**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                             |
|------------|---------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                      |
|       | **For the quarterly period ended June  30, 2003**                                                                         |
|       |                                                                                                                      |
|       | **OR**                                                                                                                    |
|       |                                                                                                                      |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                            |
|       |                                                                                                                      |
|       | **For  transition period from                  to** |

 

**CommissionFile Number 0-33203**

 

**LANDMARK BANCORP, INC.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                                                     |   | **43-1930755**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |                                     |
| **800 Poyntz Avenue, Manhattan,  Kansas**                        |   | **66502**                                |
| (Address of principal  executive offices)                        |   | (Zip Code)                               |
|                                                             |   |                                     |
| **(785) 565-2000**                                               |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined by Rule 12b-2 of the Exchange Act).  Yes o  No ý

 

Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock as of the latest practicabledate:  As of August 4, 2003, theRegistrant had outstanding 1,995,449 shares of its common stock, $.01 par valueper share.

 

 

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**LANDMARK BANCORP, INC.**

**Form 10-Q Quarterly Report**

 

**Table of Contents**

 
| PART I                   |
|--------------------------|
|                     |
| Item 1.                  | Financial Statements and Related Notes |
| Item  2.                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3.                  | Quantitative  and Qualitative Disclosures about Market Risk |
| Item 4.                  | Controls and Procedures |
|                     |
| PART II                  |
|                     |
| Item 1.                  | Legal Proceedings |
| Item 2.                  | Changes in Securities  and Use of Proceeds |
| Item 3.                  | Defaults Upon  Senior Securities |
| Item  4.                 | Submission  of Matters to a Vote of Security Holders |
| Item 5.                  | Other Information |
| Item 6.                  | Exhibits and  Reports on Form 8-K |
|                     |
| Form 10-Q Signature Page |

 

1

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                         |   | **June 30,  2003** |        | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|------------------------|--------|
|                                                                                                                         |   | **(Unaudited)**    |        |                   |   |
| **ASSETS**                                                                                                                   |   |               |        |                   |   |
| Cash and cash equivalents                                                                                                    |   | $                  | 17,828,398  |                   | $      | 11,448,684 |   |
| Investment securities available for sale                                                                                     |   | 85,800,336         |        | 89,296,337             |   |
| Loans, net                                                                                                                   |   | 207,803,985        |        | 224,061,263            |   |
| Loans held for sale                                                                                                          |   | 5,233,130          |        | 5,050,603              |   |
| Premises and equipment, net                                                                                                  |   | 3,748,783          |        | 3,755,048              |   |
| Goodwill                                                                                                                     |   | 1,971,178          |        | 1,971,178              |   |
| Other intangible assets, net                                                                                                 |   | 1,019,539          |        | 1,131,584              |   |
| Other assets                                                                                                                 |   | 4,301,094          |        | 4,599,483              |   |
|                                                                                                                         |   |               |        |                   |   |
| Total assets                                                                                                                 |   | $                  | 327,706,443 |                   | $      | 341,314,180 |   |
|                                                                                                                         |   |               |        |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |   |               |        |                   |   |
| Liabilities:                                                                                                                 |   |               |        |                   |   |
| Deposits                                                                                                                     |   | $                  | 254,917,922 |                   | $      | 264,280,870 |   |
| Other borrowings                                                                                                             |   | 25,426,539         |        | 26,203,121             |   |
| Accrued expenses, taxes and other liabilities                                                                                |   | 5,286,489          |        | 9,756,414              |   |
| Total liabilities                                                                                                            |   | 285,630,950        |        | 300,240,405            |   |
|                                                                                                                         |   |               |        |                   |   |
| Stockholders’ equity:                                                                                                   |   |               |        |                   |   |
| Common stock, $0.01 par, 3,000,000 shares  authorized, 2,178,321 and 2,157,865 shares issued at 2003 and 2002,  respectively |   | 21,783             |        | 21,578                 |   |
| Additional paid in capital                                                                                                   |   | 18,557,108         |        | 18,269,582             |   |
| Retained earnings                                                                                                            |   | 26,192,650         |        | 24,295,211             |   |
| Accumulated other comprehensive income                                                                                       |   | 1,546,554          |        | 1,898,970              |   |
| Treasury stock, at cost; 182,872 and 148,031  shares, respectively                                                           |   | (4,097,395         | )           | (3,266,359             | )      |
| Unearned employee benefits                                                                                                   |   | (145,207           | )           | (145,207               | )      |
| Total stockholders’ equity                                                                                              |   | 42,075,493         |        | 41,073,775             |   |
|                                                                                                                         |   |               |        |                   |   |
| Total liabilities and stockholders’ equity                                                                              |   | $                  | 327,706,443 |                   | $      | 341,314,180 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 
|                                                |   | **Three Months Ended June 30,** |      |
|-----------------------------------------------------|--------|---------------------------------|-----------|
|                                                |   | **2003**                        |      | **2002** |   |
| Interest income:                                    |   |                            |      |   |   |
| Loans                                               |   | $                               | 3,655,231 |   | $ | 4,181,660 |   |
| Investment securities                               |   | 642,076                         |      | 764,904 |   |
| Other                                               |   | 14,291                          |      | 9,437 |   |
| Total interest income                               |   | 4,311,598                       |      | 4,956,001 |   |
|                                                |   |                            |      |   |   |
| Interest expense:                                   |   |                            |      |   |   |
| Deposits                                            |   | 1,159,028                       |      | 1,440,256 |   |
| Borrowed funds                                      |   | 295,022                         |      | 342,051 |   |
| Total interest expense                              |   | 1,454,050                       |      | 1,782,307 |   |
|                                                |   |                            |      |   |   |
| Net interest income                                 |   | 2,857,548                       |      | 3,173,694 |   |
|                                                |   |                            |      |   |   |
| Provision for loan losses                           |   | 60,000                          |      | 33,000 |   |
|                                                |   |                            |      |   |   |
| Net interest income after provision for loan losses |   | 2,797,548                       |      | 3,140,694 |   |
|                                                |   |                            |      |   |   |
| Non-interest income:                                |   |                            |      |   |   |
| Fees and service charges                            |   | 670,655                         |      | 482,424 |   |
| Gains on sale of loans                              |   | 492,290                         |      | 235,328 |   |
| Gains on sale of investments                        |   | —                          |      | 67,618 |   |
| Other                                               |   | 82,111                          |      | 75,894 |   |
| Total non-interest income                           |   | 1,245,056                       |      | 861,264 |   |
|                                                |   |                            |      |   |   |
| Non-interest expense:                               |   |                            |      |   |   |
| Compensation and benefits                           |   | 1,209,841                       |      | 1,207,550 |   |
| Occupancy and equipment                             |   | 312,547                         |      | 282,109 |   |
| Amortization                                        |   | 111,791                         |      | 83,284 |   |
| Professional fees                                   |   | 65,504                          |      | 78,668 |   |
| Data processing                                     |   | 83,169                          |      | 72,007 |   |
| Other                                               |   | 507,148                         |      | 483,551 |   |
| Total non-interest expense                          |   | 2,290,000                       |      | 2,207,169 |   |
|                                                |   |                            |      |   |   |
| Earnings before income taxes                        |   | 1,752,604                       |      | 1,794,789 |   |
|                                                |   |                            |      |   |   |
| Income tax expense                                  |   | 537,198                         |      | 615,287 |   |
|                                                |   |                            |      |   |   |
| Net earnings                                        |   | $                               | 1,215,406 |   | $ | 1,179,502 |   |
|                                                |   |                            |      |   |   |
| Earnings per share:                                 |   |                            |      |   |   |
| Basic                                               |   | $                               | 0.61      |   | $ | 0.56 |   |
| Diluted                                             |   | $                               | 0.61      |   | $ | 0.55 |   |
|                                                |   |                            |      |   |   |
| Dividends per share                                 |   | $                               | 0.16      |   | $ | 0.1428 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

3

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|                                                |   | **Six Months Ended June 30,** |      |
|-----------------------------------------------------|--------|-------------------------------|-----------|
|                                                |   | **2003**                      |      | **2002** |   |
| Interest income:                                    |   |                          |      |   |   |
| Loans                                               |   | $                             | 7,475,065 |   | $ | 8,522,008 |   |
| Investment securities                               |   | 1,448,463                     |      | 1,410,383 |   |
| Other                                               |   | 23,235                        |      | 66,006 |   |
| Total interest income                               |   | 8,946,763                     |      | 9,998,397 |   |
|                                                |   |                          |      |   |   |
| Interest expense:                                   |   |                          |      |   |   |
| Deposits                                            |   | 2,407,925                     |      | 3,173,452 |   |
| Borrowed funds                                      |   | 595,543                       |      | 685,887 |   |
| Total interest expense                              |   | 3,003,468                     |      | 3,859,339 |   |
|                                                |   |                          |      |   |   |
| Net interest income                                 |   | 5,943,295                     |      | 6,139,058 |   |
|                                                |   |                          |      |   |   |
| Provision for loan losses                           |   | 120,000                       |      | 66,500 |   |
|                                                |   |                          |      |   |   |
| Net interest income after provision for loan losses |   | 5,823,295                     |      | 6,072,558 |   |
|                                                |   |                          |      |   |   |
| Non-interest income:                                |   |                          |      |   |   |
| Fees and service charges                            |   | 1,282,652                     |      | 882,215 |   |
| Gains on sale of loans                              |   | 1,126,797                     |      | 485,483 |   |
| Gains on sale of investments                        |   | 25,682                        |      | 93,418 |   |
| Other                                               |   | 151,153                       |      | 131,033 |   |
| Total non-interest income                           |   | 2,586,284                     |      | 1,592,149 |   |
|                                                |   |                          |      |   |   |
| Non-interest expense:                               |   |                          |      |   |   |
| Compensation and benefits                           |   | 2,422,941                     |      | 2,419,504 |   |
| Occupancy and equipment                             |   | 624,924                       |      | 568,498 |   |
| Amortization                                        |   | 223,110                       |      | 173,260 |   |
| Professional fees                                   |   | 188,283                       |      | 130,338 |   |
| Data processing                                     |   | 163,248                       |      | 155,436 |   |
| Other                                               |   | 1,020,684                     |      | 976,586 |   |
| Total non-interest expense                          |   | 4,643,190                     |      | 4,423,622 |   |
|                                                |   |                          |      |   |   |
| Earnings before income taxes                        |   | 3,766,389                     |      | 3,241,085 |   |
|                                                |   |                          |      |   |   |
| Income tax expense                                  |   | 1,227,450                     |      | 1,103,243 |   |
|                                                |   |                          |      |   |   |
| Net earnings                                        |   | $                             | 2,538,939 |   | $ | 2,137,842 |   |
|                                                |   |                          |      |   |   |
| Earnings per share:                                 |   |                          |      |   |   |
| Basic                                               |   | $                             | 1.28      |   | $ | 1.00 |   |
| Diluted                                             |   | $                             | 1.27      |   | $ | 0.98 |   |
|                                                |   |                          |      |   |   |
| Dividends per share                                 |   | $                             | 0.32      |   | $ | 0.2857 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

4

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                          |   | **Six Months Ended June 30,** |       |
|-------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                          |   | **2003**                      |       | **2002** |   |
|                                                                          |   |                          |       |   |   |
| Net cash (used in) provided by operating activities                           |   | $                             | (775,674   | ) | $ | 6,189,657 |   |
|                                                                          |   |                          |       |   |   |
| INVESTING ACTIVITIES                                                          |   |                          |       |   |   |
| Net decrease in loans                                                         |   | 15,974,584                    |       | 4,622,856 |   |
| Maturities and prepayments of investment securities  available for sale       |   | 27,593,951                    |       | 12,515,668 |   |
| Purchase of investment securities available for sale                          |   | (25,308,886                   | )          | (21,304,826 | ) |
| Proceeds from sale of investment securities available for sale                |   | 58,000                        |       | 271,060 |   |
| Payments received and proceeds from sale of foreclosed assets                 |   | 318,635                       |       | 265,367 |   |
| Improvements of real estate owned                                             |   | —                        |       | (992 | ) |
| Purchases of premises and equipment, net                                      |   | (221,895                      | )          | (335,269 | ) |
| Net cash provided by (used in) investing activities                           |   | 18,414,389                    |       | (3,966,136 | ) |
|                                                                          |   |                          |       |   |   |
| FINANCING ACTIVITIES                                                          |   |                          |       |   |   |
| Net decrease in deposits                                                      |   | (9,362,948                    | )          | (10,608,404 | ) |
| Federal Home Loan Bank and other borrowings                                   |   | 22,650,000                    |       | 21,355,000 |   |
| Federal Home Loan Bank repayments                                             |   | (23,361,248                   | )          | (22,533,570 | ) |
| Purchase of 34,841 and 161,933 shares of treasury stock                       |   | (831,036                      | )          | (3,483,991 | ) |
| Issuance of 20,456 and 60,350 shares of common stock under  stock option plan |   | 287,731                       |       | 836,563 |   |
| Payment of dividends                                                          |   | (641,500                      | )          | (621,688 | ) |
| Net cash used in financing activities                                         |   | (11,259,001                   | )          | (15,056,090 | ) |
| Net increase (decrease) in cash                                               |   | 6,379,714                     |       | (12,832,569 | ) |
| Cash at beginning of period                                                   |   | 11,448,684                    |       | 22,163,258 |   |
| Cash at end of period                                                         |   | $                             | 17,828,398 |   | $ | 9,330,689 |   |
|                                                                          |   |                          |       |   |   |
| Supplemental disclosure of cash flow information:                             |   |                          |       |   |   |
| Cash paid during period for interest                                          |   | $                             | 3,033,491  |   | $ | 3,913,000 |   |
| Cash paid during period for taxes                                             |   | $                             | 1,325,000  |   | $ | 826,500 |   |
|                                                                          |   |                          |       |   |   |
| Supplemental schedule of noncash investing activities:                        |   |                          |       |   |   |
| Transfer of loans to real estate owned                                        |   | $                             | 213,837    |   | $ | 195,000 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

5

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****             InterimFinancial Statements**

 

The condensed consolidated financial statements ofLandmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared inaccordance with the instructions to Form 10-Q. To the extent that information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements are contained in or consistent with the consolidatedaudited financial statements incorporated by reference in the Company’s Form10-K for the year ended December 31, 2002, such information and footnotes havenot been duplicated herein.  In theopinion of management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of financial statementshave been reflected herein.  TheDecember 31, 2002, condensed consolidated balance sheet has been derived from theaudited consolidated balance sheet as of that date.  The results of the interim periods ended June 30, 2003, are notnecessarily indicative of the results expected for the year ending December 31,2003.

 

**2.****             EarningsPer Share**

 

Basic earnings per share have been computed based uponthe weighted average number of common shares outstanding during eachperiod.  Diluted earnings per shareinclude the effect of all potential common shares outstanding during eachperiod.  Earnings and dividends pershare for all periods presented have been adjusted to give effect to the 5%stock dividend paid by the Company in December 2002.

 

The shares used in the calculation of basic anddiluted income per share are shown below:

 
|                                                |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Weighted average  common shares outstanding (basic) |   | 1,977,690                         |   | 2,075,754                       |   | 1,982,520 |   | 2,110,833 |   |
| Dilutive stock  options                             |   | 30,032                            |   | 61,400                          |   | 33,065 |   | 66,515 |   |
| Weighted average  common shares (diluted)           |   | 2,007,722                         |   | 2,137,154                       |   | 2,015,585 |   | 2,177,348 |   |

 

6

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**3.****             ComprehensiveIncome**

 

The Company’s only component of other comprehensiveincome is the unrealized holding gains on available for sale securities.

 
|                                                                      |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                                                      |   | **2003**                          |      | **2002**                        |   | **2003** |   | **2002** |   |
| Net income                                                                |   | $                                 | 1,215,406 |                            | $      | 1,179,502 |   | $ | 2,538,939 |   | $ | 2,137,842 |   |
|                                                                      |   |                              |      |                            |   |   |   |   |   |
| Unrealized  holding (losses)/gains                                        |   | (229,681                          | )         | 1,423,145                       |   | (542,731 | ) | 1,590,429 |   |
| Less –  reclassification adjustment for gains included in net income |   | —                            |      | 67,618                          |   | 25,682 |   | 93,418 |   |
| Net unrealized  (losses)/gains on securities                              |   | (229,681                          | )         | 1,355,527                       |   | (568,413 | ) | 1,497,011 |   |
|                                                                      |   |                              |      |                            |   |   |   |   |   |
| Income tax  (benefit)/expense                                             |   | (87,279                           | )         | 515,100                         |   | (215,997 | ) | 568,864 |   |
| Total  comprehensive income                                               |   | $                                 | 1,073,004 |                            | $      | 2,019,929 |   | $ | 2,186,523 |   | $ | 3,065,989 |   |

 

**4.****            ****Stock Based Compensation**

 

The Company utilizes thefair value recognition provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123 establishes a fair-value methodof accounting for employee stock options or similar equity instruments. Thefair value of stock-based awards to employees is calculated through the use ofoption pricing models, even though such models were developed to estimate thefair value of freely tradable, fully transferable options without vestingrestrictions, which significantly differ from the Company’s stock optionawards. These models also require subjective assumptions, including futurestock price volatility and expected time to exercise, which greatly affect thecalculated values. The Company uses the Black-Scholes option pricing model toestimate the grant date fair value of its stock options. The fair value isrecognized as additional compensation expense over the option vesting period,which is typically five years.

 

**5.****            ****Intangible Assets**

 

Effective October 1,2001, the Company adopted certain provisions of Statement of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations,” and certain provisionsof SFAS No. 142, “Goodwill and Other Intangible Assets,” as required forgoodwill and intangible assets resulting from business combinations consummatedafter June 30, 2001.  Effective January1, 2002, the Company adopted the remaining provisions of SFAS No. 142.  The Company’s goodwill and core depositintangible resulted from its acquisition of MNB Bancshares on October 9,2001.  Pursuant to certain provisions inSFAS No. 142, goodwill resulting from the merger with MNB Bancshares is notamortized; however, it is tested for impairment on a periodic basis.

 

7

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The following table presents information about theCompany’s intangible assets, which are being amortized in accordance with SFASNo. 142:

 
|                          |   | **June 30,  2003**          |      | **December  31, 2002**        |   |
|-------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                          |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible  assets: |   |                        |      |                          |   |   |   |   |   |
| Core deposit  premium         |   | $                           | 780,000   |                          | $      | (237,545 | ) | $ | 780,000 |   | $ | (173,727 | ) |
| Mortgage  servicing rights    |   | 714,162                     |      | (237,078                      | )      | 773,254 |   | (247,943 | ) |
| Total                         |   | $                           | 1,494,162 |                          | $      | (474,623 | ) | $ | 1,553,254 |   | $ | (421,670 | ) |

 

Aggregate amortizationexpense for the three months ended June 30, 2003, and June 30, 2002, was$111,789 and $83,284, respectively. Aggregate amortization expense for the six months ended June 30, 2003,and June 30, 2002, was $223,111 and $173,260, respectively.  The following is estimated amortization expensefor the years ending:

 

| **Year** |   | **Amount** |    |
|----------|--------|------------|---------|
| 2003     |   | $          | 446,000 |   |
| 2004     |   | 431,000    |    |
| 2005     |   | 99,000     |    |
| 2006     |   | 85,000     |    |
| 2007     |   | 71,000     |    |
|          |        |            |         |  |

 

**6.****             Recent AccountingPronouncements**

 

In November 2002, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 45, “Requirements for Guarantees Including Indirect Guarantees ofIndebtedness of Others.”  ThisInterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued.  It alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The disclosurerequirements in this Interpretation are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The Company does not believe that theadoption of Interpretation No. 45 will have a significant impact on itsconsolidated financial statements.

 

In January 2003, the FASB issued Interpretation No.46, “Consolidation of Variable InterestEntities.”  This Interpretationof Accounting Research Bulletin No. 51, “Consolidated Financial Statements,”elaborates on the financial statement disclosures to be made by enterprisesinvolved with variable interest entities, including requiring consolidation ofentities in which an enterprise has a controlling financial interest that isnot controlled through voting interests. The requirements in this Interpretation are effective for variableinterest entities created after January 31, 2003, and the first fiscal orinterim period beginning after June 15, 2003, for variable interest entitiesacquired before that date.  The Companydoes not believe that the adoption of Interpretation No. 46 will have a significantimpact on its consolidated financial statements.

 

SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities*.*”SFAS No. 149 amends and clarifies financial accounting and reportingfor derivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  The amendments (i) reflect decisions ofthe Derivatives Implementation Group; (ii) reflect decisions made

 

8

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by the FASB in conjunction with other projects dealing with financialinstruments; and (iii) address implementation issues related to theapplication of the definition of a derivative. SFAS No. 149 also modifies various other existing pronouncements toconform with the changes made to SFAS No. 133. SFAS No. 149 iseffective for contracts entered into or modified after June 30, 2003, andfor hedging relationships designated after June 30, 2003, with allprovisions applied prospectively. Adoption of SFAS No. 149 on July 1,2003, did not have a significant impact on the Company’s financial statements.

 

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies,measures and discloses in its financial statements certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that anissuer classify financial instruments that are within its scope as a liability,in most circumstances.  Such financialinstruments include (i) financial instruments that are issued in the formof shares that are mandatorily redeemable; (ii) financial instruments thatembody an obligation to repurchase the issuer’s equity shares, or are indexedto such an obligation, and that require the issuer to settle the obligation bytransferring assets; (iii) financial instruments that embody an obligationthat the issuer may settle by issuing a variable number of its equity sharesif, at inception, the monetary value of the obligation is predominately basedon a fixed amount, variations in something other than the fair value of theissuer’s equity shares or variations inversely related to changes in the fairvalue of the issuer’s equity shares; and (iv) certain freestandingfinancial instruments.  SFAS No.150 is effective for contracts entered into or modified after May 31,2003, and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003. Adoption of SFAS No. 150 on July 1, 2003, did not have asignificant impact on the Company’s financial statements.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

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

 

*General.*  Landmark Bancorp, Inc. is a one-bank holdingcompany incorporated under the laws of the State of Delaware and is engaged inthe banking business through its wholly-owned subsidiary, Landmark NationalBank.  Landmark Bancorp is listed on theNasdaq Stock Market National Market System (symbol “LARK”).  Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities andcontinues to originate commercial real estate and non-real estate loans, smallbusiness loans, residential mortgage loans, consumer loans, and home equityloans.

 

Our results of operations depend primarily on netinterest income, which is the difference between interest income frominterest-earning assets and interest expense on interest-bearingliabilities.  Our operations are alsoaffected by non-interest income, such as service charges, loan fees and gainsand losses from the sale of newly originated loans and investments.  Our principal operating expenses, aside frominterest expense, consist of compensation and employee benefits, occupancycosts, federal deposit insurance costs, data processing expenses and provisionfor loan losses.

 

Our accounting principles and the methods of applyingthese principles conform with accounting principles generally accepted in theUnited States and with general practices within the banking industry.  Critical accounting policies relate to loansand related earnings, investment securities and income taxes.  A description of these policies, whichsignificantly affect the determination of financial position, results ofoperations and cash flows, are summarized in Note 2, Summary of SignificantAccounting Policies in the Notes included in our Annual Report on Form 10-K forthe year ended December 31, 2002.

 

*Summaryof Results*.  Netearnings for the three months ended June 30, 2003, increased $36,000, or 3.0%,to $1.2 million as compared to the three months ended June 30, 2002.  This improvement in net earnings wasgenerally attributable to increased fees and service charges and increasedgains on sale of loans.

 

Net earnings for the six months ended June 30, 2003,increased $401,000, or 18.8%, to $2.5 million as compared to the six monthsended June 30, 2002.  This improvementin net earnings was generally attributable to increased fees and servicecharges and increased gains on sale of loans which was offset by a reduction ofnet interest income and an increase in the provision.

 

The three months ended June 30, 2003, resulted indiluted earnings per share of $0.61 compared to $0.55 for the same period in2002.  Return on average assets was1.49% for the period compared to 1.43% for the same period in 2002.  Return on average stockholders’ equity was11.62% for the period compared to 12.06% for the same period in 2002.

 

The six months ended June 30, 2003, resulted indiluted earnings per share of $1.27 compared to $0.98 for the same period in2002.  Return on average assets was1.55% for the period compared to 1.27% for the same period in 2002.  Return on average stockholders’ equity was12.26% for the period compared to 10.75% for the same period in 2002.

 

We continued our stock repurchase program during thefirst six months of 2003, resulting in the repurchase of an additional 34,841shares.  As of June 30, 2003, we held182,872 shares as treasury stock at an average cost per share of $22.41.

 

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The following table summarizes net income and key performancemeasures for the periods presented.

 
|                          |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                          |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net earnings:                 |   |                              |   |                            |   |   |   |   |   |
| Basic earnings  per share     |   | $                                 | 0.61   |                            | $      | 0.56 |   | $ | 1.28 |   | $ | 1.00 |   |
| Diluted earnings  per share   |   | $                                 | 0.61   |                            | $      | 0.55 |   | $ | 1.27 |   | $ | 0.98 |   |
| Earnings ratios:              |   |                              |   |                            |   |   |   |   |   |
| Return on  average assets (1) |   | 1.49                              | %      | 1.43                            | %      | 1.55 | % | 1.27 | % |
| Return on  average equity (1) |   | 11.62                             | %      | 12.06                           | %      | 12.26 | % | 10.75 | % |
| Dividend payout  ratio        |   | 26.23                             | %      | 25.96                           | %      | 25.20 | % | 29.15 | % |
| Net interest margin  (1)      |   | 3.84                              | %      | 3.99                            | %      | 3.70 | % | 3.82 | % |

 

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(1) The ratio has been annualized and is not necessarily indicative ofthe results for the entire year.

 

*InterestIncome.*  Interestincome for the three months ended June 30, 2003, decreased $644,000, or 13.0%,to $4.3 million from $5.0 million in the same period of 2002.  This decrease was partially related to thedecrease in interest rates experienced as interest earning assets repricedduring 2002 and throughout the second quarter of 2003.  Also contributing to the decrease was adecline in average loans for the quarter ended June 30, 2003, which were $218.2million, compared to $232.9 million for the quarter ended June 30, 2002.  The decline was primarily the result of refinancingsand paydowns in our residential mortgage portfolio.  Offsetting the decline attributable to lower loans outstandingwas an increase in average investment securities from $85.1 million for thequarter ended June 30, 2002, to $87.6 million for the quarter ended June 30,2003.

 

Interest income for the six months ended June 30,2003, decreased $1.1 million, or 10.5%, to $8.9 million from $10.0 million inthe same period of 2002.  This decreasewas partially related to the decrease in interest rates experienced as interestearning assets repriced during 2002 and the first six months of 2003.  Also contributing to the decrease was acontinued decline in average loans for the first six months of 2003, which were$221.2 million, compared to $234.9 million for the first six months of2002.  The decline was primarily theresult of refinancings and paydowns in our residential mortgage portfolio.  Offsetting the decline attributable to lowerloans outstanding was an increase in average investment securities from $82.1million for the six months ended June 30, 2002, to $88.5 million for the sixmonths ended June 30, 2003.

 

*InterestExpense*.  Interestexpense during the three months ended June 30, 2003, decreased $328,000, or18.4%, as compared to the same period of 2002. For the three months ended June 30, 2003, interest expense on depositsdecreased $281,000, or 19.5%, and interest expense on borrowings, consisting ofadvances from the Federal Home Loan Bank of Topeka, decreased $47,000, or13.8%.  This decrease in interestexpense resulted primarily from the decline in interest rates.  Reduced borrowings from the Federal HomeLoan Bank precipitated the reduced interest expense on borrowings.

 

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Interest expense during the six months ended June 30,2003, decreased $856,000, or 22.2%, as compared to the same period of2002.  For the six months ended June 30,2003, interest expense on deposits decreased $766,000, or 24.1%, and interestexpense on borrowings, consisting of advances from the Federal Home Loan Bankof Topeka, decreased $90,000, or 13.2%. This decrease in interest expense resulted primarily from the decline ininterest rates.  Reduced borrowings fromthe Federal Home Loan Bank precipitated the reduced interest expense onborrowings.

 

*NetInterest Income.* Netinterest income for the three months ended June 30, 2003, totaled $2.9 million,a 10.0% decrease, as compared to $3.2 million for the three months ended June30, 2002.  Average earning assets duringthe second quarter of 2003 totaled $309.6 million, versus $319.4 million duringthe second quarter of 2002.  The netinterest margin on earning assets was 3.70% for the first six months of 2003,down from 3.99% during the second quarter of 2002.  The refinancings and paydowns in the residential mortgageportfolio exceeded the commercial loan growth during 2002 and throughout thesecond quarter of 2003, resulting in the excess liquidity being invested intolower yielding investment securities. In addition, the prolonged low-rate environment is causing the netinterest margin to compress as assets continue to reprice with little room leftfor liability repricing.

 

Net interest income for the six months ended June 30,2003, totaled $5.9 million, a 3.2% decrease, as compared to $6.1 million forthe six months ended June 30, 2002. Average earning assets during the first six months of 2003 totaled$312.4 million, versus $323.7 million during the same period of 2002.  The net interest margin on earning assetswas 3.84% for the first six months of 2003, up slightly from 3.82% during thefirst six months of 2002.  Therefinancings and paydowns in the residential mortgage portfolio exceeded thecommercial loan growth during 2002 and the first six months of 2003, resultingin the excess liquidity being invested into lower yielding investmentsecurities.  In addition, the prolongedlow-rate environment is causing the net interest margin to compress as assetscontinue to reprice with little room left for liability repricing.

 

*Provisionfor Loan Losses.*  Theprovision for loan losses for the three months ended June 30, 2003, was$60,000, compared to a provision of $33,000 during the three months ended June30, 2002.  Our continuous review of theloan portfolio prompted an increase in our provision, primarily as a result ofincreased commercial loan balances and some limited deterioration in the assetquality of the commercial and consumer loan portfolios as a result of pooreconomic conditions.  At June 30, 2003,and December 31, 2002, the allowance for loan losses was $2.5 million and $2.6million, or 1.2% and 1.1%, respectively, of gross loans outstanding.  The provision for loan losses for the sixmonths ended June 30, 2003, was $120,000 compared to a provision of $66,500 forthe same period in 2002.

 

*Non-interestIncome.*  Non-interestincome increased $384,000, or 44.6%, for the three months ended June 30, 2003,to $1.2 million compared to the three months ended June 30, 2002.  The increase in non-interest incomereflected increased fees and service charges from $482,000 for the three monthsended June 30, 2002, to $671,000 for the three months ended June 30, 2003,relating primarily to the enhancement of our fee-based services and productofferings during 2002.  Also contributingto the increase in non-interest income was an improvement of 109.2% in gains onsale of loans from $235,000 for the three months ended June 30, 2002, to$492,000 for the three months ended June 30, 2003, as residential mortgagefinancing activity increased due to the low home mortgage rates.  Mortgage refinancing activity is expected todiminish during 2003 as many mortgage holders have already taken advantage ofthe low interest rates favorable for mortgage originations.

 

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Non-interest income increased $994,000, or 62.4%, forthe six months ended June 30, 2003, to $2.6 million compared to the six monthsended June 30, 2002.  The increase innon-interest income reflected increased fees and service charges from $882,000for the six months ended June 30, 2002, to $1.3 million for the six monthsended June 30, 2003, relating primarily to the enhancement of our fee-basedservices and product offerings during 2002. Also contributing to the increase in non-interest income was animprovement of 132.1% in gains on sale of loans from $485,000 for the sixmonths ended June 30, 2002, to $1.1 million for the six months ended June 30,2003, as residential mortgage financing activity increased due to the low homemortgage rates.  Mortgage refinancing activityis expected to diminish during the remainder of 2003 as many mortgage holdershave already taken advantage of the low interest rates favorable for mortgageoriginations.

 
|                           |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |   |
|--------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                           |   | **2003**                          |      | **2002**                        |   | **2003** |   | **2002** |   |
| Non-interest  income:          |   |                              |      |                            |   |   |   |   |   |
| Fees and service  charges      |   | $                                 | 670,655   |                            | $      | 482,424 |   | $ | 1,282,652 |   | $ | 882,215 |   |
| Gains on sales  of loans       |   | 492,290                           |      | 235,328                         |   | 1,126,797 |   | 485,483 |   |
| Gains on sales  of investments |   | —                            |      | 67,618                          |   | 25,682 |   | 93,418 |   |
| Other                          |   | 82,111                            |      | 75,894                          |   | 151,153 |   | 131,033 |   |
| Total  non-interest income     |   | $                                 | 1,245,056 |                            | $      | 861,264 |   | $ | 2,586,284 |   | $ | 1,592,149 |   |

 

*Non-interestExpense.*  Non-interestexpense increased $83,000, or 3.8%, to $2.3 million for the three months endedJune 30, 2003, compared to the same period in 2002.  The increase in non-interest expense was primarily related to anincrease of $30,000 in occupancy and equipment expense and an increase of$29,000 in amortization expense for the three months ended June 30, 2003,compared to the three months ended June 30, 2002.  The increase in occupancy and equipment expense was primarilyrelated to the depreciation of our enhanced computer system while amortizationexpense increased as prepayment speeds on our mortgage servicing portfolio haveaccelerated.

 

Non-interest expense increased $220,000, or 5.0%, to$4.6 million for the six months ended June 30, 2003, as compared to the sameperiod in 2002.  The increase innon-interest expense was primarily related to an increase of $58,000 inprofessional fees, a $56,000 increase in occupancy and equipment expense and anincrease of $50,000 in amortization expense for the six months ended June 30,2003, compared to the six months ended June 30, 2002.  The increase in occupancy and equipment expense was primarilyrelated to the depreciation of our enhanced computer system while amortizationexpense increased as prepayment speeds on our mortgage servicing portfolio haveaccelerated.  The increase in professionalfees was primarily due to legal fees incurred related to securing our“Landmark” trade name.

 

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|                       |   | **Three Months Ended  June 30,** |      | **Six Months Ended  June 30,** |   |
|----------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                       |   | **2003**                         |      | **2002**                       |   | **2003** |   | **2002** |   |
| Non-interest expense:      |   |                             |      |                           |   |   |   |   |   |
| Compensation and benefits  |   | $                                | 1,209,841 |                           | $      | 1,207,550 |   | $ | 2,422,941 |   | $ | 2,419,504 |   |
| Occupancy and equipment    |   | 312,547                          |      | 282,109                        |   | 624,924 |   | 568,498 |   |
| Amortization               |   | 111,791                          |      | 83,284                         |   | 223,110 |   | 173,260 |   |
| Professional fees          |   | 65,504                           |      | 78,668                         |   | 188,283 |   | 130,338 |   |
| Data processing            |   | 83,169                           |      | 72,007                         |   | 163,248 |   | 155,436 |   |
| Other                      |   | 507,148                          |      | 483,551                        |   | 1,020,684 |   | 976,586 |   |
| Total non-interest expense |   | $                                | 2,290,000 |                           | $      | 2,207,169 |   | $ | 4,643,190 |   | $ | 4,423,622 |   |

 

*IncomeTax Expense*.  Incometax expense for the three months ended June 30, 2003, decreased $78,000, or12.7%, from $615,000 for the three months ended June 30, 2002.  The decrease in income tax expense for thethree months ended June 30, 2003, resulted primarily from revised projectionsregarding investment tax credits.  Theeffective tax rate for the second quarter of 2003 was 30.7% compared to 34.3%for the second quarter of 2002.  Thereduction in the effective tax rate for the second quarter of 2003 as comparedto the second quarter of 2002 resulted primarily from the revised projectionsrelated to investment tax credits.

 

Income tax expense for the six months ended June 30,2003, increased $124,000, or 11.3%, from $1.1 million for the six months endedJune 30, 2002.  The increase in incometax expense for the six months ended June 30, 2003, resulted primarily from anincrease in taxable income.    Theeffective tax rate for the six months ended June 30, 2003, was 32.6% comparedto 34.0% for the same period of 2002. The reduction in the effective tax rate for the first six months of 2003as compared to the first six months of 2002 resulted from an increased level ofnon-taxable municipal investments and from revised projections related toinvestment tax credits.

 

*AssetQuality and Distribution.* Total assets declined to $327.7 million at June 30, 2003, compared to$341.3 million at December 31, 2002. Our primary ongoing sources of funds are deposits, proceeds fromprincipal and interest payments on loans and investment securities and proceedsfrom the sale of mortgage loans and investment securities.  While maturities and scheduled amortizationof loans are a predictable source of funds, deposit flows and mortgageprepayments are greatly influenced by general interest rates, economic conditions,competition, and the restructuring of the financial services industry.

 

Net loans, excluding loans held for sale, decreased$16.3 million during the six months ended June 30, 2003.  The decline was primarily the result ofrefinancings and paydowns in our residential mortgage portfolio.  Our loan portfolio composition continues todiversify as a result of pay downs and our planned expansion of commerciallending activities.  This is evidencedby our one-to-four family residential real estate loans comprising 44.7% oftotal loans as of December 31, 2002, and 35.8% of total loans as of June 30,2003.

 

Our primary investing activities are the originationof mortgage, consumer, and commercial loans and the purchase of investment andmortgage-backed securities.  Generally,we originate long- term, fixed-rate, residential mortgage loans for immediatesale in the secondary market and do not originate and warehouse those loans forresale in order to speculate on interest rates.

 

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The allowance for losses on loans is establishedthrough a provision for losses on loans based on our evaluation of the riskinherent in the loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans with respect to which full collectibility maynot be reasonably assured, considers the fair value of the underlyingcollateral, economic conditions, historical loan loss experience, level ofclassified loans and other factors that warrant recognition in providing for anadequate allowance for losses on loans.

 

We believe that the quality of the loan portfoliocontinues to be strong as evidenced by the small number and amount of loanspast due one month or more.  As of June30, 2003, loans with a balance of $1.1 million were on non-accrual status, or0.51% of total loans, compared to a balance of $925,000 loans on non-accrualstatus, or 0.40% of total loans, as of December 31, 2002.  In addition, the ratio of non-performing assetsas a percentage of total assets remained relatively flat at 0.43% as of June30, 2003, compared to 0.41% as of December 31, 2002.

 

Residential home loans comprised 21.7% of the $1.1million non-accrual balance at June 30, 2003. We have historically incurred minimal losses on mortgage loans basedupon collateral values.  We haveexperienced some isolated asset quality deterioration relating to thecommercial and consumer loan portfolios during the second quarter of 2003 as aresult of the current economic downturn. We feel that these isolated instances have been appropriately addressedas either charges against the allowance for loan losses during the quarterended June 30, 2003, or through the increased provisions to the reserve duringthe past six months.

 

We have a concern for the outlook of the economyduring the remainder of 2003.  Aslowdown in economic activity beginning in 2001 severely impacted several majorindustries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it isnot certain that this strength is sustainable. In addition, consumer confidence may be negatively impacted by therecent slowness in economic activity. These events could adversely affect cash flows for both commercial andindividual borrowers, as a result of which, we could experience increases inproblem assets, delinquencies and losses on loans.  Many financial institutions have experienced an increase innon-performing assets during this difficult economic period, as evenwell-established business borrowers have developed cash flow, profitability andother business-related problems.  Webelieve that the allowance for losses on loans at June 30, 2003, wasadequate.  While we believe that we usethe best information available to determine the allowance for losses on loans,unforeseen market conditions could result in adjustment to the allowance forlosses on loans.  In addition, netearnings could be significantly affected if circumstances differ substantiallyfrom the assumptions used in establishing the allowance for losses on loans.

 

*LiabilityDistribution.*  Totaldeposits decreased $9.4 million to $254.9 million at June 30, 2003, from $264.3million at December 31, 2002. Borrowings decreased $777,000 to $25.4 million at June 30, 2003, from$26.2 million at December 31, 2002.

 

Non-interest bearing demand accounts at June 30, 2003,were $20.7 million, or 8.1% of deposits, compared to $23.4 million, or 8.9% ofdeposits, at December 31, 2002. Certificates of deposit decreased to $143.3 million at June 30, 2003,from $147.4 million at December 31, 2002. Money market and NOW demand accounts decreased to $76.2 million at June30, 2003, from $78.4 million at December 31, 2002, and were 29.9% of totaldeposits.  Savings accounts decreased to$14.8

 

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million at June 30, 2003, from $15.0 million at December 31, 2002.  The reduction of certificate of deposit isreflective of our excess liquidity position in that we have not bidaggressively on public deposits during the past six months.

 

Certificates of deposit at June 30, 2003, which werescheduled to mature in one year or less, totaled $82.3 million.  Historically, maturing deposits havegenerally remained with our bank and we believe that a significant portion ofthe deposits maturing in one year or less will remain with us upon maturity.

 

*ContractualObligations and Commercial Commitments.*  The following table presents our contractualobligations, defined as operating lease obligations and principal payments dueon non-deposit obligations with maturities in excess of one year as of June 30,2003, for the periods indicated.

 
| **Contractual Cash Obligations** |   | **Total**  |       | **One Year  or Less** |   | **One to  Three Years** |   | **Four to  Five Years** |       | **More than  Five Years** |   |
|----------------------------------|--------|------------|------------|-----------------------|--------|-------------------------|--------|-------------------------|------------|---------------------------|--------|
|                             |   |       |       |                  |   |                    |   |                    |       |                      |   |
| Operating leases                 |   | $          | 185,408    |                  | $      | 121,357                 |   | $                       | 64,051     |                      | $      | — |   | $ | — |   |
| FHLB advances                    |   | 25,176,539 |       | 2,101,051             |   | 12,000,000              |   | —                  |       | 11,075,488                |   |
| Repurchase  agreements           |   | 250,000    |       | 250,000               |   | —                  |   | —                  |       | —                    |   |
|                             |   |       |       |                  |   |                    |   |                    |       |                      |   |
| Total  contractual obligations   |   | $          | 25,611,947 |                  | $      | 2,472,408               |   | $                       | 12,064,051 |                      | $      | — |   | $ | 11,075,488 |   |

 

*Liquidity.*  Our most liquid assets are cash and cashequivalents and investment securities available for sale.  The levels of these assets are dependent onthe operating, financing, lending and investing activities during any givenperiod.  These liquid assets totaled$103.6 million at June 30, 2003, and $100.7 million at December 31, 2002.  During periods in which we are not able tooriginate a sufficient amount of loans and/or periods of high principalprepayments, we increase our liquid assets by investing in short-term U. S.Government and agency securities or high-grade municipal securities.

 

Liquidity management is both a daily and long-termfunction of the management strategy. Excess funds are generally invested in short-term investments.  In the event funds are required beyond theability to generate them internally, additional funds are generally availablethrough the use of Federal Home Loan Bank advances, a line of credit with theFederal Home Loan Bank or through sales of securities.  At June 30, 2003, we had outstanding FederalHome Loan Bank advances of $25.2 million and had no borrowings outstanding onour line of credit with the Federal Home Loan Bank.  At June 30, 2003, our total borrowings capacity with the FederalHome Loan Bank was $66.3 million.

 

At June 30, 2003, we had outstanding loan commitmentsof $40.8 million.  We anticipate thatsufficient funds will be available to meet current loan commitments.  These commitments consist of letters ofcredit, unfunded lines of credit and commitments to fund loans.

 

*Capital.*  The Federal Reserve Board has establishedcapital requirements for bank holding companies which generally parallel thecapital requirements for national banks under the Office of the Comptroller ofthe Currency regulations.  Theregulations provide that such standards will generally

 

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be applied on a consolidated (rather than a bank-only) basis in thecase of a bank holding company with more than $150 million in totalconsolidated assets.

 

At June 30, 2003, wecontinued to maintain a sound leverage ratio of 11.8% and a total risk basedcapital ratio of 19.8%.  As shown by thefollowing table, our capital exceeded the minimum capital requirements at June30, 2003 (dollars in thousands):

 
|                      |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|---------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                  |   | $                  | 37,968 |                | 11.8   | %                     | 4.0    | %                    | $      | 12,892 |   |
| Tier 1 Capital            |   | $                  | 37,968 |                | 18.6   | %                     | 4.0    | %                    | $      | 8,182 |   |
| Total Risk Based  Capital |   | $                  | 40,457 |                | 19.8   | %                     | 8.0    | %                    | $      | 16,364 |   |

 

At June 30, 2003,our subsidiary bank continued to maintain a sound leverage ratio of 10.8% and atotal risk based capital ratio of 18.2%. As shown by the following table, our bank’s capital exceeded the minimumcapital requirements at June 30, 2003 (dollars in thousands):

 
|                      |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|---------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                  |   | $                  | 34,668 |                | 10.8   | %                     | 4.0    | %                    | $      | 12,835 |   |
| Tier 1 Capital            |   | $                  | 34,668 |                | 17.0   | %                     | 4.0    | %                    | $      | 8,159 |   |
| Total Risk Based  Capital |   | $                  | 37,157 |                | 18.2   | %                     | 8.0    | %                    | $      | 16,318 |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements.  The above ratios are wellin excess of regulatory minimums and should allow us to operate without capitaladequacy concerns.  The Federal DepositInsurance Corporation Improvement Act of 1991 establishes a bank rating systembased on the capital levels of banks. As of June 30, 2003, we were rated “well capitalized”, which is thehighest rating available under this capital-based rating system.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

*Quantitative and Qualitative Disclosures About Market Risk*. Our assets and liabilities are principally financial in nature and theresulting net interest income thereon is subject to changes in market interestrates and the mix of various assets and liabilities.  Interest rates in the financial markets affect our decision onpricing our assets and liabilities which impacts net interest income, asignificant cash flow source for us.  Asa result, a substantial portion of our risk management activities relates tomanaging interest rate risk.

 

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

 

We have been successfulin meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months,including one using rates at December 31, 2002, and forecasting volumes for thetwelve-month projection.  This positionis then subjected to a shift in interest rates of 100 and 200 basis pointsrising and 100 basis points falling with an impact to our net interest incomeon a one year horizon as follows:

 
| **Scenario**             |   | **$ Change  in Net Interest Income** |    | **% of Net  Interest Income** |   |
|--------------------------|--------|--------------------------------------|---------|-------------------------------|--------|
| 100 basis point  rising  |   | $                                    | 270,000 |                          | 2.2    | % |
| 200 basis point  rising  |   | 503,000                              |    | 4.1                           | %      |
| 100 basis point  falling |   | (393,000                             | )       | (3.2                          | )%     |
|                          |        |                                      |         |                               |        |  |

 

We believe that no significant changes in our interest rate sensitivityposition have occurred since December 31, 2002.  We also believe we are appropriately positioned for futureinterest rate movements, although we may experience some fluctuations in netinterest income due to short-term timing differences between the repricing ofassets and liabilities.

 

*Safe Harbor Statement Under the Private SecuritiesLitigation Reform Act of 1995 - Forward-Looking Statements.*** **This documentcontains, and future oral and written statements of the Company and itsmanagement may contain, forward-looking statements, within the meaning of suchterm in the Private Securities Litigation Reform Act of 1995, with respect tothe financial condition, results of operations, plans, objectives, futureperformance and business of the Company. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of the Company’s management and on informationcurrently available to management, are generally identifiable by the use ofwords such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,”“may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in thisdocument, including forward-looking statements, speak only as of the date theyare made, and the Company undertakes no obligation to update any statement inlight of new information or future events.

 

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Our ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain.  Factors which could have amaterial adverse effect on our operations and future prospects include, but arenot limited to, the following:

 

•                                         The strength of the United States economy in generaland the strength of the local economies in which we conduct our operationswhich may be less favorable than expected and may result in, among otherthings, a deterioration in the credit quality and value of our assets.

 

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

 

•                                         The effects of, and changes in, federal, state andlocal laws, regulations and policies affecting banking, securities, insuranceand monetary and financial matters.

 

•                                         The effects of changes in interest rates (includingthe effects of changes in the rate of prepayments our assets) and the policiesof the Board of Governors of the Federal Reserve System.

 

•                                         Our ability to compete with other financialinstitutions as effectively as we currently intend due to increases incompetitive pressures in the financial services sector.

 

•                                         Our inability to obtain new customers and to retainexisting customers.

 

•                                         The timely development and acceptance of products andservices, including products and services offered through alternative deliverychannels such as the Internet.

 

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

 

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

 

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

 

•                                         Consumer spending and saving habits which may changein a manner that affects our  businessadversely.

 

•                                         Business combinations and the integration of acquiredbusinesses which may be more difficult or expensive than expected.

 

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

 

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

 

•                                         Our ability to manage the risks associated with theforegoing as well as anticipated.

 

These risks and uncertainties should be considered inevaluating forward-looking statements and undue reliance should not be placedon such statements.  Additionalinformation concerning us and our business, including other factors that couldmaterially affect our financial results, is included in our filings with theSecurities and Exchange Commission.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONTROLS AND PROCEDURES**

 

*Controlsand Procedures.* An evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operations of the Company’s disclosure controls andprocedures (as defined in Rule 13a-15(e) promulgated under the Securities andExchange Act of 1934, as amended) as of June 30, 2003.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effective.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls.

 

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**PART II**

 

ITEM 1.                  LEGALPROCEEDINGS.

 

There are no material pending legal proceedings towhich the Company or its subsidiaries is a party other than ordinary routinelitigation incidental to their respective businesses.

 

ITEM 2.                  CHANGESIN SECURITIES.

 

None

 

ITEM 3.                  DEFAULTSUPON SENIOR SECURITIES.

 

None

 

ITEM 4.                  SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS.

 

On May 21, 2003, the annual meeting of LandmarkBancorp, Inc. stockholders was held.  Atthe meeting, Richard Ball, Susan E. Roepke and C. Duane Ross were elected toserve as Class II directors with terms expiring in 2006.  Continuing as Class I directors (termexpires in 2005) are Brent A. Bowman, Joseph L. Downey and David H. Snapp andcontinuing as Class III directors (term expires in 2004) are Patrick L.Alexander, Jim W. Lewis, Jerry R. Pettle and Larry Schugart.  The stockholders also ratified theappointment of KPMG LLP as Landmark Bancorp, Inc.’s independent publicaccountants for the year ending December 31, 2003.

 

There were 1,993,465 shares of common stock eligibleto vote at the annual meeting.  Thevoting on each item at the annual meeting was as follows:

 
|            |   | **For**   |   | **Withheld/  Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|-----------------|--------|-----------|--------|------------------------|--------|-------------|--------|-----------------------|--------|
|            |   |      |   |                   |   |        |   |                  |   |
| Richard A. Ball |   | 1,630,402 |   | 48,342                 |   | —      |   | —                |   |
| Susan E. Roepke |   | 1,650,230 |   | 28,514                 |   | —      |   | —                |   |
| C. Duane Ross   |   | 1,658,471 |   | 20,273                 |   | —      |   | —                |   |
| KPMG LLP        |   | 1,634,155 |   | 43,220                 |   | 1,369       |   | —                |   |

 

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ITEM 5.                  OTHERINFORMATION.

 

None

 

ITEM 6.                  EXHIBITSAND REPORTS ON FORM 8-K.

 

A.            Exhibits

 
| Exhibit 31.1 |   | Certificate of Chief Executive Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                        |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.2 |   | Certificate of Chief Financial Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                        |
| Exhibit 32.1 |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

B.            Reports on Form 8-K

 

A report on Form 8-K was filed on July 31, 2003, toreport pursuant to Item 12 that the Company had issued a press releaseannouncing earnings for the quarter and six months ended June 30, 2003, and thedeclaration of a cash dividend to stockholders.

 

A report on Form 8-K was filed on April 30, 2003, toreport pursuant to Item 12 that the Company had issued a press releaseannouncing earnings for the three months ended March 31, 2003, and thedeclaration of a cash dividend to stockholders.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         | LANDMARK BANCORP, INC.                                             |
|------------------------------|--------------------------------------------------------------------|
|                         |                                                               |
|                         |                                                               |
| Date:  August  13, 2003 | /s/   Patrick L. Alexander                          |   |
|                         | Patrick L. Alexander                                               |
|                         | President and Chief Executive Officer                              |
|                         |                                                               |
|                         |                                                               |
| Date:  August  13, 2003 | /s/   Mark A. Herpich                               |   |
|                         | Mark A. Herpich                                                    |
|                         | Vice President,  Secretary, Treasurer  and Chief Financial Officer |

 

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