition of the loan portfolio by type of loan at the
dates indicated.





As of December 31,2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005(Dollars in thousands)BalanceReal
      estate loans:One-to-four
      family residential
                          
                          $
                          98,333
                          
                          
                          $
                          112,815
                          
                          
                          $
                          126,459
                          
                          
                          $
                          151,300
                          
                          
                          $
                          114,935Commercial
                          
                          
                          106,470
                          
                          
                          
                          105,488
                          
                          
                          
                          94,885
                          
                          
                          
                          81,298
                          
                          
                          
                          66,358Construction
      and land
                          
                          
                          36,864
                          
                          
                          
                          41,107
                          
                          
                          
                          46,260
                          
                          
                          
                          50,616
                          
                          
                          
                          24,083Commercial
      loans
                          
                          
                          98,213
                          
                          
                          
                          101,976
                          
                          
                          
                          103,099
                          
                          
                          
                          90,758
                          
                          
                          
                          63,494Consumer
      loans
                          
                          
                          7,884
                          
                          
                          
                          7,937
                          
                          
                          
                          9,164
                          
                          
                          
                          9,596
                          
                          
                          
                          8,842Total
      gross loans
                          
                          
                          347,764
                          
                          
                          
                          369,323
                          
                          
                          
                          379,867
                          
                          
                          
                          383,568
                          
                          
                          
                          277,712Deferred
      loan fees/(costs) and loans in process
                          
                          
                          442
                          
                          
                          
                          320
                          
                          
                          
                          462
                          
                          
                          
                          (214
                          )
                          
                          
                          5Allowance
      for loan losses
                          
                          
                          (5,468
                          )
                          
                          
                          (3,871
                          )
                          
                          
                          (4,172
                          )
                          
                          
                          (4,030
                          )
                          
                          
                          (3,151
                          )Loans,
      net
                          
                          $
                          342,738
                          
                          
                          $
                          365,772
                          
                          
                          $
                          376,157
                          
                          
                          $
                          379,324
                          
                          
                          $
                          274,566Percent of totalReal
      estate loans:One-to-four
      family residential
                          
                          
                          28.3
                          %
                          
                          
                          30.5
                          %
                          
                          
                          33.3
                          %
                          
                          
                          39.4
                          %
                          
                          
                          41.4
                          %Commercial
                          
                          
                          30.6
                          %
                          
                          
                          28.6
                          %
                          
                          
                          25.0
                          %
                          
                          
                          21.2
                          %
                          
                          
                          23.9
                          %Construction
      and land
                          
                          
                          10.6
                          %
                          
                          
                          11.1
                          %
                          
                          
                          12.2
                          %
                          
                          
                          13.2
                          %
                          
                          
                          8.7
                          %Commercial
      loans
                          
                          
                          28.2
                          %
                          
                          
                          27.6
                          %
                          
                          
                          27.1
                          %
                          
                          
                          23.7
                          %
                          
                          
                          22.9
                          %Consumer
      loans
                          
                          
                          2.3
                          %
                          
                          
                          2.2
                          %
                          
                          
                          2.4
                          %
                          
                          
                          2.5
                          %
                          
                          
                          3.1
                          %Total
      gross loans
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %





The
following table sets forth the contractual maturities of loans as of December
31, 2009.  The table does not include unscheduled
prepayments.





As of December 31, 2009< 1 year
                      
                      
                      1-5 years
                      
                      
                      > 5 years
                      
                      
                      Total(Dollars in thousands)Real
      estate loans:One-to-four
      family residential
                      
                      $
                      15,692
                      
                      
                      $
                      50,397
                      
                      
                      $
                      32,244
                      
                      
                      $
                      98,333Commerical
                      
                      
                      13,959
                      
                      
                      
                      49,595
                      
                      
                      
                      42,916
                      
                      
                      
                      106,470Construction
      and land
                      
                      
                      31,030
                      
                      
                      
                      4,041
                      
                      
                      
                      1,793
                      
                      
                      
                      36,864Commercial
                      
                      
                      61,793
                      
                      
                      
                      32,085
                      
                      
                      
                      4,335
                      
                      
                      
                      98,213Consumer
                      
                      
                      3,730
                      
                      
                      
                      3,950
                      
                      
                      
                      204
                      
                      
                      
                      7,884Total
      gross loans
                      
                      $
                      126,204
                      
                      
                      $
                      140,068
                      
                      
                      $
                      81,492
                      
                      
                      $
                      347,764


16


The
following table sets forth the dollar amount of all loans due after December 31,
2010 and whether such loans had fixed interest rates or adjustable interest
rates:





As of December 31, 2009Fixed
                      
                      
                      Adjustable
                      
                      
                      Total(Dollars in thousands)Real
      estate loans:One-to-four
      family residential
                      
                      $
                      27,675
                      
                      
                      $
                      54,966
                      
                      
                      $
                      82,641Commerical
                      
                      
                      24,055
                      
                      
                      
                      68,456
                      
                      
                      
                      92,511Construction
      and land
                      
                      
                      1,651
                      
                      
                      
                      4,183
                      
                      
                      
                      5,834Commercial
                      
                      
                      20,773
                      
                      
                      
                      15,647
                      
                      
                      
                      36,420Consumer
                      
                      
                      3,725
                      
                      
                      
                      429
                      
                      
                      
                      4,154Total
      gross loans
                      
                      $
                      77,879
                      
                      
                      $
                      143,681
                      
                      
                      $
                      221,560





Nonperforming
Assets. The
following table sets forth information with respect to nonperforming assets,
including non-accrual loans and real estate acquired through foreclosure or by
deed in lieu of foreclosure (“real estate owned”).  Under the original
terms of the Company’s non-accrual loans as of December 31, 2009, interest
earned on such loans for the years ended December 31, 2009, 2008 and 2007 would
have increased interest income by $794,000, $252,000 and $520,000,
respectively.





As of December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(Dollars in thousands)Total
      non-accrual loans
                  
                  $
                  11,830
                  
                  
                  $
                  5,748
                  
                  
                  $
                  10,037
                  
                  
                  $
                  3,567
                  
                  
                  $
                  3,332Accruing
      loans over 90 days past due
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Nonperforming
      investments, at fair value
                  
                  
                  261
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Real
      estate owned
                  
                  
                  1,129
                  
                  
                  
                  1,934
                  
                  
                  
                  492
                  
                  
                  
                  456
                  
                  
                  
                  749Total
      nonperforming assets
                  
                  $
                  13,220
                  
                  
                  $
                  7,682
                  
                  
                  $
                  10,529
                  
                  
                  $
                  4,023
                  
                  
                  $
                  4,081Total
      nonperforming loans to total loans, net
                  
                  
                  3.5
                  %
                  
                  
                  1.6
                  %
                  
                  
                  2.7
                  %
                  
                  
                  0.9
                  %
                  
                  
                  1.2
                  %Total
      nonperforming assets to total assets
                  
                  
                  2.3
                  %
                  
                  
                  1.3
                  %
                  
                  
                  1.7
                  %
                  
                  
                  0.7
                  %
                  
                  
                  0.9
                  %Allowance
      for loan losses to nonperforming loans
                  
                  
                  46.2
                  %
                  
                  
                  67.3
                  %
                  
                  
                  41.5
                  %
                  
                  
                  113.0
                  %
                  
                  
                  94.6
                  %





The
Company’s non-accrual loans increased from $5.7 million at December 31, 2008 to
$11.8 million at December 31, 2009.  The increase in non-accrual loans
was primarily the result of two loan relationships that were placed on
non-accrual status during 2009.  These two loans consisted of a $4.2
million construction loan and a $2.4 million commercial agriculture
loan.  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 during 2008 was primarily the result of the collection of the
outstanding balances of two loan relationships totaling $3.0 million and
increased charge-offs of balances in non-accrual at December 31,
2007.  As part of the Company’s credit risk management, the Company
continues to aggressively manage the loan portfolio to identify problem loans
and has placed additional emphasis on its commercial real estate and
construction relationships.  This aggressive loan portfolio
management, combined with the current economic recession, has led to an increase
in our real estate owned.  As discussed in more detail in the “Asset
Quality and Distribution” section, we believe the Company’s allowance for loan
losses is adequate based on the Company’s evaluation of the loan portfolio’s
inherent risk as of December 31, 2009.


17


IV.
            Summary
      of Loan Loss Experience





The
following table sets forth information with respect to the Company’s allowance
for loan losses at the dates indicated:





As
      of December 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005(Dollars
      in thousands)Balances
      at beginning of year
                    
                    $
                    3,871
                    
                    
                    $
                    4,172
                    
                    
                    $
                    4,030
                    
                    
                    $
                    3,151
                    
                    
                    $
                    2,894Provision
      for loan losses
                    
                    
                    3,300
                    
                    
                    
                    2,400
                    
                    
                    
                    255
                    
                    
                    
                    235
                    
                    
                    
                    385Allowance
      of merged bank
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    891
                    
                    
                    
                    -Charge-offs:Real
      estate loans:One-to-four
      family residential
                    
                    
                    (153
                    )
                    
                    
                    (1,443
                    )
                    
                    
                    (16
                    )
                    
                    
                    (23
                    )
                    
                    
                    (25
                    )Commercial
                    
                    
                    (17
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (55
                    )
                    
                    
                    -Construction
      and land
                    
                    
                    (330
                    )
                    
                    
                    (453
                    )
                    
                    
                    (29
                    )
                    
                    
                    -
                    
                    
                    
                    -Commercial
                    
                    
                    (1,404
                    )
                    
                    
                    (728
                    )
                    
                    
                    (12
                    )
                    
                    
                    (3
                    )
                    
                    
                    (37
                    )Consumer
                    
                    
                    (122
                    )
                    
                    
                    (145
                    )
                    
                    
                    (147
                    )
                    
                    
                    (258
                    )
                    
                    
                    (160
                    )Total
      charge-offs
                    
                    
                    (2,026
                    )
                    
                    
                    (2,769
                    )
                    
                    
                    (204
                    )
                    
                    
                    (339
                    )
                    
                    
                    (222
                    )Recoveries:Real
      estate loans:One-to-four
      family residential
                    
                    
                    9
                    
                    
                    
                    4
                    
                    
                    
                    4
                    
                    
                    
                    5
                    
                    
                    
                    5Commercial
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    -Construction
      and land
                    
                    
                    200
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
                    
                    
                    72
                    
                    
                    
                    9
                    
                    
                    
                    25
                    
                    
                    
                    25
                    
                    
                    
                    59Consumer
                    
                    
                    42
                    
                    
                    
                    55
                    
                    
                    
                    62
                    
                    
                    
                    61
                    
                    
                    
                    30Total
      recoveries
                    
                    
                    323
                    
                    
                    
                    68
                    
                    
                    
                    91
                    
                    
                    
                    92
                    
                    
                    
                    94Net
      charge-offs
                    
                    
                    (1,703
                    )
                    
                    
                    (2,701
                    )
                    
                    
                    (113
                    )
                    
                    
                    (247
                    )
                    
                    
                    (128
                    )Balances
      at end of year
                    
                    $
                    5,468
                    
                    
                    $
                    3,871
                    
                    
                    $
                    4,172
                    
                    
                    $
                    4,030
                    
                    
                    $
                    3,151Allowance
      for loan losses as a  percent of total gross loans
      outstanding
                    
                    
                    1.57
                    %
                    
                    
                    1.05
                    %
                    
                    
                    1.10
                    %
                    
                    
                    1.05
                    %
                    
                    
                    1.13
                    %Net
      loans charged off as a percent of average net loans
      outstanding
                    
                    
                    0.48
                    %
                    
                    
                    0.72
                    %
                    
                    
                    0.03
                    %
                    
                    
                    0.06
                    %
                    
                    
                    0.05
                    %





Net loan
charge-offs for the year ended December 31, 2009 were $1.7 million compared to
$2.7 million for the year ended December 31, 2008.  Net loan
charge-offs declined in 2009 as the result of the timing of the collection
process on non-performing loans as the Company pursues recovery options prior to
charging off a loan.  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 increased net loan charge-offs during 2009 and 2008 were
primarily related to loans for which the Company had previously provided a
specific loss reserve allocation.  Commercial loan charge-offs
increased during 2009 as the result of a commercial loan relationship that was
liquidated in bankruptcy.  The significant increase in the 2008
one-to-four family residential charge-offs is primarily from the liquidation of
a pool of non-owner occupied, one-to-four family residential loans, made to a
single entity in the Kansas City, Missouri area.  The loans were
secured by houses located in deteriorating neighborhoods and originally obtained
as part of an acquisition and are not representative of the quality and
performance of the remaining one-to-four family residential mortgage loan
portfolio.  The loans were sold in early 2009 at a price that had an
immaterial impact on earnings.


18





The
distribution of the Company’s allowance for losses on loans at the dates
indicated and the percent of loans in each category to total loans is summarized
in the following table.  This allocation reflects management’s
judgment as to risks inherent in the types of loans indicated, but in general,
the Company’s total allowance for loan losses included in the table is not
restricted and is available to absorb all loan losses.  The amount
allocated in the following table to any category should not be interpreted as an
indication of expected actual charge-offs in that category.





As of December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Amount
                  
                  
                  % Loan
                    type to
                    total loans
                  
                  
                  Amount
                  
                  
                  % Loan
                    type to
                    total loans
                  
                  
                  Amount
                  
                  
                  % Loan
                    type to
                    total loans
                  
                  
                  Amount
                  
                  
                  % Loan
                    type to
                    total loans
                  
                  
                  Amount
                  
                  
                  % Loan
                    type to
                    total loans(Dollars
      in thousands)Real
      estate loans:One-to-four
      family residential
                  
                  $
                  625
                  
                  
                  
                  28.3
                  %
                  
                  $
                  672
                  
                  
                  
                  30.5
                  %
                  
                  $
                  1,189
                  
                  
                  
                  33.3
                  %
                  
                  $
                  827
                  
                  
                  
                  39.4
                  %
                  
                  $
                  722
                  
                  
                  
                  41.4
                  %Commercial
                  
                  
                  1,042
                  
                  
                  
                  30.6
                  %
                  
                  
                  730
                  
                  
                  
                  28.6
                  %
                  
                  
                  640
                  
                  
                  
                  25.0
                  %
                  
                  
                  823
                  
                  
                  
                  21.2
                  %
                  
                  
                  882
                  
                  
                  
                  23.9
                  %Construction
      and land
                  
                  
                  1,326
                  
                  
                  
                  10.6
                  %
                  
                  
                  833
                  
                  
                  
                  11.1
                  %
                  
                  
                  879
                  
                  
                  
                  12.2
                  %
                  
                  
                  834
                  
                  
                  
                  13.2
                  %
                  
                  
                  384
                  
                  
                  
                  8.7
                  %Commercial
                  
                  
                  2,389
                  
                  
                  
                  28.2
                  %
                  
                  
                  1,507
                  
                  
                  
                  27.6
                  %
                  
                  
                  1,191
                  
                  
                  
                  27.1
                  %
                  
                  
                  1,308
                  
                  
                  
                  23.7
                  %
                  
                  
                  941
                  
                  
                  
                  22.9
                  %Consumer
                  
                  
                  86
                  
                  
                  
                  2.3
                  %
                  
                  
                  129
                  
                  
                  
                  2.2
                  %
                  
                  
                  273
                  
                  
                  
                  2.4
                  %
                  
                  
                  238
                  
                  
                  
                  2.5
                  %
                  
                  
                  222
                  
                  
                  
                  3.1
                  %Total
                  
                  $
                  5,468
                  
                  
                  
                  100.0
                  %
                  
                  $
                  3,871
                  
                  
                  
                  100.0
                  %
                  
                  $
                  4,172
                  
                  
                  
                  100.0
                  %
                  
                  $
                  4,030
                  
                  
                  
                  100.0
                  %
                  
                  $
                  3,151
                  
                  
                  
                  100.0
                  %





The
decline in the allocation of the allowance for losses on loans to one-to-four
family residential loans since December 31, 2007 is primarily the result of the
decline in the outstanding balances in our one-to-four family residential loan
portfolio and also from the 2008 charge-off associated with one loan
relationship on a pool of non-owner occupied, one-to-four family residential
loans in the Kansas City, Missouri area which had a specific reserve associated
with the balance at December 31, 2007.  The increases in the
allocation for commercial real estate, construction and land and commercial
allowance for losses on loans, was related primarily to declines in the
estimated fair value of certain collateral dependent impaired loans, increased
historical charge-offs and management’s judgment to increase the risk factors
used to determine the allowance for loan losses.  The allowance for
losses on loans is discussed in more detail in the “Nonperforming Assets” and
“Asset Quality and Distribution” sections.  We believe the Company’s
allowance for loan losses continues to be adequate based on the Company’s
evaluation of the loan portfolio’s inherent risk as of December 31,
2009.





V.
            Deposits





The
following table presents the maturities of jumbo certificates of deposit
(amounts of $100,000 or more) at December 31, 2009 and 2008:





(Dollars
      in thousands)
                  
                  As of December 31,2009
                  
                  
                  2008Three
      months or less
                  
                  $
                  15,799
                  
                  
                  $
                  17,745Over
      three months through six months
                  
                  
                  8,214
                  
                  
                  
                  11,126Over
      six months through 12 months
                  
                  
                  13,925
                  
                  
                  
                  13,524Over
      12 months
                  
                  
                  10,484
                  
                  
                  
                  7,570Total
                  
                  $
                  48,422
                  
                  
                  $
                  49,965





VI.
                Return
      on Equity and Assets





As of or for the years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Return
      on average assets
                    
                    
                    0.54
                    %
                    
                    
                    0.75
                    %
                    
                    
                    0.90
                    %Return
      on average equity
                    
                    
                    6.18
                    %
                    
                    
                    8.98
                    %
                    
                    
                    10.78
                    %Equity
      to total assets
                    
                    
                    9.23
                    %
                    
                    
                    8.54
                    %
                    
                    
                    8.62
                    %Dividend
      payout ratio
                    
                    
                    55.3
                    %
                    
                    
                    38.1
                    %
                    
                    
                    32.7
                    %


19


ITEM
      1A.
            RISK
      FACTORS





In
addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:





Difficult
economic and market conditions have adversely affected our
industry.





Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and commercial real estate loans and resulted in significant
write-downs of assets by many financial institutions across the United
States.  General downward economic trends, reduced availability of
commercial credit and increasing unemployment have negatively impacted the
credit performance of commercial and consumer credit, resulting in additional
write-downs.  Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by many financial institutions to
their customers and to each other.  This market turmoil and tightening
of credit has led to increased commercial and consumer deficiencies, lack of
customer confidence, increased market volatility and widespread reductions in
general business activity.  Financial institutions have also generally
experienced decreased access to certain liquidity sources.  The
resulting economic pressure on consumers and businesses and the lack of
confidence in the financial markets may adversely affect our business, results
of operations and financial condition.  A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institutions
industry.  In particular, we may face the following risks in
connection with these events:




·
            we
      potentially face increased regulation of our industry and compliance with
      such regulation may increase our costs and limit our ability to pursue
      business opportunities;


·
            customer
      demand for loans secured by real estate could be reduced due to weaker
      economic conditions, an increase in unemployment, a decrease in real
      estate values or an increase in interest
rates;


·
            the
      process we use to estimate losses inherent in our credit exposure requires
      difficult, subjective and complex judgments, including forecasts of
      economic conditions and how these economic conditions might impair the
      ability of our borrowers to repay their loans.  The level of
      uncertainty concerning economic conditions may adversely affect the
      accuracy of our estimates which may, in turn, impact the reliability of
      the process;


·
            the
      value of the portfolio of investment securities that we hold may be
      adversely affected;


·
            we
      may be required to pay significantly higher FDIC premiums because market
      developments have significantly depleted the insurance fund of the FDIC
      and reduced the ratio of reserves to insured deposits;
  and


·
            declines
      in our stock price, as well as changes to other risk factors discussed
      herein, could result in impairment of our goodwill which would have an
      adverse effect on our earnings.





We
cannot predict the effect on our operations of recent legislative and regulatory
initiatives that were enacted in response to the ongoing financial
crisis.





United
States federal, state and foreign governments have taken or are considering
extraordinary actions in an attempt to deal with the worldwide financial
crisis.  To the extent adopted, many of these actions have been in
effect for only a limited time, and have produced limited or no relief to the
capital, credit and real estate markets.  There is no assurance that
these actions or other actions under consideration will ultimately be
successful.





In the
United States, the federal government has adopted the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of
2009.  With authority granted under these laws, the U.S. Treasury has
proposed a financial stability plan that is intended to:




·
            invest
      in financial institutions and purchase troubled assets and mortgages from
      financial institutions for the purpose of stabilizing and providing
      liquidity to the United States financial
  markets;


·
            temporarily
      increase the limit on FDIC deposit insurance coverage to $250,000 per
      depositor through December 31, 2009 (which was extended to December 31,
      2013 under the Helping Families Save Their Homes Act of 2009);
      and


·
            provide
      for various forms of economic stimulus, including to assist homeowners
      restructure and lower mortgage payments on qualifying
    loans.


20





Numerous
other actions have been taken by the United States Congress, the Federal
Reserve, the U.S. Treasury, the FDIC, the SEC and others to address the
liquidity and credit crisis that has followed the subprime mortgage crisis that
commenced in 2007, including the financial stability plan adopted by the U.S.
Treasury.  In addition, President Obama announced a financial
regulatory reform proposal, and the House and Senate are expected to consider
competing proposals over the coming years.





There can
be no assurance that the financial stability plan proposed by the U.S. Treasury,
the other proposals under consideration or any other legislative or regulatory
initiatives will be effective at dealing with the ongoing economic crisis and
improving economic conditions globally, nationally or in our markets, or that
the measures adopted will not have adverse consequences. The terms and costs of
these activities, or the failure of these actions to help stabilize the
financial markets, asset prices, market liquidity and a continuation or
worsening of current financial market and economic conditions could materially
and adversely affect our business, results of operations, financial condition
and the trading prices of our securities.





Negative
developments in the financial industry and the credit markets may subject us to
additional regulation.





As a result of ongoing challenges
facing the United States economy, the potential exists for new laws and
regulations regarding lending and funding practices and liquidity standards to
be promulgated, and bank regulatory agencies are expected to be active in
responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders.  Negative
developments in the financial industry and credit markets, and the impact of new
legislation in response to those developments, may negatively impact our
operations by restricting our business operations, including our ability to
originate or sell loans, and may adversely impact our financial
performance.





Our
allowance for loan losses may prove to be insufficient to absorb losses in our
loan portfolio.





We
established our allowance for loan losses and maintain it at a level considered
adequate by management to absorb loan losses that are inherent in the
portfolio.  Additionally, our Board of Directors regularly monitors
the adequacy of our allowance for loan loses.  The amount of future
loan losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, which may be beyond our
control, and such losses may exceed current estimates.  At
December 31, 2009 and 2008, our allowance for loan losses as a percentage
of total loans was 1.57% and 1.05%, respectively, and as a percentage of total
non-performing loans was 46.2% and 67.3%, respectively.  Although
management believes that the allowance for loan losses is adequate to absorb
losses on any existing loans that may become uncollectible, we cannot predict
loan losses with certainty nor can we assure you that our allowance for loan
losses will prove sufficient to cover actual loan losses in the
future.  Loan losses in excess of our reserves will adversely affect
our business, financial condition and results of operations.  The
increased levels of provision for loan losses experienced during 2009 and 2008,
as compared to historical levels, may continue for some period of
time.





Declines
in value may adversely impact the carrying amount of our investment portfolio
and result in other-than-temporary impairment charges.





As of
December 31, 2009, we had three investments in pooled trust preferred securities
with an aggregate par value of $2.5 million and book value of $1.5 million after
recording other-than-temporary impairment charges of $961,000 in
2009.  The remaining unrealized non-credit related losses on these
securities totaled approximately $1.3 million at December 31,
2009.  We may be required to record additional impairment charges on
our investment securities if they suffer further declines in value that are
considered other-than-temporary.  If the credit quality of the
securities in our investment portfolio further deteriorates, we may also
experience a loss in interest income from the suspension of either interest or
dividend payments.  Numerous factors, including lack of liquidity for
resales of certain investment securities, absence of reliable pricing
information for investment securities, adverse changes in business climate or
adverse actions by regulators could have a negative effect on our investment
portfolio in future periods.


21





Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.





FDIC
insurance premiums increased substantially in 2009, and we expect to pay higher
FDIC premiums in the future.  Bank failures have significantly
depleted the FDIC's Deposit Insurance Fund and reduced the Deposit Insurance
Fund's ratio of reserves to insured deposits.  The FDIC adopted a
revised risk-based deposit insurance assessment schedule on February 27, 2009,
which raised deposit insurance premiums.  On May 22, 2009, the FDIC
also implemented a special assessment equal to five basis points of each insured
depository institution's assets minus Tier 1 capital as of June 30, 2009, but no
more than 10 basis points times the institution's assessment base for the second
quarter of 2009, collected on September 30, 2009.  Additionally, on
November 12, 2009, the FDIC adopted a final rule that required insured
depository institutions to prepay on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011, and 2012.  Additional special assessments may be imposed
by the FDIC for future periods.





We
participate in the FDIC's Temporary Liquidity Guarantee Program, or TLG, for
non-interest-bearing transaction deposit accounts.  Banks that
participate in the TLG's non-interest-bearing transaction account guarantee will
pay the FDIC an annual assessment of 10 basis points on the amounts in such
accounts above the amounts covered by FDIC deposit insurance.  To the
extent that these TLG assessments are insufficient to cover any loss or expenses
arising from the TLG program, the FDIC is authorized to impose an emergency
special assessment on all FDIC-insured depository institutions.  The
FDIC has authority to impose charges for the TLG program upon depository
institution holding companies, as well.  The TLG was scheduled to end
December 31, 2009, but the FDIC has extended it to June 30, 2010 at an increased
charge of 15 to 25 basis points beginning January 1, 2010, depending on the
depository institution's risk assessment category rating assigned with respect
to regular FDIC assessments if the institution elects to remain in the
TLG.  These changes have caused the premiums and TLG assessments
charged by the FDIC to increase.  These actions have increased our
noninterest expense in 2009 and are expected to increase our costs for the
foreseeable future.





Our
concentration of one-to-four family residential mortgage loans may result in
lower yields and profitability.





One-to-four
family residential mortgage loans comprised $98.3 million and $112.8 million, or
28.3% and 30.5%, of our loan portfolio at December 31, 2009 and 2008,
respectively. These loans are secured primarily by properties located in the
state of Kansas.  Our concentration of these loans results in lower
yields relative to other loan categories within our loan
portfolio.  While these loans generally possess higher yields than
investment securities, their repayment characteristics are not as well defined
and they generally possess a higher degree of interest rate risk versus other
loans and investment securities within our portfolio.  This increased
interest rate risk is due to the repayment and prepayment options inherent in
residential mortgage loans which are exercised by borrowers based upon the
overall level of interest rates.  These residential mortgage loans are
generally made on the basis of the borrower’s ability to make repayments from
his or her employment and the value of the property securing the
loan.  Thus, as a result, repayment of these loans is also subject to
general economic and employment conditions within the communities and
surrounding areas where the property is located.





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




Commercial
loans make up a significant portion of our loan portfolio.





Commercial
loans comprised $98.2 million and $102.0 million, or 28.2% and 27.6%, of our
loan portfolio at December 31, 2009 and 2008, respectively.  Our
commercial loans are primarily made based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the
borrower.  Most often, this collateral is accounts receivable,
inventory, or machinery.  Credit support provided by the borrower for
most of these loans and the probability of repayment is based on the liquidation
of the pledged collateral and enforcement of a personal guarantee, if any
exists.  As a result, in the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due
from its customers.  The collateral securing other loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.


22





Our
agricultural loans involve a greater degree of risk than other loans, and the
ability of the borrower to repay may be affected by many factors outside of the
borrower’s control.





At
December 31, 2009 and 2008, agricultural real estate loans totaled $7.0 million
and $7.2 million, or 2.0% and 1.9% of our total loan portfolio,
respectively.  Agricultural real estate lending involves a greater
degree of risk and typically involves larger loans to single borrowers than
lending on single-family residences. Payments on agricultural real estate loans
are dependent on the profitable operation or management of the farm property
securing the loan. The success of the farm may be affected by many factors
outside the control of the farm borrower, including adverse weather conditions
that prevent the planting of a crop or limit crop yields (such as hail, drought
and floods), loss of livestock due to disease or other factors, declines in
market prices for agricultural products (both domestically and internationally)
and the impact of government regulations (including changes in price supports,
subsidies and environmental regulations). In addition, many farms are dependent
on a limited number of key individuals whose injury or death may significantly
affect the successful operation of the farm.  If the cash flow from a
farming operation is diminished, the borrower’s ability to repay the loan may be
impaired. The primary crops in our market areas are wheat, corn and
soybean.  Accordingly, adverse circumstances affecting wheat, corn and
soybean crops could have an adverse effect on our agricultural real estate loan
portfolio.





We also
originate agricultural operating loans. At December 31, 2009 and 2008, these
loans totaled $31.2 million and $36.0 million, respectively, or 9.0% and 9.7%
respectively, of our total loan portfolio. As with agricultural real estate
loans, the repayment of operating loans is dependent on the successful operation
or management of the farm property.  Likewise, agricultural operating
loans involve a greater degree of risk than lending on residential properties,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as farm equipment, livestock or crops.  We
generally secure agricultural operating loans with a blanket lien on livestock,
equipment, food, hay, grain and crops.  Nevertheless, any repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation.





Our
business is concentrated in and dependent upon the continued growth and welfare
of the markets in which we operate, including eastern, central and southwestern
Kansas.





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





We
may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income.





As part
of our general strategy, we may acquire banks, branches and related businesses
that we believe provide a strategic fit with our business.  In the
past, we have acquired a number of local banks and branches and, to the extent
that we continue to grow through future acquisitions, we cannot assure you that
we will be able to adequately and profitably manage this growth. Acquiring other
banks and businesses will involve risks commonly associated with acquisitions,
including:


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


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


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


·
            potential
      disruption to our business;


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


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





In
addition to acquisitions, we may expand into additional communities or attempt
to strengthen our position in our current markets by undertaking additional
branch openings.  We believe that it generally takes several years for
new banking facilities to first achieve operational profitability, due to the
impact of organization and overhead expenses and the start-up phase of
generating loans and deposits.  To the extent that we undertake
additional branch openings, we are likely to continue to experience the effects
of higher operating expenses relative to operating income from the new
operations, which may have an adverse effect on our levels of reported net
income, return on average equity and return on average assets.


23


We
face intense competition in all phases of our business from other banks and
financial institutions.





The
banking and financial services business in our market is highly
competitive.  Our competitors include large regional banks, local
community banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market mutual funds, credit unions and other non-bank financial service
providers, many of which have greater financial, marketing and technological
resources than us.  Increased competition in our market may result in
a decrease in the amounts of our loans and deposits, reduced spreads between
loan rates and deposit rates or loan terms that are more favorable to the
borrower.  Any of these results could have a material adverse effect
on our ability to grow and remain profitable.  If increased
competition causes us to significantly discount the interest rates we offer on
loans or increase the amount we pay on deposits, our net interest income could
be adversely impacted.  If increased competition causes us to
relaxour
underwriting standards, we could be exposed to higher losses from lending
activities.  Additionally, many of our competitors are much larger in
total assets and capitalization, have greater access to capital markets and
offer a broader range of financial services than we can offer.





Interest
rates and other conditions impact our results of operations.





Our
profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities.  Like most banking institutions,
our net interest spread and margin will be affected by general economic
conditions and other factors, including fiscal and monetary policies of the
federal government, that influence market interest rates and our ability to
respond to changes in such rates.  At any given time, our assets and
liabilities will be such that they are affected differently by a given change in
interest rates.  As a result, an increase or decrease in rates, the
length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity.  We measure interest rate risk under various rate
scenarios and using specific criteria and assumptions.  A summary of
this process, along with the results of our net interest income simulations is
presented in the section entitled “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations.”  Although we believe
our current level of interest rate sensitivity is reasonable and effectively
managed, significant fluctuations in interest rates may have an adverse effect
on our business, financial condition and results of operations.





We must effectively manage our credit
risk.





There are
risks inherent in making any loan, including risks inherent in dealing with
individual borrowers, risks of nonpayment, risks resulting from uncertainties as
to the future value of collateral and risks resulting from changes in economic
and industry conditions.  We attempt to minimize our credit risk
through prudent loan application approval procedures, careful monitoring of the
concentration of our loans within specific industries and periodic independent
reviews of outstanding loans by our credit review
department.  However, we cannot assure you that such approval and
monitoring procedures will reduce these credit risks.  Most of our
loans are commercial, real estate, or agriculture loans, each of which is
subject to distinct types of risk.  To reduce the lending risks we
face, we generally take a security interest in borrowers’ property for all three
types of loans.  In addition, we sell certain residential real estate
loans to third parties.  Nevertheless, the risk of non-payment is
inherent in all three types of loans and if we are unable to collect amounts
owed, it may materially affect our operations and financial
performance.





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





Our
loan portfolio has a large concentration of real estate loans, which involve
risks specific to real estate value.





Real
estate lending (including commercial, construction, and residential) is a large
portion of our loan portfolio. These categories were $241.7 million, or
approximately 69.5% of our total loan portfolio as of December 31, 2009, as
compared to $259.4 million, or approximately 70.2%, as of December 31,
2008.  The market value of real estate can fluctuate significantly in
a short period of time as a result of market conditions in the geographic area
in which the real estate is located.  Although a significant portion
of such loans are secured by a secondary form of collateral, adverse
developments affecting real estate values in one or more of our markets could
increase the credit risk associated with our loan
portfolio.  Additionally, real estate lending typically involves
higher loan principal amounts and the repayment of the loans generally is
dependent, in large part, on sufficient income from the properties securing the
loans to cover operating expenses and debt service. Economic events or
governmental regulations outside of the control of the borrower or lender could
negatively impact the future cash flow and market values of the affected
properties.


24





If the
loans that are collateralized by real estate become troubled during a time when
market conditions are declining or have declined, then we may not be able to
realize the amount of security that we anticipated at the time of originating
the loan, which could cause us to increase our provision for loan losses and
adversely affect our operating results and financial condition.  In
particular, if the declines in values that have occurred in the residential and
commercial real estate markets worsen, particularly within our market area, the
value of collateral securing our real estate loans could decline
further.  In light of the uncertainty that exists in the economy and
credit markets nationally, there can be no guarantee that we will not experience
additional deterioration resulting from the downturn in credit performance by
our real estate loan customers.





Our
anticipated pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is needed.





We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations.  We anticipate that our existing
capital resources will satisfy our capital requirements for the foreseeable
future and this is a major reason why we did not participate in the
CPP.  However, we may at some point need to raise additional capital
to support continuing growth.  Our ability to raise additional capital
is particularly important to our strategy of continual growth through
acquisitions.  Our ability to raise additional capital, if needed,
will depend on conditions in the capital markets at that time, which are outside
our control, and on our financial performance.  Accordingly, we cannot
assure you of our ability to raise additional capital if needed on terms
acceptable to us.  If we cannot raise additional capital when needed,
our ability to further expand our operations through internal growth and
acquisitions could be materially impaired.





Attractive
acquisition opportunities may not be available to us in the future.





We expect
that other banking and financial service companies, many of which have
significantly greater resources than us, will compete with us in acquiring other
financial institutions if we pursue such acquisitions.  This
competition could increase prices for potential acquisitions that we believe are
attractive. Also, acquisitions are subject to various regulatory
approvals.  If we fail to receive the appropriate regulatory
approvals, we will not be able to consummate an acquisition that we believe is
in our best interests.  Among other things, our regulators consider
our capital, liquidity, profitability, regulatory compliance and levels of
goodwill and intangibles when considering acquisition and expansion
proposals.  Any acquisition could be dilutive to our earnings and
stockholders' equity per share of our common stock.





Our
community banking strategy relies heavily on our management team, and the
unexpected loss of key managers may adversely affect our
operations.





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





Government regulation can result in
limitations on our operations.





We
operate in a highly regulated environment and are subject to supervision and
regulation by a number of governmental regulatory agencies, including the Board
of Governors of the Federal Reserve System, the FDIC and the
OCC.  Regulations adopted by these agencies, which are generally
intended to provide protection for depositors and customers rather than for the
benefit of stockholders, govern a comprehensive range of matters relating to
ownership and control of our shares, our acquisition of other 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 or unsound practices or
violations of law. The laws and regulations applicable to the banking industry
could change at any time and in light of the recent economic downturn, the
industry has experienced a general strengthening of these laws and
regulations.  Increased regulation could increase our cost of
compliance and adversely affect profitability.  For example, new
legislation or regulation may limit the manner in which we may conduct our
business, including our ability to offer new products, obtain financing, attract
deposits, make loans and achieve satisfactory interest spreads.


25


We
have a continuing need for technological change and we may not have the
resources to effectively implement new technology.
 
 The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and
services.  In addition to better serving customers, the effective use
of technology increases efficiency as well as enables financial institutions to
reduce costs.  Our future success will depend in part upon our ability
to address the needs of our customers by using technology to provide products
and services that will satisfy customer demands for convenience as well as to
create additional efficiencies in our operations as we continue to grow and
expand our market area.  Many of our larger competitors have
substantially greater resources to invest in technological
improvements.  As a result, they may be able to offer additional or
superior products to those that we will be able to offer, which would put us at
a competitive disadvantage.  Accordingly, we cannot provide you with
assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to our customers.
 
 There
is a limited trading market for our common shares, and you may not be able to
resell your shares at or above the price you paid for them.
 
 Although
our common shares are listed for trading on the Nasdaq Global Market under the
symbol “LARK”, the trading in our common shares has substantially less liquidity
than many other publicly traded companies.  A public trading market
having the desired characteristics of depth, liquidity and orderliness depends
on the presence in the market of willing buyers and sellers of our common shares
at any given time.  This presence depends on the individual decisions
of investors and general economic and market conditions over which we have no
control.  We cannot assure you that volume of trading in our common
shares will increase in the future.
 
 System
failure or breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities.
 
 The
computer systems and network infrastructure we use could be vulnerable to
unforeseen problems.  Our operations are dependent upon our ability to
protect our computer equipment against damage from physical theft, fire, power
loss, telecommunications failure or a similar catastrophic event, as well as
from security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers.  Any damage or failure that
causes an interruption in our operations could have a material adverse effect on
our financial condition and results of operations.  Computer
break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through our computer systems and network
infrastructure, which may result in significant liability to us and may cause
existing and potential customers to refrain from doing business with
us.  Although we, with the help of third-party service providers,
intend to continue to implement security technology and establish operational
procedures to prevent such damage, there can be no assurance that these security
measures will be successful. In addition, advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms we and our third-party service providers
use to encrypt and protect customer transaction data.  A failure of
such security measures could have a material adverse effect on our financial
condition and results of operations.
 
 We
are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and
errors.
 
 Employee
errors and misconduct could subject us to financial losses or regulatory
sanctions and seriously harm our reputation. Misconduct by our employees could
include hiding unauthorized activities from us, improper or unauthorized
activities on behalf of our customers or improper use of confidential
information. It is not always possible to prevent employee errors and
misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to
financial claims for negligence.
  26
 
 We
maintain a system of internal controls and insurance coverage to mitigate
against operational risks, including data processing system failures and errors
and customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance 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 our ability to pay
dividends.
 
 Our $16.5
million of subordinated debentures are held by two business trusts that we
control.  Interest payments on the debentures must be paid before we
pay dividends on our capital stock, including our common stock.  We
have the right to defer interest payments on the debentures for up to 20
consecutive quarters.  However, if we elect to defer interest
payments, all deferred interest must be paid before we may pay dividends on our
capital stock.  Deferral of interest payments could also cause a
decline in the market price of our common stock.
 
 ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
 
 None
 
 ITEM
      2.
              PROPERTIES
 
 The
Company owns its main office in Manhattan, Kansas and 17 branch offices and
leases three branch offices.  The Company also leases a parking lot
for one of the branch offices it owns.
 
 ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 There are
no pending legal proceedings to which the Company or the Bank is a party, other
than ordinary routine litigation incidental to the Bank’s
business.  While the ultimate outcome of current legal proceedings
cannot be predicted with certainty, it is the opinion of management that the
resolution of these legal actions should not have a material effect on the
Company’s consolidated financial position or results of operations.
 
 ITEM
      4.
              RESERVED
  27
  PART
II.
 
 ITEM
      5.
              MARKET
      FOR THE COMPANY’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
 
 Our
common stock has traded on the Nasdaq Global Market under the symbol "LARK"
since 2001. At December 31, 2009, the Company had approximately 1,085
stockholders, consisting of approximately 375 owners of record and approximately
710 beneficial owners of our common stock.  Set forth below are the
reported high and low sale prices of our common stock and dividends paid during
the past two years.  Information presented below has been adjusted to
give effect to the 5% stock dividends declared in December 2009 and
2008.
 
 Year ended December 31, 2009
                    
                    High
                    
                    
                    Low
                    
                    
                    Cash dividendspaidFirst
      Quarter
                    
                    $
                    19.51
                    
                    
                    $
                    12.61
                    
                    
                    $
                    0.1810Second
      Quarter
                    
                    
                    16.41
                    
                    
                    
                    13.76
                    
                    
                    
                    0.1810Third
      Quarter
                    
                    
                    15.47
                    
                    
                    
                    14.30
                    
                    
                    
                    0.1810Fourth
      Quarter
                    
                    $
                    15.51
                    
                    
                    $
                    14.01
                    
                    
                    $
                    0.1810
 
 Year ended December 31, 2008
                    
                    High
                    
                    
                    Low
                    
                    
                    Cash dividendspaidFirst
      Quarter
                    
                    $
                    23.58
                    
                    
                    $
                    21.53
                    
                    
                    $
                    0.1723Second
      Quarter
                    
                    
                    22.66
                    
                    
                    
                    20.17
                    
                    
                    
                    0.1723Third
      Quarter
                    
                    
                    20.18
                    
                    
                    
                    14.42
                    
                    
                    
                    0.1723Fourth
      Quarter
                    
                    $
                    19.50
                    
                    
                    $
                    15.88
                    
                    
                    $
                    0.1723
 
 The
Company’s ability to pay dividends is largely dependent upon the dividends it
receives from the Bank.  The Company and the Bank are subject to
regulatory limitations on the amount of cash dividends it may
pay.  See “Business – Supervision and Regulation – The Company –
Dividend Payments” and “Business - Supervision and Regulation – The Bank –
Dividend Payments” for a more detailed description of these
limitations.
 
 In May
2008, our Board of Directors announced the approval of a stock repurchase
program permitting us to repurchase up to 113,400 shares, or 5% of our
outstanding common stock.  Unless terminated earlier by resolution of
the Board of Directors, the May 2008 Repurchase Program will expire when we have
repurchased all shares authorized for repurchase thereunder.  As of
December 31, 2009 there were 108,006 shares remaining to repurchase under the
plan.  The Company did not repurchase any shares pursuant to Section
12 of the Exchange Act during the quarter ended December 31,
2009.
  28
  ITEM 6.
              SELECTED
      FINANCIAL DATA
 
 At or for the years ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005(Dollars in thousands, except per share amounts)Selected Financial Data:Total
      assets
                            
                            $
                            584,167
                            
                            
                            $
                            602,214
                            
                            
                            $
                            606,455
                            
                            
                            $
                            590,568
                            
                            
                            $
                            465,110Loans
                            
                            
                            342,738
                            
                            
                            
                            365,772
                            
                            
                            
                            376,157
                            
                            
                            
                            379,324
                            
                            
                            
                            274,566Investment
      securities
                            
                            
                            169,619
                            
                            
                            
                            171,297
                            
                            
                            
                            164,724
                            
                            
                            
                            145,884
                            
                            
                            
                            140,131Cash
      and cash equivalents
                            
                            
                            12,379
                            
                            
                            
                            13,788
                            
                            
                            
                            14,739
                            
                            
                            
                            14,752
                            
                            
                            
                            21,491Deposits
                            
                            
                            438,595
                            
                            
                            
                            439,546
                            
                            
                            
                            452,652
                            
                            
                            
                            444,485
                            
                            
                            
                            331,273Borrowings
                            
                            
                            82,183
                            
                            
                            
                            104,366
                            
                            
                            
                            93,088
                            
                            
                            
                            90,416
                            
                            
                            
                            85,258Stockholders’
      equity
                            
                            $
                            53,895
                            
                            
                            $
                            51,406
                            
                            
                            $
                            52,296
                            
                            
                            $
                            49,236
                            
                            
                            $
                            44,073Selected Operating Data:Interest
      income
                            
                            $
                            27,266
                            
                            
                            $
                            31,647
                            
                            
                            $
                            35,551
                            
                            
                            $
                            34,395
                            
                            
                            $
                            22,124Interest
      expense
                            
                            
                            9,086
                            
                            
                            
                            13,615
                            
                            
                            
                            17,868
                            
                            
                            
                            15,639
                            
                            
                            
                            8,957Net
      interest income
                            
                            
                            18,180
                            
                            
                            
                            18,032
                            
                            
                            
                            17,683
                            
                            
                            
                            18,756
                            
                            
                            
                            13,167Provision
      for loan losses
                            
                            
                            3,300
                            
                            
                            
                            2,400
                            
                            
                            
                            255
                            
                            
                            
                            235
                            
                            
                            
                            385Net
      interest income after provision for loan losses
                            
                            
                            14,880
                            
                            
                            
                            15,632
                            
                            
                            
                            17,428
                            
                            
                            
                            18,521
                            
                            
                            
                            12,782Non-interest
      income
                            
                            
                            8,436
                            
                            
                            
                            7,045
                            
                            
                            
                            5,916
                            
                            
                            
                            7,213
                            
                            
                            
                            5,009Investment
      securities gains (losses), net
                            
                            
                            (952
                            )
                            
                            
                            497
                            
                            
                            
                            -
                            
                            
                            
                            (300
                            )
                            
                            
                            47Non-interest
      expense
                            
                            
                            18,946
                            
                            
                            
                            17,511
                            
                            
                            
                            16,639
                            
                            
                            
                            17,345
                            
                            
                            
                            12,282Earnings
      before income taxes
                            
                            
                            3,418
                            
                            
                            
                            5,663
                            
                            
                            
                            6,705
                            
                            
                            
                            8,089
                            
                            
                            
                            5,556Income
      tax expense
                            
                            
                            146
                            
                            
                            
                            1,110
                            
                            
                            
                            1,303
                            
                            
                            
                            2,079
                            
                            
                            
                            1,659Net
      earnings
                            
                            $
                            3,272
                            
                            
                            $
                            4,553
                            
                            
                            $
                            5,402
                            
                            
                            $
                            6,010
                            
                            
                            $
                            3,897Earnings
      per share (1):Basic
                            
                            $
                            1.31
                            
                            
                            $
                            1.81
                            
                            
                            $
                            2.02
                            
                            
                            $
                            2.22
                            
                            
                            $
                            1.44Diluted
                            
                            
                            1.31
                            
                            
                            
                            1.80
                            
                            
                            
                            2.00
                            
                            
                            
                            2.21
                            
                            
                            
                            1.43Dividends
      per share (1)
                            
                            
                            0.72
                            
                            
                            
                            0.69
                            
                            
                            
                            0.66
                            
                            
                            
                            0.57
                            
                            
                            
                            0.53Book
      value per common share outstanding (1)
                            
                            $
                            21.65
                            
                            
                            $
                            20.64
                            
                            
                            $
                            19.75
                            
                            
                            $
                            18.22
                            
                            
                            $
                            16.23Other Data:Return
      on average assets
                            
                            
                            0.54
                            %
                            
                            
                            0.75
                            %
                            
                            
                            0.90
                            %
                            
                            
                            1.01
                            %
                            
                            
                            0.87
                            %Return
      on average equity
                            
                            
                            6.18
                            %
                            
                            
                            8.98
                            %
                            
                            
                            10.78
                            %
                            
                            
                            13.01
                            %
                            
                            
                            9.04
                            %Equity
      to total assets
                            
                            
                            9.23
                            %
                            
                            
                            8.54
                            %
                            
                            
                            8.62
                            %
                            
                            
                            8.34
                            %
                            
                            
                            9.48
                            %Net
      interest rate spread (2)
                            
                            
                            3.39
                            %
                            
                            
                            3.25
                            %
                            
                            
                            3.15
                            %
                            
                            
                            3.35
                            %
                            
                            
                            2.99
                            %Net
      interest margin (2)
                            
                            
                            3.57
                            %
                            
                            
                            3.51
                            %
                            
                            
                            3.47
                            %
                            
                            
                            3.62
                            %
                            
                            
                            3.26
                            %Non-performing
      assets to total assets
                            
                            
                            2.27
                            %
                            
                            
                            1.28
                            %
                            
                            
                            1.74
                            %
                            
                            
                            0.68
                            %
                            
                            
                            0.88
                            %Non-performing
      loans to net loans
                            
                            
                            3.45
                            %
                            
                            
                            1.57
                            %
                            
                            
                            2.67
                            %
                            
                            
                            0.94
                            %
                            
                            
                            1.21
                            %Allowance
      for loan losses to total loans
                            
                            
                            1.57
                            %
                            
                            
                            1.05
                            %
                            
                            
                            1.10
                            %
                            
                            
                            1.05
                            %
                            
                            
                            1.13
                            %Dividend
      payout ratio
                            
                            
                            55.27
                            %
                            
                            
                            38.10
                            %
                            
                            
                            32.70
                            %
                            
                            
                            26.17
                            %
                            
                            
                            37.14
                            %Number
      of full service banking offices
                            
                            
                            21
                            
                            
                            
                            20
                            
                            
                            
                            20
                            
                            
                            
                            20
                            
                            
                            
                            17
 
 **Our
selected consolidated financial data should be read in conjunction with, and is
qualified in its entirety by, our consolidated financial statements, including
the related notes.
 (1)   All
per share amounts have been adjusted to give effect to the 5% stock dividends
paid in December 2009, 2008, 2007, 2006 and 2005.
 (2)   Presented
on a taxable equivalent basis, using a 34% federal tax rate.
  29
  ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  CORPORATE
PROFILE AND OVERVIEW
 
 Landmark
Bancorp, Inc. is a one-bank holding company incorporated under the laws of the
State of Delaware and is engaged in the banking business through its
wholly-owned subsidiary, Landmark National Bank.  Landmark Bancorp is
listed on the Nasdaq Global Market under the symbol “LARK”.  Landmark
National Bank is dedicated to providing quality financial and banking services
to its local communities.  Our strategy includes continuing a
tradition of quality assets while growing our commercial and commercial real
estate loan portfolios.  We are committed to developing relationships
with our borrowers and providing a total banking service.
 
 Landmark
National Bank is principally engaged in the business of attracting deposits from
the general public and using such deposits, together with Federal Home Loan Bank
borrowings and funds from operations, to originate commercial real estate and
non-real estate loans, as well as one-to-four family residential mortgage
loans.  Landmark National Bank also originates small business,
multi-family residential mortgage, home equity and consumer
loans.  Although not our primary business function, we do invest in
certain investment and mortgage-related securities using deposits and other
borrowings as funding sources.
 
 Our
results of operations depend generally on net interest income, which is the
difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities.  While net interest income
increased during 2009 as compared to 2008, our results were affected by certain
non-interest related items, including an increase in the provision for loan
losses as compared to 2008.  Net interest income is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows.  In addition, we are subject to interest
rate risk to the degree that our interest-earning assets mature or reprice at
different times, or at different speeds, than our interest-bearing
liabilities.  Our results of operations are also affected by
non-interest income, such as service charges, loan fees and gains from the sale
of newly originated loans and gains or losses on investments.  Our
principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy costs, federal deposit insurance
costs, data processing expenses and provision for loan losses.
 
 We are
significantly impacted by prevailing economic conditions including federal
monetary and fiscal policies and federal regulations of financial
institutions.  Deposit balances are influenced by numerous factors
such as competing investments, the level of income and the personal rate of
savings within our market areas.  Factors influencing lending
activities include the demand for housing and the interest rate pricing
competition from other lending institutions.
 
 Currently,
our business consists of ownership of Landmark National Bank, with its main
office in Manhattan, Kansas and twenty branch offices in eastern, central and
southwestern Kansas.  On May 8, 2009, the Company’s subsidiary,
Landmark National Bank, completed the acquisition of a second branch office in
Lawrence, Kansas.
 
 CRITICAL
ACCOUNTING POLICIES
 
 Critical
accounting policies are those, which are both most important to the portrayal of
our financial condition and results of operations, and require our management’s
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently
uncertain.  Our critical accounting policies relate to the allowance
for loan losses, the valuation of investment securities, accounting for income
taxes and the accounting for goodwill and other intangible assets, all of which
involve significant judgment by our management.
 
 We
perform periodic and systematic detailed reviews of our lending portfolio to
assess overall collectability.  The level of the allowance for loan
losses reflects our estimate of the collectability of the loan
portfolio.  While these estimates are based on substantive methods for
determining allowance requirements, nevertheless, actual outcomes may differ
significantly from estimated results.  Additional explanation of the
methodologies used in establishing this reserve are provided in the “Asset
Quality and Distribution” section.
  30
  The
Company has classified its investment securities portfolio as
available-for-sale, with the exception of certain investments held for
regulatory purposes.  The Company carries its available-for-sale
investment securities at fair value and employs valuation techniques which
utilize observable inputs when those inputs are available.  These
observable inputs reflect assumptions market participants would use in pricing
the security, developed based on market data obtained from sources independent
of the Company.  When such information is not available, the Company
employs valuation techniques which utilize unobservable inputs, or those which
reflect the Company’s own assumptions about market participants, based on the
best information available in the circumstances.  These valuation
methods typically involve estimated cash flows and other financial modeling
techniques.  Changes in underlying factors, assumptions, estimates, or
other inputs to the valuation techniques could have a material impact on the
Company’s future financial condition and results of operations.  Fair
value measurements are classified as Level 1 (quoted prices), Level 2 (based on
observable inputs) or Level 3 (based on unobservable
inputs).  Available-for-sale securities are recorded at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders’ equity until realized.  Purchased
premiums and discounts on investment securities are amortized/accreted into
interest income over the estimated lives of the securities using the interest
method.  Gains and losses on sales of available-for-sale securities
are recorded on a trade date basis and are calculated using the specific
identification method.
 The
Company performs quarterly reviews of the investment portfolio to determine if
any investment securities have any declines in fair value which might be
considered other-than-temporary.  The initial review begins with all
securities in an unrealized loss position.  The Company’s assessment
of other-than-temporary impairment is based on its reasonable judgment of the
specific facts and circumstances impacting each individual security at the time
such assessments are made.  The Company reviews and considers factual
information, including expected cash flows, the structure of the security, the
credit quality of the underlying assets and the current and anticipated market
conditions.  As of January 1, 2009, the Company early adopted the
guidance on other-than-temporary impairments in Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 320 “Investments - Debt
and Equity Securities,” which changed the accounting for other- than-temporary
impairments of debt securities and separates the impairment into credit-related
and other factors for debt securities.  Any credit-related impairments
are realized through a charge to earnings.  If an equity security is
determined to be other-than-temporarily impaired, the entire impairment is
realized through a charge to earnings.
  We have
completed several business and asset acquisitions, which have generated
significant amounts of goodwill and intangible assets and related
amortization.  The values assigned to goodwill and intangibles, as
well as their related useful lives, are subject to judgment and estimation by
our management.  Goodwill and intangibles related to acquisitions are
determined and based on purchase price allocations.  The initial value
assigned to goodwill is the residual of the purchase price over the fair value
of all identifiable assets acquired and liabilities
assumed.  Valuation of intangible assets is generally based on the
estimated cash flows related to those assets.  Performing such a
discounted cash flow analysis involves the use of estimates and
assumptions.  Useful lives are determined based on the expected future
period of the benefit of the asset, the assessment of which considers various
characteristics of the asset, including the historical cash
flows.  Due to the number of estimates involved related to the
allocation of purchase price and determining the appropriate useful lives of
intangible assets, we have identified purchase accounting, and the subsequent
impairment testing of goodwill and intangible assets, as a critical accounting
policy.
 Goodwill
is not amortized; however, it is tested for impairment at each calendar year end
or more frequently when events or circumstances dictate.  The
impairment test compares the carrying value of goodwill to an implied fair value
of the goodwill, which is based on a review of the Company’s market
capitalization adjusted for appropriate control premiums as well as an analysis
of valuation multiples of recent, comparable acquisitions.  The
Company considers the result from each these valuation methods in determining
the implied fair value of its goodwill.  A goodwill impairment would
be recorded for the amount that the carrying value exceeds the implied fair
value.  During the first quarter of 2009, the decline in the Company’s
market capitalization coupled with the market conditions in the financial
services industry, constituted a triggering event which required an impairment
test to be performed.  The Company performed impairment tests as of
March 31, 2009 and December 31, 2009 by comparing the implied fair value of the
Company’s single reporting unit to its carrying value.  Fair value was
determined using observable market data, including the Company’s market
capitalization, with control premiums and valuation multiples, compared to
recent financial industry acquisition multiples for similar institutions to
estimate the fair value of the Company’s single reporting unit.  The
Company’s impairment tests as of March 31, 2009 and December 31, 2009 indicate
that goodwill as of these dates was not impaired.  The Company can
make no assurances that future impairment tests will not result in goodwill
impairments.
  31
  Intangible
assets include core deposit intangibles and mortgage servicing
rights.  Core deposit intangible assets are amortized over their
estimated useful life of ten years on an accelerated basis. When facts and
circumstances indicate potential impairment, the Company will evaluate the
recoverability of the intangible asset carrying value, using estimates of
undiscounted future cash flows over the remaining asset life. Any impairment
loss is measured by the excess of carrying value over fair
value.  Mortgage servicing assets are recognized as separate assets
when rights are acquired through the sale of financial assets, primarily
one-to-four family real estate loans and are recorded at the lower of amortized
cost or estimated fair value.  Mortgage servicing rights are amortized
into non-interest expense in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial
assets.  Servicing assets are recorded at the lower of amortized cost
or estimated fair value, and are evaluated for impairment based upon the fair
value of the retained rights as compared to amortized cost.
  The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns.  Judgment is required in
assessing the future tax consequences of events that have been recognized in
financial statements or tax returns.  On January 1, 2007 the Company
adopted the revised accounting guidance on accounting for uncertainty in income
taxes, in which an income tax position will be recognized only if it is more
likely than not that it will be sustained upon IRS examination, based upon its
technical merits.  Once that status is met, the amount recorded will
be the largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement.  The Company recognizes interest
and penalties related to unrecognized tax benefits as a component of income tax
expense in our consolidated statements of earnings.  The Company
assesses it deferred tax assets to determine if the items are more likely than
not be realized and a valuation allowance is established for any amounts that
are not more likely than not to be realized.  Changes in estimates
regarding the actual outcome of these future tax consequences, including the
effects of IRS examinations and examinations by other state agencies, could
materially impact our financial position and results of operations.
  COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31,
2008
 
 SUMMARY OF
PERFORMANCE.Net earnings for 2009 decreased $1.3 million, or
28.1%, to $3.3 million as compared to net earnings of $4.6 million in
2008.  The decline in earnings was primarily the result of an increase
in our provision for loan losses, impairment charges to our investment security
portfolio and increases in FDIC premiums.  We increased our provision
for loan losses by $900,000 in 2009, as compared to 2008, due to the impact of
declining residential and commercial real estate values impacting the underlying
collateral in our loan portfolio, increased levels of non-accrual and past due
loans and the impact of the current economic environment on our loan
customers.  Also during 2009, we identified our portfolio of pooled
trust preferred securities as other-than-temporarily impaired, which resulted in
net credit-related impairment charges of $961,000.  Our non-interest
expenses increased by $1.4 million, to $18.9 million, during 2009 as compared to
2008, primarily as a result of an increase in FDIC insurance
premiums.  Our FDIC insurance premiums increased by $772,000 as the
result of a $277,000 special assessment, higher assessment rates and the
depletion of our previously unused FDIC credits.  We also experienced
increases in expenses relating to the acquisition and operation of a second
branch in Lawrence, Kansas and higher foreclosure and other real estate
costs.  Offsetting the increased expenses was a $1.4 million increase
in non-interest income, which was primarily attributable to a $1.6 million
increase in gains on sale of loans driven by higher origination volumes of
residential real estate loans that were sold in the secondary
market.  Results for 2008 included a $270,000 gain from the prepayment
of a FHLB advance, which represented the remaining unamortized fair value
adjustment recorded in purchase accounting and $497,000 of gains on sales of
investment securities.
 
 Our net
interest margin, on a tax equivalent basis, increased from 3.51% for 2008 to
3.57% for 2009.  During 2009 we were able to reduce our cost of
deposits and borrowings enough to offset the lower yields earned on loans and
investment securities as our interest earning assets and liabilities repriced in
markets that experienced a dramatic decline in benchmark interest rates that
began in late 2007 and continued throughout 2008 and 2009.  The lower
cost of funding allowed us to increase our net interest margin in a market that
as of December 31, 2009 still exhibited interest rates that were very low
compared to historical levels.
  32
  The
following table summarizes earnings and key performance measures for 2009 and
2008:
 
 (Dollars in thousands, except per share amounts)
                                              
                                              Years ended December 31,2009
                                              
                                              
                                              2008Net
      earnings:Net
      earnings
                                              
                                              $
                                              3,272
                                              
                                              
                                              $
                                              4,553Basic
      earnings per share
                                              
                                              $
                                              1.31
                                              
                                              
                                              $
                                              1.81Diluted
      earnings per share
                                              
                                              $
                                              1.31
                                              
                                              
                                              $
                                              1.80Earnings
      ratios:Return
      on average assets
                                              
                                              
                                              0.54
                                              %
                                              
                                              
                                              0.75
                                              %Return
      on average equity
                                              
                                              
                                              6.18
                                              %
                                              
                                              
                                              8.98
                                              %Equity
      to total assets
                                              
                                              
                                              9.23
                                              %
                                              
                                              
                                              8.54
                                              %Net
      interest margin (1)
                                              
                                              
                                              3.57
                                              %
                                              
                                              
                                              3.51
                                              %Dividend
      payout ratio
                                              
                                              
                                              55.27
                                              %
                                              
                                              
                                              38.10
                                              %(1)
      Net interest margin is presented on a fully taxable equivalent basis,
      using a 34% federal tax
rate.
  We
distributed a 5% stock dividend for the ninth consecutive year in December
2009.  All per share and average share data in this section reflects
the 2009 and 2008 stock dividends.
 
 INTEREST
INCOME.Interest income for 2009 decreased $4.4 million, or
13.8%, to $27.3 million from $31.6 million for 2008.  The decline in
interest income was a result of lower yields on interest-earning assets as loans
and investments mature and typically reprice lower in this low interest rate
environment, an increase in non-accrual loans and a decline in average interest
earning assets.  Interest income on loans decreased $3.9 million, or
15.8%, to $20.6 million for 2009, due to a decrease in the average yield on
loans from 6.49% during 2008 to 5.75% during 2009 and lower average balances,
which decreased to $359.9 million in 2009 from $375.2 million in
2008.  Average investment securities increased from $170.0 million for
2008, to $185.6 million for 2009.  The average yield on our investment
securities decreased to 4.24% during 2009 from 4.88% during
2008.  Interest income on investment securities decreased $518,000, or
7.2%, to $6.7 million for 2009 as the lower yields more than offset the higher
average balances.  The increased levels of investments were the result
of the increased liquidity primarily from lower outstanding loan
balances.
 
 INTEREST
EXPENSE.Interest expense for 2009 decreased $4.5 million, or
33.3%, to $9.1 million from $13.6 million for 2008.  Interest expense
on deposits decreased $4.1 million to $5.8 million, or 41.2%, from $9.9 million
in 2008 primarily as a result of lower rates on our maturing certificates of
deposit and lower rates on money market and NOW accounts due to the decline in
interest rates.  Our total cost of deposits declined from 2.53% during
2008 to 1.46% during 2009.  While our average interest bearing deposit
balances increased from $391.5 million in 2008 to $399.0 million in 2009, the
mix of average deposit balances shifted from higher cost certificate of deposit
balances to lower cost money market, NOW and savings accounts contributing to
lower cost of deposits.  During 2009 interest expense on borrowings
decreased $452,000, or 12.2%, due to lower outstanding
borrowings.  Our average outstanding borrowings declined from $105.5
million during 2008 to $92.9 million during 2009, while our cost of borrowing
was 3.52% in both years.
 
 NET INTEREST
INCOME.Net interest income represents the difference between
income derived from interest-earning assets and the expense incurred on
interest-bearing liabilities.  Net interest income is affected by both
the difference between the rates of interest earned on interest-earnings assets
and the rates paid on interest-bearing liabilities (“interest rate spread”) as
well as the relative amounts of interest-earning assets and interest-bearing
liabilities.
 
 Net
interest income for 2009 increased $148,000, to $18.2 million, from $18.0
million in 2008.  On a tax equivalent basis, net interest income
increased $262,000 and net interest margin increased to 3.57% from 3.51% for
2009 and 2008, respectively.  The increase in net interest margin
occurred primarily because we were able to reduce our costs of funding by more
than our yields declined on our interest earning assets as our interest earning
assets and liabilities continue to reprice lower in this low interest rate
environment.  The average cost of our liabilities declined 33.3% while
our average yield on assets only declined 13.8% during 2009 as compared to
2008.  The improvement in net interest margin from interest rates more
than offset the lower average balances of interest earning assets which declined
from $548.2 million in 2008 to $545.5 million in 2009.
  33
  PROVISION FOR LOAN LOSSES.We
maintain, and our Board of Directors monitors, an allowance for losses on
loans.  The allowance is established based upon management's periodic
evaluation of known and inherent risks in the loan portfolio, review of
significant individual loans and collateral, review of delinquent loans, past
loss experience, adverse situations that may affect the borrowers’ ability to
repay, current and expected market conditions, and other factors management
deems important.  Determining the appropriate level of reserves
involves a high degree of management judgment and is based upon historical and
projected losses in the loan portfolio and the collateral value of specifically
identified problem loans.  Additionally, allowance strategies and
policies are subject to periodic review and revision in response to a number of
factors, including current market conditions, actual loss experience and
management's expectations.
 
 The
provision for loan losses for 2009 was $3.3 million, compared to a provision of
$2.4 million during 2008.  Our provision for loan losses increased
$900,000 in 2009 based on the analysis of our loan portfolio, which indicated
the additional provision for loan losses was warranted given the impact of
declining residential and commercial real estate values impacting the underlying
collateral in our loan portfolio, increased levels of non-accrual and past due
loans and the impact of the current economic environment on our loan
customers.  Our provision for loan losses was higher in both 2009 and
2008 than compared to historical levels prior to 2008, due to the difficult
conditions that continue to exist in the economy and the impact on our loan
portfolio as well as increased levels of charge-offs and nonperforming loans
experienced in the recent difficult economic and credit
environments.  We have been working diligently to identify and address
the credit weaknesses in our loan portfolio.  While it is difficult to
forecast future events, we believe that our current allowance for loan losses,
coupled with our capital levels, loan portfolio management and underlying
fundamental earnings before the provision for loan losses, positions us to deal
with this challenging environment.  For further discussion of the
allowance for loan losses, refer to the “Asset Quality and Distribution”
section.
 
 NON-INTEREST
INCOME.Non-interest income increased $1.4 million, or 19.7%,
for 2009, to $8.4 million, as compared to $7.0 million in 2008.  The
increase was primarily attributable to an increase of $1.6 million, or 112.2%,
in gains on sale of loans.  The increased gains on sales of loans were
driven by higher origination volumes of residential real estate loans as a
result of low mortgage rates and tax incentives to homebuyers that were
available in 2009, as well as our expansion of the mortgage lending activities
over the past few years.  These residential real estate loans were
primarily sold in the secondary market.  Partially offsetting the
increased gains on sales of loans, was a $246,000 gain that was recognized
during 2008 from the prepayment of a FHLB advance, which represented the
remaining unamortized fair value adjustment required by purchase
accounting.
 
 INVESTMENT SECURITIES GAINS
(LOSSES).During 2009, each of our three investments in pooled
trust preferred securities, with original par values totaling $2.5 million, were
identified as other-than-temporarily impaired as a result of increased levels of
deferrals and defaults on the debt obligations of the financial companies
underlying securities, which exceeded our previous expectations.  The
increased levels of non-performing assets in the collateral pools resulted in
the recognition of $961,000 of estimated credit losses associated with these
investments during 2009, while the non-credit related losses of $1.3 million
were recognized in other comprehensive income.  In 2008, we recorded
$497,000 of gains on sales of investment securities as compared to $9,000 during
2009.
 
 NON-INTEREST
EXPENSE.Non-interest expense increased $1.4 million, or 8.2%,
to $18.9 million during 2009, as compared to 2008.  This increase was
primarily driven by increases of $772,000 in FDIC insurance premiums, $267,000,
or 3.0%, in compensation and benefits, $209,000, or 44.6%, in professional fees
and $205,000, or 98.3%, in foreclosure and other real estate
expenses.  The increase in FDIC insurance premiums was the result of a
$277,000 special assessment, which affected all FDIC insured institutions, as
well as higher assessment rates which have been imposed on all deposit
institutions, and the depletion of our previously unused FDIC assessment
credits.  The increase in compensation and benefits was driven by
higher salary costs and the addition of employees resulting from the acquisition
of a branch in Lawrence, Kansas.  The increases in professional fees
are primarily associated with our branch acquisition, but were also elevated due
to costs associated with outsourcing part of our IT management and future
compliance with Section 404 of the Sarbanes-Oxley Act.  The increase
in foreclosure and other real estate expenses, which is included in other
non-interest expense, was the result of increased foreclosure activity and other
real estate balances as we address our nonperforming loans.
  34
  INCOME
TAXES.Income tax expense decreased $964,000, to $146,000 for
2009, from $1.1 million for 2008.  Our effective tax rate declined
from 19.6% during 2008 to 4.3% for 2009.  The decrease in income tax
expense and the effective tax rate for 2009 resulted primarily from a decrease
in taxable income, as a percentage of earnings before income taxes, while our
tax exempt investment income and bank owned life insurance remained similar
between 2009 and 2008.
  COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31,
2007
 
 SUMMARY OF
PERFORMANCE.Net earnings for 2008 decreased $849,000, or
15.7%, to $4.6 million as compared to 2007.  The decrease in earnings
was primarily due to a $2.1 million increase in our provision for loan
losses.  During 2008 our loan loss analysis indicated it was necessary
to increase our provision for loan losses based upon our analysis of our loan
portfolio as well as deteriorating market conditions.  Even though our
levels of non accrual and past due loans declined during 2008, increased levels
of loan loss provision were warranted given the economic environment, the
uncertainty regarding the length and severity of the recession and the loan
losses and resulting charge-offs experienced during 2008.
 
 Partially
offsetting the higher provision for loan losses were gains of $497,000 on sales
of investment securities and $270,000 of gains on the prepayment of two FHLB
advances, as well as an increase of $502,000 in gains on sales of
loans.  Market conditions during the second quarter of 2008 allowed us
to sell longer term, higher yielding U.S. agency obligations while purchasing
shorter term, lower yielding mortgage-backed obligations at gains that were
higher than the reductions in interest income as a result of the
transactions.  During 2008, we began a strategy of issuing
longer-term, fixed rate FHLB advances and repaying shorter-term FHLB advances to
lengthen our FHLB advance maturities while rates were believed to be at a
relatively low point in the rate cycle.  As a result of the prepayment
of two $10 million advances, we recognized gains of $270,000, which represented
the unamortized fair value adjustment required by purchase accounting for a
prior acquisition.  The increase in gains on sales of loans was driven
by higher origination volumes of residential real estate loans that were sold in
the secondary market.
 
 The
following table summarizes earnings and key performance measures for 2008 and
2007:
 
 (Dollars in thousands, except per share amounts)
                                              
                                              Years ended December 31,2008
                                              
                                              
                                              2007Net
      earnings:Net
      earnings
                                              
                                              $
                                              4,553
                                              
                                              
                                              $
                                              5,402Basic
      earnings per share
                                              
                                              $
                                              1.81
                                              
                                              
                                              $
                                              2.02Diluted
      earnings per share
                                              
                                              $
                                              1.80
                                              
                                              
                                              $
                                              2.00Earnings
      ratios:Return
      on average assets
                                              
                                              
                                              0.75
                                              %
                                              
                                              
                                              0.90
                                              %Return
      on average equity
                                              
                                              
                                              8.98
                                              %
                                              
                                              
                                              10.78
                                              %Equity
      to total assets
                                              
                                              
                                              8.54
                                              %
                                              
                                              
                                              8.62
                                              %Net
      interest margin (1)
                                              
                                              
                                              3.51
                                              %
                                              
                                              
                                              3.47
                                              %Dividend
      payout ratio
                                              
                                              
                                              38.10
                                              %
                                              
                                              
                                              32.70
                                              %(1)
      Net interest margin is presented on a fully taxable equivalent basis,
      using a 34% federal tax
rate.
 
 INTEREST
INCOME.Interest income for 2008 decreased $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 of the dramatic declines in
benchmark interest rates during 2008.  Average loans for 2008
decreased to $375.2 million from $383.1 million in 2007.  Interest
income on loans decreased $4.0 million, or 14.2%, to $24.4 million 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 investment securities decreased to
4.88% during 2008 from 5.15% during 2007.  Interest income on
investment securities increased $124,000, or 1.7%, to $7.2 million for
2008.
  35
 
 INTEREST
EXPENSE.Interest expense for 2008 decreased 23.8%, or $4.3
million, to $13.6 million from $17.9 million for 2007.  Interest
expense on deposits decreased to $9.9 million, or 26.7%, from $13.5 million in
2007.  Contributing to the decline in interest expense was a decline
in average interest-bearing deposits from $397.7 million for 2007, to $391.5
million during 2008, as well as a decline in the average rate from 3.40% in 2007
to 2.53% in 2008.  Interest expense on borrowings decreased $644,000
during 2008 to $3.7 million from $4.4 million in 2007.  This decline
was the result of lower rates on our average borrowings, which declined to 3.52%
during 2008 from 4.63% in 2007.  Offsetting the lower average rates
were higher average balances which increased from $94.2 million in 2007 to
$105.5 million in 2008.
 
 NET INTEREST
INCOME.Net interest income represents the difference between
income derived from interest-earning assets and the expense incurred on
interest-bearing liabilities.  Net interest income is affected by both
the difference between the rates of interest earned on interest-earnings assets
and the rates paid on interest-bearing liabilities (“interest rate spread”) as
well as the relative amounts of interest-earning assets and interest-bearing
liabilities.
 
 Net
interest 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 of
2.0%.  This increase in net interest income was due primarily to the
decline in our cost of funding outpacing the decline in our yield on interest
earning assets, which resulted in our net interest margin, on a tax equivalent
basis, increasing to 3.51% from 3.47% for 2008 and 2007,
respectively.  During 2008 we were able to reduce our cost of deposits
and borrowings enough to offset the lower yield on loans in a market that
experienced a dramatic decline in benchmark interest rates that began in late
2007 and continued throughout 2008.  The lower cost of funding allowed
us to maintain our net interest margin in markets that had considerable
competitive pricing pressures.
 
 PROVISION FOR LOAN LOSSES.The
provision for loan losses increased to $2.4 million for 2008, compared to
$255,000 for 2007.  We increased our provision for loan losses based
on our analysis of the loan portfolio as well as deteriorating market
conditions.  Even though our levels of non-accrual and past due loans
declined from December 31, 2007 to December 31, 2008, increased levels of loan
loss provision were warranted given the economic environment and the uncertainty
regarding the length and severity of the recession 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 the collection of the
outstanding balances of two loan relationships totaling $3.0 million during 2008
and increased charge-offs of 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.  At December 31, 2008, the allowance for loan losses was $3.9
million, or 1.05% of gross loans outstanding, compared to $4.2 million, or 1.10%
of gross loans outstanding, at December 31, 2007.
 
 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 on
sales of investment securities, a $270,000 gain on the prepayment of FHLB
advances and increases of $502,000 in gains on sales of loans and $228,000 in
fees and service charges, as compared to 2007.  The increase in gains
on sales of loans were driven by higher origination volumes of residential real
estate loans that were sold in the secondary market while the increase in fees
and service charges were primarily deposit related.
 
 NON-INTEREST
EXPENSE.Total non-interest expense increased $872,000, an
increase of 5.2% during 2008 as compared to 2007.  The increase was
primarily attributable to increases of $568,000 in compensation and benefits and
$352,000 in other non-interest expense.  The increase in compensation
and benefits was driven primarily by increased staffing levels and general pay
increases.  The increased staffing levels were primarily related to
increased one-to-four family residential mortgage loan staff.  The
increase in other non-interest expenses was primarily the result of $118,000
increase in foreclosure and other real estate asset expenses, as well as $66,000
of other than temporary impairment charges on certain investment
securities.  During 2008 our FDIC deposit insurance costs were
primarily offset by assessment credits that were previously
received.
  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 2008 resulted primarily from a decrease in taxable income
during 2008 as compared to 2007.  The effective tax rate was 19.6% for
2008 as compared to 19.4% for 2007.
  36
  QUARTERLY
RESULTS OF OPERATIONS
 
 (Dollars in thousands, except per share amounts)2009 Quarters EndedMarch 31
                                  
                                  
                                  June 30
                                  
                                  
                                  September 30
                                  
                                  
                                  December 31Interest
      income
                                  
                                  $
                                  6,910
                                  
                                  
                                  $
                                  6,928
                                  
                                  
                                  $
                                  6,802
                                  
                                  
                                  $
                                  6,626Interest
      expense
                                  
                                  
                                  2,518
                                  
                                  
                                  
                                  2,369
                                  
                                  
                                  
                                  2,194
                                  
                                  
                                  
                                  2,005Net
      interest income
                                  
                                  
                                  4,392
                                  
                                  
                                  
                                  4,559
                                  
                                  
                                  
                                  4,608
                                  
                                  
                                  
                                  4,621Provision
      for loan losses
                                  
                                  
                                  300
                                  
                                  
                                  
                                  800
                                  
                                  
                                  
                                  1,900
                                  
                                  
                                  
                                  300Net
      interest income after provision for loan losses
                                  
                                  
                                  4,092
                                  
                                  
                                  
                                  3,759
                                  
                                  
                                  
                                  2,708
                                  
                                  
                                  
                                  4,321Non-interest
      income
                                  
                                  
                                  2,056
                                  
                                  
                                  
                                  2,639
                                  
                                  
                                  
                                  2,110
                                  
                                  
                                  
                                  1,787Investment
      securities gains (losses), net
                                  
                                  
                                  (327
                                  )
                                  
                                  
                                  (249
                                  )
                                  
                                  
                                  (133
                                  )
                                  
                                  
                                  (243
                                  )Non-interest
      expense
                                  
                                  
                                  4,611
                                  
                                  
                                  
                                  4,945
                                  
                                  
                                  
                                  4,826
                                  
                                  
                                  
                                  4,720Earnings
      before income taxes
                                  
                                  
                                  1,210
                                  
                                  
                                  
                                  1,204
                                  
                                  
                                  
                                  (141
                                  )
                                  
                                  
                                  1,145Income
      tax expense
                                  
                                  
                                  201
                                  
                                  
                                  
                                  192
                                  
                                  
                                  
                                  (254
                                  )
                                  
                                  
                                  7Net
      earnings
                                  
                                  $
                                  1,009
                                  
                                  
                                  $
                                  1,012
                                  
                                  
                                  $
                                  113
                                  
                                  
                                  $
                                  1,138Earnings
      per share (1):Basic
                                  
                                  $
                                  0.40
                                  
                                  
                                  $
                                  0.41
                                  
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.46Diluted
                                  
                                  $
                                  0.40
                                  
                                  
                                  $
                                  0.41
                                  
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.46
 
 2008 Quarters EndedMarch 31
                                    
                                    
                                    June 30
                                    
                                    
                                    September 30
                                    
                                    
                                    December 31Interest
      income
                                    
                                    $
                                    8,494
                                    
                                    
                                    $
                                    7,985
                                    
                                    
                                    $
                                    7,763
                                    
                                    
                                    $
                                    7,405Interest
      expense
                                    
                                    
                                    4,032
                                    
                                    
                                    
                                    3,512
                                    
                                    
                                    
                                    3,243
                                    
                                    
                                    
                                    2,827Net
      interest income
                                    
                                    
                                    4,462
                                    
                                    
                                    
                                    4,473
                                    
                                    
                                    
                                    4,520
                                    
                                    
                                    
                                    4,578Provision
      for loan losses
                                    
                                    
                                    600
                                    
                                    
                                    
                                    300
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    1,000Net
      interest income after provision for loan losses
                                    
                                    
                                    3,862
                                    
                                    
                                    
                                    4,173
                                    
                                    
                                    
                                    4,020
                                    
                                    
                                    
                                    3,578Non-interest
      income
                                    
                                    
                                    1,815
                                    
                                    
                                    
                                    1,763
                                    
                                    
                                    
                                    1,741
                                    
                                    
                                    
                                    1,726Investment
      securities gains (losses), net
                                    
                                    
                                    -
                                    
                                    
                                    
                                    497
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Non-interest
      expense
                                    
                                    
                                    4,289
                                    
                                    
                                    
                                    4,263
                                    
                                    
                                    
                                    4,311
                                    
                                    
                                    
                                    4,648Earnings
      before income taxes
                                    
                                    
                                    1,388
                                    
                                    
                                    
                                    2,170
                                    
                                    
                                    
                                    1,450
                                    
                                    
                                    
                                    656Income
      tax expense
                                    
                                    
                                    321
                                    
                                    
                                    
                                    594
                                    
                                    
                                    
                                    300
                                    
                                    
                                    
                                    (104
                                    )Net
      earnings
                                    
                                    $
                                    1,067
                                    
                                    
                                    $
                                    1,576
                                    
                                    
                                    $
                                    1,150
                                    
                                    
                                    $
                                    760Earnings
      per share (1):Basic
                                    
                                    $
                                    0.41
                                    
                                    
                                    $
                                    0.63
                                    
                                    
                                    $
                                    0.46
                                    
                                    
                                    $
                                    0.31Diluted
                                    
                                    $
                                    0.41
                                    
                                    
                                    $
                                    0.63
                                    
                                    
                                    $
                                    0.46
                                    
                                    
                                    $
                                    0.30
 
 (1) All
per share amounts have been adjusted to give effect to the 5% stock dividend
paid during December 2009 and 2008.
  37
  FINANCIAL
CONDITION
 
 Although
the Company has avoided many of the most serious problems caused by the
deterioration in residential and commercial real estate market values and loan
portfolio credit quality, particularly the subprime mortgage sector, the
Company’s asset quality and performance has nonetheless been affected by the
declining residential and commercial real estate values, falling consumer
confidence, increased unemployment and decreased consumer spending, which have
all contributed to a slowing economy and a difficult credit
market.  While the markets in which the Company operates have been
impacted by the economic slowdown, the effect has not been as severe as those
experienced in some areas of the U.S.  Outside of the identified
problem assets, management believes that it continues to have a high quality
asset base and solid earnings and anticipates that its efforts to run a high
quality financial institution with a sound asset base will continue to create a
strong foundation for continued growth and profitability in the
future.
 
 ASSET QUALITY AND
DISTRIBUTION.  Total assets decreased to $584.2 million at
December 31, 2009, compared to $602.2 million at December 31,
2008.  Our primary ongoing sources of funds are deposits, FHLB
borrowings, proceeds from principal and interest payments on loans and
investment securities and proceeds from the sale of mortgage loans and
investment securities.  While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates and economic
conditions.
 
 Net
loans, excluding loans held for sale, decreased to $342.7 million as of December
31, 2009 from $365.8 million at December 31, 2008.  The $23.1 million
decline in net loans is primarily the result of a $14.5 million decline in our
one-to-four family residential loan portfolio as a result of refinancings and
paydowns in our existing portfolio as we typically sell most of our newly
originated one-to-four family loans.  Also contributing to the decline
in net loans was a $4.2 million decline in construction and land loans as we
continued to reduce our exposure to those types of loans and a $3.8 million
decline in commercial loans.  We have concentrated on generating
commercial and commercial real estate loans over the past few
years.  This is consistent with our strategy to continue to reduce
portfolio reliance on construction loans and residential mortgage loans, most of
which have been acquired in previous acquisitions, while increasing our loan
portfolio in the area of commercial lending.  Even though we continue
to concentrate on generating commercial and commercial real estate loans, these
loans declined in 2009 in part due to a decline during 2009 in demand for
commercial and commercial real estate loans that met our credit and asset
quality standards.  As of December 31, 2009, our commercial loans,
including commercial real estate loans, comprised 58.8% of our loan portfolio,
up from 56.2% at December 31, 2008.  As of December 31, 2009, our
construction and land loans comprised 10.6% of total gross loans, down from
11.1% at December 31, 2008 as we continue to reduce our exposure to these
loans.  As of December 31, 2009, our one-to-four family residential
loans comprised 28.3% of total gross loans, down from 30.5% at December 31, 2008
as one-to-four family residential loans in our portfolio continue to refinance
and pay down.  We anticipate continuing to diversify our loan
portfolio composition through our continued planned expansion of commercial and
commercial real estate lending activities and continued refinancings and
paydowns in our portfolio of one-to-four family residential loans.
 
 Our
primary investing activities are the origination of commercial real estate,
commercial and consumer loans and the purchase of investment and mortgage-backed
securities.  Generally, we originate fixed-rate, residential mortgage
loans with maturities in excess of ten years for sale in the secondary
market.  These loans are typically sold soon after the loan
closing.  We do not originate and warehouse these fixed-rate
residential loans for resale in order to speculate on interest
rates.  As of December 31, 2009, our residential mortgage loan
portfolio consisted of $36.3 million with fixed rates and $62.0 million with
variable rates.
 
 The
allowance for loan losses is established through a provision for loan losses
based on our evaluation of the risk inherent in the loan portfolio and changes
in the nature and volume of its loan activity.  Such evaluation, which
includes a review of all loans with respect to which full collectability may not
be reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, level of classified loans
and other factors that warrant recognition in providing for an adequate
allowance for losses on loans.  During 2009, we have experienced an
increase in our non-performing assets due to the difficult conditions that
continue to exist in the economy and its impact on our loan
portfolio.  As a result of the impact of declining residential and
commercial real estate values on the underlying collateral in our loan
portfolio, increased levels of non-accrual and past due loans and the current
economic environment on our loan customers, we have increased our provision for
loan losses.  During the year ended December 31, 2009 our provision
for loan losses totaled $3.3 million as compared to $2.4 million during the same
period of 2008.  As a result, our allowance for loan losses has
increased to $5.5 million at December 31, 2009 from $3.9 million at December 31,
2009.  We feel that higher levels of provisions for loan losses are
appropriate based upon our analysis of our loan portfolio as well as the effects
of the depressed market conditions on our loan portfolio.  We feel the
external risks within the environment which we operate remain present today and
will need to be continuously monitored.  We have identified the
stresses in our loan portfolio and are working to reduce the risks of certain
loan exposures, including significantly reducing our exposure to construction
loans.  Although we believe that we use the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustment to the allowance for loan losses.  In addition,
net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in establishing the allowance for loan
losses.
  38
 
 Loans
past due more than a month totaled $13.3 million at December 31, 2009, compared
to $9.4 million at December 31, 2008.  At December 31, 2009, $11.8
million in loans were on non-accrual status, or 3.5% of net loans, compared to a
balance of $5.7 million, or 1.6% of net loans, at December 31,
2008.  Non-accrual loans consist primarily of loans greater than
ninety days past due and which are also included in the past due loan
balances.  There were no loans 90 days delinquent and still accruing
interest at December 31, 2009 or December 31, 2008.  The increase in
non-accrual and past due loans was primarily driven by a $4.2 million
construction loan relationship and a $2.4 million commercial agriculture loan
that were classified as non-accrual and past due during 2009.  Our
impaired loans increased from $7.1 million at December 31, 2008 to $11.8 million
at December 31, 2009 primarily because of the same two loans that increased the
non-accrual and past due loan balances.  Our analysis of the two
nonperforming loans mentioned above concluded that the potential exists that the
updated collateral values or sources of repayment may not be sufficient to fully
cover the outstanding loan balances.  As part of the Company’s credit
risk management, we continue to aggressively manage the loan portfolio to
identify problem loans and have placed additional emphasis on commercial real
estate and construction relationships.  During 2009 we had net loan
charge-offs of $1.7 million compared to $2.7 million of net loan charge-offs for
the comparable period of 2008.  The net loan charge-offs during 2009
were primarily related to the charge-off of a $1.1 million commercial loan
relationship that was liquidated during 2009.  The 2008 net loan
charge-offs were primarily related to the liquidation of a pool of non-owner
occupied, one-to-four family residential loans, made to a single entity in the
Kansas City, Missouri area.  These loans were secured by houses
located in deteriorating neighborhoods and were originally obtained as part of a
previous acquisition.
 
 Although
the recent economic recession created a very difficult environment for financial
institutions, as well as other businesses, the U.S. government, Federal Reserve
and the Treasury Department initiated many programs to try to stimulate the
economy.  Nevertheless, many financial institutions, including us,
have experienced an increase in non-performing assets during the recent economic
period, as even well-established business borrowers developed cash flow,
profitability and other business-related problems.  We believe that
our allowance for loan losses at December 31, 2009, was adequate, however, there
can be no assurances that losses will not exceed the estimated
amounts.  While we believe that we use the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustment to the allowance for loan losses.  In addition,
net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in establishing the allowance for loan
losses.  Further deterioration in the local economy or real estate
values may create additional problem loans for us and require further adjustment
to our allowance for loan losses.
 
 LIABILITY
DISTRIBUTION.Total deposits decreased to $438.6 million at
December 31, 2009 from $439.5 million at December 31, 2008.  During
2009 we were able to increase our retail deposits by $22.3 million, which
includes $6.4 million of assumed deposits from our branch acquisition, while
reducing our public fund deposits by $23.2 million.  The decline in
public fund deposits was primarily concentrated in short-term certificates of
deposits which are typically acquired through a bid process and are awarded to
the bank that bids the highest rate.   Borrowings decreased $22.2
million to $82.2 million at December 31, 2009 from $104.4 million at December
31, 2008.  The decline in borrowings was primarily related to the
maturity of $15.0 million of FHLB advances during 2009 and paying off the
balance on our FHLB line of credit.
 
 Non-interest
bearing deposits at December 31, 2009 were $54.8 million, or 12.5% of deposits,
compared to $49.8 million, or 11.3%, at December 31, 2008.  Money
market and NOW deposit accounts were 37.0% of our deposit portfolio and totaled
$162.4 million at December 31, 2009, compared to $150.1 million, or 34.2%, at
December 31, 2008.  Savings accounts increased to $29.0 million, or
6.6% of deposits, at December 31, 2009, from $26.2 million, or 6.0%, at December
31, 2007.  Certificates of deposit decreased to $192.3 million, or
43.9% of deposits, at December 31, 2009, from $213.4 million, or 48.6%, at
December 31, 2008.
  39
 
 Certificates
of deposit at December 31, 2009, which were scheduled to mature in one year or
less, totaled $138.1 million.  Historically, maturing deposits have
generally remained with the Bank and we believe that a significant portion of
the deposits maturing in one year or less will remain with us upon
maturity.
 
 CASH FLOWS.During
the year ended December 31, 2009, our cash and cash equivalents decreased by
$1.4 million.  Our operating activities during 2009 provided net cash
of $4.0 million, while our net investing activities generated $25.6 million in
2009.  The net cash inflow from investing activities was primarily
related to the net decrease in loans.  Our financing activities used
net cash of $31.1 million during 2009, primarily to reduce
borrowings.
 
 LIQUIDITY.  Our most
liquid assets are cash and cash equivalents and investment securities available
for sale. The level of these assets is dependent on our operating, financing,
lending and investing activities during any given period.  At December
31, 2009 and 2008, the carrying value of these liquid assets totaled $174.0
million and $176.0 million, respectively.  During periods in which we
are not able to originate a sufficient amount of loans and/or periods of high
principal prepayments, we increase our liquid assets by investing in short-term,
high-grade investments.
 
 Liquidity
management is both a daily and long-term function of our
strategy.  Excess funds are generally invested in short-term
investments.  In the event we require funds beyond our ability to
generate them internally, additional funds are generally available through the
use of FHLB advances, a line of credit with the FHLB, other borrowings or
through sales of securities.  At December 31, 2009, we had outstanding
FHLB advances of $56.0 million and no borrowings against our line of credit with
the FHLB.  At December 31, 2009, our total borrowing capacity with the
FHLB was $98.9 million.  At December 31, 2009, we had no borrowings
through the Federal Reserve discount window, while our borrowing capacity was
$14.7 million.  We also have various other fed funds agreements, both
secured and unsecured, with correspondent banks totaling approximately $58.8
million at December 31, 2009, which had no borrowings against at that
time.  We had other borrowings of $26.2 million at December 31, 2009,
which included $16.5 million of subordinated debentures and $5.3 million in
repurchase agreements.  The Company has a $7.5 million line of credit
from an unrelated financial institution maturing on November 17, 2010, with an
interest rate that adjusts daily based on the prime rate plus 0.25%, but not
less than 4.25%.  This line of credit has covenants specific to
capital and other financial ratios, which the Company was in compliance with at
December 31, 2009.  The outstanding balance on the line of credit at
December 31, 2009 was $4.4 million, which was included in other
borrowings.
 
 As a
provider of financial services, we routinely issue financial guarantees in the
form of financial and performance standby letters of credit.  Standby
letters of credit are contingent commitments issued by us generally to guarantee
the payment or performance obligation of a customer to a third
party.  While these standby letters of credit represent a potential
outlay by us, a significant amount of the commitments may expire without being
drawn upon.  We have recourse against the customer for any amount the
customer is required to pay to a third party under a standby letter of
credit.  The letters of credit are subject to the same credit
policies, underwriting standards and approval process as loans made by
us.  Most of the standby letters of credit are secured, and in the
event of nonperformance by the customers, we have the right to the underlying
collateral, which could include commercial real estate, physical plant and
property, inventory, receivables, cash and marketable securities.  The
contract amount of these standby letters of credit, which represents the maximum
potential future payments guaranteed by us, was $2.4 million at December 31,
2009.
 
 At
December 31, 2009, we had outstanding loan commitments, excluding standby
letters of credit, of $57.4 million. We anticipate that sufficient funds will be
available to meet current loan commitments. These commitments consist of
unfunded lines of credit and commitments to finance real estate
loans.
 
 CAPITAL.The
Federal Reserve has established capital requirements for bank holding companies
which generally parallel the capital requirements for national banks under OCC
regulations. The regulations provide that 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 in total consolidated
assets.
  40
  At
December 31, 2009, we continued to maintain a sound leverage capital ratio of
9.3% and a total risk-based capital ratio of 15.0%.  As shown by the
following table, our capital exceeded the minimum capital requirements at
December 31, 2009 (dollars in thousands):
 
 Actual
                    
                    
                    Actual
                    
                    
                    Required
                    
                    
                    Requiredamount
                    
                    
                    percent
                    
                    
                    amount
                    
                    
                    percentLeverage
                    
                    $
                    54,386
                    
                    
                    
                    9.3
                    %
                    
                    $
                    23,413
                    
                    
                    
                    4.0
                    %Tier
      1 capital
                    
                    
                    54,386
                    
                    
                    
                    13.7
                    %
                    
                    
                    15,901
                    
                    
                    
                    4.0
                    %Total
      risk-based capital
                    
                    
                    59,439
                    
                    
                    
                    15.0
                    %
                    
                    
                    31,803
                    
                    
                    
                    8.0
                    %
 
 At
December 31, 2009, Landmark National Bank continued to maintain a sound leverage
ratio of 9.9% and a total risk-based capital ratio of 15.8%.  As shown
by the following table, Landmark National Bank’s capital exceeded the minimum
capital requirements at December 31, 2009 (dollars in thousands):
 
 Actual
                    
                    
                    Actual
                    
                    
                    Required
                    
                    
                    Requiredamount
                    
                    
                    percent
                    
                    
                    amount
                    
                    
                    percentLeverage
                    
                    $
                    57,548
                    
                    
                    
                    9.9
                    %
                    
                    $
                    23,343
                    
                    
                    
                    4.0
                    %Tier
      1 capital
                    
                    
                    57,548
                    
                    
                    
                    14.5
                    %
                    
                    
                    15,837
                    
                    
                    
                    4.0
                    %Total
      risk-based capital
                    
                    
                    62,429
                    
                    
                    
                    15.8
                    %
                    
                    
                    31,673
                    
                    
                    
                    8.0
                    %
 
 Banks and
bank holding companies are generally expected to operate at or above the minimum
capital requirements. The above ratios are well in excess of regulatory minimums
and should allow us to operate without capital adequacy concerns. The Federal
Deposit Insurance Corporation Improvement Act of 1991 establishes a bank rating
system based on the capital levels of banks.  As of December 31, 2009
and 2008, we were rated "well capitalized", which is the highest rating
available under this capital-based rating system.  We have $16.5
million in trust preferred securities which, in accordance with current capital
guidelines, has been included in Tier 1 capital as of December 31,
2009.  Cash distributions on the securities are payable quarterly, are
deductible for income tax purposes and are included in interest expense in the
consolidated financial statements.
 
 On
March 1, 2005, the Board of Governors of the Federal Reserve System issued
a final rule regarding the continued inclusion of trust preferred securities in
the Tier 1 capital of bank holding companies, subject to stricter
standards.  As a result of the final rule, the Federal Reserve will
limit the aggregate amount of a bank holding company’s cumulative perpetual
preferred stock, trust preferred securities and other minority interests to 25%
of a company’s core capital elements, net of goodwill.  Regulations in
place at the time we placed our currently outstanding trust preferred securities
did not require the deduction of goodwill.  The rule also provides
that amounts of qualifying trust preferred securities and certain minority
interests in excess of the 25% limit may be included in Tier 2 capital but
will be limited, together with subordinated debt and limited-life preferred
stock, to 50% of Tier 1 capital.  The final rule provides a
five-year transition period for bank holding companies to meet these
quantitative limitations.
  DIVIDENDS
  During
the year ended December 31, 2009, we paid a quarterly cash dividend of $0.181
per share to our stockholders.   Additionally, we distributed a
5% stock dividend for the ninth consecutive year in December
2009.  The cash dividends have been adjusted to give effect to the 5%
stock dividend.
  The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations.  As described above,
Landmark National Bank exceeded its minimum capital requirements under
applicable guidelines as of December 31, 2009.  The National Bank Act
imposes limitations on the amount of dividends that a national bank may pay
without prior regulatory approval.  Generally, the amount is limited
to the bank's current year's net earnings plus the adjusted retained earnings
for the two preceding years.  As of December 31, 2009, approximately
$3.0 million was available to be paid as dividends to Landmark Bancorp by
Landmark National Bank without prior regulatory approval.
  41
  Additionally,
our ability to pay dividends is limited by the subordinated debentures that are
held by two business trusts that we control.  Interest payments on the
debentures must be paid before we pay dividends on our capital stock, including
our common stock.  We have the right to defer interest payments on the
debentures for up to 20 consecutive quarters.  However, if we elect to
defer interest payments, all deferred interest must be paid before we may pay
dividends on our capital stock.
  RECENT
ACCOUNTING DEVELOPMENTS
  In April
2009, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance, Accounting Standards Codification (“ASC”) 320-10-35, on the
recognition and presentation of other-than-temporary impairments, which amends
guidance for recognizing and reporting other-than-temporary impairments of debt
securities and improves the presentation of other-than-temporary impairments in
financial statements for both debt and equity securities.  Companies
are now required to separate an other-than-temporary impairment of a debt
security into credit related losses and other factors when management asserts
that it does not have the intent to sell the security and it is more likely than
not that it will not be required to sell the security before recovery of its
cost basis.  The amount of other-than-temporary impairment related to
credit losses is recognized in earnings while the amount related to other
factors is recorded in other comprehensive income.  The Company
adopted the accounting guidance effective January 1, 2009 and applied the
principles to its other-than-temporary impairment analysis during 2009,
including investments in pooled trust preferred securities which resulted in the
recognition of credit-related impairments of $961,000 in earnings while the
noncredit-related impairments of $1.3 million are recognized in accumulated
other comprehensive income.
 
 In
April 2009, the FASB issued authoritative guidance, ASC 820-10-35-15A, for
estimating fair value when the volume and level of activity for an asset or
liability, in relation to normal market activity, has significantly
decreased.  The guidance emphasizes that the objective of fair value
measurement remains the same, determining the price that would be received or
paid in an orderly transaction between market participants at the measurement
date under current market conditions.  The Company adopted this
guidance as of January 1, 2009 and has applied the guidance to its pooled trust
preferred securities.
 
 In April
2009, the FASB amended existing guidance, ASC 825-10-50, on the disclosure about
fair value of financial instruments to include interim reporting periods, in
addition to annual disclosures.  The Company adopted the guidance on
April 1, 2009 and began including the disclosures in its interim reports
beginning with the June 30, 2009 reporting period.
 
 In May
2009, the FASB issued authoritative guidance ASC 855 Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are
issued.  In particular this statement sets forth the period after the
balance sheet date during which management should evaluate events or
transactions for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize subsequent
events or transactions and the disclosures required.  The Company
adopted this guidance for the year ended December 31, 2009 and concluded there
were no material subsequent events the date that these financial statements were
issued.
 
 In June
2009, the FASB amended the existing guidance to ASC Topic 860, Transfers and
Servicing.  The revision pertains to accounting for transfers
of loans, participating interests in loans and other financial assets and
reinforced the determination of whether a transferor has surrendered control
over transferred financial assets.  That determination must consider
the transferor’s continuing involvements in the transferred financial asset,
including all arrangements or agreements made contemporaneously with, or in
contemplation of, the transfer, even if they were not entered into at the time
of the transfer.  It added the term “participating interest” to
establish specific conditions for reporting a transfer of a portion of a
financial asset as a sale.  A qualifying “participating interest”
requires each of the following: (1) conveys proportionate ownership rights with
equal priority to each participating interest holder; (2) involves no recourse
(other than standard representations and warranties) to, or subordination by,
any participating interest holder; and (3) does not entitle any participating
interest holder to receive cash before any other participating interest
holder.  If the transfer does not meet those conditions, a transferor
should account for the transfer as a sale only if it transfers the entire
financial asset or a group of entire financial assets and surrenders control
over the entire transferred assets in accordance with the conditions in ASC
860-10-40, as amended.  The Company adopted the guidance as of January
1, 2010.  The adoption of this guidance did not have a material effect
on our consolidated financial statements.
 
 In June
2009, the FASB improved the financial reporting of variable interest entities
and provided clarification as a result of the elimination of qualifying special
purpose entities.  For calendar year companies, this statement is
effective for annual periods ending on December 31, 2009 and for all interim and
annual periods thereafter.  The adoption of this guidance did not have
a material effect on our consolidated financial statements.
  42
  In June
2009, the FASB established the Accounting Standards Codification (“ASC”) as the
source of authoritative U.S. GAAP.  Rules and interpretive releases of
the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants.  On the effective date the Codification superseded all
then-existing non-SEC accounting and reporting standards.  Going
forward the Board will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it
will issue Accounting Standards Updates (“ASU”).  The Board will not
consider Accounting Standards Updates as authoritative in their own right. ASU
will serve only to update the Codification, provide background information about
the guidance, and provide the bases for conclusions on the change(s) in the
Codification.  The Company applied this guidance beginning with the
interim reporting period of September 30, 2009.  The adoption of this
guidance did not have a material effect on our consolidated financial
statements.
 
 In
January 2010, the FASB updated the Codification on accounting for distributions
to shareholders that offers them the ability to elect to receive their entire
distribution in cash or stock with a potential limitation on the total amount of
cash that all shareholders can receive in the aggregate is considered a share
issuance that is reflected in EPS prospectively and is not a stock
dividend.  The new guidance is effective for interim and annual
periods after December 15, 2009, and would be applied on a retrospective
basis.  The adoption of this guidance did not have a material effect
on our consolidated financial statements.
 
 In
January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosure about Fair Value
Measurements which requires new disclosures related to recurring and
nonrecurring fair value measurements.  The ASU requires new
disclosures about the transfers into and out of Levels 1 and 2 as well as
requiring disclosures about Level 3 activity relating to purchases, sales,
issuances and settlements.  The update also clarifies that fair value
measurement disclosures should be at an appropriate level of disaggregation and
that an appropriate class of assets and liabilities is often a subset of the
line items in the financial statements.  The update also clarifies
that disclosures should include the valuation techniques and inputs used to
measure fair value in Levels 2 and 3 for both recurring and nonrecurring
measurements.  The new guidance is effective for interim and annual
periods beginning after December 15, 2009, except for disclosures on the Level 3
activity relating to purchases, sales, issuances and settlements which are
effective for interim and annual periods after December 15, 2010.
 
 In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure
Requirements.  The amendments in the ASU remove the requirement
for companies that are subject to the periodic reporting requirements of the
Exchange Act to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements.  Revised
financial statements include financial statements revised as a result of either
correction of an error or retrospective application of U.S. generally accepted
accounting principals (“U.S. GAAP”).  The FASB also clarified that if
the financial statements have been revised, then an entity that is not an SEC
filer should disclose both the date that the financial statements were issued or
available to be issued and the date the revised financial statements were issued
or available to be issued.  The FASB believes these amendments remove
potential conflicts with the SEC’s literature.  All of the amendments
in the ASU were effective upon issuance, except for the use of the issued date
for conduit debt obligors, which will be effective for interim or annual periods
ending after June 15, 2010.  The adoption of this guidance did not
have a material effect on our consolidated financial statements.
 
 EFFECTS
OF INFLATION
 
 Our
consolidated financial statements and accompanying footnotes have been prepared
in accordance with U.S. generally accepted accounting principles, which
generally requires the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation.  The impact of
inflation can be found in the increased cost of our operations because our
assets and liabilities are primarily monetary and interest rates have a greater
impact on our performance than do the effects of
inflation.
  43
  ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Our
assets and liabilities are principally financial in nature and the resulting net
interest income thereon is subject to changes in market interest rates and the
mix of various assets and liabilities.  Interest rates in the
financial markets affect our decision on pricing our assets and liabilities
which impacts our net interest income, a significant cash flow source for
us.  As a result, a substantial portion of our risk management
activities relates to managing interest rate risk.
 
 Our
Asset/Liability Management Committee monitors the interest rate sensitivity of
our balance sheet using earnings simulation models and interest sensitivity GAP
analysis.  We have set policy limits of interest rate risk to be
assumed in the normal course of business and monitor such limits through our
simulation process.
 
 In the
past, we have been successful in meeting the interest rate sensitivity
objectives set forth in our policy.  Simulation models are prepared to
determine the impact on net interest income for the coming twelve months,
including using rates at December 31, 2009 and forecasting volumes for the
twelve month projection.  This position is then subjected to a shift
in interest rates of 100 and 200 basis points rising and 100 basis points
falling with an impact to our net interest income on a one year horizon as
follows:
 
 Scenario
                        
                        $000'schange
                          innet interest
                          income
                        
                        
                        % changein
                          netinterest
                          income200
      basis point rising
                        
                        $
                        1,577
                        
                        
                        
                        8.1
                        %100
      basis point rising
                        
                        $
                        819
                        
                        
                        
                        4.2
                        %100
      basis point falling
                        
                        $
                        (535
                        )
                        
                        
                        -2.7
                        %
 
 ASSET/LIABILITY
MANAGEMENT
 
 Interest
rate "gap" analysis is a common, though imperfect, measure of interest rate risk
which measures the relative dollar amounts of interest-earning assets and
interest bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment.  The "gap" is the difference
between the amounts of such assets and liabilities that are subject to such
repricing.  A "positive" gap for a given period means that the amount
of interest-earning assets maturing or otherwise repricing within that period
exceeds the amount of interest-bearing liabilities maturing or otherwise
repricing during that same period.  In a rising interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a greater increase in the
yield of its assets relative to the cost of its
liabilities.  Conversely, the cost of funds for an institution with a
positive gap would generally be expected to decline less quickly than the yield
on its assets in a falling interest rate environment.  Changes in
interest rates generally have the opposite effect on an institution with a
"negative" gap.
 
 Following
is our "static gap" schedule.  One-to-four family and consumer loans
included prepayment assumptions, while all other loans assume no
prepayments.  The mortgage-backed securities included published
prepayment assumptions, while all other investments assume no
prepayments.
 
 Certificates
of deposit reflect contractual maturities only.  Money market accounts
are rate sensitive and accordingly, a higher percentage of the accounts have
been included as repricing immediately in the first period.  Savings
and NOW accounts are not as rate sensitive as money market accounts and for that
reason a significant percentage of the accounts are reflected in the more than 1
to 5 years category.
 
 We have
been successful in meeting the interest sensitivity objectives set forth in our
policy.  This has been accomplished primarily by managing the assets
and liabilities while maintaining our traditional high credit
standards.
  44
  INTEREST-EARNING
ASSETS AND INTEREST-BEARING LIABILITIES REPRICING SCHEDULE
("GAP" TABLE)
 
 As of December 31, 20093 months or
                                        less
                                      
                                      
                                      More than
                                        3 to 12
                                        months
                                      
                                      
                                      More than
                                        1 to 5years
                                      
                                      
                                      Over 5
                                        years
                                      
                                      
                                      Total(Dollars in thousands)Interest-earning
      assets:Investment
      securities
                                      
                                      $
                                      16,494
                                      
                                      
                                      $
                                      21,244
                                      
                                      
                                      $
                                      77,274
                                      
                                      
                                      $
                                      54,607
                                      
                                      
                                      $
                                      169,619Loans
                                      
                                      
                                      119,376
                                      
                                      
                                      
                                      108,751
                                      
                                      
                                      
                                      118,208
                                      
                                      
                                      
                                      1,106
                                      
                                      
                                      
                                      347,441Total
      interest-earning assets
                                      
                                      $
                                      135,870
                                      
                                      
                                      $
                                      129,995
                                      
                                      
                                      $
                                      195,482
                                      
                                      
                                      $
                                      55,713
                                      
                                      
                                      $
                                      517,060Interest-bearing
      liabilities:Certificates
      of deposit
                                      
                                      $
                                      52,349
                                      
                                      
                                      $
                                      85,791
                                      
                                      
                                      $
                                      54,108
                                      
                                      
                                      $
                                      89
                                      
                                      
                                      $
                                      192,337Money
      market and NOW accounts
                                      
                                      
                                      19,494
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      142,955
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      162,449Savings
      accounts
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      29,010
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      29,010Borrowed
      money
                                      
                                      
                                      22,864
                                      
                                      
                                      
                                      15,352
                                      
                                      
                                      
                                      15,182
                                      
                                      
                                      
                                      28,785
                                      
                                      
                                      
                                      82,183Total
      interest-bearing liabilities
                                      
                                      $
                                      94,707
                                      
                                      
                                      $
                                      101,143
                                      
                                      
                                      $
                                      241,255
                                      
                                      
                                      $
                                      28,874
                                      
                                      
                                      $
                                      465,979Interest
      sensitivity gap per period
                                      
                                      $
                                      41,163
                                      
                                      
                                      $
                                      28,852
                                      
                                      
                                      $
                                      (45,773
                                      )
                                      
                                      $
                                      26,839
                                      
                                      
                                      $
                                      51,081Cumulative
      interest sensitivity gap
                                      
                                      
                                      41,163
                                      
                                      
                                      
                                      70,015
                                      
                                      
                                      
                                      24,242
                                      
                                      
                                      
                                      51,081Cumulative
      gap as a percent of total interest-earning assets
                                      
                                      
                                      7.96
                                      %
                                      
                                      
                                      13.54
                                      %
                                      
                                      
                                      4.69
                                      %
                                      
                                      
                                      9.88
                                      %Cumulative
      interest sensitive assets as a percent of cumulative interest sensitive
      liabilities
                                      
                                      
                                      143.46
                                      %
                                      
                                      
                                      135.75
                                      %
                                      
                                      
                                      105.55
                                      %
                                      
                                      
                                      110.96
                                      %
  45
  SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
 
 Forward-Looking
Statements
 
 This
document (including information incorporated by reference) contains, and future
oral and written statements by us and our management may contain,
forward-looking statements, within the meaning of such term in the Private
Securities Litigation Reform Act of 1995, with respect to our financial
condition, results of operations, plans, objectives, future performance and
business.  Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of our management and on information
currently available 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 this document, including
forward-looking statements, speak only as of the date they are made, and we
undertake no obligation to update any statement in light of new information or
future events.
 
 Our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.  Factors which could have a material adverse
effect on operations and future prospects by us and our subsidiaries include,
but are not limited to, the following:
  ·
              The
      strength of the United States economy in general and the strength of the
      local economies in which we conduct our operations which may be less
      favorable than expected and may result in, among other 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 and the effects of further increases in FDIC
      premiums.
 ·
              The
      effects of changes in interest rates (including the effects of changes in
      the rate of prepayments of our assets) and the policies of the Board of
      Governors of the Federal Reserve
System.
 ·
              Our
      ability to compete with other financial institutions as effectively as we
      currently intend due to increases in competitive pressures in the
      financial services sector.
 ·
              Our
      inability to obtain new customers and to retain existing
      customers.
 ·
              The
      timely development and acceptance of products and services, including
      products and services offered through alternative delivery channels such
      as the Internet.
 ·
              Technological
      changes implemented by us and by other parties, including third party
      vendors, which may be more difficult or more expensive than anticipated or
      which may have unforeseen consequences to us and our
      customers.
 ·
              Our
      ability to develop and maintain secure and reliable electronic
      systems.
 ·
              Our
      ability to retain key executives and employees and the difficulty that we
      may experience in replacing key executives and employees in an effective
      manner.
 ·
              Consumer
      spending and saving habits which may change in a manner that affects our
      business adversely.
 ·
              Our
      ability to successfully integrate acquired businesses and future
      growth.
 ·
              The
      costs, effects and outcomes of existing or future
    litigation.
 ·
              Changes
      in accounting policies and practices, as may be adopted by state and
      federal regulatory agencies and the Financial Accounting Standards
      Board.
 ·
              The
      economic impact of past and any future terrorist attacks, acts of war or
      threats thereof, and the response of the United States to any such threats
      and attacks.
 ·
              Our
      ability to effectively manage our credit
risk.
 ·
              Our
      ability to forecast probable loan losses and maintain an adequate
      allowance for loan losses.
 ·
              The
      effects of declines in the value of our investment
    portfolio.
 ·
              Our
      ability to raise additional capital if
needed.
 ·
              The
      effects of declines in real estate
markets.
 
 These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.  Additional information concerning us and our business,
including other factors that could materially affect our financial results is
included in the “Risk Factors” section.
  46
  ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
 
 REPORT
OF INDEPENDENT REGISTERED
 PUBLIC
ACCOUNTING FIRM
 
 The Board
of Directors
  Landmark
Bancorp, Inc.:
  We have
audited the accompanying consolidated balance sheets of Landmark Bancorp, Inc.
and subsidiary (the Company) as of December 31, 2009 and 2008, and the
related consolidated statements of earnings, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2009.  These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Landmark Bancorp,
Inc. and subsidiary as of December 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
 
 As
discussed in note 3 to the consolidated financial statements, the Company
changed its method of accounting for other-than-temporary impairments of debt
securities due to the adoption of FASB Staff Position No. FAS 115-2 and FAS
124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,”
(included in FASB ASC Topic 320, Investments-Debt and Equity Securities), as of
January 1, 2009.
 
 /s/ KPMG
LLP
 
 Kansas
City, Missouri
 March 26,
2010
  47
  LANDMARK
BANCORP, INC. AND SUBSIDIARY
 Consolidated
Balance Sheets
 
 (Dollars in thousands)
                                
                                December 31,2009
                                
                                
                                2008AssetsCash
      and cash equivalents
                                
                                $
                                12,379
                                
                                
                                $
                                13,788Investment
      securities:Available-for-sale,
      at fair value
                                
                                
                                161,628
                                
                                
                                
                                162,245Other
      securities
                                
                                
                                7,991
                                
                                
                                
                                9,052Loans,
      net
                                
                                
                                342,738
                                
                                
                                
                                365,772Loans
      held for sale
                                
                                
                                4,703
                                
                                
                                
                                1,487Premises
      and equipment, net
                                
                                
                                15,877
                                
                                
                                
                                13,956Goodwill
                                
                                
                                12,894
                                
                                
                                
                                12,894Other
      intangible assets, net
                                
                                
                                2,481
                                
                                
                                
                                2,407Bank
      owned life insurance
                                
                                
                                12,548
                                
                                
                                
                                11,996Accrued
      interest and other assets
                                
                                
                                10,928
                                
                                
                                
                                8,617Total
      assets
                                
                                $
                                584,167
                                
                                
                                $
                                602,214Liabilities
      and Stockholders’ EquityLiabilities:Deposits:Non-interest
      bearing demand
                                
                                $
                                54,799
                                
                                
                                $
                                49,823Money
      market and NOW
                                
                                
                                162,449
                                
                                
                                
                                150,116Savings
                                
                                
                                29,010
                                
                                
                                
                                26,203Time,
      $100,000 and greater
                                
                                
                                48,422
                                
                                
                                
                                49,965Time,
      other
                                
                                
                                143,915
                                
                                
                                
                                163,439Total
      deposits
                                
                                
                                438,595
                                
                                
                                
                                439,546Federal
      Home Loan Bank borrowings
                                
                                
                                56,004
                                
                                
                                
                                77,319Other
      borrowings
                                
                                
                                26,179
                                
                                
                                
                                27,047Accrued
      interest, taxes, and other liabilities
                                
                                
                                9,494
                                
                                
                                
                                6,896Total
      liabilities
                                
                                
                                530,272
                                
                                
                                
                                550,808Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par, 200,000 shares authorized; none issued
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.01 par, 7,500,000 shares authorized;  2,489,779 and
      2,411,412 shares issued at December 31, 2009 and 2008,
      respectively
                                
                                
                                25
                                
                                
                                
                                24Additional
      paid-in capital
                                
                                
                                24,844
                                
                                
                                
                                23,873Retained
      earnings
                                
                                
                                27,523
                                
                                
                                
                                27,819Treasury
      stock, at cost; 0 and 39,162 shares at December 31, 2009 and 2008,
      respectively
                                
                                
                                -
                                
                                
                                
                                (935
                                )Accumulated
      other comprehensive income
                                
                                
                                1,503
                                
                                
                                
                                625Total
      stockholders’ equity
                                
                                
                                53,895
                                
                                
                                
                                51,406Total
      liabilities and stockholders’ equity
                                
                                $
                                584,167
                                
                                
                                $
                                602,214
  48
  LANDMARK
BANCORP, INC. AND SUBSIDIARY
 Consolidated
Statements of Earnings
 
 (Dollars in thousands, except per share amounts)
                                
                                Years ended December 31,2009
                                
                                
                                2008
                                
                                
                                2007Interest
      income:Loans:Taxable
                                
                                $
                                20,338
                                
                                
                                $
                                24,236
                                
                                
                                $
                                28,316Tax-exempt
                                
                                
                                236
                                
                                
                                
                                201
                                
                                
                                
                                149Investment
      securities:Taxable
                                
                                
                                4,176
                                
                                
                                
                                4,771
                                
                                
                                
                                4,675Tax-exempt
                                
                                
                                2,501
                                
                                
                                
                                2,394
                                
                                
                                
                                2,345Other
                                
                                
                                15
                                
                                
                                
                                45
                                
                                
                                
                                66Total
      interest income
                                
                                
                                27,266
                                
                                
                                
                                31,647
                                
                                
                                
                                35,551Interest
      expense:Deposits
                                
                                
                                5,820
                                
                                
                                
                                9,897
                                
                                
                                
                                13,506Borrowings
                                
                                
                                3,266
                                
                                
                                
                                3,718
                                
                                
                                
                                4,362Total
      interest expense
                                
                                
                                9,086
                                
                                
                                
                                13,615
                                
                                
                                
                                17,868Net
      interest income
                                
                                
                                18,180
                                
                                
                                
                                18,032
                                
                                
                                
                                17,683Provision
      for loan losses
                                
                                
                                3,300
                                
                                
                                
                                2,400
                                
                                
                                
                                255Net
      interest income after provision for loan losses
                                
                                
                                14,880
                                
                                
                                
                                15,632
                                
                                
                                
                                17,428Non-interest
      income:Fees
      and service charges
                                
                                
                                4,422
                                
                                
                                
                                4,233
                                
                                
                                
                                4,005Gains
      on sales of loans, net
                                
                                
                                3,091
                                
                                
                                
                                1,457
                                
                                
                                
                                955Gains
      on prepayment of FHLB borrowings
                                
                                
                                -
                                
                                
                                
                                270
                                
                                
                                
                                -Bank
      owned life insurance
                                
                                
                                508
                                
                                
                                
                                488
                                
                                
                                
                                474Other
                                
                                
                                415
                                
                                
                                
                                597
                                
                                
                                
                                482Total
      non-interest income
                                
                                
                                8,436
                                
                                
                                
                                7,045
                                
                                
                                
                                5,916Investment
      securities gains (losses), net:Impairment
      losses on investment securities
                                
                                
                                (2,228
                                )
                                
                                
                                -
                                
                                
                                
                                -Less
      noncredit-related losses
                                
                                
                                1,267
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      impairment losses
                                
                                
                                (961
                                )
                                
                                
                                -
                                
                                
                                
                                -Gains
      on sales of investment securities
                                
                                
                                9
                                
                                
                                
                                497
                                
                                
                                
                                -Investment
      securities (losses) gains, net
                                
                                
                                (952
                                )
                                
                                
                                497
                                
                                
                                
                                -Non-interest
      expense:Compensation
      and benefits
                                
                                
                                9,062
                                
                                
                                
                                8,795
                                
                                
                                
                                8,227Occupancy
      and equipment
                                
                                
                                2,724
                                
                                
                                
                                2,848
                                
                                
                                
                                2,861Federal
      deposit insurance premiums
                                
                                
                                849
                                
                                
                                
                                77
                                
                                
                                
                                53Data
      processing
                                
                                
                                778
                                
                                
                                
                                774
                                
                                
                                
                                751Amortization
      of intangibles
                                
                                
                                767
                                
                                
                                
                                792
                                
                                
                                
                                915Professional
      fees
                                
                                
                                678
                                
                                
                                
                                469
                                
                                
                                
                                437Advertising
                                
                                
                                480
                                
                                
                                
                                447
                                
                                
                                
                                415Other
                                
                                
                                3,608
                                
                                
                                
                                3,309
                                
                                
                                
                                2,980Total
      non-interest expense
                                
                                
                                18,946
                                
                                
                                
                                17,511
                                
                                
                                
                                16,639Earnings
      before income taxes
                                
                                
                                3,418
                                
                                
                                
                                5,663
                                
                                
                                
                                6,705Income
      tax expense
                                
                                
                                146
                                
                                
                                
                                1,110
                                
                                
                                
                                1,303Net
      earnings
                                
                                $
                                3,272
                                
                                
                                $
                                4,553
                                
                                
                                $
                                5,402Earnings
      per share:Basic
                                
                                $
                                1.31
                                
                                
                                $
                                1.81
                                
                                
                                $
                                2.02Diluted
                                
                                $
                                1.31
                                
                                
                                $
                                1.80
                                
                                
                                $
                                2.00
 
 See
accompanying notes to consolidated financial statements.
  49
  LANDMARK
BANCORP, INC. AND SUBSIDIARY
 Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
 
 (Dollars in thousands, except per share amounts)
                                                
                                                Common
                                                  stock
                                                
                                                
                                                Additional
                                                  paid-in
                                                  capital
                                                
                                                
                                                Retained
                                                  earnings
                                                
                                                
                                                Treasury
                                                  stock
                                                
                                                
                                                Accumulated other
                                                  comprehensive
                                                  income (loss)
                                                
                                                
                                                TotalBalance
      at December 31, 2006
                                                
                                                $
                                                23
                                                
                                                
                                                $
                                                22,607
                                                
                                                
                                                $
                                                26,758
                                                
                                                
                                                $
                                                (138
                                                )
                                                
                                                $
                                                (14
                                                )
                                                
                                                $
                                                49,236Comprehensive
      income:Net
      earnings
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                5,402
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                5,402Change
      in fair value of investment securities available-for-sale, net of
      tax
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                695
                                                
                                                
                                                
                                                695Total
      comprehensive income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,097Dividends
      paid ($0.66 per share)
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,768
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,768
                                                )Stock
      based compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                118
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                118Exercise
      of stock options, 2,374 shares, including tax benefit of
$8
                                                
                                                
                                                -
                                                
                                                
                                                
                                                49
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                49Purchase
      of 52,240 treasury shares
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,436
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,436
                                                )5%
      stock dividend, 114,484 shares
                                                
                                                
                                                1
                                                
                                                
                                                
                                                1,530
                                                
                                                
                                                
                                                (2,899
                                                )
                                                
                                                
                                                1,368
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Balance
      at December 31, 2007
                                                
                                                
                                                24
                                                
                                                
                                                
                                                24,304
                                                
                                                
                                                
                                                27,493
                                                
                                                
                                                
                                                (206
                                                )
                                                
                                                
                                                681
                                                
                                                
                                                
                                                52,296Comprehensive
      income:Net
      earnings
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,553
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,553Change
      in fair value of investment securities available-for-sale, net of
      tax
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (56
                                                )
                                                
                                                
                                                (56
                                                )Total
      comprehensive income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,497Dividends
      paid ($0.69 per share)
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,753
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,753
                                                )Stock
      based compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                134
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                134Exercise
      of stock options, 2,287 shares, including excess tax benefit of
      $6
                                                
                                                
                                                -
                                                
                                                
                                                
                                                43
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                43Purchase
      of 144,290 treasury shares
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,476
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (3,476
                                                )5%
      stock dividend, 112,891 shares
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (608
                                                )
                                                
                                                
                                                (2,139
                                                )
                                                
                                                
                                                2,747
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Adoption
      of Emerging Issues Task Force Issue 06-4
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (335
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (335
                                                )Balance
      at December 31, 2008
                                                
                                                
                                                24
                                                
                                                
                                                
                                                23,873
                                                
                                                
                                                
                                                27,819
                                                
                                                
                                                
                                                (935
                                                )
                                                
                                                
                                                625
                                                
                                                
                                                
                                                51,406Comprehensive
      income:Net
      earnings
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,272
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,272Change
      in fair value of investment securities available-for-sale, net of
      tax
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                878
                                                
                                                
                                                
                                                878Total
      comprehensive income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,150Dividends
      paid ($0.72 per share)
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,806
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,806
                                                )Stock
      based compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                157
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                157Purchase
      of 800 treasury shares
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (12
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (12
                                                )5%
      stock dividend, 118,329 shares
                                                
                                                
                                                1
                                                
                                                
                                                
                                                814
                                                
                                                
                                                
                                                (1,762
                                                )
                                                
                                                
                                                947
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Balance
      at December 31, 2009
                                                
                                                $
                                                25
                                                
                                                
                                                $
                                                24,844
                                                
                                                
                                                $
                                                27,523
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                1,503
                                                
                                                
                                                $
                                                53,895
 
 See
accompanying notes to consolidated financial statements.
  50
  LANDMARK
BANCORP, INC. AND SUBSIDIARY
 Consolidated
Statements of Cash Flows
 
 (Dollars in thousands)
                            
                            Years ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007Cash
      flows from operating activities:Net
      earnings
                            
                            $
                            3,272
                            
                            
                            $
                            4,553
                            
                            
                            $
                            5,402Adjustments
      to reconcile net earnings to net cash  provided by operating
      activities:Provision
      for loan losses
                            
                            
                            3,300
                            
                            
                            
                            2,400
                            
                            
                            
                            255Amortization
      of intangibles
                            
                            
                            767
                            
                            
                            
                            792
                            
                            
                            
                            916Depreciation
                            
                            
                            946
                            
                            
                            
                            1,050
                            
                            
                            
                            883Stock-based
      compensation
                            
                            
                            157
                            
                            
                            
                            134
                            
                            
                            
                            118Deferred
      income taxes
                            
                            
                            (1,567
                            )
                            
                            
                            368
                            
                            
                            
                            114Net
      losses (gains) on investment securities
                            
                            
                            952
                            
                            
                            
                            (431
                            )
                            
                            
                            -Net
      losses (gains) on sales of premises and equipment and foreclosed
      assets
                            
                            
                            3
                            
                            
                            
                            (10
                            )
                            
                            
                            (65
                            )Net
      gains on sales of loans
                            
                            
                            (3,091
                            )
                            
                            
                            (1,457
                            )
                            
                            
                            (955
                            )Proceeds
      from sale of loans
                            
                            
                            208,023
                            
                            
                            
                            85,241
                            
                            
                            
                            59,437Origination
      of loans held for sale
                            
                            
                            (208,335
                            )
                            
                            
                            (83,547
                            )
                            
                            
                            (58,841
                            )Gains
      on prepayments of FHLB borrowings
                            
                            
                            -
                            
                            
                            
                            (270
                            )
                            
                            
                            -Changes
      in assets and liabilities:Accrued
      interest and other assets
                            
                            
                            (2,378
                            )
                            
                            
                            (1,669
                            )
                            
                            
                            (941
                            )Accrued
      expenses, taxes, and other liabilities
                            
                            
                            1,982
                            
                            
                            
                            (1,823
                            )
                            
                            
                            1,447Net
      cash provided by operating activities
                            
                            
                            4,031
                            
                            
                            
                            5,331
                            
                            
                            
                            7,770Cash
      flows from investing activities:Net
      decrease in loans
                            
                            
                            22,087
                            
                            
                            
                            5,206
                            
                            
                            
                            2,379Maturities
      and prepayments of investment securities
                            
                            
                            56,077
                            
                            
                            
                            34,914
                            
                            
                            
                            16,490Net
      cash paid in branch acquisition
                            
                            
                            (130
                            )
                            
                            
                            -
                            
                            
                            
                            -Purchases
      of investment securities
                            
                            
                            (57,074
                            )
                            
                            
                            (51,530
                            )
                            
                            
                            (34,280
                            )Proceeds
      from sale of investment securities
                            
                            
                            2,846
                            
                            
                            
                            10,407
                            
                            
                            
                            -Proceeds
      from sales of premises and equipment and foreclosed assets
                            
                            
                            2,638
                            
                            
                            
                            1,412
                            
                            
                            
                            403Purchases
      of premises and equipment, net
                            
                            
                            (814
                            )
                            
                            
                            (747
                            )
                            
                            
                            (1,518
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            25,630
                            
                            
                            
                            (338
                            )
                            
                            
                            (16,526
                            )Cash
      flows from financing activities:Net
      (decrease) increase in deposits
                            
                            
                            (7,347
                            )
                            
                            
                            (13,106
                            )
                            
                            
                            8,269Federal
      Home Loan Bank advance borrowings
                            
                            
                            -
                            
                            
                            
                            40,000
                            
                            
                            
                            -Federal
      Home Loan Bank advance repayments
                            
                            
                            (15,037
                            )
                            
                            
                            (25,537
                            )
                            
                            
                            (3,037
                            )Change
      in Federal Home Loan Bank line of credit, net
                            
                            
                            (6,000
                            )
                            
                            
                            (5,100
                            )
                            
                            
                            11,100Proceeds
      from other borrowings
                            
                            
                            3,185
                            
                            
                            
                            6,915
                            
                            
                            
                            4,310Repayments
      on other borrowings
                            
                            
                            (4,053
                            )
                            
                            
                            (3,930
                            )
                            
                            
                            (8,744
                            )Proceeds
      from issuance of common stock under stock option plans
                            
                            
                            -
                            
                            
                            
                            37
                            
                            
                            
                            41Excess
      tax benefit related to stock option plans
                            
                            
                            -
                            
                            
                            
                            6
                            
                            
                            
                            8Payment
      of dividends
                            
                            
                            (1,806
                            )
                            
                            
                            (1,753
                            )
                            
                            
                            (1,768
                            )Purchase
      of treasury stock
                            
                            
                            (12
                            )
                            
                            
                            (3,476
                            )
                            
                            
                            (1,436
                            )Net
      cash (used in) provided by financing activities
                            
                            
                            (31,070
                            )
                            
                            
                            (5,944
                            )
                            
                            
                            8,743Net
      decrease in cash and cash equivalents
                            
                            
                            (1,409
                            )
                            
                            
                            (951
                            )
                            
                            
                            (13
                            )Cash
      and cash equivalents at beginning of year
                            
                            
                            13,788
                            
                            
                            
                            14,739
                            
                            
                            
                            14,752Cash
      and cash equivalents at end of year
                            
                            $
                            12,379
                            
                            
                            $
                            13,788
                            
                            
                            $
                            14,739Supplemental
      disclosure of cash flow information:Cash
      paid during the year for income taxes
                            
                            $
                            862
                            
                            
                            $
                            953
                            
                            
                            $
                            553Cash
      paid during the year for interest
                            
                            
                            9,449
                            
                            
                            
                            14,296
                            
                            
                            
                            17,946Supplemental
      schedule of noncash investing and financing activities:Transfer
      of loans to real estate owned
                            
                            
                            2,001
                            
                            
                            
                            2,825
                            
                            
                            
                            368Branch
      acquisition:Fair
      value of liabilities assumed
                            
                            
                            6,650
                            
                            
                            
                            -
                            
                            
                            
                            -Fair
      value of assets acquired
                            
                            
                            6,520
                            
                            
                            
                            -
                            
                            
                            
                            -
 
 See
accompanying notes to consolidated financial statements.
  51


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(1)
            Summary
      of Significant Accounting Policies




(a)
            Principles
      of Consolidation




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




(b)
            Subsequent
      Events




The
Company evaluates subsequent events and transactions that occur after the
balance sheet date up to the date that financial statements are filed for
potential recognition or disclosure.  Any material events that occur
between the balance sheet date and filing date are disclosed as subsequent
events while the consolidated financial statements are adjusted to reflect any
material transactions that occur during the same period.




(c)
            Investment
      Securities




The
Company has classified its investment securities portfolio as
available-for-sale, with the exception of certain investments held for
regulatory purposes.  The Company carries its available-for-sale
investment securities at fair value and employs valuation techniques which
utilize observable inputs when those inputs are available.  These
observable inputs reflect assumptions market participants would use in pricing
the security, developed based on market data obtained from sources independent
of the Company.  When such information is not available, the Company
employs valuation techniques which utilize unobservable inputs, or those which
reflect the Company’s own assumptions about market participants, based on the
best information available in the circumstances.  These valuation
methods typically involve estimated cash flows and other financial modeling
techniques.  Changes in underlying factors, assumptions, estimates, or
other inputs to the valuation techniques could have a material impact on the
Company’s future financial condition and results of operations.  Fair
value measurements are classified as Level 1 (quoted prices), Level 2 (based on
observable inputs) or Level 3 (based on unobservable inputs) and are discussed
in more detail in Note 12 to the consolidated financial
statements.   Available-for-sale securities are recorded at fair
value with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders’ equity, net of taxes, until
realized.  Purchased premiums and discounts on investment securities
are amortized/accreted into interest income over the estimated lives of the
securities using the interest method.  Realized gains and losses on
sales of available-for-sale securities are recorded on a trade date basis and
are calculated using the specific identification method.




The
Company performs quarterly reviews of the investment portfolio to determine if
investment securities have any declines in fair value which might be considered
other-than-temporary.  The initial review begins with all securities
in an unrealized loss position.  The Company’s assessment of
other-than-temporary impairment is based on its reasonable judgment of the
specific facts and circumstances impacting each individual security at the time
such assessments are made.  The Company reviews and considers all
available information, including expected cash flows, the structure of the
security, the credit quality of the underlying assets and the current and
anticipated market conditions.  As of January 1, 2009, the Company
adopted the guidance on other-than-temporary impairments in Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320
“Investments - Debt and Equity Securities,” which changed the accounting for
other-than-temporary impairments of debt securities and separates the impairment
into credit-related and other factors for debt securities.  Any
credit-related impairments are realized through a charge to
earnings.  If an equity security is determined to be
other-than-temporarily impaired, the entire impairment is realized through a
charge to earnings.




Other
investments included in the Company’s investment portfolio are investments
acquired for regulatory purposes and borrowing availability and are accounted
for at cost.  The cost of such investments represents their redemption
value as such investments do not have a readily determinable fair
value.




52




(d)
            Loans
      and Allowance for Loan Losses




Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balances, net of undisbursed loan proceeds, the allowance
for loan losses, and any deferred fees or costs on originated
loans.  Origination fees received on loans held in portfolio and the
estimated direct costs of origination are deferred and amortized to interest
income using the interest method.




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




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




A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining if a loan
is impaired include payment status, probability of collecting scheduled
principal and interest payments when due and value of collateral for collateral
dependent loans.  Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as
impaired.  Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed.  Impairment is measured on a loan-by-loan basis for commercial,
commercial real estate and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.




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




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




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




(e)
            Premises
      and Equipment




Premises
and equipment are stated at cost less accumulated depreciation.  Major
replacements and betterments are capitalized while maintenance and repairs are
charged to expense when incurred.  Gains or losses on dispositions are
reflected in operations as incurred.




53




(f)
            Goodwill
      and Intangible Assets




Goodwill
is not amortized; however, it is tested for impairment at each calendar year end
or more frequently when events or circumstances dictate.  The
impairment test compares the carrying value of goodwill to an implied fair value
of the goodwill, which is based on a review of the Company’s market
capitalization adjusted for appropriate control premiums as well as an analysis
of valuation multiples of recent, comparable acquisitions.  The
Company considers the result from each these valuation methods in determining
the implied fair value of its goodwill.  A goodwill impairment would
be recorded for the amount that the carrying value exceeds the implied fair
value.




Intangible
assets include core deposit intangibles and mortgage servicing
rights.  Core deposit intangible assets are amortized over their
estimated useful life of ten years on an accelerated basis. When facts and
circumstances indicate potential impairment, the Company will evaluate the
recoverability of the intangible asset carrying value, using estimates of
undiscounted future cash flows over the remaining asset life. Any impairment
loss is measured by the excess of carrying value over fair
value.  Mortgage servicing assets are recognized as separate assets
when rights are acquired through the sale of financial assets, primarily
one-to-four family real estate loans and are recorded at the lower of amortized
cost or estimated fair value.  Mortgage servicing rights are amortized
into non-interest expense in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial
assets.  Servicing assets are recorded at the lower of amortized cost
or estimated fair value, and are evaluated for impairment based upon the fair
value of the retained rights as compared to amortized cost.




There are
a number of estimates involved in the allocation of purchase price and
determining the appropriate useful lives of intangible assets, changes in
which could impact the subsequent impairment testing of goodwill and intangible
assets.




(g)
            Income
      Taxes




The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns.  Judgment is required in
assessing the future tax consequences of events that have been recognized in
financial statements or tax returns.  Uncertain income tax positions
will be recognized only if it is more likely than not that it will be sustained
upon IRS examination, based upon its technical merits.  Once that
status is met, the amount recorded will be the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate
settlement.  The Company recognizes interest and penalties related to
unrecognized tax benefits as a component of income tax expense in our
consolidated statements of earnings.  The Company assesses deferred
tax assets to determine if the items are more likely than not be realized and a
valuation allowance is established for any amounts that are not more likely than
not to be realized.  Changes in estimates regarding the actual outcome
of these future tax consequences, including the effects of IRS examinations and
examinations by other state agencies, could materially impact our financial
position and results of operations.




(h)
            Use
      of Estimates




The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles (“GAAP”) requires the Company to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  Estimates that are particularly
susceptible to significant change include the determination of the allowance for
loan losses, valuation and impairment of investment securities, income taxes and
goodwill.  Actual results could differ from those
estimates.




54




(i)
            Comprehensive
      Income




The
Company’s other comprehensive income consists of unrealized holding gains and
losses on available-for-sale securities as shown below:




(Dollars
      in thousands)
                                      
                                      Years ended December 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007Net
      earnings
                                      
                                      $
                                      3,272
                                      
                                      
                                      $
                                      4,553
                                      
                                      
                                      $
                                      5,402Unrealized
      holding losses on available-for-sale securities for which a portionof an other-than-temporary impairment has been recorded in
      earnings
                                      
                                      
                                      (479
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      unrealized holding gains on all other available-for-sale
      securities
                                      
                                      
                                      897
                                      
                                      
                                      
                                      342
                                      
                                      
                                      
                                      1,121Less
      reclassification adjustment for losses (gains) included in
      earnings
                                      
                                      
                                      952
                                      
                                      
                                      
                                      (431
                                      )
                                      
                                      
                                      -Net
      unrealized gains (losses)
                                      
                                      
                                      1,370
                                      
                                      
                                      
                                      (89
                                      )
                                      
                                      
                                      1,121Income
      tax expense (benefit)
                                      
                                      
                                      492
                                      
                                      
                                      
                                      (33
                                      )
                                      
                                      
                                      426Total
      comprehensive income
                                      
                                      $
                                      4,150
                                      
                                      
                                      $
                                      4,497
                                      
                                      
                                      $
                                      6,097




(j)
            Foreclosed
      Assets




Assets
acquired through, or in lieu of, foreclosure are to be sold and are initially
recorded at the date of foreclosure at fair value through a gain or a charge to
the allowance for loan losses, establishing a new cost
basis.  Subsequent to foreclosure, the Company records a charge to
earnings if the carrying value of a property exceeds the fair value less
estimated costs to sell.  Revenue and expenses from operations and
subsequent declines in fair value are included in other non-interest expense in
the statement of earnings.




(k)
            Stock
      Based Compensation




The
Company has a stock-based employee compensation plan, which is described more
fully in note 11.  The fair value of stock options awarded to
employees is calculated through the use of an option pricing model, which
requires subjective assumptions, including future stock price volatility and
expected term, which greatly affect the estimated fair value.  The
Company uses the Black-Scholes option pricing model to estimate the grant date
fair value of its stock options, which is recognized as compensation expense
over the option vesting period, on a straight-line basis, which is typically
four or five years.




(l)
            Earnings
      per Share




Basic
earnings per share represents net earnings divided by the weighted average
number of common shares outstanding during the year.  Diluted earnings
per share reflect additional common shares that would have been outstanding if
dilutive potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance.  Potential common
shares that may be issued by the Company relate solely to outstanding stock
options and are determined using the treasury stock method using the average
market price of the Company’s stock for the respective
periods.  Anti-dilutive stock options were 153,164, 35,648 and 2,180
for the years ended December 31, 2009, 2008 and 2007, respectively.




55




The
shares used in the calculation of basic and diluted earnings per share, which
have been adjusted to give effect for the 5% stock dividends paid by the Company
in December 2009, 2008 and 2007, are shown below:




(Dollars
      in thousands, except per share amounts)
                    
                    Years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Net
      earnings available to common shareholders
                    
                    $
                    3,272
                    
                    
                    $
                    4,553
                    
                    
                    $
                    5,402Weighted
      average common shares outstanding - basic
                    
                    
                    2,489,906
                    
                    
                    
                    2,521,982
                    
                    
                    
                    2,681,149Assumed
      exercise of stock options
                    
                    
                    5,105
                    
                    
                    
                    8,235
                    
                    
                    
                    19,955Weighted
      average common shares outstanding - diluted
                    
                    
                    2,495,011
                    
                    
                    
                    2,530,217
                    
                    
                    
                    2,701,104Earnings
      per share (1):Basic
                    
                    $
                    1.31
                    
                    
                    $
                    1.81
                    
                    
                    $
                    2.02Diluted
                    
                    $
                    1.31
                    
                    
                    $
                    1.80
                    
                    
                    $
                    2.00





(1) All
per share amounts have been adjusted to give effect to the 5% stock dividend
paid during December 2009 and 2008.




(m)
            Treasury
      Stock




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




(n)
            Cash
      and cash equivalents




Cash and
cash equivalents include cash on hand and amounts due from banks.




(o)
            Derivative
      Financial Instruments




The
Company is exposed to market risk, primarily relating to changes in interest
rates.  To manage the volatility relating to these exposures, the
Company’s risk management policies permit its use of derivative financial
instruments.  The Company uses derivatives on a limited basis mainly
to stabilize interest rate margins.  The Company more often manages
normal asset and liability positions by altering the terms of the products it
offers.




GAAP
requires that all derivative financial instruments be recorded on the balance
sheet at fair value, with adjustments to fair value recorded in current
earnings.  Derivatives that qualify in a hedging relationship can be
designated, based on the exposure being hedged, as fair value or cash flow
hedges.  Under the cash flow hedging model, the effective portion of
the change in the gain or loss related to the derivative is recognized as a
component of other comprehensive income, net of taxes.  The
ineffective portion is recognized in current earnings.  The Company
had no derivative financial instruments designated as hedging instruments as of
December 31, 2009 and 2008.




The
Company enters into interest rate lock commitments on certain mortgage loans,
which are commitments to originate loans whereby the interest rate on the loan
is determined prior to funding.  The Company also has corresponding
forward sales contracts related to these interest rate lock
commitments.  Both the mortgage loan commitments and the related
forward sales contracts are accounted for as derivatives and carried at fair
value with changes in fair value recorded in income.  As of January 1,
2008, the Company began including the value of the servicing associated with the
originated loan in the fair value of the interest rate lock
commitments.




56




(2)
              Goodwill
      and Intangible Assets




The
Company tests goodwill for impairment annually or more frequently if
circumstances warrant.  During the first quarter of 2009, the decline in
the Company’s stock price coupled with current market conditions in the
financial services industry, constituted a triggering event which required an
impairment test to be performed as of March 31, 2009.  The Company also
performed its annual impairment test as of December 31, 2009.  The fair
value of the Company’s single reporting unit was determined using observable
market data including a market approach using the Company’s market
capitalization adjusted for appropriate control premiums, as well as a review of
valuation multiples  of recent financial industry acquisitions for
similar institutions, to estimate the fair value of the Company’s single
reporting unit.  The fair value was compared to the carrying value of
goodwill at each measurement date to determine if any impairment existed. 
Based on the results of the March 31, 2009 and December 31, 2009 impairment
tests, the Company concluded its goodwill was not impaired.  The
Company can make no assurances that future impairment tests will not result in
goodwill impairments.





On May 8,
2009, the Company’s subsidiary, Landmark National Bank, assumed approximately
$6.4 million in deposits in connection with a branch acquisition.  As
part of the transaction, Landmark National Bank agreed to pay a deposit premium
of 1.75 percent on the core deposit balance as of 270 days after the close of
the transaction.  The core deposit premium, based on the acquired core
deposit balances, was $86,000.  The final core deposit premium,
measured on February 2, 2010, was $49,000.  The following is an
analysis of changes in the core deposit intangible assets:





(Dollars
      in thousands)
                                                                
                                                                Years ended December, 312009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2007Fair value atacquisition
                                                                
                                                                
                                                                Accumulatedamortization
                                                                
                                                                
                                                                Fair value atacquisition
                                                                
                                                                
                                                                Accumulatedamortization
                                                                
                                                                
                                                                Fair value atacquisition
                                                                
                                                                
                                                                AccumulatedamortizationBalance at
      beginning of year
                                                                
                                                                $
                                                                5,396
                                                                
                                                                
                                                                $
                                                                (3,159
                                                                )
                                                                
                                                                $
                                                                5,396
                                                                
                                                                
                                                                $
                                                                (2,462
                                                                )
                                                                
                                                                $
                                                                5,396
                                                                
                                                                
                                                                $
                                                                (1,667
                                                                )Additions
                                                                
                                                                
                                                                86
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Amortization
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (608
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (697
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (795
                                                                )Balance
      at end of year
                                                                
                                                                $
                                                                5,482
                                                                
                                                                
                                                                $
                                                                (3,767
                                                                )
                                                                
                                                                $
                                                                5,396
                                                                
                                                                
                                                                $
                                                                (3,159
                                                                )
                                                                
                                                                $
                                                                5,396
                                                                
                                                                
                                                                $
                                                                (2,462
                                                                )




The
following is an analysis of the changes in mortgage servicing
rights:




Years ended December, 312009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Accumulated
                                  
                                  
                                  
                                  
                                  
                                  Accumulated
                                  
                                  
                                  
                                  
                                  
                                  AccumulatedCost
                                  
                                  
                                  amortization
                                  
                                  
                                  Cost
                                  
                                  
                                  amortization
                                  
                                  
                                  Cost
                                  
                                  
                                  amortizationBalance
      at beginning of year
                                  
                                  $
                                  772
                                  
                                  
                                  $
                                  (602
                                  )
                                  
                                  $
                                  770
                                  
                                  
                                  $
                                  (560
                                  )
                                  
                                  $
                                  792
                                  
                                  
                                  $
                                  (490
                                  )Additions
                                  
                                  
                                  755
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  55
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  29
                                  
                                  
                                  
                                  -Prepayments/maturities
                                  
                                  
                                  (80
                                  )
                                  
                                  
                                  80
                                  
                                  
                                  
                                  (53
                                  )
                                  
                                  
                                  53
                                  
                                  
                                  
                                  (51
                                  )
                                  
                                  
                                  51Amortization
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (159
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (95
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (121
                                  )Balance
      at end of year
                                  
                                  $
                                  1,447
                                  
                                  
                                  $
                                  (681
                                  )
                                  
                                  $
                                  772
                                  
                                  
                                  $
                                  (602
                                  )
                                  
                                  $
                                  770
                                  
                                  
                                  $
                                  (560
                                  )




Estimated
amortization expense for the years ending December 31 is as
follows:




(Dollars
      in thousands)
                  
                  Amortizationexpense2010
                  
                  $
                  7152011
                  
                  
                  6152012
                  
                  
                  5192013
                  
                  
                  4002014
                  
                  
                  148Thereafter
                  
                  $
                  84




57




(3)
            Investment
      Securities




A summary
of investment securities available-for-sale is as follows:





As of December 31, 2009Gross
                                              
                                              
                                              GrossAmortized
                                              
                                              
                                              unrealized
                                              
                                              
                                              unrealized
                                              
                                              
                                              Estimated(Dollars
      in thousands)
                                              
                                              cost
                                              
                                              
                                              gains
                                              
                                              
                                              losses
                                              
                                              
                                              fair
      valueU.
      S. federal agency obligations
                                              
                                              $
                                              18,734
                                              
                                              
                                              $
                                              356
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              19,090Municipal
      obligations, tax exempt
                                              
                                              
                                              67,149
                                              
                                              
                                              
                                              1,938
                                              
                                              
                                              
                                              (228
                                              )
                                              
                                              
                                              68,859Municipal
      obligations, taxable
                                              
                                              
                                              1,366
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (23
                                              )
                                              
                                              
                                              1,343Mortgage-backed
      securities
                                              
                                              
                                              63,265
                                              
                                              
                                              
                                              1,532
                                              
                                              
                                              
                                              (102
                                              )
                                              
                                              
                                              64,695Common
      stocks
                                              
                                              
                                              693
                                              
                                              
                                              
                                              191
                                              
                                              
                                              
                                              (19
                                              )
                                              
                                              
                                              865Pooled
      trust preferred securities
                                              
                                              
                                              1,528
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,267
                                              )
                                              
                                              
                                              261Certificates
      of deposit
                                              
                                              
                                              6,515
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              6,515Total
                                              
                                              $
                                              159,250
                                              
                                              
                                              $
                                              4,017
                                              
                                              
                                              $
                                              (1,639
                                              )
                                              
                                              $
                                              161,628As of December 31, 2008Gross
                                              
                                              
                                              GrossAmortized
                                              
                                              
                                              unrealized
                                              
                                              
                                              unrealized
                                              
                                              
                                              Estimated(Dollars
      in thousands)
                                              
                                              cost
                                              
                                              
                                              gains
                                              
                                              
                                              losses
                                              
                                              
                                              fair
      valueU.
      S. federal agency obligations
                                              
                                              $
                                              28,565
                                              
                                              
                                              $
                                              950
                                              
                                              
                                              $
                                              (1
                                              )
                                              
                                              $
                                              29,514Municipal
      obligations, tax exempt
                                              
                                              
                                              63,711
                                              
                                              
                                              
                                              1,532
                                              
                                              
                                              
                                              (934
                                              )
                                              
                                              
                                              64,309Mortgage-backed
      securities
                                              
                                              
                                              55,752
                                              
                                              
                                              
                                              934
                                              
                                              
                                              
                                              (104
                                              )
                                              
                                              
                                              56,582Common
      stocks
                                              
                                              
                                              694
                                              
                                              
                                              
                                              389
                                              
                                              
                                              
                                              (9
                                              )
                                              
                                              
                                              1,074Pooled
      trust preferred securities
                                              
                                              
                                              2,489
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,749
                                              )
                                              
                                              
                                              740Certificates
      of deposit
                                              
                                              
                                              10,026
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              10,026Total
                                              
                                              $
                                              161,237
                                              
                                              
                                              $
                                              3,805
                                              
                                              
                                              $
                                              (2,797
                                              )
                                              
                                              $
                                              162,245




58




The
tables above show that some of the securities in the available-for-sale
investment portfolio had unrealized losses, or were temporarily impaired, as of
December 31, 2009 and 2008.  This temporary impairment represents the
estimated amount of loss that would be realized if the securities were sold on
the valuation date.  Securities which were temporarily impaired are
shown below, along with the length of the impairment period.




As
      of December 31, 2009(Dollars
      in thousands)
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Less
      than 12 months
                                                                                    
                                                                                    
                                                                                    12
      months or longer
                                                                                    
                                                                                    
                                                                                    TotalNo.
      of
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealized
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealized
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealizedsecurities
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    losses
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    losses
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    lossesMunicipal
      obligations, tax exempt
                                                                                    
                                                                                    
                                                                                    24
                                                                                    
                                                                                    
                                                                                    $
                                                                                    7,765
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (167
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    780
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (61
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    8,545
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (228
                                                                                    )Municipal
      obligations, taxable
                                                                                    
                                                                                    
                                                                                    2
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,233
                                                                                    
                                                                                    
                                                                                    
                                                                                    (23
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,233
                                                                                    
                                                                                    
                                                                                    
                                                                                    (23
                                                                                    )Mortgage-backed
      securities
                                                                                    
                                                                                    
                                                                                    6
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,140
                                                                                    
                                                                                    
                                                                                    
                                                                                    (101
                                                                                    )
                                                                                    
                                                                                    
                                                                                    44
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1
                                                                                    )
                                                                                    
                                                                                    
                                                                                    8,184
                                                                                    
                                                                                    
                                                                                    
                                                                                    (102
                                                                                    )Common
      stocks
                                                                                    
                                                                                    
                                                                                    4
                                                                                    
                                                                                    
                                                                                    
                                                                                    59
                                                                                    
                                                                                    
                                                                                    
                                                                                    (19
                                                                                    )
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    59
                                                                                    
                                                                                    
                                                                                    
                                                                                    (19
                                                                                    )Pooled
      trust preferred securities
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    261
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,267
                                                                                    )
                                                                                    
                                                                                    
                                                                                    261
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,267
                                                                                    )Total
                                                                                    
                                                                                    
                                                                                    39
                                                                                    
                                                                                    
                                                                                    $
                                                                                    17,197
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (310
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    1,085
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1,329
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    18,282
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1,639
                                                                                    )As
      of December 31, 2008(Dollars
      in thousands)
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Less
      than 12 months
                                                                                    
                                                                                    
                                                                                    12
      months or longer
                                                                                    
                                                                                    
                                                                                    TotalNo.
      of
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealized
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealized
                                                                                    
                                                                                    
                                                                                    Fair
                                                                                    
                                                                                    
                                                                                    Unrealizedsecurities
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    losses
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    losses
                                                                                    
                                                                                    
                                                                                    value
                                                                                    
                                                                                    
                                                                                    lossesU.
      S. federal agency obligations
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    64
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    133
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    197
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1
                                                                                    )Municipal
      obligations, tax exempt
                                                                                    
                                                                                    
                                                                                    56
                                                                                    
                                                                                    
                                                                                    
                                                                                    13,282
                                                                                    
                                                                                    
                                                                                    
                                                                                    (466
                                                                                    )
                                                                                    
                                                                                    
                                                                                    8,542
                                                                                    
                                                                                    
                                                                                    
                                                                                    (468
                                                                                    )
                                                                                    
                                                                                    
                                                                                    21,824
                                                                                    
                                                                                    
                                                                                    
                                                                                    (934
                                                                                    )Mortgage-backed
      securities
                                                                                    
                                                                                    
                                                                                    80
                                                                                    
                                                                                    
                                                                                    
                                                                                    12,219
                                                                                    
                                                                                    
                                                                                    
                                                                                    (78
                                                                                    )
                                                                                    
                                                                                    
                                                                                    3,400
                                                                                    
                                                                                    
                                                                                    
                                                                                    (26
                                                                                    )
                                                                                    
                                                                                    
                                                                                    15,619
                                                                                    
                                                                                    
                                                                                    
                                                                                    (104
                                                                                    )Common
      stocks
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    
                                                                                    13
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2
                                                                                    )
                                                                                    
                                                                                    
                                                                                    18
                                                                                    
                                                                                    
                                                                                    
                                                                                    (7
                                                                                    )
                                                                                    
                                                                                    
                                                                                    31
                                                                                    
                                                                                    
                                                                                    
                                                                                    (9
                                                                                    )Pooled
      trust preferred securities
                                                                                    
                                                                                    
                                                                                    3
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    740
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,749
                                                                                    )
                                                                                    
                                                                                    
                                                                                    740
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,749
                                                                                    )Total
                                                                                    
                                                                                    
                                                                                    145
                                                                                    
                                                                                    
                                                                                    $
                                                                                    25,578
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (546
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    12,833
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (2,251
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    38,411
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (2,797
                                                                                    )




As of
December 31, 2009 the Company does not intend to sell and it is more likely than
not that the Company will not be required to sell its municipal obligations in
an unrealized loss position until the recovery of its cost.  Due to
the issuers’ continued satisfaction of the securities’ obligations in accordance
with their contractual terms and the expectation that they will continue to do
so, the evaluation of the fundamentals of the issuers’ financial condition and
other objective evidence, the Company believes that the municipal obligations
identified in the tables above were temporarily impaired as of December 31, 2009
and December 31, 2008.




The
receipt of principal, at par, and interest on mortgage-backed securities is
guaranteed by the respective government-sponsored agency guarantor, such that
the Company believes that its mortgage-backed securities do not expose the
Company to credit related losses.  Based on these factors, along with
the Company’s intent to not sell the security and that it is more likely than
not that the Company will not be required to sell the security before recovery
of its cost basis, the Company believes that the mortgage-backed securities
identified in the tables above were temporarily impaired as of December 31, 2009
and December 31, 2008.  The Company’s mortgage-backed securities
portfolio consists of securities underwritten to the standards of and guaranteed
by the government-sponsored agencies of FHLMC, FNMA and GNMA.




As of
December 31, 2009, the Company owned three pooled trust preferred securities
with an original cost basis of $2.5 million, which represent investments in
pools of collateralized debt obligations issued by financial institutions and
insurance companies.  The market for these securities is considered to
be inactive.   The Company used discounted cash flow models to
assess if the present value of the cash flows expected to be collected was less
than the amortized cost, which would result in an other-than-temporary
impairment associated with the credit of the underlying
collateral.  The assumptions used in preparing the discounted cash
flow models include the following: estimated discount rates, estimated deferral
and default rates on collateral, assumed recoveries, and estimated cash flows
including all information available through the date of issuance of the
financial statements.  The discounted cash flow analysis included a
review of all issuers within the collateral pool and incorporated higher
deferral and default rates, as compared to historical rates, in the cash flow
projections through maturity.  The Company also reviewed a stress test
of these securities to determine the additional estimated deferrals or defaults
in the collateral pool in excess of what the Company believes is likely, before
the payments on the individual securities are negatively impacted.




59




As of
December 31, 2009, the analysis of the Company’s three investments in pooled
trust preferred securities indicated that a portion of the unrealized loss was
other-than-temporary.  The amount of actual and projected deferrals
and/or defaults by the financial institutions underlying these pooled trust
preferred securities increased significantly since the beginning of
2009.  The increase in nonperforming collateral resulted in credit
related other-than-temporary impairments of $961,000 on these three securities
during the year ended December 31, 2009.  The Company performed a
discounted cash flow analysis, using the factors noted above to determine the
amount of the other-than-temporary impairment that was applicable to either
credit losses or other factors.  The amount associated with credit
losses, $961,000, has been realized through a charge to earnings for the year
ended December 31, 2009, while the $479,000 change in the unrealized loss
associated with other factors was recorded in other comprehensive
income.




During
the year ended December 31, 2008 the Company recorded $66,000 of impairment
charges on two common stock investments.  The impairment charges
reduced the carrying value of these securities down to their fair value as of
December 31, 2008 and was recorded in other non-interest expense.




The
following tables provide additional information related to the Company’s
investments in pooled trust preferred securities as of December 31,
2009:




(Dollars
      in thousands)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                CumulativeMoody's
                                
                                
                                Original
                                
                                
                                Cost
                                
                                
                                Fair
                                
                                
                                Unrealized
                                
                                
                                realizedInvestment
                                
                                Class
                                
                                
                                rating
                                
                                
                                par
                                
                                
                                basis
                                
                                
                                value
                                
                                
                                loss
                                
                                
                                lossPreTSL
      VIII
                                
                                B
                                
                                
                                C
                                
                                
                                $
                                1,000
                                
                                
                                $
                                381
                                
                                
                                $
                                110
                                
                                
                                $
                                (271
                                )
                                
                                $
                                (619
                                )PreTSL
      IX
                                
                                B
                                
                                
                                C
                                
                                
                                
                                1,000
                                
                                
                                
                                765
                                
                                
                                
                                102
                                
                                
                                
                                (663
                                )
                                
                                
                                (235
                                )PreTSL
      XVII
                                
                                C
                                
                                
                                C
                                
                                
                                
                                500
                                
                                
                                
                                382
                                
                                
                                
                                49
                                
                                
                                
                                (333
                                )
                                
                                
                                (107
                                )Total
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                2,500
                                
                                
                                $
                                1,528
                                
                                
                                $
                                261
                                
                                
                                $
                                (1,267
                                )
                                
                                $
                                (961
                                )




Number
      of
                  
                  
                  Non-performing collateral as % of current collateral (at quarter end)Investment
                  
                  issuers in pool
                  
                  
                  
                  Q4 2008
                  
                  
                  
                  Q1 2009
                  
                  
                  
                  Q2 2009
                  
                  
                  
                  Q3 2009
                  
                  
                  
                  Q4 2009PreTSL
      VIII
                  
                  
                  38
                  
                  
                  
                  10.6
                  %
                  
                  
                  28.0
                  %
                  
                  
                  41.2
                  %
                  
                  
                  42.8
                  %
                  
                  
                  43.7
                  %PreTSL
      IX
                  
                  
                  61
                  
                  
                  
                  6.1
                  %
                  
                  
                  11.7
                  %
                  
                  
                  17.3
                  %
                  
                  
                  26.3
                  %
                  
                  
                  28.1
                  %PreTSL
      XVII
                  
                  
                  59
                  
                  
                  
                  7.1
                  %
                  
                  
                  11.5
                  %
                  
                  
                  16.9
                  %
                  
                  
                  17.0
                  %
                  
                  
                  19.9
                  %




60




The
following table reconciles the changes in the Company’s credit losses recognized
in earnings for the year ended December 31, 2009:




(Dollars
      in thousands)Balance
      at beginning of year
                      
                      $
                      -Additional
      credit losses:Securities
      with no previous other-than-temporary impairment
                      
                      
                      961Securities
      with previous other-than-temporary impairments
                      
                      
                      -Balance
      at end of year
                      
                      $
                      961




It is
reasonably possible that the fair values of the Company’s investment securities
could decline in the future if the overall economy and the financial condition
of some of the issuers continue to deteriorate and the liquidity of these
securities remains low.  As a result, there is a risk that additional
other-than-temporary impairments may occur in the future and any such amounts
could be material to the Company’s consolidated financial
statements.  The fair value of the Company’s investment securities may
also decline from an increase in market interest rates, as the market prices of
these investments move inversely to their market yields.




Maturities
of investment securities at December 31, 2009 are as follows:




(Dollars
      in thousands)
                    
                    Amortized
                    
                    
                    Estimatedcost
                    
                    
                    fair valueDue
      in less than one year
                    
                    $
                    16,067
                    
                    
                    $
                    14,476Due
      after one year but within five years
                    
                    
                    30,376
                    
                    
                    
                    31,178Due
      after five years
                    
                    
                    48,849
                    
                    
                    
                    50,414Mortgage-backed
      securities and common stocks
                    
                    
                    63,958
                    
                    
                    
                    65,560Total
                    
                    $
                    159,250
                    
                    
                    $
                    161,628




For
mortgage-backed securities, actual maturities will differ from contractual
maturities because borrowers have the right to prepay obligations with or
without prepayment penalties.




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




(Dollars
      in thousands)
                    
                    Years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Realized
      gains
                    
                    $
                    9
                    
                    
                    $
                    497
                    
                    
                    $
                    -Realized
      losses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    9
                    
                    
                    $
                    497
                    
                    
                    $
                    -




At
December 31, 2009 securities pledged to secure public funds on deposit,
repurchase agreements and as collateral for the Federal Reserve discount window
had a carrying value of approximately $101.4 million.  Except for U.
S. federal agency obligations, no investment in a single issuer exceeded 10% of
stockholders’ equity.




Other
investment securities include restricted investments in Federal Home Loan Bank
(“FHLB”) and Federal Reserve Bank (“FRB”) stock.  The carrying value
of the FHLB stock at December 31, 2009 and 2008 was $6.2 million and $7.3
million, respectively and the carrying value of the FRB stock at December 31,
2009 and 2008 was $1.8 million and $1.7 million, respectively.  These
securities are not readily marketable and are required for regulatory purposes
and borrowing availability.  Since there is no available market values
these securities are carried at cost.  Redemption of these investments
at par value is at the option of the FHLB or FRB.  During the year
ended December 31, 2009, the FHLB redeemed $1.2 million of FHLB stock held by
the Company.  We have assessed the ultimate recoverability of these
investments and believe that no impairment has occurred.




61




(4)
            Loans




Loans
consist of the following:





(Dollars
      in thousands)
                        
                        As of December 31,2009
                        
                        
                        2008Real
      estate loans:One-to-four
      family residential
                        
                        $
                        98,333
                        
                        
                        $
                        112,815Commercial
                        
                        
                        106,470
                        
                        
                        
                        105,488Construction
      and land
                        
                        
                        36,864
                        
                        
                        
                        41,107Commercial
      loans
                        
                        
                        98,213
                        
                        
                        
                        101,976Consumer
      loans
                        
                        
                        7,884
                        
                        
                        
                        7,937Total
      gross loans
                        
                        
                        347,764
                        
                        
                        
                        369,323Deferred
      loan fees/(costs) and loans in process
                        
                        
                        442
                        
                        
                        
                        320Allowance
      for loan losses
                        
                        
                        (5,468
                        )
                        
                        
                        (3,871
                        )Loans,
      net
                        
                        $
                        342,738
                        
                        
                        $
                        365,772Percent of totalReal
      estate loans:One-to-four
      family residential
                        
                        
                        28.3
                        %
                        
                        
                        30.5
                        %Commercial
                        
                        
                        30.6
                        %
                        
                        
                        28.6
                        %Construction
      and land
                        
                        
                        10.6
                        %
                        
                        
                        11.1
                        %Commercial
      loans
                        
                        
                        28.2
                        %
                        
                        
                        27.6
                        %Consumer
      loans
                        
                        
                        2.3
                        %
                        
                        
                        2.2
                        %Total
      gross loans
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %




The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet customers’ financing needs.  These
financial instruments consist principally of commitments to extend
credit.  The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.  The Company’s exposure to credit loss in the event of
nonperformance by the other party is represented by the contractual amount of
those instruments.  In the normal course of business, there are
various commitments and contingent liabilities, such as commitments to extend
credit, letters of credit, and lines of credit, the balance of which are not
recorded in the accompanying consolidated financial statements.  The
Company generally requires collateral or other security on unfunded loan
commitments and irrevocable letters of credit.  Unfunded commitments
to extend credit, excluding standby letters of credit, aggregated
$57.4 million and $67.3 million at December 31, 2009 and 2008,
respectively, and are generally at variable interest rates.  Standby
letters of credit totaled $2.4 million and $2.1 at December 31, 2009 and 2008,
respectively.




The
Company is exposed to varying risks associated with concentrations of credit
relating primarily to lending activities in specific geographic
areas.  The Company’s principal lending area consists of 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 surrounding communities, and
substantially all of the Company’s loans are to residents of or secured by
properties located in its principal lending area.  Accordingly, the
ultimate collectability of the Company’s loan portfolio is dependent in part
upon market conditions in those areas.  These geographic
concentrations are considered in management’s establishment of the allowance for
loan losses.




62




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




(Dollars
      in thousands)
                    
                    Years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Balance
      at beginning of year
                    
                    $
                    3,871
                    
                    
                    $
                    4,172
                    
                    
                    $
                    4,030Provision
      for loan losses
                    
                    
                    3,300
                    
                    
                    
                    2,400
                    
                    
                    
                    255Charge-offs
                    
                    
                    (2,026
                    )
                    
                    
                    (2,769
                    )
                    
                    
                    (204
                    )Recoveries
                    
                    
                    323
                    
                    
                    
                    68
                    
                    
                    
                    91Balance
      at end of year
                    
                    $
                    5,468
                    
                    
                    $
                    3,871
                    
                    
                    $
                    4,172




At
December 31, 2009, $11.8 million in loans were on non-accrual status, or 3.5% of
net loans, compared to a balance of $5.7 million, or 1.6% of net loans, at
December 31, 2008.  Non-accrual loans consist primarily of loans
greater than ninety days past due.  There were no loans 90 days
delinquent and still accruing interest at December 31, 2009 or December 31,
2008.  The increase in non-accrual loans was primarily driven by a
$4.2 million construction loan relationship and a $2.4 million commercial
agriculture loan that were classified as non-accrual during 2009.  Our
impaired loans increased from $7.1 million at December 31, 2008 to $11.8 million
at December 31, 2009 primarily because of the same two loans that increased the
non-accrual loan balances.




The
following table presents information on non-accrual loans:




(Dollars
      in thousands)
                    
                    As of December 31,2009
                    
                    
                    2008Real
      estate loans:One-to-four
      family residential
                    
                    $
                    1,146
                    
                    
                    $
                    1,358Commercial
                    
                    
                    1,475
                    
                    
                    
                    2,041Construction
      and land
                    
                    
                    6,402
                    
                    
                    
                    759Commercial
      loans
                    
                    
                    2,785
                    
                    
                    
                    1,537Consumer
      loans
                    
                    
                    22
                    
                    
                    
                    53Total
      non-accrual loans
                    
                    $
                    11,830
                    
                    
                    $
                    5,748




Under the
original terms of the Company’s non-accrual loans, interest earned on such loans
for the years 2009, 2008 and 2007, would have increased interest income by
$794,000 and $245,000 and $520,000, respectively.  There were no loans
90 days delinquent and still accruing interest at December 31, 2009 and
2008.




63




The
following table presents information on impaired loans:




(Dollars
      in thousands)
                  
                  As of December 31,2009
                  
                  
                  2008Real
      estate loans:One-to-four
      family residential
                  
                  $
                  1,146
                  
                  
                  $
                  1,332Commercial
                  
                  
                  1,475
                  
                  
                  
                  1,537Construction
      and land
                  
                  
                  6,402
                  
                  
                  
                  2,108Commercial
      loans
                  
                  
                  2,785
                  
                  
                  
                  2,074Consumer
      loans
                  
                  
                  13
                  
                  
                  
                  8Total
      impaired loans
                  
                  $
                  11,821
                  
                  
                  $
                  7,059Impaired
      loans for which an allowance has been provided
                  
                  $
                  10,620
                  
                  
                  $
                  1,867Impaired
      loans for which no allowance has been provided
                  
                  
                  1,201
                  
                  
                  
                  5,192Allowance
      related to impaired loans
                  
                  $
                  2,770
                  
                  
                  $
                  705




Average
impaired loans were $11.2 million for 2009, $6.1 million for 2008, and $5.7
million for 2007.




The
Company provides servicing on loans for others with outstanding principal
balances of $138.4 million and $82.0 million at December 31, 2009
and 2008, respectively.  Gross service fee income related to such
loans was $279,000, $219,000 and $243,000 for the years ended December 31,
2009, 2008 and 2007, respectively, and is included in fees and service charges
in the consolidated statements of earnings.




The
Company had loans to directors and officers at December 31, 2009 and 2008,
which carry terms similar to those for other loans.  Management
believes such outstanding loans do not represent more than a normal risk of
collection.  A summary of such loans is as follows:




(Dollars
      in thousands)Balance
      at December 31, 2008
                      
                      $
                      6,096New
      loans
                      
                      
                      972Repayments
                      
                      
                      (903
                      )Balance
      at December 31, 2009
                      
                      $
                      6,165




64




(5)
            Premises
      and Equipment




Premises
and equipment consisted of the following:




(Dollars
      in thousands)
                            
                            Estimated
                            
                            As of December 31,useful lives
                            
                            2009
                            
                            
                            2008Land
                            
                            Indefinite
                            
                            $
                            3,758
                            
                            
                            $
                            3,787Office
      buildings and improvements
                            
                            10
      - 50 years
                            
                            
                            13,513
                            
                            
                            
                            11,267Furniture
      and equipment
                            
                            3 -
      15 years
                            
                            
                            6,635
                            
                            
                            
                            6,178Automobiles
                            
                            2 -
      5 years
                            
                            
                            355
                            
                            
                            
                            329Total
      premises and equiptment
                            
                            
                            
                            
                            24,261
                            
                            
                            
                            21,561Accumulated
      depreciation
                            
                            
                            
                            
                            (8,384
                            )
                            
                            
                            (7,605
                            )Total
      premises and equiptment, net
                            
                            
                            
                            $
                            15,877
                            
                            
                            $
                            13,956




Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $946,000, $1.1
million and $883,000, respectively and was included in occupancy and equipment
on the consolidated statements of earnings.




(6)
            Deposits




The
following table presents the maturities of certificates of deposit at December
31, 2009:




(Dollars
      in thousands)Year
                      
                      Amount2010
                      
                      $
                      138,1402011
                      
                      
                      33,6622012
                      
                      
                      13,1362013
                      
                      
                      4,7942014
                      
                      
                      2,357Thereafter
                      
                      
                      248Total
                      
                      $
                      192,337




The
components of interest expense associated with deposits are as
follows:




(Dollars
      in thousands)
                    
                    Years ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Time
      deposits
                    
                    $
                    5,101
                    
                    
                    $
                    8,075
                    
                    
                    $
                    10,656Money
      market and NOW
                    
                    
                    643
                    
                    
                    
                    1,741
                    
                    
                    
                    2,769Savings
                    
                    
                    76
                    
                    
                    
                    81
                    
                    
                    
                    81Total
                    
                    $
                    5,820
                    
                    
                    $
                    9,897
                    
                    
                    $
                    13,506




Regulations
of the Federal Reserve System require reserves to be maintained by all banking
institutions according to the types and amounts of certain deposit
liabilities.  These requirements restrict a portion of the amounts
shown as consolidated cash and due from banks from everyday usage in operation
of the banks.  The minimum reserve requirements for the Bank totaled
$25,000 at December 31, 2009.




65




(7)
              Federal
      Home Loan Bank Borrowings




Term
advances from the FHLB, excluding line of credit advances, at December 31,
2009 and 2008, amounted to $56.0 million and $71.3 million,
respectively.  Maturities of such borrowings at December 31, 2009
and 2008 are summarized as follows:





(Dollars
      in thousands)
                                        
                                        As
      of December 31,2009
                                        
                                        
                                        2008Weighted
                                        
                                        
                                        
                                        
                                        
                                        WeightedYear
                                        
                                        Amount
                                        
                                        
                                        average rates
                                        
                                        
                                        
                                        
                                        
                                        average rates2009
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        15,089
                                        
                                        
                                        
                                        4.91
                                        %2010
                                        
                                        $
                                        15,168
                                        
                                        
                                        
                                        4.45
                                        %
                                        
                                        
                                        15,357
                                        
                                        
                                        
                                        4.39
                                        %2011-2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -2016
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        2.70
                                        %
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        2.70
                                        %2017
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        3.64
                                        %
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        3.64
                                        %2018
                                        
                                        
                                        25,836
                                        
                                        
                                        
                                        3.38
                                        %
                                        
                                        
                                        25,873
                                        
                                        
                                        
                                        3.38
                                        %Total
                                        
                                        $
                                        56,004
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        71,319




All of
the Bank’s term advances with the FHLB have fixed rates and prepayment
penalties.  However, certain borrowings contain a conversion option,
at which on certain dates the FHLB may exercise an option to convert the
borrowing to a variable rate equal to the FHLB one month short-term advance
rate, adjustable monthly.  The Bank would then have the option to
prepay the advances without penalty.  The Bank may repay the advance
at each respective reset date if the FHLB first exercises its 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 no outstanding borrowings as of December 31, 2009
and $6.0 million outstanding at December 31, 2008.  Interest on any
outstanding balances on the line of credit accrues at the federal funds market
rate plus 0.15% (0.18% at December 31, 2009).




Although
no loans are specifically pledged, the FHLB requires the Bank to maintain
eligible collateral (qualifying loans and investment securities) that has a
lending value at least equal to its required collateral. At December 31,
2009 and 2008, the Bank’s total borrowing capacity with the FHLB was
approximately $98.9 million and $126.1 million,
respectively.  The available borrowing capacity with the FHLB of
Topeka is collateral based, and the Bank’s ` ability to borrow is subject to
maintaining collateral that meets the eligibility requirements.  The
borrowing capacity is not committed and is subject to approval by the
FHLB.


66


(8)
            Other
      Borrowings




In 2003,
the Company issued $8.2 million of subordinated debentures.  These
debentures, which are due in 2034 and are redeemable beginning in 2009, were
issued to a wholly owned grantor trust (“the Trust”) formed to issue preferred
securities representing undivided beneficial interests in the assets of the
Trust.  The Trust then invested the gross proceeds of such preferred
securities in the debentures.  The Trust’s preferred securities and
the subordinated debentures require quarterly interest payments and have
variable rates, adjustable quarterly.  Interest accrues at LIBOR plus
2.85%.  The interest rates at December 31, 2009 and 2008 were 3.13%
and 6.32%, respectively.




In 2005,
the Company issued an additional $8.2 million of subordinated
debentures.  These debentures, which are due in 2036 and are
redeemable beginning in 2011, were issued to a wholly owned grantor trust
(“Trust II”) formed to issue preferred securities representing undivided
beneficial interests in the assets of Trust II.  Trust II then
invested the gross proceeds of such preferred securities in the
debentures.  Trust II’s preferred securities and the subordinated
debentures require quarterly interest payments and have variable rates,
adjustable quarterly.  Interest accrues at LIBOR plus 1.34% on $5.2
million of the subordinated debentures, while the remaining $3.0 million of the
subordinated debentures has a fixed rate of 6.17%.  The blended
interest rate at December 31, 2009 and 2008 was 3.31% and 4.40%,
respectively.




While
these Trusts are accounted for as unconsolidated equity investments under the
requirements of Financial Accounting Interpretation No. 46R, “Consolidation of Variable Interest
Entities,”a portion of the trust preferred securities issued by the
Trust qualifies as Tier 1 Capital for regulatory purposes.




The
Company has a $7.5 million line of credit from an unrelated financial
institution maturing on November 17, 2010, with an interest rate that adjusts
daily based on the prime rate plus 0.25%, but not less than
4.25%.  This line of credit has covenants specific to capital and
other ratios, which the Company was in compliance with at December 31,
2009.  The outstanding balance of the line of credit at December 31,
2009 and 2008, was $4.4 million and $4.8 million, respectively, and is included
in other borrowings.  Additionally, the Bank had $5.3 million and $5.8
million in repurchase agreements outstanding and included in other borrowings at
December 31, 2009 and 2008.




At
December 31, 2009 and 2008, the Bank had no borrowings through the Federal
Reserve discount window, while our borrowing capacity was $14.7 million and
$15.7 million, respectively.  The Bank also has various other federal
funds agreements, both secured and unsecured, with correspondent banks totaling
approximately $58.8 million.  As of December 31, 2009 and 2008 there
were no borrowings through these correspondent bank federal funds
agreements.


67


(9)
            Income
      Taxes




Income
tax expense attributable to income from operations consisted of:




(Dollars
      in thousands)
                  
                  Years
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Current:Federal
                  
                  $
                  1,565
                  
                  
                  $
                  1,244
                  
                  
                  $
                  1,085State
                  
                  
                  148
                  
                  
                  
                  (502
                  )
                  
                  
                  104Total
      current
                  
                  
                  1,713
                  
                  
                  
                  742
                  
                  
                  
                  1,189Deferred:Federal
                  
                  
                  (1,451
                  )
                  
                  
                  266
                  
                  
                  
                  110State
                  
                  
                  (116
                  )
                  
                  
                  102
                  
                  
                  
                  4Total
      deferred
                  
                  
                  (1,567
                  )
                  
                  
                  368
                  
                  
                  
                  114Income
      tax expense
                  
                  $
                  146
                  
                  
                  $
                  1,110
                  
                  
                  $
                  1,303




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




(Dollars
      in thousands)
                    
                    Years
      ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Income
      tax from operations
                    
                    $
                    146
                    
                    
                    $
                    1,110
                    
                    
                    $
                    1,303Stockholders’
      equity, recognition of tax benefit for stock options
    exercised
                    
                    
                    -
                    
                    
                    
                    (6
                    )
                    
                    
                    (8
                    )Stockholders’
      equity, recognition of unrealized (losses)/gains on available-for-sale
      securities
                    
                    
                    492
                    
                    
                    
                    (33
                    )
                    
                    
                    426$
                    638
                    
                    
                    $
                    1,071
                    
                    
                    $
                    1,721




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




(Dollars
      in thousands)
                  
                  Years
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Computed
      “expected” tax expense
                  
                  $
                  1,162
                  
                  
                  $
                  1,925
                  
                  
                  $
                  2,280Increase
      (reduction) in income taxes resulting from:Tax-exempt
      interest income, net
                  
                  
                  (861
                  )
                  
                  
                  (783
                  )
                  
                  
                  (717
                  )Bank
      owned life insurance
                  
                  
                  (179
                  )
                  
                  
                  (140
                  )
                  
                  
                  (160
                  )State
      income taxes, net of federal benefit
                  
                  
                  21
                  
                  
                  
                  36
                  
                  
                  
                  71Investment
      tax credits, net of costs
                  
                  
                  (43
                  )
                  
                  
                  20
                  
                  
                  
                  (149
                  )Other,
      net
                  
                  
                  46
                  
                  
                  
                  52
                  
                  
                  
                  (22
                  )$
                  146
                  
                  
                  $
                  1,110
                  
                  
                  $
                  1,303


68


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




(Dollars
      in thousands)
                        
                        As
      of December 31,2009
                        
                        
                        2008Deferred
      tax assets:Loans,
      including allowance for loan losses
                        
                        $
                        2,192
                        
                        
                        $
                        1,203Federal
      alternative minimum tax credit and low incomehousing
      credit carryforwards
                        
                        
                        1,070
                        
                        
                        
                        1,064Net
      operating loss carry forwards
                        
                        
                        520
                        
                        
                        
                        701Deferred
      compensation arrangements
                        
                        
                        250
                        
                        
                        
                        262State
      taxes
                        
                        
                        380
                        
                        
                        
                        199Investment
      impairments
                        
                        
                        349
                        
                        
                        
                        22FHLB
      advances
                        
                        
                        57
                        
                        
                        
                        152Accrued
      expenses
                        
                        
                        -
                        
                        
                        
                        2Total
      deferred tax assets
                        
                        
                        4,818
                        
                        
                        
                        3,605Deferred
      tax liabilities:FHLB
      stock dividends
                        
                        
                        1,023
                        
                        
                        
                        974Unrealized
      gain on investment securities available-for-sale
                        
                        
                        875
                        
                        
                        
                        383Premises
      and equipment, net of depreciation
                        
                        
                        746
                        
                        
                        
                        1,057Intangible
      assets
                        
                        
                        323
                        
                        
                        
                        455Investments
                        
                        
                        12
                        
                        
                        
                        9Other,
      net
                        
                        
                        57
                        
                        
                        
                        69Total
      deferred tax liabilities
                        
                        
                        3,036
                        
                        
                        
                        2,947Less
      valuation allowance
                        
                        
                        (377
                        )
                        
                        
                        (328
                        )Net
      deferred tax asset
                        
                        $
                        1,405
                        
                        
                        $
                        330




The
Company has recorded a deferred tax asset for future benefits of net operating
losses and alternative minimum tax credit carry forwards.  The net
operating loss carry forwards will expire, if not utilized.  The
Company has $393,000 of federal net operating loss carry forwards as of December
31, 2009, which expire in 2026 and $334,000 of Kansas privilege tax net
operating loss carry forwards as of December 31, 2009, which expire between 2012
and 2015.  The Company also has Kansas corporate net operating loss
carry forwards totaling $7.8 million as of December 31, 2009, which expire
between 2010 and 2019.  The alternative minimum tax credit carry
forward does not expire and totaled $775,000 as of December 31,
2009.  In addition, the Company has low income housing credit carry
forwards of $295,000 which expire in varying amounts between 2026 and
2029.  The Company has recorded a valuation allowance to reduce
certain Kansas corporate net operating loss carry forwards which expire at
various times through 2019.  The increase in the valuation allowance
is related to additional net operating loss carry forwards generated during
2009.  At December 31, 2009 and 2008, the Company believes it is more
likely than not that these items will not be realized.  A valuation
allowance related to the remaining deferred tax assets has not been provided
because management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.




Retained
earnings at December 31, 2009 and 2008, includes approximately $6.3 million
for which no provision for federal income tax had been made.  This
amount represents allocations of income to bad debt deductions in years prior to
1988 for tax purposes only.  Reduction of amounts allocated for
purposes other than tax bad debt losses will create income for tax purposes
only, which will be subject to the then current corporate income tax
rate.




The
Company has unrecognized tax benefits representing tax positions for which a
liability has been established.  A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:


69





(Dollars
      in thousands)
                  
                  Years
      ended December 31,2009
                  
                  
                  2008Unrecognized
      tax benefits at beginning of year
                  
                  $
                  810
                  
                  
                  $
                  852Gross
      increases to current year tax positions
                  
                  
                  310
                  
                  
                  
                  182Gross
      increases (decreases) to prior year’s tax positions
                  
                  
                  17
                  
                  
                  
                  (14
                  )Lapse
      of statute of limitations
                  
                  
                  (162
                  )
                  
                  
                  (210
                  )Unrecognized
      tax benefits at end of year
                  
                  $
                  975
                  
                  
                  $
                  810





Tax years
that remain open and subject to audit include the years 2006 through 2009 for
both federal and state.  We recognized $162,000 and $210,000 of
previously unrecognized tax benefits during 2009 and 2008,
respectively.  Our gross unrecognized tax benefits balance of $975,000
and $810,000 at December 31, 2009 and 2008, respectively, would favorably impact
our effective tax rate by $644,000 and $535,000, respectively, if
recognized.  As of December 31, 2009 and 2008 we have accrued interest
and penalties of $221,000 and $212,000, respectively which are not included in
the table above.  We believe that it is reasonably possible that a
reduction in gross unrecognized tax benefits of up to $190,000 is possible
during the next 12 months.





(10)
            Employee
      Benefit Plans




Employee
Retirement Plan




Substantially
all employees are covered under a 401(k) defined contribution savings plan.
Contributions were $368,000, $290,000 and $269,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.




Deferred
Compensation and Retirement Agreements




On
January 1, 2008 the Company recognized a liability for future benefits payable
under an agreement that splits life insurance policy benefits between the
Company and a former employee.  The effect of the change was
recognized through an adjustment to equity.  The Company recognized a
liability of $335,000, with an offsetting reduction to retained earnings,
attributable to the future benefits payable to the former employee pursuant to a
split-dollar life insurance arrangement.  At December 31, 2009 and
2008 the liability was $322,000 and $328,000, respectively.  At
December 31, 2009 the Company had an asset of $2.0 million recorded representing
the net cash surrender value for the corresponding life insurance
arrangement.




The
Company entered into deferred compensation and other retirement agreements with
certain key employees that provides for cash payments to be made after their
retirement.  The obligations under these arrangements have been
recorded at the present value of the accrued benefits.  The Company
has also entered into agreements with certain directors to defer portions of
their compensation.  The balance of estimated accrued benefits under
all of these arrangements, including the split-dollar life insurance
arrangement, was $1.1 million at both December 31, 2009 and 2008, and was
included as a component of other liabilities in the accompanying consolidated
balance sheets.  To assist in funding benefits under each of these
plans, the Bank has purchased certain assets including life insurance policies
on covered employees in which the Bank is the beneficiary.  At
December 31, 2009 and 2008, the cash surrender values on these policies
established to meet such obligations were $3.6 million and $3.4 million,
respectively.




In
addition to these policies the Bank purchased $7.5 million of bank owned life
insurance policies during 2006, which had a cash surrender value of $8.9 million
and $8.6 million at December 31, 2009 and 2008, respectively.  These
policies are not related to deferred compensation split-dollar arrangements or
other retirement agreements.


70


(11)
            Stock
      Option Plan




The
Company has a stock based employee compensation plan which allows for the
issuance of stock options, the purpose of which is to provide additional
incentive to certain officers, directors, and key employees by facilitating
their purchase of a stock interest in the Company.  The plan is
administered by the compensation committee of the board of directors who
approves employees to whom options are granted and the number of shares
granted.  The option price may not be less than 100% of the fair
market value of the shares on the date of the grant, and no option shall be
exercisable after the expiration of ten years from the grant
date.  The Company intends to utilize authorized, but un-issued shares
to satisfy option exercises.  The number of shares available for
future grants under the plan was 64,507 at December 31,
2009.  Compensation expense is recognized over the option vesting
period, which is typically pro-rata over four or five years.  The
stock-based compensation cost related to these awards was $157,000, $134,000 and
$118,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.  The Company recognized tax benefits of $30,000, $28,000
and $31,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.




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




The fair
value of options granted were estimated utilizing the following weighted average
assumptions:




Years
      ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Dividend
      rate
                      
                      
                      n/a
                      
                      
                      
                      5.30
                      %
                      
                      
                      n/aVolatility
                      
                      
                      n/a
                      
                      
                      
                      18.50
                      %
                      
                      
                      n/aRisk-free
      interest rate
                      
                      
                      n/a
                      
                      
                      
                      2.90
                      %
                      
                      
                      n/aExpected
      lives
                      
                      
                      n/a
                      
                      
                      5
      years
                      
                      
                      
                      n/aFair
      value per option at grant date
                      
                      
                      n/a
                      
                      
                      $
                      2.10
                      
                      
                      
                      n/a







A summary
of option activity during 2009 is presented below:




(Dollars
      in thousands, except per share amounts)
                            
                            
                            Weighted
                            
                            
                            Weightedaverage
                            
                            
                            averageexercise
                            
                            
                            remaining
                            
                            
                            Aggregateprice
                            
                            
                            contractual
                            
                            
                            intrinsicShares
                            
                            
                            per
      share
                            
                            
                            term
                            
                            
                            valueOutstanding
      at December 31, 2008
                            
                            
                            394,193
                            
                            
                            $
                            21.97
                            
                            
                            7.0
      years
                            
                            
                            $
                            235Granted
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            —
                            
                            
                            
                            n/aEffect
      of 5% stock dividend
                            
                            
                            19,708
                            
                            
                            $
                            -
                            
                            
                            
                            —
                            
                            
                            
                            n/aForfeited/expired
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            —
                            
                            
                            
                            n/aExercised
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            —
                            
                            
                            
                            n/aOutstanding
      at December 31, 2009
                            
                            
                            413,901
                            
                            
                            $
                            20.92
                            
                            
                            6.0
      years
                            
                            
                            $
                            99Exercisable
      at December 31, 2009
                            
                            
                            271,283
                            
                            
                            $
                            20.78
                            
                            
                            5.1
      years
                            
                            
                            $
                            99Vested
      and expected to vest at December 31, 2009
                            
                            
                            395,718
                            
                            
                            $
                            20.89
                            
                            
                            6.0
      years
                            
                            
                            $
                            99


71


Additional
information about stock options exercised is presented below:




(Dollars
      in thousands)
                    
                    Years
      ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Intrinsic
      value of options exercised (on exercise date)
                    
                    $
                    -
                    
                    
                    $
                    16
                    
                    
                    $
                    22Cash
      received from options exercised
                    
                    
                    -
                    
                    
                    
                    37
                    
                    
                    
                    41Excess
      tax benefit realized from options exercised
                    
                    $
                    -
                    
                    
                    $
                    6
                    
                    
                    $
                    8




As of
December 31, 2009, there was $195,000 of total unrecognized compensation cost
related to outstanding unvested options.  That unrecognized
compensation cost is expected to be recognized over a weighted-average period of
approximately one year.  The total fair value (at vest date) of shares
vested during the years ended December 31, 2009, 2008 and 2007 was $0, $66,000
and $295,000, respectively.




72


(12)
            Fair
      Value of Financial Instruments and Fair Value
  Measurements




The
Company follows FASB ASC 820 “Fair Value Measurements and Disclosures,” which
defines fair value, establishes a framework for measuring fair value and expands
the disclosures about fair value measurements.  ASC Topic 820-10-55
requires the use of a hierarchy of fair value techniques based upon whether the
inputs to those fair values reflect assumptions other market participants would
use based upon market data obtained from independent sources or reflect the
Company’s own assumptions of market participant valuation.  Effective
January 1, 2009, the Company began applying FASB ASC 820 to certain nonfinancial
assets and liabilities, which include foreclosed real estate, long-lived assets,
goodwill, and core deposit premium, which are recorded at fair value only upon
impairment.  The fair value hierarchy is as follows:




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




• Level
2:  Quoted prices for similar assets in active markets, quoted prices
in markets that are not active or quoted prices that contain observable inputs
such as yield curves, volatilities, prepayment speeds and other inputs derived
from market data.




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




Fair
value estimates of the Company’s financial instruments as of December 31,
2009 and 2008, including methods and assumptions utilized, are set forth
below:




(Dollars
      in thousands)
                  
                  As
      of December 31,2009
                  
                  
                  2008Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  Estimatedamount
                  
                  
                  fair
      value
                  
                  
                  amount
                  
                  
                  fair
      valueFinancial
      assets:Cash
      and cash equivalents
                  
                  $
                  12,379
                  
                  
                  $
                  12,379
                  
                  
                  $
                  13,788
                  
                  
                  $
                  13,788Investment
      securities:Available-for-sale
                  
                  
                  161,628
                  
                  
                  
                  161,628
                  
                  
                  
                  162,245
                  
                  
                  
                  162,245Other
      securities
                  
                  
                  7,991
                  
                  
                  
                  7,991
                  
                  
                  
                  9,052
                  
                  
                  
                  9,052Loans,
      net
                  
                  
                  342,738
                  
                  
                  
                  343,671
                  
                  
                  
                  365,772
                  
                  
                  
                  368,558Loans
      held for sale
                  
                  
                  4,703
                  
                  
                  
                  4,718
                  
                  
                  
                  1,487
                  
                  
                  
                  1,749Derivative
      financial instruments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18
                  
                  
                  
                  18Mortgage
      servicing rights
                  
                  
                  766
                  
                  
                  
                  2,188
                  
                  
                  
                  170
                  
                  
                  
                  1,008Accrued
      interest receivable
                  
                  
                  2,702
                  
                  
                  
                  2,702
                  
                  
                  
                  3,459
                  
                  
                  
                  3,459Financial
      liabilities:Non-maturity
      deposits
                  
                  
                  246,258
                  
                  
                  
                  246,258
                  
                  
                  
                  226,142
                  
                  
                  
                  226,142Time
      deposits
                  
                  
                  192,337
                  
                  
                  
                  193,707
                  
                  
                  
                  213,403
                  
                  
                  
                  214,859FHLB
      borrowings
                  
                  
                  56,004
                  
                  
                  
                  58,174
                  
                  
                  
                  77,319
                  
                  
                  
                  81,986Other
      borrowings
                  
                  
                  26,179
                  
                  
                  
                  24,537
                  
                  
                  
                  27,047
                  
                  
                  
                  23,298Derivative
      financial instruments
                  
                  
                  84
                  
                  
                  
                  84
                  
                  
                  
                  -
                  
                  
                  
                  -Accrued
      interest payable
                  
                  
                  1,028
                  
                  
                  
                  1,028
                  
                  
                  
                  1,391
                  
                  
                  
                  1,391




Methods
and Assumptions Utilized




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




73


The
Company’s investment securities classified as available-for-sale include U.S.
federal agency securities, municipal obligations, mortgage-backed securities,
pooled trust preferred securities, certificates of deposits and common
stocks.  Quoted exchange prices are available for the Company’s common
stock investments, which are classified as Level 1.  Agency securities
and mortgage-backed obligations are priced utilizing industry-standard models
that consider various assumptions, including time value, yield curves,
volatility factors, prepayment speeds, default rates, loss severity, current
market and contractual prices for the underlying financial instruments, as well
as other relevant economic measures.  Substantially all of these
assumptions are observable in the marketplace, can be derived from observable
data, or are supported by observable levels at which transactions are executed
in the marketplace and are classified as Level 2.  Municipal
securities are valued using a type of matrix, or grid, pricing in which
securities are benchmarked against the treasury rate based on credit
rating.  These model and matrix measurements are classified as Level 2
in the fair value hierarchy.  The Company’s investments in FDIC
insured, fixed-rate certificates of deposits are valued using a net present
value model that discounts the future cash flows at the current market rates and
are classified as Level 2.




The
Company classifies its pooled trust preferred securities as Level
3.  The portfolio consists of three investments in pooled trust
preferred securities issued by various financial companies.  These
securities are valued based on a matrix pricing in which the securities are
benchmarked against single issuer trust preferred securities based on credit
rating.  The pooled trust preferred market is inactive so single
issuer trading is used as the benchmark, with additional adjustments made for
credit and liquidity risk.




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




The
estimated fair value of the Company’s loan portfolio is based on the segregation
of loans by collateral type, interest terms, and maturities.  The fair
value is estimated based on discounting scheduled and estimated cash flows
through maturity using an appropriate risk-adjusted yield curves to approximate
current interest rates for each category.  No adjustment was made to
the interest rates for changes in credit risk of performing loans where there
are no known credit concerns.  Management segregates loans in
appropriate risk categories.  Management believes that the risk factor
embedded in the interest rates along with the allowance for loan losses
applicable to the performing loan portfolio results in a fair valuation of such
loans.  The fair values of impaired loans are generally based on
market prices for similar assets determined through independent appraisals or
discounted values of independent appraisals and brokers’ opinions of
value.  This method of estimating fair value does not incorporate the
exit-price concept of fair value prescribed by ASC Topic 820.




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




The
Company’s derivative financial instruments consist solely of interest rate lock
commitments and corresponding forward sales contracts on mortgage loans held for
sale and are not designated as hedging instruments.  The fair values
of these derivatives are based on quoted prices for similar loans in the
secondary market.  The market prices are adjusted by a factor, based
on the Company’s historical data and its judgment about future economic trends,
which considers the likelihood that a commitment will ultimately result in a
closed loan.  These instruments are classified as Level 3 based on the
unobservable nature of these assumptions.  The amounts are included in
other assets or other liabilities on the consolidated balance sheets and gains
on sale of loans in the consolidated statements of earnings.




The
Company measures its mortgage servicing rights at the lower of amortized cost or
fair value.  Periodic impairment assessments are performed based on
fair value estimates at the reporting date.  The fair value of
mortgage servicing rights are estimated based on a valuation model which
calculates the present value of estimated future cash flows associated with
servicing the underlying loans.  The model incorporates assumptions
that market participants use in estimating future net servicing income,
including estimated prepayment speeds, market discount rates, cost to service,
and other servicing income, including late fees.  The fair value
measurements are classified as Level 3.




The
carrying amount of accrued interest receivable and payable are considered to
approximate fair value.


74


The
estimated fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, money market accounts, and NOW accounts, is
equal to the amount payable on demand.  The fair value of
interest-bearing time deposits is based on the discounted value of contractual
cash flows of such deposits.  The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities.  These fair values do not incorporate the value of core
deposit intangibles which may be associated with the deposit base.




The fair
value of advances from the FHLB and other borrowings is estimated using current
rates offered for similar borrowings adjusted for the Company’s current credit
spread if applicable.




Off-Balance
Sheet Financial Instruments




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




Limitations




Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instruments.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company’s entire holdings of a particular financial
instrument.  Because no market exists for a significant portion of the
Company’s financial instruments, fair value estimates are based on judgments
regarding future loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors.  These estimates are subjective in nature and involve
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 existing
balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments.





Valuation
methods for financial instruments measured at fair value on a recurring
basis




The
following table represents the Company’s financial instruments that are measured
at fair value on a recurring basis at December 31, 2009 and 2008 allocated to
the appropriate fair value hierarchy:




Total
                      
                      
                      Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3Assets:Cash
      and cash equivalents
                      
                      $
                      12,379
                      
                      
                      $
                      12,379
                      
                      
                      $
                      -
                      
                      
                      $
                      -Available-for-sale
      securities
                      
                      
                      161,628
                      
                      
                      
                      805
                      
                      
                      
                      160,562
                      
                      
                      
                      261Liabilities:Derivative
      financial instruments
                      
                      
                      84
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      84





As
      of December 31, 2008Fair
      value hierarchyTotal
                              
                              
                              Level
      1
                              
                              
                              Level
      2
                              
                              
                              Level
      3Assets:Cash
      and cash equivalents
                              
                              $
                              13,788
                              
                              
                              $
                              13,788
                              
                              
                              $
                              -
                              
                              
                              $
                              -Available-for-sale
      securities
                              
                              
                              162,245
                              
                              
                              
                              1,014
                              
                              
                              
                              160,491
                              
                              
                              
                              740Derivative
      financial instruments
                              
                              
                              18
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              18


75


The
following table reconciles the changes in the Company’s Level 3 financial
instruments during 2009:




DerivativeAvailable-for
                      
                      
                      financialsale-securities
                      
                      
                      instrumentsLevel
      3 asset fair value at December 31, 2008
                      
                      $
                      740
                      
                      
                      $
                      18Transfers
      into Level 3
                      
                      
                      -
                      
                      
                      
                      -Total
      gains (losses):Included
      in earnings
                      
                      
                      (961
                      )
                      
                      
                      (102
                      )Included
      in other comprehensive income
                      
                      
                      482
                      
                      
                      
                      -Level
      3 asset (liability) fair value at December 31, 2009
                      
                      $
                      261
                      
                      
                      $
                      (84
                      )





Changes
in the fair value of available-for-sale securities are included in other
comprehensive income to the extent the changes are not considered
other-than-temporary impairments.  Other-than-temporary impairment
tests are performed on a quarterly basis and any decline in the fair value of an
individual security below its cost that is deemed to be other-than-temporary
results in a write-down of that security’s cost basis.  During 2009,
the Company recorded $961,000 of impairment losses on all three securities in
its portfolio of investments in pooled trust preferred securities.




Valuation
methods for instruments measured at fair value on a nonrecurring
basis




The
Company does not value its loan portfolio at fair value, however adjustments are
recorded on certain loans to reflect the impaired value on the underlying
collateral.  Collateral values are reviewed on a loan-by-loan basis
through independent appraisals.  Appraised values may be discounted
based on management’s historical knowledge, changes in market conditions and/or
management’s expertise and knowledge of the client and the client’s
business.  Because many of these inputs are unobservable the
valuations are classified as Level 3.  The carrying value of the
Company’s impaired loans was $11.8 and $7.1 million, with an allocated allowance
of $2.8 million and $705,000, at December 31, 2009 and December 31, 2008,
respectively.




The
Company’s measure of its goodwill is based on market based valuation techniques,
including reviewing the Company’s market capitalization with appropriate control
premiums and valuation multiples as compared to recent similar financial
industry acquisition multiples to estimate the fair value of the Company’s
single reporting unit.  The fair value measurements are classified as
Level 3.  Core deposit intangibles are recognized at the time core
deposits are acquired, using valuation techniques which calculate the present
value of the estimated net cost savings relative to the Company’s alternative
costs of funds over the expected remaining economic life of the
deposits.  Subsequent evaluations are made when facts or circumstances
indicate potential impairment may have occurred.  The models
incorporate market discount rates, estimated average core deposit lives and
alternative funding rates.  The fair value measurements are classified
as Level 3.




Other
real estate owned includes assets acquired through, or in lieu of, foreclosure
are initially recorded at the date of foreclosure at the fair value of the
collateral less estimates selling costs.  Subsequent to foreclosure,
valuations are updated periodically and are based upon appraisals, third party
price opinions or internal pricing models and are classified as Level
3.


76


The
following table represents the Company’s financial instruments that are measured
at fair value on a non-recurring basis at December 31, 2009 and 2008 allocated
to the appropriate fair value hierarchy:




(Dollars
      in thousands)As
      of December 31 ,2009Fair
      value hierarchy
                    
                    
                    Total
      gainsTotal
                    
                    
                    Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    /
      (losses)Assets:Other
      investment securities
                    
                    $
                    7,991
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    7,991
                    
                    
                    $
                    -Impaired
      loans
                    
                    
                    9,051
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,051
                    
                    
                    
                    (2,770
                    )Loans
      held for sale
                    
                    
                    4,718
                    
                    
                    
                    -
                    
                    
                    
                    4,718
                    
                    
                    
                    -
                    
                    
                    
                    -Mortgage
      servicing rights
                    
                    
                    2,188
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,188
                    
                    
                    
                    -Other
      real estate owned
                    
                    $
                    1,129
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,129
                    
                    
                    $
                    (100
                    )





As
      of December 31 ,2008Fair
      value hierarchy
                    
                    
                    Total
      gainsTotal
                    
                    
                    Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    /
      (losses)Assets:Other
      investment securities
                    
                    $
                    9,052
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    9,052
                    
                    
                    $
                    -Impaired
      loans
                    
                    
                    6,354
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,354
                    
                    
                    
                    (705
                    )Loans
      held for sale
                    
                    
                    1,749
                    
                    
                    
                    -
                    
                    
                    
                    1,749
                    
                    
                    
                    -
                    
                    
                    
                    -Mortgage
      servicing rights
                    
                    
                    1,008
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,008
                    
                    
                    
                    -Other
      real estate owned
                    
                    $
                    1,934
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,934
                    
                    
                    $
                    -


77




(13)
            Regulatory
      Capital Requirements




Current
regulatory capital regulations require financial institutions (including banks
and bank holding companies) to meet certain regulatory capital
requirements.  Institutions are required to have minimum leverage
capital equal to 4% of total average assets and total qualifying capital equal
to 8% of total risk-weighted assets in order to be considered “adequately
capitalized.”  As of December 31, 2009 and 2008, the Company and the
Bank were rated “well capitalized,” which is the highest rating available under
the regulatory capital regulations framework for prompt corrective
action.  Management believes that as of December 31, 2009, the
Company and the Bank meet all capital adequacy requirements to which they are
subject.  The following is a comparison of the Company’s regulatory
capital to minimum capital requirements at December 31, 2009 and 2008,
(dollars in thousands):




To be well-capitalizedunder prompt(Dollars in thousands)
                      
                      
                      
                      
                      For capital
                      
                      
                      correctiveActual
                      
                      
                      adequacy purposes
                      
                      
                      action provisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioAs of December 31, 2009Leverage
                      
                      $
                      54,386
                      
                      
                      
                      9.3
                      %
                      
                      $
                      23,413
                      
                      
                      
                      4.0
                      %
                      
                      $
                      29,266
                      
                      
                      
                      5.0
                      %Tier
      1 Capital
                      
                      $
                      54,386
                      
                      
                      
                      13.7
                      %
                      
                      $
                      15,901
                      
                      
                      
                      4.0
                      %
                      
                      $
                      23,852
                      
                      
                      
                      6.0
                      %Total
      Risk Based Capital
                      
                      $
                      59,439
                      
                      
                      
                      15.0
                      %
                      
                      $
                      31,803
                      
                      
                      
                      8.0
                      %
                      
                      $
                      39,754
                      
                      
                      
                      10.0
                      %As of December 31, 2008Leverage
                      
                      $
                      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
                      %





The
following is a comparison of the Bank’s regulatory capital to minimum capital
requirements at December 31, 2009 and 2008 (dollars in
thousands):




To be well-capitalizedunder prompt(Dollars in thousands)
                            
                            
                            
                            
                            
                            
                            
                            For capital
                            
                            
                            correctiveActual
                            
                            
                            adequacy purposes
                            
                            
                            action provisionsAmount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            RatioAs of December 31, 2009Leverage
                            
                            $
                            57,548
                            
                            
                            
                            9.9
                            %
                            
                            $
                            23,343
                            
                            
                            
                            4.0
                            %
                            
                            $
                            29,179
                            
                            
                            
                            5.0
                            %Tier
      1 Capital
                            
                            $
                            57,548
                            
                            
                            
                            14.5
                            %
                            
                            $
                            15,837
                            
                            
                            
                            4.0
                            %
                            
                            $
                            23,755
                            
                            
                            
                            6.0
                            %Total
      Risk Based Capital
                            
                            $
                            62,429
                            
                            
                            
                            15.8
                            %
                            
                            $
                            31,673
                            
                            
                            
                            8.0
                            %
                            
                            $
                            39,592
                            
                            
                            
                            10.0
                            %As of December 31, 2008Leverage
                            
                            $
                            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
                            %


78


(14)
            Parent
      Company Condensed Financial
Statements




The
following is condensed financial information of the parent company as of
December 31, 2009 and 2008, and for years ended December 31, 2009, 2008 and
2007:




Condensed
Balance Sheets




(Dollars in thousands)
                  
                  As of December 31,2009
                  
                  
                  2008Assets:Cash
                  
                  $
                  17
                  
                  
                  $
                  10Investment
      securities
                  
                  
                  1,088
                  
                  
                  
                  1,448Investment
      in Bank
                  
                  
                  72,944
                  
                  
                  
                  70,587Other
                  
                  
                  817
                  
                  
                  
                  1,086Total
      assets
                  
                  $
                  74,866
                  
                  
                  $
                  73,131Liabilities
      and stockholders’ equity:Other
      borrowings
                  
                  $
                  20,848
                  
                  
                  $
                  21,281Other
                  
                  
                  123
                  
                  
                  
                  444Stockholders’
      equity
                  
                  
                  53,895
                  
                  
                  
                  51,406Total
      liabilities and stockholders’ equity
                  
                  $
                  74,866
                  
                  
                  $
                  73,131




Condensed
Statements of Earnings




(Dollars in thousands)
                  
                  Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Dividends
      from Bank
                  
                  $
                  2,709
                  
                  
                  $
                  4,121
                  
                  
                  $
                  6,507Interest
      income
                  
                  
                  53
                  
                  
                  
                  77
                  
                  
                  
                  73Other
      income
                  
                  
                  7
                  
                  
                  
                  7
                  
                  
                  
                  7Interest
      expense
                  
                  
                  (792
                  )
                  
                  
                  (1,191
                  )
                  
                  
                  (1,575
                  )Other
      expense, net
                  
                  
                  (244
                  )
                  
                  
                  (271
                  )
                  
                  
                  (176
                  )Earnings
      before equity in undistributed earnings of Bank
                  
                  
                  1,733
                  
                  
                  
                  2,743
                  
                  
                  
                  4,836(Decrease)/increase
      in undistributed equity of Bank
                  
                  
                  1,199
                  
                  
                  
                  1,806
                  
                  
                  
                  (18
                  )Earnings
      before income taxes
                  
                  
                  2,932
                  
                  
                  
                  4,549
                  
                  
                  
                  4,818Income
      tax benefit
                  
                  
                  (340
                  )
                  
                  
                  (4
                  )
                  
                  
                  (584
                  )Net
      earnings
                  
                  $
                  3,272
                  
                  
                  $
                  4,553
                  
                  
                  $
                  5,402


79


Condensed
Statements of Cash Flows




(Dollars in thousands)
                  
                  Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Cash
      flows from operating activities:Net
      earnings
                  
                  $
                  3,272
                  
                  
                  $
                  4,553
                  
                  
                  $
                  5,402Decrease/(increase)
      in undistributed equity of Bank
                  
                  
                  (1,199
                  )
                  
                  
                  (1,806
                  )
                  
                  
                  18Loss
      on impairment of investment securities
                  
                  
                  -
                  
                  
                  
                  66
                  
                  
                  
                  -Other
                  
                  
                  35
                  
                  
                  
                  308
                  
                  
                  
                  208Net
      cash provided by operating activities
                  
                  
                  2,108
                  
                  
                  
                  3,121
                  
                  
                  
                  5,628Cash
      flows from investing activities:Purchase
      of investment securities
                  
                  
                  -
                  
                  
                  
                  (40
                  )
                  
                  
                  (455
                  )Proceeds
      from sales and maturities of  investment
    securities
                  
                  
                  150
                  
                  
                  
                  1
                  
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  150
                  
                  
                  
                  (39
                  )
                  
                  
                  (455
                  )Cash
      flows from financing activities:Issuance
      of shares under stock option plan
                  
                  
                  -
                  
                  
                  
                  37
                  
                  
                  
                  41Proceeds
      from other borrowings
                  
                  
                  3,185
                  
                  
                  
                  6,030
                  
                  
                  
                  4,310Repayments
      on other borrowings
                  
                  
                  (3,618
                  )
                  
                  
                  (3,930
                  )
                  
                  
                  (6,355
                  )Purchase
      of treasury stock
                  
                  
                  (12
                  )
                  
                  
                  (3,476
                  )
                  
                  
                  (1,436
                  )Payment
      of dividends
                  
                  
                  (1,806
                  )
                  
                  
                  (1,753
                  )
                  
                  
                  (1,768
                  )Net
      cash used in financing  activities
                  
                  
                  (2,251
                  )
                  
                  
                  (3,092
                  )
                  
                  
                  (5,208
                  )Net
      increase (decrease) in cash
                  
                  
                  7
                  
                  
                  
                  (10
                  )
                  
                  
                  (35
                  )Cash
      at beginning of year
                  
                  
                  10
                  
                  
                  
                  20
                  
                  
                  
                  55Cash
      at end of year
                  
                  $
                  17
                  
                  
                  $
                  10
                  
                  
                  $
                  20




Dividends
paid by the Company are provided through dividends from the Bank.  At
December 31, 2009, the Bank could distribute dividends of up to $3.0
million without regulatory approvals.  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 its undivided profits in such amounts
and at such times as the bank’s board of directors deems
prudent.  Without prior OCC approval, however, a national bank may not
pay dividends in any calendar year that, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s retained net income for the two
preceding years.  The payment of dividends by any financial
institution is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized.




(15)
            Stockholders’
      Rights Plan




On
October 11, 2001, the Company’s board of directors adopted a stockholders’
rights plan (the Rights Plan).  The Rights Plan provided for the
distribution of one right on February 13, 2002, for each share of the
Company’s outstanding common stock as of February 1, 2002.  The
rights have no immediate economic value to 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 announces a tender offer.  The Rights Plan
also permits the Company’s board of directors to redeem each right for one cent
under various circumstances.  In general, the Rights Plan provides
that if a person, group or entity acquires a 15% or larger stake in the Company
or announces a tender offer, and the Company’s board of directors chooses not to
redeem the rights, all holders of rights, other than the 15% stockholder or the
tender offer or, will be able to purchase a certain amount of the Company’s
common stock for half of its market price.




80


(16)
            Commitments,
      Contingencies and Guarantees




Commitments
to extend credit are legally binding agreements to lend to a borrower providing
there are no violations of any conditions established in the
contract.  The Company, as a provider of financial services, routinely
issues financial guarantees in the form of financial and performance commercial
and standby letters of credit.  As many of the commitments are
expected to expire without being drawn upon, the total commitment does not
necessarily represent future cash requirements (see Note 4).




The
Company guarantees payments to holders of certain trust preferred securities
issued by wholly owned grantor trusts.  The securities are due in 2034
and 2036 and are redeemable beginning in 2009 and 2011. The maximum potential
future payments guaranteed by the Company, which includes future interest and
principal payments through maturity, was approximately $30.0 million at December
31, 2009.  At December 31, 2009, the Company had a recorded liability
of $16.6 million of principal and accrued interest to date, representing amounts
owed to the Trust.





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




81


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





None





ITEM
      9A.
            CONTROLS
      AND PROCEDURES





Disclosure
Controls and Procedures





An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2009. Based on that evaluation, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company’s disclosure controls and procedures were
effective.





Management’s
Report on Internal Control over Financial Reporting





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





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





Management
has made a comprehensive review, evaluation, and assessment of the Company’s
internal control over financial reporting as of December 31, 2009.  In
making its assessment of the effectiveness of the Company’s internal control
over financial reporting, management used the framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework.  Based on that assessment, management concluded
that, as of December 31, 2009, the Company’s internal control over financial
reporting was effective.





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





There
were no changes in the Company’s internal control over financial reporting
during the quarter ended December 31, 2009 that materially affected or were
reasonably likely to materially affect the Company’s internal control over
financial reporting.





ITEM
9B.             OTHER
INFORMATION





None




82


PART
III.





ITEM
10.               DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Directors





The
Company incorporates by reference the information called for by Item 10 of this
Form 10-K regarding directors of the Company from the sections entitled
“Election of Directors” and “Corporate Governance and the Board of Directors” of
the Company’s Proxy Statement for the annual meeting of stockholders to be held
May 19, 2010 (the “2010 Proxy Statement”).





Section
16(a) of the Exchange Act requires that the Company’s executive officers,
directors and persons who own more than 10% of their Company’s common stock file
reports of ownership and changes in ownership with the SEC and with the exchange
on which the Company’s shares of common stock are traded.  Such
persons are also required to furnish the Company with copies of all Section
16(a) forms they file.  Based solely on the Company’s review of the
copies 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 reports
required by Section 16(a) of the Exchange Act during 2009.





The
executive officers of the Company, each of whom is also currently an executive
officer of the Bank and both of whom serve at the discretion of the Board of
Directors, are identified below:





Name
            
            Age
            
            Positions with the CompanyPatrick
      L. Alexander
            
            57
            
            President
      and Chief Executive OfficerMark
      A. Herpich
            
            42
            
            Vice
      President, Secretary, Chief Financial Officer and
  Treasurer





The
executive officers of the Bank are identified below:





Name
            
            Age
            
            Positions with the BankPatrick
      L. Alexander
            
            57
            
            President
      and Chief Executive OfficerMark
      A. Herpich
            
            42
            
            Executive
      Vice President and Chief Financial OfficerMichael
      E. Scheopner
            
            48
            
            Executive
      Vice President, Credit Risk ManagerDean
      R. Thibault
            
            58
            
            Executive
      Vice President, Commercial BankingLarry
      R. Heyka
            
            63
            
            Market
      President, Manhattan RegionMark
      J. Oliphant
            
            57
            
            Market
      President, Southwest Kansas RegionBradly
      L. Chindamo
            
            41
            
            Market
      President, Eastern Kansas Region




ITEM
11.             EXECUTIVE
COMPENSATION





The
Company incorporates by reference the information called for by Item 11 of this
Form 10-K from the sections entitled “Corporate Governance and the Board of
Directors,” and “Executive Compensation” of the 2010 Proxy
Statement.


83


ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





The
Company incorporates by reference the information called for by Item 12 of this
Form 10-K from the section entitled “Security Ownership of Certain Beneficial
Owners” of the 2010 Proxy Statement.





Equity
Compensation Plan Information





The table
below sets forth the following information as of December 31, 2009 for (i) all
compensation plans previously approved by the Company’s stockholders and (ii)
all compensation plans not previously approved by the Company’s
stockholders:




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




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




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





EQUITY COMPENSATION PLAN INFORMATIONPlan category
                  
                  Number of securities to be
                    issued upon exercise of
                    outstanding options (1)
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options
                  
                  
                  Number of securities
                    remaining availablefor future issuance (1)Equity
      compensation plans approved by security holders
                  
                  
                  413,901
                  
                  
                  $
                  20.92
                  
                  
                  
                  64,507Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -Total
                  
                  
                  413,901
                  
                  
                  $
                  20.92
                  
                  
                  
                  64,507





(1)
Includes options assumed by the Company in 2001 in connection with the mergers
of Landmark Bancshares, Inc. and MNB Bancshares, Inc. with the
Company.  At the time of the mergers, there were options issued under
the previous companies’ plans, each of which was approved by stockholders of the
respective company at the time of their adoption.  All of the options
granted under these plans fully vested at the time of the merger and no
additional options were available for grant after the merger.  As of
December 31, 2009, there were options outstanding for an aggregate of
24,230 shares of the Company’s common stock under the prior plans with a
weighted average exercise price of $10.58.




ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE





The
Company incorporates by reference the information called for by Item 13 of this
Form 10-K from the sections entitled “Nominees” and “Corporate Governance and
Board of Directors” of the 2010 Proxy Statement.




ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
Company incorporates by reference the information called for by Item 14 of this
Form 10-K from the section entitled “Ratification of Independent Registered
Public Accounting Firm” of the 2010 Proxy Statement.




84


PART
IV





ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





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





LANDMARK
BANCORP, INC. AND SUBSIDIARIES


LIST OF
FINANCIAL STATEMENTS





The
following audited Consolidated Financial Statements of the Company and its
subsidiaries and related notes and auditors’ report are included in Part II,
Item 8 of this Report:





Report of Independent Registered Public
Accounting Firm





Consolidated
Balance Sheets – December 31, 2009 and 2008





Consolidated
Statements of Earnings – Years ended December 31, 2009, 2008 and
2007





Consolidated
Statements of Stockholders’ Equity and Comprehensive Income – Years ended
December 31, 2009, 2008 and 2007





Consolidated
Statements of Cash Flows – Years ended December 31, 2009, 2008 and
2007





Notes to Consolidated Financial
Statements





All
schedules are omitted because they are not required or are not applicable or the
required information is shown in the financial statements incorporated by
reference or notes thereto.





Item
15(a)3.             Exhibits





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





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


85


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





LANDMARK
      BANCORP, INC.(Registrant)By:
      /s/ Patrick L. Alexander
                
                By:  /s/
      Mark A. HerpichPatrick
      L. Alexander
                
                Mark
      A. HerpichPresident
      and Chief Executive Officer
                
                Principal
      Financial and Accounting Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




SIGNATURE
                                    
                                    
                                    
                                    TITLE/s/
      Patrick L. Alexander
                                    
                                    March
      26, 2010
                                    
                                    President,
      Chief Executive Officer and DirectorPatrick
      L. Alexander
                                    
                                    Date/s/
      Larry L. Schugart
                                    
                                    March
      26, 2010
                                    
                                    Chairman
      of the Board, DirectorLarry
      L. Schugart
                                    
                                    Date/s/
      Richard A. Ball
                                    
                                    March
      26, 2010
                                    
                                    DirectorRichard
      A. Ball
                                    
                                    Date/s/
      Brent A. Bowman
                                    
                                    March
      26, 2010
                                    
                                    DirectorBrent
      A. Bowman
                                    
                                    Date/s/
      Joseph L. Downey
                                    
                                    March
      26, 2010
                                    
                                    DirectorJoseph
      L. Downey
                                    
                                    Date/s/
      Jim W. Lewis
                                    
                                    March
      26, 2010
                                    
                                    DirectorJim
      W. Lewis
                                    
                                    Date/s/
      Jerry R. Pettle
                                    
                                    March
      26, 2010
                                    
                                    DirectorJerry
      R. Pettle
                                    
                                    Date/s/
      Susan E. Roepke
                                    
                                    March
      26, 2010
                                    
                                    DirectorSusan
      E. Roepke
                                    
                                    Date/s/
      C. Duane Ross
                                    
                                    March
      26, 2010
                                    
                                    DirectorC.
      Duane Ross
                                    
                                    Date/s/
      David H. Snapp
                                    
                                    March
      26, 2010
                                    
                                    DirectorDavid
      H. Snapp
                                    
                                    Date


86


INDEX
TO EXHIBITS




Exhibit Number
            
            Description
            
            Incorporated by reference
to
            
            Attached hereto3.1
            
            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)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)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)


87





10.12
            
            2001
      Stock Incentive Plan
            
            The
      registrant’s Registration Statement on form S-8 filed with the Commission
      on February 11, 200310.13
            
            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
            
            the
      registrant’s report on Form 10-K for the period ending December 31, 2008,
      filed with the Commission on March 27, 2009 (SEC file no.
      000-33203)10.15
            
            First
      Amendment to Revolving Credit Agreement, dated November 18, 2009 between
      Landmark Bancorp, Inc. and First National Bank of Omaha
            
            
            
            X13.1
            
            Letter
      to Stockholders and Corporate Information included in 2009 Annual Report
      to Stockholders
            
            
            
            X21.1
            
            Subsidiaries
      of the Company
            
            
            
            X23.1
            
            Consent
      of KPMG LLP
            
            
            
            X31.1
            
            Certification
      of Chief Executive Officer Pursuant to Rule
      13a-14(a)/15d-14(a)
            
            
            
            X31.2
            
            Certification
      of Chief Financial Officer Pursuant to Rule
      13a-14(a)/15d-14(a)
            
            
            
            X32.1
            
            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
            
            
            
            X32.2
            
            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


88