UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)
OF


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2010





OR





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE


SECURITIES
EXCHANGE ACT OF 1934


For
transition period from ________ to ________





Commission
File Number 0-33203





LANDMARK BANCORP,
INC.


(Exact
name of Registrant as specified in its charter)





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





701 Poyntz Avenue, Manhattan,
      Kansas
                  
                  66502(Address
      of principal executive offices)
                  
                  (Zip
      Code)





(785)
565-2000


(Registrant's
telephone number, including area code)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes x  No  ̈





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





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


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


(Do not
check if a smaller reporting company)





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





Indicate the number of shares
outstanding of each of the Issuer's classes of common stock as of the latest
practicable date: as of November 9, 2010, the Issuer had outstanding 2,511,572
shares of its common stock, $.01 par value per share.







LANDMARK
BANCORP, INC.


Form
10-Q Quarterly Report





Table
of Contents





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




1


ITEM
1.  FINANCIAL STATEMENTS AND RELATED NOTES





LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





(Dollars in thousands)
                            
                            September 30,
                            
                            
                            December 31,2010
                            
                            
                            2009AssetsCash
      and cash equivalents
                            
                            $
                            13,042
                            
                            
                            $
                            12,379Investment
      securities:Available-for-sale,
      at fair value
                            
                            
                            156,580
                            
                            
                            
                            161,568Other
      securities
                            
                            
                            8,170
                            
                            
                            
                            8,051Loans,
      net
                            
                            
                            322,913
                            
                            
                            
                            342,738Loans
      held for sale
                            
                            
                            10,162
                            
                            
                            
                            4,703Premises
      and equipment, net
                            
                            
                            15,311
                            
                            
                            
                            15,877Real
      estate owned
                            
                            
                            4,093
                            
                            
                            
                            1,129Bank
      owned life insurance
                            
                            
                            12,917
                            
                            
                            
                            12,548Goodwill
                            
                            
                            12,894
                            
                            
                            
                            12,894Other
      intangible assets, net
                            
                            
                            2,218
                            
                            
                            
                            2,481Accrued
      interest and other assets
                            
                            
                            9,003
                            
                            
                            
                            9,799Total
      assets
                            
                            $
                            567,303
                            
                            
                            $
                            584,167Liabilities
      and Stockholders’ EquityLiabilities:Deposits:Non-interest-bearing
      demand
                            
                            $
                            54,722
                            
                            
                            $
                            54,799Money
      market and NOW
                            
                            
                            165,543
                            
                            
                            
                            162,449Savings
                            
                            
                            31,882
                            
                            
                            
                            29,010Time,
      $100,000 and greater
                            
                            
                            50,925
                            
                            
                            
                            48,422Time,
      other
                            
                            
                            133,095
                            
                            
                            
                            143,915Total
      deposits
                            
                            
                            436,167
                            
                            
                            
                            438,595Federal
      Home Loan Bank borrowings
                            
                            
                            41,446
                            
                            
                            
                            56,004Other
      borrowings
                            
                            
                            27,884
                            
                            
                            
                            26,179Accrued
      interest, taxes, and other liabilities
                            
                            
                            6,677
                            
                            
                            
                            9,494Total
      liabilities
                            
                            
                            512,174
                            
                            
                            
                            530,272Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par, 200,000 shares authorized; none issued
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $0.01 par, 7,500,000 shares authorized; 2,504,265 and
      2,489,779shares
      issued at September 30, 2010 and December 31, 2009,
      respectively
                            
                            
                            25
                            
                            
                            
                            25Additional
      paid-in capital
                            
                            
                            25,100
                            
                            
                            
                            24,844Retained
      earnings
                            
                            
                            27,295
                            
                            
                            
                            27,523Accumulated
      other comprehensive income
                            
                            
                            2,709
                            
                            
                            
                            1,503Total
      stockholders’ equity
                            
                            
                            55,129
                            
                            
                            
                            53,895Total
      liabilities and stockholders’ equity
                            
                            $
                            567,303
                            
                            
                            $
                            584,167





See
accompanying notes to consolidated financial statements.


2


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three months ended
                            
                            
                            Nine months ended(Dollars in thousands, except per share amounts)
                            
                            September 30,
                            
                            
                            September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Interest
      income:Loans:Taxable
                            
                            $
                            4,764
                            
                            
                            $
                            5,062
                            
                            
                            $
                            14,398
                            
                            
                            $
                            15,365Tax-exempt
                            
                            
                            61
                            
                            
                            
                            55
                            
                            
                            
                            207
                            
                            
                            
                            168Investment
      securities:Taxable
                            
                            
                            606
                            
                            
                            
                            1,045
                            
                            
                            
                            2,087
                            
                            
                            
                            3,230Tax-exempt
                            
                            
                            606
                            
                            
                            
                            637
                            
                            
                            
                            1,854
                            
                            
                            
                            1,867Other
                            
                            
                            2
                            
                            
                            
                            3
                            
                            
                            
                            4
                            
                            
                            
                            10Total
      interest income
                            
                            
                            6,039
                            
                            
                            
                            6,802
                            
                            
                            
                            18,550
                            
                            
                            
                            20,640Interest
      expense:Deposits
                            
                            
                            916
                            
                            
                            
                            1,401
                            
                            
                            
                            2,923
                            
                            
                            
                            4,598Borrowings
                            
                            
                            654
                            
                            
                            
                            793
                            
                            
                            
                            2,018
                            
                            
                            
                            2,483Total
      interest expense
                            
                            
                            1,570
                            
                            
                            
                            2,194
                            
                            
                            
                            4,941
                            
                            
                            
                            7,081Net
      interest income
                            
                            
                            4,469
                            
                            
                            
                            4,608
                            
                            
                            
                            13,609
                            
                            
                            
                            13,559Provision
      for loan losses
                            
                            
                            500
                            
                            
                            
                            1,900
                            
                            
                            
                            5,200
                            
                            
                            
                            3,000Net
      interest income after provision for loan losses
                            
                            
                            3,969
                            
                            
                            
                            2,708
                            
                            
                            
                            8,409
                            
                            
                            
                            10,559Non-interest
      income:Fees
      and service charges
                            
                            
                            1,330
                            
                            
                            
                            1,191
                            
                            
                            
                            3,470
                            
                            
                            
                            3,289Gains
      on sales of loans, net
                            
                            
                            833
                            
                            
                            
                            722
                            
                            
                            
                            2,237
                            
                            
                            
                            2,629Bank
      owned life insurance
                            
                            
                            124
                            
                            
                            
                            126
                            
                            
                            
                            372
                            
                            
                            
                            373Other
                            
                            
                            101
                            
                            
                            
                            71
                            
                            
                            
                            350
                            
                            
                            
                            358Total
      non-interest income
                            
                            
                            2,388
                            
                            
                            
                            2,110
                            
                            
                            
                            6,429
                            
                            
                            
                            6,649Investment
      securities gains (losses), net:Impairment
      losses on investment securities
                            
                            
                            (251
                            )
                            
                            
                            (133
                            )
                            
                            
                            (391
                            )
                            
                            
                            (709
                            )Gains
      on sales of investment securities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            563
                            
                            
                            
                            -Investment
      securities gains (losses), net
                            
                            
                            (251
                            )
                            
                            
                            (133
                            )
                            
                            
                            172
                            
                            
                            
                            (709
                            )Non-interest
      expense:Compensation
      and benefits
                            
                            
                            2,358
                            
                            
                            
                            2,360
                            
                            
                            
                            6,997
                            
                            
                            
                            6,739Occupancy
      and equipment
                            
                            
                            731
                            
                            
                            
                            716
                            
                            
                            
                            2,123
                            
                            
                            
                            2,030Federal
      deposit insurance premiums
                            
                            
                            180
                            
                            
                            
                            176
                            
                            
                            
                            542
                            
                            
                            
                            656Data
      processing
                            
                            
                            208
                            
                            
                            
                            189
                            
                            
                            
                            640
                            
                            
                            
                            583Amortization
      of intangibles
                            
                            
                            208
                            
                            
                            
                            196
                            
                            
                            
                            569
                            
                            
                            
                            574Professional
      fees
                            
                            
                            113
                            
                            
                            
                            190
                            
                            
                            
                            433
                            
                            
                            
                            554Advertising
                            
                            
                            137
                            
                            
                            
                            121
                            
                            
                            
                            374
                            
                            
                            
                            361Other
                            
                            
                            827
                            
                            
                            
                            878
                            
                            
                            
                            2,664
                            
                            
                            
                            2,729Total
      non-interest expense
                            
                            
                            4,762
                            
                            
                            
                            4,826
                            
                            
                            
                            14,342
                            
                            
                            
                            14,226Earnings
      (loss) before income taxes
                            
                            
                            1,344
                            
                            
                            
                            (141
                            )
                            
                            
                            668
                            
                            
                            
                            2,273Income
      tax expense (benefit)
                            
                            
                            241
                            
                            
                            
                            (254
                            )
                            
                            
                            (531
                            )
                            
                            
                            139Net
      earnings
                            
                            $
                            1,103
                            
                            
                            $
                            113
                            
                            
                            $
                            1,199
                            
                            
                            $
                            2,134Earnings
      per share:Basic
                            
                            $
                            0.44
                            
                            
                            $
                            0.05
                            
                            
                            $
                            0.48
                            
                            
                            $
                            0.86Diluted
                            
                            $
                            0.44
                            
                            
                            $
                            0.05
                            
                            
                            $
                            0.48
                            
                            
                            $
                            0.86Dividends
      per share
                            
                            $
                            0.19
                            
                            
                            $
                            0.18
                            
                            
                            $
                            0.57
                            
                            
                            $
                            0.54





See
accompanying notes to consolidated financial statements.


3


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine months ended(Dollars in thousands)
                  
                  September 30,2010
                  
                  
                  2009Net
      cash (used in) provided by operating activities
                  
                  $
                  (726
                  )
                  
                  $
                  4,089Investing
      activities:Net
      decrease in loans
                  
                  
                  10,457
                  
                  
                  
                  16,286Maturities
      and prepayments of investment securities
                  
                  
                  27,360
                  
                  
                  
                  37,167Purchases
      of investment securities
                  
                  
                  (30,993
                  )
                  
                  
                  (43,133
                  )Proceeds
      from sale of investment securities
                  
                  
                  10,097
                  
                  
                  
                  1,210Proceeds
      from sales of foreclosed assets
                  
                  
                  1,036
                  
                  
                  
                  1,954Purchases
      of premises and equipment, net
                  
                  
                  (164
                  )
                  
                  
                  (676
                  )Net
      cash paid in branch acquisition
                  
                  
                  -
                  
                  
                  
                  (130
                  )Net
      cash provided by investing activities
                  
                  
                  17,793
                  
                  
                  
                  12,678Financing
      activities:Net
      (decrease) increase in deposits
                  
                  
                  (2,428
                  )
                  
                  
                  4,900Federal
      Home Loan Bank advance repayments
                  
                  
                  (15,028
                  )
                  
                  
                  (10,027
                  )Change
      in Federal Home Loan Bank line of credit, net
                  
                  
                  600
                  
                  
                  
                  (6,000
                  )Other
      borrowings, net
                  
                  
                  1,705
                  
                  
                  
                  2,617Proceeds
      from issuance of common stock under stock option plans
                  
                  
                  143
                  
                  
                  
                  -Excess
      tax benefit related to stock option plans
                  
                  
                  31
                  
                  
                  
                  -Payment
      of dividends
                  
                  
                  (1,427
                  )
                  
                  
                  (1,352
                  )Purchase
      of treasury stock
                  
                  
                  -
                  
                  
                  
                  (12
                  )Net
      cash used in financing activities
                  
                  
                  (16,404
                  )
                  
                  
                  (9,874
                  )Net
      increase in cash and cash equivalents
                  
                  
                  663
                  
                  
                  
                  6,893Cash
      and cash equivalents at beginning of period
                  
                  
                  12,379
                  
                  
                  
                  13,788Cash
      and cash equivalents at end of period
                  
                  $
                  13,042
                  
                  
                  $
                  20,681Supplemental
      disclosure of cash flow information:Cash
      paid during the period for income taxes
                  
                  $
                  942
                  
                  
                  $
                  872Cash
      paid during the period for interest
                  
                  
                  5,192
                  
                  
                  
                  7,210Supplemental
      schedule of noncash investing and financing activities:Transfer
      of loans to real estate owned
                  
                  $
                  3,973
                  
                  
                  $
                  1,827Branch
      acquisition:Fair
      value of liabilities assumed
                  
                  
                  -
                  
                  
                  
                  6,650Fair
      value of assets acquired
                  
                  $
                  -
                  
                  
                  $
                  6,520





See
accompanying notes to consolidated financial statements.


4


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME


(Unaudited)





(Dollars in thousands, except per share amounts)
                    
                    Common
                      stock
                    
                    
                    Additional
                      paid-in
                      capital
                    
                    
                    Retained
                      earnings
                    
                    
                    Treasury
                      stock
                    
                    
                    Accumulatedother
                      comprehensive
                      income
                    
                    
                    TotalBalance
      at December 31, 2008
                    
                    $
                    24
                    
                    
                    $
                    23,873
                    
                    
                    $
                    27,819
                    
                    
                    $
                    (935
                    )
                    
                    $
                    625
                    
                    
                    $
                    51,406Comprehensive
      income:Net
      earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,134
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,134Change
      in fair value of investment securities available-for-sale, net of
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,128
                    
                    
                    
                    2,128Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,262Dividends
      paid ($0.54 per share)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,352
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,352
                    )Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    118
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    118Purchase
      of 800 treasury shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12
                    )
                    
                    
                    -
                    
                    
                    
                    (12
                    )Balance
      at September 30, 2009
                    
                    $
                    24
                    
                    
                    $
                    23,991
                    
                    
                    $
                    28,601
                    
                    
                    $
                    (947
                    )
                    
                    $
                    2,753
                    
                    
                    $
                    54,422Balance
      at December 31, 2009
                    
                    $
                    25
                    
                    
                    $
                    24,844
                    
                    
                    $
                    27,523
                    
                    
                    $
                    -
                    
                    
                    $
                    1,503
                    
                    
                    $
                    53,895Comprehensive
      income:Net
      earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,199
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,199Change
      in fair value of investment securities available-for-sale, net of
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,206
                    
                    
                    
                    1,206Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,405Dividends
      paid ($0.57 per share)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,427
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,427
                    )Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    82
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    82Exercise
      of stock options, 14,486 shares, including excess tax benefit of
      $31
                    
                    
                    -
                    
                    
                    
                    174
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    174Balance
      at September 30, 2010
                    
                    $
                    25
                    
                    
                    $
                    25,100
                    
                    
                    $
                    27,295
                    
                    
                    $
                    -
                    
                    
                    $
                    2,709
                    
                    
                    $
                    55,129





See
accompanying notes to consolidated financial statements.


5


LANDMARK
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
            Interim
      Financial Statements





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





2.
              Goodwill
      and Other Intangible Assets





The Company tests goodwill
for impairment annually or more frequently if circumstances
warrant.The Company determined that a decline in its stock
price during the third quarter of 2010 constituted a triggering event, which
required an impairment test to be performed.  The Company performed an
impairment test as of September 30, 2010 by comparing the fair value of the
Company’s single reporting unit to its carrying value.  Fair value was
determined using observable market data including the Company’s market
capitalization and valuation multiples compared to recent financial industry
acquisition multiples for similar institutions to estimate the fair value of the
Company’s single reporting unit.  Based on the results of
the September 30, 2010 impairment testing, which indicated no impairment, the
Company concluded its goodwill was not impaired as of September 30,
2010.  The Company can make no assurances that future impairment tests
will not result in goodwill impairments.





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





Three months ended September 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  5,445
                  
                  
                  $
                  (4,025
                  )
                  
                  $
                  5,482
                  
                  
                  $
                  (3,467
                  )Additions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
                  
                  
                  -
                  
                  
                  
                  (128
                  )
                  
                  
                  -
                  
                  
                  
                  (154
                  )Balance
      at end of period
                  
                  $
                  5,445
                  
                  
                  $
                  (4,153
                  )
                  
                  $
                  5,482
                  
                  
                  $
                  (3,621
                  )





Nine months ended September 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Fair value at
                    acquisition
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  5,482
                  
                  
                  $
                  (3,767
                  )
                  
                  $
                  5,396
                  
                  
                  $
                  (3,159
                  )Additions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  -Adjustments
      to prior estimates
                  
                  
                  (37
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
                  
                  
                  -
                  
                  
                  
                  (386
                  )
                  
                  
                  -
                  
                  
                  
                  (462
                  )Balance
      at end of period
                  
                  $
                  5,445
                  
                  
                  $
                  (4,153
                  )
                  
                  $
                  5,482
                  
                  
                  $
                  (3,621
                  )


6


Mortgage
servicing rights are related to loans serviced by the Company for unrelated
third parties.  The outstanding principal balances of such loans were
$155.6 million and $138.4 million at September 30, 2010 and December 31, 2009,
respectively.  Gross service fee income related to such loans was
$93,000 and $79,000 for the quarters ended September 30, 2010 and 2009,
respectively, which is included in fees and service charges in the consolidated
statements of operations.  Gross service fee income for the nine
months ended September 30, 2010 and 2009 was $269,000 and $194,000,
respectively.  The following is an analysis of changes in the mortgage
servicing rights:





Three months ended September 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Cost
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  1,572
                  
                  
                  $
                  (756
                  )
                  
                  $
                  1,211
                  
                  
                  $
                  (617
                  )Additions
                  
                  
                  190
                  
                  
                  
                  -
                  
                  
                  
                  177
                  
                  
                  
                  -Prepayments
                  
                  
                  (48
                  )
                  
                  
                  48
                  
                  
                  
                  (12
                  )
                  
                  
                  12Amortization
                  
                  
                  -
                  
                  
                  
                  (80
                  )
                  
                  
                  -
                  
                  
                  
                  (42
                  )Balance
      at end of period
                  
                  $
                  1,714
                  
                  
                  $
                  (788
                  )
                  
                  $
                  1,376
                  
                  
                  $
                  (647
                  )





Nine months ended September 30,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Cost
                  
                  
                  Accumulated
                    amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    amortizationBalance
      at beginning of period
                  
                  $
                  1,447
                  
                  
                  $
                  (681
                  )
                  
                  $
                  772
                  
                  
                  $
                  (602
                  )Additions
                  
                  
                  343
                  
                  
                  
                  -
                  
                  
                  
                  671
                  
                  
                  
                  -Prepayments
                  
                  
                  (76
                  )
                  
                  
                  76
                  
                  
                  
                  (67
                  )
                  
                  
                  67Amortization
                  
                  
                  -
                  
                  
                  
                  (183
                  )
                  
                  
                  -
                  
                  
                  
                  (112
                  )Balance
      at end of period
                  
                  $
                  1,714
                  
                  
                  $
                  (788
                  )
                  
                  $
                  1,376
                  
                  
                  $
                  (647
                  )





Aggregate
core deposit and mortgage servicing rights amortization expense for the quarters
ended September 30, 2010 and 2009, was $208,000 and $196,000,
respectively.  Aggregate core deposit and mortgage servicing rights
amortization expense for the nine months ended September 30, 2010 and 2009, was
$569,000 and $574,000, respectively.  The following sets forth
estimated amortization expense for all intangible assets for the remainder of
2010 and in successive years ending December 31:





Year
                  
                  Amount (in thousands)Remainder
      of 2010
                  
                  $
                  2102011
                  
                  
                  7602012
                  
                  
                  6642013
                  
                  
                  3642014
                  
                  
                  145Thereafter
                  
                  
                  75




7


3.
            Investments





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





As of September 30, 2010Gross
                    
                    
                    GrossAmortized
                    
                    
                    unrealized
                    
                    
                    unrealized
                    
                    
                    Estimated(Dollars in thousands)
                    
                    cost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    fair valueU.
      S. federal agency obligations
                    
                    $
                    22,093
                    
                    
                    $
                    206
                    
                    
                    $
                    -
                    
                    
                    $
                    22,299Municipal
      obligations, tax exempt
                    
                    
                    63,789
                    
                    
                    
                    3,616
                    
                    
                    
                    (27
                    )
                    
                    
                    67,378Municipal
      obligations, taxable
                    
                    
                    2,755
                    
                    
                    
                    27
                    
                    
                    
                    (1
                    )
                    
                    
                    2,781Mortgage-backed
      securities
                    
                    
                    49,826
                    
                    
                    
                    1,280
                    
                    
                    
                    (4
                    )
                    
                    
                    51,102Common
      stocks
                    
                    
                    693
                    
                    
                    
                    165
                    
                    
                    
                    (51
                    )
                    
                    
                    807Pooled
      trust preferred securities
                    
                    
                    1,131
                    
                    
                    
                    -
                    
                    
                    
                    (917
                    )
                    
                    
                    214Certificates
      of deposit
                    
                    
                    11,999
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,999Total
                    
                    $
                    152,286
                    
                    
                    $
                    5,294
                    
                    
                    $
                    (1,000
                    )
                    
                    $
                    156,580





As of December 31, 2009Gross
                  
                  
                  GrossAmortized
                  
                  
                  unrealized
                  
                  
                  unrealized
                  
                  
                  Estimated(Dollars
      in thousands)
                  
                  cost
                  
                  
                  gains
                  
                  
                  losses
                  
                  
                  fair valueU.
      S. federal agency obligations
                  
                  $
                  18,734
                  
                  
                  $
                  356
                  
                  
                  $
                  -
                  
                  
                  $
                  19,090Municipal
      obligations, tax exempt
                  
                  
                  67,149
                  
                  
                  
                  1,938
                  
                  
                  
                  (228
                  )
                  
                  
                  68,859Municipal
      obligations, taxable
                  
                  
                  1,366
                  
                  
                  
                  -
                  
                  
                  
                  (23
                  )
                  
                  
                  1,343Mortgage-backed
      securities
                  
                  
                  63,265
                  
                  
                  
                  1,532
                  
                  
                  
                  (102
                  )
                  
                  
                  64,695Common
      stocks
                  
                  
                  633
                  
                  
                  
                  191
                  
                  
                  
                  (19
                  )
                  
                  
                  805Pooled
      trust preferred securities
                  
                  
                  1,528
                  
                  
                  
                  -
                  
                  
                  
                  (1,267
                  )
                  
                  
                  261Certificates
      of deposit
                  
                  
                  6,515
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,515Total
                  
                  $
                  159,190
                  
                  
                  $
                  4,017
                  
                  
                  $
                  (1,639
                  )
                  
                  $
                  161,568





As of September 30, 2010, the Company
owned three investments in pooled trust preferred securities with an original
cost basis of $2.5 million, which represent investments in pools of
collateralized debt obligations issued by financial institutions and insurance
companies.  Included in the gross unrealized losses at September 30,
2010, are noncredit-related losses of $917,000 related to two investments in
pooled trust preferred securities, Preferred Term Security (“PreTSL”) VIII and
PreTSL IX, which were determined to be other-than-temporarily impaired and
recorded in accumulated other comprehensive income.  The amortized
cost of PreTSL VIII and PreTSL IX was $1.1 million at September 30,
2010.  During 2009, $854,000 of credit-related impairment losses was
recognized on these two securities.  A credit-related,
other-than-temporary impairment charge of $242,000 was taken during the third
quarter of 2010 for the remaining cost basis of the third investment in a pooled
trust preferred security, PreTSL XVII, and as a result the security was
determined to have no value.  Additional credit-related,
other-than-temporary impairment charges of $140,000 and $107,000 had previously
been recorded on PreTSL XVII during the second quarter of 2010 and the fourth
quarter of 2009, respectively.  The fair value of PreTSL VIII and
PreTSL IX totaled $214,000 at September 30, 2010, while the $917,000 of
unrealized losses were included in accumulated other comprehensive income, net
of tax.  The fair value of the three securities totaled $261,000 at
December 31, 2009, while $1.3 million of unrealized losses were included in
accumulated other comprehensive income, net of tax.


8


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





As of September 30, 2010(Dollars in thousands)
                    
                    
                    
                    
                    Lessthan12months
                    
                    
                    12monthsorlonger
                    
                    
                    TotalNo. of
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealizedsecurities
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    lossesMunicipal
      obligations, tax exempt
                    
                    
                    2
                    
                    
                    $
                    407
                    
                    
                    $
                    (3
                    )
                    
                    $
                    481
                    
                    
                    $
                    (24
                    )
                    
                    $
                    888
                    
                    
                    $
                    (27
                    )Municipal
      obligations, taxable
                    
                    
                    1
                    
                    
                    
                    999
                    
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    999
                    
                    
                    
                    (1
                    )Mortgage-backed
      securities
                    
                    
                    3
                    
                    
                    
                    2,335
                    
                    
                    
                    (4
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,335
                    
                    
                    
                    (4
                    )Common
      stocks
                    
                    
                    3
                    
                    
                    
                    420
                    
                    
                    
                    (44
                    )
                    
                    
                    17
                    
                    
                    
                    (7
                    )
                    
                    
                    437
                    
                    
                    
                    (51
                    )Pooled
      trust preferred securities
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    214
                    
                    
                    
                    (917
                    )
                    
                    
                    214
                    
                    
                    
                    (917
                    )Total
                    
                    
                    11
                    
                    
                    $
                    4,161
                    
                    
                    $
                    (52
                    )
                    
                    $
                    712
                    
                    
                    $
                    (948
                    )
                    
                    $
                    4,873
                    
                    
                    $
                    (1,000
                    )





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





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





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





The
receipt of principal, at par, and interest on mortgage-backed securities is
guaranteed by the respective government-sponsored agency guarantor, such that
the Company believes that its mortgage-backed securities do not expose the
Company to credit-related losses.  Based on these factors, along with
the Company’s intent to not sell the security and the Company’s belief that it
is more likely than not that the Company will not be required to sell the
security before recovery of its cost basis, the Company believes that the
mortgage-backed securities identified in the tables above were temporarily
impaired as of September 30, 2010 and December 31, 2009.  The
Company’s mortgage-backed securities portfolio consists of securities
underwritten to the standards of and guaranteed by the government-sponsored
agencies of FHLMC, FNMA and GNMA.




9




During
the quarter ended September 30, 2010, the Company determined that an equity
investment in a financial institution was other-than-temporarily impaired. 
The Company recorded a $9,000 other-temporary-impairment charge equal to the
cost of the equity investment during the third quarter of 2010, as the remaining
fair value of the equity investment was immaterial.





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





As of September 30, 2010, the analysis
of the Company’s three investments in pooled trust preferred securities
indicated that the unrealized losses on two of the three securities were not
credit-related.  However, the analysis indicated that the unrealized loss
was other-than-temporary on PreTSL XVII.  The increase in nonperforming
collateral in PreTSL XVII resulted in a credit-related other-than-temporary
impairment for the remaining cost basis of $242,000 during the quarter ended
September 30, 2010.  The cumulative realized loss on PreTSL XVII totaled
$489,000.  The Company performed a discounted cash flow analysis, using the
factors noted above to determine the amount of the other-than-temporary
impairment that was applicable to either credit losses or other factors. 
As of September 30, 2010, the Company had recorded credit losses on all three
PreTSL securities totaling $1.3 million through charges to earnings during 2009
and the first nine months of 2010.





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





(Dollars in thousands)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    CumulativeMoody's
                    
                    
                    Original
                    
                    
                    Cost
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    realizedInvestment
                    
                    Class
                    
                    
                    rating
                    
                    
                    par
                    
                    
                    basis
                    
                    
                    value
                    
                    
                    loss
                    
                    
                    lossPreTSL
      VIII
                    
                    
                    B
                    
                    
                    
                    C
                    
                    
                    $
                    1,000
                    
                    
                    $
                    381
                    
                    
                    $
                    57
                    
                    
                    $
                    (325
                    )
                    
                    $
                    (619
                    )PreTSL
      IX
                    
                    
                    B
                    
                    
                    
                    C
                    
                    
                    
                    1,000
                    
                    
                    
                    750
                    
                    
                    
                    157
                    
                    
                    
                    (592
                    )
                    
                    
                    (235
                    )PreTSL
      XVII
                    
                    
                    C
                    
                    
                    
                    C
                    
                    
                    
                    500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (489
                    )Total
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    2,500
                    
                    
                    $
                    1,131
                    
                    
                    $
                    214
                    
                    
                    $
                    (917
                    )
                    
                    $
                    (1,343
                    )




Non-performing collateral as %Number of
                              
                              
                              of current collateral (at quarter end)Investment
                              
                              issuers in pool
                              
                              
                              Q4 2009
                              
                              
                              Q1 2010
                              
                              
                              Q2 2010
                              
                              
                              Q3 2010PreTSL
      VIII
                              
                              
                              37
                              
                              
                              
                              43.7
                              %
                              
                              
                              43.7
                              %
                              
                              
                              43.7
                              %
                              
                              
                              43.7
                              %PreTSL
      IX
                              
                              
                              51
                              
                              
                              
                              28.1
                              %
                              
                              
                              29.2
                              %
                              
                              
                              29.2
                              %
                              
                              
                              29.2
                              %PreTSL
      XVII
                              
                              
                              58
                              
                              
                              
                              19.9
                              %
                              
                              
                              20.6
                              %
                              
                              
                              24.0
                              %
                              
                              
                              35.7
                              %




10


The
following table reconciles the changes in the Company’s credit losses on its
portfolio of investments in pooled trust preferred securities recognized in
earnings:





Three months ending September 30,(Dollars in thousands)
                    
                    2010
                    
                    
                    2009Beginning
      balance
                    
                    $
                    1,101
                    
                    
                    $
                    576Additional
      credit losses:Securities with no previous other-than-temporary
impairment
                    
                    
                    -
                    
                    
                    
                    -Securities with previous other-than-temporary impairments
                    
                    
                    242
                    
                    
                    
                    133Ending
      balance
                    
                    $
                    1,343
                    
                    
                    $
                    709Nine
      months ending September 30,(Dollars in thousands)
                    
                    2010
                    
                    
                    2009Beginning
      balance
                    
                    $
                    961
                    
                    
                    $
                    -Additional
      credit losses:Securities with no previous other-than-temporary
impairment
                    
                    
                    -
                    
                    
                    
                    709Securities with previous other-than-temporary impairments
                    
                    
                    382
                    
                    
                    
                    -Ending
      balance
                    
                    $
                    1,343
                    
                    
                    $
                    709





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





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





(Dollars in thousands)
                    
                    Amortized
                    
                    
                    Estimatedcost
                    
                    
                    fair valueDue
      in less than one year
                    
                    $
                    27,757
                    
                    
                    $
                    27,860Due
      after one year but within five years
                    
                    
                    28,092
                    
                    
                    
                    29,162Due
      after five years
                    
                    
                    45,918
                    
                    
                    
                    47,649Mortgage-backed
      securities and common stocks
                    
                    
                    50,519
                    
                    
                    
                    51,909Total
                    
                    $
                    152,286
                    
                    
                    $
                    156,580





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





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





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




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




11


4. 
         Loans and Allowance for Loan
Losses





Loans consisted of the following as
of:





(Dollars in thousands)
                            
                            September 30,
                            
                            
                            December 31,2010
                            
                            
                            2009One-to-four family residential real estate
                            
                            $
                            91,729
                            
                            
                            $
                            98,333Commercial real estate
                            
                            
                            102,014
                            
                            
                            
                            106,470Construction and land
                            
                            
                            26,439
                            
                            
                            
                            36,864Commercial loans
                            
                            
                            101,100
                            
                            
                            
                            98,213Consumer loans
                            
                            
                            5,989
                            
                            
                            
                            7,884Total gross loans
                            
                            
                            327,271
                            
                            
                            
                            347,764Deferred loan fees, costs and loans in
process
                            
                            
                            242
                            
                            
                            
                            442Allowance for loan losses
                            
                            
                            (4,600
                            )
                            
                            
                            (5,468
                            )Loans, net
                            
                            $
                            322,913
                            
                            
                            $
                            342,738Percent of total:One-to-four family residential real estate
                            
                            
                            28.0
                            %
                            
                            
                            28.3
                            %Commercial real estate
                            
                            
                            31.2
                            %
                            
                            
                            30.6
                            %Construction and land
                            
                            
                            8.1
                            %
                            
                            
                            10.6
                            %Commercial loans
                            
                            
                            30.9
                            %
                            
                            
                            28.2
                            %Consumer loans
                            
                            
                            1.8
                            %
                            
                            
                            2.3
                            %Total gross loans
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %





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





(Dollars in thousands)
                      
                      Three months ended September 30,
                      
                      
                      Nine months ended September 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Beginning
      balance
                      
                      $
                      4,373
                      
                      
                      $
                      4,827
                      
                      
                      $
                      5,468
                      
                      
                      $
                      3,871Provision
      for loan losses
                      
                      
                      500
                      
                      
                      
                      1,900
                      
                      
                      
                      5,200
                      
                      
                      
                      3,000Charge-offs
                      
                      
                      (300
                      )
                      
                      
                      (1,543
                      )
                      
                      
                      (6,124
                      )
                      
                      
                      (1,923
                      )Recoveries
                      
                      
                      27
                      
                      
                      
                      44
                      
                      
                      
                      56
                      
                      
                      
                      280Ending
      balance
                      
                      $
                      4,600
                      
                      
                      $
                      5,228
                      
                      
                      $
                      4,600
                      
                      
                      $
                      5,228





Loans past due 30-89 days
and still accruing interest totaled $2.7 million, or 0.8% of gross loans, at
September 30, 2010, compared to $2.5 million, or 0.7% of gross loans, at
December 31, 2009.Loans past due more than a month totaled $5.3
million, or 1.6% of gross loans, at September 30, 2010, compared to $13.3
million, or 3.8% of gross loans, at December 31, 2009.  At September 30,
2010, $4.5 million in loans were on non-accrual status, or 1.4% of gross loans,
compared to a balance of $11.8 million, or 3.4% of gross loans, at December 31,
2009.  Non-accrual loans consist of loans 90 days or more past due and
impaired loans that are not past due.  There were no loans 90 days or more
delinquent and still accruing interest at September 30, 2010 or December 31,
2009.




12


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





(Dollars in thousands)
                      
                      September 30,
                      
                      
                      December 31,2010
                      
                      
                      2009One-to-four
      family residential real estate
                      
                      $
                      1,386
                      
                      
                      $
                      1,146Commercial
      real estate
                      
                      
                      45
                      
                      
                      
                      1,475Construction
      and land
                      
                      
                      1,241
                      
                      
                      
                      6,402Commercial
      loans
                      
                      
                      1,762
                      
                      
                      
                      2,785Consumer
      loans
                      
                      
                      35
                      
                      
                      
                      22Total non-accrual loans
                      
                      $
                      4,469
                      
                      
                      $
                      11,830





A summary
of the nonperforming assets is as follows:


September 30,
                      
                      
                      December 31,(Dollars in thousands)
                      
                      2010
                      
                      
                      2009Total
      non-accrual loans
                      
                      $
                      4,469
                      
                      
                      $
                      11,830Accruing
      loans over 90 days past due
                      
                      
                      -
                      
                      
                      
                      -Nonperforming
      investments
                      
                      
                      1,131
                      
                      
                      
                      1,528Real
      estate owned
                      
                      
                      4,093
                      
                      
                      
                      1,129Total nonperforming assets
                      
                      $
                      9,693
                      
                      
                      $
                      14,487Total
      nonperforming loans to gross loans
                      
                      
                      1.4
                      %
                      
                      
                      3.4
                      %Total
      nonperforming assets to total assets
                      
                      
                      1.7
                      %
                      
                      
                      2.5
                      %Allowance
      for loan losses to gross loans outstanding
                      
                      
                      1.4
                      %
                      
                      
                      1.6
                      %Allowance
      for loan losses to nonperforming loans
                      
                      
                      102.9
                      %
                      
                      
                      46.2
                      %





A summary of the impaired loans is as
follows:




(Dollars in thousands)
                      
                      September 30,
                      
                      
                      December 31,2010
                      
                      
                      2009One-to-four
      family residential real estate
                      
                      $
                      1,386
                      
                      
                      $
                      1,146Commercial
      real estate
                      
                      
                      45
                      
                      
                      
                      1,475Construction
      and land
                      
                      
                      1,241
                      
                      
                      
                      6,402Commercial
      loans
                      
                      
                      1,762
                      
                      
                      
                      2,785Consumer
      loans
                      
                      
                      35
                      
                      
                      
                      22Total impaired loans
                      
                      $
                      4,469
                      
                      
                      $
                      11,830Impaired
      loans for which an allowance has been provided
                      
                      $
                      2,768
                      
                      
                      $
                      10,620Impaired
      loans for which no allowance has been provided
                      
                      
                      1,701
                      
                      
                      
                      1,210Allowance
      related to impaired loans
                      
                      $
                      1,015
                      
                      
                      $
                      2,770




At September 30, 2010, the Company
hada loan
relationship totaling $853,000 that has been classified as a troubled debt
restructuring.  As of September 30, 2010, the value of the collateral
securing the loan was deficient by $308,000, which was reserved for in the
allowance related to impaired loans.  The relationship consisted of two
restructured 1-4 family residential real estate loans to a borrower who was
experiencing financial difficulty and granted concessions at renewal.  The
interest rate on $308,000 of the loan relationship was judged to be below market
for new debt with similar risk, and thus both of these loans were classified as
troubled debt restructurings.  These restructured loans are performing in
accordance with their modified terms and the Company believes it probable that
all amounts due under the modified terms of the agreements will be
collected.  At September 30, 2010 both loans were classified as non-accrual
and impaired.




13


5. 
         Earnings per Share





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





(Dollars in thousands, except per share amounts)
                
                Three months ended September 30,
                
                
                Nine months ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      earnings
                
                $
                1,103
                
                
                $
                113
                
                
                $
                1,199
                
                
                $
                2,134Weighted
      average common shares outstanding - basic
                
                
                2,504,265
                
                
                
                2,490,023
                
                
                
                2,500,906
                
                
                
                2,490,201Assumed
      exercise of stock options
                
                
                2,080
                
                
                
                5,086
                
                
                
                2,333
                
                
                
                5,158Weighted
      average common shares outstanding - diluted
                
                
                2,506,345
                
                
                
                2,495,109
                
                
                
                2,503,239
                
                
                
                2,495,359Net
      earnings per share (1):Basic
                
                $
                0.44
                
                
                $
                0.05
                
                
                $
                0.48
                
                
                $
                0.86Diluted
                
                $
                0.44
                
                
                $
                0.05
                
                
                $
                0.48
                
                
                $
                0.86





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





6. 
         Comprehensive Income





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





(Dollars in thousands)
                                  
                                  Three months ended September 30,
                                  
                                  
                                  Nine months ended September 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Net
      earnings
                                  
                                  $
                                  1,103
                                  
                                  
                                  $
                                  113
                                  
                                  
                                  $
                                  1,199
                                  
                                  
                                  $
                                  2,134Unrealized
      holding losses on available-for-salesecurities for which a  portion of an other-than-temporary impairment has been recorded in earnings
                                  
                                  
                                  (42
                                  )
                                  
                                  
                                  (154
                                  )
                                  
                                  
                                  (32
                                  )
                                  
                                  
                                  (339
                                  )Net
      unrealized holding gains on all otheravailable-for-sale securities
                                  
                                  
                                  1,030
                                  
                                  
                                  
                                  3,462
                                  
                                  
                                  
                                  2,120
                                  
                                  
                                  
                                  2,982Less
      reclassification adjustment for losses (gains)included in earnings
                                  
                                  
                                  251
                                  
                                  
                                  
                                  133
                                  
                                  
                                  
                                  (172
                                  )
                                  
                                  
                                  709Net unrealized gains
                                  
                                  
                                  1,239
                                  
                                  
                                  
                                  3,441
                                  
                                  
                                  
                                  1,916
                                  
                                  
                                  
                                  3,352Income
      tax expense
                                  
                                  
                                  461
                                  
                                  
                                  
                                  1,270
                                  
                                  
                                  
                                  710
                                  
                                  
                                  
                                  1,224Total comprehensive income
                                  
                                  $
                                  1,881
                                  
                                  
                                  $
                                  2,284
                                  
                                  
                                  $
                                  2,405
                                  
                                  
                                  $
                                  4,262




14


7. 
         Fair Value of Financial Instruments and Fair
Value Measurements





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




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


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


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




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




(Dollars in thousands)
                    
                    September 30, 2010
                    
                    
                    December 31, 2009Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    Estimatedamount
                    
                    
                    fair value
                    
                    
                    amount
                    
                    
                    fair valueFinancial
      assets:Investment securities:Available-for-sale
                    
                    $
                    156,580
                    
                    
                    $
                    156,580
                    
                    
                    $
                    161,568
                    
                    
                    $
                    161,568Other securities
                    
                    
                    8,170
                    
                    
                    
                    8,170
                    
                    
                    
                    8,051
                    
                    
                    
                    8,051Loans, net
                    
                    
                    322,913
                    
                    
                    
                    322,590
                    
                    
                    
                    342,738
                    
                    
                    
                    343,671Loans held for sale
                    
                    
                    10,162
                    
                    
                    
                    10,420
                    
                    
                    
                    4,703
                    
                    
                    
                    4,718Mortgage servicing rights
                    
                    
                    926
                    
                    
                    
                    3,164
                    
                    
                    
                    766
                    
                    
                    
                    2,188Derivative financial instruments
                    
                    
                    15
                    
                    
                    
                    15
                    
                    
                    
                    -
                    
                    
                    
                    -Accrued interest receivable
                    
                    $
                    2,763
                    
                    
                    $
                    2,763
                    
                    
                    $
                    2,702
                    
                    
                    $
                    2,702Financial
      liabilities:Non-maturity deposits
                    
                    $
                    252,147
                    
                    
                    $
                    252,147
                    
                    
                    $
                    246,258
                    
                    
                    $
                    246,258Time deposits
                    
                    
                    184,020
                    
                    
                    
                    186,256
                    
                    
                    
                    192,337
                    
                    
                    
                    193,707FHLB borrowings
                    
                    
                    41,446
                    
                    
                    
                    43,450
                    
                    
                    
                    56,004
                    
                    
                    
                    58,174Other borrowings
                    
                    
                    27,884
                    
                    
                    
                    25,287
                    
                    
                    
                    26,179
                    
                    
                    
                    24,537Derivative financial instruments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    84
                    
                    
                    
                    84Accrued interest payable
                    
                    $
                    777
                    
                    
                    $
                    777
                    
                    
                    $
                    1,028
                    
                    
                    $
                    1,028




Methods
and Assumptions Utilized




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





15


The Company classifies the fair value
of its pooled trust preferred securities as Level 3.  The portfolio
consists of three investments in pooled trust preferred securities issued by
various financial companies, one of which had no value at September 30,
2010.  These securities are valued based on a matrix pricing in which the
securities are benchmarked against single issuer trust preferred securities
based on credit rating.  The pooled trust preferred market is inactive so
single issuer trading is used as the benchmark, with additional adjustments made
for credit and liquidity risk.





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





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





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





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





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





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





The estimated fair value of deposits
with no stated maturity, such as non-interest-bearing demand deposits, savings,
money market accounts, and NOW accounts, is equal to the amount payable on
demand.  The fair value of interest bearing time deposits is based on the
discounted value of contractual cash flows of such deposits.  The discount
rate is tied to the FHLB yield curve plus an appropriate servicing spread. 
Fair value measurements based on discounted cash flows are classified as Level
3.  These fair values do not incorporate the value of core deposit
intangibles which may be associated with the deposit base.





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




16


Off-Balance
Sheet Financial Instruments





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





Limitations





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





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





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





(Dollars in thousands)
                          
                          
                          
                          
                          As of September 30, 2010Fair value hierarchyTotal
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Assets:Available-for-sale securitiesU. S. federal agency obligations
                          
                          $
                          22,299
                          
                          
                          $
                          -
                          
                          
                          $
                          22,299
                          
                          
                          $
                          -Municipal obligations, tax exempt
                          
                          
                          67,378
                          
                          
                          
                          -
                          
                          
                          
                          67,378
                          
                          
                          
                          -Municipal obligations, taxable
                          
                          
                          2,781
                          
                          
                          
                          -
                          
                          
                          
                          2,781
                          
                          
                          
                          -Mortgage-backed securities
                          
                          
                          51,102
                          
                          
                          
                          -
                          
                          
                          
                          51,102
                          
                          
                          
                          -Common stocks
                          
                          
                          807
                          
                          
                          
                          807
                          
                          
                          
                          -
                          
                          
                          
                          -Pooled trust preferred securities
                          
                          
                          214
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          214Certificates of deposit
                          
                          
                          11,999
                          
                          
                          
                          -
                          
                          
                          
                          11,999
                          
                          
                          
                          -Derivative financial instruments
                          
                          $
                          15
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          15As
      of December 31, 2009Fair
      value hierarchyTotal
                          
                          
                          Level
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3Assets:Available-for-sale securitiesU. S. federal agency obligations
                          
                          $
                          19,090
                          
                          
                          $
                          -
                          
                          
                          $
                          19,090
                          
                          
                          $
                          -Municipal obligations, tax exempt
                          
                          
                          68,859
                          
                          
                          
                          -
                          
                          
                          
                          68,859
                          
                          
                          
                          -Municipal obligations, taxable
                          
                          
                          1,343
                          
                          
                          
                          -
                          
                          
                          
                          1,343
                          
                          
                          
                          -Mortgage-backed securities
                          
                          
                          64,695
                          
                          
                          
                          -
                          
                          
                          
                          64,695
                          
                          
                          
                          -Common stocks
                          
                          
                          805
                          
                          
                          
                          805
                          
                          
                          
                          -
                          
                          
                          
                          -Pooled trust preferred securities
                          
                          
                          261
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          261Certificates of deposit
                          
                          
                          6,515
                          
                          
                          
                          -
                          
                          
                          
                          6,515
                          
                          
                          
                          -Liabilities:Derivative financial instruments
                          
                          $
                          84
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          84




17




The following table reconciles the
changes in the Company’s Level 3 financial instruments during the first nine
months of 2010:





(Dollars in thousands)
                    
                    
                    
                    
                    DerivativeAvailable-for
                    
                    
                    financialsale-securities
                    
                    
                    instrumentsLevel
      3 asset (liability) fair value at December 31, 2009
                    
                    $
                    261
                    
                    
                    $
                    (84
                    )Transfers
      into Level 3
                    
                    
                    -
                    
                    
                    
                    -Payments
      applied to reduce carrying value
                    
                    
                    (15
                    )
                    
                    
                    -Total
      gains (losses):Included in earnings
                    
                    
                    (382
                    )
                    
                    
                    99Included in other comprehensive income
                    
                    
                    350
                    
                    
                    
                    -Level
      3 asset fair value at September 30, 2010
                    
                    $
                    214
                    
                    
                    $
                    15





Changes in the fair value of
available-for-sale securities are included in other comprehensive income to the
extent the changes are not considered other-than-temporary impairments. 
Other-than-temporary impairment tests are performed on a quarterly basis and any
decline in the fair value of an individual security below its cost that is
deemed to be other-than-temporary results in a write-down of that security’s
cost basis.





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





The Company does not value its loan
portfolio at fair value, however adjustments are recorded on certain loans to
reflect the impaired value on the underlying collateral.  Collateral values
are reviewed on a loan-by-loan basis through independent appraisals. 
Appraised values may be discounted based on management’s historical knowledge,
changes in market conditions and/or management’s expertise and knowledge of the
client and the client’s business.  Because many of these inputs are
unobservable, the valuations are classified as Level 3.  The carrying value
of the Company’s impaired loans was $4.5 million at September 30, 2010 and $11.8
million at December 31, 2009, with allocated allowances of $1.0 million and $2.8
million, respectively.





The
Company’s measure of its goodwill is based on market based valuation techniques,
including reviewing the Company’s market capitalization with appropriate control
premiums and valuation multiples as compared to recent similar financial
industry acquisition multiples to estimate the fair value of the Company’s
single reporting unit.  The fair value measurements are classified as Level
3.  Core deposit intangibles are recognized at the time core deposits are
acquired, using valuation techniques which calculate the present value of the
estimated net cost savings relative to the Company’s alternative costs of funds
over the expected remaining economic life of the deposits.  Subsequent
evaluations are made when facts or circumstances indicate potential impairment
may have occurred.  The models incorporate market discount rates, estimated
average core deposit lives and alternative funding rates.  The fair value
measurements are classified as Level 3.





Real estate owned, which includes
assets acquired through, or in lieu of, foreclosure, is initially recorded at
the date of foreclosure at the fair value of the collateral less estimated
selling costs.  Subsequent to foreclosure, valuations are updated
periodically and are based upon independent appraisals, third party price
opinions or internal pricing models and are classified as Level 3.




18


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





(Dollars in thousands)
                              
                              
                              
                              
                              As of September 30 ,2010Fair value hierarchy
                              
                              
                              TotalTotal
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3
                              
                              
                              lossesAssets:Impaired loans
                              
                              $
                              3,454
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              3,454
                              
                              
                              $
                              (676
                              )Loans held for sale
                              
                              
                              10,420
                              
                              
                              
                              -
                              
                              
                              
                              10,420
                              
                              
                              
                              -
                              
                              
                              
                              -Mortgage servicing rights
                              
                              
                              3,164
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              3,164
                              
                              
                              
                              -Real estate owned
                              
                              $
                              4,093
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              4,093
                              
                              
                              $
                              -(Dollars
      in thousands)
                              
                              
                              
                              
                              
                              As
      of December 31 ,2009Fair
      value hierarchy
                              
                              
                              TotalTotal
                              
                              
                              Level
      1
                              
                              
                              Level
      2
                              
                              
                              Level
      3
                              
                              
                              lossesAssets:Impaired loans
                              
                              $
                              9,060
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              9,060
                              
                              
                              $
                              (2,770
                              )Loans held for sale
                              
                              
                              4,718
                              
                              
                              
                              -
                              
                              
                              
                              4,718
                              
                              
                              
                              -
                              
                              
                              
                              -Mortgage servicing rights
                              
                              
                              2,188
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,188
                              
                              
                              
                              -Real estate owned
                              
                              $
                              1,129
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,129
                              
                              
                              $
                              (100
                              )




19


8. 
         Impact of Recent Accounting
Pronouncements





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





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





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


20


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





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





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





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





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


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


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


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


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


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


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


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


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


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


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





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





21


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





Summary of
Results. 
During the third quarter of 2010, we recorded net earnings of $1.1 million as
compared to net earnings of $113,000 in the same period of 2009.  The
increase in net earnings was primarily the result of a $1.4 million decrease in
our provision for loan losses in the third quarter of 2010 as compared to the
third quarter of 2009.  Net earnings decreased from $2.1 million during the
nine months ended September 30, 2009 to $1.2 million during the same period of
2010.  The primary cause of this decline was a $2.2 million increase in our
provision for loan losses during the first nine months of 2010 as compared to
the first nine months of 2009.  Partially offsetting the increased
provision for loan losses during the first nine months of 2010 was a gain on
sales of investment securities of $563,000 recorded in 2010, as well as a
decline in our net credit-related impairment losses on investment securities,
which decreased from $709,000 during the first nine months of 2009 to $391,000
during the first nine months of 2010.





The
provision for loan losses declined during the third quarter of 2010, as compared
to the third quarter of 2009, due to decreased charge-offs and lower levels of
nonperforming loans.  Net loan charge-offs declined from $1.5 million in
the third quarter of 2009 to $273,000 in the same period of 2010.  For the
nine months ended September 30, 2010 the provision for loan losses reflected
increased charge-offs as compared to the same period of 2009.  Net loan
charge-offs increased from $1.6 million during the first nine months of 2009 to
$6.1 million during the same period of 2010.  The increase in net loan
charge-offs in 2010 was principally associated with a $4.3 million construction
loan, which experienced a significant decline in the appraised value of the
collateral securing the loan and a $2.3 million commercial agriculture
loan.  Both loans were classified as impaired and non-accrual during
2009.  During the first nine months of 2010, we charged-off the remaining
balance on the commercial agriculture loan and $3.3 million of the construction
loan.  Our ratio of nonperforming loans to gross loans decreased to 1.4% at
September 30, 2010 compared to 3.4% at December 31, 2009, primarily as a result
of the charge-offs described above.





Our net
interest margin increased from 3.59% during the third quarter of 2009 to 3.76%
for the third quarter of 2010 and from 3.54% during the nine months ended
September 30, 2009 to 3.79% during the nine months ended September 30,
2010.The
increase in net interest margin was primarily a result of maintaining the yields
on our loan portfolio while our investment portfolio, deposits and FHLB advances
repriced lower in the current low rate environment.  While our net interest
margin increased, our average interest earnings asset balances declined over the
same periods as a result of our decision not to reinvest excess liquidity into
lower yielding investments thereby reducing higher cost liabilities.  It is
unlikely that we will continue to increase our net interest margin from current
levels in the near term and instead may see declines in net interest margin as
we currently expect to reinvest some of our future excess liquidity and future
cash flows into low yielding investments.





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





(Dollars in thousands)
                    
                    Three months ended September30,
                    
                    
                    Nine months ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      earnings:Net
      earnings
                    
                    $
                    1,103
                    
                    
                    $
                    113
                    
                    
                    $
                    1,199
                    
                    
                    $
                    2,134Basic
      earnings per share
                    
                    $
                    0.44
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.48
                    
                    
                    $
                    0.86Diluted
      earnings per share
                    
                    $
                    0.44
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.48
                    
                    
                    $
                    0.86Earnings
      ratios:Return
      on average assets (1)
                    
                    
                    0.75
                    %
                    
                    
                    0.07
                    %
                    
                    
                    0.28
                    %
                    
                    
                    0.47
                    %Return
      on average equity (1)
                    
                    
                    8.05
                    %
                    
                    
                    0.84
                    %
                    
                    
                    2.93
                    %
                    
                    
                    5.43
                    %Equity
      to total assets
                    
                    
                    9.72
                    %
                    
                    
                    9.01
                    %
                    
                    
                    9.72
                    %
                    
                    
                    9.01
                    %Net
      interest margin (1) (2)
                    
                    
                    3.76
                    %
                    
                    
                    3.59
                    %
                    
                    
                    3.79
                    %
                    
                    
                    3.54
                    %Dividend
      payout ratio
                    
                    
                    43.18
                    %
                    
                    
                    380.00
                    %
                    
                    
                    118.75
                    %
                    
                    
                    63.33
                    %





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


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





22


Interest
Income.  Interest income for the quarter ended September 30, 2010,
decreased $763,000 to $6.0 million, a decline of 11.2% as compared to the same
period of 2009.  Interest income on loans decreased $292,000, or 5.7%, to
$4.8 million for the quarter ended September 30, 2010 due to decreased average
outstanding loan balances.  Partially offsetting the lower average
outstanding loans were higher tax equivalent yields earned on loans. 
Average loan balances for the third quarter of 2010, decreased to $337.5 million
from $359.8 million for the third quarter of 2009 while the average tax
equivalent yield increased to 5.71% from 5.67% over the same periods,
respectively.  Interest income on investment securities decreased $471,000,
or 28.0%, to $1.2 million for the third quarter of 2010, as compared to the same
period of 2009.  The decline in interest income on investment securities
was due to a decline in the average balance of investments, from $186.3 million
during the third quarter of 2009 to $168.0 million during the third quarter of
2010, and a decline in the tax equivalent yield on those investments from 4.23%
to 3.56% over the same periods, respectively.





Interest
income for the nine months ended September 30, 2010, decreased $2.1 million, or
10.1%, to $18.6 million as compared to the same period of 2009.  Interest
income on loans decreased $928,000, or 6.0%, to $14.6 million for the nine
months ended September 30, 2010 due to decreased average outstanding loan
balances and lower tax equivalent yields earned on loans.  Average loan
balances for the nine months ended September 30, 2010, decreased to $344.8
million from $363.5 million for the nine months ended September 30, 2009 while
the average tax equivalent yield declined to 5.70% from 5.74% over the same
periods, respectively.  Interest income on investment securities decreased
$1.2 million, or 22.8%, to $3.9 million for the first nine months of 2010, as
compared to the same period of 2009.  The decline in interest income on
investment securities was due to a decline in the average balance of
investments, from $184.5 million during the first nine months of 2009 to $171.0
million during the first nine months of 2010, and a decline in the tax
equivalent yield on those investments from 4.34% to 3.78% over the same periods,
respectively.





Interest
Expense. 
Interest expense during the quarter ended September 30, 2010 decreased $624,000,
or 28.4%, to $1.6 million as compared to the same period of 2009.  For the
third quarter of 2010, interest expense on interest-bearing deposits decreased
$485,000, or 34.6%, to $916,000 as a result of lower rates on deposit balances,
consisting of lower rates for our maturing certificates of deposit and lower
rates on money market and NOW accounts.  Our total cost of deposits
declined from 1.38% during the third quarter of 2009 to 0.96% during the same
period of 2010.  Also contributing to the decline in interest expense were
lower average deposit balances, which decreased from $401.8 million for the
third quarter of 2009 to $378.0 million for the third quarter of 2010.  The
decline in average deposit balances was the result of lower balances of
certificates of deposits.  For the third quarter of 2010, interest expense
on borrowings decreased $139,000, or 17.5%, to $654,000 due to lower outstanding
balances on our borrowings and also to lower average costs of borrowings. 
Our average outstanding borrowings declined from $90.3 million in the third
quarter of 2009 to $75.7 million in the same period of 2010 while our cost of
borrowings decreased from 3.48% to 3.43% over the same periods.





Interest
expense during the nine months ended September 30, 2010 decreased $2.1 million,
or 30.2%, to $4.9 million as compared to the same period of 2009.  For the
first nine months of 2010, interest expense on interest-bearing deposits
decreased $1.7 million, or 36.4%, to $2.9 million as a result of lower rates on
deposit balances, consisting of lower rates for our maturing certificates of
deposit and lower rates on money market and NOW accounts.  Our total cost
of deposits declined from 1.53% during the nine months ended September 30, 2009
to 1.02% during the same period of 2010.  Also contributing to the decline
in interest expense were lower average deposit balances, which decreased from
$401.2 million for the first nine months of 2009 to $382.0 million for the same
period of 2010.  The decline in average deposit balances was the result of
lower balances of certificates of deposits.  For the first nine months of
2010, interest expense on borrowings decreased $465,000, or 18.7%, to $2.0
million due to lower outstanding balances on our borrowings and lower average
costs of borrowings.  Our cost of borrowing decreased from 3.53% in the
nine months ended September 30, 2009 to 3.30% in the same period of 2010 while
our average outstanding borrowings declined from $94.0 million to $81.7 million
over the same periods.  The decrease in average balances and interest
expense are primarily from the maturity of some of our higher rate FHLB
advances.





Net Interest
Income.  Net
interest income declined $139,000, or 3.0%, for the third quarter of 2010 to
$4.5 million from $4.6 million in the same period of 2009.  Our net
interest margin, on a tax equivalent basis, increased from 3.59% during the
third quarter of 2009 to 3.76% during the third quarter of 2010.  The
improvement in net interest margin from interest rates did not offset the lower
average balances of interest earning assets which declined from $546.2 million
in the third quarter of 2009 to $505.5 million in the third quarter of
2010.





Net
interest income for the nine months ended September 30, 2010 totaled $13.6
million, increasing $50,000, or 0.4%, as compared to the same period of
2009.  Our net interest margin, on a tax equivalent basis, increased from
3.54% during the first nine months of 2009 to 3.79% during the same period of
2010.  The improvement in net interest margin from interest rates offset
the lower average balances of interest earning assets which declined from $548.0
million in the first nine months of 2009 to $515.8 million in the first nine
months of 2010.





23


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





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





Our
provision for loan losses for the quarter ended September 30, 2010 was $500,000,
compared to a provision of $1.9 million during the same period of 2009. 
The provision for loan losses declined during the third quarter of 2010, as
compared to the third quarter of 2009, due to decreased net loan charge-offs and
lower levels of nonperforming loans.  Net loan charge-offs declined from
$1.5 million in the third quarter of 2009 to $273,000 in the third quarter of
2010.  During the first nine months of 2010 our provision for loan losses
was $5.2 million, compared to a provision of $3.0 million during the same period
of 2009.  Net loan charge-offs increased from $1.6 million during the first
nine months of 2009 to $6.1 million during the same period of 2010.  The
increased net loan charge-offs in 2010 were primarily related to a previously
identified and impaired construction loan totaling $4.3 million, which
experienced a significant decline in the appraised value of the collateral
securing the loan.  While it was necessary to recognize the loss associated
with this decline in value, we continue to pursue the guarantor.  Also
during the first nine months of 2010, we charged-off the remaining $2.3 million
balance on a commercial agriculture loan after exhausting our collection
attempts.  The commercial agriculture loan charge-off exceeded the reserves
in the allowance for loan losses by $242,000.  In 2009 our charge-offs were
primarily related to a commercial loan relationship that was liquidated in
bankruptcy.  Our provision for loan losses was higher in both 2010 and 2009
as compared to historical levels prior to 2008, due to the difficult economic
conditions over the past few years and its impact on our loan portfolio which
increased our levels of charge-offs and nonperforming loans over the same
period.  We have been working diligently to identify and address the credit
weaknesses in our loan portfolio.  While it is difficult to forecast future
events, we believe that our current allowance for loan losses, coupled with our
capital levels, loan portfolio management and underlying fundamental earnings
before the provision for loan losses, positions us to deal with this challenging
environment.  For further discussion of the allowance for loan losses,
refer to the “Asset Quality and Distribution” section.





Non-interest
Income. 
Total non-interest income was $2.4 million for the third quarter of 2010, up
$278,000, or 13.2%, from the same period in 2009.  The increase in
non-interest income was primarily attributable to a $139,000 increase in fees
and service charges and a $111,000 increase in gains on sale of loans as
origination volumes of residential real estate loans that were sold in the
secondary market increased in the third quarter of 2010 compared to the same
period of 2009.





Total
non-interest income decreased $220,000, or 3.3%, to $6.4 million for the first
nine months of 2010 compared to the same period in 2009, primarily attributable
to a $392,000 decrease in gains on sales of loans which was partially offset by
a $181,000 increase in fees and service charges.  Our originations of
one-to-four family residential real estate loans that were sold in the secondary
market declined in the first nine months of 2010 as compared to the origination
volumes that we experienced in the same period of 2009.





Investment
Securities Gains (Losses).  During the third
quarter of 2010, we recorded a credit-related, other-than-temporary impairment
loss of $242,000 for the remaining cost basis of one of our three investments in
pooled trust preferred investment securities.  In addition, we also
recorded a $9,000 other-than-temporary impairment loss on a common stock
investment during the third quarter of 2010.  In the third quarter of 2009,
we recorded $133,000 of credit-related, other-than-temporary impairment losses
on our portfolio of pooled trust preferred investment securities.





During the first nine
months of 2010, we realized $563,000 of gains on sales of investment securities
resulting from the sale of $10.1 million of high-quality mortgage-backed
investment securities as we capitalized on the premium pricing that existed in
the markets for these types of securities.We recorded
credit-related, other-than-temporary impairment losses on our investment
securities portfolio during the first nine months of both 2010 and 2009, however
the amount of the net impairment loss declined from $709,000 during the first
nine months of 2009 to $391,000 during the first nine months of
2010.





24


Non-interest
Expense. 
Non-interest expense decreased $64,000, or 1.3%, to $4.8 million for the third
quarter of 2010, compared to the same period of 2009.  The decline in
non-interest expense was primarily due to a decrease of $77,000 in professional
fees.





Non-interest
expense increased $116,000, or 0.8%, to $14.3 million for the first nine months
of 2010, compared to the same period of 2009.  The May 2009 acquisition of
a branch in Lawrence, Kansas, contributed to increases of $258,000 in
compensation and benefits and $93,000 in occupancy and equipment costs during
the first nine months of 2010 as compared to the first nine months of
2009.  Offsetting those increases were decreases of $114,000 in federal
deposit insurance premiums and $121,000 in professional fees.  The decrease
in federal deposit insurance premiums was the result of a $277,000 special
assessment during the second quarter of 2009 offset by higher assessment rates,
which affected all FDIC insured institutions, and the utilization of our
remaining FDIC assessment credits during the first nine months of 2009. 
Our professional fees were elevated during the first nine months of 2009 as a
result of the branch acquisition.





Income Tax
(Benefit) Expense.  During the third
quarter of 2010, we recorded an income tax expense of $241,000 as compared to
income tax benefit of $254,000 during the same period of 2009.  Our
effective tax rate was 17.9% in the third quarter of 2010.  The tax benefit
recorded in the third quarter of 2009 resulted from a decrease in taxable
income, as a percentage of earnings before income taxes, and was primarily a
result of the higher provision for loan losses.  Our tax exempt investment
income and bank owned life insurance remained similar between the third quarters
of 2010 and 2009.





During
the nine months ended September 30, 2010 we recorded a tax benefit of $531,000
compared to a tax expense of $139,000, or an effective tax rate of 6.1%, during
the same period of 2009.  The tax benefit recorded in the first nine months
of 2010 resulted from a decrease in taxable income, as a percentage of earnings
before income taxes, and was primarily a result of the higher provision for loan
losses.  Our tax exempt investment income and bank owned life insurance
remained similar between the first nine months of 2010 and 2009.





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





Asset Quality and
Distribution.  Our primary investing
activities are the origination of commercial real estate, commercial and
consumer loans and the purchase of investment and mortgage-backed
securities.  Total assets decreased to $567.3 million at September 30,
2010, compared to $584.2 million at December 31, 2009.  Net loans,
excluding loans held for sale, decreased to $322.9 million at September 30, 2010
from $342.7 million at December 31, 2009.  The $19.8 million decline in net
loans was primarily the result of declines of $10.4 million in construction and
land loans and $4.4 million in commercial real estate loans.  The decline
in these loan balances is the result of multiple factors, including management
decisions to reduce exposure to construction and land loans, declines in loan
demand from our customers and $6.1 million of net loan charge-offs during the
first nine months of 2010.  Our one-to-four family residential real estate
loan portfolio also declined by $6.6 million during the first nine months of
2010 due to normal runoff relating to principal payments and prepayments. 
The outstanding balances in our one-to-four family residential real estate loan
portfolio typically decline as we sell most of our newly originated loans. 
Generally, we originate fixed-rate, residential mortgage loans with maturities
in excess of ten years for sale in the secondary market.  These loans are
typically sold soon after the loan closing.  We do not originate and
warehouse these fixed-rate residential loans for resale in order to speculate on
interest rates.  The $2.9 million increase in our commercial loan balances
is due to seasonal increases in borrowings on commercial agriculture lines of
credit.





25


The allowance for loan losses is
established through a provision for loan losses based on our evaluation of the
risk inherent in the loan portfolio and changes in the nature and volume of our
loan activity.  This evaluation, which includes a review of all loans with
respect to which full collectability may not be reasonably assured, considers
the fair value of the underlying collateral, economic conditions, historical
loan loss experience, level of classified loans and other factors that warrant
recognition in providing for an adequate allowance for losses on loans.  At
September 30, 2010, our allowance for loan losses totaled $4.6 million, or 1.4%
of gross loans outstanding, as compared to $5.5 million, or 1.6% of gross loans
outstanding, at December 31, 2009.  Our provision for loan losses for the
quarter ended September 30, 2010 was $500,000, compared to a provision of $1.9
million during the same period of 2009.  During the first nine months of
2010, our provision for loan losses was $5.2 million, compared to a provision of
$3.0 million during the same period of 2009.  Our provision for loan losses
was higher in both 2010 and 2009 as compared to historical levels prior to 2008,
due to the difficult economic conditions over the past few years and its impact
on our loan portfolio as well as increased levels of charge-offs and
nonperforming loans over the same period.  We have been working diligently
to identify and address the credit weaknesses in our loan portfolio.  While
it is difficult to forecast future events, we believe that our current allowance
for loan losses, coupled with our capital levels, loan portfolio management and
underlying fundamental earnings before the provision for loan losses, positions
us to deal with this challenging environment.





Loans past due 30-89 days
and still accruing interest totaled $2.7 million, or 0.8% of gross loans, at
September 30, 2010, compared to $2.5 million, or 0.7% of gross loans, at
December 31, 2009.Loans past due more than a month totaled $5.3
million, or 1.6% of gross loans, at September 30, 2010, compared to $13.3
million, or 3.8% of gross loans, at December 31, 2009.  At September 30,
2010, $4.5 million in loans were on non-accrual status, or 1.4% of gross loans,
compared to a balance of $11.8 million, or 3.4% of gross loans, at December 31,
2009.  Non-accrual loans consist of loans 90 or more days past due and
impaired loans that are not past due.  There were no loans 90 days or more
delinquent and still accruing interest at September 30, 2010 or December 31,
2009.  Our impaired loans were $4.5 million at September 30, 2010 compared
to $11.8 million at December 31, 2009.  The $7.4 million decline
in non-accrual and impaired loans during the first nine months of 2010 was
primarily the result of $6.1 million of net loan
charge-offs.





During
the first nine months of 2010, we had net loan charge-offs of $6.1 million as
compared to $1.6 million during the first nine months of 2009.  The
increased net loan charge-offs in 2010 were primarily related to a previously
identified and impaired construction loan totaling $4.3 million, which
experienced a significant decline in the appraised value of the collateral
securing the loan.  While it was necessary to recognize the loss associated
with this decline in value, we continue to pursue the guarantor.  We also
charged-off the remaining $2.3 million balance on a commercial agriculture loan
after exhausting our collection attempts during 2010.  The 2009 charge-offs
were primarily related to a commercial loan relationship that was liquidated in
bankruptcy.  As part of our credit risk management, we continue to
aggressively manage the loan portfolio to identify problem loans and have placed
additional emphasis on commercial real estate and construction
relationships.  We are aggressively working to resolve the remaining
problem credits or move the nonperforming credits out of the loan
portfolio.





During the first nine
months of 2010, real estate owned increased by $3.0 million primarily as the
result of foreclosure on loans that were nonperforming at December 31,
2009.The $3.0 million increase in real estate owned was primarily
the result of the foreclosure on a residential subdivision development as the
Company took possession of the real estate after the development slowed and the
borrower was unable to comply with the contractual terms of the loan and a loan
settlement where the Company took possession of a commercial real estate
building.  The remaining increase in other real estate owned was from
foreclosures on residential properties.No significant
losses resulted from the foreclosure of the loans that increased other real
estate owned.





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





Liability
Distribution.  Our primary ongoing
sources of funds are deposits, FHLB borrowings, proceeds from principal and
interest payments on loans and investment securities and proceeds from the sale
of mortgage loans and investment securities.  While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates and
economic conditions.  Total deposits decreased $2.4 million to $436.2
million at September 30, 2010, from $438.6 million at December 31, 2009. 
Total borrowings decreased $12.9 million to $69.3 million at September 30, 2010,
from $82.2 million at December 31, 2009.  The decrease was primarily from
the maturity of a $10.0 million FHLB advance in the third quarter of 2010 and
the prepayment of a $5.0 million FHLB advance that converted to a variable rate
during the first quarter of 2010.





26


Certificates
of deposit at September 30, 2010, which were scheduled to mature in one year or
less, totaled $128.3 million.  Historically, maturing deposits have
generally remained with our bank and we believe that a significant portion of
the deposits maturing in one year or less will remain with us upon
maturity.





Cash
Flows.  During the nine months ended September 30, 2010, our cash
and cash equivalents increased by $663,000.  Our operating activities used
net cash of $726,000 during the first nine months of 2010 primarily from funding
the seasonal increase in origination volumes of one-to-four family residential
which are reflected in the increased balances of loans held for sale.  Our
investing activities provided net cash of $17.8 million during the first nine
months of 2010 as the net funds from our investment portfolio were used to fund
the increased balances of loans held for sale and to offset the lower FHLB
borrowings and deposit balances.  Our financing activities used net cash of
$16.4 million during the first nine months of 2010, primarily from the maturity
and prepayment of FHLB advances.





Liquidity.Our most liquid assets are
cash and cash equivalents and investment securities available for sale. 
The levels of these assets are dependent on the operating, financing, lending
and investing activities during any given period.  These liquid assets
totaled $169.7 million at September 30, 2010 and $174.0 million at December 31,
2009.  During periods in which we are not able to originate a sufficient
amount of loans and/or periods of high principal prepayments, we increase our
liquid assets by investing in short-term, high-grade investments.





Liquidity management is both a daily
and long-term function of our strategy.  Excess funds are generally
invested in short-term investments.  In the event we require funds beyond
our ability to generate them internally, additional funds are generally
available through the use of FHLB advances, a line of credit with the FHLB,
other borrowings or through sales of investment securities.  At September
30, 2010, we had outstanding FHLB advances of $41.4 million and $600,000 in
borrowings against our line of credit with the FHLB.  At September 30,
2010, we had collateral pledged to the FHLB that would allow us to borrow an
additional $63.3 million subject to FHLB credit requirements and policies. 
At September 30, 2010, we had no borrowings through the Federal Reserve discount
window, while our borrowing capacity was $13.4 million.  We also have
various other fed funds agreements, both secured and unsecured, with
correspondent banks totaling approximately $58.8 million at September 30, 2010,
which had no borrowings against at that time.  We had other borrowings of
$27.9 million at September 30, 2010, which included $16.5 million of
subordinated debentures and $6.6 million in repurchase agreements.  The
Company has a $7.5 million line of credit from an unrelated financial
institution maturing on November 4, 2011, with an interest rate that adjusts
daily based on the prime rate plus 0.25%, but not less than 4.25%.  This
line of credit has covenants specific to capital and other financial ratios,
which the Company was in compliance with at September 30, 2010.  The
outstanding balance on the line of credit at September 30, 2010 was $4.8
million, which was included in other borrowings.





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





At
September 30, 2010, we had outstanding loan commitments, excluding standby
letters of credit, of $48.1 million.  We anticipate that sufficient funds
will be available to meet current loan commitments.  These commitments
consist of unfunded lines of credit and commitments to finance real estate
loans.




27


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





To be well-capitalizedunder prompt(Dollars in thousands)
                      
                      
                      
                      
                      For capital
                      
                      
                      correctiveActual
                      
                      
                      adequacy purposes
                      
                      
                      action provisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioAs of September 30, 2010Leverage
                      
                      $
                      54,710
                      
                      
                      
                      9.8
                      %
                      
                      $
                      22,303
                      
                      
                      
                      4.0
                      %
                      
                      $
                      27,878
                      
                      
                      
                      5.0
                      %Tier 1 Capital
                      
                      $
                      54,710
                      
                      
                      
                      14.4
                      %
                      
                      $
                      15,168
                      
                      
                      
                      4.0
                      %
                      
                      $
                      22,753
                      
                      
                      
                      6.0
                      %Total Risk Based Capital
                      
                      $
                      59,412
                      
                      
                      
                      15.7
                      %
                      
                      $
                      30,337
                      
                      
                      
                      8.0
                      %
                      
                      $
                      37,921
                      
                      
                      
                      10.0
                      %As of December 31, 2009Leverage
                      
                      $
                      54,386
                      
                      
                      
                      9.3
                      %
                      
                      $
                      23,413
                      
                      
                      
                      4.0
                      %
                      
                      $
                      29,266
                      
                      
                      
                      5.0
                      %Tier 1 Capital
                      
                      $
                      54,386
                      
                      
                      
                      13.7
                      %
                      
                      $
                      15,901
                      
                      
                      
                      4.0
                      %
                      
                      $
                      23,852
                      
                      
                      
                      6.0
                      %Total Risk Based Capital
                      
                      $
                      59,439
                      
                      
                      
                      15.0
                      %
                      
                      $
                      31,803
                      
                      
                      
                      8.0
                      %
                      
                      $
                      39,754
                      
                      
                      
                      10.0
                      %




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




To be well-capitalizedunder prompt(Dollars in thousands)
                      
                      
                      
                      
                      For capital
                      
                      
                      correctiveActual
                      
                      
                      adequacy purposes
                      
                      
                      action provisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioAs of September 30, 2010Leverage
                      
                      $
                      58,282
                      
                      
                      
                      10.5
                      %
                      
                      $
                      22,303
                      
                      
                      
                      4.0
                      %
                      
                      $
                      27,878
                      
                      
                      
                      5.0
                      %Tier 1 Capital
                      
                      $
                      58,282
                      
                      
                      
                      15.4
                      %
                      
                      $
                      15,107
                      
                      
                      
                      4.0
                      %
                      
                      $
                      22,660
                      
                      
                      
                      6.0
                      %Total Risk Based Capital
                      
                      $
                      62,933
                      
                      
                      
                      16.7
                      %
                      
                      $
                      30,214
                      
                      
                      
                      8.0
                      %
                      
                      $
                      37,767
                      
                      
                      
                      10.0
                      %As of December 31, 2009Leverage
                      
                      $
                      57,548
                      
                      
                      
                      9.9
                      %
                      
                      $
                      23,343
                      
                      
                      
                      4.0
                      %
                      
                      $
                      29,179
                      
                      
                      
                      5.0
                      %Tier 1 Capital
                      
                      $
                      57,548
                      
                      
                      
                      14.5
                      %
                      
                      $
                      15,837
                      
                      
                      
                      4.0
                      %
                      
                      $
                      23,755
                      
                      
                      
                      6.0
                      %Total Risk Based Capital
                      
                      $
                      62,429
                      
                      
                      
                      15.8
                      %
                      
                      $
                      31,673
                      
                      
                      
                      8.0
                      %
                      
                      $
                      39,592
                      
                      
                      
                      10.0
                      %




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





The
payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations.  As described above, Landmark
National Bank exceeded its minimum capital requirements under applicable
guidelines as of September 30, 2010.  The National Bank Act imposes
limitations on the amount of dividends that a national bank may pay without
prior regulatory approval.  Generally, the amount is limited to the bank's
current year's net earnings plus the adjusted retained earnings for the two
preceding years.  As of September 30, 2010, approximately $3.3 million was
available to be paid as dividends to Landmark Bancorp by Landmark National Bank
without prior regulatory approval.




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




28


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





Three months ended
                      
                      
                      Three months endedSeptember 30, 2010
                      
                      
                      September 30, 2009Average
                        balance
                      
                      
                      Interest
                      
                      
                      Average
                        yield/rate
                      
                      
                      Average
                        balance
                      
                      
                      Interest
                      
                      
                      Average
                        yield/rate(Dollars in thousands)AssetsInterest-earning
      assets:Investment
      securities (1)
                      
                      $
                      168,028
                      
                      
                      $
                      1,507
                      
                      
                      
                      3.56
                      %
                      
                      $
                      186,316
                      
                      
                      $
                      1,987
                      
                      
                      
                      4.23
                      %Loans
      receivable, net (2)
                      
                      
                      337,479
                      
                      
                      
                      4,855
                      
                      
                      
                      5.71
                      %
                      
                      
                      359,839
                      
                      
                      
                      5,144
                      
                      
                      
                      5.67
                      %Total
      interest-earning assets
                      
                      
                      505,507
                      
                      
                      
                      6,362
                      
                      
                      
                      4.99
                      %
                      
                      
                      546,155
                      
                      
                      
                      7,131
                      
                      
                      
                      5.18
                      %Non-interest-earning
      assets
                      
                      
                      65,772
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      62,391Total
                      
                      $
                      571,279
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      608,546Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Certificates
      of deposit
                      
                      $
                      185,981
                      
                      
                      $
                      785
                      
                      
                      
                      1.67
                      %
                      
                      $
                      219,699
                      
                      
                      $
                      1,232
                      
                      
                      
                      2.22
                      %Money
      market and NOW accounts
                      
                      
                      159,796
                      
                      
                      
                      115
                      
                      
                      
                      0.29
                      %
                      
                      
                      153,167
                      
                      
                      
                      151
                      
                      
                      
                      0.39
                      %Savings
      accounts
                      
                      
                      32,193
                      
                      
                      
                      16
                      
                      
                      
                      0.20
                      %
                      
                      
                      28,884
                      
                      
                      
                      18
                      
                      
                      
                      0.25
                      %Total
      deposits
                      
                      
                      377,970
                      
                      
                      
                      916
                      
                      
                      
                      0.96
                      %
                      
                      
                      401,750
                      
                      
                      
                      1,401
                      
                      
                      
                      1.38
                      %FHLB
      advances and other borrowings
                      
                      
                      75,695
                      
                      
                      
                      654
                      
                      
                      
                      3.43
                      %
                      
                      
                      90,277
                      
                      
                      
                      793
                      
                      
                      
                      3.48
                      %Total
      interest-bearing liabilities
                      
                      
                      453,665
                      
                      
                      
                      1,570
                      
                      
                      
                      1.37
                      %
                      
                      
                      492,027
                      
                      
                      
                      2,194
                      
                      
                      
                      1.77
                      %Non-interest-bearing
      liabilities
                      
                      
                      63,228
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      63,267Stockholders'
      equity
                      
                      
                      54,386
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      53,252Total
                      
                      $
                      571,279
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      608,546Interest
      rate spread (3)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.62
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.41
                      %Net
      interest margin (4)
                      
                      
                      
                      
                      
                      $
                      4,792
                      
                      
                      
                      3.76
                      %
                      
                      
                      
                      
                      
                      $
                      4,937
                      
                      
                      
                      3.59
                      %Tax
      equivalent interest - imputed
                      
                      
                      
                      
                      
                      
                      323
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      329Net
      interest income
                      
                      
                      
                      
                      
                      $
                      4,469
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      4,608Ratio
      of average interest-earning assetsto average interest-bearing liabilities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      111.4
                      %
                      
                      
                      
                      
                      
                      
                      111.0
                      %





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


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


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


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




29




Nine months ended
                    
                    
                    Nine months endedSeptember30,2010
                    
                    
                    September30,2009Average
                      balance
                    
                    
                    Interest
                    
                    
                    Average
                      yield/rate
                    
                    
                    Average
                      balance
                    
                    
                    Interest
                    
                    
                    Average
                      yield/rate(Dollars in thousands)AssetsInterest-earning
      assets:Investment
      securities (1)
                    
                    $
                    170,997
                    
                    
                    $
                    4,841
                    
                    
                    
                    3.78
                    %
                    
                    $
                    184,506
                    
                    
                    $
                    5,988
                    
                    
                    
                    4.34
                    %Loans
      receivable, net (2)
                    
                    
                    344,770
                    
                    
                    
                    14,707
                    
                    
                    
                    5.70
                    %
                    
                    
                    363,533
                    
                    
                    
                    15,615
                    
                    
                    
                    5.74
                    %Total
      interest-earning assets
                    
                    
                    515,767
                    
                    
                    
                    19,548
                    
                    
                    
                    5.07
                    %
                    
                    
                    548,039
                    
                    
                    
                    21,603
                    
                    
                    
                    5.27
                    %Non-interest-earning
      assets
                    
                    
                    65,752
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    61,081Total
                    
                    $
                    581,519
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    609,120Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Certificates
      of deposit
                    
                    $
                    188,812
                    
                    
                    $
                    2,511
                    
                    
                    
                    1.78
                    %
                    
                    $
                    218,318
                    
                    
                    $
                    4,047
                    
                    
                    
                    2.48
                    %Money
      market and NOW accounts
                    
                    
                    161,704
                    
                    
                    
                    360
                    
                    
                    
                    0.30
                    %
                    
                    
                    154,328
                    
                    
                    
                    493
                    
                    
                    
                    0.43
                    %Savings
      accounts
                    
                    
                    31,489
                    
                    
                    
                    52
                    
                    
                    
                    0.22
                    %
                    
                    
                    28,550
                    
                    
                    
                    58
                    
                    
                    
                    0.27
                    %Total
      deposits
                    
                    
                    382,005
                    
                    
                    
                    2,923
                    
                    
                    
                    1.02
                    %
                    
                    
                    401,196
                    
                    
                    
                    4,598
                    
                    
                    
                    1.53
                    %FHLB
      advances and other borrowings
                    
                    
                    81,670
                    
                    
                    
                    2,018
                    
                    
                    
                    3.30
                    %
                    
                    
                    94,010
                    
                    
                    
                    2,483
                    
                    
                    
                    3.53
                    %Total
      interest-bearing liabilities
                    
                    
                    463,675
                    
                    
                    
                    4,941
                    
                    
                    
                    1.42
                    %
                    
                    
                    495,206
                    
                    
                    
                    7,081
                    
                    
                    
                    1.91
                    %Non-interest-bearing
      liabilities
                    
                    
                    63,204
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    61,374Stockholders'
      equity
                    
                    
                    54,640
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    52,540Total
                    
                    $
                    581,519
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    609,120Interest
      rate spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.65
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.36
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    $
                    14,606
                    
                    
                    
                    3.79
                    %
                    
                    
                    
                    
                    
                    $
                    14,522
                    
                    
                    
                    3.54
                    %Tax
      equivalent interest - imputed
                    
                    
                    
                    
                    
                    
                    997
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    963Net
      interest income
                    
                    
                    
                    
                    
                    $
                    13,609
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    13,559Ratio
      of average interest-earning assetsto average interest-bearing liabilities
                    
                    
                    
                    
                    
                    
                    111.2
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    110.7
                    %




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


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


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


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


30




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




Three months ended September 30,
                          
                          
                          Nine months ended September 30,2010 vs 2009
                          
                          
                          2010 vs 2009Increase/(decrease) attributableto
                          
                          
                          Increase/(decrease) attributabletoVolume
                          
                          
                          Rate
                          
                          
                          Net
                          
                          
                          Volume
                          
                          
                          Rate
                          
                          
                          Net(Dollars in thousands)
                          
                          
                          (Dollars in thousands)Interest
      income:Investment securities
                          
                          $
                          (184
                          )
                          
                          $
                          (296
                          )
                          
                          $
                          (480
                          )
                          
                          $
                          (415
                          )
                          
                          $
                          (732
                          )
                          
                          $
                          (1,147
                          )Loans
                          
                          
                          (326
                          )
                          
                          
                          37
                          
                          
                          
                          (289
                          )
                          
                          
                          (800
                          )
                          
                          
                          (108
                          )
                          
                          
                          (908
                          )Total
                          
                          
                          (510
                          )
                          
                          
                          (259
                          )
                          
                          
                          (769
                          )
                          
                          
                          (1,215
                          )
                          
                          
                          (840
                          )
                          
                          
                          (2,055
                          )Interest
      expense:Deposits
                          
                          
                          (79
                          )
                          
                          
                          (406
                          )
                          
                          
                          (485
                          )
                          
                          
                          (210
                          )
                          
                          
                          (1,465
                          )
                          
                          
                          (1,675
                          )Other borrowings
                          
                          
                          (128
                          )
                          
                          
                          (11
                          )
                          
                          
                          (139
                          )
                          
                          
                          (311
                          )
                          
                          
                          (154
                          )
                          
                          
                          (465
                          )Total
                          
                          
                          (207
                          )
                          
                          
                          (417
                          )
                          
                          
                          (624
                          )
                          
                          
                          (521
                          )
                          
                          
                          (1,619
                          )
                          
                          
                          (2,140
                          )Net
      interest income
                          
                          $
                          (303
                          )
                          
                          $
                          158
                          
                          
                          $
                          (145
                          )
                          
                          $
                          (694
                          )
                          
                          $
                          779
                          
                          
                          $
                          85






ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





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





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





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





Dollar change in net
                  
                  
                  Percent change inScenario
                  
                  interest income ($000’s)
                  
                  
                  net interest income200
      basis point rising
                  
                  $
                  787
                  
                  
                  
                  4.4
                  %100
      basis point rising
                  
                  $
                  457
                  
                  
                  
                  2.6
                  %100
      basis point falling
                  
                  $
                  (527
                  )
                  
                  
                  (3.0
                  )%




31


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





Forward-Looking
Statements





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




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




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


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


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


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


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


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


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


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


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


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


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


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


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


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


·
            Our
      ability to effectively manage our credit
risk.


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


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


·
            Our
      ability to raise additional capital if
needed.


·
            The
      effects of declines in real estate
markets.





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




32


ITEM
4.  CONTROLS AND PROCEDURES





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





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




33


LANDMARK
BANCORP, INC. AND SUBSIDIARY


PART
II – OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS





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





ITEM
1A.  RISK FACTORS





Other
than as set forth below, there have been no material changes in the risk factors
applicable to the Company from those disclosed in Part I, Item 1A.
“Risk Factors,” in the Company's 2009 Annual Report on Form 10-K and the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2010.





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





None





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





None




ITEM
4.  REMOVED AND RESERVED




ITEM
5.  OTHER INFORMATION




None




ITEM
6.  EXHIBITS





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


34




SIGNATURES




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




LANDMARK
      BANCORP, INC.Date:
      November 10, 2010
            /s/ Patrick L. AlexanderPatrick
      L. AlexanderPresident
      and Chief Executive OfficerDate:
      November 10, 2010
            /s/ Mark A. HerpichMark
      A. HerpichVice
      President, Secretary, Treasurerand Chief Financial Officer




35