Table ofContents

 

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------|-----------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                |
|       | **For the  quarterly period ended June 30, 2008**                                                    |
|       |                                                                                                      |
|       | **OR**                                                                                                    |
|       |                                                                                                      |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |

 

**For transition period from           to         **

 

**Commission File Number 0-33203**

 

**LANDMARK BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **43-1930755**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **701  Poyntz Avenue, Manhattan, Kansas**                       | ** ** | **66502**                                |
| (Address of  principal executive offices)                       |       | (Zip Code)                               |
|                                                            |       |                                     |
| **(785)  565-2000**                                             |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes o   No x

 

Indicate thenumber of shares outstanding of each of the Registrant’s classes of commonstock as of the latest practicable date: as of July 31, 2008, the Registrant had outstanding 2,268,859shares of its common stock, $.01 par value per share.

 

 

 

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**LANDMARKBANCORP, INC.**

**Form 10-QQuarterly Report**

 

**Table ofContents**

 
| ** **                     | ** **                                                                                  | **Page Number** |
|--------------------------------|---------------------------------------------------------------------------------------------|----------------------|
| ** **                     | ** **                                                                                  | ** **           |
| ** **                     | PART I                                                                                 | ** **           |
| ** **                     | ** **                                                                                  | ** **           |
| Item  1.                       | Financial Statements and  Related Notes                                                     | 2 - 10               |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11 - 20              |
| Item 3.                        | Quantitative  and Qualitative Disclosures about Market Risk                                 | 20 - 21              |
| Item 4.                        | Controls and  Procedures                                                                    | 21                   |
|                           |                                                                                        |                 |
| PART II                   |
|                           |                                                                                        |                 |
| Item 1.                        | Legal Proceedings                                                                           | 22                   |
| Item  1A.                      | Risk Factors                                                                                | 22                   |
| Item 2.                        | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 22                   |
| Item 3.                        | Defaults  Upon Senior Securities                                                            | 22                   |
| Item 4.                        | Submission  of Matters to a Vote of Security Holders                                        | 23                   |
| Item 5.                        | Other Information                                                                           | 23                   |
| Item  6.                       | Exhibits                                                                                    | 23                   |
|                           |                                                                                        |                 |
| Form 10-Q  Signature Page | 24                                                                                          |

 

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**ITEM1.  FINANCIAL STATEMENTS AND RELATEDNOTES**

 

**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| ** **                                                                                                                                                     | ** ** | **(Unaudited)**   | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                                                                     | ** ** | ** **        | ** **  | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                                      |       | $                 | 13,058,669  |                  | $          | 14,739,148 |   |
| Investment securities:                                                                                                                                         |       |              |        |                  |       |
| Available for sale, at fair value                                                                                                                              |       | 163,168,673       |        | 155,879,231           |       |
| Other securities                                                                                                                                               |       | 8,968,600         |        | 8,844,950             |       |
| Loans, net                                                                                                                                                     |       | 376,175,256       |        | 376,156,608           |       |
| Loans held for sale                                                                                                                                            |       | 5,915,712         |        | 1,723,687             |       |
| Premises and equipment, net                                                                                                                                    |       | 14,222,986        |        | 14,259,172            |       |
| Goodwill                                                                                                                                                       |       | 12,894,167        |        | 12,894,167            |       |
| Other intangible assets, net                                                                                                                                   |       | 2,768,032         |        | 3,144,001             |       |
| Bank owned life insurance                                                                                                                                      |       | 11,867,743        |        | 11,634,535            |       |
| Accrued interest and other assets                                                                                                                              |       | 7,517,114         |        | 7,179,224             |       |
|                                                                                                                                                           |       |              |        |                  |       |
| Total assets                                                                                                                                                   |       | $                 | 616,556,952 |                  | $          | 606,454,723 |   |
|                                                                                                                                                           |       |              |        |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |              |        |                  |       |
| Liabilities:                                                                                                                                                   |       |              |        |                  |       |
| Deposits                                                                                                                                                       |       | $                 | 447,797,216 |                  | $          | 452,652,306 |   |
| Federal Home Loan Bank borrowings                                                                                                                              |       | 83,435,810        |        | 69,026,525            |       |
| Other borrowings                                                                                                                                               |       | 27,964,265        |        | 24,061,554            |       |
| Accrued expenses, taxes and other liabilities                                                                                                                  |       | 7,777,875         |        | 8,418,200             |       |
| Total liabilities                                                                                                                                              |       | 566,975,166       |        | 554,158,585           |       |
|                                                                                                                                                           |       |              |        |                  |       |
| Stockholders’ equity:                                                                                                                                     |       |              |        |                  |       |
| Preferred stock, $0.01 par, 200,000 shares authorized, none issued                                                                                             |       | —            |        | —                |       |
| Common stock, $0.01 par, 5,000,000 shares authorized, 2,411,007 and  2,409,125 shares issued, at June 30, 2008 and  December 31,  2007, respectively |       | 24,110            |        | 24,091                |       |
| Additional paid-in capital                                                                                                                                     |       | 24,395,752        |        | 24,304,144            |       |
| Retained earnings                                                                                                                                              |       | 28,914,357        |        | 27,493,281            |       |
| Treasury stock, at cost; 142,148 and 7,763 shares at June 30, 2008  and December 31, 2007, respectively                                              |       | (3,501,696        | )           | (205,894              | )          |
| Accumulated other comprehensive income                                                                                                                         |       | (250,737          | )           | 680,516               |       |
| Total stockholders’ equity                                                                                                                                |       | 49,581,786        |        | 52,296,138            |       |
|                                                                                                                                                           |       |              |        |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                |       | $                 | 616,556,952 |                  | $          | 606,454,723 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

# **CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **
| ** **                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income:                                     |       |                                                |       |                                              |       |   |   |   |   |
| Loans:                                               |       |                                                |       |                                              |       |   |   |   |   |
| Taxable                                              |       | $                                                   | 6,112,322  |                                              | $          | 7,175,902 |   | $ | 12,726,396 |   | $ | 14,284,790 |   |
| Tax-exempt                                           |       | 56,227                                              |       | 36,189                                            |       | 99,418 |   | 63,583 |   |
| Investment securities:                               |       |                                                |       |                                              |       |   |   |   |   |
| Taxable                                              |       | 1,238,074                                           |       | 1,178,213                                         |       | 2,421,116 |   | 2,314,986 |   |
| Tax-exempt                                           |       | 559,158                                             |       | 602,451                                           |       | 1,195,114 |   | 1,144,947 |   |
| Other                                                |       | 19,253                                              |       | 9,124                                             |       | 36,996 |   | 24,295 |   |
| Total interest income                                |       | 7,985,034                                           |       | 9,001,879                                         |       | 16,479,040 |   | 17,832,611 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Deposits                                             |       | 2,615,126                                           |       | 3,362,111                                         |       | 5,736,435 |   | 6,612,276 |   |
| Borrowed funds                                       |       | 897,039                                             |       | 1,173,313                                         |       | 1,808,302 |   | 2,254,680 |   |
| Total interest expense                               |       | 3,512,165                                           |       | 4,535,424                                         |       | 7,544,737 |   | 8,866,956 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net interest income                                  |       | 4,472,869                                           |       | 4,466,455                                         |       | 8,934,303 |   | 8,965,655 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Provision for loan losses                            |       | 300,000                                             |       | 60,000                                            |       | 900,000 |   | 125,000 |   |
| Net interest income after provision for  loan losses |       | 4,172,869                                           |       | 4,406,455                                         |       | 8,034,303 |   | 8,840,655 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Non-interest income:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Fees and service charges                             |       | 1,114,488                                           |       | 1,010,384                                         |       | 2,081,465 |   | 1,911,515 |   |
| Gains on sales of loans                              |       | 394,109                                             |       | 256,116                                           |       | 738,516 |   | 439,408 |   |
| Gain on prepayment of FHLB borrowings                |       | —                                              |       | —                                            |       | 246,033 |   | — |   |
| Gains on sales of investment securities              |       | 497,134                                             |       | —                                            |       | 497,134 |   | — |   |
| Bank owned life insurance                            |       | 117,833                                             |       | 114,143                                           |       | 233,923 |   | 229,967 |   |
| Other                                                |       | 136,168                                             |       | 133,715                                           |       | 277,938 |   | 262,337 |   |
| Total non-interest income                            |       | 2,259,732                                           |       | 1,514,358                                         |       | 4,075,009 |   | 2,843,227 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Non-interest expense:                                |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and benefits                            |       | 2,097,116                                           |       | 2,033,323                                         |       | 4,225,156 |   | 4,076,558 |   |
| Occupancy and equipment                              |       | 673,290                                             |       | 676,389                                           |       | 1,434,291 |   | 1,375,358 |   |
| Amortization of intangibles                          |       | 204,519                                             |       | 236,188                                           |       | 409,255 |   | 470,097 |   |
| Data processing                                      |       | 205,799                                             |       | 202,290                                           |       | 402,989 |   | 405,610 |   |
| Professional fees                                    |       | 121,312                                             |       | 134,412                                           |       | 232,577 |   | 252,319 |   |
| Advertising                                          |       | 88,964                                              |       | 106,475                                           |       | 176,991 |   | 215,363 |   |
| Other                                                |       | 871,641                                             |       | 768,700                                           |       | 1,670,834 |   | 1,519,867 |   |
| Total non-interest expense                           |       | 4,262,641                                           |       | 4,157,779                                         |       | 8,552,093 |   | 8,315,172 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Earnings before income taxes                         |       | 2,169,960                                           |       | 1,763,034                                         |       | 3,557,219 |   | 3,368,710 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Income tax expense                                   |       | 593,553                                             |       | 409,431                                           |       | 914,298 |   | 770,487 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net earnings                                         |       | $                                                   | 1,576,407  |                                              | $          | 1,353,603 |   | $ | 2,642,921 |   | $ | 2,598,223 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Earnings per share:                                  |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                |       | $                                                   | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.06 |   |
| Diluted                                              |       | $                                                   | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.05 |   |
| Dividends per share                                  |       | $                                                   | 0.19       |                                              | $          | 0.18 |   | $ | 0.38 |   | $ | 0.36 |   |

* *

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                              |       |                                              |       |   |   |
| Net cash (used in) provided by operating activities               |       | $                                                 | (1,280,848 | ) | $ | 3,533,569 |   |
|                                                              |       |                                              |       |   |   |
| Cash flows from investing activities:                             |       |                                              |       |   |   |
| Net increase in loans                                             |       | (2,241,246                                        | )          | (1,306,378 | ) |
| Maturities and prepayments of investments                         |       | 7,096,626                                         |       | 7,680,469 |   |
| Purchase of investment securities                                 |       | (25,900,603                                       | )          | (21,648,983 | ) |
| Proceeds from sales of investment securities                      |       | 10,407,572                                        |       | — |   |
| Proceeds from sales of foreclosed assets                          |       | 668,031                                           |       | 339,357 |   |
| Purchases of premises and equipment, net                          |       | (472,462                                          | )          | (1,274,862 | ) |
| Net cash used in investing activities                             |       | (10,442,082                                       | )          | (16,210,397 | ) |
|                                                              |       |                                              |       |   |   |
| Cash flows from financing activities:                             |       |                                              |       |   |   |
| Net increase (decrease) in deposits                               |       | (4,855,090                                        | )          | 1,677,743 |   |
| Federal Home Loan Bank advance borrowings                         |       | 35,000,000                                        |       | — |   |
| Federal Home Loan Bank advance repayments                         |       | (13,518,384                                       | )          | (18,384 | ) |
| Federal Home Loan Bank line of credit, net                        |       | (6,400,000                                        | )          | 8,800,000 |   |
| Other borrowings, net                                             |       | 3,902,711                                         |       | 1,293,902 |   |
| Purchase of treasury stock                                        |       | (3,295,802                                        | )          | (700,689 | ) |
| Proceeds from issuance of common stock under  stock option  plans |       | 30,432                                            |       | 20,491 |   |
| Excess tax benefit related to stock option plans                  |       | 5,010                                             |       | 3,774 |   |
| Payment of dividends                                              |       | (887,130                                          | )          | (886,342 | ) |
| Net cash provided by financing activities                         |       | 9,981,747                                         |       | 10,190,495 |   |
| Net decrease in cash and cash equivalents                         |       | (1,741,183                                        | )          | (2,486,333 | ) |
| Cash and cash equivalents at beginning of period                  |       | 14,739,148                                        |       | 14,751,914 |   |
| Cash and cash equivalents at end of period                        |       | $                                                 | 13,058,669 |   | $ | 12,265,581 |   |
|                                                              |       |                                              |       |   |   |
| Supplemental disclosure of cash flow information:                 |       |                                              |       |   |   |
| Cash paid during period for interest                              |       | $                                                 | 7,776,000  |   | $ | 8,640,000 |   |
| Cash paid during period for taxes                                 |       | $                                                 | 213,000    |   | $ | — |   |
| Supplemental schedule of non-cash investing activities:           |       |                                              |       |   |   |
| Transfer of loans to real estate owned                            |       | $                                                 | 1,346,000  |   | $ | 189,000 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF EQUITY AND COMPREHENSIVE INCOME**

**(Unaudited)**

** **
| ** **                                                                    | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|------------|------------|
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Balance  December 31, 2006                                               |       | $                 | 23,417     |                             | 22,607,510 |                   | 26,758,056 |                | (138,506   | )                                                         | (14,462    | )          | 49,236,015 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Net earnings                                                                  |       | —            |       | —                           |       | 2,598,223              |       | —              |       | —                                                    |       | 2,598,223  |       |
| Change in fair  value of investment securities available-for-sale, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | (1,111,842                                                | )          | (1,111,842 | )          |
| Dividends paid  ($0.36 per share)                                             |       | —            |       | —                           |       | (886,342               | )          | —              |       | —                                                    |       | (886,342   | )          |
| Stock-based  compensation                                                     |       | —            |       | 62,124                           |       | —                 |       | —              |       | —                                                    |       | 62,124     |       |
| Exercise of  stock options, 1,181 shares, including tax benefit of $3,774     |       | 12                |       | 24,253                           |       | —                 |       | —              |       | —                                                    |       | 24,265     |       |
| Purchase of  24,771 treasury shares                                           |       | —            |       | —                           |       | —                 |       | (700,689            | )          | —                                                    |       | (700,689   | )          |
| Balance  June 30, 2007                                                   |       | $                 | 23,429     |                             | 22,693,887 |                   | 28,469,937 |                | (839,195   | )                                                         | (1,126,304 | )          | 49,221,754 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Balance  December 31, 2007                                               |       | $                 | 24,091     |                             | 24,304,144 |                   | 27,493,281 |                | (205,894   | )                                                         | 680,516    |       | 52,296,138 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Net earnings                                                                  |       | —            |       | —                           |       | 2,642,921              |       | —              |       | —                                                    |       | 2,642,291  |       |
| Change in fair  value of investment securities available-for-sale, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | (931,253                                                  | )          | (931,253   | )          |
| Dividends paid  ($0.38 per share)                                             |       | —            |       | —                           |       | (887,130               | )          | —              |       | —                                                    |       | (887,130   | )          |
| Stock-based  compensation                                                     |       | —            |       | 56,185                           |       | —                 |       | —              |       | —                                                    |       | 56,185     |       |
| Exercise of stock  options, 1,882 shares, including tax benefit of $5,010     |       | 19                |       | 35,423                           |       | —                 |       | —              |       | —                                                    |       | 35,442     |       |
| Purchase of  134,385 treasury shares                                          |       | —            |       | —                           |       | —                 |       | (3,295,802          | )          | —                                                    |       | (3,295,802 | )          |
| Adoption of  Emerging Issues Task Force Issue 06-4                            |       | —            |       | —                           |       | (334,715               | )          | —              |       | —                                                    |       | (334,715   | )          |
| Balance  June 30, 2008                                                   |       | $                 | 24,110     |                             | 24,395,752 |                   | 28,914,357 |                | (3,501,696 | )                                                         | (250,737   | )          | 49,581,786 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****         ****Interim Financial Statements**

 

             The condensed consolidated financial statements ofLandmark Bancorp, Inc. (the “Company”) and subsidiary have been preparedin accordance with the instructions to Form 10-Q.  To the extent that information and footnotesrequired by U.S. generally accepted accounting principles for complete financialstatements are contained in or consistent with the consolidated auditedfinancial statements incorporated by reference in the Company’s Form 10-Kfor the year ended December 31, 2007, such information and footnotes havenot been duplicated herein.  In theopinion of management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of financial statementshave been reflected herein.  The December 31,2007, condensed consolidated balance sheet has been derived from the auditedconsolidated balance sheet as of that date. The results of the interim period ended June 30, 2008 are notnecessarily indicative of the results expected for the year ending December 31,2008.

 

**2.****         ****Fair Value**

 

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

 

·      Level 1: Unadjusted quoted prices inactive 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 inmarkets that are not active or quoted prices that contain observable inputssuch as yield curves, volatilities, prepayment speeds and other inputs derivedfrom market data.

 

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

 

TheCompany’s fair value disclosures exclude certain nonfinancial assets andliabilities which are deferred under the provisions of FASB Staff Position157-2. These include foreclosed real estate, long-lived assets, goodwill, andcore deposit premium, which are recorded at fair value only upon impairment.The FASB’s deferral is intended to allow additional time to consider the effectof various implementation issues relating to these non-financial instruments,and defers disclosures under SFAS No. 157 until January 1, 2009.

 

**Valuation methods for instrumentsmeasured at fair value on a recurring basis**

 

The Company’s investmentsecurities classified as available-for-sale includes agency securities,municipal obligations, mortgage-backed securities, corporate bonds,certificates of deposits and common stock. Quoted exchange prices are available for the common stock investments,which are classified as Level 1.  Agencysecurities and mortgage-backed obligations are priced utilizingindustry-standard models that consider various assumptions, including timevalue, yield curves, volatility factors, prepayment speeds, default rates, lossseverity, current market and contractual prices for the underlying financialinstruments, as well as other relevant economic measures.  Substantially all of these assumptions areobservable in the marketplace, can be derived from observable data, or aresupported by observable levels at which transactions are executed in themarketplace and are classified as Level 2. Municipal and corporate securities are valued using a type of matrix, orgrid, pricing in which securities are benchmarked against the treasury ratebased on credit rating.  These model andmatrix measurements are classified as Level 2 in the fair value hierarchy.  The Company’s investments in fixed ratecertificates of deposits are valued using a net present value model thatdiscounts the future cash flows at the current market rates and are classifiedas Level 2.

 

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The following tablerepresents the company’s investment securities that are measured at fair valueon a recurring basis at June 30, 2008 allocated to the appropriate fairvalue hierarchy:

 
| ** **                           | ** ** | ** ** | ** ** | **Fair value hierarchy** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------|------------|
| **Assets (in thousands):** | ** ** | **Total**  | ** ** | **Level 1**                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Available-for-sale  securities       |       | $          | 163,169    |                               | $          | 984 |   | $ | 162,185 |   | — |   |
|                                      |            |            |            |                                    |            |  |  |  |  |  |  |  |

 

Changes in the fair valueof available-for-sale securities are included in other comprehensive income.

 

The Company’s derivativeinstruments consist solely of interest rate lock commitments and correspondingforward sales contracts on certain mortgage loans.  The fair values of these derivatives arebased 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 economictrends, which considers the likelihood that a commitment will ultimately resultin a closed loan.  These instruments,which were not significant at June 30, 2008, are classified as Level 3based on the unobservable nature of these assumptions.

 

**Valuation methods for instrumentsmeasured at fair value on a nonrecurring basis**

 

The Company’s otherinvestment securities include investments in Federal Home Loan Bank (“FHLB”)and Federal Reserve Bank stock, which are held for regulatory purposes.  These investments generally have restrictionson the sale and/or liquidation of stock and the carrying value is approximatelyequal to fair value.  Fair valuemeasurements for these securities are classified as Level 3 based on theundeliverable nature and related credit risk.

 

The Company does notvalue its loan portfolio at fair value, however adjustments are recorded oncertain loans to reflect the impaired value on the underlying collateral.  Collateral values are reviewed on aloan-by-loan basis through independent appraisals.  Appraised values may be discounted based onmanagement’s historical knowledge, changes in market conditions and/ormanagement’s expertise and knowledge of the client and the client’sbusiness.  Because many of these inputsare unobservable the valuations are classified as Level 3.  The carrying value of the Company’s impairedloans was $5.7 million, with an allocated allowance of $184,000, at June 30,2008.

 

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

 

The Company initiallymeasures its mortgage servicing rights at fair value, and amortizes them overthe period equal to estimated net servicing income.  Periodic impairment assessments are performedbased on fair value estimates at the reporting date.  The fair value of mortgage servicing rightsare estimated based on a valuation model which calculates the present value ofestimated future cash flows associated with servicing the underlyingloans.  The model incorporatesassumptions that market participants use in estimating future net servicingincome, including estimated prepayment speeds, market discount rates, cost toservice, and other servicing income, including late fees.  The fair value measurements are classified asLevel 3.

 

**3.  Split-Dollar Life Insurance**

 

The Company adopted theEmerging Issues Task Force (“EITF”) Issue 06-4, “*Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements*”, on January 1,2008.  The EITF Issue 06-4 addressesaccounting for separate agreements that split life insurance policy benefitsbetween an employer and employee, and requires the employer to recognize aliability for future benefits payable to an employee under theseagreements.  The effects of adoption mustbe recognized through either a change in accounting principle through anadjustment to equity or through the retrospective application to all priorperiods.  Upon adoption, the Companyrecognized a liability of $335,000 attributable to the future benefits payableto a former employee, with an offsetting reduction to retained earnings, for asplit-dollar life insurance arrangement with a former employee.  The Company has an asset of $1.9 millionrecorded on the net cash surrender value for the corresponding life insurancearrangement.

 

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

 

A summary of option activity during the first sixmonths of 2008 is presented below:

 
| ** **                                         | ** ** | **Shares** | ** ** | **Weighted   average   exercise   price** | ** ** | **Weighted   average   remaining   contractual   term** | ** ** | **Aggregate   intrinsic   value** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  December 31, 2007             |       | 249,188    |       | $                                                        | 23.05      |                                                                        | 6.80 years |                                        | n/a        |   |
| Granted                                            |       | 126,600    |       | 23.00                                                    |       | —                                                                      |       | n/a                                         |       |
| Forfeited/expired                                  |       | —     |       | —                                                   |       | —                                                                      |       | n/a                                         |       |
| Exercised                                          |       | 1,882      |       | 16.17                                                    |       | —                                                                      |       | n/a                                         |       |
| Outstanding at  June 30, 2008                 |       | 373,906    |       | $                                                        | 23.07      |                                                                        | 7.52 years |                                        | $          | (306,000 | ) |
| Exercisable at  June 30, 2008                 |       | 188,536    |       | $                                                        | 22.63      |                                                                        | 5.89 years |                                        | $          | 255,000 |   |
| Vested and  expected to vest at June 30, 2008 |       | 357,509    |       | $                                                        | 23.03      |                                                                        | 7.49 years |                                        | $          | 255,000 |   |

 

                The fair value of each option grant is estimated on the date ofgrant.  The fair value of options grantedduring the first six months of 2008 were estimated utilizing the followingassumptions: dividend rate of 5.3%, volatility of 18.5%, risk-free rate of2.9%, and expected lives of five years, resulting in a fair value of $2.11 peroption at grant date.

 

Additional information about stock options exercisedis presented below:

 
| ** **                                          | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Intrinsic value  of options exercised               |       | $                                                 | 14,736     |   | $ | 11,101 |   |
| Cash received  from options exercised               |       | $                                                 | 30,432     |   | $ | 20,491 |   |
| Excess tax  benefit realized from options exercised |       | $                                                 | 5,010      |   | $ | 3,774 |   |

 

As of June 30, 2008, there was $427,000 of totalunrecognized compensation cost related to outstanding options.  That cost is expected to be recognized over aweighted-average period of 4 years.  Thetotal fair value (at vest date) of shares vested during the six months ended June 30,2008 and 2007 was $66,000 and $348,000 respectively.

 

**5.****            ****Earnings per Share**

 

                Basic earnings per share have been computed based uponthe weighted average number of common shares outstanding during eachperiod.  Diluted earnings per shareinclude the effect of all potential common shares outstanding during eachperiod.  Earnings and dividends per sharefor prior periods have been adjusted to give effect to the 5% stock dividendpaid by the Company in December 2007.

 

The shares used in thecalculation of basic and diluted earnings per share are shown below:

 
| ** **                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended**

**June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                        | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net earnings  available to common stockholders      |       | $                                               | 1,576,407  |                                              | $          | 1,353,603 |   | $ | 2,642,921 |   | $ | 2,598,223 |   |
|                                                |       |                                            |       |                                              |       |   |   |   |   |
| Weighted average  common shares outstanding (basic) |       | 2,268,859                                       |       | 2,442,151                                         |       | 2,311,029 |   | 2,447,303 |   |
| Dilutive stock  options                             |       | 8,501                                           |       | 20,712                                            |       | 9,631 |   | 20,003 |   |
| Weighted average  common shares (diluted)           |       | 2,277,360                                       |       | 2,462,863                                         |       | 2,320,660 |   | 2,467,306 |   |
|                                                |       |                                            |       |                                              |       |   |   |   |   |
| Net earnings per  share:                            |       |                                            |       |                                              |       |   |   |   |   |
| Basic                                               |       | $                                               | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.06 |   |
| Diluted                                             |       | $                                               | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.05 |   |

 

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**6.****            ****Other Comprehensive Income**

 

The Company’sother comprehensive income (loss) consists of the unrealized holding gains andlosses on available-for-sale securities as shown below.

** **
| ** **                                                         | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Unrealized  holding lossess on securities                          |       | $                                                     | (3,358,572 | )                                                   | $          | (2,070,828 | ) | $ | (1,004,888 | ) | $ | (1,793,293 | ) |
| Less  reclassification adjustment for net gains included in income |       | 497,134                                               |       | —                                              |       | 497,134 |   | — |   |
| Net unrealized  gains                                              |       | (3,855,706                                            | )          | (2,070,828                                          | )          | (1,502,022 | ) | (1,793,293 | ) |
| Income tax  expense                                                |       | (1,465,169                                            | )          | (786,914                                            | )          | (570,769 | ) | (681,451 | ) |
| Other  comprehensive income (loss)                                 |       | $                                                     | (2,390,537 | )                                                   | $          | (1,283,914 | ) | $ | (931,253 | ) | $ | (1,111,842 | ) |

 

**7.****            ****Other Intangible Assets**

 

The following is ananalysis of changes in the core deposit intangible assets:

 
| ** **                      | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Fair value at   acquisition**    | ** ** | **Accumulated  Amortization** | ** ** | **Fair value at  acquisition** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                 | 5,396,065  |   | $ | (2,462,256 | ) | $ | 5,396,065 |   | $ | (1,667,478 | ) |
| Additions                       |       | —                                            |       | — |   | — |   | — |   |
| Amortization                    |       | —                                            |       | (355,830 | ) | — |   | (404,880 | ) |
| Balance at end  of period       |       | $                                                 | 5,396,065  |   | $ | (2,818,086 | ) | $ | 5,396,065 |   | $ | (2,072,358 | ) |

 

The following is ananalysis of changes in the mortgage servicing rights:

 
| ** **                      | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Cost**                                          | ** ** | **Accumulated  Amortization** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                 | 770,172    |   | $ | (559,980 | ) | $ | 791,840 |   | $ | (489,718 | ) |
| Additions                       |       | 33,286                                            |       | — |   | 10,432 |   | — |   |
| Prepayments/maturities          |       | (32,596                                           | )          | 32,596 |   | (27,691 | ) | 27,691 |   |
| Amortization                    |       | —                                            |       | (53,425 | ) | — |   | (65,217 | ) |
| Balance at end  of period       |       | $                                                 | 770,862    |   | $ | (580,809 | ) | $ | 774,581 |   | $ | (527,244 | ) |

 

The mortgage servicingrights correspond to loans serviced by the Company for unrelated third partieswith outstanding principal balances of $86.3 million and $91.0 million at June 30,2008 and December 31, 2007, respectively. Gross service fee income related to such loans was $56,000 and $62,000for the quarters ended June 30, 2008 and June 30, 2007, respectively,which is included in fees and service charges in the condensed consolidatedstatements of earnings.  Gross servicefee income for the six months ended June 30, 2008 and 2007 was $113,000and $126,000, respectively.

 

Aggregate amortizationexpense for the quarters ended June 30, 2008 and 2007, was $205,000 and$236,000, respectively and $409,000 and $470,000 for the six months ended June 30,2008 and 2007, respectively.  Thefollowing depicts estimated amortization expense for the remainder of 2008 andin successive years ending December 31:

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2008       |       | $          | 433,000    |   |
| 2009       |       | 697,000    |       |
| 2010       |       | 500,000    |       |
| 2011       |       | 402,000    |       |
| 2012       |       | 308,000    |       |
| Thereafter |       | 428,000    |       |
|            |            |            |            |  |

 

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**8.****            ****Impact of Recent AccountingPronouncements**

 

In February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*.”  SFAS No. 159 allows companies to electfair-value measurement of specified financial instruments and warranty andinsurance contracts when an eligible asset or liability is initially recognizedor when an event, such as a business combination triggers a new basis ofaccounting for that asset or liability. The election, called the “fair-value option,” will enable companies toreduce the volatility in reported earnings caused by measuring related assetsand liabilities differently.  Theelection is available for eligible assets or liabilities on a contract-by-contractbasis without electing it for identical assets or liabilities under certainrestrictions.  For calendar yearcompanies, SFAS No. 159 was effective beginning January 1, 2008.  We did not elect to apply SFAS No. 159to any existing financial instruments upon adoption.

 

In November 2007,the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 109, “*Written Loan Commitment Recorded at Fair Value Through Earnings*.”  This SAB supersedes SAB 105 and expresses thecurrent view that, consistent with the guidance in SFAS No. 156, *Accounting for Servicing of Financial Assets*, and SFAS No. 159,“*The Fair Value Option for Financial Assets andFinancial Liabilities*”, the expected net future cash flows relatedto the associated servicing of the loan should be included in the measurementof all written loan commitments that are accounted for at fair value throughearnings.  For calendar year companies,this SAB was effective January 1, 2008. The adoption of SAB 109 did not have a material effect on ourconsolidated financial statements.

 

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

 

Also in December 2007,the FASB issued SFAS No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements*–*anamendment of ARB No. 51*”. This statement amends ARB 51 to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  It alsoamends certain of ARB 51’s consolidation procedures for consistency with therequirements of FASB Statement No. 141 (revised 2007), *Business Combinations*. For calendar year companies, this Statement is effective January 1,2009.  We do not expect that adoption ofthe Statement will have a material effect on our consolidated financialstatements.

 

In March 2008, the FASBissued Statement of Financial Accounting Standards No. 161, “*Disclosures about Derivative Instruments and Hedging Activities - anamendment of FASB Statement No. 133*”.  This Statement requires enhanced disclosuresabout how and why an entity uses derivative instruments, how derivativeinstruments and related hedged items are accounted for, and how theseactivities affect its financial position, financial performance, and cashflows. For the calendar year companies, this statement is effective January 1,2009.  We do not expect that adoption ofthe Statement will have a material effect on our consolidated financialstatements.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

Our results of operations depend primarily on netinterest income, which is the difference between interest income frominterest-earning assets and interest expense on interest-bearingliabilities.  Net interest income isaffected by regulatory, economic and competitive factors that influenceinterest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that ourinterest-earning assets mature or reprice at different times, or at differentspeeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, suchas service charges, loan fees and gains and losses from the sale of newlyoriginated loans and investments.  Ourprincipal operating expenses, aside from interest expense, consist ofcompensation and employee benefits, occupancy costs, data processing expensesand provision for loan losses.

 

We are significantly impacted by prevailing nationaland local economic conditions, including federal monetary and fiscal policiesand federal regulations of financial institutions.  Deposit balances are influenced by numerousfactors such as competing personal investments, the level of personal incomeand the personal rate of savings within our market areas.  Factors influencing lending activitiesinclude the demand for housing and commercial loans as well as the interestrate pricing competition from other lending institutions.

 

*CriticalAccounting Policies.*Critical accounting policies are those which are both most important to theportrayal of our financial condition and results of operations, and require ourmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain.  Our critical accountingpolicies relate to the allowance for loan losses, the valuation of investmentsecurities and accounting for income taxes, all of which involve significantjudgment by our management.

 

We perform periodic andsystematic detailed reviews of our lending portfolio to assess overallcollectability.  The level of theallowance for loan losses reflects our estimate of the collectability of theloan portfolio as of each reporting date. While these estimates are based on substantive methods for determiningallowance requirements, nevertheless, actual outcomes may differ significantlyfrom estimated results.  Additionalexplanation of the methodologies used in establishing this reserve is providedin the “Asset Quality and Distribution” section.

 

We report our investmentsecurities at estimated fair values based primarily on observable marketinputs, which are obtained from independent sources.  We perform periodic reviews of the fair valueof investment securities to determine if any declines in value might beconsidered other than temporary.  Ourmost recent review showed that the securities that had experienced decreases infair value, resulting in unrealized loss positions, were related to changes ininterest rates and not to a credit deterioration.  We have the ability and intent to hold thesesecurities until market values recover, including up to the maturity date.  Although we believe that our estimates of thefair values of investment securities to be reasonable, economic and market factorsmay affect the amounts that will ultimately be realized from these investments.

 

The objectives ofaccounting for income taxes are to recognize the amount of taxes payable orrefundable for the current year and deferred tax liabilities and assets for thefuture tax consequences of events that have been recognized in an entity’sfinancial statements or tax returns. Judgment is required in assessing the future tax consequences of eventsthat have been recognized in our financial statements or tax returns.  Under FIN 48, an income tax position will berecognized if it is more likely than not that it will be sustained upon IRSexamination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amountof benefit that is greater than 50 percent likely of being realized uponultimate settlement.  Changes inestimates regarding the actual outcome of these future tax consequences,including the effects of IRS examinations and examinations by other stateagencies, could materially impact our financial position and results ofoperations.

 

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*Summaryof Results*.  During the second quarter of 2008 weexperienced a $223,000 increase in earnings as compared to the second quarterof 2007.  This increase was primarilyattributable to $497,000 of gains on sales of investment securities.  Partially offsetting the gains on sales ofinvestment securities was a $240,000 increase in our provision for loan lossesduring the second quarter of 2008 as compared to the same period in 2007.  Our net interest margin declined slightlyfrom 3.50% during the second quarter of 2007 to 3.47% during the same period of2008.

 

During the firstsix months of 2008 we experienced a $45,000 increase in earnings as compared tothe first six months of 2007.  Theincrease in earnings was primarily the result of increased non-interest incomewhich more than offset our higher provision for loan losses.  During the first six months of 2008 werecorded gains of $497,000 on sales of investment securities and a $246,000gain recognized on the prepayment of a $10 million FHLB advance, as well as a$299,000 increase in gains on sales of loans during the first six months of2008 as compared to the same period of 2007. Offsetting the higher non-interest income was a $775,000 increase inprovision for loan losses over the same periods.  Our net interest margin declined from 3.54%during the first six months of 2007 to 3.48% during the same period of 2008.

 

This decline innet interest margin was the result of competitive deposit pricing pressures notallowing us to decrease our costs of deposits in line with our decrease invariable loan rates during 2008 as the Federal Reserve Bank continued todecrease the federal funds target rate. Our variable rates on commercial and commercial real estate loans aregenerally tied to the prime rate, which moves with the federal funds targetrate.  Our certificate of deposits andmoney market rates are typically priced off of our alternative funding sourcesas well as competitors’ rates, which typically do not decline as fast or as faras the federal funds target rate.  Thosecharacteristics generally lead to a decline in our net interest margin in adeclining rate environment, which occurred during the first six months of 2008.

 

The followingtable summarizes earnings and key performance measures for the periodspresented.

 
| ** **                        | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net earnings:                     |       |                                                |       |                                              |       |   |   |   |   |
| Net earnings                      |       | $                                                   | 1,576,407  |                                              | $          | 1,353,603 |   | $ | 2,642,921 |   | $ | 2,598,223 |   |
| Basic earnings  per share         |       | $                                                   | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.06 |   |
| Diluted earnings  per share       |       | $                                                   | 0.69       |                                              | $          | 0.55 |   | $ | 1.14 |   | $ | 1.05 |   |
| Earnings ratios:                  |       |                                                |       |                                              |       |   |   |   |   |
| Return on  average assets (1)     |       | 1.03                                                | %          | 0.90                                              | %          | 0.87 | % | 0.87 | % |
| Return on  average equity (1)     |       | 12.52                                               | %          | 10.83                                             | %          | 10.38 | % | 10.51 | % |
| Dividend payout  ratio            |       | 27.54                                               | %          | 32.76                                             | %          | 33.33 | % | 34.23 | % |
| Net interest  margin (1) (2) |       | 3.47                                                | %          | 3.50                                              | %          | 3.48 | % | 3.54 | % |

 

----

(1)          The ratio has been annualized and is notnecessarily indicative of the results for the entire year.

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

 

*InterestIncome.*  Interest income for the three months ended June 30,2008, decreased $1.0 million, or 11.3%, to $8.0 million from $9.0 million inthe same period of 2007, resulting from decreased interest income onloans.  Interest income on loansdecreased $1.0 million, or 14.5%, to $6.2 million for the quarter ended June 30,2008 due primarily to decreases in yields and lower loan balances outstandingduring the second quarter of 2008 as compared to the same of period of2007.  See the Rate\Volume Table foradditional details.  Average loans outstandingfor the quarter ended June 30, 2008 decreased to $379.2 million from$383.9 million for the quarter ended June 30, 2007.  Interest income on investment securitiesincreased $27,000, or 1.5%, to $1.8 million for the second quarter of 2008, ascompared to the same period of 2007. Average investment securities outstanding increased from $160.4 millionfor the quarter ended June 30, 2007, to $173.6 million for the quarterended June 30, 2008.  Offsetting theincrease in average investments outstanding for the comparable period was alower yield on those investments as market rates declined during the secondquarter of 2008 as compared to the same period of 2007.

 

Interest income for thesix months ended June 30, 2008, decreased $1.4 million, or 7.6%, to $16.5million from $17.8 million in the same period of 2007, resulting from decreasedinterest income on loans.  Interestincome on loans decreased $1.5 million, or 10.6%, to $12.8 million for the sixmonths ended June 30, 2008 due primarily to decreases in yields and lowerloan balances outstanding during the first six months of 2008 as compared tothe same of period of 2007.  See theRate\Volume Table for additional details. Average loans for the six months ended June 30, 2008 decreased to$380.3 million from $383.7 million for the six months ended June 30,2007.  Interest income on investmentsecurities increased $169,000, or 4.9%, to $3.7 million for the first sixmonths of 2008, as compared to the same period of 2007.  Average investment securities outstandingincreased from $156.7 million for the six months ended June 30, 2007, to$170.2

 

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million for the quarterended June 30, 2008.  Offsetting theincrease in average investments outstanding for the comparable period was alower yield on those investments as market declined during the first six monthsof 2008 as compared to the same period of 2007.

 

*InterestExpense*.  Interest expense during the three monthsended June 30, 2008 decreased $1.0 million, or 22.6%, as compared to thesame period of 2007.  For the threemonths ended June 30, 2008, interest expense on interest-bearing depositsdecreased $747,000, or 22.2%.  Averageinterest-bearing deposits increased from $398.1 million during the quarterended June 30, 2007 to $398.9 million for the quarter ended June 30,2008.  The decrease in interest expenseon interest-bearing deposits resulted from lower rates on deposit balances,primarily lower rates for our maturing certificates of deposit, and lower rateson money market and NOW accounts, as they repriced down, along with the federalfunds target rates and other interest rates, throughout 2008.  Average borrowings for the quarter ended June 30,2008 increased to $102.8 million from $99.2 million for the quarter ended June 30,2007, however interest expense on borrowings decreased $276,000, or 23.6%, to$897,000 for the three months ended June 30, 2008 as compared to the sameperiod in 2007.  The declining rates onour variable rate borrowings more than offset the higher average balancesduring the quarter.

 

Interest expense duringthe six months ended June 30, 2008 decreased $1.3 million, or 14.9%, ascompared to the same period of 2007.  Forthe six months ended June 30, 2008, interest expense on interest-bearingdeposits decreased $876,000, or 13.3%. Average interest-bearing deposits increased from $397.6 million duringthe six months ended June 30, 2007 to $399.2 million for the six monthsended June 30, 2008.  The decreasein interest expense on interest-bearing deposits resulted from lower rates ondeposit balances, primarily lower rates for our maturing certificates ofdeposit, and lower rates on money market and NOW accounts, as they repriceddown, along with the federal funds target rates and other interest rates,throughout the first six months of 2008. Average borrowings for the six months ended June 30, 2008 increasedto $100.8 million from $96.5 million for the six months ended June 30,2007, however interest expense on borrowings decreased $446,000, or 19.8%, to$1.8 million for the six months ended June 30, 2008 as compared to thesame period in 2007.  The declining rateson our variable rate borrowings more than offset the higher average balancesduring the first six months of 2008.

 

*NetInterest Income*.  Net interest income for the three monthsended June 30, 2008 totaled $4.2 million, increasing $6,000, or 0.1%, ascompared to the three months ended June 30, 2007.  Average interest-earning assets increasedduring the second quarter of 2008 to $552.8 million from $544.3 million for thesecond quarter of 2007.  Our net interestmargin, on a tax equivalent basis, declined to 3.47% for the three months endedJune 30, 2008 from 3.50% for the same period in 2007.

 

Net interest income forthe six months ended June 30, 2008, totaled $8.9 million, decreasing$31,000, or 0.4%, as compared to the six months ended June 30, 2007.  This decline in net interest income was dueprimarily to the decreases in yields on interest earning assets outpacing thedecreases in our cost of funding on deposits. Average interest-earning assets increased during the six months of 2008to $550.5 million from $540.4 million for the first six months of 2007.  Our net interest margin, on a tax equivalent basis,declined to 3.48% for the six months ended June 30, 2008 from 3.54% forthe same period in 2007.

 

*Provisionfor Loan Losses*.  We maintain, and our board of directorsmonitors, an allowance for losses on loans. The allowance is established basedupon management’s periodic evaluation of known and inherent risks in the loanportfolio, review of significant individual loans and collateral, review ofdelinquent loans, past loss experience, adverse situations that may affect theborrowers’ ability to repay, current market conditions, and other factorsmanagement deems important. Determining the appropriate level of reservesinvolves a high degree of management judgment and is based upon historical andprojected losses in the loan portfolio and the collateral value of specificallyidentified impaired loans. Allowance policies are subject to periodic reviewand revision in response to a number of factors, including current marketconditions, actual loss experience and management’s expectations.

 

The provision for loanlosses for the three months ended June 30, 2008 was $300,000, compared toa provision of $60,000 during the three months ended June 30, 2007.  The provision for loan losses for the sixmonths ended June 30, 2008 was $900,000, compared to a provision of$125,000 during the six months ended June 30, 2007.  We increased our provision for loan losses by$775,000 during 2008 due to the difficult conditions in the credit markets andincreased historical losses as a result of increased charge-offs, despite thefact that our levels of non-accrual and past due loans declined during2008.  While our markets experienced ageneral economic slowdown in 2007, the economic decline accelerated rapidlyduring the first quarter of 2008 and continued during the second quarter.  This was evidenced nationally bydeteriorating U.S. economic indicators coupled with further declines inresidential real estate prices, higher energy and food costs and ebbingconsumer confidence.  These risk factorswere further exemplified by the Federal Open Market

 

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Committee reducing thefed funds target rate by 225 basis points during 2008 and through the use ofits emergency monetary powers in an effort to calm the credit markets.

 

One measure of theadequacy of the allowance for estimated losses on loans is the ratio of theallowance to the total loan portfolio. At June 30, 2008, the allowance for loan losses was $3.3 million,or 0.9% of gross loans outstanding, compared to $4.2 million, or 1.1% of grossloans outstanding at December 31, 2007. Our allowance for loan losses to gross loans ratio declined during thefirst six months of 2008, despite the increase in our provision, because of the$1.7 million in charge-offs were primarily related to previously identifiedimpaired loans.  The charge-offsdecreased gross loans and the allowance for loan losses, lowering thecorresponding ratio.  For furtherdiscussion of the allowance for loan losses, refer to the “Asset Quality andDistribution” section.

 

*Non-interestIncome*.  Non-interest income increased $745,000, or49.2%, for the three months ended June 30, 2008, to $1.8 million, ascompared to the three months ended June 30, 2007.  The increase was primarily attributable to$497,000 of gains on the sales of investment securities and increases of$138,000 in gains on sale of loans and $104,000 in fees and service charges, ascompared to the second quarter of 2007. Market conditions during the second quarter of 2008 allowed us to selllonger term, higher yielding agency securities while purchasing shorter term,lower yielding mortgage-backed obligations at gains that were higher than thereductions in interest income as a result of the transactions.  The increased gains on sales of loans weredriven by higher origination volumes of residential real estate loans that weresold in the secondary market, while the increases in fees and service chargeswere primarily related to deposits.  Ourability to originate secondary market conforming loans allowed us to increaseour loan volumes.

 

Non-interest incomeincreased $1.2 million, or 43.3%, for the six months ended June 30, 2008,to $4.1 million, as compared to the six months ended June 30, 2007.  The increase was primarily attributable to$497,000 of gains on sales of investments and a $246,000 gain on the prepaymentof a FHLB advance along with increases of $299,000 in gains on sales of loansand $170,000 in fees and service charges, as compared to the first six monthsof 2007.  During 2008, we began astrategy of issuing longer-term, fixed rate FHLB advances and repayingshorter-term FHLB advances to lengthen our FHLB advance maturities while rateswere believed to be at a relatively low point in the rate cycle.  As a result of the prepayment of a $10million advance, we were able to recognize a gain of $246,000, whichrepresented the remaining fair value adjustment required by purchase accountingfor a prior acquisition.

 

*Non-interestExpense*.  Non-interest expense increased $105,000, or3.2%, to $4.3 million for the three months ended June 30, 2008, ascompared to the three months ended June 30, 2007.  These increases were primarily driven byhigher costs of compensation and a $70,000 valuation allowance related to thedeclines in the fair value of two foreclosed assets, which is included in othernon-interest expense.

 

Non-interest expenseincreased $237,000, or 2.9%, to $8.6 million for the six months ended June 30,2008, as compared to the six months ended June 30, 2007.  These increases were primarily driven byhigher costs of compensation and benefits and a $70,000 valuation allowancerelated to the declines in the fair value of two foreclosed assets, which isincluded in other non-interest expense.

 

*IncomeTax Expense*.  Income tax expense increased $184,000, or45.0%, from $409,000 for the three months ended June 30, 2007, to $594,000for the three months ended June 30, 2008. The effective tax rate for the second quarter of 2008 was 27.4% comparedto 23.2% during the second quarter of 2007. The increase in the effective tax rate was primarily the result ofhigher taxable income.

 

Income tax expenseincreased $144,000, or 18.7%, from $770,000 for the six months ended June 30,2007, to $914,000 for the six months ended June 30, 2008.  The effective tax rate for the six months of2008 was 25.7% compared to 22.9% during the first six months of 2007.  The increase in the effective tax rate wasprimarily the result of higher taxable income.

 

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*AssetQuality and Distribution*.  Our primary investingactivities are the origination of commercial, commercial real estate, mortgageand consumer loans and the purchase of investment securities.  We have concentrated on generating commercialand commercial real estate loans over the past few years and are pleased withthe growth in this segment of our loan portfolio.  We also originate fixed-rate, residentialmortgage loans with maturities in excess of ten years, primarily for sale inthe secondary market.  Total assetsincreased to $616.6 million at June 30, 2008, compared to $606.5 millionat December 31, 2007.  While netloans, excluding loans held for sale was $376.2 million at both June 30,2008 and December 31, 2007, the composition of loans changed moresubstantially as our commercial and commercial real estate loans increased by$10.4 million and our one-to-four family residential loans decreased by $10.3million.

 

Loans consisted of thefollowing:

 
| ** **                                    | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| Real estate loans:                            |       |                        |        |                            |       |
| One-to-four family residential                |       | $                           | 116,130,004 |                            | $          | 126,459,081 |   |
| Commercial                                    |       | 125,939,825                 |        | 113,209,220                     |       |
| Construction                                  |       | 21,960,038                  |        | 27,936,176                      |       |
| Commercial loans                              |       | 106,762,065                 |        | 103,098,695                     |       |
| Consumer loans                                |       | 8,512,951                   |        | 9,164,122                       |       |
| Total                                         |       | 379,304,883                 |        | 379,867,294                     |       |
|                                          |       |                        |        |                            |       |
| Less: Deferred loan fees and loans in process |       | (196,615                    | )           | (460,981                        | )          |
| Less: Allowance for loan losses               |       | 3,326,242                   |        | 4,171,667                       |       |
| Loans, net                                    |       | $                           | 376,175,256 |                            | $          | 376,156,608 |   |

 

The allowance for loanlosses is established through a provision for losses on loans based on ourevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of its loan activity.  Suchevaluation, which includes a review of all loans with respect to which fullcollectability may not be reasonably assured, considers the fair value of theunderlying collateral, economic conditions, historical loan loss experience,level of classified loans and other factors that warrant recognition inproviding for an adequate allowance for loan losses.  As a part of its examination process, the OCCperiodically reviews our allowance for loan losses and has the authority torequire us to make additions to the allowance based on its evaluation.  Although we believe that we use the bestinformation available to determine the allowance for loan losses, unforeseenmarket conditions could result in adjustment to the allowance for loanlosses.  In addition, net earnings couldbe significantly affected if circumstances differ substantially from theassumptions used in establishing the allowance for loan losses.

 

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

 
| ** **                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| Beginning  balance         |       | $                                | 3,287,904  |                           | $          | 4,075,103 |   | $ | 4,171,667 |   | $ | 4,029,710 |   |
| Provision for  loan losses |       | 300,000                          |       | 60,000                         |       | 900,000 |   | 125,000 |   |
| Charge-offs                |       | (276,579                         | )          | (43,502                        | )          | (1,779,934 | ) | (85,873 | ) |
| Recoveries                 |       | 14,918                           |       | 13,528                         |       | 34,510 |   | 36,292 |   |
| Ending balance             |       | $                                | 3,326,242  |                           | $          | 4,105,129 |   | $ | 3,326,242 |   | $ | 4,105,129 |   |

 

Loans past due more thana month totaled $8.4 million at June 30, 2008, compared to $11.9 millionat December 31, 2007.  Loans pastdue more than a month and still accruing interest at June 30, 2008,totaled $3.9 million.  At June 30,2008, $4.9 million in loans were on non-accrual status, or 1.3% of net loans,compared to a balance of $10.0 million in loans on non-accrual status, or 2.7%of net loans, at December 31, 2007. The decrease in non-accrual loans was primarily the result of thecollection of the outstanding balances on two loan relationships totaling $3.0million and certain loan charge-offs on loans previously classified asnon-accrual during 2008.  Althoughnon-accrual loans decreased during the first six months of 2008, we increasedour provision for loan losses during the period due to difficult conditions inthe credit markets, slowing national and local economies and an increase inhistorical losses resulting from the higher levels of charge-offs during2008.  We felt this step was appropriategiven the impact these factors could have on our outstanding loanportfolio.  Net loan charge-offs for thesix months ended June 30, 2008 were $1.7 million compared to $50,000 forthe comparable period of 2007.  While thecharge-offs increased during the first six months of 2008, substantially allhad a specific loss reserve allocation at December 31, 2007.  The increased charge-offs were primarilyrelated to four loan

 

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relationships withinsufficient collateral, on which we believe it is not likely that ourcollection attempts will result in any significant recoveries.

 

A summary of thenon-performing assets:

 
| ** **                                              | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Total  non-accrual loans                                |       | $                           | 4,879,260  |                            | $          | 10,037,022 |   |
| Accruing loans  over 90 days past due                   |       | —                      |       | —                          |       |
| Real estate  owned                                      |       | 1,172,664                   |       | 491,722                         |       |
| Total  nonperforming assets                             |       | $                           | 6,051,924  |                            | $          | 10,528,744 |   |
|                                                    |       |                        |       |                            |       |
| Total  nonperforming loans to total loans, net          |       | 1.3                         | %          | 2.7                             | %          |
| Total  nonperforming assets to total assets             |       | 1.0                         | %          | 1.7                             | %          |
| Allowance for  loan losses to gross loans outstanding   |       | 0.9                         | %          | 1.1                             | %          |
| Allowance for  loan losses to total nonperforming loans |       | 62.2                        | %          | 41.5                            | %          |

 

*LiabilityDistribution*.  Our primary ongoing sources of funds aredeposits, proceeds from principal and interest payments on loans and investmentsecurities and proceeds from the sale of mortgage loans.  While maturities and scheduled amortizationof loans are a predictable source of funds, deposit flows and mortgageprepayments are greatly influenced by general interest rates, economicconditions, competition and the restructuring of the financial servicesindustry.  Total deposits decreased $4.9million to $447.8 million at June 30, 2008, from $452.7 million at December 31,2007.  Borrowings increased $18.3 millionto $111.4 million at June 30, 2008, from $93.1 million at December 31,2007.

 

Deposits consisted of thefollowing:

 
| ** **                   | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| Non-interest  bearing demand |       | $                           | 53,530,106  |                            | $          | 51,007,859 |   |
| Money market and  NOW        |       | 145,806,688                 |        | 139,557,359                     |       |
| Savings                      |       | 27,995,729                  |        | 25,882,935                      |       |
| Time, $100,000  and greater  |       | 47,925,042                  |        | 58,980,552                      |       |
| Time, other                  |       | 172,539,651                 |        | 177,223,601                     |       |
| Total deposits               |       | $                           | 447,797,216 |                            | $          | 452,652,306 |   |

 

Certificates of depositat June 30, 2008, which were scheduled to mature in one year or less,totaled $186.9 million.  Historically,maturing deposits have generally remained with our bank and we believe that asignificant portion of the deposits maturing in one year or less will remainwith us upon maturity.

 

*Liquidity*. Our most liquid assets are cash and cash equivalents and investmentsecurities available for sale.  Thelevels of these assets are dependent on the operating, financing, lending andinvesting activities during any given period. These liquid assets totaled $176.2 million at June 30, 2008, and$170.6 million at December 31, 2007. During periods in which we are not able to originate a sufficient amountof loans and/or periods of high principal prepayments, we increase our liquidassets by investing in short-term U. S. Government and agency securities orhigh-grade municipal securities.

 

Liquidity management isboth a daily and long-term function of our strategy.  Excess funds are generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare generally available through the use of FHLB advances, a line of credit withthe FHLB, or other borrowings or through sales of securities.  At June 30, 2008, we had outstandingFHLB advances of $77.9 million and $4.7 million of borrowings against our lineof credit with the FHLB.  At June 30,2008, our total borrowing capacity with the FHLB was $106.4 million.  We also had other borrowings of $28.6 millionat June 30, 2008, which included $16.5 million of subordinated debentures,$6.6 million of long-term debt and $5.5 million in repurchase agreements.

 

During the first quarter,and continuing in the second quarter of 2008 we began a strategy of issuinglonger-term, fixed rate FHLB advances and repaying shorter-term, variable rateFHLB advances to lengthen our maturities while we believed interest rates wereat a relatively point in the rate cycle. Over the first six months of 2008, we issued $35 million of advanceswith maturities ranging from eight to ten years.  These advances have a one-time option,available to the FHLB, to convert to adjustable rates, beginning between twoand five years from the issue date.  Weretired $13.5 million of advances that had previously converted to adjustablerates.

 

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As a provider of financialservices, we routinely issue financial guarantees in the form of financial andperformance standby letters of credit. Standby letters of credit are contingentcommitments issued by us generally to guarantee the payment or performanceobligation of a customer to a third party. While these standby letters ofcredit represent a potential outlay by us, a significant amount of thecommitments may expire without being drawn upon. We have recourse against thecustomer for any amount the bank is required to pay to a third party under astandby letter of credit. The letters of credit are subject to the same creditpolicies, underwriting standards and approval process as loans originated byus. Most of the standby letters of credit are secured, and in the event ofnonperformance by the customer, 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 ofthese standby letters of credit, which represents the maximum potential futurepayments guaranteed by us, was $2.6 million at June 30, 2008.

 

At June 30, 2008, wehad outstanding loan commitments, excluding standby letters of credit, of $61.2million.  We anticipate that sufficientfunds will be available to meet current loan commitments.  These commitments consist of unfunded linesof credit and commitments to finance real estate loans.

 

*Capital*. The Federal Reserve Board has established capital requirements for bankholding companies which generally parallel the capital requirements fornational banks under the Office of the Comptroller of the Currencyregulations.  The regulations providethat such standards will generally be applied on a consolidated (rather than abank-only) basis in the case of a bank holding company with more than $150million in total consolidated assets. Banks and bank holding companies are generally expected to operate at orabove the minimum capital requirements. Our ratios are well in excess of regulatory minimums and should allow usto operate without capital adequacy concerns.

 

At June 30, 2008, wecontinued to remain well capitalized, with a leverage ratio of 8.43% and atotal risk based capital ratio of 12.98%. As shown by the following table, our capital exceeded the minimumcapital requirements at June 30, 2008 (dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|---------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| **Company**               | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                  |       | $          | 50,342     |                                         | 8.43       | %                                      | $          | 23,893 |   | 4.0 | % | $ | 29,867 |   | 5.0 | % |
| Tier 1 Capital            |       | $          | 50,342     |                                         | 12.18      | %                                      | $          | 16,534 |   | 4.0 | % | $ | 24,802 |   | 6.0 | % |
| Total Risk Based  Capital |       | $          | 53,668     |                                         | 12.98      | %                                      | $          | 33,069 |   | 8.0 | % | $ | 41,336 |   | 10.0 | % |

 

At June 30,2008, Landmark National Bank continued to remain well capitalized, with aleverage ratio of 9.25% and a total risk based capital ratio of 14.15%.  As shown by the following table, the bank’scapital exceeded the minimum capital requirements at June 30, 2008(dollars in thousands):

 
| ** **                           | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| **Landmark National Bank** | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                             |       | $          | 55,050     |                                         | 9.25       | %                                      | $          | 23,807 |   | 4.0 | % | $ | 29,759 |   | 5.0 | % |
| Tier 1 Capital                       |       | $          | 55,050     |                                         | 13.35      | %                                      | $          | 16,498 |   | 4.0 | % | $ | 24,747 |   | 6.0 | % |
| Total Risk Based  Capital            |       | $          | 58,376     |                                         | 14.15      | %                                      | $          | 32,996 |   | 8.0 | % | $ | 41,245 |   | 10.0 | % |

 

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*AverageAssets/Liabilities*.  The following tables set forth informationrelating to average balances of interest-earning assets and liabilities for thethree and six months ended June 30, 2008 and the same periods for2007.  The following tables reflect theaverage tax equivalent yields on assets and average costs of liabilities forthe periods indicated (derived by dividing income or expense by the monthlyaverage balance of assets or liabilities, respectively) as well as “netinterest margin” (which reflects the effect of the net earnings balance) forthe periods shown:

 
| ** **                                                                        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**      | ** ** |
| **(Dollars in thousands)**                                                        | ** ** | **Average  balance**             | ** ** | **Interest**                     | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                | 173,575    |                             | $          | 2,086 |   | 4.83 | % | $ | 160,406 |   | $ | 2,052 |   | 5.13 | % |
| Loans (2)                                                                         |       | 379,177                          |       | 6,196                            |       | 6.57 | % | 383,919 |   | 7,229 |   | 7.55 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 552,752                          |       | 8,282                            |       | 6.03 | % | 544,325 |   | 9,281 |   | 6.84 | % |
| Non-interest-earning  assets                                                      |       | 60,074                           |       |                             |       |   |   | 60,953 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                                | 612,826    |                             |       |   |   |   | $ | 605,278 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                | 224,242    |                             | $          | 2,144 |   | 3.85 | % | $ | 236,451 |   | $ | 2,613 |   | 4.43 | % |
| Money market and  NOW accounts                                                    |       | 147,269                          |       | 451                              |       | 1.23 | % | 134,101 |   | 728 |   | 2.18 | % |
| Savings accounts                                                                  |       | 27,344                           |       | 20                               |       | 0.29 | % | 27,575 |   | 20 |   | 0.29 | % |
| FHLB advances  and other borrowings                                               |       | 102,762                          |       | 897                              |       | 3.51 | % | 99,249 |   | 1,174 |   | 4.74 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 501,617                          |       | 3,512                            |       | 2.82 | % | 497,376 |   | 4,535 |   | 3.66 | % |
| Non-interest-bearing  liabilities                                                 |       | 60,557                           |       |                             |       |   |   | 57,763 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 50,652                           |       |                             |       |   |   | 50,139 |   |   |   |   |   |
| Total                                                                             |       | $                                | 612,826    |                             |       |   |   |   | $ | 605,278 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                             |       |                             |       | 3.21 | %  |   |   |   |   | 3.18 | % |
| Net interest  margin (4)                                                          |       |                             |       | 4,770                            |       | 3.47 | % |   |   | 4,746 |   | 3.50 | % |
| Tax equivalent  interest – imputed                                           |       |                             |       | 297                              |       |   |   |   |   | 279 |   |   |   |
| Net interest  income                                                              |       |                             |       | $                                | 4,473      |   |   |   |   |   | $ |  4,467 |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                             |       | 110.2                            | %          |   |   |   |   | 109.4 | %  |   |   |
|                                                                                   |            |                                  |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

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

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

 

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| ** **                                                                        | ** ** | **Six months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **June 30, 2008**    | ** ** | **June 30, 2007**    | ** ** |
| **(Dollars in thousands)**                                              | ** ** | **Average  balance**           | ** ** | **Interest**                   | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                              | 170,184    |                           | $          | 4,187 |   | 4.95 | % | $ | 156,661 |   | $ | 3,982 |   | 5.13 | % |
| Loans (2)                                                                         |       | 380,312                        |       | 12,873                         |       | 6.81 | % | 383,731 |   | 14,379 |   | 7.56 | % |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 550,496                        |       | 17,060                         |       | 6.23 | % | 540,392 |   | 18,361 |   | 6.85 | % |
| Non-interest-earning  assets                                                      |       | 59,999                         |       |                           |       |   |   | 60,746 |   |   |   |   |   |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                              | 610,495    |                           |       |   |   |   | $ | 601,138 |   |   |   |   |   |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                              | 227,188    |                           | $          | 4,620 |   | 4.09 | % | $ | 234,435 |   | $ | 5,110 |   | 4.40 | % |
| Money market and  NOW accounts                                                    |       | 145,291                        |       | 1,077                          |       | 1.49 | % | 135,449 |   | 1,461 |   | 2.18 | % |
| Savings accounts                                                                  |       | 26,732                         |       | 40                             |       | 0.30 | % | 27,678 |   | 41 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 100,768                        |       | 1,808                          |       | 3.61 | % | 96,503 |   | 2,255 |   | 4.71 | % |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 499,979                        |       | 7,545                          |       | 3.03 | % | 494,065 |   | 8,867 |   | 3.62 | % |
| Non-interest-bearing  liabilities                                                 |       | 59,301                         |       |                           |       |   |   | 57,242 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 51,215                         |       |                           |       |   |   | 49,831 |   |   |   |   |   |
| Total                                                                             |       | $                              | 610,495    |                           |       |   |   |   | $ | 601,138 |   |   |   |   |   |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                           |       |                           |       | 3.20 | % |   |   |   |   | 3.23 | % |
| Net interest  margin (4)                                                          |       |                           |       | 9,515                          |       | 3.48 | %  |   |   | 9,494 |   | 3.54 | % |
| Tax equivalent  interest – imputed                                           |       |                           |       | 581                            |       |   |   |   |   | 528 |   |   |   |
| Net interest  income                                                              |       |                           |       | $                              | 8,934      |   |   |   |   |   | $ | 8,966 |   |   |   |
|                                                                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                           |       | 110.1                          | %          |   |   |   |   | 109.4 | % |   |   |

 

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

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

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

(4)   Netinterest margin represents annualized net interest income divided by averageinterest-earning assets.

 

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*Rate/VolumeTable.*  The followingtable describes the extent to which changes in interest income and interestexpense for major components of interest-earning assets and interest-bearingliabilities affected the Company’s interest income and expense during theperiods indicted.  The tabledistinguishes between (i) changes attributable to rate (changes in ratemultiplied by prior volume), (ii) changes attributable to volume (changesin volume multiplied by prior rate), and (iii) net change (the sum of theprevious columns).  The net changesattributable to the combined effect of volume and rate, which cannot besegregated, have been allocated proportionately to the change due to volume andthe change due to rate.

 
| ** **             | ** ** | **Three months ended June 30, 2008  compared with the same period of 2007** | ** ** | **Six months ended June 30, 2008  compared with the same period in 2007** | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Increase/(Decrease) Attributable to**                                                                                  | ** ** | **Increase/(Decrease) Attributable to**                                                                                | ** ** |
| ** **             | ** ** | **Volume**                                                                                                                         | ** ** | **Rate**                                                                                                                         | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)**                                                                                               | ** ** |
| Interest income:       |       |                                                                                                                               |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Investment  securities |       | $                                                                                                                                  | 118        |                                                                                                                             | $          | (84 | ) | $ | 34 |   | $ | 345 |   | $ | (140 | ) | $ | 205 |   |
| Loans                  |       | (90                                                                                                                                | )          | (943                                                                                                                             | )          | (1,033 | ) | (124 | ) | (1,382 | ) | (1,506 | ) |
| Total                  |       | 32                                                                                                                                 |       | (1,030                                                                                                                           | )          | (999 | ) | 221 |   | (1,522 | ) | (1,301 | ) |
| Interest  expense:     |       |                                                                                                                               |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |
| Deposits               |       | 6                                                                                                                                  |       | (752                                                                                                                             | )          | (746 | ) | 27 |   | (902 | ) | (875 | ) |
| Borrowings             |       | 44                                                                                                                                 |       | (321                                                                                                                             | )          | (277 | ) | 104 |   | (551 | ) | (447 | ) |
| Total                  |       | 50                                                                                                                                 |       | (1,073                                                                                                                           | )          | (1,023 | ) | 132 |   | (1,453 | ) | (1,322 | ) |
| Net interest  income   |       | $                                                                                                                                  | (18        | )                                                                                                                                | $          | 43 |   | $ | 24 |   | $ | 90 |   | $ | (69 | ) | $ | 21 |   |

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

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

 

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

 

We have been successfulin meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months,including one using rates at June 30, 2008, and forecasting volumes forthe twelve-month projection.  Thisposition is then subjected to a shift in interest rates of 100 and 200 basispoints rising and falling with an impact to our net interest income on a oneyear****horizon as follows:

 
| **Scenario**            | ** ** | **$  Change in Net Interest Income** | ** **  | **% of Net Interest Income** | ** ** |
|-------------------------|------------|--------------------------------------------------------------------|-------------|--------------------------------------------------|------------|
| 200 basis point rising  |       | $                                                                  | 692,000     |                                             | 3.8        | % |
| 100 basis point rising  |       | $                                                                  | 387,000     |                                             | 2.1        | % |
| 100 basis point falling |       | $                                                                  | (486,000)   |                                             | (2.7       | )% |
| 200 basis point falling |       | $                                                                  | (1,241,000) |                                             | (6.8       | )% |

 

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

 

**Forward-LookingStatements**

** **

Thisdocument (including information incorporated by reference) contains, and futureoral and written statements by us and our management may contain,forward-looking statements, within the meaning of such term in the PrivateSecurities Litigation Reform Act of 1995, with respect to our financialcondition, results of operations, plans, objectives, future performance andbusiness.  Forward-looking statements,which may be based upon beliefs, expectations and assumptions of our managementand on information currently available to management, are generallyidentifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,”“intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or othersimilar expressions.  Additionally, allstatements in this document, including forward-looking statements, speak onlyas of the date they are made, and we undertake no obligation to update anystatement in light of new information or future events.

 

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

 

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

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

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

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

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

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

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

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

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

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

·                  Ourability to successfully integrate acquired businesses.

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

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

·                  Theeconomic impact of past and any future terrorist attacks, acts of war orthreats thereof, and the response of the United States to any such threats andattacks.

 

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.  Additional information concerning us and ourbusiness, including other factors that could materially affect our financialresults, is included in our filings with the Securities and ExchangeCommission, including the “Risk Factors” section in our Form 10-K.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

An evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) promulgated under the Securities andExchange Act of 1934, as amended) as of June 30, 2008.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effectiveas of June 30, 2008.

 

There were no changes inthe Company’s internal control over financial reporting during the quarterended June 30, 2008 that materially affected or were likely to materiallyaffect the Company’s internal control over financial reporting.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**PART II – OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A.               RISK FACTORS**

 

There have been nomaterial changes in the risk factors applicable to the Company from thosedisclosed in Part I, Item 1A. “Risk Factors,” in the Company’s 2007Annual Report on Form 10-K.

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

The following table provides information aboutpurchases by the Company and its affiliated purchases during the quarter ended June 30,2008, of equity securities that are registered by the Company pursuant to Section 12of the Exchange Act.

 
| **Period**             | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased as Part of a  Publicly  Announced Plan (1)** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased  Under the Plans (1)** | ** ** |
|------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| April 1-30,  2008 |       | —                                       |       | —                                       |       | —                                                                                                                        |       | 118,711                                                                                                                    |       |
| May 1-31,  2008   |       | —                                       |       | $                                            | —     |                                                                                                                          | —     |                                                                                                                       | 118,711    |   |
| June-30, 2008          |       | —                                       |       | $                                            | —     |                                                                                                                          | —     |                                                                                                                       | 118,711    |   |
| Total                  |       | —                                       |       | $                                            | —     |                                                                                                                          | —     |                                                                                                                       | 118,711    |   |

 

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(1)          InJanuary 2008, our Board of Directors announced the approval of a stockrepurchase program permitting us to repurchase up to 119,900 shares, or 5% ofour outstanding common stock (“January 2008 Repurchase Program”),following completion of the 2004 Repurchase Program.  The company completed the repurchase planapproved in November 2004 during February 2008.  In May 2008, our Board of Directorsannounced another a new stock repurchase program, permitting us to repurchaseup to 113,400 shares, or 5% of our outstanding common stock (“May 2008Repurchase Program”), following completion of the January 2008 RepurchaseProgram.  Unless terminated earlier byresolution of the Board of Directors, the January 2008 Repurchase Programand the May 2008 Repurchase Program will expire when we have repurchasedall shares authorized for repurchase thereunder.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

None

 

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**ITEM4.  SUBMISSION OF MATTERS TO VOTE OFSECURITY HOLDERS**

 

On May 21, 2008, the annual meeting of LandmarkBancorp, Inc. stockholders was held. There were 2,268,859 shares of common stock eligible to vote at theannual meeting.  The voting on each itemat the annual meeting was as follows:

 

1.  Election of three Class I directors withterms expiring in 2011:

 
| ** **       | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|------------------|------------|-----------|------------|--------------|------------|-------------|------------|-----------------------|------------|
| Brent A. Bowman  |       | 1,761,833 |       | 285,315      |       | —      |       | —                |       |
| Joseph L. Downey |       | 1,926,796 |       | 120,352      |       | —      |       | —                |       |
| David H. Snapp   |       | 2,020,047 |       | 27,101       |       | —      |       | —                |       |

 

2.  Amendment to Landmark Bancorp, Inc.’sAmended and Restated Certificate of Incorporation to increase the number ofauthorized shares of common stock from 5,000,000 to 7,500,000:

 
| ** **                                     | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
| Increase in  authorized shares of common stock |       | 1,973,319 |       | 52,630      |       | 21,199      |       | —                |       |

 

3.  Ratification of the appointment of KPMG LLPas the Company’s independent registered public accounting firm for the yearending December 31, 2008:

 
| ** ** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
| KPMG LLP   |       | 2,021,050 |       | 24,608      |       | 1,490       |       | —                |       |

 

**ITEM5.  OTHER INFORMATION**

 

None

 

**ITEM6.  EXHIBITS**

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

 

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**SIGNATURES**

 

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

 
|                        | LANDMARK BANCORP, INC.                 |
|-----------------------------|----------------------------------------|
|                        |                                   |
|                        |                                   |
| Date: August 13,  2008 | /s/ Patrick L.  Alexander              |
|                        | Patrick L. Alexander                   |
|                        | President and Chief  Executive Officer |
|                        |                                   |
|                        |                                   |
| Date: August 13,  2008 | /s/ Mark A. Herpich                    |
|                        | Mark A. Herpich                        |
|                        | Vice President,  Secretary, Treasurer  |
|                        |  and Chief  Financial Officer     |

 

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