** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

 

**FORM 10-Q**

 

 
| **ý**                                                                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                          |       |                                                                                          |
| **For the  quarterly period ended September 30, 2004**                                                                                                                                                        |
|                                                                                                                                                                                                          |       |                                                                                          |
| **OR**                                                                                                                                                                                                        |
|                                                                                                                                                                                                          |       |                                                                                          |
| **o**                                                                                                                                                                                                         | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                          |       |                                                                                          |
| **For  transition period from                 to               ** |
|                                                                                                                                                                                                          |       |                                                                                          |

**CommissionFile Number 0-33203**

 

 

**LANDMARKBANCORP, INC.**

(Exact name ofRegistrant as specified in its charter)

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

 

**800Poyntz Avenue, Manhattan, Kansas       66502**

(Address ofprincipal executive offices)   (Zip Code)

 

**(785)565-2000**

(Registrant’stelephone number, including area code)

 

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

 

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

 

             Indicate the number of shares outstanding of each of theRegistrant’s classes of common stock as of the latest practicable date:  As of November 8, 2004, the Registrant hadoutstanding 2,044,868 shares of its common stock, $0.01 par value per share.

 

 

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**LANDMARK BANCORP, INC.**

**Form 10-Q Quarterly Report**

 

**Table of Contents**

 

 

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

 

 

 

1

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

** **
| ** **                                                                                                 | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                                                                                 | ** ** | **2004**          | ** **  | **2003**         | ** ** |
| ** **                                                                                                 | ** ** | **(Unaudited)**   | ** **  | ** **       | ** ** |
| **ASSETS**                                                                                                 |       |              |        |             |       |
| Cash and cash equivalents                                                                                  |       | $                 | 8,882,448   |             | $          | 7,708,115 |   |
| Investment securities available for sale                                                                   |       | 141,999,062       |        | 99,746,365       |       |
| Loans, net                                                                                                 |       | 282,812,437       |        | 214,295,940      |       |
| Loans held for sale                                                                                        |       | 1,176,576         |        | 734,456          |       |
| Premises and equipment, net                                                                                |       | 5,763,767         |        | 3,631,102        |       |
| Goodwill                                                                                                   |       | 7,651,891         |        | 1,971,178        |       |
| Other intangible assets, net                                                                               |       | 1,397,018         |        | 959,532          |       |
| Accrued interest and other assets                                                                          |       | 7,687,523         |        | 4,999,601        |       |
|                                                                                                       |       |              |        |             |       |
| Total assets                                                                                               |       | $                 | 457,370,722 |             | $          | 334,046,289 |   |
|                                                                                                       |       |              |        |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                              |       |              |        |             |       |
| Liabilities:                                                                                               |       |              |        |             |       |
| Deposits                                                                                                   |       | $                 | 318,608,783 |             | $          | 253,108,220 |   |
| Federal Home Loan Bank borrowings                                                                          |       | 78,843,852        |        | 25,257,104       |       |
| Other borrowings                                                                                           |       | 13,038,000        |        | 8,498,000        |       |
| Accrued expenses, taxes and other liabilities                                                              |       | 4,071,549         |        | 4,610,862        |       |
| Total liabilities                                                                                          |       | 414,562,184       |        | 291,474,186      |       |
|                                                                                                       |       |              |        |             |       |
| Stockholders’ equity:                                                                                 |       |              |        |             |       |
| Common stock, $0.01 par, 3,000,000 shares authorized, 2,230,435 and  2,207,807 shares issued, respectively |       | 22,304            |        | 22,078           |       |
| Additional paid in capital                                                                                 |       | 19,712,670        |        | 19,332,130       |       |
| Retained earnings                                                                                          |       | 27,307,525        |        | 25,213,188       |       |
| Accumulated other comprehensive income                                                                     |       | 531,817           |        | 796,932          |       |
| Treasury stock, at cost; 185,567 and 119,657 shares, respectively                                          |       | (4,765,778        | )           | (2,792,225       | )          |
| Total stockholders’ equity                                                                            |       | 42,808,538        |        | 42,572,103       |       |
|                                                                                                       |       |              |        |             |       |
| Total liabilities and stockholders’ equity                                                            |       | $                 | 457,370,722 |             | $          | 334,046,289 |   |
|                                                                                                            |            |                   |             |                  |            |  |  |  |  |

 

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

 

2

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

# **CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **

** **
| ** **                                          | ** ** | **Three Months Ended September  30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Interest income:                                    |       |                                  |       |   |   |
| Loans                                               |       | $                                     | 4,181,628  |   | $ | 3,474,288 |   |
| Investment securities                               |       | 1,129,283                             |       | 647,265 |   |
| Other                                               |       | 14,093                                |       | 11,400 |   |
| Total interest income                               |       | 5,325,004                             |       | 4,132,953 |   |
|                                                |       |                                  |       |   |   |
| Interest expense:                                   |       |                                  |       |   |   |
| Deposits                                            |       | 1,006,231                             |       | 1,054,886 |   |
| Borrowed funds                                      |       | 905,624                               |       | 295,876 |   |
| Total interest expense                              |       | 1,911,855                             |       | 1,350,762 |   |
|                                                |       |                                  |       |   |   |
| Net interest income                                 |       | 3,413,149                             |       | 2,782,191 |   |
|                                                |       |                                  |       |   |   |
| Provision for loan losses                           |       | 130,000                               |       | 60,000 |   |
|                                                |       |                                  |       |   |   |
|                                                |       |                                  |       |   |   |
| Net interest income after provision for loan losses |       | 3,283,149                             |       | 2,722,191 |   |
|                                                |       |                                  |       |   |   |
| Non-interest income:                                |       |                                  |       |   |   |
| Fees and service charges                            |       | 993,549                               |       | 655,669 |   |
| Gains on sale of loans                              |       | 174,515                               |       | 284,833 |   |
| Gains on sale of investments                        |       | —                                |       | 290,417 |   |
| Other                                               |       | 210,647                               |       | 66,714 |   |
| Total non-interest income                           |       | 1,378,711                             |       | 1,297,633 |   |
|                                                |       |                                  |       |   |   |
| Non-interest expense:                               |       |                                  |       |   |   |
| Compensation and benefits                           |       | 1,577,400                             |       | 1,142,368 |   |
| Occupancy and equipment                             |       | 439,610                               |       | 306,637 |   |
| Amortization                                        |       | 101,416                               |       | 122,570 |   |
| Professional fees                                   |       | 69,523                                |       | 56,565 |   |
| Data processing                                     |       | 100,218                               |       | 73,909 |   |
| Other                                               |       | 694,306                               |       | 488,965 |   |
| Total non-interest expense                          |       | 2,982,473                             |       | 2,191,014 |   |
|                                                |       |                                  |       |   |   |
| Earnings before income taxes                        |       | 1,679,387                             |       | 1,828,810 |   |
|                                                |       |                                  |       |   |   |
| Income tax expense                                  |       | 543,456                               |       | 597,168 |   |
|                                                |       |                                  |       |   |   |
| Net earnings                                        |       | $                                     | 1,135,931  |   | $ | 1,231,642 |   |
|                                                |       |                                  |       |   |   |
| Earnings per share:                                 |       |                                  |       |   |   |
| Basic                                               |       | $                                     | 0.55       |   | $ | 0.59 |   |
| Diluted                                             |       | $                                     | 0.55       |   | $ | 0.58 |   |
|                                                |       |                                  |       |   |   |
| Dividends per share                                 |       | $                                     | 0.17       |   | $ | 0.1619 |   |
|                                                     |            |                                       |            |  |  |  |  |  |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

 

3

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

# **CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **

** **
| ** **                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Interest income:                                    |       |                                |       |   |   |
| Loans                                               |       | $                                   | 11,539,772 |   | $ | 10,949,353 |   |
| Investment securities                               |       | 3,145,546                           |       | 2,103,139 |   |
| Other                                               |       | 33,194                              |       | 27,224 |   |
| Total interest income                               |       | 14,718,512                          |       | 13,079,716 |   |
|                                                |       |                                |       |   |   |
| Interest expense:                                   |       |                                |       |   |   |
| Deposits                                            |       | 2,974,800                           |       | 3,462,811 |   |
| Borrowed funds                                      |       | 2,135,293                           |       | 891,419 |   |
| Total interest expense                              |       | 5,110,093                           |       | 4,354,230 |   |
|                                                |       |                                |       |   |   |
| Net interest income                                 |       | 9,608,419                           |       | 8,725,486 |   |
|                                                |       |                                |       |   |   |
| Provision for loan losses                           |       | 310,000                             |       | 180,000 |   |
|                                                |       |                                |       |   |   |
| Net interest income after provision for loan losses |       | 9,298,419                           |       | 8,545,486 |   |
|                                                |       |                                |       |   |   |
| Non-interest income:                                |       |                                |       |   |   |
| Fees and service charges                            |       | 2,457,706                           |       | 1,938,321 |   |
| Gains on sale of loans                              |       | 632,545                             |       | 1,411,630 |   |
| Gains on sale of investments                        |       | 129,790                             |       | 316,099 |   |
| Other                                               |       | 399,663                             |       | 217,867 |   |
| Total non-interest income                           |       | 3,619,704                           |       | 3,883,917 |   |
|                                                |       |                                |       |   |   |
| Non-interest expense:                               |       |                                |       |   |   |
| Compensation and benefits                           |       | 4,310,278                           |       | 3,565,309 |   |
| Occupancy and equipment                             |       | 1,183,278                           |       | 931,561 |   |
| Amortization                                        |       | 284,782                             |       | 345,680 |   |
| Professional fees                                   |       | 230,439                             |       | 244,848 |   |
| Data processing                                     |       | 309,583                             |       | 237,157 |   |
| Other                                               |       | 1,921,895                           |       | 1,509,649 |   |
| Total non-interest expense                          |       | 8,240,255                           |       | 6,834,204 |   |
|                                                |       |                                |       |   |   |
| Earnings before income taxes                        |       | 4,677,868                           |       | 5,595,199 |   |
|                                                |       |                                |       |   |   |
| Income tax expense                                  |       | 1,518,389                           |       | 1,824,618 |   |
|                                                |       |                                |       |   |   |
| Net earnings                                        |       | $                                   | 3,159,479  |   | $ | 3,770,581 |   |
|                                                |       |                                |       |   |   |
| Earnings per share:                                 |       |                                |       |   |   |
| Basic                                               |       | $                                   | 1.52       |   | $ | 1.80 |   |
| Diluted                                             |       | $                                   | 1.51       |   | $ | 1.77 |   |
|                                                |       |                                |       |   |   |
| Dividends per share                                 |       | $                                   | 0.51       |   | $ | 0.4667 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

 

 

4

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                          | ** ** | **Nine Months Ended September 30,** | ** **  |
|-------------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                          | ** ** | **2004**                            | ** **  | **2003** | ** ** |
|                                                                                |       |                                |        |   |   |
| Net cash provided by operating activities                                           |       | $                                   | 3,998,531   |   | $ | 1,338,258 |   |
|                                                                                |       |                                |        |   |   |
| INVESTING ACTIVITIES                                                                |       |                                |        |   |   |
| Net increase in loans                                                               |       | 1,298,559                           |        | 15,231,955 |   |
| Maturities and prepayments of investment securities  available  for sale       |       | 24,699,893                          |        | 47,100,790 |   |
| Purchase of investment securities available for sale                                |       | (5,259,465                          | )           | (64,182,433 | ) |
| Proceeds from sale of investment securities available for sale                      |       | 241,874                             |        | 747,100 |   |
| Proceeds from sale of foreclosed assets                                             |       | 1,014,874                           |        | 354,551 |   |
| Net cash paid in First Kansas acquisition                                           |       | (8,788,732                          | )           | — |   |
| Net cash paid in Beloit and Phillipsburg branch sales                               |       | (8,714,311                          | )           | — |   |
| Purchases of premises and equipment, net                                            |       | (904,264                            | )           | (269,286 | ) |
| Net cash provided by/(used) in investing activities                                 |       | 3,588,428                           |        | (1,017,323 | ) |
|                                                                                |       |                                |        |   |   |
| FINANCING ACTIVITIES                                                                |       |                                |        |   |   |
| Net decrease in deposits                                                            |       | (6,008,815                          | )           | (7,102,219 | ) |
| Federal Home Loan Bank borrowings                                                   |       | 28,600,000                          |        | 34,350,000 |   |
| Federal Home Loan Bank repayments                                                   |       | (30,827,576                         | )           | (32,170,440 | ) |
| Proceeds from other borrowings                                                      |       | 8,585,000                           |        | — |   |
| Repayments on other borrowings                                                      |       | (4,045,000                          | )           | — |   |
| Purchase of 65,910 and 34,841 shares of treasury stock                              |       | (1,973,553                          | )           | (831,036 | ) |
| Issuance of 22,628 and 36,290 shares of common stock  under  stock option plan |       | 322,460                             |        | 351,252 |   |
| Payment of dividends                                                                |       | (1,065,142                          | )           | (980,726 | ) |
| Net cash used in financing activities                                               |       | (6,412,626                          | )           | (6,383,169 | ) |
| Net increase/(decrease) in cash                                                     |       | 1,174,333                           |        | (6,062,234 | ) |
| Cash and cash equivalents at beginning of period                                    |       | 7,708,115                           |        | 11,448,684 |   |
| Cash and cash equivalents at end of period                                          |       | $                                   | 8,882,448   |   | $ | 5,386,450 |   |
|                                                                                |       |                                |        |   |   |
| Supplemental disclosure of cash flow information:                                   |       |                                |        |   |   |
| Cash paid during period for interest                                                |       | $                                   | 4,466,000   |   | $ | 4,378,000 |   |
| Cash paid during period for taxes                                                   |       | $                                   | 1,175,000   |   | $ | 1,735,000 |   |
|                                                                                |       |                                |        |   |   |
| Supplemental schedule of noncash investing activities:                              |       |                                |        |   |   |
| Transfer of loans to real estate owned                                              |       | $                                   | 916,000     |   | $ | 224,000 |   |
| First Kansas acquisition:                                                           |       |                                |        |   |   |
| Fair value of liabilities assumed                                                   |       | $                                   | 140,619,000 |   | $ | — |   |
| Fair value of assets acquired, including goodwill                                   |       | $                                   | 149,408,000 |   | $ | — |   |
| Beloit and Phillipsburg branch sales:                                               |       |                                |        |   |   |
| Fair value of liabilities transferred                                               |       | $                                   | (12,489,000 | ) | $ | — |   |
| Fair value of assets sold                                                           |       | $                                   | (3,774,000  | ) | $ | — |   |
|                                                                                     |            |                                     |             |  |  |  |  |  |  |  |  |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

* *

* *

 

5

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** **

**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

 

**1.          Interim Financial Statements**

 

             Thecondensed consolidated financial statements of Landmark Bancorp, Inc. (the “Company”)and subsidiary have been prepared in accordance with the instructions to Form10-Q.  To the extent that information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements are contained in orconsistent with the consolidated audited financial statements incorporated byreference in the Company’s Form 10-K for the year ended December 31, 2003, suchinformation and footnotes have not been duplicated herein.  In the opinion of management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation of financial statements have been reflected herein.  The December 31, 2003, condensed consolidatedbalance sheet has been derived from the audited consolidated balance sheet asof that date.  The results of the interimperiods ended September 30, 2004, are not necessarily indicative of the resultsexpected for the year ending December 31, 2004.

 

 

**2.             Acquisition of First Kansas Financial Corporation**

 

On April 1, 2004, theCompany acquired all of the outstanding stock of First Kansas FinancialCorporation (“First Kansas”) at a cost of $19.00 per share in cash.  This acquisition expanded the Company’spresence in high-growth market areas, presenting the Company with potential forrevenue generation and asset growth.  FirstKansas was a single thrift holding company based in Osawatomie, Kansas.  At March 31, 2004, First Kansas had totalassets of approximately $150 million, including loans and deposits ofapproximately $74 million and $84 million, respectively.  The acquisition of First Kansas by theCompany was accounted for using the purchase method of accounting.  The cost in excess of the tangible andidentifiable intangible net assets acquired has been recorded as goodwill.  In connection with the acquisition, the companyrecorded a core deposit intangible of $710,000, which is being amortized on anaccelerated basis over ten years, and goodwill attributable to the acquisitionof First Kansas of approximately $6.1 million, none of which is expected to bedeductible for tax purposes.

 

The Company sold itsbranches in Beloit and Phillipsburg, Kansas on August 13, 2004, and September10, 2004, respectively.  These branches hadbeen acquired in the acquisition of First Kansas.  Upon consummation of these transactions, theCompany sold approximately $7.7 million in deposits and approximately $2.4million in loans and premises and equipment associated with the Beloit branchand approximately $4.7 million in deposits and approximately $846,000 in loansand premises and equipment related to the Phillipsburg branch.  The net proceeds received from the buyers ofthese branches were recorded as a reduction of goodwill approximating $466,000and core deposit intangible of approximately $105,000.

 

 

6

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The accompanyingconsolidated financial statements as of and for the three and nine months endedSeptember 30, 2004, include the accounts of the Company and, commencing April1, 2004, First Kansas.  The consolidatedfinancial statements for periods prior to April 1, 2004, are Landmark Bancorp,Inc.’s historical financial statements. Pro forma information, as if the acquisition was consummated January 1,2003, is as follows:

 

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                  | ** ** | **(Actual)**                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                     |       | $                                     | 6,704,000  |                                 | $          | 7,226,000 |   | $ | 20,166,000 |   | $ | 22,762,000 |   |
| Net earnings                |       | $                                     | 1,136,000  |                                 | $          | 1,258,000 |   | $ | 3,237,000 |   | $ | 4,116,000 |   |
| Diluted earnings  per share |       | $                                     | 0.55       |                                 | $          | 0.60 |   | $ | 1.54 |   | $ | 1.94 |   |
|                             |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

**3.             Earningsper Share**

 

                Basic earnings pershare have been computed based upon the weighted average number of commonshares outstanding during each period. Diluted earnings per share include the effect of all potential commonshares outstanding during each period. Earnings and dividends per share for all periods presented have beenadjusted to give effect to the 5% stock dividend paid by the Company inDecember 2003.

 

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

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average  common shares outstanding (basic) |       | 2,069,350                             |       | 2,082,485                            |       | 2,081,643 |   | 2,092,769 |   |
| Dilutive stock  options                             |       | 11,153                                |       | 29,746                               |       | 14,031 |   | 33,565 |   |
| Weighted average  common shares (diluted)           |       | 2,080,503                             |       | 2,112,231                            |       | 2,095,674 |   | 2,126,334 |   |

 

 

 

7

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**4.             ComprehensiveIncome**

 

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

 
| ** **                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                              |       | $                                     | 1,135,931  |                                 | $          | 1,231,642 |   | $ | 3,159,479 |   | $ | 3,770,581 |   |
|                                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Unrealized  holding (losses)/gains                                      |       | 947,140                               |       | (252,139                             | )          | (308,815 | ) | (794,870 | ) |
| Less—reclassification  adjustment for gains included in net income |       | —                                |       | 290,417                              |       | 129,790 |   | 316,099 |   |
| Net unrealized  (losses)/gains on securities                            |       | 947,140                               |       | (542,556                             | )          | (438,605 | ) | (1,110,969 | ) |
| Unrealized gain  on interest rate swap                                  |       | 11,000                                |       | —                               |       | 11,000 |   | — |   |
| Income tax  (benefit)/expense                                           |       | 364,094                               |       | (206,171                             | )          | (162,490 | ) | (422,168 | ) |
| Total  comprehensive income                                             |       | $                                     | 1,729,977  |                                 | $          | 895,257 |   | $ | 2,894,364 |   | $ | 3,081,780 |   |
|                                                                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

**5.             Other Intangible Assets**

 

The following tablepresents information about the Company’s other intangible assets, which arebeing amortized in accordance with SFAS No. 142:

 
| ** **                    | ** ** | **September 30, 2004**     | ** ** | **December 31, 2003**         | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortized  intangible assets: |       |                       |       |                          |       |   |   |   |   |
| Core deposit  premium         |       | $                          | 1,385,000  |                          | $          | (447,455 | ) | $ | 780,000 |   | $ | (297,818 | ) |
| Mortgage  servicing rights    |       | 764,737                    |       | (305,264                      | )          | 727,158 |   | (249,808 | ) |
| Total                         |       | $                          | 2,149,737  |                          | $          | (752,719 | ) | $ | 1,507,158 |   | $ | (547,626 | ) |
|                               |            |                            |            |                               |            |  |  |  |  |  |  |  |  |  |

 

Aggregate amortizationexpense for the three months ended September 30, 2004, and September 30, 2003,was $101,000 and $123,000, respectively. Aggregate amortization expense for the nine months ended September 30,2004, and September 30, 2003, was $285,000 and $346,000, respectively.  The following depicts estimated amortizationexpense for the years ending December 31:

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2004     |       | $          | 361,000    |   |
| 2005     |       | 341,000    |       |
| 2006     |       | 316,000    |       |
| 2007     |       | 192,000    |       |
| 2008     |       | 97,000     |       |
|          |            |            |            |  |

** **

** **

 

8

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** **

**6.             Guarantees**

 

The Company, as a provider of financial services,routinely issues financial guarantees in the form of financial and performancecommercial and standby letters of credit. As many of the commitments areexpected to expire without being drawn upon, the total commitment does notnecessarily represent future cash requirements. The Company generally requires collateral or other security on unfundedloan commitments and irrevocable letters of credit. Unfunded commitments toextend credit, excluding standby letters of credit, aggregated $45.2 millionat September 30, 2004, and $25.6 million at December 31, 2003.  Standby letters of credit totaled $1.7million at September 30, 2004, and $2.4 million at December 31, 2003.

The Company guaranteespayments to holders of certain trust preferred securities issued by a whollyowned grantor trust. The securities are due in 2034 and are redeemablebeginning in 2009. The maximum potential future payments guaranteed by theCompany, which includes future interest and principal payments throughmaturity, was approximately $20.5 million at September 30, 2004.  The Company had a recorded liability of $8.3million of principal and accrued interest to date, representing amounts owed tothe Trust, at September 30, 2004.

 

 

**7.             Stock Based Compensation**

 

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

# ** **

# ** **

# **8.             RecentAccounting Pronouncements**

# ** **

**               **In March 2004,the Securities and Exchange Commission staff issued Staff Accounting BulletinNo. 105, “Application of Accounting Principles to Loan Commitments” (SAB105).  SAB 105 provides additionalguidance in determining the fair market value of mortgage loancommitments.  The new guidance prohibitsthe inclusion of the expected cash flows related to the associated servicing ofthe loan when determining the fair value of the loan commitment.  This change in accounting tends to reduce thefair market value of the loan commitment and defers the income recognitionresulting from the valuation of the commitment. SAB 105 is effective for loan commitments accounted for as derivativesand entered into on or after April 1, 2004, at which time the Company beganexcluding these expected cash flows in its determination of fair value.  The effect of the change was not material tothe Company’s financial statements.

** **

** **

 

9

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** **

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

 

*General.*  LandmarkBancorp, Inc. is a one-bank holding company incorporated under the laws of theState of Delaware and is engaged in the banking business through itswholly-owned subsidiary, Landmark National Bank.  Landmark Bancorp is listed on the NasdaqStock Market National Market System under the symbol “LARK”.  Landmark National Bank is dedicated toproviding quality financial and banking services to its local communities.  Landmark National Bank originates commercialreal estate and non-real estate loans, one-to-four family residential mortgageloans, consumer loans, multi-family residential mortgage loans, and home equityloans.

 

                Criticalaccounting policies are those which are both most important to the portrayal ofour financial condition and results of operations, and require our management’smost difficult, subjective or complex judgments, often as a result of the needto 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 performperiodic and systematic detailed reviews of our lending portfolio to assessoverall collectability.  The level of theallowance for loan losses reflects our estimate of the collectability of theloan portfolio.  While these estimatesare based on substantive methods for determining allowance requirements,nevertheless, actual outcomes may differ significantly from estimatedresults.  Additional explanation of themethodologies used in establishing this reserve is provided in the “AssetQuality and Distribution” section.

 

                We report ourinvestment securities at estimated fair values based on readily ascertainablevalues which are obtained from independent sources.  Our management performs periodic reviews ofthe investment securities to determine if any investment securities havedeclined in value which might be considered other than temporary.  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.  Fluctuations in the actual outcome of thesefuture tax consequences, including the effects of IRS examinations andexaminations by other state agencies, could materially impact our financialposition and results of operations.

 

On April 1, 2004, we completed the cash acquisition ofFirst Kansas Financial Corporation (“First Kansas”), which had total assets ofapproximately $150 million, including loans and deposits of $74 million and $84million, respectively.  First Kansas hadbranches in Osawatomie, Paola, Louisburg, Fort Scott, Beloit, and Phillipsburg,Kansas.  This acquisition expandedour presence in high-growth market areas, presenting us with potential forrevenue

 

 

 

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generation and asset growth.  Our acquisition of First Kansas was accountedfor using the purchase method of accounting. The cost in excess of the tangible and identifiable intangible netassets acquired has been recorded as goodwill. We recorded a core deposit intangible of $710,000, which is beingamortized on an accelerated basis over ten years, and goodwill attributable tothe acquisition of First Kansas of $6.1 million, none of which is expected tobe deductible for tax purposes.  All financial information presented forperiods prior to April 1, 2004, reflects only the operations of LandmarkBancorp.  The results for the nine monthsended September 30, 2004, include First Kansas’ results of operations sinceApril 1, 2004.

 

During the third quarter of 2004, we sold our newly acquiredBeloit and Phillipsburg branches primarily because these small branches wereoutside our current geographic range of operations.  Upon consummation of the transactions, we soldapproximately $7.7 million in deposits and approximately $2.4 million in loansand premises and equipment associated with the Beloit branch and approximately$4.7 million in deposits and approximately $846,000 in loans and premises andequipment related to the Phillipsburg branch. The net proceeds received from the buyers of these branches wererecorded as a reduction of goodwill of approximately $466,000 and otherintangible assets of approximately $105,000.

 

Our results of operationsdepend primarily on net interest income, which is the difference betweeninterest income from interest-earning assets and interest expense oninterest-bearing liabilities.  Netinterest income is affected by regulatory, economic and competitive factorsthat influence interest rates, loan demand and deposit flows.  In addition, we are subject to interest raterisk to the degree that our interest-earning assets mature or reprice atdifferent times, or at different speeds, than our interest-bearingliabilities.  Our results of operationsare also affected by non-interest income, such as service charges, loan feesand gains and losses from the sale of newly originated loans andinvestments.  Our principal operatingexpenses, aside from interest expense, consist of compensation and employeebenefits, occupancy costs, federal deposit insurance costs, data processingexpenses and provision for loan losses.

 

                We are significantly impacted by prevailing economicconditions including federal monetary and fiscal policies and federalregulations of financial institutions. Deposit balances are influenced by numerous factors such as competingpersonal investments, the level of personal income and the personal rate ofsavings within our market areas.  Factorsinfluencing lending activities include the demand for housing and the interestrate pricing competition from other lending institutions.

 

*                Summary of Results*. Net earnings for the three months ended September 30, 2004, decreased $96,000,or 7.8%, to $1.1 million as compared to the three months ended September 30,2003.  This decline in net earnings was generallyattributable to increased non-interest expense which was partially offset by animprovement in net interest income.

 

                Net earnings for the nine monthsended September 30, 2004, decreased $611,000, or 16.2%, to $3.2 million ascompared to the nine months ended September 30, 2003.  This decline in net earnings was generallyattributable to reduced gains on sale of loans and investments and increasednon-interest expense which was offset by a slight increase in net interestincome.

 

 

 

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                The three months ended September30, 2004, resulted in diluted earnings per share of $0.55 compared to $0.58 forthe same period in 2003.  Return onaverage assets was 0.96% for the period compared to 1.48% for the same periodin 2003.  Return on average stockholders’equity was 10.68% for the period compared to 11.53% for the same period in2003.

 

                The nine months ended September30, 2004, resulted in diluted earnings per share of $1.51 compared to $1.77 forthe same period in 2003.  Return onaverage assets was 0.99% for the period compared to 1.53% for the same periodin 2003.  Return on average stockholders’equity was 9.91% for the period compared to 12.08% for the same period in 2003.

 

                We continued our stockrepurchase program during the first nine months of 2004, resulting in therepurchase of an additional 65,910 shares. Under the current stock repurchase program authorized by our Board ofDirectors, as of September 30, 2004, we can repurchase an additional 11,900 sharesof our common stock.  As of September 30,2004, we held 185,567 shares as treasury stock at an average cost per share of$25.68.

 

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

 
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings:                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings  per share     |       | $                                     | 0.55       |                                 | $          | 0.59 |   | $ | 1.52 |   | $ | 1.80 |   |
| Diluted earnings  per share   |       | $                                     | 0.55       |                                 | $          | 0.58 |   | $ | 1.51 |   | $ | 1.77 |   |
| Earnings ratios:              |       |                                  |       |                                 |       |   |   |   |   |
| Return on  average assets (1) |       | 0.96                                  | %          | 1.48                                 | %          | 0.99 | % | 1.53 | % |
| Return on  average equity (1) |       | 10.68                                 | %          | 11.53                                | %          | 9.91 | % | 12.08 | % |
| Dividend payout  ratio        |       | 30.91                                 | %          | 27.91                                | %          | 33.77 | % | 26.37 | % |
| Net interest  margin (1)      |       | 3.09                                  | %          | 3.54                                 | %          | 3.20 | % | 3.74 | % |
|                          |       |                                  |       |                                 |       |   |   |   |   |

----

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

 

*Interest Income.*  Interestincome for the three months ended September 30, 2004, increased $1.2 million,or 28.8 %, to $5.3 million from $4.1 million in the same period of 2003,primarily as a result of the First Kansas acquisition.  Average loans for the quarter ended September30, 2004, increased to $289.2 million from $212.7 million for the quarter endedSeptember 30, 2003.   The increase inaverage loans was primarily the result of the acquisition of First Kansas,which had approximately $74.1 million in loans at March 31, 2004.  Interest income on loans increased $707,000,or 20.4%, to $4.2 million for the quarter ended September 30, 2004.  Average investment securities also increasedas a result of the First Kansas acquisition, from $93.8 million for the quarterended September 30, 2003, to $146.3 million for the quarter ended September 30,2004.  First Kansas had approximately$62.8 million in investment securities at March 31, 2004.  Interest income on investment securitiesincreased

 

 

 

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$482,000, or 74.5%, to $1.1 million for the quarter ended September 30,2004, as compared to the same period of 2003.

 

Interest income for the nine months ended September30, 2004, increased $1.6 million, or 12.5%, to $14.7 million from $13.1 millionin the same period of 2003.  Thisincrease was primarily the result of the First Kansas acquisition, being offsetby the decrease in interest rates experienced as interest earning assetsrepriced during 2003 and the first nine months of 2004.  Average loans for the first nine months of2004 increased to $262.3 million from $218.3 million for the first nine monthsof 2003.  The increase in average loanswas primarily the result of the acquisition of First Kansas.  Interest income on loans increased $590,000,or 5.4%, to $11.5 million for the nine months ended September 30, 2004.  Average investment securities also increasedas a result of the First Kansas acquisition, from $90.2 million for the ninemonths ended September 30, 2003, to $134.3 million for the same period of2004.  Interest income on investmentsecurities increased $1.0 million, or 49.6%, to $3.1 million for the ninemonths ended September 30, 2004.

 

                *Interest Expense*. Interest expense during the three months ended September 30, 2004,increased $561,000, or 41.5%, as compared to the same period of 2003.  For the three months ended September 30,2004, interest expense on deposits decreased $49,000, or 4.6%.  The decrease in interest expense on depositsresulted primarily from the decline in interest rates and associated repricingof deposits as they matured.  Interestexpense on borrowings increased $610,000, or 206.1%.  The increase in interest expense onborrowings resulted primarily from additional advances from the Federal HomeLoan Bank of approximately $56.4 million which we assumed through theacquisition of First Kansas, the $8.2 million in trust preferred securitiesthat we issued in December 2003, and the $7.0 million that we borrowed on a newline of credit entered into in April 2004 from an unaffiliated financialinstitution to consummate the acquisition of First Kansas.  The full commitment of this line of creditwas $9.0 million at an interest rate equal to prime less 0.5%.  Concurrently, we entered into a swapagreement that fixed the rate on $3.0 million of these borrowings at 5.68% forfive years.  The swap agreement has beenaccounted for as a cash flow hedge with the change in fair value recorded as acomponent of other comprehensive income.

 

Interest expense during the nine months endedSeptember 30, 2004, increased $756,000, or 17.4%, as compared to the sameperiod of 2003.  For the nine months endedSeptember 30, 2004, interest expense on deposits decreased $488,000, or 14.1%.  The decrease in interest expense on depositsresulted primarily from the decline in interest rates and the repricing ofmaturing deposits at these lower rates. Interest expense on borrowings increased $1.2 million, or 139.5%.  The increase in interest expense onborrowings resulted primarily from additional advances from the Federal HomeLoan Bank of approximately $56.4 million which we assumed through theacquisition of First Kansas, the $8.2 million in trust preferred securitiesthat we issued in December 2003, and the $7.0 million that we borrowed in April2004 to consummate the acquisition of First Kansas.

 

 

 

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*Net Interest Income.* Net interest income for the three months endedSeptember 30, 2004, totaled $3.4 million, a 22.7% increase, as compared to $2.8million for the three months ended September 30, 2003, resulting primarily fromthe acquisition of First Kansas.  Averageearning assets also increased during the third quarter of 2004 as a result ofthe First Kansas acquisition, increasing to $439.7 million from $311.4 millionfor the third quarter of 2003.  The netinterest margin on earning assets was 3.09% for the third quarter of 2004, downfrom 3.54% during the third quarter of 2003. The refinancings and paydowns in the residential mortgage portfolioexceeded the commercial loan growth during 2003, resulting in the excessliquidity being invested into lower yielding investment securities.  In addition, the prolonged low-rateenvironment has caused the net interest margin to compress as assets havecontinued to reprice downward with little room left for liability repricing.

 

                Net interestincome for the nine months ended September 30, 2004, totaled $9.6 million, a 10.1%increase, as compared to $8.7 million for the nine months ended September 30,2003, primarily as a result of the First Kansas acquisition.  Average earning assets also increased duringthe first nine months of 2004 as a result of the acquisition of First Kansas,increasing to $401.1 million from $312.1 million for the same period of2003.  The net interest margin on earningassets was 3.20% for the first nine months of 2004, down from 3.74% during thefirst nine months of 2003.  Therefinancings and paydowns in the residential mortgage portfolio exceeded thecommercial loan growth during 2003, resulting in the excess liquidity beinginvested into lower yielding investment securities.  In addition, the prolonged low-rateenvironment has caused the net interest margin to compress as assets havecontinued to reprice with little room left for liability repricing.  We believe an increase in prime rates willhave a positive impact on our net interest margin.

 

                *Provision for Loan Losses.* The provision for loan losses for the three months ended September 30,2004, was $130,000, compared to a provision of $60,000 during the three monthsended September 30, 2003.  Our continuousreview of the loan portfolio prompted an increase in our provision, relatingprimarily to our commercial loan growth. The provision for loan losses for the nine months ended September 30,2004, was $310,000 compared to a provision of $180,000 for the same period in2003.  First Kansas had an allowance forloan losses approximating $352,000, or 0.47% of outstanding loans, at March 31,2004, which increased our allowance following the acquisition.  At September 30, 2004, and December 31, 2003,the allowance for loan losses was $2.8 million and $2.3 million, or 1.0% and1.1%, respectively, of gross loans outstanding.

 

                *Non-interest Income.* Non-interest income increased $81,000, or 6.3%, for the three monthsended September 30, 2004, to $1.4 million compared to the three months endedSeptember 30, 2003.  The increase innon-interest income reflected increased fees and service charges from $656,000for the three months ended September 30, 2003, to $994,000 for the three monthsended September 30, 2004, relating primarily to increased deposit servicecharges as a result of the First Kansas acquisition.  The increase in non-interest income was partiallyoffset by a $290,000 reduction in the gains on sale of investments during thethird quarter of 2004 as compared to the same period of 2003.  Also offsetting the increase in non-interestincome was a decline of 38.7% in the gains on sale of loans from $285,000 forthe three months ended

 

 

 

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September 30, 2003, to $175,000 for the same period of 2004.  In addition, loan fees were lower during thethird quarter of 2004 as compared to the third quarter of 2003.  Mortgage refinancing and prepayments weremuch lower during the third quarter of 2004 as compared to the same period of2003 as many mortgage holders had already taken advantage of the low interestrates favorable for mortgage refinancing and because rates have risen.  Mortgage origination and refinancing activityis expected to continue at levels similar to the third quarter of 2004 duringthe fourth quarter.

 

                Non-interestincome decreased $264,000, or 6.8%, for the nine months ended September 30,2004, to $3.6 million compared to the nine months ended September 30, 2004.  The decrease in non-interest income reflecteda 55.2% decline in the gains on sale of loans from $1.4 million for the ninemonths ended September 30, 2003, to $633,000 for the nine months ended September30, 2004.  A decrease of $186,000 ingains on sale of investments for the nine months ended September 30, 2004, ascompared to the nine months ended September 30, 2003, also contributed to theoverall decrease in non-interest income. Loan fees were also lower during the nine months ended September 30,2004, as compared to the same period of 2003. The decrease in non-interest income was partially offset by increasedfees and service charges of $519,000 to $2.5 million for the nine months ended September30, 2004, as compared to the same period of 2003, relating primarily toincreased deposit service charges as a result of the First Kansasacquisition.  Mortgage refinancing andprepayments were much lower during the first nine months of 2004 as compared tothe same period of 2003 as many mortgage holders had already taken advantage ofthe low interest rates favorable for mortgage refinancing and because rateshave risen.  Mortgage origination andrefinancing activity is expected to remain relatively stable during theremainder of 2004.

 

The decreases in gains onsale of investments for both the three months and nine months ended September30, 2004, resulted from fewer equity securities sales from our holding company’sinvestment portfolio.  We periodicallysell equity securities based on performance and other indicators, and we maysell additional equity securities in future periods.  Our equity securities portfolio was $1.2million, including unrealized gains of $534,000, at September 30, 2004.  Although circumstances could change, weanticipate selling additional equity securities and realizing gains on thesesales during the fourth quarter of 2004.

  
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Non-interest  income:         |       |                                  |       |                                 |       |   |   |   |   |
| Fees and service  charges     |       | $                                     | 993,549    |                                 | $          | 655,669 |   | $ | 2,457,706 |   | $ | 1,938,321 |   |
| Gains on sales  of loans      |       | 174,515                               |       | 284,833                              |       | 632,545 |   | 1,411,630 |   |
| Gains on sale of  investments |       | —                                |       | 290,417                              |       | 129,790 |   | 316,099 |   |
| Other                         |       | 210,647                               |       | 66,714                               |       | 399,663 |   | 217,867 |   |
| Total  non-interest income    |       | $                                     | 1,378,711  |                                 | $          | 1,297,633 |   | $ | 3,619,704 |   | $ | 3,883,917 |   |
|                               |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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**               ***Non-interest Expense.* Non-interest expense increased $791,000, or 36.1%, to $3.0 million forthe three months ended September 30, 2004, as compared to the three monthsended September 30, 2003.  This increasein non-interest expense resulted primarily from increased expenses associatedwith the operations of the branches acquired from First Kansas includingcompensation and benefits, occupancy and equipment and data processing.

 

                Non-interestexpense increased $1.4 million, or 20.6%, to $8.2 million for the nine monthsended September 30, 2004, as compared to the nine months ended September 30,2003.  The increase in non-interestexpense for the first nine months of 2004 as compared to the same period of2003 resulted primarily from compensation and benefits, occupancy and equipmentand data processing expenses associated with the operations of the branchesacquired from First Kansas.  Offsettingthese increases in non-interest expense was a $61,000 decrease in amortizationexpense for the nine months ended September 30, 2004, compared to the ninemonths ended September 30, 2003. Amortization expense decreased as prepayment speeds on our mortgageservicing portfolio have slowed.

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Non-interest expense:                   |       |                                  |       |                                 |       |   |   |   |   |
| Compensation and benefits               |       | $                                     | 1,577,400  |                                 | $          | 1,142,368 |   | $ | 4,310,278 |   | $ | 3,565,309 |   |
| Occupancy and equipment                 |       | 439,610                               |       | 306,637                              |       | 1,183,278 |   | 931,561 |   |
| Amortization of intangible assets  |       | 101,416                               |       | 122,570                              |       | 284,782  |   | 345,680  |   |
| Professional fees                       |       | 69,523                                |       | 56,565                               |       | 230,439 |   | 244,848 |   |
| Data processing                         |       | 100,218                               |       | 73,909                               |       | 309,583 |   | 237,157 |   |
| Other                                   |       | 694,306                               |       | 488,965                              |       | 1,921,895 |   | 1,509,649 |   |
| Total non-interest expense              |       | $                                     | 2,982,473  |                                 | $          | 2,191,014 |   | $ | 8,240,255 |   | $ | 6,834,204 |   |
|                                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Income Tax Expense*.  Income taxexpense decreased $54,000, or 9.0%, from $597,000 for the three months endedSeptember 30, 2003, to $543,000 for the three months ended September 30,2004.  The decrease in income tax expensefor the three months ended September 30, 2004, resulted primarily from adecrease in taxable income.  Theeffective tax rate for the third quarter of 2004 was 32.4% compared to 32.7%for the third quarter of 2003.

 

Income tax expense decreased $306,000, or 16.8%, from$1.8 million for the nine months ended September 30, 2003, to $1.5 million forthe nine months ended September 30, 2004. The decrease in income tax expense for the nine months ended September30, 2004, resulted primarily from a decrease in taxable income.  The effective tax rate for the nine monthsended September 30, 2004, was 32.5% compared to 32.6% for the same period of2003.

 

*Asset Quality and Distribution.* Total assets increased to $457.4 million at September 30, 2004, comparedto $334.0 million at December 31, 2003. This increase was primarily attributable to the acquisition of FirstKansas consummated on April 1, 2004.  Ourprimary ongoing sources of funds are deposits, proceeds from principal andinterest payments on loans and investment securities and proceeds from the saleof mortgage loans and investment

 

 

 

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securities.  While maturities andscheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interestrates, economic conditions, competition, and the restructuring of the financialservices industry.

 

Net loans, excluding loans held for sale, increased to$282.8 million during the nine months ended September 30, 2004.  This increase was primarily the result of theacquisition of First Kansas on April 1, 2004. The majority of loans acquired from First Kansas were one-to-four familyresidential loans.  As of September 30,2004, our one-to-four family residential loans comprised 48.0% of totalsloans.  We anticipate continuing todiversify our loan portfolio composition through our continued plannedexpansion of commercial lending activities.

 

Our primary investingactivities are the origination of mortgage, consumer, and commercial loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  We do notoriginate and warehouse these fixed-rate residential loans for resale in orderto speculate on interest rates.

 

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

 

We believe that the qualityof the loan portfolio continues to be strong as evidenced by our low levels ofpast due and non-accrual loans.  Loanspast due more than one month and less than 90 days as of September 30, 2004,totaled $3.5 million, as compared to $2.3 million at December 31, 2003.  As of September 30, 2004, loans with abalance of $1.7 million were on non-accrual status, or 0.58% of total loans,compared to a balance of $1.2 million loans on non-accrual status, or 0.55% oftotal loans, as of December 31, 2003.  Inaddition, the ratio of non-performing assets as a percentage of total assets decreasedfrom 0.45% as of December 31, 2003, to 0.42% as of September 30, 2004.  While the non-accrual loans have increased,the majority of the increase occurred in the one-to-four family residentialloan portfolio.  Residential home loanscomprised 75.2% of the $1.7 million non-accrual balance at September 30,2004.  These loans have been underwrittenaccording to our residential lending policies and are well secured by realestate collateral, and in many instances, private mortgage insurance orgovernment guarantees.  We havehistorically incurred minimal losses on mortgage loans based upon collateralvalues and underlying insurance or guarantees. We are aggressively pursuing collection activity of these loans whichshould enable the collection of principal.

 

A slowdown in economicactivity beginning in 2001 severely impacted several major industries as wellas the economy as a whole.  We arepleased that there appear to be numerous indications of emerging strength inthe economy, including the Federal Open Market Committee raising the target forthe Federal Funds rate by 25 basis points on June 30, 2004, and again by 25basis points on August 10, 2004, September 21, 2004, and November 10, 2004.  The outlook of

 

 

 

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the economy for the remainder of 2004 and/or2005, however, depends on whether the strengthening will be sustainable and howquickly consumer confidence responds to the positive effects, if any, on theeconomy.  Based on the outcomes, theseevents could adversely affect cash flows for both commercial and individualborrowers, as a result of which, we could experience increases in problemassets, delinquencies and losses on loans. Many financial institutions have experienced an increase innon-performing assets during the recent difficult economic period, as evenwell-established business borrowers developed cash flow, profitability andother business-related problems.  Webelieve that the allowance for losses on loans at September 30, 2004, isadequate.  While we believe that we usethe best information available to determine the allowance for losses on loans,unforeseen market conditions could result in adjustment to the allowance forlosses on loans.  In addition, netearnings could be significantly affected if circumstances differ substantiallyfrom the assumptions used in establishing the allowance for losses on loans.

 

                *Liability Distribution.* Total deposits increased $65.5 million to $318.6 million at September30, 2004, from $253.1 million at December 31, 2003.  The amount of deposits acquired in the April2004 acquisition of First Kansas approximated $84.2 million.  Borrowings increased $58.1 million to $91.9million at September 30, 2004, from $33.8 million at December 31, 2003.  The amount of borrowings acquired in theFirst Kansas acquisition approximated $56.4 million.  In April 2004, we borrowed $7.0 million on a$9.0 million line of credit from an unrelated financial institution to fund theacquisition of First Kansas.

 

Non-interest bearing demand accounts at September 30,2004, were $26.5 million, or 8.3% of deposits, compared to $20.5 million, or 8.1%of deposits, at December 31, 2003. Certificates of deposit increased to $154.7 million at September 30, 2004,from $140.8 million at December 31, 2003. Money market and NOW demand accounts increased to $113.1 million at September30, 2004, from $77.0 million at December 31, 2003, and were 35.5% of totaldeposits.  Savings accounts increased to $24.1million at September 30, 2004, from $14.8 million at December 31, 2003.

 

                Certificates ofdeposit at September 30, 2004, which were scheduled to mature in one year orless, totaled $95.8 million. Historically, maturing deposits have generally remained with our bankand we believe that a significant portion of the deposits maturing in one yearor less will remain with us upon maturity.

 

**               ***Contractual Obligations andCommercial Commitments.*  The following table presentsour contractual obligations, defined as operating lease obligations andprincipal payments due on non-deposit obligations with maturities in excess ofone year as of September 30, 2004, for the periods indicated.

 

 

 

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| **Contractual Cash Obligations** | ** ** | **Total**  | ** ** | **One Year**

**or Less** | ** ** | **One to**

**Three Years** | ** ** | **Four to**

**Five Years** | ** ** | **More than**

**Five Years** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------------|------------|
|                             |       |       |       |                      |       |                        |       |                        |       |                          |       |
| Operating leases                 |       | $          | 46,233     |                      | $          | 46,233                      |       | $                           | —     |                          | $          | — |   | $ | — |   |
| Service  contracts               |       | 2,470,000  |       | 780,000                   |       | 1,690,000                   |       | —                      |       | —                        |       |
| FHLB advances                    |       | 78,843,852 |       | 12,125,353                |       | 4,376,059                   |       | 35,125,353                  |       | 27,217,087                    |       |
| Other borrowings                 |       | 12,698,000 |       | —                    |       | —                      |       | 4,450,000                   |       | 8,248,000                     |       |
| Total  contractual obligations   |       | $          | 94,058,085 |                      | $          | 12,951,586                  |       | $                           | 6,066,059  |                          | $          | 39,595,353 |   | $ | 35,465,087 |   |
|                                  |            |            |            |                           |            |                             |            |                             |            |                               |            |  |  |  |  |  |  |  |  |

 

*Liquidity.*  Our mostliquid assets are cash and cash equivalents and investment securities availablefor sale.  The levels of these assets aredependent on the operating, financing, lending and investing activities duringany given period.  These liquid assetstotaled $150.9 million at September 30, 2004, and $107.5 million at December31, 2003.  The amount of investmentsacquired in the April 2004 acquisition of First Kansas approximated $62.8million.  During periods in which we arenot able to originate a sufficient amount of loans and/or periods of highprincipal prepayments, we increase our liquid assets by investing in short-termU. S. Government and agency securities or high-grade municipal securities.

 

Liquidity management is botha daily and long-term function of our strategy. Excess funds are generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are generally availablethrough the use of Federal Home Loan Bank advances, a line of credit with theFederal Home Loan Bank or through sales of securities.  At September 30, 2004, we had outstandingFederal Home Loan Bank advances of $78.8 million and no borrowings outstandingon our line of credit with the Federal Home Loan Bank.  At September 30, 2004, our total borrowingcapacity with the Federal Home Loan Bank was $113.4 million.  We also had other borrowings of $13.0 millionat September 30, 2004, which included $8.2 million of subordinated debentures,$4.5 million of long-term debt and $250,000 in repurchase agreements.

 

At September 30, 2004, wehad outstanding loan commitments, excluding standby letters of credit, of $45.2million.  We anticipate that sufficientfunds will be available to meet current loan commitments.  These commitments consist of letters ofcredit, unfunded lines of credit and commitments to finance real estate loans.

 

                *Capital.*  The FederalReserve Board has established capital requirements for bank holding companieswhich generally parallel the capital requirements for national banks under theOffice of the Comptroller of the Currency regulations.  The regulations provide that such standardswill generally be applied on a consolidated (rather than a bank-only) basis inthe case of a bank holding company with more than $150 million in totalconsolidated assets.

 

 

 

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At September 30, 2004, wecontinued to maintain a sound leverage ratio of 9.1% and a total risk basedcapital ratio of 16.3%.  As shown by thefollowing table, our capital exceeded the minimum capital requirements at September30, 2004 (dollars in thousands):

 
| ** **                | ** ** | **Actual Amount** | ** ** | **Actual Percent** | ** ** | **Required Percent** | ** ** | **Required Amount** | ** ** |
|---------------------------|------------|-------------------|------------|--------------------|------------|----------------------|------------|---------------------|------------|
| Leverage                  |       | $                 | 41,888     |               | 9.1        | %                    | 4.0        | %                   | $          | 18,496 |   |
| Tier 1 Capital            |       | $                 | 41,888     |               | 15.3       | %                    | 4.0        | %                   | $          | 10,947 |   |
| Total Risk Based  Capital |       | $                 | 44,705     |               | 16.3       | %                    | 8.0        | %                   | $          | 21,893 |   |

 

At September 30, 2004,our subsidiary bank continued to maintain a sound leverage ratio of 9.7% and atotal risk based capital ratio of 17.4%. As shown by the following table, our bank’s capital exceeded the minimumcapital requirements at September 30, 2004 (dollars in thousands):

 
| ** **                | ** ** | **Actual Amount** | ** ** | **Actual Percent** | ** ** | **Required Percent** | ** ** | **Required Amount** | ** ** |
|---------------------------|------------|-------------------|------------|--------------------|------------|----------------------|------------|---------------------|------------|
| Leverage                  |       | $                 | 44,597     |               | 9.7        | %                    | 4.0        | %                   | $          | 18,396 |   |
| Tier 1 Capital            |       | $                 | 44,597     |               | 16.4       | %                    | 4.0        | %                   | $          | 10,907 |   |
| Total Risk Based  Capital |       | $                 | 47,414     |               | 17.4       | %                    | 8.0        | %                   | $          | 21,813 |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements.  The above ratios are wellin excess of regulatory minimums and should allow us to operate without capitaladequacy concerns.  The Federal DepositInsurance Corporation Improvement Act of 1991 establishes a bank rating systembased on the capital levels of banks.  Asof September 30, 2004, we were rated “well capitalized”, which is the highestrating available under this capital-based rating system.

 

                During December 2003, we issued $8.2 million in trustpreferred securities.  In accordance withcurrent regulatory capital guidelines, this amount has been included in ourTier 1 capital ratios as of September 30, 2004. Cash distributions on the securities are payable quarterly, aredeductible for income tax purposes and are included in interest expense in theconsolidated financial statements.

 

OnMay 6, 2004, the Board of Governors of the Federal Reserve System issued aNotice of Proposed Rulemaking in which it proposed to allow the continuedinclusion of trust preferred securities in the Tier 1 capital ofbank holding companies, subject to stricter standards.  The Federal Reserve is proposing to limit theaggregate amount of a bank holding company’s cumulative perpetual preferredstock, trust preferred securities and other minority interests to 25% ofthe company’s core capital elements, net of goodwill.  Current regulations do not require thededuction of goodwill.  The proposalalso provides that amounts of qualifying trust preferred securities and certainminority interests in excess of the 25% limit may be included in Tier 2 capitalbut would be limited, together with subordinated debt and limited-lifepreferred stock, to 50% of Tier 1 capital. The proposal provides a three-year transition period for bankholding companies to meet these quantitative limitations.

 

 

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

*Quantitative and QualitativeDisclosures about Market Risk*.  Our assetsand liabilities are principally financial in nature and the resulting netinterest income thereon is subject to changes in market interest rates and themix of various assets and liabilities. Interest rates in the financial markets affect our decision on pricingour assets and liabilities which impacts net interest income, a significantcash flow source for us.  As a result, asubstantial portion of our risk management activities relates to managinginterest rate risk.

 

                OurAsset/Liability Management Committee monitors the interest rate sensitivity ofour balance sheet 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 September 30, 2004, and forecasting volumes forthe twelve-month projection.  Thisposition is then subjected to a shift in interest rates of 100 and 200 basispoints rising and 100 basis points falling with an impact to our net interestincome on a one year horizon as follows:

 
| **Scenario**             | ** ** | **$ Change in Net Interest Income** | ** ** | **% of Net Interest Income** | ** ** |
|--------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| 100 basis point  rising  |       | $                                        | 714,679    |                         | 5.0        | % |
| 200 basis point  rising  |       | 1,394,269                                |       | 9.7                          | %          |
| 100 basis point  falling |       | (822,509                                 | )          | (5.7                         | %)         |
|                          |            |                                          |            |                              |            |  |

 

We believe that no significant changes in our interest rate sensitivityposition have occurred since September 30, 2004.  We also believe we are appropriatelypositioned for future interest rate movements, although we may experience somefluctuations in net interest income due to short-term timing differencesbetween the repricing of assets and liabilities.

 

*Recent Regulatory Developments. *On June 17, 2004, the Securities and ExchangeCommission, the ”SEC,” issued a Proposed Rule in which it described theparameters under which banks may sell securities to their customers withouthaving to register as broker-dealers with the SEC in accordance with Title IIof the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as Regulation B, clarifies, amongother things: (i) the limitations on the amount that unregistered bankemployees may be compensated for making referrals in connection with athird-party brokerage arrangement; (ii) the manner by which banks may becompensated for effecting securities transactions for its customers in afiduciary capacity; and (iii) the extent to which banks may engage incertain securities transactions as a custodian. We do not believe that the Proposed Rule’s impact will be material toour financial statements or results of operations.

 

 

 

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*Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995 - Forward-Looking Statements.*** **This document contains, and future oral and writtenstatements of the Company and its management may contain, forward-lookingstatements, within the meaning of such term in the Private SecuritiesLitigation Reform Act of 1995, with respect to the financial condition, resultsof operations, plans, objectives, future performance and business of theCompany.  Forward-looking statements,which may be based upon beliefs, expectations and assumptions of the Company’smanagement and 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 other similarexpressions.  Additionally, allstatements in this document, including forward-looking statements, speak onlyas of the date they are made, and the Company undertakes no obligation toupdate any statement in light of new information or future events.

 

Our ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain.  Factors which could have amaterial adverse effect on our operations and future prospects  include, but are not limited to, thefollowing:

 

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

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

·                                         The effects of,and changes in, federal, state and local laws, regulations and policiesaffecting banking, securities, insurance and monetary and financial matters.

·                                         The effects ofchanges in interest rates (including the effects of changes in the rate ofprepayments our assets) and the policies of the Board of Governors of the FederalReserve System.

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

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

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

·                                         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.

 

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·                                         Our ability todevelop and maintain secure and reliable electronic systems.

·                                         Our ability toretain key executives and employees and the difficulty that we may experiencein replacing key executives and employees in an effective manner.

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

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

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

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

·                                         Our ability tomanage the risks associated with the foregoing as well as anticipated.

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.

 

 

 

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** **

**ITEM 4.  CONTROLS AND PROCEDURES**

 

An evaluation was performed under thesupervision and with the participation of our management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule13a-15(e) promulgated under the Securities and Exchange Act of 1934, asamended) as of September 30, 2004.  Basedon that evaluation, our management, including the Chief Executive Officer andChief Financial Officer, concluded that our disclosure controls and procedureswere effective.  There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls.

 

 

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** **

**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**PART II — OTHERINFORMATION**

 

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

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

 

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

Thefollowing table provides information about purchases by the Company and itsaffiliated purchasers during the quarter ended September 30, 2004, of equitysecurities that are registered by the Company pursuant to Section 12 of theExchange Act:
| **Period**            | ** ** | **Total Number of Shares Purchased(1)** | ** ** | **Average Price Paid per Share** | ** ** | **Total Number of Shares Purchased as Part of a Publicly Announced  Plan(2)** | ** ** | **Maximum Number (or Approximate Dollar Value) of Shares that May Yet  Be Purchased Under the Plan** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| July 1-31, 2004       |       | —                                  |       | —                           |       | —                                                                        |       | 44,864                                                                                               |       |
| August 1-31, 2004     |       | 1,966                                   |       | $                                | 30.00      |                                                                          | 1,966      |                                                                                                 | 42,898     |   |
| September 1-30,  2004 |       | 30,920                                  |       | 30.05                            |       | 30,920                                                                        |       | 11,978                                                                                               |       |
| Total                 |       | 32,886                                  |       | $                                | 30.05      |                                                                          | 32,886     |                                                                                                 | 11,978     |   |

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(1)          We haverepurchased an aggregate of 88,822 shares of our common stock pursuant to therepurchase program that we publicly announced in November 2003.

(2)          Our Board ofDirectors approved the repurchase by us up to an aggregate of 100,800 shares ofour common stock pursuant to the repurchase program.  Unless terminated earlier by resolution ofthe Board of Directors, the repurchase program will expire when we haverepurchased all shares authorized for repurchase thereunder.

 

 

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

                None

 

 

 

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**ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS.**

 

                None

 

**ITEM 5.  OTHER INFORMATION.**

 

                None

 

 

**ITEM 6.  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 therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

|                    |   | LANDMARK BANCORP, INC.                |
|-------------------------|--------|---------------------------------------|
|                    |   |                                  |
| Date: November 15, 2004 |   | /s/ Patrick L. Alexander              |
|                    |   | Patrick L. Alexander                  |
|                    |   | President and Chief Executive Officer |
|                    |   |                                  |
| Date: November 15, 2004 |   | /s/ Mark A. Herpich                   |
|                    |   | Mark A. Herpich                       |
|                    |   | Vice President, Secretary, Treasurer  |
|                    |   |  and Chief  Financial Officer    |

 

 

 

 

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