**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 September 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**

 

**LANDMARKBANCORP, INC.**

(Exact name ofRegistrant as 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 90days.  Yes  ý   No  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined by Rule 12b-2 of the ExchangeAct).  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 November 2, 2003, theRegistrant had outstanding 2,017,283 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**

** **
|                                                                                                                         |   | **September 30,  2003** |        | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|------------------------|--------|
|                                                                                                                         |   | **(Unaudited)**         |        |                   |   |
| **ASSETS**                                                                                                                   |   |                    |        |                   |   |
| Cash and cash equivalents                                                                                                    |   | $                       | 5,386,450   |                   | $      | 11,448,684 |   |
| Investment securities  available for sale                                                                                    |   | 103,970,661             |        | 89,296,337             |   |
| Loans, net                                                                                                                   |   | 208,491,766             |        | 224,061,263            |   |
| Loans held for sale                                                                                                          |   | 4,784,528               |        | 5,050,603              |   |
| Premises and equipment, net                                                                                                  |   | 3,687,274               |        | 3,755,048              |   |
| Goodwill                                                                                                                     |   | 1,971,178               |        | 1,971,178              |   |
| Other intangible assets, net                                                                                                 |   | 921,942                 |        | 1,131,584              |   |
| Other assets                                                                                                                 |   | 4,347,696               |        | 4,599,483              |   |
|                                                                                                                         |   |                    |        |                   |   |
| Total assets                                                                                                                 |   | $                       | 333,561,495 |                   | $      | 341,314,180 |   |
|                                                                                                                         |   |                    |        |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |   |                    |        |                   |   |
| Liabilities:                                                                                                                 |   |                    |        |                   |   |
| Deposits                                                                                                                     |   | $                       | 257,178,651 |                   | $      | 264,280,870 |   |
| Other borrowings                                                                                                             |   | 28,284,681              |        | 26,203,121             |   |
| Accrued expenses, taxes and  other liabilities                                                                               |   | 5,239,097               |        | 9,756,414              |   |
| Total liabilities                                                                                                            |   | 290,702,429             |        | 300,240,405            |   |
|                                                                                                                         |   |                    |        |                   |   |
| Stockholders’ equity:                                                                                                   |   |                    |        |                   |   |
| Common stock, $0.01 par,  3,000,000 shares authorized, 2,194,155 and 2,157,865 shares issued at 2003  and 2002, respectively |   | 21,942                  |        | 21,578                 |   |
| Additional paid in capital                                                                                                   |   | 18,784,491              |        | 18,269,582             |   |
| Retained earnings                                                                                                            |   | 27,085,066              |        | 24,295,211             |   |
| Accumulated other  comprehensive income                                                                                      |   | 1,210,169               |        | 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                                                                                              |   | 42,859,066              |        | 41,073,775             |   |
|                                                                                                                         |   |                    |        |                   |   |
| Total liabilities and  stockholders’ equity                                                                             |   | $                       | 333,561,495 |                   | $      | 341,314,180 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

2

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

# **CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **
|                                                |   | **Three Months Ended September 30,** |      |
|-----------------------------------------------------|--------|--------------------------------------|-----------|
|                                                |   | **2003**                             |      | **2002** |   |
| Interest income:                                    |   |                                 |      |   |   |
| Loans                                               |   | $                                    | 3,474,288 |   | $ | 4,155,734 |   |
| Investment securities                               |   | 637,611                              |      | 734,912 |   |
| Other                                               |   | 21,054                               |      | 22,436 |   |
| Total interest income                               |   | 4,132,953                            |      | 4,913,082 |   |
|                                                |   |                                 |      |   |   |
| Interest expense:                                   |   |                                 |      |   |   |
| Deposits                                            |   | 1,054,886                            |      | 1,336,776 |   |
| Borrowed funds                                      |   | 295,876                              |      | 331,523 |   |
| Total interest expense                              |   | 1,350,762                            |      | 1,668,299 |   |
|                                                |   |                                 |      |   |   |
| Net interest income                                 |   | 2,782,191                            |      | 3,244,783 |   |
|                                                |   |                                 |      |   |   |
| Provision for loan losses                           |   | 60,000                               |      | 50,000 |   |
|                                                |   |                                 |      |   |   |
| Net interest income after provision for loan losses |   | 2,722,191                            |      | 3,194,783 |   |
|                                                |   |                                 |      |   |   |
| Non-interest income:                                |   |                                 |      |   |   |
| Fees and service charges                            |   | 655,669                              |      | 592,232 |   |
| Gains on sale of loans                              |   | 284,833                              |      | 263,242 |   |
| Gains on sale of investments                        |   | 290,417                              |      | 1,500 |   |
| Other                                               |   | 66,714                               |      | 60,129 |   |
| Total non-interest income                           |   | 1,297,633                            |      | 917,103 |   |
|                                                |   |                                 |      |   |   |
| Non-interest expense:                               |   |                                 |      |   |   |
| Compensation and benefits                           |   | 1,142,368                            |      | 1,213,977 |   |
| Occupancy and equipment                             |   | 306,637                              |      | 298,954 |   |
| Amortization of intangible assets                   |   | 122,570                              |      | 91,182 |   |
| Professional fees                                   |   | 56,565                               |      | 58,145 |   |
| Data processing                                     |   | 73,909                               |      | 100,719 |   |
| Other                                               |   | 488,965                              |      | 523,581 |   |
| Total non-interest expense                          |   | 2,191,014                            |      | 2,286,558 |   |
|                                                |   |                                 |      |   |   |
| Earnings before income taxes                        |   | 1,828,810                            |      | 1,825,328 |   |
|                                                |   |                                 |      |   |   |
| Income tax expense                                  |   | 597,168                              |      | 620,828 |   |
|                                                |   |                                 |      |   |   |
| Net earnings                                        |   | $                                    | 1,231,642 |   | $ | 1,204,500 |   |
|                                                |   |                                 |      |   |   |
| Earnings per share:                                 |   |                                 |      |   |   |
| Basic                                               |   | $                                    | 0.62      |   | $ | 0.59 |   |
| Diluted                                             |   | $                                    | 0.61      |   | $ | 0.57 |   |
|                                                |   |                                 |      |   |   |
| Dividends per share                                 |   | $                                    | 0.17      |   | $ | 0.14 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

3

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

# **CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 
|                                                |   | **Nine Months Ended September 30,** |       |
|-----------------------------------------------------|--------|-------------------------------------|------------|
|                                                |   | **2003**                            |       | **2002** |   |
| Interest income:                                    |   |                                |       |   |   |
| Loans                                               |   | $                                   | 10,949,353 |   | $ | 12,677,742 |   |
| Investment securities                               |   | 2,086,074                           |       | 2,145,295 |   |
| Other                                               |   | 44,289                              |       | 88,442 |   |
| Total interest income                               |   | 13,079,716                          |       | 14,911,479 |   |
|                                                |   |                                |       |   |   |
| Interest expense:                                   |   |                                |       |   |   |
| Deposits                                            |   | 3,462,811                           |       | 4,510,228 |   |
| Borrowed funds                                      |   | 891,419                             |       | 1,017,410 |   |
| Total interest expense                              |   | 4,354,230                           |       | 5,527,638 |   |
|                                                |   |                                |       |   |   |
| Net interest income                                 |   | 8,725,486                           |       | 9,383,841 |   |
|                                                |   |                                |       |   |   |
| Provision for loan losses                           |   | 180,000                             |       | 116,500 |   |
|                                                |   |                                |       |   |   |
| Net interest income after provision for loan losses |   | 8,545,486                           |       | 9,267,341 |   |
|                                                |   |                                |       |   |   |
| Non-interest income:                                |   |                                |       |   |   |
| Fees and service charges                            |   | 1,938,321                           |       | 1,474,447 |   |
| Gains on sale of loans                              |   | 1,411,630                           |       | 748,725 |   |
| Gains on sale of investments                        |   | 316,099                             |       | 94,918 |   |
| Other                                               |   | 217,867                             |       | 191,162 |   |
| Total non-interest income                           |   | 3,883,917                           |       | 2,509,252 |   |
|                                                |   |                                |       |   |   |
| Non-interest expense:                               |   |                                |       |   |   |
| Compensation and benefits                           |   | 3,565,309                           |       | 3,633,481 |   |
| Occupancy and equipment                             |   | 931,561                             |       | 867,452 |   |
| Amortization of intangible assets                   |   | 345,680                             |       | 264,442 |   |
| Professional fees                                   |   | 244,848                             |       | 188,483 |   |
| Data processing                                     |   | 237,157                             |       | 256,155 |   |
| Other                                               |   | 1,509,649                           |       | 1,500,167 |   |
| Total non-interest expense                          |   | 6,834,204                           |       | 6,710,180 |   |
|                                                |   |                                |       |   |   |
| Earnings before income taxes                        |   | 5,595,199                           |       | 5,066,413 |   |
|                                                |   |                                |       |   |   |
| Income tax expense                                  |   | 1,824,618                           |       | 1,724,071 |   |
|                                                |   |                                |       |   |   |
| Net earnings                                        |   | $                                   | 3,770,581  |   | $ | 3,342,342 |   |
|                                                |   |                                |       |   |   |
| Earnings per share:                                 |   |                                |       |   |   |
| Basic                                               |   | $                                   | 1.90       |   | $ | 1.60 |   |
| Diluted                                             |   | $                                   | 1.88       |   | $ | 1.55 |   |
|                                                |   |                                |       |   |   |
| Dividends per share                                 |   | $                                   | 0.49       |   | $ | 0.43 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

4

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** LANDMARK BANCORP, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

** **
|                                                                           |   | **Nine Months Ended September 30,** |      |
|--------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                           |   | **2003**                            |      | **2002** |   |
|                                                                           |   |                                |      |   |   |
| Net cash provided by operating activities                                      |   | $                                   | 1,338,258 |   | $ | 4,205,353 |   |
|                                                                           |   |                                |      |   |   |
| INVESTING ACTIVITIES                                                           |   |                                |      |   |   |
| Net decrease in loans                                                          |   | 15,231,955                          |      | 8,627,902 |   |
| Maturities and prepayments of investment securities  available for sale        |   | 47,100,790                          |      | 17,450,137 |   |
| Purchase of investment securities available for sale                           |   | (64,182,433                         | )         | (27,323,554 | ) |
| Proceeds from sale of investment securities available  for sale                |   | 747,100                             |      | 276,685 |   |
| Payments received and proceeds from sale of foreclosed  assets                 |   | 354,551                             |      | 454,709 |   |
| Improvements of real estate owned                                              |   | —                              |      | (992 | ) |
| Purchases of premises and equipment, net                                       |   | (269,286                            | )         | (693,881 | ) |
| Net cash used in investing activities                                          |   | (1,017,323                          | )         | (1,208,994 | ) |
|                                                                           |   |                                |      |   |   |
| FINANCING ACTIVITIES                                                           |   |                                |      |   |   |
| Net decrease in deposits                                                       |   | (7,102,219                          | )         | (12,772,126 | ) |
| Federal Home Loan Bank and other borrowings                                    |   | 34,350,000                          |      | 29,055,000 |   |
| Federal Home Loan Bank repayments                                              |   | (32,170,440                         | )         | (30,305,002 | ) |
| Purchase of 34,841 and 161,933 shares of treasury  stock                       |   | (831,036                            | )         | (4,098,150 | ) |
| Issuance of 36,290 and 60,350 shares of common stock  under  stock option plan |   | 351,252                             |      | 951,238 |   |
| Payment of dividends                                                           |   | (980,726                            | )         | (920,226 | ) |
| Net cash used in financing activities                                          |   | (6,383,169                          | )         | (18,089,266 | ) |
| Net decrease in cash                                                           |   | (6,062,234                          | )         | (15,092,907 | ) |
| Cash at beginning of period                                                    |   | 11,448,684                          |      | 22,163,258 |   |
| Cash at end of period                                                          |   | $                                   | 5,386,450 |   | $ | 7,070,351 |   |
|                                                                           |   |                                |      |   |   |
| Supplemental disclosure of cash flow information:                              |   |                                |      |   |   |
| Cash paid during period for interest                                           |   | $                                   | 4,378,000 |   | $ | 5,572,000 |   |
| Cash paid during period for taxes                                              |   | $                                   | 1,735,000 |   | $ | 1,117,000 |   |
|                                                                           |   |                                |      |   |   |
| Supplemental schedule of noncash investing activities:                         |   |                                |      |   |   |
| Transfer of loans to real estate owned                                         |   | $                                   | 224,000   |   | $ | 319,000 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

5

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**Notes to Condensed ConsolidatedFinancial 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 fromthe audited consolidated balance sheet as of that date.  The results of the interim periods endedSeptember 30, 2003, are not necessarily indicative of the results expected forthe 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  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Weighted  average common shares outstanding (basic) |   | 1,983,319                              |   | 2,040,387                             |   | 1,982,788 |   | 2,095,552 |   |
| Dilutive  stock options                             |   | 28,330                                 |   | 54,592                                |   | 31,966 |   | 53,875 |   |
| Weighted  average common shares (diluted)           |   | 2,011,649                              |   | 2,094,979                             |   | 2,014,754 |   | 2,149,427 |   |

 

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  September 30,** |      | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
|                                                                      |   | **2003**                               |      | **2002**                              |   | **2003** |   | **2002** |   |
| Net  income                                                               |   | $                                      | 1,231,642 |                                  | $      | 1,204,500 |   | $ | 3,770,581 |   | $ | 3,342,342 |   |
|                                                                      |   |                                   |      |                                  |   |   |   |   |   |
| Unrealized  holding (losses)/gains                                        |   | (252,139                               | )         | 616,256                               |   | (794,870 | ) | 2,206,685 |   |
| Less  – reclassification adjustment for gains included in net income |   | 290,417                                |      | 1,500                                 |   | 316,099 |   | 94,918 |   |
| Net  unrealized (losses)/gains on securities                              |   | (542,556                               | )         | 614,756                               |   | (1,110,969 | ) | 2,111,767 |   |
|                                                                      |   |                                   |      |                                  |   |   |   |   |   |
| Income  tax (benefit)/expense                                             |   | (206,171                               | )         | 233,607                               |   | (422,168 | ) | 802,471 |   |
| Total  comprehensive income                                               |   | $                                      | 895,257   |                                  | $      | 1,585,649 |   | $ | 3,081,780 |   | $ | 4,651,638 |   |

 

**4.****                                      StockBased 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 option awards.These models also require subjective assumptions, including future stock pricevolatility and expected time to exercise, which greatly affect the calculatedvalues. The Company uses the Black-Scholes option pricing model to estimate thegrant date fair value of its stock options. The fair value is recognized asadditional compensation expense over the option vesting period, which istypically five years.

 

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

 

Effective October 1, 2001, the Company adopted certainprovisions of Statement of Financial Accounting Standards (SFAS) No. 141,“Business Combinations,” and certain provisions of SFAS No. 142, “Goodwill andOther Intangible Assets,” as required for goodwill and intangible assetsresulting from business combinations consummated after June 30, 2001.  Effective January 1, 2002, the Companyadopted the remaining provisions of SFAS No. 142.  The Company’s goodwill and core deposit intangible resulted fromits acquisition of MNB Bancshares on October 9, 2001.  Pursuant to certain provisions in SFAS No. 142, goodwillresulting from the merger with MNB Bancshares is not amortized; however, it istested for impairment on a periodic basis.

 

7

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The following table presents information about the Company’sintangible assets, which are being amortized in accordance with SFAS No. 142:

 
|                         |   | **September  30, 2003**     |      | **December  31, 2002**        |   |
|------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                         |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible assets: |   |                        |      |                          |   |   |   |   |   |
| Core  deposit premium        |   | $                           | 780,000   |                          | $      | (269,454 | ) | $ | 780,000 |   | $ | (173,727 | ) |
| Mortgage  servicing rights   |   | 638,913                     |      | (227,517                      | )      | 773,254 |   | (247,943 | ) |
| Total                        |   | $                           | 1,418,913 |                          | $      | (496,971 | ) | $ | 1,553,254 |   | $ | (421,670 | ) |

 

At September 30, 2003, weserviced loans for other investors totaling $106.6 million. Aggregateamortization expense for the three months ended September 30, 2003, andSeptember 30, 2002, was $122,569 and $91,182, respectively.  Aggregate amortization expense for the ninemonths ended September 30, 2003, and September 30, 2002, was $345,680 and$264,442, respectively.  The followingis estimated amortization expense for the years ending:

 

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

 

# **6.**                                      Recent Accounting Pronouncements

# ** **

# **In November 2002, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 45, “Requirements for Guarantees IncludingIndirect Guarantees of Indebtedness of Others.”  This Interpretation elaborates on the disclosuresto be made by a guarantor in its interim and annual financial statements aboutits obligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  The disclosure requirements in thisInterpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. The Company does not believe that the adoption of Interpretation No. 45did have a significant impact on its consolidated financial statements.**

# ** **

# **In January 2003, the FASB issuedInterpretation No. 46, “Consolidationof Variable Interest Entities.” This Interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” elaborates on the financial statementdisclosures to be made by enterprises involved with variable interest entities,including requiring consolidation of entities in which an enterprise has a controllingfinancial interest that is not controlled through voting interests.  The requirements in this Interpretation areeffective for variable interest entities created after January 31, 2003, andthe first fiscal or interim period beginning after December 15, 2003, forvariable interest entities acquired before that date.  The Company does not believe that the adoption of InterpretationNo. 46 will have a significant impact on its consolidated financial statements.**

 

SFASNo. 149, “Amendment of Statement 133on Derivative Instruments and Hedging Activities*.*” SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The

 

8

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amendments (i) reflect decisions of theDerivatives Implementation Group; (ii) reflect decisions made by the FASBin conjunction with other projects dealing with financial instruments; and(iii) address implementation issues related to the application of thedefinition 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.

 

SFASNo. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards forhow an issuer classifies, measures and discloses in its financial statementscertain financial instruments with characteristics of both liabilities andequity.  SFAS No. 150 requires thatan issuer classify financial instruments that are within its scope as aliability, in most circumstances.  Suchfinancial instruments include (i) financial instruments that are issued inthe form of shares that are mandatorily redeemable; (ii) financialinstruments that embody an obligation to repurchase the issuer’s equity shares,or are indexed to such an obligation, and that require the issuer to settle theobligation by transferring assets; (iii) financial instruments that embodyan obligation that the issuer may settle by issuing a variable number of itsequity shares if, at inception, the monetary value of the obligation ispredominately based on a fixed amount, variations in something other than thefair value of the issuer’s equity shares or variations inversely related tochanges in the fair value of the issuer’s equity shares; and (iv) certainfreestanding financial instruments. SFAS No. 150 is effective for contracts entered into or modifiedafter May 31, 2003, and is otherwise effective at the beginning of thefirst interim period beginning after June 15, 2003.  Adoption of SFAS No. 150 onJuly 1, 2003, did not have a significant impact on the Company’s financialstatements.

 

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**LANDMARK BANCORP, INC. AND SUBSIDIARYMANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

## ** **

*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’s common stockis quoted on the Nasdaq Stock Market National Market System (symbol“LARK”).  Landmark National Bank isdedicated to providing quality financial and banking services to its localcommunities and continues to originate commercial real estate and non-realestate loans, small business loans, residential mortgage loans, consumer loans,and home equity loans.

 

Our results of operationsdepend primarily on net interest income, which is the difference betweeninterest income from interest-earning assets and interest expense oninterest-bearing liabilities.  Ouroperations are also affected by non-interest income, such as service charges,loan fees and gains and losses from the sale of newly originated loans andinvestments.  Our principal operatingexpenses, aside from interest expense, consist of compensation and employeebenefits, occupancy costs, federal deposit insurance costs, data processingexpenses and provision for loan losses.

 

Our accounting principlesand the methods of applying these principles conform with accounting principlesgenerally accepted in the United States and with general practices within thebanking industry.  Critical accountingpolicies relate to loans and related earnings, investment securities and incometaxes.  A description of these policies,which significantly 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 September 30, 2003, increased $27,000, or2.3%, to $1.2 million as compared to the three months ended September 30,2002.  This improvement in net earningswas primarily attributable to increased gains on sale of investments andincreased fees and service charges, which was offset by a reduction of netinterest income.

 

Net earnings for the nine months ended September 30,2003, increased $428,000, or 12.8%, to $3.8 million as compared to the ninemonths ended September 30, 2002.  Thisimprovement in net earnings was generally attributable to increased fees andservice charges, increased gains on sale of loans and increased gains on saleof investments which was offset by a reduction of net interest income.

 

The three months ended September 30, 2003, resulted indiluted earnings per share of $0.61 compared to $0.57 for the same period in2002.  Return on average assets was1.48% for the period compared to 1.42% for the same period in 2002.  Return on average stockholders’ equity was11.53% for the period compared to 11.77% for the same period in 2002.

 

The nine months ended September 30, 2003, resulted indiluted earnings per share of $1.88 compared to $1.55 for the same period in2002.  Return on average assets was1.53% for the period compared to 1.32% for the same period in 2002.  Return on average stockholders’ equity was12.08% for the period compared to 11.10 % for the same period in 2002.

 

We continued our stock repurchase program during thefirst nine months of 2003, resulting in the repurchase of an additional 34,841shares.  As of September 30, 2003, weheld 182,872 shares as treasury stock at an average cost per share of $22.41.

 

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The following table summarizes net income and keyperformance measures for the periods presented.

 
|                          |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                          |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net  earnings:                |   |                                   |   |                                  |   |   |   |   |   |
| Basic  earnings per share     |   | $                                      | 0.62   |                                  | $      | 0.59 |   | $ | 1.90 |   | $ | 1.60 |   |
| Diluted  earnings per share   |   | $                                      | 0.61   |                                  | $      | 0.57 |   | $ | 1.88 |   | $ | 1.55 |   |
| Earnings  ratios:             |   |                                   |   |                                  |   |   |   |   |   |
| Return  on average assets (1) |   | 1.48                                   | %      | 1.42                                  | %      | 1.53 | % | 1.32 | % |
| Return  on average equity (1) |   | 11.53                                  | %      | 11.77                                 | %      | 12.08 | % | 11.10 | % |
| Dividend  payout ratio        |   | 27.87                                  | %      | 25.00                                 | %      | 26.06 | % | 27.61 | % |
| Net  interest margin (1)      |   | 3.54                                   | %      | 3.96                                  | %      | 3.74 | % | 3.91 | % |

 

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(1) The ratio has beenannualized and is not necessarily indicative of the results for the entireyear.

 

*Interest Income.*  Interest income for the three months endedSeptember 30, 2003, decreased $780,000, or 15.9 %, to $4.1 million from $4.9million in the same period of 2002. This decrease was partially related to the decrease in interest ratesexperienced as interest earning assets repriced during 2002 and throughout thethird quarter of 2003.  Alsocontributing to the decrease was a decline in average loans for the quarterended September 30, 2003, which were $212.7 million, compared to $232.1 millionfor the quarter ended September 30, 2002. The decline was primarily the result of refinancings and paydowns in ourresidential mortgage portfolio. Offsetting the portion attributable to lower loans outstanding, was anincrease in average investment securities from $83.4 million for the thirdquarter of 2002, to $93.8 million for the third quarter of 2003.

 

Interest income for thenine months ended September 30, 2003, decreased $1.8 million, or 12.3%, to$13.1 million from $14.9 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 the first nine months of 2003. Also contributing to the decrease was a continued decline in averageloans for the first nine months of 2003, which were $218.3 million, compared to$232.28 million for the first nine months of 2002.  The decline was primarily the result of refinancings and paydownsin our residential mortgage portfolio. Offsetting the portion attributable to lower loans outstanding, was anincrease in average investment securities from $82.5 million for the ninemonths ended September 30, 2002, to $90.2 million for the nine months endedSeptember 30, 2003.

 

*InterestExpense*.  Interestexpense during the three months ended September 30, 2003, decreased $318,000,or 19.0%, as compared to the same period of 2002.  For the three months ended September 30, 2003, interest expenseon deposits decreased $282,000, or 21.1%, and interest expense on borrowings,consisting of advances from the Federal Home Loan Bank of Topeka, decreased$36,000, or 10.8%.  This decrease ininterest expense resulted primarily from the decline in interest rates and to adecline in average balances of deposits and other borrowings.

 

Interest expense duringthe nine months ended September 30, 2003, decreased $1.2 million, or 21.2%, ascompared to the same period of 2002. For the nine months ended September 30, 2003, interest expense ondeposits decreased $1.0 million, or 23.2%, and interest expense on borrowings,

 

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consisting of advancesfrom the Federal Home Loan Bank of Topeka, decreased $126,000, or 12.4%.  This decrease in interest expense resultedprimarily from the decline in interest rates and a decline in average balancesof deposits and other borrowings.

 

*NetInterest Income.* Netinterest income for the three months ended September 30, 2003, totaled $2.8million, a 14.3% decrease, as compared to $3.2 million for the three monthsended September 30, 2002.  Averageearning assets during the third quarter of 2003 totaled $311.4 million,compared to $322.2 million during the third quarter of 2002.  The net interest margin on earning assetswas 3.54% for the third quarter of 2003, down from 3.96% for the third quarterof 2002.  The refinancings and paydownsin the residential mortgage portfolio exceeded the commercial loan growthduring 2002 and throughout the third quarter of 2003, resulting in the excessliquidity being invested into lower yielding investment securities.  In addition, the prolonged low-rateenvironment caused the net interest margin to compress as assets continue toreprice with little room left for liability repricing.

 

Net interest income for the nine months endedSeptember 30, 2003, totaled $8.7 million, a 7.0% decrease, as compared to $9.4million for the nine months ended September 30, 2002.  Average earning assets during the first nine months of 2003totaled $312.1 million, versus $323.2 million during the same period of2002.  The net interest margin onearning assets was 3.74% for the first nine months of 2003, down from 3.91%during the first nine months of 2002. The refinancings and paydowns in the residential mortgage portfolioexceeded the commercial loan growth during 2002 and the first nine months of2003, resulting in the excess liquidity being invested into lower yieldinginvestment securities.  In addition, theprolonged low-rate environment caused 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 September 30, 2003, was$60,000 compared to a provision of $50,000 during the three months endedSeptember 30, 2002.  The provision for loanlosses for the nine months ended September 30, 2003, was $180,000 compared to aprovision of $117,000 for the same period in 2002.  Our continuous review of the loan portfolio prompted an increasein our provision, primarily as a result of the loan portfolio’s increasedpercentage of commercial loans and some limited deterioration in the assetquality of the commercial and consumer loan portfolios as a result of weakeconomic conditions.  At September 30,2003, the allowance for loan losses was $2.5 million, or 1.2%, of gross loansoutstanding compared to $2.6 million, or 1.1% of gross loans outstanding atDecember 31, 2002.

 

*Non-interestIncome.*  Non-interestincome increased $381,000, or 41.5%, for the three months ended September 30,2003, to $1.3 million compared to the three months ended September 30,2002.  The increase in non-interestincome was primarily attributable to a $289,000 increase in gains on sale ofinvestments for the third quarter of 2003 compared to the third quarter of2002.  This increase in gains on sale ofinvestments resulted from equity security sales from our holding company’sinvestment portfolio.  We periodicallysell equity securities based on performance and other indicators, and we couldsell additional equity securities in future periods.  Our equity securities portfolio was $1.0 million, includingunrealized gains of $518,000, at September 30, 2003.  We estimate that gains on sale of investments during the fourthquarter 2003 will continue, however, it is likely that they will be at a levelless than the amount realized during the third quarter.  The increase in non-interest income alsoreflected increased fees and service charges from $592,000 for the three monthsended September 30, 2002, to $656,000 for the three months ended September 30,2003, relating primarily to the enhancement of our fee-based services andproduct offerings during the second half of 2002.  Also contributing to the increase in non-interest income was animprovement of 8.2% in gains on sale of loans from $263,000 for the threemonths ended September 30, 2002, to

 

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$285,000, for the threemonths ended September 30, 2003, as residential mortgage financing activityincreased due to continued low home mortgage rates.  Mortgage refinancing activity is expected to diminish during theremainder of 2003 as many mortgage holders have already taken advantage of thelow interest rates favorable for mortgage originations.

 

Non-interest income increased $1.4 million, or 54.8%,for the nine months ended September 30, 2003, to $3.9 million compared to thenine months ended September 30, 2002. The increase in non-interest income reflected an improvement of 88.5% ingains on sale of loans from $749,000 for the nine months ended September 30,2002, to $1.4 million for the nine months ended September 30, 2003, asresidential mortgage financing activity increased due to low home mortgagerates.  Mortgage refinancing activity isexpected to diminish during the remainder of 2003 as many mortgage holders havealready taken advantage of the low interest rates favorable for mortgageoriginations.  Also contributing to theincrease in non-interest income was increased fees and service charges from$1.5 million for the nine months ended September 30, 2002, to $1.9 million forthe nine months ended September 30, 2003, relating primarily to the enhancementof our fee-based services and product offerings during the second half of2002.  The increase in non-interestincome also reflected a $221,000 increase in gains on sale of investments forthe nine months ended September 30, 2003 as compared to the same period of2002.  This increase in gains on sale ofinvestments resulted from equity security sales from our holding company’sinvestment portfolio.  We periodicallysell equity securities based on performance and other indicators.

 
|                           |   | **Three  Months Ended  September 30,** |      | **Nine  Months Ended  September 30,** |   |
|--------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
|                           |   | **2003**                               |      | **2002**                              |   | **2003** |   | **2002** |   |
| Non-interest  income:          |   |                                   |      |                                  |   |   |   |   |   |
| Fees  and service charges      |   | $                                      | 655,669   |                                  | $      | 592,232 |   | $ | 1,938,321 |   | $ | 1,474,447 |   |
| Gains  on sales of loans       |   | 284,833                                |      | 263,242                               |   | 1,411,630 |   | 748,725 |   |
| Gains  on sales of investments |   | 290,417                                |      | 1,500                                 |   | 316,099 |   | 94,918 |   |
| Other                          |   | 66,714                                 |      | 60,129                                |   | 217,867 |   | 191,162 |   |
| Total  non-interest income     |   | $                                      | 1,297,633 |                                  | $      | 917,103 |   | $ | 3,883,917 |   | $ | 2,509,252 |   |

 

*Non-interestExpense.*  Non-interestexpense decreased $96,000, or 4.2%, to $2.2 million for the three months endedSeptember 30, 2003, compared to the same period in 2002.  The decrease in non-interest expense wasprimarily related to a decrease of $72,000 in compensation and benefits expenseand a $27,000 decrease in data processing expense for the three months endedSeptember 30, 2003, compared to the three months ended September 30, 2002.  These decreases were partially offset by a$31,000 increase in amortization expense for the third quarter of 2003 comparedto the third quarter of 2002.  Thedecrease in compensation and benefits expense was primarily related to reducedcosts associated with our employee stock ownership plan.  Data processing expense was higher duringthe third quarter of 2002 due to costs related to the conversion to a new dataprocessing system.  The increase inamortization expense resulted from accelerated prepayments in our mortgageservicing portfolio.

 

Non-interest expenseincreased $124,000, or 1.9%, to $6.8 million for the nine months endedSeptember 30, 2003, as compared to the same period in 2002.  The increase in non-interest expense wasprimarily related to an increase of $64,000 in occupancy and equipment expense,a $56,000 increase in professional fees and an increase of $81,000 inamortization expense for the nine months

 

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ended September 30, 2003,compared to the nine months ended September 30, 2002.  The increase in occupancy and equipment expense was primarilyrelated to the depreciation of our enhanced computer system while amortizationexpense increased as prepayments in our mortgage servicing portfolio haveaccelerated.  The increase inprofessional fees included legal fees of approximately $25,000 incurred relatedto securing our “Landmark” trade name.

 
|                              |   | **Three Months Ended  September 30,** |      | **Nine Months Ended  September 30,** |   |
|-----------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                              |   | **2003**                              |      | **2002**                             |   | **2003** |   | **2002** |   |
| Non-interest expense:             |   |                                  |      |                                 |   |   |   |   |   |
| Compensation and benefits         |   | $                                     | 1,142,368 |                                 | $      | 1,213,977 |   | $ | 3,565,309 |   | $ | 3,633,481 |   |
| Occupancy and equipment           |   | 306,637                               |      | 298,954                              |   | 931,561 |   | 867,452 |   |
| Amortization of intangible assets |   | 122,570                               |      | 91,182                               |   | 345,680 |   | 264,442 |   |
| Professional fees                 |   | 56,565                                |      | 58,145                               |   | 244,848 |   | 188,483 |   |
| Data processing                   |   | 73,909                                |      | 100,719                              |   | 237,157 |   | 256,155 |   |
| Other                             |   | 488,965                               |      | 523,581                              |   | 1,509,649 |   | 1,500,167 |   |
| Total non-interest expense        |   | $                                     | 2,191,014 |                                 | $      | 2,286,558 |   | $ | 6,834,204 |   | $ | 6,710,180 |   |

 

*IncomeTax Expense*.  Incometax expense for the three months ended September 30, 2003, decreased $24,000,or 3.8%, from $621,000 for the three months ended September 30, 2002.  The effective tax rate for the third quarterof 2003 was 32.7% compared to 34.0% for the third quarter of 2002.  The reduction in the effective tax rate forthe third quarter of 2003 as compared to the third quarter of 2002 resultedprimarily from the revised projections related to investment tax credits.

 

Income tax expense forthe nine months ended September 30, 2003, increased $101,000, or 5.8%, from$1.7 million for the nine months ended September 30, 2002.  The increase in income tax expense for thenine months ended September 30, 2003, resulted primarily from an increase intaxable income.  The effective tax ratefor the nine months ended September 30, 2003, was 32.6% compared to 34.0% forthe same period of 2002.  The reductionin the effective tax rate for the first nine months of 2003 as compared to thefirst nine months of 2002 resulted from an increased level of non-taxablemunicipal investments and from revised projections related to investment taxcredits.

 

*AssetQuality and Distribution.* Total assets declined to $333.6 million at September 30, 2003, comparedto $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, economicconditions, competition, and the restructuring of the financial servicesindustry.

 

Net loans, excludingloans held for sale, decreased $15.6 million during the nine months endedSeptember 30, 2003.  The decline wasprimarily the result of refinancings and paydowns in our residential mortgageportfolio.  Our loan portfoliocomposition continues to diversify as a result of pay downs and our plannedexpansion of commercial lending activities. This is evidenced by our one-to-four family residential real estateloans comprising 44.7% of total loans as of December 31, 2002, and 35.6% oftotal loans as of September 30, 2003.

 

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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.

 

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

 

We believe that thequality of the loan portfolio continues to be strong as evidenced by the smallnumber and amount of loans past due one month or more.  As of September 30, 2003, loans with abalance of $1.1 million were on non-accrual status, or 0.50 % of total loans,compared to a balance of $925,000 loans on non-accrual status, or 0.40% oftotal loans, as of December 31, 2002. In addition, the ratio of non-performing assets as a percentage of totalassets remained relatively flat at 0.40% as of September 30, 2003, compared to0.41% as of December 31, 2002.

 

Residential home loanscomprised 45.0% of the $1.1 million non-accrual balance at September 30,2003.  We have historically incurredminimal losses on mortgage loans based upon collateral values.  We experienced some isolated asset qualitydeterioration relating to the commercial and consumer loan portfolios duringthe second quarter of 2003 as a result of the weak economy.  We feel that these instances have beenappropriately addressed as either charges against the allowance for loan lossesor through the increased provisions to the reserve during the past nine months.

 

A slowdown in economic activity beginning in 2001severely impacted several major industries as well as the economy as a whole.  While we are pleased that there appears tobe numerous indications of emerging strength in the economy, we still have aconcern for the outlook of the economy during the remainder of 2003.  The strengthening may not be sustainable andconsumer confidence may be slow to respond to the positive effects, if any, onthe economy.  These events couldadversely affect cash flows for both commercial and individual borrowers, as aresult of which, we could experience increases in problem assets, delinquenciesand losses on loans.  Many financialinstitutions have experienced an increase in non-performing assets during therecent difficult economic period, as even well-established business borrowersdeveloped cash flow, profitability and other business-related problems.  We believe that the allowance for losses onloans at September 30, 2003, was adequate. While we believe that we use the best information available to determinethe allowance for losses on loans, unforeseen market conditions could result inadjustment to the allowance for losses on loans.  In addition, net earnings could be significantly affected ifcircumstances differ substantially from the assumptions used in establishingthe allowance for losses on loans.

 

*LiabilityDistribution.*  Totaldeposits decreased $7.1 million to $257.2 million at September 30, 2003, from$264.3 million at December 31, 2002. Borrowings increased $2.1 million to $28.3 million at September 30,2003, from $26.2 million at December 31, 2002.

 

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Non-interest bearing demand accounts at September 30,2003, were $20.8 million, or 8.1% of deposits, compared to $23.4 million, or8.9% of deposits, at December 31, 2002. Certificates of deposit decreased to $140.4 million at September 30,2003, from $147.4 million at December 31, 2002.  Money market and NOW demand accounts increased to $81.2 millionat September 30, 2003, from $78.4 million at December 31, 2002, and were 31.6%of total deposits.  Savings accountsremained flat at $14.8 million at September 30, 2003, compared to $15.0 millionat December 31, 2002.  The reduction ofcertificates of deposit was reflective of our excess liquidity position in thatwe have not bid aggressively on public deposits during the past nine months.

 

Certificates of deposit at September 30, 2003, whichwere scheduled to mature in one year or less, totaled $81.6 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 ofSeptember 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                 |   | $          | 146,069    |                  | $      | 107,857                 |   | $                       | 38,212     |                      | $      | — |   | $ | — |   |
| FHLB  advances                    |   | 25,134,681 |       | 2,068,385             |   | 12,000,000              |   | —                  |       | 11,066,296                |   |
| Repurchase  agreements            |   | 250,000    |       | 250,000               |   | —                  |   | —                  |       | —                    |   |
|                              |   |       |       |                  |   |                    |   |                    |       |                      |   |
| Total  contractual obligations    |   | $          | 25,530,750 |                  | $      | 2,426,242               |   | $                       | 12,038,212 |                      | $      | — |   | $ | 11,066,296 |   |

 

*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$109.4 million at September 30, 2003, and $100.7 million at December 31,2002.  During periods in which we arenot able to originate a sufficient amount of loans and/or periods of highprincipal prepayments, we increase our liquid assets by investing in short-termU. 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 September 30, 2003, we had outstandingFederal Home Loan Bank advances of $25.1 million and had outstanding borrowingsof $2.9 million on our line of credit with the Federal Home Loan Bank.  At September 30, 2003, our total borrowingscapacity with the Federal Home Loan Bank was $59.3 million.

 

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As a provider of financial services, we routinelyissue financial guarantees in the form of financial and performance standby lettersof credit.  Standby letters of creditare contingent commitments issued by us generally to guarantee the payment orperformance obligation of a customer to a third party.  While these standby letters of creditrepresent a potential outlay by us, a significant amount of the commitments mayexpire without being drawn upon.  Wehave recourse against the customer for any amount the customer is required topay to a third party under a standby letter of credit.  The letters of credit are subject to thesame credit policies, underwriting standards and approval process as loans madeby us.  Most of the standby letters ofcredit are secured, and in the event of nonperformance by the customers, wehave the right to the underlying collateral, which could include commercialreal estate, physical plant and property, inventory, receivables, cash andmarketable securities.  The contractamount of these standby letters of credit, which represents the maximumpotential future payments guaranteed by us, was $2.0 million at September 30,2003.

 

At September 30, 2003, we had outstanding loancommitments, excluding standby letters of credit, of $27.7 million.  We anticipate that sufficient funds will beavailable to meet current loan commitments. These commitments consist of letters of credit, unfunded lines of creditand 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 be applied on aconsolidated (rather than a bank-only) basis in the case of a bank holdingcompany with more than $150 million in total consolidated assets.

 

At September 30, 2003, we continued to maintain asound leverage ratio of 11.9% and a total risk based capital ratio of20.1%.  As shown by the following table,our capital exceeded the minimum capital requirements at September 30, 2003 (dollarsin thousands):

 
|                      |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|---------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                  |   | $                  | 39,126 |                | 11.9   | %                     | 4.0    | %                    | $      | 13,110 |   |
| Tier  1 Capital           |   | $                  | 39,126 |                | 18.8   | %                     | 4.0    | %                    | $      | 8,307 |   |
| Total  Risk Based Capital |   | $                  | 41,646 |                | 20.1   | %                     | 8.0    | %                    | $      | 16,614 |   |

 

At September 30, 2003, our subsidiary bank continuedto maintain a sound leverage ratio of 11.0% and a total risk based capitalratio of 18.5%.  As shown by thefollowing table, our bank’s capital exceeded the minimum capital requirementsat September 30, 2003 (dollars in thousands):

 
|                      |   | **Actual  Amount** |   | **Actual  Percent** |   | **Required  Percent** |   | **Required  Amount** |   |
|---------------------------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|----------------------|--------|
| Leverage                  |   | $                  | 35,761 |                | 11.0   | %                     | 4.0    | %                    | $      | 13,010 |   |
| Tier  1 Capital           |   | $                  | 35,761 |                | 17.2   | %                     | 4.0    | %                    | $      | 8,296 |   |
| Total  Risk Based Capital |   | $                  | 38,281 |                | 18.5   | %                     | 8.0    | %                    | $      | 16,592 |   |

 

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Banks and bank holding companies are generallyexpected to operate at or above the minimum capital requirements.  The above ratios are well in excess ofregulatory minimums and should allow us to operate without capital adequacyconcerns.  The Federal Deposit InsuranceCorporation Improvement Act of 1991 establishes a bank rating system based onthe capital levels of banks.  As ofSeptember 30, 2003, we were rated “well capitalized”, which is the highest ratingavailable under this capital-based rating system.

 

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**LANDMARK BANCORP, INC. AND SUSIDIARY**

**QUANTITATIVE AND QUALITATIVEDISCLOSURESABOUT MARKET RISK**

 

*Quantitativeand Qualitative Disclosures About Market Risk*.  Our assets and liabilities are principallyfinancial in nature and the resulting net interest income thereon is subject tochanges in market interest rates and the mix of various assets and liabilities.  Interest rates in the financial marketsaffect our decision on pricing our assets and liabilities which impacts netinterest income, a significant cash flow source for us.  As a result, a substantial portion of ourrisk management activities relates to managing interest rate risk.

 

Our Asset/Liability Management Committee monitors theinterest rate sensitivity of our balance sheet using earnings simulation modelsand interest sensitivity gap analysis. We have set policy limits of interest rate risk to be assumed in thenormal course of business and monitor such limits through our simulationprocess.

 

We have been successful in meeting the interest ratesensitivity objectives set forth in our policy.  Simulation models are prepared to determine the impact on netinterest income for the coming twelve months, including one using rates atAugust 31, 2003, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shiftin interest rates of 100 and 200 basis points rising and 100 basis pointsfalling with an impact to our net interest income on a one year horizon asfollows:

 
| **Scenario**             |   | **$ Change  in Net Interest Income** |    | **% of Net  Interest Income** |   |
|--------------------------|--------|--------------------------------------|---------|-------------------------------|--------|
| 100  basis point rising  |   | $                                    | 877,000 |                          | 7.5    | % |
| 200  basis point rising  |   | 1,675,000                            |    | 14.4                          | %      |
| 100  basis point falling |   | (974,000                             | )       | (8.4                          | )%     |
|                          |        |                                      |         |                               |        |  |

 

We believe that nosignificant changes in our interest rate sensitivity position have occurredsince August 31, 2003.  We also believewe are appropriately positioned for future interest rate movements, although wemay experience some fluctuations in net interest income due to short-termtiming differences between the repricing of assets and liabilities.

 

*Safe Harbor Statement Under thePrivate Securities Litigation Reform Act of 1995 - Forward-Looking Statements.*** **This document contains, and futureoral and written statements of the Company and its management may contain,forward-looking statements, within the meaning of such term in the PrivateSecurities Litigation Reform Act of 1995, with respect to the financialcondition, results of operations, plans, objectives, future performance andbusiness 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 predict results or the actual effect offuture plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on ouroperations and future prospects include, but are not limited to, the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

These risks 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**

**CONTROLSAND 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 September 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 wereeffective.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls.

 

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**PARTII**

 

ITEM 1.                        LEGALPROCEEDINGS.

 

There are no materialpending legal proceedings to which the Company or its subsidiaries is a partyother than ordinary routine litigation incidental to their respectivebusinesses.

 

ITEM 2.                        CHANGESIN SECURITIES.

 

None

 

ITEM 3.                        DEFAULTSUPON SENIOR SECURITIES.

 

None

 

ITEM 4.                        SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS.

 

None

 

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 |

 

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B.                                     Reportson Form 8-K

 

A report on Form 8-K wasfiled on October 31, 2003, to report pursuant to Item 12 that the Company hadissued a press release announcing earnings for the quarter and nine monthsended September 30, 2003, and the declaration of a cash dividend to stockholders.

 

A report on Form 8-K wasfiled on July 31, 2003, to report pursuant to Item 12 that the Company hadissued a press release announcing earnings for the quarter and six months endedJune 30, 2003, and the declaration 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:  November 12, 2003 |   |   | /s/   Patrick  L. Alexander |   |
|                          |   |   | Patrick L. Alexander                       |
|                          |   |   | President and Chief  Executive Officer     |
|                          |   |   |                                       |
|                          |   |   |                                       |
| Date:  November 12, 2003 |   |   | /s/   Mark  A. Herpich      |   |
|                          |   |   | Mark A. Herpich                            |
|                          |   |   | Vice President, Secretary,  Treasurer      |
|                          |   |   |  and Chief Financial Officer          |
|                               |        |        |                                            |  |  |

 

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