Table of Contents

 

 

 

**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, 2008** |
| ** **                                                  |
| **OR**                                                      |
|                                                        |                                                                                                     |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For transition period from                to                **

 

**Commission File Number 0-33203**

 

**LANDMARK BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **43-1930755**                             |
|-----------------------------------------------------------------|------------|--------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification   Number) |
|                                                            |       |                                       |
| **701  Poyntz Avenue, Manhattan, Kansas**                       | ** ** | **66502**                                  |
| (Address of  principal executive offices)                       |       | (Zip Code)                                 |

 

**(785) 565-2000**

(Registrant’s telephone number, including area code)

 

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

 

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

 
| Large accelerated filer  o | Accelerated  filer o | Non-accelerated  filer o                       | Smaller reporting  company x |
|----------------------------|----------------------|------------------------------------------------|------------------------------|
|                       |                 | (Do  not check if a smaller reporting company) |                         |

 

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

 

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

 

 

 

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**LANDMARKBANCORP, INC.**

**Form 10-QQuarterly Report**

 

**Table of Contents**

 
| ** **                    | ** **                                                                                  | ** ** | **Page Number** |
|-------------------------------|---------------------------------------------------------------------------------------------|------------|----------------------|
| PART I                   |
|                          |                                                                                        |       |
| Item 1.                       | Financial Statements and  Related Notes                                                     |       | 2 - 10               |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 11 - 21              |
| Item 3.                       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 21 - 22              |
| Item 4.                       | Controls and  Procedures                                                                    |       | 23                   |
|                          |                                                                                        |       |                 |
| PART II                  |
|                          |                                                                                        |       |
| Item 1.                       | Legal Proceedings                                                                           |       | 24                   |
| Item 1A.                      | Risk Factors                                                                                |       | 24                   |
| Item 2.                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 24                   |
| Item 3.                       | Defaults  Upon Senior Securities                                                            |       | 24                   |
| Item 4.                       | Submission  of Matters to a Vote of Security Holders                                        |       | 24                   |
| Item 5.                       | Other Information                                                                           |       | 24                   |
| Item 6.                       | Exhibits                                                                                    |       | 24                   |
|                          |                                                                                        |       |                 |
| Form 10-Q Signature Page |                                                                                        | 25         |

 

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**ITEM1.  FINANCIAL STATEMENTS AND RELATEDNOTES**

 

**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                         | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                                                                         |       |                   |        |                  |       |
| Cash and cash equivalents                                                                                                                                          |       | $                      | 10,525,293  |                  | $          | 14,739,148 |   |
| Investment securities:                                                                                                                                             |       |                   |        |                  |       |
| Available for sale, at fair value                                                                                                                                  |       | 160,138,276            |        | 155,879,231           |       |
| Other securities                                                                                                                                                   |       | 9,024,700              |        | 8,844,950             |       |
| Loans, net                                                                                                                                                         |       | 373,051,161            |        | 376,156,608           |       |
| Loans held for sale                                                                                                                                                |       | 3,123,699              |        | 1,723,687             |       |
| Premises and equipment, net                                                                                                                                        |       | 14,111,971             |        | 14,259,172            |       |
| Goodwill                                                                                                                                                           |       | 12,894,167             |        | 12,894,167            |       |
| Other intangible assets, net                                                                                                                                       |       | 2,584,209              |        | 3,144,001             |       |
| Bank owned life insurance                                                                                                                                          |       | 11,987,421             |        | 11,634,535            |       |
| Accrued interest and other assets                                                                                                                                  |       | 6,742,274              |        | 7,179,224             |       |
|                                                                                                                                                               |       |                   |        |                  |       |
| Total assets                                                                                                                                                       |       | $                      | 604,183,171 |                  | $          | 606,454,723 |   |
|                                                                                                                                                               |       |                   |        |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                      |       |                   |        |                  |       |
| Liabilities:                                                                                                                                                       |       |                   |        |                  |       |
| Deposits                                                                                                                                                           |       | $                      | 435,362,896 |                  | $          | 452,652,306 |   |
| Federal Home Loan Bank borrowings                                                                                                                                  |       | 81,239,602             |        | 69,026,525            |       |
| Other borrowings                                                                                                                                                   |       | 29,803,362             |        | 24,061,554            |       |
| Accrued expenses, taxes and other liabilities                                                                                                                      |       | 7,781,027              |        | 8,418,200             |       |
| Total liabilities                                                                                                                                                  |       | 554,186,887            |        | 554,158,585           |       |
|                                                                                                                                                               |       |                   |        |                  |       |
| Stockholders’ equity:                                                                                                                                         |       |                   |        |                  |       |
| Preferred stock, $0.01 par, 200,000 shares authorized, none issued                                                                                                 |       | —                 |        | —                |       |
| Common stock, $0.01 par, 5,000,000 shares authorized, 2,411,007 and  2,409,125 shares issued, at September 30, 2008 and  December 31, 2007, respectively |       | 24,110                 |        | 24,091                |       |
| Additional paid-in capital                                                                                                                                         |       | 24,434,815             |        | 24,304,144            |       |
| Retained earnings                                                                                                                                                  |       | 29,633,298             |        | 27,493,281            |       |
| Treasury stock, at cost; 142,148 and 7,763 shares at September 30,  2008 and December 31, 2007, respectively                                             |       | (3,501,696             | )           | (205,894              | )          |
| Accumulated other comprehensive income (loss)                                                                                                                      |       | (594,243               | )           | 680,516               |       |
| Total stockholders’ equity                                                                                                                                    |       | 49,996,284             |        | 52,296,138            |       |
|                                                                                                                                                               |       |                   |        |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                    |       | $                      | 604,183,171 |                  | $          | 606,454,723 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

# **CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **
| ** **                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income:                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Loans:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Taxable                                              |       | $                                                        | 5,900,113  |                                                    | $          | 7,243,570 |   | $ | 18,626,509 |   | $ | 21,528,360 |   |
| Tax-exempt                                           |       | 52,300                                                   |       | 43,307                                                  |       | 151,718 |   | 106,890 |   |
| Investment securities:                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Taxable                                              |       | 1,213,140                                                |       | 1,179,661                                               |       | 3,634,256 |   | 3,494,657 |   |
| Tax-exempt                                           |       | 596,446                                                  |       | 608,164                                                 |       | 1,791,560 |   | 1,753,111 |   |
| Other                                                |       | 1,781                                                    |       | 11,203                                                  |       | 38,777 |   | 35,498 |   |
| Total interest income                                |       | 7,763,780                                                |       | 9,085,905                                               |       | 24,242,820 |   | 26,918,516 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest expense:                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Deposits                                             |       | 2,259,732                                                |       | 3,505,464                                               |       | 7,996,167 |   | 10,117,740 |   |
| Borrowed funds                                       |       | 983,885                                                  |       | 1,119,529                                               |       | 2,792,187 |   | 3,374,209 |   |
| Total interest expense                               |       | 3,243,617                                                |       | 4,624,993                                               |       | 10,788,354 |   | 13,491,949 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Net interest income                                  |       | 4,520,163                                                |       | 4,460,912                                               |       | 13,454,466 |   | 13,426,567 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Provision for loan losses                            |       | 500,000                                                  |       | 70,000                                                  |       | 1,400,000 |   | 195,000 |   |
| Net interest income after provision for  loan losses |       | 4,020,163                                                |       | 4,390,912                                               |       | 12,054,466 |   | 13,231,567 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Non-interest income:                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Fees and service charges                             |       | 1,092,320                                                |       | 1,047,395                                               |       | 3,173,785 |   | 2,958,910 |   |
| Gains on sale of loans                               |       | 398,265                                                  |       | 300,661                                                 |       | 1,136,781 |   | 740,069 |   |
| Gain on prepayment of FHLB borrowings                |       | —                                                   |       | —                                                  |       | 246,033 |   | — |   |
| Gains on sales of investment securities              |       | —                                                   |       | —                                                  |       | 497,134 |   | — |   |
| Bank owned life insurance                            |       | 120,036                                                  |       | 117,468                                                 |       | 353,959 |   | 347,435 |   |
| Other                                                |       | 130,307                                                  |       | 109,925                                                 |       | 408,245 |   | 372,262 |   |
| Total non-interest income                            |       | 1,740,928                                                |       | 1,575,449                                               |       | 5,815,937 |   | 4,418,676 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Non-interest expense:                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation and benefits                            |       | 2,213,656                                                |       | 2,120,127                                               |       | 6,438,812 |   | 6,196,685 |   |
| Occupancy and equipment                              |       | 687,175                                                  |       | 671,494                                                 |       | 2,121,466 |   | 2,046,852 |   |
| Amortization of intangibles                          |       | 195,710                                                  |       | 228,259                                                 |       | 604,965 |   | 698,356 |   |
| Data processing                                      |       | 182,848                                                  |       | 184,472                                                 |       | 585,837 |   | 590,082 |   |
| Professional fees                                    |       | 109,153                                                  |       | 81,124                                                  |       | 341,730 |   | 333,443 |   |
| Advertising                                          |       | 87,945                                                   |       | 106,629                                                 |       | 264,936 |   | 321,992 |   |
| Other                                                |       | 834,609                                                  |       | 769,349                                                 |       | 2,505,443 |   | 2,289,216 |   |
| Total non-interest expense                           |       | 4,311,096                                                |       | 4,161,454                                               |       | 12,863,189 |   | 12,476,626 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings before income taxes                         |       | 1,449,995                                                |       | 1,804,907                                               |       | 5,007,214 |   | 5,173,617 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Income tax expense                                   |       | 299,970                                                  |       | 367,341                                                 |       | 1,214,268 |   | 1,137,828 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Net earnings                                         |       | $                                                        | 1,150,025  |                                                    | $          | 1,437,566 |   | $ | 3,792,946 |   | $ | 4,035,789 |   |
|                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings per share:                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                |       | $                                                        | 0.51       |                                                    | $          | 0.59 |   | $ | 1.65 |   | $ | 1.65 |   |
| Diluted                                              |       | $                                                        | 0.51       |                                                    | $          | 0.59 |   | $ | 1.65 |   | $ | 1.64 |   |
| Dividends per share                                  |       | $                                                        | 0.19       |                                                    | $          | 0.18 |   | $ | 0.57 |   | $ | 0.54 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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** LANDMARK BANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                       | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                             |       |                                                    |       |   |   |
| Net cash provided by operating activities                        |       | $                                                       | 3,628,011  |   | $ | 4,518,469 |   |
|                                                             |       |                                                    |       |   |   |
| Cash flows from investing activities:                            |       |                                                    |       |   |   |
| Net increase (decrease) in loans                                 |       | 382,849                                                 |       | (1,560,689 | ) |
| Maturities and prepayments of investments                        |       | 13,377,266                                              |       | 12,582,401 |   |
| Purchase of investment securities                                |       | (29,792,606                                             | )          | (21,742,912 | ) |
| Proceeds from sales of investment securities                     |       | 10,407,572                                              |       | — |   |
| Proceeds from sales of foreclosed assets                         |       | 1,409,106                                               |       | 363,961 |   |
| Purchases of premises and equipment, net                         |       | (572,301                                                | )          | (1,380,257 | ) |
| Net cash used in investing activities                            |       | (4,788,114                                              | )          | (11,737,496 | ) |
|                                                             |       |                                                    |       |   |   |
| Cash flows from financing activities:                            |       |                                                    |       |   |   |
| Net increase (decrease) in deposits                              |       | (17,289,410                                             | )          | 5,798,792 |   |
| Federal Home Loan Bank advance borrowings                        |       | 35,000,000                                              |       | — |   |
| Federal Home Loan Bank advance repayments                        |       | (13,527,576                                             | )          | (27,576 | ) |
| Federal Home Loan Bank line of credit, net                       |       | (8,400,000                                              | )          | 4,000,000 |   |
| Other borrowings, net                                            |       | 5,741,808                                               |       | (1,027,197 | ) |
| Purchase of treasury stock                                       |       | (3,295,802                                              | )          | (964,894 | ) |
| Proceeds from issuance of common stock under  stock option plans |       | 30,432                                                  |       | 41,117 |   |
| Excess tax benefit related to stock option plans                 |       | 5,010                                                   |       | 7,543 |   |
| Payment of dividends                                             |       | (1,318,214                                              | )          | (1,325,842 | ) |
| Net cash (used in) provided by financing activities              |       | (3,053,752                                              | )          | 6,501,943 |   |
| Net decrease in cash and cash equivalents                        |       | (4,213,855                                              | )          | (717,084 | ) |
| Cash and cash equivalents at beginning of period                 |       | 14,739,148                                              |       | 14,751,914 |   |
| Cash and cash equivalents at end of period                       |       | $                                                       | 10,525,293 |   | $ | 14,034,830 |   |
|                                                             |       |                                                    |       |   |   |
| Supplemental disclosure of cash flow information:                |       |                                                    |       |   |   |
| Cash paid during period for interest                             |       | $                                                       | 11,187,000 |   | $ | 13,319,000 |   |
| Cash paid during period for taxes                                |       | $                                                       | 578,000    |   | $ | 350,000 |   |
| Supplemental schedule of non-cash investing activities:          |       |                                                    |       |   |   |
| Transfer of loans to real estate owned                           |       | $                                                       | 1,346,000  |   | $ | 368,000 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF EQUITY AND COMPREHENSIVE INCOME**

**(Unaudited)**

** **
| ** **                                                                    | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|------------|------------|
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Balance at  December 31, 2006                                            |       | $                 | 23,417     |                             | 22,607,510 |                   | 26,758,056 |                | (138,506   | )                                                         | (14,462    | )          | 49,236,015 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Net earnings                                                                  |       | —            |       | —                           |       | 4,035,789              |       | —              |       | —                                                    |       | 4,035,789  |       |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Change in fair  value of investment securities available-for-sale, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | 85,578                                                    |       | 85,578     |       |
| Dividends paid  ($0.54 per share)                                             |       | —            |       | —                           |       | (1,325,842             | )          | —              |       | —                                                    |       | (1,325,842 | )          |
| Stock-based  compensation                                                     |       | —            |       | 90,219                           |       | —                 |       | —              |       | —                                                    |       | 90,219     |       |
| Exercise of  stock options, 2,374 shares, including tax benefit of $7,543     |       | 24                |       | 48,636                           |       | —                 |       | —              |       | —                                                    |       | 48,660     |       |
| Purchase of  34,477 treasury shares                                           |       | —            |       | —                           |       | —                 |       | (964,894            | )          | —                                                    |       | (964,894   | )          |
| Balance at  September 30, 2007                                           |       | $                 | 23,441     |                             | 22,746,365 |                   | 29,468,003 |                | (1,103,400 | )                                                         | 71,116     |       | 51,205,525 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Balance at  December 31, 2007                                            |       | $                 | 24,091     |                             | 24,304,144 |                   | 27,493,281 |                | (205,894   | )                                                         | 680,516    |       | 52,296,138 |   |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Net earnings                                                                  |       | —            |       | —                           |       | 3,792,946              |       | —              |       | —                                                    |       | 3,792,946  |       |
|                                                                          |       |              |       |                             |       |                   |       |                |       |                                                      |       |       |       |
| Change in fair  value of investment securities available-for-sale, net of tax |       | —            |       | —                           |       | —                 |       | —              |       | (1,274,759                                                | )          | (1,274,759 | )          |
| Dividends paid  ($0.57 per share)                                             |       | —            |       | —                           |       | (1,318,214             | )          | —              |       | —                                                    |       | (1,318,214 | )          |
| Stock-based  compensation                                                     |       | —            |       | 95,248                           |       | —                 |       | —              |       | —                                                    |       | 95,248     |       |
| Exercise of  stock options, 1,882 shares, including tax benefit of $5,010     |       | 19                |       | 35,423                           |       | —                 |       | —              |       | —                                                    |       | 35,442     |       |
| Purchase of  134,385 treasury shares                                          |       | —            |       | —                           |       | —                 |       | (3,295,802          | )          | —                                                    |       | (3,295,802 | )          |
| Adoption of  Emerging Issues Task Force Issue 06-4                            |       | —            |       | —                           |       | (334,715               | )          | —              |       | —                                                    |       | (334,715   | )          |
| Balance at  September 30, 2008                                           |       | $                 | 24,110     |                             | 24,434,815 |                   | 29,633,298 |                | (3,501,696 | )                                                         | (594,243   | )          | 49,996,284 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                InterimFinancial Statements**

 

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

 

**2.****                                FairValue**

 

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

 

·                  Level1:  Unadjusted quoted prices in activemarkets that are accessible at the measurement date for identical,unrestricted assets or liabilities.

 

·                  Level2:  Quoted prices for similar assets inactive markets, quoted prices in markets that are not active or quoted pricesthat contain observable inputs such as yield curves, volatilities, prepaymentspeeds and other inputs derived from market data.

 

·                  Level3:  Quoted prices or valuation techniquesthat require inputs that are both significant to the fair value measurement andunobservable.

 

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

 

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

 

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

 

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The following tablerepresents the Company’s investment securities that are measured at fair valueon a recurring basis at September 30, 2008 allocated to the appropriatefair value hierarchy:

 
| ** **                           | ** ** | ** ** | ** ** | **Fair value hierarchy** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------|------------|
| **Assets (in thousands):** | ** ** | **Total**  | ** ** | **Level 1**                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Available-for-sale  securities       |       | $          | 160,138    |                               | $          | 1,066 |   | $ | 159,072 |   | — |   |
|                                      |            |            |            |                                    |            |  |  |  |  |  |  |  |

 

Changes in the fair valueof available-for-sale securities are included in other comprehensive income tothe extent the changes are not considered other than temporaryimpairments.  Other than temporaryimpairment tests are performed on a quarterly basis and any decline in the fairvalue of an individual security below their cost that is deemed to be otherthan temporary results in a write-down to the estimated fair value.  These write-downs are included as a componentof earnings as realized losses.  Duringthe third quarter of 2008 the Company recorded a $30,000 impairment charge on acommon stock investment, which is included in other non-interest expense.

 

The Company’s derivativeinstruments consist solely of interest rate lock commitments and correspondingforward sales contracts on certain mortgage loans.  The fair values of these derivatives arebased on quoted prices for similar loans in the secondary market.  The market prices are adjusted by a factor, basedon the Company’s historical data and its judgment about future economic trends,which considers the likelihood that a commitment will ultimately result in aclosed loan.  These instruments, whichwere not significant at September 30, 2008, are classified as Level 3based on the unobservable nature of these assumptions.

 

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

 

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

 

The Company does notvalue its loan portfolio at fair value, however adjustments are recorded oncertain loans to reflect the impaired value on the underlying collateral.  Collateral values are reviewed on a loan-by-loanbasis through independent appraisals. Appraised values may be discounted based on management’s historicalknowledge, changes in market conditions and/or management’s expertise andknowledge of the client and the client’s business.  Because many of these inputs are unobservablethe valuations are classified as Level 3. The carrying value of the Company’s impaired loans was $5.6 million,with an allocated allowance of $670,000, at September 30, 2008.

 

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

 

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

 

**3.****                                Split-DollarLife Insurance**

 

The Company adopted the EmergingIssues Task Force (“EITF”) Issue 06-4, “*Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements*”, on January 1, 2008.  The EITF Issue 06-4 addresses accounting forseparate agreements that split life insurance policy benefits between anemployer and employee, and requires the employer to recognize a liability forfuture benefits payable to an employee under these agreements.  The effects of adoption must be recognizedthrough either a change in accounting principle through an adjustment to equityor through the retrospective application to all prior periods.  Upon adoption, the Company recognized aliability of $335,000, with an offsetting reduction to retained earnings,attributable to the future benefits payable to a former employee pursuant to asplit-dollar life insurance arrangement. The Company has an asset of $1.9 million recorded on the net cashsurrender value for the corresponding life insurance arrangement.

 

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**4.****                                StockBased Compensation**

 

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

 

| ** **                                              | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2008                    |       | 249,188    |       | $                                      | 23.05      |                                                | 6.80 years |                            | n/a        |   |
| Granted                                                 |       | 126,600    |       | 23.00                                  |       | —                                              |       | n/a                             |       |
| Forfeited/expired                                       |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Exercised                                               |       | 1,882      |       | 16.17                                  |       | —                                              |       | n/a                             |       |
| Outstanding at  September 30, 2008                 |       | 373,906    |       | $                                      | 23.07      |                                                | 7.27 years |                            | $          | 237,000 |   |
| Exercisable at  September 30, 2008                 |       | 188,536    |       | $                                      | 22.63      |                                                | 5.63 years |                            | $          | 237,000 |   |
| Vested and  expected to vest at September 30, 2008 |       | 357,509    |       | $                                      | 23.03      |                                                | 7.24 years |                            | $          | 237,000 |   |

 

The fair value of each option grant is estimated onthe date of grant.  The fair value ofoptions granted during the first nine months of 2008 were estimated utilizingthe following assumptions: dividend rate of 5.3%, volatility of 18.5%,risk-free rate of 2.9%, and expected lives of five years, resulting in a fairvalue of $2.11 per option at grant date.

 

Additional information about stock options exercisedis presented below:

 
| ** **                                          | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Intrinsic value  of options exercised               |       | $                                                       | 14,736     |   | $ | 22,185 |   |
| Cash received  from options exercised               |       | $                                                       | 30,432     |   | $ | 41,117 |   |
| Excess tax  benefit realized from options exercised |       | $                                                       | 5,010      |   | $ | 7,543 |   |

 

As of September 30, 2008, there was $388,000 oftotal unrecognized compensation cost related to outstanding options.  That cost is expected to be recognized over aweighted-average period of 4 years.  Thetotal fair value (at vest date) of shares vested during the nine months ended September 30,2008 and 2007 was $66,000 and $348,000 respectively.

 

**5.****                                Earningsper Share**

 

Basic earnings per sharehave been computed based upon the weighted average number of common sharesoutstanding during each period.  Dilutedearnings per share include the effect of all potential common sharesoutstanding during each period.  Earningsand dividends per share for prior periods have been adjusted to give effect tothe 5% stock dividend paid by the Company in December 2007.

 

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

 
| ** **                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net earnings  available to common stockholders      |       | $                                                    | 1,150,025  |                                                | $          | 1,437,566 |   | $ | 3,792,946 |   | $ | 4,035,789 |   |
|                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  common shares outstanding (basic) |       | 2,268,859                                            |       | 2,426,273                                           |       | 2,296,870 |   | 2,440,217 |   |
| Dilutive stock  options                             |       | 6,548                                                |       | 18,337                                              |       | 7,768 |   | 19,881 |   |
| Weighted average  common shares (diluted)           |       | 2,275,407                                            |       | 2,444,610                                           |       | 2,304,638 |   | 2,460,098 |   |
|                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Net earnings per  share:                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                               |       | $                                                    | 0.51       |                                                | $          | 0.59 |   | $ | 1.65 |   | $ | 1.65 |   |
| Diluted                                             |       | $                                                    | 0.51       |                                                | $          | 0.59 |   | $ | 1.65 |   | $ | 1.64 |   |

 

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**6.****                                OtherComprehensive Income**

 

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

** **
| ** **                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Unrealized  holding gains (losses) on available for sale securities |       | $                                                    | (554,042   | )                                                   | $          | 1,931,323 |   | $ | (1,558,930 | ) | $ | 138,029 |   |
| Less  reclassification adjustment for net gains included in income  |       | —                                               |       | —                                              |       | 497,134 |   | — |   |
| Net unrealized  gains (losses)                                      |       | (554,042                                             | )          | 1,931,323                                           |       | (2,056,064 | ) | 138,029 |   |
| Income tax  expense (benefit)                                       |       | (210,536                                             | )          | 733,902                                             |       | (781,305 | ) | 52,451 |   |
| Other  comprehensive income (loss)                                  |       | $                                                    | (343,506   | )                                                   | $          | 1,197,421 |   | $ | (1,274,759 | ) | $ | 85,578 |   |

 

**7.****                                OtherIntangible Assets**

 

The following isan analysis of changes in the core deposit intangible assets:

 
| ** **                      | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Fair value at  acquisition**                | ** ** | **Accumulated  Amortization** | ** ** | **Fair value at  acquisition** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                       | 5,396,065  |   | $ | (2,462,256 | ) | $ | 5,396,065 |   | $ | (1,667,478 | ) |
| Additions                       |       | —                                                  |       | — |   | — |   | — |   |
| Amortization                    |       | —                                                  |       | (530,197 | ) | — |   | (603,774 | ) |
| Balance at end  of period       |       | $                                                       | 5,396,065  |   | $ | (2,992,453 | ) | $ | 5,396,065 |   | $ | (2,271,252 | ) |

 

The following isan analysis of changes in the mortgage servicing rights:

 
| ** **                      | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Cost**                                                | ** ** | **Accumulated  Amortization** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                       | 770,172    |   | $ | (559,980 | ) | $ | 791,840 |   | $ | (489,718 | ) |
| Additions                       |       | 45,173                                                  |       | — |   | 19,088 |   | — |   |
| Prepayments/maturities          |       | (43,103                                                 | )          | 43,103 |   | (40,304 | ) | 40,304 |   |
| Amortization                    |       | —                                                  |       | (74,768 | ) | — |   | (94,582 | ) |
| Balance at end  of period       |       | $                                                       | 772,242    |   | $ | (591,645 | ) | $ | 770,624 |   | $ | (543,996 | ) |

 

The mortgage servicingrights correspond to loans serviced by the Company for unrelated third partieswith outstanding principal balances of $84.2 million and $91.0 million at September 30,2008 and December 31, 2007, respectively. Gross service fee income related to such loans was $54,000 and $60,000for the quarters ended September 30, 2008 and September 30, 2007,respectively, which is included in fees and service charges in the condensedconsolidated statements of earnings. Gross service fee income for the nine months ended September 30,2008 and 2007 was $167,000 and $185,000, respectively.

 

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Aggregateamortization expense for the quarters ended September 30, 2008 and 2007,was $196,000 and $228,000, respectively and $605,000 and $698,000 for the ninemonths ended September 30, 2008 and 2007, respectively.  The following depicts estimated amortizationexpense for all intangible assets for the remainder of 2008 and in successiveyears ending December 31:

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2008       |       | $          | 192,000    |   |
| 2009       |       | 699,000    |       |
| 2010       |       | 555,000    |       |
| 2011       |       | 402,000    |       |
| 2012       |       | 308,000    |       |
| Thereafter |       | 428,000    |       |
|            |            |            |            |  |

** **

**8.****                                Impactof Recent Accounting Pronouncements**

 

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

 

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

 

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

 

Also in December 2007,the FASB issued SFAS No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements – an amendment of ARB No. 51*”.  This statement amends ARB 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It also amends certain of ARB 51’sconsolidation procedures for consistency with the requirements of FASBStatement No. 141 (revised 2007), *Business Combinations*.  For calendar year companies, this statementis effective January 1, 2009.  We donot expect that adoption of the statement will have a material effect on ourconsolidated financial statements.

 

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

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*RecentDevelopments. *Recentevents in the U.S. and global financial markets, including the deterioration ofthe worldwide credit markets, have created significant challenges for financialinstitutions such as us.  Dramaticdeclines in the housing market during the past year, marked by falling homeprices and increasing levels of mortgage foreclosures, have resulted insignificant write-downs of asset values by many financial institutions,including government-sponsored entities and major commercial and investmentbanks.  In addition, many lenders andinstitutional investors have reduced, and in some cases, ceased to providefunding to borrowers, including other financial institutions, as a result ofconcern about the stability of the financial markets and the strength ofcounterparties.

 

In response to the crisesaffecting the U.S. banking system and financial markets and in an attempt tobolster the distressed economy and improve consumer confidence in the financialsystem, on October 3, 2008, the U.S. Congress passed, and the Presidentsigned into law, the Emergency Economic Stabilization Act of 2008 (the “StabilizationAct”).  The Stabilization Act authorizesthe Secretary of the U.S. Treasury and the Federal Deposit InsuranceCorporation (the “FDIC”) to implement various temporary emergency programsdesigned to strengthen the capital positions of financial institutions andstimulate the availability of credit within the U.S. financial system.  Pursuant to the Stabilization Act, the U.S.Treasury will have the authority to, among other things, purchase up to $700billion of mortgages, mortgage-backed securities and certain other financialinstruments from financial institutions for the purpose of stabilizing andproviding liquidity to the U.S. financial markets.

 

On October 14, 2008,the U.S. Treasury announced that it will purchase equity stakes in eligiblefinancial institutions that wish to participate.  This program, known as the Capital PurchaseProgram, allocates $250 billion from the $700 billion authorized by theStabilization Act to the U.S. Treasury for the purchase of senior preferredshares from qualifying financial institutions. Eligible institutions will be able to sell equity interests to the U.S.Treasury in amounts equal to between 1% and 3% of the institution’srisk-weighted assets.  In conjunctionwith the purchase of preferred stock, the U.S. Treasury will receive warrantsto purchase common stock from the participating institutions with an aggregatemarket price equal to 15% of the preferred investment.  Participating financial institutions will berequired to adopt the U.S. Treasury’s standards for executive compensation andcorporate governance for the period during which the U.S. Treasury holds equityissued under the Capital Purchase Program. Many financial institutions have already announced that they willparticipate in the Capital Purchase Program. While we believe that we have sufficient capital to support continuedgrowth, we are considering whether or not to participate in the CapitalPurchase Program.

 

Also on October 14,2008, using the systemic risk exception to the FDIC Improvement Act of 1991,the U.S. Treasury authorized the FDIC to provide a 100% guarantee ofnewly-issued senior unsecured debt and deposits in non-interest bearingaccounts at FDIC insured institutions. Initially, all eligible financial institutions will automatically becovered under this program, known as the Temporary Liquidity Guarantee Program,without incurring any fees for a period of 30 days.  Coverage under the Temporary LiquidityGuarantee Program after the initial 30-day period is available to insuredfinancial institutions at a cost of 75 basis points per annum for seniorunsecured debt and 10 basis points per annum for non-interest bearingdeposits.  After the initial 30-dayperiod, institutions will continue to be covered under the Temporary LiquidityGuarantee Program unless they inform the FDIC that they have decided to opt outof the program.  We are assessingparticipation in the Temporary Liquidity Guarantee Program and anticipate thatwe will participate in the insurance program covering the non-interest bearingdeposits but not participate in the program to guarantee unsecured senior debt.

 

Under the Troubled AssetAuction Program, another initiative based on the authority granted by theStabilization Act, the U.S. Treasury, through a newly-created Office ofFinancial Stability, will purchase certain troubled mortgage-related assetsfrom financial institutions in a reverse-auction format.  Troubled assets eligible for purchase by theOffice of Financial Stability include residential and commercial mortgagesoriginated on or before March 14, 2008, securities or obligations that arebased on such mortgages, and any other financial instrument that the Secretaryof the U.S. Treasury determines, after consultation with the Chairman of theBoard of Governors of the Federal Reserve System, is necessary to promotefinancial market stability.  The U.S.Treasury has not issued any definitive guidance regarding this program and theCompany’s management has not determined whether or not it will participate.

 

Under the StabilizationAct, the U.S. Treasury is also required to establish a program that willguarantee principal of, and interest on, troubled assets originated or issuedprior to March 14, 2008, including mortgage-backed securities.  The program may take any form and may vary byasset class, but it must be voluntary and self-funding.  The U.S. Treasury has the authority to setpremiums to reflect the credit risk characteristics of the insured assets.  The U.S. Treasury has solicited requests forcomments on how the program should be structured but no program has been implementedto date.  The 

 

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Stabilization Act alsotemporarily increases the amount of insurance coverage of deposit accounts heldat FDIC-insured depository institutions, including Landmark National Bank, from$100,000 to $250,000.  The increasedcoverage is effective during the period from October 3, 2008 until December 31,2009.

 

It is not clear at thistime what impact the Stabilization Act, the Capital Purchase Program, theTemporary Liquidity Guarantee Program, the Troubled Asset Auction Program,other liquidity and funding initiatives of the Federal Reserve and otheragencies that have been previously announced, and any additional programs thatmay be initiated in the future will have on our future financial condition andresults of operations.

 

The preceding is asummary of recently enacted laws and regulations that could materially impactour results of operations or financial condition.  This discussion is qualified in its entiretyby reference to such laws and regulations and should be read in conjunctionwith “Supervision and Regulation” discussion contained in the Company’s 2007 Form 10-K.

 

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

 

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

 

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

 

*CriticalAccounting Policies.* Critical accounting policies are thosewhich are both most important to the portrayal of our financial condition andresults of operations, and require our management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  Our critical accounting policies relate tothe allowance for loan losses, the valuation of investment securities andaccounting for income taxes, all of which involve significant judgment by ourmanagement.

 

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

 

We report our investmentsecurities at estimated fair values based primarily on observable marketinputs, which are primarily obtained from independent sources.  Occasionally we perform our own analysis,which may include discounted cash flows, to support the fair values forinvestment securities in which observable market inputs are not available.  We also perform periodic reviews of the fairvalue of investment securities to determine if any declines in value might beconsidered other than temporary.  Ourmost recent review showed that all of our securities, except one common stockinvestment, that had experienced decreases in fair value, resulting inunrealized loss positions, were related to changes in interest rates and not toa credit deterioration.  We determinedthat one common stock investment had experienced an other than temporaryimpairment and recorded a write down for that impairment.  We have the ability and intent to hold thesesecurities until market values recover, including up to the maturity date.  Although we believe that our estimates of thefair values of investment securities to be reasonable, economic and marketfactors may affect the amounts that will ultimately be realized from theseinvestments.

 

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

 

*Summaryof Results*.  During thethird quarter of 2008 our net earnings totaled $1.2 million as compared to $1.4million in the same period of 2007, which was a $288,000 decrease in net earnings.  This decrease was primarily attributable to a$430,000 increase in our provision for loan losses.  We increased our provision for loan losses to$500,000 for the third quarter of 2008 based on our analysis of our loanportfolio and the elevated environmental risk factors associated with thedeteriorating market conditions experienced during the third quarter of2008.  Our net interest margin remainedat 3.47% during the third quarter of 2008.

 

During the firstnine months of 2008 we experienced a $243,000 decrease in net earnings ascompared to the first nine months of 2007. The decrease in earnings was primarily attributable to a $1.2 millionincrease in our provision for loan losses. Partially offsetting the higher provision for loan losses were increasesin our non-interest income.  During thefirst nine months of 2008 we recorded gains of $497,000 on sales of investmentsecurities and a $246,000 gain recognized on the prepayment of a $10 millionFHLB advance, as well as a $397,000 increase in gains on sales of loans duringthe first nine months of 2008 as compared to the same period of 2007.  Our net interest margin declined from 3.52%during the first nine months of 2007 to 3.48% during the same period of 2008.

 

This decline innet interest margin was primarily the result of competitive deposit pricingpressures not allowing us to decrease our costs of deposits in line with ourdecrease in variable loan rates during 2008 as the Federal Reserve Bankcontinued to decrease the federal funds target rate.  Our variable rates on commercial andcommercial real estate loans are generally tied to the prime rate, which moveswith the federal funds target rate.  Ourcertificate of deposits and money market rates are typically priced off of ouralternative funding sources as well as competitors’ rates, which typically donot decline as fast or as far as the federal funds target rate.  Those characteristics generally lead to adecline in our net interest margin in a declining rate environment, which occurredduring the first nine months of 2008.

 

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

 
| ** **                        | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net earnings:                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Net earnings                      |       | $                                                        | 1,150,025  |                                                    | $          | 1,437,566 |   | $ | 3,792,946 |   | $ | 4,035,789 |   |
| Basic earnings  per share         |       | $                                                        | 0.51       |                                                    | $          | 0.59 |   | $ | 1.65 |   | $ | 1.65 |   |
| Diluted earnings  per share       |       | $                                                        | 0.51       |                                                    | $          | 0.59 |   | $ | 1.65 |   | $ | 1.64 |   |
| Earnings ratios:                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Return on average  assets (1)     |       | 0.75                                                     | %          | 0.95                                                    | %          | 0.83 | % | 0.90 | % |
| Return on  average equity (1)     |       | 9.11                                                     | %          | 11.53                                                   | %          | 9.96 | % | 10.85 | % |
| Dividend payout  ratio            |       | 37.25                                                    | %          | 30.65                                                   | %          | 34.55 | % | 33.14 | % |
| Net interest  margin (1) (2) |       | 3.47                                                     | %          | 3.47                                                    | %          | 3.48 | % | 3.52 | % |

 

----

(1)          Theratio has been annualized and is not necessarily indicative of the results forthe entire year.

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

 

*InterestIncome.*  Interestincome for the three months ended September 30, 2008, decreased $1.3million, or 14.6%, to $7.8 million from $9.1 million in the same period of2007, resulting from decreased interest income on loans.  Interest income on loans decreased $1.3million, or 18.3%, to $6.0 million for the quarter ended September 30,2008 due primarily to decreases in yields during the third quarter of 2008 ascompared to the same of period of 2007. See the Rate\Volume Table at the end of this Item 2 for additionaldetails.  Average loans outstanding forthe quarter ended September 30, 2008 decreased to $379.5 million from$386.5 million for the quarter ended September 30, 2007.  Interest income on investment securitiesincreased $12,000, or 0.7%, to $1.8 million for the third quarter of 2008, ascompared to the same period of 2007. Average investment securities outstanding increased from $156.3 millionfor the quarter ended September 30, 2007, to $172.1 million for thequarter ended September 30, 2008. Offsetting the increase in average 

 

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investments outstandingfor the comparable period was a lower yield on those investments as marketrates declined during the third quarter of 2008 as compared to the same periodof 2007.

 

Interest income for thenine months ended September 30, 2008, decreased $2.7 million, or 9.9%, to$24.2 million from $26.9 million in the same period of 2007, resulting fromdecreased interest income on loans.  Interestincome on loans decreased $2.9 million, or 13.2%, to $18.8 million for the ninemonths ended September 30, 2008 due primarily to decreases in yieldsduring the first nine months of 2008 as compared to the same of period of2007.  See the Rate\Volume Table foradditional details.  Average loans forthe nine months ended September 30, 2008 decreased to $380.1 million from$384.7 million for the nine months ended September 30, 2007.  Interest income on investment securitiesincreased $181,000, or 3.4%, to $5.5 million for the first nine months of 2008,as compared to the same period of 2007. Average investment securities outstanding increased from $156.6 millionfor the nine months ended September 30, 2007, to $170.8 million for thenine months ended September 30, 2008. Offsetting the increase in average investments outstanding for thecomparable period was a lower yield on those investments as market ratesdeclined during the first nine months of 2008 as compared to the same period of2007.

 

*InterestExpense*.  Interestexpense during the three months ended September 30, 2008 decreased $1.4million, or 29.9%, as compared to the same period of 2007.  For the three months ended September 30,2008, interest expense on interest-bearing deposits decreased $1.2 million, or35.5%.  Average interest-bearing depositsdecreased from $399.7 million during the quarter ended September 30, 2007to $388.2 million for the quarter ended September 30, 2008.  The decrease in interest expense oninterest-bearing deposits resulted from lower deposit balances and lower rateson those balances, primarily lower rates for our maturing certificates ofdeposit, and lower rates on money market and NOW accounts, as they repriceddown, along with the federal funds target rates and other interest rates,throughout 2008.  Average borrowings forthe quarter ended September 30, 2008 increased to $111.6 million from$94.5 million for the quarter ended September 30, 2007, however interestexpense on borrowings decreased $136,000, or 12.1%, to $984,000 for the threemonths ended September 30, 2008 as compared to the same period in2007.  The declining rates on ourvariable rate borrowings more than offset the higher average outstandingbalances during the quarter.

 

Interest expense duringthe nine months ended September 30, 2008 decreased $2.7 million, or 20.0%,as compared to the same period of 2007. For the nine months ended September 30, 2008, interest expense oninterest-bearing deposits decreased $2.1 million, or 21.0%.  Average interest-bearing deposits decreasedfrom $398.3 million during the nine months ended September 30, 2007 to$395.5 million for the nine months ended September 30, 2008.  The decrease in interest expense oninterest-bearing deposits resulted from lower rates on deposit balances,primarily lower rates for our maturing certificates of deposit, and lower rateson money market and NOW accounts, as they repriced down, along with the federalfunds target rates and other interest rates, throughout the first nine monthsof 2008.  Average borrowings for the ninemonths ended September 30, 2008 increased to $104.4 million from $95.8million for the nine months ended September 30, 2007, however interestexpense on borrowings decreased $582,000, or 17.3%, to $2.8 million for the ninemonths ended September 30, 2008 as compared to the same period in2007.  The declining rates on ourvariable rate borrowings more than offset the higher average balances duringthe first nine months of 2008.

 

*NetInterest Income*.  Netinterest income for the three months ended September 30, 2008 totaled $4.5million, increasing $59,000, or 1.3%, as compared to the three months ended September 30,2007.  Average interest-earning assetsincreased during the third quarter of 2008 to $551.7 million from $542.8million for the third quarter of 2007. Our net interest margin, on a tax equivalent basis, remained at 3.47%during the third quarters of both 2008 and 2007.

 

 Net interest income for the nine months ended September 30,2008, totaled $13.5 million, increasing $28,000, or 0.2%, as compared to thenine months ended September 30, 2007. Average interest-earning assets increased during the nine months of 2008to $550.9 million from $541.2 million for the first nine months of 2007.  Our net interest margin, on a tax equivalentbasis, declined to 3.48% for the nine months ended September 30, 2008 from3.52% for the same period in 2007.

 

                                                *Provision for Loan Losses*. We maintain, and our board of directors monitors, an allowance forlosses on loans. The allowance is established based upon management’s periodicevaluation of known and inherent risks in the loan portfolio, review ofsignificant individual loans and collateral, review of delinquent loans, pastloss experience, adverse situations that may affect the borrowers’ ability torepay, current market conditions, and other factors management deems important.Determining the appropriate level of reserves involves a high degree ofmanagement judgment and is based upon historical and projected losses in theloan portfolio and the collateral value of specifically identified impairedloans. Allowance policies are subject to periodic review and revision inresponse to a number of factors, including current market conditions, actualloss experience and management’s expectations.

 

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The provision for loanlosses for the three months ended September 30, 2008 was $500,000,compared to a provision of $70,000 during the three months ended September 30,2007.  The provision for loan losses forthe nine months ended September 30, 2008 was $1.4 million, compared to aprovision of $195,000 during the nine months ended September 30,2007.  We increased our provision forloan losses by $1.2 million during 2008 due to the continuing difficultconditions in the credit markets and increased historical losses as a result ofincreased charge-offs, despite the fact that our levels of non-accrual and pastdue loans declined during 2008.  Whileour markets experienced a general economic slowdown in late 2007, the economicdecline accelerated during 2008.  Thiswas evidenced nationally by deteriorating U.S. economic indicators coupled withfurther declines in residential real estate prices, higher energy and foodcosts and ebbing consumer confidence. These risk factors were further exemplified by the Federal Open MarketCommittee reducing the fed funds target rate by 225 basis points during 2008and through the use of the programs discussed previously.

 

One measure of theadequacy of the allowance for estimated losses on loans is the ratio of theallowance to the total loan portfolio. At September 30, 2008, the allowance for loan losses was $3.8million, or 1.0% of gross loans outstanding, compared to $4.2 million, or 1.1%of gross loans outstanding at December 31, 2007.  Our allowance for loan losses to gross loansratio declined during the first nine months of 2008, despite the increase inour provision, because the $1.8 million in charge-offs were primarily relatedto impaired loans that had been previously identified by management.  The charge-offs decreased gross loans and theallowance for loan losses, lowering the corresponding ratio.  For further discussion of the allowance forloan losses, refer to the “Asset Quality and Distribution” section.

 

*Non-interestIncome*.  Non-interestincome increased $165,000, or 10.5%, for the three months ended September 30,2008, to $1.7 million, as compared to the three months ended September 30,2007.  The increase was primarilyattributable to increases of $98,000 in gains on sale of loans and $45,000 infees and service charges, as compared to the third quarter of 2007.  The increased gains on sales of loans weredriven by higher origination volumes of residential real estate loans that weresold in the secondary market, while the increases in fees and service chargeswere primarily related to deposits.

 

Non-interest incomeincreased $1.4 million, or 31.2%, for the nine months ended September 30,2008, to $5.8 million, as compared to the nine months ended September 30,2007.  The increase was primarilyattributable to $497,000 of gains on sales of investments and a $246,000 gainon the prepayment of a FHLB advance along with increases of $397,000 in gainson sales of loans and $215,000 in fees and service charges, as compared to thefirst nine months of 2007.  Marketconditions during the second quarter of 2008 allowed us to sell longer term,higher yielding agency securities while purchasing shorter term, lower yieldingmortgage-backed obligations at gains that were higher than the reductions ininterest income as a result of the transactions.  During 2008, we began a strategy of issuinglonger-term, fixed rate FHLB advances and repaying shorter-term FHLB advancesto lengthen our FHLB advance maturities while rates were believed to be at arelatively low point in the rate cycle. As a result of the prepayment of a $10 million advance, we were able torecognize a gain of $246,000, which represented the remaining fair valueadjustment required by purchase accounting for a prior acquisition.

 

*Non-interestExpense*.  Non-interestexpense increased $150,000, or 3.6%, to $4.3 million for the three months endedSeptember 30, 2008, as compared to the three months ended September 30,2007.  These increases were primarilydriven by higher costs of compensation and a $30,000 other than temporaryimpairment charge recorded on a common stock investment in the third quarter of2008, which is included in other non-interest expense.

 

Non-interest expenseincreased $387,000, or 3.1%, to $12.9 million for the nine months ended September 30,2008, as compared to the nine months ended September 30, 2007.  These increases were primarily driven byhigher costs of compensation and benefits and a $70,000 valuation allowancerelated to the declines in the fair value of two foreclosed assets, which isincluded in other non-interest expense.

 

 *Income Tax Expense*.  Income tax expense decreased $67,000, or18.3%, from $367,000 for the three months ended September 30, 2007, to$300,000 for the three months ended September 30, 2008.  The effective tax rate for the third quarterof 2008 was 20.7% compared to 20.4% during the third quarter of 2007.  The decrease in income taxes was primarilythe result of lower taxable income.

 

Income tax expenseincreased $176,000, or 6.7%, from $1.1 million for the nine months ended September 30,2007, to $1.2 million for the nine months ended September 30, 2008.  The effective tax rate for the nine months of2008 was 24.3% compared to 22.0% during the first nine months of 2007.  The increase in the effective tax rate wasprimarily the result of higher taxable income during the first nine months of2008 as well as the recognition of $50,000 of previously unrecognized taxbenefits during the third quarter of 2007, which favorably impacted oureffective tax rate.

 

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*AssetQuality and Distribution*. Our primary investing activities are the origination of commercial,commercial real estate, mortgage and consumer loans and the purchase ofinvestment securities.  We have concentratedon generating commercial and commercial real estate loans over the past fewyears and are pleased with the growth in this segment of our loanportfolio.  We also originate fixed-rate,residential mortgage loans with maturities in excess of ten years, primarilyfor sale in the secondary market.  Totalassets decreased to $604.2 million at September 30, 2008, compared to$606.5 million at December 31, 2007. Net loans, excluding loans held for sale, decreased to $373.1 million atSeptember 30, 2008 from $376.2 million at December 31, 2007.  The composition of loans changed moresubstantially as our commercial and commercial real estate loans increased by$8.0 million and our one-to-four family residential loans decreased by $10.9million.

 

Loans consisted of the following:

 
| ** **                                    | ** ** | **September 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| Real estate loans:                            |       |                             |        |                            |       |
| One-to-four family residential                |       | $                                | 115,599,460 |                            | $          | 126,459,081 |   |
| Commercial                                    |       | 125,493,512                      |        | 113,209,220                     |       |
| Construction                                  |       | 21,338,366                       |        | 27,936,176                      |       |
| Commercial loans                              |       | 105,392,826                      |        | 103,098,695                     |       |
| Consumer loans                                |       | 8,484,293                        |        | 9,164,122                       |       |
| Total                                         |       | 376,308,457                      |        | 379,867,294                     |       |
|                                          |       |                             |        |                            |       |
| Less: Deferred loan fees and loans in process |       | (531,025                         | )           | (460,981                        | )          |
| Less: Allowance for loan losses               |       | 3,788,321                        |        | 4,171,667                       |       |
| Loans, net                                    |       | $                                | 373,051,161 |                            | $          | 376,156,608 |   |

 

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

 

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

 

| ** **                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **September 30,  2008**     | ** ** | **September 30,  2007**    | ** ** | **September 30,   2008** | ** ** | **September 30,   2007** | ** ** |
| Beginning  balance         |       | $                                | 3,326,242  |                            | $          | 4,105,129 |   | $ | 4,171,667 |   | $ | 4,029,710 |   |
| Provision for  loan losses |       | 500,000                          |       | 70,000                          |       | 1,400,000 |   | 195,000 |   |
| Charge-offs                |       | (59,834                          | )          | (80,407                         | )          | (1,839,768 | ) | (166,280 | ) |
| Recoveries                 |       | 21,913                           |       | 23,202                          |       | 56,422 |   | 59,494 |   |
| Ending balance             |       | $                                | 3,788,321  |                            | $          | 4,117,924 |   | $ | 3,788,321 |   | $ | 4,117,924 |   |

 

Loans past due more thana month totaled $6.9 million at September 30, 2008, compared to $11.9million at December 31, 2007.  Loanspast due more than a month and still accruing interest at September 30,2008, totaled $1.3 million.  At September 30,2008, $6.0 million in loans were on non-accrual status, or 1.6% of net loans,compared to a balance of $10.0 million in loans on non-accrual status, or 2.7%of net loans, at December 31, 2007. The decrease in non-accrual loans was primarily the result of thecollection of the outstanding balances on two loan relationships totaling $3.0million and certain loan charge-offs on loans previously classified asnon-accrual during 2008.  Althoughnon-accrual loans decreased during the first nine months of 2008, we increasedour provision for loan losses during the period due to difficult conditions inthe credit markets, slowing national and local economies and an increase inhistorical losses resulting from the higher levels of charge-offs during2008.  We felt this step was appropriategiven the impact these factors could have on our outstanding loan portfolio.

 

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Net loan charge-offs forthe nine months ended September 30, 2008 were $1.8 million compared to$107,000 for the comparable period of 2007. While the charge-offs increased during the first nine months of 2008,substantially all had a specific loss reserve allocation at December 31,2007.  The increased charge-offs wereprimarily related to four loan relationships with insufficient collateral, onwhich we believe it is not likely that our collection attempts will result inany significant recoveries.

 

A summary of thenon-performing assets:

 
| ** **                                              | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Total  non-accrual loans                                |       | $                                | 5,957,950  |                            | $          | 10,037,022 |   |
| Accruing loans  over 90 days past due                   |       | —                           |       | —                          |       |
| Real estate  owned                                      |       | 454,664                          |       | 491,722                         |       |
| Total  nonperforming assets                             |       | $                                | 6,421,614  |                            | $          | 10,528,744 |   |
|                                                    |       |                             |       |                            |       |
| Total  nonperforming loans to total loans, net          |       | 1.6                              | %          | 2.7                             | %          |
| Total  nonperforming assets to total assets             |       | 1.1                              | %          | 1.7                             | %          |
| Allowance for  loan losses to gross loans outstanding   |       | 1.0                              | %          | 1.1                             | %          |
| Allowance for  loan losses to total nonperforming loans |       | 63.6                             | %          | 41.5                            | %          |

 

*LiabilityDistribution*.  Ourprimary ongoing sources of funds are deposits, proceeds from principal andinterest payments on loans and investment securities and proceeds from the saleof mortgage loans.  While maturities andscheduled amortization of loans are a predictable source of funds, deposit flowsand mortgage prepayments are greatly influenced by general interest rates,economic conditions, competition and the restructuring of the financialservices industry.  Total depositsdecreased $17.3 million to $435.4 million at September 30, 2008, from$452.7 million at December 31, 2007. The decline in deposits was due tolower deposit balances associated with our public fund customers.   This decline was related to seasonalfluctuations and the result of replacing public fund certificates of depositwith FHLB borrowings.  We replaced publicfund certificates of deposits with FHLB advances to extend the maturities ofour liabilities.  Borrowings increased$17.9 million to $111.0 million at September 30, 2008, from $93.1 millionat December 31, 2007.

 

Deposits consisted of thefollowing:

 
| ** **                   | ** ** | **September 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| Non-interest  bearing demand |       | $                                | 51,203,241  |                            | $          | 51,007,859 |   |
| Money market and  NOW        |       | 137,803,310                      |        | 139,557,359                     |       |
| Savings                      |       | 27,434,510                       |        | 25,882,935                      |       |
| Time, $100,000  and greater  |       | 44,772,915                       |        | 58,980,552                      |       |
| Time, other                  |       | 174,148,920                      |        | 177,223,601                     |       |
| Total deposits               |       | $                                | 435,362,896 |                            | $          | 452,652,306 |   |

 

Certificates of depositat September 30, 2008, which were scheduled to mature in one year or less,totaled $179.1 million.  Historically,maturing deposits have generally remained with our bank and we believe that asignificant portion of the deposits maturing in one year or less will remainwith us upon maturity.

 

*Liquidity*.  Our most liquid assets are cash and cashequivalents and investment securities available for sale.  The levels of these assets are dependent onthe operating, financing, lending and investing activities during any givenperiod.  These liquid assets totaled$179.7 million at September 30, 2008, and $170.6 million at December 31,2007.  During periods in which we are notable to originate a sufficient amount of loans and/or periods of high principalprepayments, we increase our liquid assets by investing in short-term U. S.Government and agency securities or high-grade municipal securities.

 

Liquidity management is botha daily and long-term function of our strategy. Excess funds are generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are generally availablethrough the use of FHLB advances, a line of credit with the FHLB, or otherborrowings or through sales of securities. At September 30, 2008, we had outstanding FHLB advances of $78.5million and $2.7 million of borrowings against our line of credit with theFHLB.  At September 30, 2008, ourtotal borrowing capacity with the FHLB was $128.4 million.  At September 30, 2008, we had noborrowings through the Federal Reserve discount window, while our borrowingcapacity was $15.5 million.  We also havevarious other fed funds agreements, both secured and unsecured, withcorrespondent banks totaling approximately $57.9 million.  As of September 30, 2008 we had $100,000borrowed through the correspondent bank fed funds agreements.  We also had other borrowings of $29.8 millionat September 30, 2008,

 

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which included $16.5million of subordinated debentures, $6.5 million of long-term debt and $6.8million in repurchase agreements.

 

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

 

As a provider offinancial services, we routinely issue financial guarantees in the form offinancial and performance standby letters of credit. Standby letters of creditare contingent commitments issued by us generally to guarantee the payment orperformance obligation of a customer to a third party. While these standbyletters of credit represent a potential outlay by us, a significant amount ofthe commitments may expire without being drawn upon. We have recourse againstthe customer for any amount the bank is required to pay to a third party undera standby letter of credit. The letters of credit are subject to the samecredit policies, underwriting standards and approval process as loansoriginated by us. Most of the standby letters of credit are secured, and in theevent of nonperformance by the customer, we have the right to the underlyingcollateral, which could include commercial real estate, physical plant andproperty, inventory, receivables, cash and marketable securities. The contractamount of these standby letters of credit, which represents the maximumpotential future payments guaranteed by us, was $2.3 million at September 30,2008.

 

At September 30,2008, we had outstanding loan commitments, excluding standby letters of credit,of $66.6 million.  We anticipate thatsufficient funds will be available to meet current loan commitments.  These commitments consist of unfunded linesof credit and commitments to finance real estate loans.

 

*Capital*.  The Federal Reserve Board has establishedcapital requirements for bank holding companies which generally parallel thecapital requirements for national banks under the Office of the Comptroller ofthe Currency regulations.  Theregulations provide that such standards will generally be applied on aconsolidated (rather than a bank-only) basis in the case of a bank holdingcompany with more than $150 million in total consolidated assets.  Banks and bank holding companies aregenerally expected to operate at or above the minimum capital requirements.  Our ratios are well in excess of regulatoryminimums and should allow us to operate without capital adequacy concerns.

 

At September 30,2008, we continued to remain well capitalized, with a leverage ratio of 8.60%and a total risk based capital ratio of 13.48%. As shown by the following table, our capital exceeded the minimumcapital requirements at September 30, 2008 (dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|---------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| **Company**               | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                  |       | $          | 51,274     |                                         | 8.60       | %                                      | $          | 23,845 |   | 4.0 | % | $ | 29,807 |   | 5.0 | % |
| Tier 1 Capital            |       | $          | 51,274     |                                         | 12.55      | %                                      | $          | 16,338 |   | 4.0 | % | $ | 24,507 |   | 6.0 | % |
| Total Risk Based  Capital |       | $          | 55,062     |                                         | 13.48      | %                                      | $          | 32,675 |   | 8.0 | % | $ | 32,675 |   | 10.0 | % |

 

At September 30,2008, Landmark National Bank continued to remain well capitalized, with aleverage ratio of 9.40% and a total risk based capital ratio of 14.63%.  As shown by the following table, the bank’scapital exceeded the minimum capital requirements at September 30, 2008(dollars in thousands):

 
| ** **                           | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-   capitalized** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Landmark National Bank** | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                             |       | $          | 55,861     |                                         | 9.40       | %                                            | $          | 23,760 |   | 4.0 | % | $ | 29,700 |   | 5.0 | % |
| Tier 1 Capital                       |       | $          | 55,861     |                                         | 13.71      | %                                            | $          | 16,303 |   | 4.0 | % | $ | 24,455 |   | 6.0 | % |
| Total Risk Based  Capital            |       | $          | 59,649     |                                         | 14.63      | %                                            | $          | 32,607 |   | 8.0 | % | $ | 40,759 |   | 10.0 | % |

 

 

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

 
| ** **                                                                        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **(Dollars in thousands)**                                              | ** ** | **Average  balance**             | ** ** | **Interest**                     | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                | 172,133    |                             | $          | 2,084 |   | 4.82 | % | $ | 156,338 |   | $ | 2,063 |   | 5.24 | % |
| Loans (2)                                                                         |       | 379,547                          |       | 5,979                            |       | 6.27 | % | 386,481 |   | 7,307 |   | 7.50 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 551,680                          |       | 8,063                            |       | 5.81 | % | 542,819 |   | 9,370 |   | 6.85 | % |
| Non-interest-earning  assets                                                      |       | 59,768                           |       |                             |       |   |   | 60,688 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                                | 611,448    |                             |       |   |   |   | $ | 603,507 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                | 219,393    |                             | $          | 1,862 |   | 3.38 | % | $ | 242,774 |   | $ | 2,809 |   | 4.59 | % |
| Money market and  NOW accounts                                                    |       | 140,912                          |       | 377                              |       | 1.06 | % | 130,109 |   | 676 |   | 2.06 | % |
| Savings accounts                                                                  |       | 27,916                           |       | 21                               |       | 0.30 | % | 26,863 |   | 20 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 111,649                          |       | 984                              |       | 3.51 | % | 94,525 |   | 1,120 |   | 4.70 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 499,870                          |       | 3,244                            |       | 2.58 | % | 494,271 |   | 4,625 |   | 3.71 | % |
| Non-interest-bearing  liabilities                                                 |       | 61,362                           |       |                             |       |   |   | 59,762 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 50,216                           |       |                             |       |   |   | 49,474 |   |   |   |   |   |
| Total                                                                             |       | $                                | 611,448    |                             |       |   |   |   | $ | 603,507 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                             |       |                             |       | 3.23 | % |   |   |   |   | 3.14 | % |
| Net interest  margin (4)                                                          |       |                             |       | 4,819                            |       | 3.47 | % |   |   | 4,745 |   | 3.47 | % |
| Tax equivalent  interest – imputed                                           |       |                             |       | 299                              |       |   |   |   |   | 284 |   |   |   |
| Net interest  income                                                              |       |                             |       | $                                | 4,520      |   |   |   |   |   | $ | 4,461 |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                             |       | 110.4                            | %          |   |   |   |   | 109.8 | % |   |   |

 

----

|   | (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 taxable 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 taxable 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.                                                                                                                                      |

 

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| ** **                                                                        | ** ** | **Nine months ended**  | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **(Dollars in thousands)**                                              | ** ** | **Average  balance**             | ** ** | **Interest**                     | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                | 170,838    |                             | $          | 6,271 |   | 4.90 | % | $ | 156,552 |   | $ | 6,045 |   | 5.16 | % |
| Loans (2)                                                                         |       | 380,055                          |       | 18,851                           |       | 6.63 | % | 384,658 |   | 21,686 |   | 7.54 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 550,893                          |       | 25,122                           |       | 6.09 | % | 541,210 |   | 27,731 |   | 6.85 | % |
| Non-interest-earning  assets                                                      |       | 59,922                           |       |                             |       |   |   | 60,726 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                                | 610,815    |                             |       |   |   |   | $ | 601,936 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                | 224,570    |                             | $          | 6,482 |   | 3.86 | % | $ | 237,245 |   | $ | 7,919 |   | 4.46 | % |
| Money market and  NOW accounts                                                    |       | 143,843                          |       | 1,453                            |       | 1.35 | % | 133,649 |   | 2,138 |   | 2.14 | % |
| Savings accounts                                                                  |       | 27,129                           |       | 61                               |       | 0.30 | % | 27,403 |   | 61 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 104,422                          |       | 2,792                            |       | 3.57 | % | 95,836 |   | 3,374 |   | 4.71 | % |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 499,964                          |       | 10,788                           |       | 2.88 | % | 494,133 |   | 13,492 |   | 3.65 | % |
| Non-interest-bearing  liabilities                                                 |       | 59,971                           |       |                             |       |   |   | 58,092 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 50,880                           |       |                             |       |   |   | 49,711 |   |   |   |   |   |
| Total                                                                             |       | $                                | 610,815    |                             |       |   |   |   | $ | 601,936 |   |   |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                             |       |                             |       | 3.21 | % |   |   |   |   | 3.20 | % |
| Net interest  margin (4)                                                          |       |                             |       | 14,334                           |       | 3.48 | % |   |   | 14,239 |   | 3.52 | % |
| Tax equivalent  interest – imputed                                           |       |                             |       | 880                              |       |   |   |   |   | 812 |   |   |   |
| Net interest  income                                                              |       |                             |       | $                                | 13,454     |   |   |   |   |   | $ | 13,427 |   |   |   |
|                                                                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                             |       | 110.2                            | %          |   |   |   |   | 109.5 | % |   |   |

 

----

|   | (1) | Income  on investment securities includes all securities, including interest bearing  deposits in other financial institutions. Income on tax exempt securities is  presented on a fully taxable 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 taxable 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.                                                                                                                                      |

 

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

 
| ** **             | ** ** | **Three months ended September 30, 2008  compared with the same period of 2007** | ** ** | **Nine months ended September 30, 2008  compared with the same period in 2007** | ** ** |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Increase/(Decrease) Attributable to**                                                                                       | ** ** | **Increase/(Decrease) Attributable to**                                                                                      | ** ** |
| ** **             | ** ** | **Volume**                                                                                                                              | ** ** | **Rate**                                                                                                                               | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)**                                                                                                    | ** ** |
| Interest income:       |       |                                                                                                                                    |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Investment  securities |       | $                                                                                                                                       | 102        |                                                                                                                                   | $          | (81 | ) | $ | 21 |   | $ | 505 |   | $ | (279 | ) | $ | 226 |   |
| Loans                  |       | (131                                                                                                                                    | )          | (1,197                                                                                                                                 | )          | (1,328 | ) | (256 | ) | (2,579 | ) | (2,835 | ) |
| Total                  |       | (29                                                                                                                                     | )          | (1,278                                                                                                                                 | )          | (1,307 | ) | 249 |   | (2,858 | ) | (2,609 | ) |
| Interest  expense:     |       |                                                                                                                                    |       |                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Deposits               |       | (99                                                                                                                                     | )          | (1,146                                                                                                                                 | )          | (1,245 | ) | (69 | ) | (2,053 | ) | (2,122 | ) |
| Borrowings             |       | 342                                                                                                                                     |       | (478                                                                                                                                   | )          | (136 | ) | 342 |   | (924 | ) | (582 | ) |
| Total                  |       | 243                                                                                                                                     |       | (1,624                                                                                                                                 | )          | (1,381 | ) | 273 |   | (2,977 | ) | (2,704 | ) |
| Net interest  income   |       | $                                                                                                                                       | (272       | )                                                                                                                                      | $          | 346 |   | $ | 74 |   | $ | (24 | ) | $ | 119 |   | $ | 95 |   |

 

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

 

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

 

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

 

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

 

| **Scenario**             | ** ** | **$ Change in Net Interest Income** | ** ** | **% of Net Interest Income** | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| 200 basis point  rising  |       | $                                                            | 623,000    |                                             | 3.4        | % |
| 100 basis point  rising  |       | $                                                            | 343,000    |                                             | 1.9        | % |
| 100 basis point  falling |       | $                                                            | (425,000   | )                                                | (2.3       | )% |
| 200 basis point  falling |       | $                                                            | (958,000   | )                                                | (5.2       | )% |

 

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

 

**Forward-LookingStatements**

** **

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

 

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

 
|   | · | 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.                                                                                                              |
|   | · | 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.                                                                                                                                                                                                                         |
|   | · | 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.                                                                                                              |

 

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

 

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**ITEM4.  CONTROLS AND PROCEDURES**

 

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

 

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

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**PART II– OTHER INFORMATION**

 

**ITEM 1.    LEGAL PROCEEDINGS**

 

There is nomaterial pending legal proceedings to which the Company or its subsidiaries isa party other than ordinary routine litigation incidental to their respectivebusinesses.

 

**ITEM 1A.  RISK FACTORS**

 

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

 

**ITEM2.    UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

There were no repurchasesduring the quarter ended September 30, 2008, of equity securities that areregistered by the Company pursuant to Section 12 of the Exchange Act.

 

**ITEM 3.    DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM4.    SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS**

 

None

 

**ITEM5.    OTHER INFORMATION**

 

None

 

**ITEM 6.    EXHIBITS**

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

 

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**SIGNATURES**

 

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

 
|                          |   | LANDMARK BANCORP, INC.                   |
|-------------------------------|--------|------------------------------------------|
|                          |   |                                     |
|                          |   |                                     |
| Date: November 14,  2008 |   | /s/ Patrick L.  Alexander                |
|                          |   | Patrick L. Alexander                     |
|                          |   | President and Chief  Executive Officer   |
|                          |   |                                     |
|                          |   |                                     |
| Date: November 14,  2008 |   | /s/ Mark A. Herpich                      |
|                          |   | Mark A. Herpich                          |
|                          |   | Vice President, Secretary,  Treasurer    |
|                          |   |   and Chief  Financial Officer |

 

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