UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x
              UARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2010ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      transition period from ________ to ________





Commission
File Number 0-33203





LANDMARK BANCORP,
INC.


(Exact
name of Registrant as specified in its charter)





Delaware
              
              43-1930755(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification
Number)





701 Poyntz Avenue,
Manhattan,
Kansas       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) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes x  No o





Indicate by check mark whether the
registrant has submitted electronically and posted on its Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).  Yes o  No o





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


Large
accelerated filer o      Accelerated
filer o      Non-accelerated
filer o      Smaller
reporting company  x


(Do not
check if a smaller reporting company)





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes o  No x





Indicate the number of shares
outstanding of each of the Registrant's classes of common stock as of the latest
practicable date: as of August 11, 2010, the Registrant had outstanding
2,504,265 shares of its common stock, $.01 par value per share.





LANDMARK
BANCORP, INC.


Form
10-Q Quarterly Report





Table
of Contents





Page NumberPART
      IItem
      1.
                        Financial
      Statements and Related Notes
                        2 -
      20Item
      2.
                        Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                        21
      – 31Item
      3.
                        Quantitative
      and Qualitative Disclosures aboutMarket
      Risk
                        31
      - 32Item
      4.
                        Controls
      and Procedures
                        33PART
      IIItem
      1.
                        Legal
      Proceedings
                        34Item
      1A.
                        Risk
      Factors
                        34Item
      2.
                        Unregistered
      Sales of Equity Securities andUse
      of Proceeds
                        34Item
      3.
                        Defaults
      Upon Senior Securities
                        34Item
      4.
                        Removed
      and Reserved
                        34Item
      5.
                        Other
      Information
                        34Item
      6.
                        Exhibits
                        34Form
      10-Q Signature Page
                        35


1


ITEM
1.  FINANCIAL STATEMENTS AND RELATED NOTES





LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





(Dollars
      in thousands)
                          
                          June
      30,
                          
                          
                          December 31,2010
                          
                          
                          2009AssetsCash
      and cash equivalents
                          
                          $
                          9,655
                          
                          
                          $
                          12,379Investment
      securities:Available-for-sale,
      at fair value
                          
                          
                          157,420
                          
                          
                          
                          161,628Other
      securities
                          
                          
                          8,078
                          
                          
                          
                          7,991Loans,
      net
                          
                          
                          334,912
                          
                          
                          
                          342,738Loans
      held for sale
                          
                          
                          9,544
                          
                          
                          
                          4,703Premises
      and equipment, net
                          
                          
                          15,454
                          
                          
                          
                          15,877Goodwill
                          
                          
                          12,894
                          
                          
                          
                          12,894Other
      intangible assets, net
                          
                          
                          2,236
                          
                          
                          
                          2,481Bank
      owned life insurance
                          
                          
                          12,794
                          
                          
                          
                          12,548Real
      estate owned
                          
                          
                          3,370
                          
                          
                          
                          1,129Accrued
      interest and other assets
                          
                          
                          9,833
                          
                          
                          
                          9,799Total
      assets
                          
                          $
                          576,190
                          
                          
                          $
                          584,167Liabilities
      and Stockholders’ EquityLiabilities:Deposits:Non-interest-bearing
      demand
                          
                          $
                          53,333
                          
                          
                          $
                          54,799Money
      market and NOW
                          
                          
                          157,549
                          
                          
                          
                          162,449Savings
                          
                          
                          31,981
                          
                          
                          
                          29,010Time,
      $100,000 and greater
                          
                          
                          53,894
                          
                          
                          
                          48,422Time,
      other
                          
                          
                          135,993
                          
                          
                          
                          143,915Total
      deposits
                          
                          
                          432,750
                          
                          
                          
                          438,595Federal
      Home Loan Bank borrowings
                          
                          
                          57,290
                          
                          
                          
                          56,004Other
      borrowings
                          
                          
                          26,499
                          
                          
                          
                          26,179Accrued
      interest, taxes, and other liabilities
                          
                          
                          5,945
                          
                          
                          
                          9,494Total
      liabilities
                          
                          
                          522,484
                          
                          
                          
                          530,272Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par, 200,000 shares authorized; none issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $0.01 par, 7,500,000 shares authorized; 2,504,265 and 2,489,779
      shares issued at June 30, 2010 and December 31, 2009,
      respectively
                          
                          
                          25
                          
                          
                          
                          25Additional
      paid-in capital
                          
                          
                          25,082
                          
                          
                          
                          24,844Retained
      earnings
                          
                          
                          26,668
                          
                          
                          
                          27,523Accumulated
      other comprehensive income
                          
                          
                          1,931
                          
                          
                          
                          1,503Total
      stockholders’ equity
                          
                          
                          53,706
                          
                          
                          
                          53,895Total
      liabilities and stockholders’ equity
                          
                          $
                          576,190
                          
                          
                          $
                          584,167





See
accompanying notes to consolidated financial statements.


2


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





(Dollars in thousands, except per share amounts)
                          
                          Three months ended June 30,
                          
                          
                          Six months ended June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Interest
      income:Loans:Taxable
                          
                          $
                          4,842
                          
                          
                          $
                          5,170
                          
                          
                          $
                          9,634
                          
                          
                          $
                          10,303Tax-exempt
                          
                          
                          68
                          
                          
                          
                          64
                          
                          
                          
                          146
                          
                          
                          
                          113Investment
      securities:Taxable
                          
                          
                          687
                          
                          
                          
                          1,069
                          
                          
                          
                          1,481
                          
                          
                          
                          2,185Tax-exempt
                          
                          
                          621
                          
                          
                          
                          621
                          
                          
                          
                          1,248
                          
                          
                          
                          1,230Other
                          
                          
                          1
                          
                          
                          
                          4
                          
                          
                          
                          2
                          
                          
                          
                          7Total
      interest income
                          
                          
                          6,219
                          
                          
                          
                          6,928
                          
                          
                          
                          12,511
                          
                          
                          
                          13,838Interest
      expense:Deposits
                          
                          
                          968
                          
                          
                          
                          1,558
                          
                          
                          
                          2,007
                          
                          
                          
                          3,197Borrowings
                          
                          
                          679
                          
                          
                          
                          811
                          
                          
                          
                          1,364
                          
                          
                          
                          1,690Total
      interest expense
                          
                          
                          1,647
                          
                          
                          
                          2,369
                          
                          
                          
                          3,371
                          
                          
                          
                          4,887Net
      interest income
                          
                          
                          4,572
                          
                          
                          
                          4,559
                          
                          
                          
                          9,140
                          
                          
                          
                          8,951Provision
      for loan losses
                          
                          
                          4,000
                          
                          
                          
                          800
                          
                          
                          
                          4,700
                          
                          
                          
                          1,100Net
      interest income after provision for loan losses
                          
                          
                          572
                          
                          
                          
                          3,759
                          
                          
                          
                          4,440
                          
                          
                          
                          7,851Non-interest
      income:Fees
      and service charges
                          
                          
                          1,135
                          
                          
                          
                          1,142
                          
                          
                          
                          2,140
                          
                          
                          
                          2,098Gains
      on sales of loans, net
                          
                          
                          893
                          
                          
                          
                          1,199
                          
                          
                          
                          1,404
                          
                          
                          
                          1,907Bank
      owned life insurance
                          
                          
                          124
                          
                          
                          
                          124
                          
                          
                          
                          248
                          
                          
                          
                          247Other
                          
                          
                          124
                          
                          
                          
                          174
                          
                          
                          
                          249
                          
                          
                          
                          287Total
      non-interest income
                          
                          
                          2,276
                          
                          
                          
                          2,639
                          
                          
                          
                          4,041
                          
                          
                          
                          4,539Investment
      securities gains (losses), net:Impairment
      losses on investment securities
                          
                          
                          (332
                          )
                          
                          
                          (60
                          )
                          
                          
                          (332
                          )
                          
                          
                          (910
                          )Less
      noncredit-related losses
                          
                          
                          192
                          
                          
                          
                          (189
                          )
                          
                          
                          192
                          
                          
                          
                          334Net
      impairment losses
                          
                          
                          (140
                          )
                          
                          
                          (249
                          )
                          
                          
                          (140
                          )
                          
                          
                          (576
                          )Gains
      on sales of investment securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          563
                          
                          
                          
                          -Investment
      securities gains (losses), net
                          
                          
                          (140
                          )
                          
                          
                          (249
                          )
                          
                          
                          423
                          
                          
                          
                          (576
                          )Non-interest
      expense:Compensation
      and benefits
                          
                          
                          2,315
                          
                          
                          
                          2,203
                          
                          
                          
                          4,639
                          
                          
                          
                          4,379Occupancy
      and equipment
                          
                          
                          673
                          
                          
                          
                          663
                          
                          
                          
                          1,392
                          
                          
                          
                          1,314Federal
      deposit insurance premiums
                          
                          
                          183
                          
                          
                          
                          447
                          
                          
                          
                          362
                          
                          
                          
                          480Data
      processing
                          
                          
                          224
                          
                          
                          
                          204
                          
                          
                          
                          432
                          
                          
                          
                          394Amortization
      of intangibles
                          
                          
                          182
                          
                          
                          
                          191
                          
                          
                          
                          361
                          
                          
                          
                          378Professional
      fees
                          
                          
                          186
                          
                          
                          
                          192
                          
                          
                          
                          320
                          
                          
                          
                          364Advertising
                          
                          
                          119
                          
                          
                          
                          119
                          
                          
                          
                          237
                          
                          
                          
                          240Other
                          
                          
                          890
                          
                          
                          
                          926
                          
                          
                          
                          1,837
                          
                          
                          
                          1,851Total
      non-interest expense
                          
                          
                          4,772
                          
                          
                          
                          4,945
                          
                          
                          
                          9,580
                          
                          
                          
                          9,400Earnings
      (loss) before income taxes
                          
                          
                          (2,064
                          )
                          
                          
                          1,204
                          
                          
                          
                          (676
                          )
                          
                          
                          2,414Income
      tax expense (benefit)
                          
                          
                          (1,017
                          )
                          
                          
                          192
                          
                          
                          
                          (772
                          )
                          
                          
                          393Net
      earnings (loss)
                          
                          $
                          (1,047
                          )
                          
                          $
                          1,012
                          
                          
                          $
                          96
                          
                          
                          $
                          2,021Earnings
      (loss) per share:Basic
                          
                          $
                          (0.42
                          )
                          
                          $
                          0.41
                          
                          
                          $
                          0.04
                          
                          
                          $
                          0.81Diluted
                          
                          $
                          (0.42
                          )
                          
                          $
                          0.41
                          
                          
                          $
                          0.04
                          
                          
                          $
                          0.81Dividends
      per share
                          
                          $
                          0.19
                          
                          
                          $
                          0.18
                          
                          
                          $
                          0.38
                          
                          
                          $
                          0.36





See
accompanying notes to consolidated financial statements.


3


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





(Dollars in thousands)
                
                Six months ended June 30,2010
                
                
                2009Net
      cash used in operating activities
                
                $
                (3,675
                )
                
                $
                (712
                )Cash
      flows from investing activities:Net
      decrease in loans
                
                
                395
                
                
                
                12,247Maturities
      and prepayments of investment securities
                
                
                18,169
                
                
                
                29,101Purchases
      of investment securities
                
                
                (23,372
                )
                
                
                (37,707
                )Proceeds
      from sale of investment securities
                
                
                10,097
                
                
                
                1,210Proceeds
      from sales of foreclosed assets
                
                
                645
                
                
                
                1,095Purchases
      of premises and equipment, net
                
                
                (63
                )
                
                
                (552
                )Net
      cash paid in branch acquisition
                
                
                -
                
                
                
                (130
                )Net
      cash provided by investing activities
                
                
                5,871
                
                
                
                5,264Cash
      flows from financing activities:Net
      (decrease) increase in deposits
                
                
                (5,845
                )
                
                
                15,636Federal
      Home Loan Bank advance repayments
                
                
                (5,018
                )
                
                
                (10,018
                )Change
      in Federal Home Loan Bank line of credit, net
                
                
                6,400
                
                
                
                (6,000
                )Other
      borrowings, net
                
                
                320
                
                
                
                1,808Proceeds
      from issuance of common stock under stock option plans
                
                
                143
                
                
                
                -Excess
      tax benefit related to stock option plans
                
                
                31
                
                
                
                -Payment
      of dividends
                
                
                (951
                )
                
                
                (901
                )Purchase
      of treasury stock
                
                
                -
                
                
                
                (12
                )Net
      cash (used in) provided by financing activities
                
                
                (4,920
                )
                
                
                513Net
      (decrease) increase in cash and cash equivalents
                
                
                (2,724
                )
                
                
                5,065Cash
      and cash equivalents at beginning of period
                
                
                12,379
                
                
                
                13,788Cash
      and cash equivalents at end of period
                
                $
                9,655
                
                
                $
                18,853Supplemental
      disclosure of cash flow information:Cash
      paid during the period for income taxes
                
                $
                950
                
                
                $
                312Cash
      paid during the period for interest
                
                
                3,512
                
                
                
                4,832Supplemental
      schedule of noncash investing and financing activities:Transfer
      of loans to real estate owned
                
                $
                2,860
                
                
                $
                1,140Branch
      acquisition:Fair
      value of liabilities assumed
                
                $
                -
                
                
                $
                6,650Fair
      value of assets acquired
                
                $
                -
                
                
                $
                6,520





See
accompanying notes to consolidated financial statements.


4


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME


(Unaudited)





(Dollars in thousands, except per share amounts)
                  
                  Common
                    stock
                  
                  
                  Additional
                    paid-in
                    capital
                  
                  
                  Retained
                    earnings
                  
                  
                  Treasury
                    stock
                  
                  
                  Accumulated other
                    comprehensive
                    income
                  
                  
                  TotalBalance
      at December 31, 2008
                  
                  $
                  24
                  
                  
                  $
                  23,873
                  
                  
                  $
                  27,819
                  
                  
                  $
                  (935
                  )
                  
                  $
                  625
                  
                  
                  $
                  51,406Comprehensive
      income:Net
      earnings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,021
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,021Change
      in fair value of investment securities available-for-sale, net of
      tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (43
                  )
                  
                  
                  (43
                  )Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,978Dividends
      paid ($0.36 per share)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (901
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (901
                  )Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  78
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  78Purchase
      of 800 treasury shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12
                  )
                  
                  
                  -
                  
                  
                  
                  (12
                  )Balance
      at June 30, 2009
                  
                  $
                  24
                  
                  
                  $
                  23,951
                  
                  
                  $
                  28,939
                  
                  
                  $
                  (947
                  )
                  
                  $
                  582
                  
                  
                  $
                  52,549Balance
      at December 31, 2009
                  
                  $
                  25
                  
                  
                  $
                  24,844
                  
                  
                  $
                  27,523
                  
                  
                  $
                  -
                  
                  
                  $
                  1,503
                  
                  
                  $
                  53,895Comprehensive
      income:Net
      earnings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  96
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  96Change
      in fair value of investment securities available-for-sale, net of
      tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  428
                  
                  
                  
                  428Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  524Dividends
      paid ($0.38 per share)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (951
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (951
                  )Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  64Exercise
      of stock options, 14,486 shares, including excess tax benefit of
      $31
                  
                  
                  -
                  
                  
                  
                  174
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  174Balance
      at June 30, 2010
                  
                  $
                  25
                  
                  
                  $
                  25,082
                  
                  
                  $
                  26,668
                  
                  
                  $
                  -
                  
                  
                  $
                  1,931
                  
                  
                  $
                  53,706





See
accompanying notes to consolidated financial statements.


5


LANDMARK
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.         
  Interim Financial Statements





The
condensed consolidated financial statements of Landmark Bancorp, Inc. (the
“Company”) and subsidiary have been prepared in accordance with the instructions
to Form 10-Q.  To the extent that information and footnotes required
by U.S. generally accepted accounting principles (“GAAP”) for complete financial
statements are contained in or consistent with the consolidated audited
financial statements incorporated by reference in the Company’s Form 10-K for
the year ended December 31, 2009, such information and footnotes have not been
duplicated herein.  In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation of financial statements have been reflected herein.  The
December 31, 2009 consolidated balance sheet has been derived from the audited
consolidated balance sheet as of that date.  The results of the
interim period ended June 30, 2010 are not necessarily indicative of the results
expected for the year ending December 31, 2010.  The Company evaluates
subsequent events and transactions that occur after the balance sheet date up to
the date that financial statements are filed for potential recognition or
disclosure.





2.          
Goodwill and Other Intangible Assets





The Company tests goodwill for
impairment annually or more frequently if circumstances warrant.  The
Company’s annual impairment test as of December 31, 2009 concluded that its
goodwill was not impaired, however the Company can make no assurances that
future impairment tests will not result in goodwill impairments.  The
Company concluded there were no triggering events during the first six months of
2010 that required an interim goodwill impairment test.





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





Three months ended June 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  5,445
                  
                  
                  $
                  (3,896
                  )
                  
                  $
                  5,396
                  
                  
                  $
                  (3,314
                  )Additions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  -Amortization
                  
                  
                  -
                  
                  
                  
                  (129
                  )
                  
                  
                  -
                  
                  
                  
                  (153
                  )Balance
      at end of period
                  
                  $
                  5,445
                  
                  
                  $
                  (4,025
                  )
                  
                  $
                  5,482
                  
                  
                  $
                  (3,467
                  )





Six months ended June 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  5,482
                  
                  
                  $
                  (3,767
                  )
                  
                  $
                  5,396
                  
                  
                  $
                  (3,159
                  )Additions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  -Adjustments
      to prior estimates
                  
                  
                  (37
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
                  
                  
                  -
                  
                  
                  
                  (258
                  )
                  
                  
                  -
                  
                  
                  
                  (308
                  )Balance
      at end of period
                  
                  $
                  5,445
                  
                  
                  $
                  (4,025
                  )
                  
                  $
                  5,482
                  
                  
                  $
                  (3,467
                  )


6


Mortgage
servicing rights are related to loans serviced by the Company for unrelated
third parties.  The outstanding principal balances of such loans were
$144.6 million and $138.4 million at June 30, 2010 and December 31, 2009,
respectively.  Gross service fee income related to such loans was
$89,000 and $63,000 for the quarters ended June 30, 2010 and 2009, respectively,
which is included in fees and service charges in the consolidated statements of
operations.  Gross service fee income for the six months ended June
30, 2010 and 2009 was $176,000 and $114,000, respectively.  The
following is an analysis of changes in the mortgage servicing
rights:





Three months ended June 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Cost
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  1,496
                  
                  
                  $
                  (717
                  )
                  
                  $
                  893
                  
                  
                  $
                  (600
                  )Additions
                  
                  
                  90
                  
                  
                  
                  -
                  
                  
                  
                  339
                  
                  
                  
                  -Prepayments/maturities
                  
                  
                  (14
                  )
                  
                  
                  14
                  
                  
                  
                  (21
                  )
                  
                  
                  21Amortization
                  
                  
                  -
                  
                  
                  
                  (53
                  )
                  
                  
                  -
                  
                  
                  
                  (38
                  )Balance
      at end of period
                  
                  $
                  1,572
                  
                  
                  $
                  (756
                  )
                  
                  $
                  1,211
                  
                  
                  $
                  (617
                  )





Six months ended June 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Cost
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  1,447
                  
                  
                  $
                  (681
                  )
                  
                  $
                  772
                  
                  
                  $
                  (602
                  )Additions
                  
                  
                  153
                  
                  
                  
                  -
                  
                  
                  
                  494
                  
                  
                  
                  -Prepayments/maturities
                  
                  
                  (28
                  )
                  
                  
                  28
                  
                  
                  
                  (55
                  )
                  
                  
                  55Amortization
                  
                  
                  -
                  
                  
                  
                  (103
                  )
                  
                  
                  -
                  
                  
                  
                  (70
                  )Balance
      at end of period
                  
                  $
                  1,572
                  
                  
                  $
                  (756
                  )
                  
                  $
                  1,211
                  
                  
                  $
                  (617
                  )





Aggregate
core deposit and mortgage servicing rights amortization expense for the quarters
ended June 30, 2010 and 2009, was $182,000 and $191,000,
respectively.  Aggregate core deposit and mortgage servicing rights
amortization expense for the six months ended June 30, 2010 and 2009, was
$361,000 and $378,000, respectively.  The following sets forth
estimated amortization expense for all intangible assets for the remainder of
2010 and in successive years ending December 31:





Year
                  
                  Amount (in thousands)Remainder
      of 2010
                  
                  $
                  3472011
                  
                  
                  6102012
                  
                  
                  5142013
                  
                  
                  4302014
                  
                  
                  261Thereafter
                  
                  
                  74


7


3.           Investments





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





As of June 30, 2010Gross
                    
                    
                    GrossAmortized
                    
                    
                    unrealized
                    
                    
                    unrealized
                    
                    
                    Estimated(Dollars
      in thousands)
                    
                    cost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    fair valueU.
      S. federal agency obligations
                    
                    $
                    24,974
                    
                    
                    $
                    244
                    
                    
                    $
                    -
                    
                    
                    $
                    25,218Municipal
      obligations, tax exempt
                    
                    
                    64,693
                    
                    
                    
                    2,430
                    
                    
                    
                    (83
                    )
                    
                    
                    67,040Municipal
      obligations, taxable
                    
                    
                    1,365
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    1,373Mortgage-backed
      securities
                    
                    
                    48,949
                    
                    
                    
                    1,374
                    
                    
                    
                    -
                    
                    
                    
                    50,323Common
      stocks
                    
                    
                    764
                    
                    
                    
                    217
                    
                    
                    
                    (18
                    )
                    
                    
                    963Pooled
      trust preferred securities
                    
                    
                    1,382
                    
                    
                    
                    -
                    
                    
                    
                    (1,117
                    )
                    
                    
                    265Certificates
      of deposit
                    
                    
                    12,238
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,238Total
                    
                    $
                    154,365
                    
                    
                    $
                    4,273
                    
                    
                    $
                    (1,218
                    )
                    
                    $
                    157,420





As of December 31, 2009Gross
                  
                  
                  GrossAmortized
                  
                  
                  unrealized
                  
                  
                  unrealized
                  
                  
                  Estimated(Dollars in thousands)
                  
                  cost
                  
                  
                  gains
                  
                  
                  losses
                  
                  
                  fair valueU.
      S. federal agency obligations
                  
                  $
                  18,734
                  
                  
                  $
                  356
                  
                  
                  $
                  -
                  
                  
                  $
                  19,090Municipal
      obligations, tax exempt
                  
                  
                  67,149
                  
                  
                  
                  1,938
                  
                  
                  
                  (228
                  )
                  
                  
                  68,859Municipal
      obligations, taxable
                  
                  
                  1,366
                  
                  
                  
                  -
                  
                  
                  
                  (23
                  )
                  
                  
                  1,343Mortgage-backed
      securities
                  
                  
                  63,265
                  
                  
                  
                  1,532
                  
                  
                  
                  (102
                  )
                  
                  
                  64,695Common
      stocks
                  
                  
                  693
                  
                  
                  
                  191
                  
                  
                  
                  (19
                  )
                  
                  
                  865Pooled
      trust preferred securities
                  
                  
                  1,528
                  
                  
                  
                  -
                  
                  
                  
                  (1,267
                  )
                  
                  
                  261Certificates
      of deposit
                  
                  
                  6,515
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,515Total
                  
                  $
                  159,250
                  
                  
                  $
                  4,017
                  
                  
                  $
                  (1,639
                  )
                  
                  $
                  161,628





Included in the gross unrealized losses
at June 30, 2010, are noncredit-related losses of $1.1 million related to three
investments in pools of trust preferred securities with an original cost basis
of $2.5 million, which were determined to be other-than-temporarily impaired and
recorded in accumulated other comprehensive income.  The amortized
cost of the portfolio of pooled trust preferred securities, after recognition of
$140,000 of credit-related impairment losses during the first six months of
2010, was $1.4 million at June 30, 2010.  During 2009, $961,000 of
credit-related impairment losses were recognized on the portfolio of pooled
trust preferred securities.  The fair value of these three securities
totaled $265,000 at June 30, 2010 compared to $261,000 at December 31, 2009,
while the unrealized losses included in accumulated other comprehensive income
were $1.1 million at June 30, 2010 and $1.3 million at December 31,
2009.


8


The
summary of available-for-sale investment securities shows that some of the
securities had unrealized losses, or were temporarily impaired, as of June 30,
2010 and December 31, 2009.  This temporary impairment represents the
estimated amount of loss that would be realized if the securities were sold on
the valuation date.  Securities which were temporarily impaired are
shown below, along with the length of the impairment period.





As of June 30, 2010(Dollars in thousands)
                    
                    
                    
                    
                    Lessthan12months
                    
                    
                    12monthsorlonger
                    
                    
                    TotalNo. of
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealizedsecurities
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    lossesMunicipal
      obligations, tax exempt
                    
                    
                    7
                    
                    
                    $
                    1,136
                    
                    
                    $
                    (16
                    )
                    
                    $
                    1,123
                    
                    
                    $
                    (67
                    )
                    
                    $
                    2,259
                    
                    
                    $
                    (83
                    )Common
      stocks
                    
                    
                    3
                    
                    
                    
                    54
                    
                    
                    
                    (10
                    )
                    
                    
                    1
                    
                    
                    
                    (8
                    )
                    
                    
                    55
                    
                    
                    
                    (18
                    )Pooled
      trust preferred securities
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    265
                    
                    
                    
                    (1,117
                    )
                    
                    
                    265
                    
                    
                    
                    (1,117
                    )Total
                    
                    
                    13
                    
                    
                    $
                    1,190
                    
                    
                    $
                    (26
                    )
                    
                    $
                    1,389
                    
                    
                    $
                    (1,192
                    )
                    
                    $
                    2,579
                    
                    
                    $
                    (1,218
                    )





As of December 31, 2009(Dollars in thousands)
                    
                    
                    
                    
                    Lessthan12months
                    
                    
                    12monthsorlonger
                    
                    
                    TotalNo. of
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealizedsecurities
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    lossesMunicipal
      obligations, tax exempt
                    
                    
                    24
                    
                    
                    $
                    7,765
                    
                    
                    $
                    (167
                    )
                    
                    $
                    780
                    
                    
                    $
                    (61
                    )
                    
                    $
                    8,545
                    
                    
                    $
                    (228
                    )Municipal
      obligations, taxable
                    
                    
                    2
                    
                    
                    
                    1,233
                    
                    
                    
                    (23
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,233
                    
                    
                    
                    (23
                    )Mortgage-backed
      securities
                    
                    
                    6
                    
                    
                    
                    8,140
                    
                    
                    
                    (101
                    )
                    
                    
                    44
                    
                    
                    
                    (1
                    )
                    
                    
                    8,184
                    
                    
                    
                    (102
                    )Common
      stocks
                    
                    
                    4
                    
                    
                    
                    59
                    
                    
                    
                    (19
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    59
                    
                    
                    
                    (19
                    )Pooled
      trust preferred securities
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    261
                    
                    
                    
                    (1,267
                    )
                    
                    
                    261
                    
                    
                    
                    (1,267
                    )Total
                    
                    
                    39
                    
                    
                    $
                    17,197
                    
                    
                    $
                    (310
                    )
                    
                    $
                    1,085
                    
                    
                    $
                    (1,329
                    )
                    
                    $
                    18,282
                    
                    
                    $
                    (1,639
                    )





The
Company performs quarterly reviews of the investment portfolio to determine if
investment securities have any declines in fair value which might be considered
other-than-temporary.  The initial review begins with all securities
in an unrealized loss position.  The Company’s assessment of
other-than-temporary impairment is based on its reasonable judgment of the
specific facts and circumstances impacting each individual security at the time
such assessments are made.  The Company reviews and considers all
available information, including expected cash flows, the structure of the
security, the credit quality of the underlying assets and the current and
anticipated market conditions.  Any credit-related impairments on debt
securities are realized through a charge to operations.  If an equity
security is determined to be other-than-temporarily impaired, the entire
impairment is realized through a charge to operations.





As of June 30, 2010, the Company does
not intend to sell and it is more likely than not that the Company will not be
required to sell its municipal obligations in an unrealized loss position until
the recovery of its cost.  Due to the issuers’ continued satisfaction
of the securities’ obligations in accordance with their contractual terms and
the expectation that they will continue to do so, the evaluation of the
fundamentals of the issuers’ financial condition and other objective evidence,
the Company believes that the municipal obligations identified in the tables
above were temporarily impaired as of June 30, 2010 and December 31,
2009.





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





As of June 30, 2010, the Company owned
three pooled trust preferred securities with an original cost basis of $2.5
million, which represent investments in pools of collateralized debt obligations
issued by financial institutions and insurance companies.  The market
for these securities is considered to be inactive.   The Company
used discounted cash flow models to assess if the present value of the cash
flows expected to be collected was less than the amortized cost, which would
result in an other-than-temporary impairment associated with the credit of the
underlying collateral.  The assumptions used in preparing the
discounted cash flow models include the following: estimated discount rates,
estimated deferral and default rates on collateral, assumed recoveries, and
estimated cash flows including all information available through the date of
issuance of the financial statements.  The discounted cash flow
analysis included a review of all issuers within the collateral pool and
incorporated higher deferral and default rates, as compared to historical rates,
in the cash flow projections through maturity.


9


As of June 30, 2010, the analysis of
the Company’s three investments in pooled trust preferred securities indicated
that the unrealized losses on two of the three securities were not
credit-related.  However, the analysis indicated that a portion of the
unrealized loss was other-than-temporary on the third pooled trust preferred
security.  The increase in nonperforming collateral on a $500,000 par
pooled trust preferred investment resulted in a credit-related
other-than-temporary impairment of $140,000 during the quarter ended June 30,
2010, which increased the cumulative realized loss to
$247,000.  During 2009, the Company recorded a credit-related
other-than-temporary impairment of $107,000 on the same $500,000 par pooled
trust preferred investment.  The Company performed a discounted cash
flow analysis, using the factors noted above to determine the amount of the
other-than-temporary impairment that was applicable to either credit losses or
other factors.  As of June 30, 2010, the Company had recorded credit
losses on all three pooled trust preferred securities totaling $1.1 million
through charges to operations during 2009 and the first six months of
2010.





The following tables provide additional
information related to the Company’s portfolio of investments in pooled trust
preferred securities as of June 30, 2010:





(Dollars in thousands)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    CumulativeMoody's
                    
                    
                    Original
                    
                    
                    Cost
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    realizedInvestment
                    
                    Class
                    
                    
                    rating
                    
                    
                    par
                    
                    
                    basis
                    
                    
                    value
                    
                    
                    loss
                    
                    
                    lossPreTSL
      VIII
                    
                    
                    B
                    
                    
                    
                    C
                    
                    
                    $
                    1,000
                    
                    
                    $
                    381
                    
                    
                    $
                    55
                    
                    
                    $
                    (326
                    )
                    
                    $
                    (619
                    )PreTSL
      IX
                    
                    
                    B
                    
                    
                    
                    C
                    
                    
                    
                    1,000
                    
                    
                    
                    759
                    
                    
                    
                    160
                    
                    
                    
                    (599
                    )
                    
                    
                    (235
                    )PreTSL
      XVII
                    
                    
                    C
                    
                    
                    
                    C
                    
                    
                    
                    500
                    
                    
                    
                    242
                    
                    
                    
                    50
                    
                    
                    
                    (192
                    )
                    
                    
                    (247
                    )Total
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    2,500
                    
                    
                    $
                    1,382
                    
                    
                    $
                    265
                    
                    
                    $
                    (1,117
                    )
                    
                    $
                    (1,101
                    )





Non-performing collateral as %Number of
                    
                    
                    of current collateral (at quarter end)Investment
                    
                    issuers in pool
                    
                    
                    
                    Q4 2009
                    
                    
                    
                    Q1 2010
                    
                    
                    
                    Q2 2010PreTSL
      VIII
                    
                    
                    37
                    
                    
                    
                    43.7
                    %
                    
                    
                    43.7
                    %
                    
                    
                    43.7
                    %PreTSL
      IX
                    
                    
                    51
                    
                    
                    
                    28.1
                    %
                    
                    
                    29.2
                    %
                    
                    
                    29.2
                    %PreTSL
      XVII
                    
                    
                    58
                    
                    
                    
                    19.9
                    %
                    
                    
                    20.6
                    %
                    
                    
                    24.0
                    %





The
following table reconciles the changes in the Company’s credit losses recognized
in earnings:





Three months ending June 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  961
                  
                  
                  $
                  327Additional
      credit losses:Securities
      with no previous other-than-temporary impairment
                  
                  
                  -
                  
                  
                  
                  -Securities
      with previous other-than-temporary impairments
                  
                  
                  140
                  
                  
                  
                  249Ending
      balance
                  
                  $
                  1,101
                  
                  
                  $
                  576





SixmonthsendingJune30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  961
                  
                  
                  $
                  -Additional
      credit losses:Securities
      with no previous other-than-temporary impairment
                  
                  
                  -
                  
                  
                  
                  576Securities
      with previous other-than-temporary impairments
                  
                  
                  140
                  
                  
                  
                  -Ending
      balance
                  
                  $
                  1,101
                  
                  
                  $
                  576





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


10


Maturities
of investment securities at June 30, 2010 are as follows:





(Dollars in thousands)
                    
                    Amortized
                    
                    
                    Estimatedcost
                    
                    
                    fair valueDue
      in less than one year
                    
                    $
                    25,918
                    
                    
                    $
                    26,007Due
      after one year but within five years
                    
                    
                    30,750
                    
                    
                    
                    31,657Due
      after five years
                    
                    
                    47,984
                    
                    
                    
                    48,470Mortgage-backed
      securities and common stocks
                    
                    
                    49,713
                    
                    
                    
                    51,286Total
                    
                    $
                    154,365
                    
                    
                    $
                    157,420





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





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





Three months ended
                      
                      
                      Six months ended(Dollars in thousands)
                      
                      June 30,
                      
                      
                      June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Realized
      gains
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      563
                      
                      
                      $
                      -Realized
      losses
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      563
                      
                      
                      $
                      -





Other investment securities include
restricted investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve
Bank (“FRB”) stock.  The carrying value of the FHLB stock at June 30,
2010 and December 31, 2009 was $6.3 million and $6.2 million, respectively and
the carrying value of the FRB stock at June 30, 2010 and December 31, 2009 was
$1.8 million.  These securities are not readily marketable and are
required for regulatory purposes and borrowing availability.  Since
there are no available market values for these securities, they are carried at
cost.  Redemption of these investments at par value is at the option
of the FHLB or FRB.  We have assessed the ultimate recoverability of
these investments and believe that no impairment has occurred.


11


4.           Loans
and Allowance for Loan Losses





Loans consisted of the following as
of:





(Dollars in thousands)
                    
                    June 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Real
      estate loans:One-to-four
      family residential
                    
                    $
                    94,775
                    
                    
                    $
                    98,333Commercial
                    
                    
                    105,305
                    
                    
                    
                    106,470Construction
      and land
                    
                    
                    29,378
                    
                    
                    
                    36,864Commercial
      loans
                    
                    
                    102,702
                    
                    
                    
                    98,213Consumer
      loans
                    
                    
                    6,676
                    
                    
                    
                    7,884Total
      gross loans
                    
                    
                    338,836
                    
                    
                    
                    347,764Deferred
      loan fees/(costs) and loans in process
                    
                    
                    449
                    
                    
                    
                    442Allowance
      for loan losses
                    
                    
                    (4,373
                    )
                    
                    
                    (5,468
                    )Loans,
      net
                    
                    $
                    334,912
                    
                    
                    $
                    342,738Percent of totalReal
      estate loans:One-to-four
      family residential
                    
                    
                    28.0
                    %
                    
                    
                    28.3
                    %Commercial
                    
                    
                    31.1
                    %
                    
                    
                    30.6
                    %Construction
      and land
                    
                    
                    8.6
                    %
                    
                    
                    10.6
                    %Commercial
      loans
                    
                    
                    30.3
                    %
                    
                    
                    28.2
                    %Consumer
      loans
                    
                    
                    2.0
                    %
                    
                    
                    2.3
                    %Total
      gross loans
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %





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





(Dollars in thousands)
                    
                    Three months ended June 30,
                    
                    
                    Six months ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Beginning
      balance
                    
                    $
                    6,037
                    
                    
                    $
                    4,307
                    
                    
                    $
                    5,468
                    
                    
                    $
                    3,871Provision
      for loan losses
                    
                    
                    4,000
                    
                    
                    
                    800
                    
                    
                    
                    4,700
                    
                    
                    
                    1,100Charge-offs
                    
                    
                    (5,677
                    )
                    
                    
                    (298
                    )
                    
                    
                    (5,824
                    )
                    
                    
                    (380
                    )Recoveries
                    
                    
                    13
                    
                    
                    
                    18
                    
                    
                    
                    29
                    
                    
                    
                    236Ending
      balance
                    
                    $
                    4,373
                    
                    
                    $
                    4,827
                    
                    
                    $
                    4,373
                    
                    
                    $
                    4,827





Loans
past due more than a month totaled $7.2 million, or 2.1% of gross loans, at June
30, 2010, compared to $13.3 million, or 3.8% of gross loans, at December 31,
2009.  At June 30, 2010, $6.7 million in loans were on non-accrual
status, or 2.0% of gross loans, compared to a balance of $11.8 million, or 3.4%
of gross loans, at December 31, 2009.  Non-accrual loans consist
primarily of loans greater than ninety days past due.  There were no
loans 90 days delinquent and still accruing interest at June 30, 2010 or
December 31, 2009.





A summary
of the non-accrual loans is as follows:





(Dollars in thousands)
                    
                    June 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Real
      estate loans:One-to-four
      family residential
                    
                    $
                    968
                    
                    
                    $
                    1,146Commercial
                    
                    
                    2,346
                    
                    
                    
                    1,475Construction
      and land
                    
                    
                    1,915
                    
                    
                    
                    6,402Commercial
      loans
                    
                    
                    1,481
                    
                    
                    
                    2,785Consumer
      loans
                    
                    
                    16
                    
                    
                    
                    22Total
      non-accrual loans
                    
                    $
                    6,726
                    
                    
                    $
                    11,830


12


A summary
of the nonperforming assets is as follows:





June 30,
                      
                      
                      December 31,(Dollars in thousands)
                      
                      2010
                      
                      
                      2009Total
      non-accrual loans
                      
                      $
                      6,726
                      
                      
                      $
                      11,830Accruing
      loans over 90 days past due
                      
                      
                      -
                      
                      
                      
                      -Nonperforming
      investments, at fair value
                      
                      
                      265
                      
                      
                      
                      261Real
      estate owned
                      
                      
                      3,370
                      
                      
                      
                      1,129Total
      nonperforming assets
                      
                      $
                      10,361
                      
                      
                      $
                      13,220Total
      nonperforming loans to gross loans
                      
                      
                      2.0
                      %
                      
                      
                      3.4
                      %Total
      nonperforming assets to total assets
                      
                      
                      1.8
                      %
                      
                      
                      2.3
                      %Allowance
      for loan losses to gross loans outstanding
                      
                      
                      1.3
                      %
                      
                      
                      1.6
                      %Allowance
      for loan losses to nonperforming loans
                      
                      
                      65.0
                      %
                      
                      
                      46.2
                      %





The $5.1 million decline in non-accrual
and impaired loans was primarily the result of the charge-off of $3.3 million of
a $4.3 million construction loan and the remaining balance on a $2.3 million
commercial agriculture loan during the second quarter of 2010.  The
$2.2 increase in real estate owned was primarily the result of the foreclosure
on a $1.3 million residential subdivision development as the Company took
possession of the real estate after the development slowed and the borrower was
unable to comply with the contractual terms of the loan.  The
remaining increase in other real estate owned was from foreclosures on
commercial real estate and residential properties.




A summary
of the impaired loans is as follows:




(Dollars in thousands)
                      
                      June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009Real
      estate loans:One-to-four
      family residential
                      
                      $
                      968
                      
                      
                      $
                      1,146Commercial
                      
                      
                      2,346
                      
                      
                      
                      1,475Construction
      and land
                      
                      
                      1,915
                      
                      
                      
                      6,402Commercial
      loans
                      
                      
                      1,481
                      
                      
                      
                      2,785Consumer
      loans
                      
                      
                      16
                      
                      
                      
                      22Total
      impaired loans
                      
                      $
                      6,726
                      
                      
                      $
                      11,830Impaired
      loans for which an allowance has been provided
                      
                      $
                      2,777
                      
                      
                      $
                      10,620Impaired
      loans for which no allowance has been provided
                      
                      
                      3,949
                      
                      
                      
                      1,210Allowance
      related to impaired loans
                      
                      $
                      953
                      
                      
                      $
                      2,770


13


5.           Net
Earnings (Loss) per Share





Basic
earnings (loss) per share have been computed based upon the weighted average
number of common shares outstanding during each period.  Diluted
earnings (loss) per share includes the effect of all potential common shares
outstanding during each period.  The shares used in the calculation of
basic and diluted earnings (loss) per share are shown below:





(Dollars in thousands, except per share amounts)
                  
                  Three months ended June 30,
                  
                  
                  Six months ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      earnings (loss) available to common shareholders
                  
                  $
                  (1,047
                  )
                  
                  $
                  1,012
                  
                  
                  $
                  96
                  
                  
                  $
                  2,021Weighted
      average common shares outstanding - basic
                  
                  
                  2,504,265
                  
                  
                  
                  2,490,023
                  
                  
                  
                  2,499,199
                  
                  
                  
                  2,490,291Assumed
      exercise of stock options
                  
                  
                  -
                  
                  
                  
                  5,029
                  
                  
                  
                  2,412
                  
                  
                  
                  5,189Weighted
      average common shares outstanding - diluted
                  
                  
                  2,504,265
                  
                  
                  
                  2,495,052
                  
                  
                  
                  2,501,611
                  
                  
                  
                  2,495,480Net
      earnings (loss) per share (1):Basic
                  
                  $
                  (0.42
                  )
                  
                  $
                  0.41
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.81Diluted
                  
                  $
                  (0.42
                  )
                  
                  $
                  0.41
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.81





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





6.           Other
Comprehensive Income (Loss)





The Company’s other comprehensive
income (loss) consists of the unrealized holding gains and losses on available
for sale securities as shown below.





(Dollars in thousands)
                  
                  Three months ended June 30,
                  
                  
                  Six months ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      earnings (loss)
                  
                  $
                  (1,047
                  )
                  
                  $
                  1,012
                  
                  
                  $
                  96
                  
                  
                  $
                  2,021Unrealized
      holding gains (losses) on available-for-sale securities for which
      a  portion of an other-than-temporary impairment has been
      recorded in earnings
                  
                  
                  (47
                  )
                  
                  
                  (60
                  )
                  
                  
                  10
                  
                  
                  
                  (185
                  )Net
      unrealized holding gains (losses) on all other available-for-sale
      securities
                  
                  
                  1,084
                  
                  
                  
                  33
                  
                  
                  
                  1,090
                  
                  
                  
                  (480
                  )Less
      reclassification adjustment for losses (gains) included in
      earnings
                  
                  
                  140
                  
                  
                  
                  249
                  
                  
                  
                  (423
                  )
                  
                  
                  576Net
      unrealized gains (losses)
                  
                  
                  1,177
                  
                  
                  
                  222
                  
                  
                  
                  677
                  
                  
                  
                  (89
                  )Income
      tax expense (benefit)
                  
                  
                  437
                  
                  
                  
                  85
                  
                  
                  
                  249
                  
                  
                  
                  (46
                  )Total
      comprehensive income (loss)
                  
                  $
                  (307
                  )
                  
                  $
                  1,149
                  
                  
                  $
                  524
                  
                  
                  $
                  1,978


14


7.           Fair
Value of Financial Instruments and Fair Value Measurements





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





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


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


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





Fair
value estimates of the Company’s financial instruments as of June 30, 2010 and
December 31, 2009, including methods and assumptions utilized, are set forth
below:





(Dollars in thousands)
                    
                    June 30, 2010
                    
                    
                    December 31, 2009Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    Estimatedamount
                    
                    
                    fair value
                    
                    
                    amount
                    
                    
                    fair valueFinancial assets:Cash
      and cash equivalents
                    
                    $
                    9,655
                    
                    
                    $
                    9,655
                    
                    
                    $
                    12,379
                    
                    
                    $
                    12,379Investment
      securities:Available-for-sale
                    
                    
                    157,420
                    
                    
                    
                    157,420
                    
                    
                    
                    161,628
                    
                    
                    
                    161,628Other
      securities
                    
                    
                    8,078
                    
                    
                    
                    8,078
                    
                    
                    
                    7,991
                    
                    
                    
                    7,991Loans,
      net
                    
                    
                    334,912
                    
                    
                    
                    337,259
                    
                    
                    
                    342,738
                    
                    
                    
                    343,671Loans
      held for sale
                    
                    
                    9,544
                    
                    
                    
                    9,909
                    
                    
                    
                    4,703
                    
                    
                    
                    4,718Mortgage
      servicing rights
                    
                    
                    816
                    
                    
                    
                    2,378
                    
                    
                    
                    766
                    
                    
                    
                    2,188Derivative
      financial instruments
                    
                    
                    80
                    
                    
                    
                    80
                    
                    
                    
                    -
                    
                    
                    
                    -Accrued
      interest receivable
                    
                    $
                    2,871
                    
                    
                    $
                    2,871
                    
                    
                    $
                    2,702
                    
                    
                    $
                    2,702Financial
      liabilities:Non-maturity
      deposits
                    
                    $
                    242,863
                    
                    
                    $
                    242,863
                    
                    
                    $
                    246,258
                    
                    
                    $
                    246,258Time
      deposits
                    
                    
                    189,887
                    
                    
                    
                    190,916
                    
                    
                    
                    192,337
                    
                    
                    
                    193,707FHLB
      borrowings
                    
                    
                    57,290
                    
                    
                    
                    60,181
                    
                    
                    
                    56,004
                    
                    
                    
                    58,174Other
      borrowings
                    
                    
                    26,499
                    
                    
                    
                    25,131
                    
                    
                    
                    26,179
                    
                    
                    
                    24,537Derivative
      financial instruments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    84
                    
                    
                    
                    84Accrued
      interest payable
                    
                    $
                    887
                    
                    
                    $
                    887
                    
                    
                    $
                    1,028
                    
                    
                    $
                    1,028





Methods
and Assumptions Utilized





The carrying amount of cash, cash
equivalents, repurchase agreements and federal funds sold are considered to
approximate fair value and are classified as Level 1.





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


15


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





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





The estimated fair value of the
Company’s loan portfolio is classified as Level 3 and is based on the
segregation of loans by collateral type, interest terms, and
maturities.  The fair value is estimated based on discounting
scheduled and estimated cash flows through maturity using an appropriate
risk-adjusted yield curve to approximate current interest rates for each
category.  No adjustment was made to the interest rates for changes in
credit risk of performing loans where there are no known credit
concerns.  Management segregates loans in appropriate risk
categories.  Management believes that the risk factor embedded in the
interest rates along with the allowance for loan losses applicable to the
performing loan portfolio results in a fair valuation of such
loans.  This method of estimating fair value does not incorporate the
exit-price concept of fair value prescribed by ASC Topic 820.  The
fair values of impaired loans are generally based on market prices for similar
assets determined through independent appraisals or discounted values of
independent appraisals and brokers’ opinions of value.





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





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





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





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





The estimated fair value of deposits
with no stated maturity, such as non-interest-bearing demand deposits, savings,
money market accounts, and NOW accounts, is equal to the amount payable on
demand.  The fair value of interest bearing time deposits is based on
the discounted value of contractual cash flows of such deposits.  The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.  Fair value measurements based on
discounted cash flows are classified as Level 3.  These fair values do
not incorporate the value of core deposit intangibles which may be associated
with the deposit base.





The fair value of advances from the
FHLB and other borrowings is estimated using current rates offered for similar
borrowings adjusted for the Company’s current credit spread if applicable and
classified as Level 2.


16


Off-Balance
Sheet Financial Instruments





The fair value of letters of credit and
commitments to extend credit is based on the fees currently charged to enter
into similar agreements.  The aggregate of these fees is not
material.  These instruments are also discussed in Item 2 Management’s
Discussion and Analysis of Financial Condition.





Limitations





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





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





The following table represents the
Company’s financial instruments that are measured at fair value on a recurring
basis at June 30, 2010 and December 31, 2009 allocated to the appropriate fair
value hierarchy:





(Dollars in thousands)
                        
                        
                        
                        
                        As of June 30, 2010Fair value hierarchyTotal
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Assets:Cash
      and cash equivalents
                        
                        $
                        9,655
                        
                        
                        $
                        9,655
                        
                        
                        $
                        -
                        
                        
                        $
                        -Available-for-sale
      securitiesU.
      S. federal agency obligations
                        
                        
                        25,218
                        
                        
                        
                        -
                        
                        
                        
                        25,218
                        
                        
                        
                        -Municipal
      obligations, tax exempt
                        
                        
                        67,040
                        
                        
                        
                        -
                        
                        
                        
                        67,040
                        
                        
                        
                        -Municipal
      obligations, taxable
                        
                        
                        1,373
                        
                        
                        
                        -
                        
                        
                        
                        1,373
                        
                        
                        
                        -Mortgage-backed
      securities
                        
                        
                        50,323
                        
                        
                        
                        -
                        
                        
                        
                        50,323
                        
                        
                        
                        -Common
      stocks
                        
                        
                        963
                        
                        
                        
                        903
                        
                        
                        
                        60
                        
                        
                        
                        -Pooled
      trust preferred securities
                        
                        
                        265
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        265Certificates
      of deposit
                        
                        
                        12,238
                        
                        
                        
                        -
                        
                        
                        
                        12,238
                        
                        
                        
                        -Derivative
      financial instruments
                        
                        $
                        80
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        80





As of December 31, 2009Fair value hierarchyTotal
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets:Cash
      and cash equivalents
                    
                    $
                    12,379
                    
                    
                    $
                    12,379
                    
                    
                    $
                    -
                    
                    
                    $
                    -Available-for-sale
      securitiesU.
      S. federal agency obligations
                    
                    
                    19,090
                    
                    
                    
                    -
                    
                    
                    
                    19,090
                    
                    
                    
                    -Municipal
      obligations, tax exempt
                    
                    
                    68,859
                    
                    
                    
                    -
                    
                    
                    
                    68,859
                    
                    
                    
                    -Municipal
      obligations, taxable
                    
                    
                    1,343
                    
                    
                    
                    -
                    
                    
                    
                    1,343
                    
                    
                    
                    -Mortgage-backed
      securities
                    
                    
                    64,695
                    
                    
                    
                    -
                    
                    
                    
                    64,695
                    
                    
                    
                    -Common
      stocks
                    
                    
                    865
                    
                    
                    
                    805
                    
                    
                    
                    60
                    
                    
                    
                    -Pooled
      trust preferred securities
                    
                    
                    261
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    261Certificates
      of deposit
                    
                    
                    6,515
                    
                    
                    
                    -
                    
                    
                    
                    6,515
                    
                    
                    
                    -Liabilities:Derivative
      financial instruments
                    
                    $
                    84
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    84





17




The
following table reconciles the changes in the Company’s Level 3 financial
instruments during the first six months of 2010:
 
 (Dollars in thousands)
                        
                        
                        
                        
                        DerivativeAvailable-for
                        
                        
                        financialsale-securities
                        
                        
                        instrumentsLevel
      3 asset (liability) fair value at December 31, 2009
                        
                        $
                        261
                        
                        
                        $
                        (84
                        )Transfers
      into Level 3
                        
                        
                        -
                        
                        
                        
                        -Payments
      applied to reduce carrying value
                        
                        
                        (6
                        )
                        
                        
                        -Total
      gains (losses):Included
      in earnings
                        
                        
                        -
                        
                        
                        
                        164Included
      in other comprehensive income
                        
                        
                        10
                        
                        
                        
                        -Level
      3 asset fair value at June 30, 2010
                        
                        $
                        265
                        
                        
                        $
                        80
 
 Changes in the fair value of
available-for-sale securities are included in other comprehensive income to the
extent the changes are not considered other-than-temporary
impairments.  Other-than-temporary impairment tests are performed on a
quarterly basis and any decline in the fair value of an individual security
below its cost that is deemed to be other-than-temporary results in a write-down
of that security’s cost basis.
 
 Valuation
methods for instruments measured at fair value on a nonrecurring
basis
 
 The Company does not value its loan
portfolio at fair value, however adjustments are recorded on certain loans to
reflect the impaired value on the underlying collateral.  Collateral
values are reviewed on a loan-by-loan basis through independent
appraisals.  Appraised values may be discounted based on management’s
historical knowledge, changes in market conditions and/or management’s expertise
and knowledge of the client and the client’s business.  Because many
of these inputs are unobservable, the valuations are classified as Level
3.  The carrying value of the Company’s impaired loans was $6.7
million at June 30, 2010 and $11.8 at December 31, 2009, with allocated
allowances of $819,000 and $2.8 million, respectively.
 
 The
Company’s measure of its goodwill is based on market based valuation techniques,
including reviewing the Company’s market capitalization with appropriate control
premiums and valuation multiples as compared to recent similar financial
industry acquisition multiples to estimate the fair value of the Company’s
single reporting unit.  The fair value measurements are classified as
Level 3.  Core deposit intangibles are recognized at the time core
deposits are acquired, using valuation techniques which calculate the present
value of the estimated net cost savings relative to the Company’s alternative
costs of funds over the expected remaining economic life of the
deposits.  Subsequent evaluations are made when facts or circumstances
indicate potential impairment may have occurred.  The models
incorporate market discount rates, estimated average core deposit lives and
alternative funding rates.  The fair value measurements are classified
as Level 3.
 
 Real estate owned, which includes
assets acquired through, or in lieu of, foreclosure, is initially recorded at
the date of foreclosure at the fair value of the collateral less estimated
selling costs.  Subsequent to foreclosure, valuations are updated
periodically and are based upon independent appraisals, third party price
opinions or internal pricing models and are classified as Level 3.
 
 18
 
 The
following table represents the Company’s financial instruments that are measured
at fair value on a non-recurring basis at June 30, 2010 and December 31, 2009
allocated to the appropriate fair value hierarchy:
 
 (Dollars in thousands)
                            
                            
                            
                            
                            As of June 30 ,2010Fair value hierarchy
                            
                            
                            TotalTotal
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3
                            
                            
                            lossesAssets:Other
      investment securities
                            
                            $
                            8,078
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            8,078
                            
                            
                            $
                            -Impaired
      loans
                            
                            
                            5,907
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,907
                            
                            
                            
                            (296
                            )Loans
      held for sale
                            
                            
                            9,909
                            
                            
                            
                            -
                            
                            
                            
                            9,909
                            
                            
                            
                            -
                            
                            
                            
                            -Mortgage
      servicing rights
                            
                            
                            2,378
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,378
                            
                            
                            
                            -Real
      estate owned
                            
                            $
                            3,370
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            3,370
                            
                            
                            $
                            -
 
 (Dollars in thousands)
                              
                              
                              
                              
                              As of December 31 ,2009Fair value hierarchy
                              
                              
                              TotalTotal
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3
                              
                              
                              lossesAssets:Other
      investment securities
                              
                              $
                              7,991
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              7,991
                              
                              
                              $
                              -Impaired
      loans
                              
                              
                              9,060
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              9,060
                              
                              
                              
                              (2,770
                              )Loans
      held for sale
                              
                              
                              4,718
                              
                              
                              
                              -
                              
                              
                              
                              4,718
                              
                              
                              
                              -
                              
                              
                              
                              -Mortgage
      servicing rights
                              
                              
                              2,188
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,188
                              
                              
                              
                              -Real
      estate owned
                              
                              $
                              1,129
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,129
                              
                              
                              $
                              (100
                              )
 
 19




8.
            Impact
      of Recent Accounting Pronouncements





In June
2009, the FASB amended the existing guidance to ASC Topic 860, Transfers and
Servicing.  The revision pertains to accounting for transfers
of loans, participating interests in loans and other financial assets and
reinforced the determination of whether a transferor has surrendered control
over transferred financial assets.  That determination must consider
the transferor’s continuing involvements in the transferred financial asset,
including all arrangements or agreements made contemporaneously with, or in
contemplation of, the transfer, even if they were not entered into at the time
of the transfer.  It added the term “participating interest” to
establish specific conditions for reporting a transfer of a portion of a
financial asset as a sale.  A qualifying “participating interest”
requires each of the following: (1) conveys proportionate ownership rights with
equal priority to each participating interest holder; (2) involves no recourse
(other than standard representations and warranties) to, or subordination by,
any participating interest holder; and (3) does not entitle any participating
interest holder to receive cash before any other participating interest
holder.  If the transfer does not meet those conditions, a transferor
should account for the transfer as a sale only if it transfers the entire
financial asset or a group of entire financial assets and surrenders control
over the entire transferred assets in accordance with the conditions in ASC
860-10-40, as amended.  The Company adopted the guidance as of January
1, 2010.  The adoption of this guidance did not have a material effect
on our consolidated financial statements.





In
January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures (Topic
820): Improving
Disclosure about Fair Value Measurements which requires new disclosures
related to recurring and nonrecurring fair value measurements.  The
ASU requires new disclosures about the transfers into and out of Levels 1 and 2
as well as requiring disclosures about Level 3 activity relating to purchases,
sales, issuances and settlements.  The update also clarifies that fair
value measurement disclosures should be at an appropriate level of
disaggregation and that an appropriate class of assets and liabilities is often
a subset of the line items in the financial statements.  The update
also clarifies that disclosures should include the valuation techniques and
inputs used to measure fair value in Levels 2 and 3 for both recurring and
nonrecurring measurements.  The new guidance is effective for interim-
and annual periods beginning after December 15, 2009, except for disclosures on
the Level 3 activity relating to purchases, sales, issuances and settlements
which are effective for interim and annual periods after December 15,
2010.  The adoption of this guidance did not have a material effect on
our consolidated financial statements.





In July
2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses.  ASU 2010-20 requires additional disclosures about the
credit quality of a company’s loans and the allowance for loan losses held
against those loans.  Companies will need to disaggregate new and
existing disclosures based on how it develops its allowance for loan losses and
how it manages credit exposures.  Additional disclosure is also
required about the credit quality indicators of loans by class at the end of the
reporting period, the aging of past due loans, information about troubled debt
restructurings, and significant purchases and sales of loans during the
reporting period by class.  The new guidance is
effective for interim- and annual periods beginning after December 15,
2010.  The Company anticipates that adoption of these
additional disclosures will not have a material effect on its financial position
or results of operations.


20


ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





Overview.  Landmark Bancorp,
Inc. is a bank holding company incorporated under the laws of the State of
Delaware and is engaged in the banking business through its wholly-owned
subsidiary, Landmark National Bank.  Landmark Bancorp is listed on the
NASDAQ Global Market under the symbol “LARK”.  Landmark National Bank
is dedicated to providing quality financial and banking services to its local
communities.  Landmark National Bank originates commercial, commercial
real estate, one-to-four family residential mortgage loans, consumer loans,
multi-family residential mortgage loans and home equity loans.





Our results of operations depend
generally on net interest income, which is the difference between interest
income from interest-earning assets and interest expense on interest-bearing
liabilities.  Net interest income is affected by regulatory, economic
and competitive factors that influence interest rates, loan demand and deposit
flows.  In addition, we are subject to interest rate risk to the
degree that our interest-earning assets mature or reprice at different times, or
at different speeds, than our interest-bearing liabilities.  Our
results of operations are also affected by non-interest income, such as service
charges, loan fees and gains from the sale of newly originated loans and gains
or losses on investments.  Our principal operating expenses, aside
from interest expense, consist of compensation and employee benefits, occupancy
costs, data processing expenses and provision for loan losses.





We are significantly impacted by
prevailing national and local economic conditions, including federal monetary
and fiscal policies and federal regulations of financial
institutions.  Deposit balances are influenced by numerous factors
such as competing personal investments, the level of personal income and the
personal rate of savings within our market areas.  Factors influencing
lending activities include the demand for housing and commercial loans as well
as the interest rate pricing competition from other lending
institutions.





Recent
Legislation Impacting the Financial Services Industry.  On July
21, 2010, sweeping financial regulatory reform legislation entitled the
“Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank
Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes
across the financial regulatory landscape, including provisions that, among
other things:


·
            Create
      a Financial Services Oversight Council to identify emerging systemic risks
      and improve interagency
cooperation;


·
            Centralize
      responsibility for consumer financial protection by creating a new agency,
      the Consumer Financial Protection Bureau, responsible for implementing,
      examining and enforcing compliance with federal consumer financial
      laws;


·
            Establish
      strengthened capital standards for banks and bank holding companies, and
      disallow trust preferred securities from being included in a bank’s Tier 1
      capital determination (subject to a grandfather provision for existing
      trust preferred securities);


·
            Contain
      a series of provisions covering mortgage loan origination standards
      affecting, among other things, originator compensation, minimum repayment
      standards and pre-payments;


·
            Require
      bank holding companies and banks to be both well-capitalized and
      well-managed in order to acquire banks located outside their home
      state;


·
            Grant
      the Federal Reserve the power to regulate debit card interchange
      fees;


·
            Implement
      corporate governance revisions, including with regard to executive
      compensation and proxy access by shareholders, that apply to all public
      companies, not just financial
institutions;


·
            Make
      permanent the $250,000 limit for federal deposit insurance and increase
      the cash limit of Securities Investor Protection Corporation protection
      from $100,000 to $250,000 and provide unlimited federal deposit insurance
      until January 1, 2013 for non-interest-bearing demand transaction accounts
      at all insured depository
institutions;


·
            Repeal
      the federal prohibitions on the payment of interest on demand deposits,
      thereby permitting depository institutions to pay interest on business
      transaction and other accounts; and


·
            Increase
      the authority of the Federal Reserve to examine the Company and its
      nonbank subsidiaries.





Many
aspects of the Dodd-Frank Act are subject to rulemaking and will take effect
over several years, making it difficult to anticipate the overall financial
impact on the Company, its customers or the financial industry more generally.
Provisions in the legislation that affect deposit insurance assessments, payment
of interest on demand deposits and interchange fees could increase the costs
associated with deposits as well as place limitations on certain revenues those
deposits may generate. Provisions in the legislation that revoke the Tier 1
capital treatment of trust preferred securities and otherwise require revisions
to the capital requirements of the Company and the Bank could require them to
seek other sources of capital in the future.


21





Critical
Accounting Policies.  Critical
accounting policies are those which are both most important to the portrayal of
our financial condition and results of operations, and require our management’s
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently
uncertain.  Our critical accounting policies relate to the allowance
for loan losses, the valuation of investment securities, income taxes and
goodwill and other intangible assets, all of which involve significant judgment
by our management.  Information about our critical accounting policies
is included under Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2009.





Summary of
Results.  During the second
quarter of 2010, we recorded a net loss of $1.0 million as compared to net
earnings of $1.0 million in the same period of 2009.  The primary
cause of our net loss during the second quarter of 2010 was from recording a
$4.0 million provision for loan losses.  During the second quarter of
2009 our provision for loan losses was $800,000.  During the first six
months of 2010 our net earnings were $96,000, as compared $2.0 million during
the same period of 2009.  The primary cause of the decline in net
earnings during the first six months of 2010 was a result of a $3.6 million
increase in our provision for loan losses to $4.7 million as compared to $1.1
million in the same period of 2009.  Partially offsetting the
increased provision for loan losses during the first six months of 2010 was a
gain on sales of investment securities of $563,000 recorded in the first quarter
of 2010, as well as a decline in our net credit-related impairment losses on
investment securities, from $576,000 during the first six months of 2009 to
$140,000 during the first six months of 2010.





The
provision for loan losses reflected increased charge-offs during the second
quarter of 2010, and was primarily related to a previously identified and
impaired construction loan totaling $4.3 million, which experienced a
significant decline in the appraised value of the collateral securing the loan
during the second quarter of 2010.  While it was necessary to
recognize the loss associated with this decline in appraised value, we continue
to pursue the guarantor of this loan.  During the first six months of
2010, we had net loan charge-offs of $5.8 million compared to $144,000 during
the first six months of 2009.  The increase in net loan charge-offs in
2010 was associated with the $4.3 million construction loan mentioned above and
a $2.3 million commercial agriculture loan, which were both classified as
impaired and non-accrual during 2009.  During the second quarter of
2010 we charged-off the remaining balance on the commercial agriculture loan and
$3.3 million of the construction loan.  As of March 31, 2010 we had
included in our allowance for loan losses reserves of $716,000 on the
construction loan and $2.1 million on the commercial agriculture
loan.  As a result of the charge-offs, our nonperforming loans to
gross loans decreased to 2.0% at June 30, 2010 compared to 3.4% at December 31,
2009.  Our provision for loan losses was higher in both 2010 and 2009
as compared to historical levels prior to 2008, due to the difficult economic
conditions over the past few years and its impact on our loan portfolio which
increased our levels of charge-offs and nonperforming loans over the same
period.





Our net
interest margin increased from 3.58% during the second quarter of 2009 to 3.79%
for the second quarter of 2010 and from 3.52% during the six months ended June
30, 2009 to 3.80% during the six months ended June 30, 2010.The
increase in net interest margin was primarily a result of maintaining the yields
on our loan portfolio while our investment portfolio, deposits and FHLB advances
repriced lower in the current low rate environment.





The following table summarizes earnings
and key performance measures for the periods presented.





(Dollars in thousands)
                      
                      Three months ended June 30,
                      
                      
                      Six months ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Net
      earnings (loss):Net
      earnings (loss)
                      
                      $
                      (1,047
                      )
                      
                      $
                      1,012
                      
                      
                      $
                      96
                      
                      
                      $
                      2,021Basic
      earnings (loss) per share
                      
                      $
                      (0.42
                      )
                      
                      $
                      0.41
                      
                      
                      $
                      0.04
                      
                      
                      $
                      0.81Diluted
      earnings (loss) per share
                      
                      $
                      (0.42
                      )
                      
                      $
                      0.41
                      
                      
                      $
                      0.04
                      
                      
                      $
                      0.81Earnings
      ratios:Return
      on average assets (1)
                      
                      
                      (0.72
                      )%
                      
                      
                      0.67
                      %
                      
                      
                      0.03
                      %
                      
                      
                      0.67
                      %Return
      on average equity (1)
                      
                      
                      (7.63
                      )%
                      
                      
                      7.81
                      %
                      
                      
                      0.35
                      %
                      
                      
                      7.81
                      %Equity
      to total assets
                      
                      
                      9.32
                      %
                      
                      
                      8.57
                      %
                      
                      
                      9.32
                      %
                      
                      
                      8.57
                      %Net
      interest margin (1) (2)
                      
                      
                      3.79
                      %
                      
                      
                      3.58
                      %
                      
                      
                      3.80
                      %
                      
                      
                      3.52
                      %Dividend
      payout ratio
                      
                      NM
                      
                      
                      
                      44.19
                      %
                      
                      NM
                      
                      
                      
                      44.71
                      %





(1) Ratio
have been annualized and is not necessarily indicative of the results for the
entire year.


(2) Net
interest margin is presented on a fully tax equivalent basis, using a 34%
federal tax rate.


22





Interest
Income.  Interest income for the quarter ended June 30, 2010,
decreased $709,000, or 10.2%, to $6.2 million from $6.9 million in the same
period of 2009.  Interest income on loans decreased $324,000, or 6.2%,
to $4.9 million for the quarter ended June 30, 2010 due to decreased average
outstanding loan balances and lower tax equivalent yields earned on
loans.  Average loan balances for the quarter ended June 30, 2010,
decreased to $349.4 million from $362.4 million for the quarter ended June 30,
2009 while the average tax equivalent yield declined to 5.67% from 5.83% over
the same periods, respectively.  Interest income on investment
securities decreased $385,000, or 22.7%, to $1.3 million for the second quarter
of 2010, as compared to the same period of 2009.  The decline in
interest income on investment securities was due to a decline in the average
balance of investments, from $185.1 million during the second quarter of 2009 to
$170.0 million during the second quarter of 2010, and a decline in the tax
equivalent yield on those investments from 4.30% to 3.80% over the same periods,
respectively.





Interest
income for the six months ended June 30, 2010, decreased $1.3 million, or 9.6%,
to $12.5 million from $13.8 million in the same period of
2009.  Interest income on loans decreased $636,000, or 6.1%, to $9.8
million for the six months ended June 30, 2010 due to decreased average
outstanding loan balances and lower tax equivalent yields earned on
loans.  Average loan balances for the six months ended June 30, 2010,
decreased to $348.5 million from $365.4 million for the six months ended June
30, 2009 while the average tax equivalent yield declined to 5.70% from 5.78%
over the same periods, respectively.  Interest income on investment
securities decreased $691,000, or 20.2%, to $2.7 million for the first six
months of 2010, as compared to the same period of 2009.  The decline
in interest income on investment securities was due to a decline in the average
balance of investments, from $183.6 million during the first six months of 2009
to $172.5 million during the first six months of 2010, and a decline in the tax
equivalent yield on those investments from 4.39% to 3.90% over the same periods,
respectively.





Interest
Expense.  Interest expense
during the quarter ended June 30, 2010 decreased $722,000, or 30.5%, as compared
to the same period of 2009.  For the second quarter of 2010, interest
expense on interest-bearing deposits decreased $590,000, or 37.9%, as a result
of lower rates on deposit balances, primarily consisting of lower rates for our
maturing certificates of deposit and lower rates on money market and NOW
accounts.  Our total cost of deposits declined from 1.56% during the
second quarter of 2009 to 1.02% during the same period of 2010.  Also
contributing to the decline in interest expense were lower average deposit
balances, which decreased from $401.3 million for the second quarter of 2009 to
$381.0 million for the second quarter of 2010.  For the second quarter
of 2010, interest expense on borrowings decreased $132,000, or 16.3%, due to
lower outstanding balances on our borrowings and lower average costs of
borrowings.  Our cost of borrowings decreased from 3.53% in the second
quarter of 2009 to 3.13% in the same period of 2010 while our average
outstanding borrowings declined from $92.3 million to $87.1 million over the
same periods, primarily from lower outstanding FHLB advances.





Interest
expense during the six months ended June 30, 2010 decreased $1.5 million, or
31.0%, as compared to the same period of 2009.  For the first six
months of 2010, interest expense on interest-bearing deposits decreased $1.2
million, or 37.2%, as a result of lower rates on deposit balances, primarily
consisting of lower rates for our maturing certificates of deposit and lower
rates on money market and NOW accounts.  Our total cost of deposits
declined from 1.61% during the six months ended June 30, 2009 to 1.05% during
the same period of 2010.  Also contributing to the decline in interest
expense were lower average deposit balances, which decreased from $400.9 million
for the first six months of 2009 to $384.1 million for the same period of
2010.  For the first six months of 2010, interest expense on
borrowings decreased $326,000, or 19.3%, due to lower outstanding balances on
our borrowings and lower average costs of borrowings.  Our cost of
borrowing decreased from 3.55% in the six months ended June 30, 2009 to 3.25% in
the same period of 2010 while our average outstanding borrowings declined from
$95.9 million to $84.7 million over the same periods, primarily from the
maturity of some of our higher rate FHLB advances.





Net Interest
Income.  Net interest
income for the second quarter of both 2010 and 2009 totaled $4.6
million.  Our net interest margin, on a tax equivalent basis,
increased from 3.58% during the second quarter of 2009 to 3.79% during the
second quarter of 2010.  The improvement in net interest margin from
interest rates more than offset the lower average balances of interest earning
assets which declined from $547.6 million in the second quarter of 2009 to
$519.5 million in the second quarter of 2010.





Net
interest income for the six months ended June 30, 2010 totaled $9.1 million,
increasing $189,000, or 2.1%, as compared to the same period of
2009.  Our net interest margin, on a tax equivalent basis, increased
from 3.52% during the first six months of 2009 to 3.80% during the same period
of 2010.  The increase in net interest margin was primarily a result
of us maintaining the yields on our loan portfolio while our investment
portfolio, deposits and FHLB advances repriced lower.  The improvement
in net interest margin from interest rates more than offset the lower average
balances of interest earning assets which declined from $549.0 million in the
first six months of 2009 to $520.9 million in the first six months of
2010.


23





See the
Average Assets/Liabilities and Rate/Volume tables at the end of Item 2
Management’s Discussion and Analysis of Financial Condition for additional
details on asset yields, liability rates and net interest margin.





Provision for
Loan Losses.  We maintain, and
our Board of Directors monitors, an allowance for losses on
loans.  The allowance is established based upon management's periodic
evaluation of known and inherent risks in the loan portfolio, review of
significant individual loans and collateral, review of delinquent loans, past
loss experience, adverse situations that may affect the borrowers’ ability to
repay, current and expected market conditions, and other factors management
deems important.  Determining the appropriate level of reserves
involves a high degree of management judgment and is based upon historical and
projected losses in the loan portfolio and the collateral value of specifically
identified problem loans.  Additionally, allowance strategies and
policies are subject to periodic review and revision in response to a number of
factors, including current market conditions, actual loss experience and
management's expectations.





Our
provision for loan losses for the quarter ended June 30, 2010 was $4.0 million,
compared to a provision of $800,000 during the same period of
2009.  During the first six months of 2010 our provision for loan
losses was $4.7 million, compared to a provision of $1.1 million during the same
period of 2009.  The provision for loan losses reflected increased
loan charge-offs, including a previously identified and impaired construction
loan totaling $4.3 million, which experienced a significant decline in the
appraised value of the collateral securing the loan during the second quarter of
2010.  While it was necessary to recognize the loss associated with
this decline in value, we continue to pursue the guarantor.  Also
during the second quarter of 2010, we charged-off the remaining $2.3 million
balance on a commercial agriculture loan after exhausting our collection
attempts.  The commercial agriculture loan charge-off exceeded the
reserves in the allowance for loan losses by $242,000.  Our provision
for loan losses was higher in both 2010 and 2009 as compared to historical
levels prior to 2008, due to the difficult economic conditions over the past few
years and its impact on our loan portfolio which increased our levels of
charge-offs and nonperforming loans over the same period.  We have
been working diligently to identify and address the credit weaknesses in our
loan portfolio.  While it is difficult to forecast future events, we
believe that our current allowance for loan losses, coupled with our capital
levels, loan portfolio management and underlying fundamental earnings before the
provision for loan losses, positions us to deal with this challenging
environment.  For further discussion of the allowance for loan losses,
refer to the “Asset Quality and Distribution” section.





Non-interest
Income.  Non-interest
income decreased $363,000, or 13.8%, during the second quarter of 2010,
primarily as a result of a $306,000 decline in gains on sales of loans as our
originations of one-to-four family residential real estate loans that were sold
in the secondary market declined in the second quarter of 2010 as compared to
the origination volumes that we experienced in the same period of
2009.





Non-interest
income decreased $498,000, or 11.0%, during the first six months of 2010,
primarily as a result of a $503,000 decline in gains on sales of loans as our
originations of one-to-four family residential real estate loans that were sold
in the secondary market declined in the first six months of 2010 as compared to
the origination volumes that we experienced in the same period of
2009.  We expect the origination volumes of residential real estate
loans to remain lower in 2010 than the record levels we experienced during
2009.





Investment
Securities Gains (Losses).  During the first
quarter of 2010, we realized $563,000 of gains on sales of investment securities
resulting from the sale of $10.1 million of high-quality mortgage-backed
investment securities as we capitalized on the premium pricing that existed in
the markets for these types of securities.  During the second quarter
of 2010, we recognized a net credit-related other-than-temporary impairment loss
of $140,000 on a $500,000 par investment in a pooled trust preferred
security.  The investment experienced increased levels of deferrals
and defaults during the second quarter of 2010 which exceeded our
expectations.  No impairment losses were recorded in the first quarter
of 2010.  During the second quarter of 2009, we identified a $1.0
million par investment in a pooled trust preferred security as
other-than-temporarily impaired.  The same investment was also
identified as other-than-temporarily impaired during the first quarter of 2009,
but experienced increased levels of deferrals and defaults during the second
quarter of 2009 which exceeded our expectations resulting in an additional net
credit-related impairment loss on this security of $249,000 in the second
quarter of 2009.  During the first six months of 2009 the net
credit-related impairment loss totaled $576,000 on the $1.0 million par
investment in the pooled trust preferred security.





Non-interest
Expense.  Non-interest
expense decreased $173,000, or 3.5%, to $4.8 million for the quarter ended June
30, 2010, as compared to the same period of 2009.  The decline in
non-interest expense was primarily due to a decrease of $264,000 in our federal
deposit insurance premiums, as the second quarter of 2009 included a $277,000
special assessment which affected all FDIC insured
institutions.


24





Non-interest
expense increased $180,000, or 1.9%, to $9.6 million for the first six months of
2010, as compared to the same period of 2009.  The increase in
non-interest expense was primarily driven by increases of $260,000 in
compensation and benefits and $78,000 in occupancy and equipment.  The
acquisition of a branch in Lawrence, Kansas in May 2009 contributed to the
increases in compensation and benefits and occupancy and equipment in the first
six months of 2010 as compared to the first six months
2009.  Offsetting those increases were decreases of $118,000 in
federal deposit insurance premiums and $44,000 in professional
fees.  The decrease in federal deposit insurance premiums was the
result of the $277,000 special assessment during the second quarter of 2009
offset by higher assessment rates, which affected all FDIC insured institutions,
and the utilization of our remaining FDIC assessment credits during the first
six months of 2009.  Our professional fees were elevated during the
first six months of 2009 as a result of the branch acquisition.





Income Tax
(Benefit) Expense.  During the second
quarter of 2010, we recorded an income tax benefit of $1.0 million as compared
to income tax expense of $192,000 during the same period of 2009.  The
decrease in our effective tax rate for the second quarter of 2010 resulted
primarily from the decrease in taxable income, as a percentage of earnings
before income taxes, while our tax exempt investment income and bank owned life
insurance remained similar between the second quarters of 2010 and
2009.





During
the first six months of 2010, we recorded an income tax benefit of $772,000 as
compared to income tax expense of $393,000 during the same period of
2009.  The decrease in our effective tax rate for the six months ended
June 30, 2010 resulted primarily from the decrease in taxable income, as a
percentage of earnings before income taxes, while our tax exempt investment
income and bank owned life insurance remained similar between the first six
months of both 2010 and 2009.





Financial
Condition.  While, the Company’s asset quality and performance
have been affected by the declining residential and commercial real estate
values, falling consumer confidence, increased unemployment and decreased
consumer spending, which have all contributed to a slowing economy and a
difficult credit market, we have managed to avoid most of the hardest hit
areas.  Even though the markets in which the Company operates have
been impacted by the economic slowdown, the effect has not been as severe as
those experienced in some areas of the U.S.  In addition, the
Company’s loan portfolio is diversified across various types of loans and
collateral throughout the markets in which we operate.  Outside of the
identified problem assets, management believes that it continues to have a high
quality asset base and solid core earnings and anticipates that its efforts to
run a high quality financial institution with a sound asset base will continue
to create a strong foundation for continued growth and profitability in the
future.





Asset Quality and
Distribution.  Our primary
investing activities are the origination of commercial real estate, commercial
and consumer loans and the purchase of investment and mortgage-backed
securities.  Generally, we originate fixed-rate, residential mortgage
loans with maturities in excess of ten years for sale in the secondary
market.  These loans are typically sold soon after the loan
closing.  We do not originate and warehouse these fixed-rate
residential loans for resale in order to speculate on interest
rates.  Total assets decreased to $576.2 million at June 30, 2010,
compared to $584.2 million at December 31, 2009.  Net loans, excluding
loans held for sale, decreased to $334.9 million at June 30, 2010 from $342.7
million at December 31, 2009.  The $7.8 million decline in net loans
was primarily the result of $5.8 million of net loan charge-offs during the
first six months of 2010.  Our one-to-four family residential real
estate loan portfolio also declined by $3.6 million during the first six months
of 2010 due to normal runoff relating to principal payments and
prepayments.  The outstanding balances in our one-to-four family
residential real estate loan portfolio typically decline as we sell our newly
originated loans.  The increase in our commercial loan balances is due
to seasonal increases in borrowings on commercial agriculture lines of
credit.





The allowance for loan losses is
established through a provision for loan losses based on our evaluation of the
risk inherent in the loan portfolio and changes in the nature and volume of its
loan activity.  Such evaluation, which includes a review of all loans
with respect to which full collectability may not be reasonably assured,
considers the fair value of the underlying collateral, economic conditions,
historical loan loss experience, level of classified loans and other factors
that warrant recognition in providing for an adequate allowance for losses on
loans.  At June 30, 2010, our allowance for loan losses totaled $4.4
million, or 1.3% of gross loans outstanding, as compared to $5.5 million, or
1.6% of gross loans outstanding, at December 31, 2009.  Our provision
for loan losses for the quarter ended June 30, 2010 was $4.0 million, compared
to a provision of $800,000 during the same period of 2009.  During the
first six months of 2010, our provision for loan losses was $4.7 million,
compared to a provision of $1.1 million during the same period of
2009.  Our provision for loan losses was higher in both 2010 and 2009
as compared to historical levels prior to 2008, due to the difficult economic
conditions over the past few years and its impact on our loan portfolio as well
as increased levels of charge-offs and nonperforming loans over the same
period.  We have been working diligently to identify and address the
credit weaknesses in our loan portfolio.  While it is difficult to
forecast future events, we believe that our current allowance for loan losses,
coupled with our capital levels, loan portfolio management and underlying
fundamental earnings before the provision for loan losses, positions us to deal
with this challenging environment.


25





Loans past due more than a month
totaled $7.2 million, or 2.1% of gross loans, at June 30, 2010, compared to
$13.3 million, or 3.8% of gross loans, at December 31,
2009.  Non-accrual loans, which primarily consist of loans greater
than 90 days past due and are included in the past due loan balances, totaled
$6.7 million at June 30, 2010 and $11.8 million at December 31, 2009, or 2.0%
and 3.4% of gross loans, respectively.  There were no loans 90
days delinquent and still accruing interest at June 30, 2010 or December 31,
2009.  Our impaired loans were $6.7 million at June 30, 2010
compared to $11.8 million at December 31, 2009.  During the first six
months of 2010, we had net loan charge-offs of $5.8 million as compared to
$144,000 during the first six months of 2009.  The increase in net
loan charge-offs in 2010 was associated with two impaired loans consisting of a
$4.3 million construction loan and a $2.3 million commercial agriculture loan,
which were both classified as impaired and non-accrual during
2009.  During the second quarter of 2010 we charged-off the remaining
balance on the commercial agriculture loan after exhausting our collection
attempts and $3.3 million of the construction loan relating to a significant
decline in appraised value of the real estate collateral and uncertainty about
the likelihood, magnitude and timeliness of our collection expectations from the
guarantor.  As of March 31, 2010 we had included in our allowance for
loan losses reserves of $716,000 on the construction loan and $2.1 million on
the commercial agriculture loan.  As part of our credit risk
management, we continue to aggressively manage the loan portfolio to identify
problem loans and have placed additional emphasis on commercial real estate and
construction relationships.  We are aggressively working to resolve
the remaining problem credits or move the nonperforming credits out of the loan
portfolio.  During the first six months of 2010, real estate owned
increased by $2.2 million primarily as the result of foreclosure on loans that
were nonperforming at December 31, 2009.  No significant losses
resulted from the foreclosure of the loans that increased other real estate
owned.





Although the recent economic recession
created a very difficult environment for financial institutions, as well as
other businesses, the U.S. government, Federal Reserve and the Treasury
Department initiated many programs to try to stimulate the
economy.  Nevertheless, many financial institutions, including us,
have experienced an increase in nonperforming assets during the recent economic
period, as even well-established business borrowers developed cash flow,
profitability and other business-related problems.  We believe that
our allowance for loan losses at June 30, 2010, was appropriate, however, there
can be no assurances that losses will not exceed the estimated
amounts.  While we believe that we use the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustment to the allowance for loan losses.  In addition,
net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in establishing the allowance for loan
losses.  Further deterioration in the local economy or real estate
values may create additional problem loans for us and require further adjustment
to our allowance for loan losses.





Liability
Distribution.  Our primary
ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal
and interest payments on loans and investment securities and proceeds from the
sale of mortgage loans and investment securities.  While maturities
and scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates
and economic conditions.  Total deposits decreased $5.8 million to
$432.8 million at June 30, 2010, from $438.6 million at December 31,
2009.  Total borrowings increased $1.6 million to $83.8 million at
June 30, 2010, from $82.2 million at December 31, 2009.  The increase
was primarily from borrowing $6.4 million on our FHLB line of credit as of June
30, 2010 which offset the prepayment of a $5.0 million FHLB advance that
converted to a variable rate during the first quarter of 2010.





Certificates
of deposit at June 30, 2010, which were scheduled to mature in one year or less,
totaled $138.1 million.  Historically, maturing deposits have
generally remained with our bank and we believe that a significant portion of
the deposits maturing in one year or less will remain with us upon
maturity.





Cash
Flows.  During the six months ended June 30, 2010, our cash and
cash equivalents decreased by $2.7 million.  Our operating activities
used net cash of $3.7 million during the first six months of 2010 primarily from
funding the seasonal increase in origination volumes of one-to-four family
residential which are reflected in the increased balances of loans held for
sale.  Our investing activities provided net cash of $5.9 million
during the first six months of 2010 as the net funds from our investment
portfolio were used to fund the increased balances of loans held for sale and to
offset the lower deposit balances.  Our financing activities used net
cash of $4.9 million during the first six months of 2010, primarily from lower
deposit balances.





Liquidity.Our most liquid assets are
cash and cash equivalents and investment securities available for
sale.  The levels of these assets are dependent on the operating,
financing, lending and investing activities during any given
period.  These liquid assets totaled $167.1 million at June 30, 2010
and $174.0 million at December 31, 2009.  During periods in which we
are not able to originate a sufficient amount of loans and/or periods of high
principal prepayments, we increase our liquid assets by investing in short-term,
high-grade investments.


26





Liquidity management is both a daily
and long-term function of our strategy.  Excess funds are generally
invested in short-term investments.  In the event we require funds
beyond our ability to generate them internally, additional funds are generally
available through the use of FHLB advances, a line of credit with the FHLB,
other borrowings or through sales of investment securities.  At June
30, 2010, we had outstanding FHLB advances of $50.9 million and $6.4 million in
borrowings against our line of credit with the FHLB.  At June 30,
2010, we had collateral pledged to the FHLB that would allow us to borrow an
additional $50.7 million per FHLB credit guidelines.  At June 30,
2010, we had no borrowings through the Federal Reserve discount window, while
our borrowing capacity was $13.0 million.  We also have various other
fed funds agreements, both secured and unsecured, with correspondent banks
totaling approximately $59.0 million at June 30, 2010, which had no borrowings
against at that time.  We had other borrowings of $26.5 million at
June 30, 2010, which included $16.5 million of subordinated debentures and $5.2
million in repurchase agreements.  The Company has a $7.5 million line
of credit from an unrelated financial institution maturing on November 17, 2010,
with an interest rate that adjusts daily based on the prime rate plus 0.25%, but
not less than 4.25%.  This line of credit has covenants specific to
capital and other financial ratios, which the Company was in compliance with at
June 30, 2010.  The outstanding balance on the line of credit at June
30, 2010 was $4.8 million, which was included in other borrowings.  We
anticipate that we will renew this line of credit for another one year period
before the maturity date.  If we are unable to renew the line of
credit, we will attempt to refinance with another financial institution, which
may not be on similar terms, or repay the facility.





As a
provider of financial services, we routinely issue financial guarantees in the
form of financial and performance standby letters of credit.  Standby
letters of credit are contingent commitments issued by us generally to guarantee
the payment or performance obligation of a customer to a third
party.  While these standby letters of credit represent a potential
outlay by us, a significant amount of the commitments may expire without being
drawn upon.  We have recourse against the customer for any amount the
customer is required to pay to a third party under a standby letter of
credit.  The letters of credit are subject to the same credit
policies, underwriting standards and approval process as loans made by
us.  Most of the standby letters of credit are secured, and in the
event of nonperformance by the customers, we have the right to the underlying
collateral, which could include commercial real estate, physical plant and
property, inventory, receivables, cash and marketable securities.  The
contract amount of these standby letters of credit, which represents the maximum
potential future payments guaranteed by us, was $2.1 million at June 30,
2010.





At June
30, 2010, we had outstanding loan commitments, excluding standby letters of
credit, of $49.9 million. We anticipate that sufficient funds will be available
to meet current loan commitments. These commitments consist of unfunded lines of
credit and commitments to finance real estate loans.


27


Capital.  Current
regulatory capital regulations require financial institutions (including banks
and bank holding companies) to meet certain regulatory capital
requirements.  Institutions are required to have minimum leverage
capital equal to 4% of total average assets and total qualifying capital equal
to 8% of total risk weighted assets in order to be considered “adequately
capitalized.”  As of June 30, 2010, both the Company and the Bank were
rated “well capitalized,” which is the highest rating available under the
regulatory capital regulations framework for prompt corrective
action.  As of June 30, 2010, the Company and the Bank met all capital
adequacy requirements to which we are subject.  The following is a
comparison of the Company’s regulatory capital to minimum capital requirements
at June 30, 2010:


To
      be well-capitalizedunder
      prompt(Dollars
      in thousands)
                        
                        
                        
                        
                        For
      capital
                        
                        
                        correctiveActual
                        
                        
                        adequacy
      purposes
                        
                        
                        action
      provisionsAmount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        RatioAs
      of June 30, 2010Leverage
                        
                        $
                        53,981
                        
                        
                        
                        9.4
                        %
                        
                        $
                        22,886
                        
                        
                        
                        4.0
                        %
                        
                        $
                        28,607
                        
                        
                        
                        5.0
                        %Tier
      1 Capital
                        
                        $
                        53,981
                        
                        
                        
                        13.9
                        %
                        
                        $
                        15,582
                        
                        
                        
                        4.0
                        %
                        
                        $
                        23,373
                        
                        
                        
                        6.0
                        %Total
      Risk Based Capital
                        
                        $
                        58,569
                        
                        
                        
                        15.0
                        %
                        
                        $
                        31,164
                        
                        
                        
                        8.0
                        %
                        
                        $
                        38,955
                        
                        
                        
                        10.0
                        %As
      of December 31, 2009Leverage
                        
                        $
                        54,386
                        
                        
                        
                        9.3
                        %
                        
                        $
                        23,413
                        
                        
                        
                        4.0
                        %
                        
                        $
                        29,266
                        
                        
                        
                        5.0
                        %Tier
      1 Capital
                        
                        $
                        54,386
                        
                        
                        
                        13.7
                        %
                        
                        $
                        15,901
                        
                        
                        
                        4.0
                        %
                        
                        $
                        23,852
                        
                        
                        
                        6.0
                        %Total
      Risk Based Capital
                        
                        $
                        59,439
                        
                        
                        
                        15.0
                        %
                        
                        $
                        31,803
                        
                        
                        
                        8.0
                        %
                        
                        $
                        39,754
                        
                        
                        
                        10.0
                        %





The
following is a comparison of the Bank’s regulatory capital to minimum capital
requirements at June 30, 2010:


To
      be well-capitalizedunder
      prompt(Dollars
      in thousands)
                        
                        
                        
                        
                        For
      capital
                        
                        
                        correctiveActual
                        
                        
                        adequacy
      purposes
                        
                        
                        action
      provisionsAmount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        RatioAs
      of June 30, 2010Leverage
                        
                        $
                        57,604
                        
                        
                        
                        10.1
                        %
                        
                        $
                        22,728
                        
                        
                        
                        4.0
                        %
                        
                        $
                        28,411
                        
                        
                        
                        5.0
                        %Tier
      1 Capital
                        
                        $
                        57,604
                        
                        
                        
                        14.9
                        %
                        
                        $
                        15,521
                        
                        
                        
                        4.0
                        %
                        
                        $
                        23,282
                        
                        
                        
                        6.0
                        %Total
      Risk Based Capital
                        
                        $
                        62,102
                        
                        
                        
                        16.0
                        %
                        
                        $
                        31,042
                        
                        
                        
                        8.0
                        %
                        
                        $
                        38,803
                        
                        
                        
                        10.0
                        %As
      of December 31, 2009Leverage
                        
                        $
                        57,548
                        
                        
                        
                        9.9
                        %
                        
                        $
                        23,343
                        
                        
                        
                        4.0
                        %
                        
                        $
                        29,179
                        
                        
                        
                        5.0
                        %Tier
      1 Capital
                        
                        $
                        57,548
                        
                        
                        
                        14.5
                        %
                        
                        $
                        15,837
                        
                        
                        
                        4.0
                        %
                        
                        $
                        23,755
                        
                        
                        
                        6.0
                        %Total
      Risk Based Capital
                        
                        $
                        62,429
                        
                        
                        
                        15.8
                        %
                        
                        $
                        31,673
                        
                        
                        
                        8.0
                        %
                        
                        $
                        39,592
                        
                        
                        
                        10.0
                        %





Dividends.  During
the quarter ended June 30, 2010, we paid a quarterly cash dividend of $0.19 per
share to our stockholders.





The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations.  As described above,
Landmark National Bank exceeded its minimum capital requirements under
applicable guidelines as of June 30, 2010.  The National Bank Act
imposes limitations on the amount of dividends that a national bank may pay
without prior regulatory approval.  Generally, the amount is limited
to the bank's current year's net earnings plus the adjusted retained earnings
for the two preceding years.  As of June 30, 2010, approximately $2.8
million was available to be paid as dividends to Landmark Bancorp by Landmark
National Bank without prior regulatory approval.





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


28


Average
Assets/Liabilities.  The following
tables set forth information relating to average balances of interest-earning
assets and liabilities for the three months and six months ended June 30, 2010
and 2009.  The following tables reflect the average tax equivalent
yields on assets and average costs of liabilities for the periods indicated
(derived by dividing income or expense by the monthly average balance of assets
or liabilities, respectively) as well as “net interest margin” (which reflects
the effect of the net earnings balance) for the periods shown:





Quarter
      ended June 30, 2010
                                  
                                  
                                  Quarter
      ended June 30, 2009Average
                                    balance
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                    yield/rate
                                  
                                  
                                  Average
                                    balance
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                    yield/rate(Dollars
      in thousands)AssetsInterest-earning
      assets:Investment
      securities (1)
                                  
                                  $
                                  170,043
                                  
                                  
                                  $
                                  1,609
                                  
                                  
                                  
                                  3.80
                                  %
                                  
                                  $
                                  185,131
                                  
                                  
                                  $
                                  1,986
                                  
                                  
                                  
                                  4.30
                                  %Loans
      receivable, net (2)
                                  
                                  
                                  349,442
                                  
                                  
                                  
                                  4,943
                                  
                                  
                                  
                                  5.67
                                  %
                                  
                                  
                                  362,436
                                  
                                  
                                  
                                  5,265
                                  
                                  
                                  
                                  5.83
                                  %Total
      interest-earning assets
                                  
                                  
                                  519,485
                                  
                                  
                                  
                                  6,552
                                  
                                  
                                  
                                  5.06
                                  %
                                  
                                  
                                  547,567
                                  
                                  
                                  
                                  7,251
                                  
                                  
                                  
                                  5.31
                                  %Non-interest-earning
      assets
                                  
                                  
                                  66,447
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  60,853Total
                                  
                                  $
                                  585,932
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  608,420Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Certificates
      of deposit
                                  
                                  $
                                  188,636
                                  
                                  
                                  $
                                  835
                                  
                                  
                                  
                                  1.78
                                  %
                                  
                                  $
                                  218,519
                                  
                                  
                                  $
                                  1,379
                                  
                                  
                                  
                                  2.53
                                  %Money
      market and NOW accounts
                                  
                                  
                                  160,575
                                  
                                  
                                  
                                  117
                                  
                                  
                                  
                                  0.29
                                  %
                                  
                                  
                                  153,511
                                  
                                  
                                  
                                  159
                                  
                                  
                                  
                                  0.42
                                  %Savings
      accounts
                                  
                                  
                                  31,754
                                  
                                  
                                  
                                  16
                                  
                                  
                                  
                                  0.20
                                  %
                                  
                                  
                                  29,252
                                  
                                  
                                  
                                  20
                                  
                                  
                                  
                                  0.27
                                  %Total
      deposits
                                  
                                  
                                  380,965
                                  
                                  
                                  
                                  968
                                  
                                  
                                  
                                  1.02
                                  %
                                  
                                  
                                  401,282
                                  
                                  
                                  
                                  1,558
                                  
                                  
                                  
                                  1.56
                                  %FHLB
      advances and other borrowings
                                  
                                  
                                  87,066
                                  
                                  
                                  
                                  679
                                  
                                  
                                  
                                  3.13
                                  %
                                  
                                  
                                  92,277
                                  
                                  
                                  
                                  811
                                  
                                  
                                  
                                  3.53
                                  %Total
      interest-bearing liabilities
                                  
                                  
                                  468,031
                                  
                                  
                                  
                                  1,647
                                  
                                  
                                  
                                  1.41
                                  %
                                  
                                  
                                  493,559
                                  
                                  
                                  
                                  2,369
                                  
                                  
                                  
                                  1.93
                                  %Non-interest-bearing
      liabilities
                                  
                                  
                                  62,895
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  62,336Stockholders'
      equity
                                  
                                  
                                  55,006
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  52,525Total
                                  
                                  $
                                  585,932
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  608,420Interest
      rate spread (3)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.65
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.38
                                  %Net
      interest margin (4)
                                  
                                  
                                  
                                  
                                  
                                  $
                                  4,905
                                  
                                  
                                  
                                  3.79
                                  %
                                  
                                  
                                  
                                  
                                  
                                  $
                                  4,882
                                  
                                  
                                  
                                  3.58
                                  %Tax
      equivalent interest - imputed
                                  
                                  
                                  
                                  
                                  
                                  
                                  333
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  323Net
      interest income
                                  
                                  
                                  
                                  
                                  
                                  $
                                  4,572
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  4,559Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                  
                                  
                                  
                                  
                                  
                                  
                                  111.0
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  110.9
                                  %





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


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


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


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


29





Six
      months ended June 30, 2010
                          
                          
                          Six
      months ended June 30, 2009Average
                            balance
                          
                          
                          Interest
                          
                          
                          Average
                            yield/rate
                          
                          
                          Average
                            balance
                          
                          
                          Interest
                          
                          
                          Average
                            yield/rate(Dollars
      in thousands)AssetsInterest-earning
      assets:Investment
      securities (1)
                          
                          $
                          172,456
                          
                          
                          $
                          3,333
                          
                          
                          
                          3.90
                          %
                          
                          $
                          183,585
                          
                          
                          $
                          4,001
                          
                          
                          
                          4.39
                          %Loans
      receivable, net (2)
                          
                          
                          348,476
                          
                          
                          
                          9,852
                          
                          
                          
                          5.70
                          %
                          
                          
                          365,410
                          
                          
                          
                          10,471
                          
                          
                          
                          5.78
                          %Total
      interest-earning assets
                          
                          
                          520,932
                          
                          
                          
                          13,185
                          
                          
                          
                          5.10
                          %
                          
                          
                          548,995
                          
                          
                          
                          14,472
                          
                          
                          
                          5.32
                          %Non-interest-earning
      assets
                          
                          
                          65,792
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          60,417Total
                          
                          $
                          586,724
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          609,412Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Certificates
      of deposit
                          
                          $
                          190,252
                          
                          
                          $
                          1,726
                          
                          
                          
                          1.83
                          %
                          
                          $
                          217,617
                          
                          
                          $
                          2,815
                          
                          
                          
                          2.61
                          %Money
      market and NOW accounts
                          
                          
                          162,674
                          
                          
                          
                          246
                          
                          
                          
                          0.30
                          %
                          
                          
                          154,937
                          
                          
                          
                          342
                          
                          
                          
                          0.45
                          %Savings
      accounts
                          
                          
                          31,130
                          
                          
                          
                          35
                          
                          
                          
                          0.23
                          %
                          
                          
                          28,381
                          
                          
                          
                          40
                          
                          
                          
                          0.28
                          %Total
      deposits
                          
                          
                          384,056
                          
                          
                          
                          2,007
                          
                          
                          
                          1.05
                          %
                          
                          
                          400,935
                          
                          
                          
                          3,197
                          
                          
                          
                          1.61
                          %FHLB
      advances and other borrowings
                          
                          
                          84,707
                          
                          
                          
                          1,364
                          
                          
                          
                          3.25
                          %
                          
                          
                          95,908
                          
                          
                          
                          1,690
                          
                          
                          
                          3.55
                          %Total
      interest-bearing liabilities
                          
                          
                          468,763
                          
                          
                          
                          3,371
                          
                          
                          
                          1.45
                          %
                          
                          
                          496,843
                          
                          
                          
                          4,887
                          
                          
                          
                          1.98
                          %Non-interest-bearing
      liabilities
                          
                          
                          63,192
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          60,391Stockholders'
      equity
                          
                          
                          54,769
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          52,178Total
                          
                          $
                          586,724
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          609,412Interest
      rate spread (3)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.65
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.34
                          %Net
      interest margin (4)
                          
                          
                          
                          
                          
                          $
                          9,814
                          
                          
                          
                          3.80
                          %
                          
                          
                          
                          
                          
                          $
                          9,585
                          
                          
                          
                          3.52
                          %Tax
      equivalent interest - imputed
                          
                          
                          
                          
                          
                          
                          674
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          634Net
      interest income
                          
                          
                          
                          
                          
                          $
                          9,140
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          8,951Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                          
                          
                          
                          
                          
                          
                          111.1
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          110.5
                          %





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


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


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


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


30





Rate/Volume
Table.  The following
table describes the extent to which changes in tax equivalent interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities affected the Company’s interest income and expense
for the three months ended June 30, 2010 as compared to the three months ended
June 30, 2009 and the six months ended June 30, 2010 as compared to the six
months ended June 20, 2009.  The table distinguishes between (i)
changes attributable to rate (changes in rate multiplied by prior volume), (ii)
changes attributable to volume (changes in volume multiplied by prior rate), and
(iii) net change (the sum of the previous columns).  The net changes
attributable to the combined effect of volume and rate, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.





Three months ended June 30,
                  
                  
                  Six months ended June 30,2010 vs 2009
                  
                  
                  2010 vs 2009Increase/(decrease) attributable
      to
                  
                  
                  Increase/(decrease) attributable
      toVolume
                  
                  
                  Rate
                  
                  
                  Net
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  Net(Dollars
      in thousands)
                  
                  
                  (Dollars
      in thousands)Interest
      income:Investment
      securities
                  
                  $
                  (154
                  )
                  
                  $
                  (223
                  )
                  
                  $
                  (377
                  )
                  
                  $
                  (235
                  )
                  
                  $
                  (433
                  )
                  
                  $
                  (668
                  )Loans
                  
                  
                  (182
                  )
                  
                  
                  (140
                  )
                  
                  
                  (322
                  )
                  
                  
                  (477
                  )
                  
                  
                  (142
                  )
                  
                  
                  (619
                  )Total
                  
                  
                  (336
                  )
                  
                  
                  (363
                  )
                  
                  
                  (699
                  )
                  
                  
                  (712
                  )
                  
                  
                  (575
                  )
                  
                  
                  (1,287
                  )Interest
      expense:Deposits
                  
                  
                  (75
                  )
                  
                  
                  (515
                  )
                  
                  
                  (590
                  )
                  
                  
                  (128
                  )
                  
                  
                  (1,062
                  )
                  
                  
                  (1,190
                  )Other
      borrowings
                  
                  
                  (44
                  )
                  
                  
                  (88
                  )
                  
                  
                  (132
                  )
                  
                  
                  (189
                  )
                  
                  
                  (137
                  )
                  
                  
                  (326
                  )Total
                  
                  
                  (119
                  )
                  
                  
                  (603
                  )
                  
                  
                  (722
                  )
                  
                  
                  (317
                  )
                  
                  
                  (1,199
                  )
                  
                  
                  (1,516
                  )Net
      interest income
                  
                  $
                  (217
                  )
                  
                  $
                  240
                  
                  
                  $
                  23
                  
                  
                  $
                  (395
                  )
                  
                  $
                  624
                  
                  
                  $
                  229





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





Our assets and liabilities are
principally financial in nature and the resulting net interest income thereon is
subject to changes in market interest rates and the mix of various assets and
liabilities.  Interest rates in the financial markets affect our
decision on pricing our assets and liabilities, which impacts net interest
income, a significant cash flow source for us.  As a result, a
substantial portion of our risk management activities relates to managing
interest rate risk.





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





We have been successful in meeting the
interest rate sensitivity objectives set forth in our
policy.  Simulation models are prepared to determine the impact on net
interest income for the coming twelve months, including one using rates at June
30, 2010, and forecasting volumes for the twelve-month
projection.  This position is then subjected to a shift in interest
rates of 100 and 200 basis points rising and 100 basis points falling with an
impact to our net interest income on a one yearhorizon as
follows:





Dollar
      change in net
                  
                  
                  Percent
      change inScenario
                  
                  interest income ($000’s)
                  
                  
                  net interest income200
      basis point rising
                  
                  $
                  1,327
                  
                  
                  
                  7.3
                  %100
      basis point rising
                  
                  $
                  645
                  
                  
                  
                  3.5
                  %100
      basis point falling
                  
                  $
                  (992
                  )
                  
                  
                  (5.4
                  )%


31


SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995





Forward-Looking
Statements





This
document (including information incorporated by reference) contains, and future
oral and written statements by us and our management may contain,
forward-looking statements, within the meaning of such term in the Private
Securities Litigation Reform Act of 1995, with respect to our financial
condition, results of operations, plans, objectives, future performance and
business.  Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of our management and on information
currently available to management, are generally identifiable by the use of
words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,”
“may,” “will,” “would,” “could,” “should” or other similar
expressions.  Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and we
undertake no obligation to update any statement in light of new information or
future events.




Our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.  Factors which could have a material adverse
effect on operations and future prospects by us and our subsidiaries include,
but are not limited to, the following:




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


·
            The
      effects of, and changes in, federal, state and local laws, regulations and
      policies affecting banking, securities, insurance and monetary and
      financial matters and the effects of further increases in FDIC premiums
      (including the impact of the Dodd-Frank Wall Street Reform and Consumer
      Protection Act and the extensive regulations to be promulgated
      thereunder).


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


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


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


·
            The
      timely development and acceptance of products and services, including
      products and services offered through alternative delivery channels such
      as the Internet.


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


·
            Our
      ability to develop and maintain secure and reliable electronic
      systems.


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


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


·
            Our
      ability to successfully integrate acquired businesses and future
      growth.


·
            The
      costs, effects and outcomes of existing or future
    litigation.


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


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


·
            Our
      ability to effectively manage our credit
risk.


·
            Our
      ability to forecast probable loan losses and maintain an adequate
      allowance for loan losses.


·
            The
      effects of declines in the value of our investment
    portfolio.


·
            Our
      ability to raise additional capital if
needed.


·
            The
      effects of declines in real estate
markets.





These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.  Additional information concerning us and our business,
including other factors that could materially affect our financial results, is
included in our filings with the Securities and Exchange Commission, including
the “Risk Factors” section in our Form 10-K.


32


ITEM
4.  CONTROLS AND PROCEDURES





An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended) as of June 30, 2010.  Based on that
evaluation, the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company’s disclosure controls and
procedures were effective as of June 30, 2010.





There
were no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2010 that materially affected or were likely
to materially affect the Company’s internal control over financial
reporting.


33


LANDMARK
BANCORP, INC. AND SUBSIDIARY


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





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





ITEM
1A.  RISK FACTORS





Other
than as set forth below, there have been no material changes in the risk factors
applicable to the Company from those disclosed in Part I, Item 1A.
“Risk Factors,” in the Company's 2009 Annual Report on Form 10-K.





Recently
enacted regulatory reforms could have a significant impact on our business,
financial condition and results of operations.





On July
21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which is perhaps the most significant financial reform
since the Great Depression.  While the provisions of the Act receiving
the most public attention have generally been those more likely to affect larger
institutions, the Act also contains many provisions which will affect smaller
institutions such as ours in substantial and unpredictable
ways.  Compliance with the Act’s provisions may curtail our revenue
opportunities, increase our operating costs, require us to hold higher levels of
regulatory capital and/or liquidity or otherwise adversely affect our business
or financial results in the future.  Our management is actively
reviewing the provisions of the Act and assessing its probable impact on our
business, financial condition, and result of operations.  However,
because many aspects of the Act are subject to future rulemaking, it is
difficult to precisely anticipate its overall financial impact on the Company
and the Bank at this time.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4.  REMOVED AND RESERVED





ITEM
5.  OTHER INFORMATION





None





ITEM
6.  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


34





SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





LANDMARK
      BANCORP, INC.Date:
      August 11, 2010
              /s/ Patrick L. AlexanderPatrick
      L. AlexanderPresident
      and Chief Executive OfficerDate:
      August 11, 2010
              /s/ Mark A. HerpichMark
      A. HerpichVice
      President, Secretary, Treasurerand
      Chief Financial Officer


35