**UNITEDSTATES**

**SECURITIESAND 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, 2007**                                        |
|   | ** **                                                                                    |
|   | **OR**                                                                                        |
|   | ** **                                                                                    |
| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Fortransition period from          to         **

** **

**CommissionFile Number 0-33203**

 

 

**LANDMARKBANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

|                                                                                                       |                |   |
|------------------------------------------------------------------------------------------------------------|---------------------|--------|
| **701  Poyntz Avenue, Manhattan,  Kansas       66502**                  |
| (Address  of principal executive offices)         (Zip  Code) |
|                                                                                                       |                |   |
|                                                                                                       | **(785)  565-2000** |   |
| (Registrant’s  telephone number, including area code)                                                 |
|                                                                                                       |                |   |

 

                Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

                Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large accelerated filer o                         Acceleratedfiler  o                        Non-acceleratedfiler  x

 

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

 

                Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock as of the latest practicabledate:  as of November 5, 2007, theRegistrant had outstanding 2,304,641 shares of its common stock, $.01 par valueper share.

 

 

 

 

----

 

**LANDMARK BANCORP, INC.**

**Form 10-Q Quarterly Report**

 

**Table of Contents**

 

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

 

 

1

----

 

 

 

 

** **

 

**ITEM 1.FINANCIAL STATEMENTS AND RELATED NOTES**

 

**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

** **
| ** **                                                                                                 | ** ** | **September 30,**

**2007** | ** **  | **December 31,**

**2006** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
| **ASSETS**                                                                                                 |       | **(Unaudited)**             |        |                       |       |
| Cash and cash equivalents                                                                                  |       | $                           | 14,034,830  |                       | $          | 14,751,914 |   |
| Investment securities available for sale, at fair value                                                    |       | 155,110,013                 |        | 145,884,168                |       |
| Loans, net                                                                                                 |       | 380,161,738                 |        | 379,323,581                |       |
| Loans held for sale                                                                                        |       | 3,574,597                   |        | 1,364,474                  |       |
| Premises and equipment, net                                                                                |       | 14,330,835                  |        | 13,767,075                 |       |
| Goodwill                                                                                                   |       | 13,009,167                  |        | 13,009,167                 |       |
| Other intangible assets, net                                                                               |       | 3,351,441                   |        | 4,030,709                  |       |
| Bank owned life insurance                                                                                  |       | 11,496,047                  |        | 11,144,796                 |       |
| Accrued interest and other assets                                                                          |       | 7,275,222                   |        | 7,292,352                  |       |
|                                                                                                       |       |                        |        |                       |       |
| Total assets                                                                                               |       | $                           | 602,343,890 |                       | $          | 590,568,236 |   |
|                                                                                                       |       |                        |        |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                              | ** ** | ** **                  | ** **  | ** **                 | ** ** |
| Liabilities:                                                                                               |       |                        |        |                       |       |
| Deposits                                                                                                   |       | $                           | 450,182,495 |                       | $          | 444,485,370 |   |
| Federal Home Loan Bank borrowings                                                                          |       | 65,174,999                  |        | 61,920,421                 |       |
| Other borrowings                                                                                           |       | 27,468,446                  |        | 28,495,643                 |       |
| Accrued expenses, taxes and other liabilities                                                              |       | 8,312,425                   |        | 6,430,787                  |       |
| Total liabilities                                                                                          |       | 551,138,365                 |        | 541,332,221                |       |
|                                                                                                       |       |                        |        |                       |       |
| Stockholders’ equity:                                                                                 |       |                        |        |                       |       |
| Common stock, $0.01 par, 5,000,000 shares authorized, 2,344,118 and  2,341,744 shares issued, respectively |       | 23,441                      |        | 23,417                     |       |
| Additional paid-in capital                                                                                 |       | 22,746,365                  |        | 22,607,510                 |       |
| Retained earnings                                                                                          |       | 29,468,003                  |        | 26,758,056                 |       |
| Treasury stock, at cost; 39,477 and 5,000 shares, respectively                                             |       | (1,103,400                  | )           | (138,506                   | )          |
| Accumulated other comprehensive income (loss)                                                              |       | 71,116                      |        | (14,462                    | )          |
| Total stockholders’ equity                                                                            |       | 51,205,525                  |        | 49,236,015                 |       |
|                                                                                                       |       |                        |        |                       |       |
| Total liabilities and stockholders’ equity                                                            |       | $                           | 602,343,890 |                       | $          | 590,568,236 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

2

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

# **CONDENSED CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(Unaudited)**

** **
| ** **                                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                    |       |                                 |       |                                |       |   |   |   |   |
| Loans                                               |       | $                                    | 7,286,877  |                                | $          | 7,293,653 |   | $ | 21,635,250 |   | $ | 20,805,168 |   |
| Investment securities                               |       | 1,787,825                            |       | 1,517,481                           |       | 5,247,768 |   | 4,388,145 |   |
| Other                                               |       | 11,203                               |       | 26,337                              |       | 35,498 |   | 127,731 |   |
| Total interest income                               |       | 9,085,905                            |       | 8,837,471                           |       | 26,918,516 |   | 25,321,044 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Interest expense:                                   |       |                                 |       |                                |       |   |   |   |   |
| Deposits                                            |       | 3,505,464                            |       | 2,848,151                           |       | 10,117,740 |   | 7,891,865 |   |
| Borrowed funds                                      |       | 1,119,529                            |       | 1,266,940                           |       | 3,374,209 |   | 3,514,525 |   |
| Total interest expense                              |       | 4,624,993                            |       | 4,115,091                           |       | 13,491,949 |   | 11,406,390 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Net interest income                                 |       | 4,460,912                            |       | 4,722,380                           |       | 13,426,567 |   | 13,914,654 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Provision for loan losses                           |       | 70,000                               |       | 80,000                              |       | 195,000 |   | 155,000 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Net interest income after provision for loan losses |       |                                 |       |                                |       |   |   |   |   |
|                                                |       | 4,390,912                            |       | 4,642,380                           |       | 13,231,567 |   | 13,759,654 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Non-interest income:                                |       |                                 |       |                                |       |   |   |   |   |
| Fees and service charges                            |       | 1,047,395                            |       | 1,124,057                           |       | 2,958,910 |   | 3,259,392 |   |
| Gains on sale of loans                              |       | 300,661                              |       | 347,054                             |       | 740,069 |   | 933,418 |   |
| Losses on sale of investments, net                  |       | —                               |       | —                              |       | — |   | (300,256 | ) |
| Gains (losses) on sale of other assets              |       | —                               |       | (11,638                             | )          | — |   | 716,815 |   |
| Bank owned life insurance                           |       | 117,468                              |       | 114,689                             |       | 347,435 |   | 272,343 |   |
| Other                                               |       | 109,925                              |       | 108,915                             |       | 372,262 |   | 434,231 |   |
| Total non-interest income                           |       | 1,575,449                            |       | 1,683,077                           |       | 4,418,676 |   | 5,315,943 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Non-interest expense:                               |       |                                 |       |                                |       |   |   |   |   |
| Compensation and benefits                           |       | 2,120,127                            |       | 2,140,241                           |       | 6,196,685 |   | 6,388,817 |   |
| Occupancy and equipment                             |       | 671,494                              |       | 705,523                             |       | 2,046,852 |   | 2,101,545 |   |
| Amortization of intangibles                         |       | 228,259                              |       | 258,732                             |       | 698,356 |   | 782,904 |   |
| Data processing                                     |       | 184,472                              |       | 183,695                             |       | 590,082 |   | 532,685 |   |
| Professional fees                                   |       | 81,124                               |       | 132,080                             |       | 333,443 |   | 342,806 |   |
| Advertising                                         |       | 106,629                              |       | 109,065                             |       | 321,992 |   | 327,802 |   |
| Other                                               |       | 769,349                              |       | 784,234                             |       | 2,289,216 |   | 2,291,019 |   |
| Total non-interest expense                          |       | 4,161,454                            |       | 4,313,570                           |       | 12,476,626 |   | 12,767,578 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Earnings before income taxes                        |       | 1,804,907                            |       | 2,011,887                           |       | 5,173,617 |   | 6,308,019 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Income tax expense                                  |       | 367,341                              |       | 548,240                             |       | 1,137,828 |   | 1,827,368 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Net earnings                                        |       | $                                    | 1,437,566  |                                | $          | 1,463,647 |   | $ | 4,035,789 |   | $ | 4,480,651 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Earnings per share:                                 |       |                                 |       |                                |       |   |   |   |   |
| Basic                                               |       | $                                    | 0.62       |                                | $          | 0.63 |   | $ | 1.74 |   | $ | 1.92 |   |
| Diluted                                             |       | $                                    | 0.62       |                                | $          | 0.62 |   | $ | 1.72 |   | $ | 1.90 |   |
|                                                |       |                                 |       |                                |       |   |   |   |   |
| Dividends per share                                 |       | $                                    | 0.1900     |                                | $          | 0.1619 |   | $ | 0.5700 |   | $ | 0.4857 |   |
|                                                     |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

* Seeaccompanying notes to condensed consolidated financial statements.*

 

3

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                          | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                                                                |       |                                |       |   |   |
| Net cash provided by operating activities                           |       | $                                   | 4,518,469  |   | $ | 2,167,704 |   |
|                                                                |       |                                |       |   |   |
| Cash flows from investing activities:                               |       |                                |       |   |   |
| Net increase in loans                                               |       | (1,560,689                          | )          | (12,394,045 | ) |
| Maturities and prepayments of investments                           |       | 12,582,401                          |       | 35,226,616 |   |
| Purchase of investment securities                                   |       | (21,742,912                         | )          | (41,360,107 | ) |
| Proceeds from sale of investment securities                         |       | —                              |       | 17,943,322 |   |
| Net cash paid in FMB acquisition                                    |       | —                              |       | (9,147,605 | ) |
| Proceeds from sales of premises and equipment and foreclosed assets |       | 363,961                             |       | 588,422 |   |
| Purchases of premises and equipment, net                            |       | (1,380,257                          | )          | (2,825,405 | ) |
| Net cash used in investing activities                               |       | (11,737,496                         | )          | (11,968,802 | ) |
|                                                                |       |                                |       |   |   |
| Cash flows from financing activities:                               |       |                                |       |   |   |
| Net increase in deposits                                            |       | 5,798,792                           |       | 5,323,486 |   |
| Federal Home Loan Bank advance repayments                           |       | (27,576                             | )          | (1,027,576 | ) |
| Federal Home Loan Bank line of credit, net                          |       | 4,000,000                           |       | 4,400,000 |   |
| Other borrowings, net                                               |       | (1,027,197                          | )          | 1,708,858 |   |
| Purchase of treasury stock                                          |       | (964,894                            | )          | — |   |
| Proceeds from issuance of common stock under stock option plans     |       | 41,117                              |       | 9,491 |   |
| Excess tax benefit related to stock option plans                    |       | 7,543                               |       | 2,503 |   |
| Payment of dividends                                                |       | (1,325,842                          | )          | (1,136,695 | ) |
| Net cash provided by financing activities                           |       | 6,501,943                           |       | 9,280,067 |   |
| Net decrease in cash and cash equivalents                           |       | (717,084                            | )          | (521,031 | ) |
| Cash and cash equivalents at beginning of period                    |       | 14,751,914                          |       | 21,490,512 |   |
| Cash and cash equivalents at end of period                          |       | $                                   | 14,034,830 |   | $ | 20,969,481 |   |
|                                                                |       |                                |       |   |   |
| Supplemental disclosure of cash flow information:                   |       |                                |       |   |   |
| Cash paid during period for interest                                |       | $                                   | 13,319,000 |   | $ | 9,990,000 |   |
| Cash paid during period for taxes                                   |       | $                                   | 350,000    |   | $ | 560,000 |   |
| Supplemental schedule of non-cash investing activities:             |       |                                |       |   |   |
| Transfer of loans to real estate owned                              |       | $                                   | 368,000    |   | $ | 160,000 |   |
| FMB acquisition:                                                    |       |                                |       |   |   |
| Fair value of liabilities assumed                                   |       | $                                   | —     |   | $ | 123,965,000 |   |
| Fair value of assets acquired, including goodwill                   |       | $                                   | —     |   | $ | 133,112,000 |   |

 

*                 See accompanying notes to condensedconsolidated financial statements.*

 

4

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF EQUITY AND COMPREHENSIVE INCOME**

**(Unaudited)**

** **
| ** **                                                                                                 | ** ** | **Common**

**stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained earnings** | ** ** | **Treasury stock** | ** ** | **Accumulated other comprehensive income (loss)** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------------------------------|------------|------------|------------|
|                                                                                                       |       |                  |       |                             |       |                  |       |               |       |                                              |       |       |       |
| Balance December  31, 2005                                                                                 |       | $                     | 22,443     |                             | 19,868,567 |                  | 25,322,019 |               | (414,514   | )                                                 | (725,908   | )          | 44,072,607 |   |
|                                                                                                       |       |                  |       |                             |       |                  |       |               |       |                                              |       |       |       |
| Net earnings                                                                                               |       | —                |       | —                           |       | 4,480,651             |       | —             |       | —                                            |       | 4,480,651  |       |
|  Change in fair value of investment  securities available-for-sale and interest rate swap, net of tax |       | —                |       | —                           |       | —                |       | —             |       | 1,003,806                                         |       | 1,003,806  |       |
| Dividends paid  ($0.4857 per share)                                                                        |       | —                |       | —                           |       | (1,136,695            | )          | —             |       | —                                            |       | (1,136,695 | )          |
| Stock-based compensation                                                                                   |       | —                |       | 77,153                           |       | —                |       | —             |       | —                                            |       | 77,153     |       |
| Exercise of  stock options, 667 shares, including tax benefit of $2,503                                    |       | 7                     |       | 11,987                           |       |                  |       |               |       |                                              |       | 11,994     |       |
|                                                                                                       |       |                  |       |                             |       |                  |       |               |       |                                              |       |       |       |
| Balance  September 30, 2006                                                                                |       | $                     | 22,450     |                             | 19,957,707 |                  | 28,665,975 |               | (414,514   | )                                                 | 277,898    |       | 48,509,516 |   |
|                                                                                                       |       |                  |       |                             |       |                  |       |               |       |                                              |       |       |       |
| Balance 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 investmentsecurities available-for-sale, net of tax                               |       | —                |       | —                           |       | —                |       | —             |       | 85,578                                            |       | 85,578     |       |
| Dividends paid  ($0.57 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  September 30, 2007                                                                                |       | $                     | 23,441     |                             | 22,746,365 |                  | 29,468,003 |               | (1,103,400 | )                                                 | 71,116     |       | 51,205,525 |   |

 

* Seeaccompanying notes to condensed consolidated financial statements.*

 

 

5

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

             Thecondensed consolidated financial statements of Landmark Bancorp, Inc. (the “Company”)and subsidiary have been prepared in accordance with the instructions to Form10-Q.  To the extent that information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial statements are contained in or consistent with theconsolidated audited financial statements incorporated by reference in theCompany’s Form 10-K for the year ended December 31, 2006, such information andfootnotes have not been duplicated herein. In the opinion of management, all adjustments, consisting of normalrecurring accruals, considered necessary for a fair presentation of financialstatements have been reflected herein. The December 31, 2006, condensed consolidated balance sheet has beenderived from the audited consolidated balance sheet as of that date.  The results of the interim period endedSeptember 30, 2007 are not necessarily indicative of the results expected forthe year ending December 31, 2007.

 

**2.****                             ****Income Tax**

 

**            **The Company adopted the provisions of theFinancial Accounting Standards Board (“FASB”) Financial Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*” (“FIN 48”) onJanuary 1, 2007.  FIN 48 provides acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken in income tax returns. Unrecognized tax benefits represent tax positions for which reserveshave been established.  The Company’sadoption of FIN 48 did not have any effect on its consolidated financialstatements.  As of the date of adoption,our gross unrecognized tax benefits totaled approximately $1.2 million.  The anticipated amount of unrecognized taxbenefits that, if recognized, would favorably impact the effective tax rate was$827,000.  Included in this unrecognizedtax benefit, are interest and penalties of $245,000.  We recognize interest and penalties relatedto unrecognized tax benefits as a component of income tax expense in ourconsolidated statements of earnings.

 

             Taxyears that remain open and subject to audit include the years 2003 through 2006for both federal and state.  During thethree months ended September 30, 2007 we recognized $50,000 of previouslyunrecognized tax benefits.  We anticipaterecognizing an additional $290,000 of previously unrecognized tax benefitsduring the fourth quarter, of which $175,000 will favorably impact theeffective tax rate.  We believe that itis reasonably possible that a reduction in unrecognized tax benefits of up to$115,000 is possible during the next 12 months.

 

 

 

6

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**3.          Stock Based Compensation**

 

A summary of option activityduring the first nine months of 2007 is presented below.

 
| ******                                             | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006                  |       | 246,226    |       | $                                      | 24.18      |                                                | 7.77 years |                            | $          | 755,000 |   |
| Granted                                            |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Cancelled                                          |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Exercised                                          |       | 2,374      |       | 17.32                                  |       | —                                              |       | $                               | 22,185     |   |
| Outstanding at  September 30, 2007                 |       | 243,852    |       | $                                      | 24.25      |                                                | 7.08 years |                            | $          | 670,000 |   |
| Exercisable at  September 30, 2007                 |       | 129,502    |       | $                                      | 22.95      |                                                | 6.18 years |                            | $          | 524,000 |   |
| Vested and  expected to vest at September 30, 2007 |       | 233,822    |       | $                                      | 24.19      |                                                | 7.05 years |                            | $          | 656,000 |   |

 

                Additional information aboutstock options exercised is presented below.

 
| *** ***                                        | ** ** | **Nine  months   ended September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| * *                                            |       | **2007**                               | ** ** | **2006** |   |
| Intrinsic value  of options exercised               |       | $                                      | 22,185     |   | $ | 7,360 |   |
| Cash received  from options exercised               |       | $                                      | 41,117     |   | $ | 9,491 |   |
| Excess tax  benefit realized from options exercised |       | $                                      | 7,543      |   | $ | 2,503 |   |

 

As of September 30, 2007, there was $259,000 of totalunrecognized compensation cost related to outstanding options.  That cost is expected to be recognized over aweighted-average period of 4 years.  Thetotal fair value (at vest date) of shares vested during the nine month periodsended September 30, 2007 and 2006 was $348,000 and $103,000 respectively.

 

**4.             Earnings per Share**

 

                Basic earnings pershare have been computed based upon the weighted average number of commonshares outstanding during each period. Diluted earnings per share include the effect of all potential commonshares outstanding during each period. Earnings and dividends per share for prior periods have been adjusted togive effect to the 5% stock dividend paid by the Company in December 2006.

 

The shares used in the calculation of basic and diluted earnings pershare are shown below:

 
| ** **                                          | ** ** | **Three  months ended  September 30,** | ** ** | **Nine  months ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
|                                                |       | **2007**                               | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** |   |
| Net earnings  available to common stockholders      |       | $                                      | 1,437,566  |                                  | $          | 1,463,647 |   | $ | 4,035,789 |   | $ | 4,480,651 |   |
|                                                |       |                                   |       |                                  |       |   |   |   |   |
| Weighted average  common shares outstanding (basic) |       | 2,310,736                              |       | 2,340,544                             |       | 2,324,016 |   | 2,339,214 |   |
| Dilutive stock  options                             |       | 17,464                                 |       | 9,730                                 |       | 18,934 |   | 13,252 |   |
| Weighted average  common shares (diluted)           |       | 2,328,200                              |       | 2,350,274                             |       | 2,342,950 |   | 2,352,466 |   |
|                                                |       |                                   |       |                                  |       |   |   |   |   |
| Net earnings per  share:                            |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                               |       | $                                      | 0.62       |                                  | $          | 0.63 |   | $ | 1.74 |   | $ | 1.92 |   |
| Diluted                                             |       | $                                      | 0.62       |                                  | $          | 0.62 |   | $ | 1.72 |   | $ | 1.90 |   |
|                                                     |            |                                        |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

7

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**5.             Other Comprehensive Income**

 

                The Company’s other comprehensive incomeconsists of the unrealized holding gains and losses on available-for-salesecurities and an unrealized gain on an interest rate swap, which wasterminated in December 2006, as shown below.

** **

| ** **                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Unrealized  holding gains on securities and interest rate swap      |       | $                                     | 1,931,323  |                                 | $          | 2,779,301 |   | $ | 138,029 |   | $ | 1,318,785 |   |
| Less  reclassification adjustment for net losses included in income |       | —                                |       | —                               |       | — |   | (300,256 | ) |
| Net unrealized  gains                                               |       | 1,931,323                             |       | 2,779,301                            |       | 138,029 |   | 1,619,041 |   |
| Income tax  benefit                                                 |       | 733,902                               |       | 1,056,135                            |       | 52,451 |   | 615,235 |   |
| Other  comprehensive income                                         |       | $                                     | 1,197,421  |                                 | $          | 1,723,166 |   | $ | 85,578 |   | $ | 1,003,806 |   |

                                                                     

                Accumulated other comprehensive incomerelated entirely to investment securities, classified as available for sale, atSeptember 30, 2007.  The components atSeptember 30, 2006 were unrealized gains of $73,000 in cash flow hedgingactivities and $205,000 in available for sale investment securities, net oftaxes.

 

**6.             Other Intangible Assets**

 

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

 

| ** **                      | ** ** | **Nine  months ended September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
|                            |       | **2007**                             | ** ** | **2006** |   |
|                            |       | **Fair  value at acquisition**       | ** ** | **Accumulated  Amortization** | ** ** | **Fair  value at acquisition** | ** ** | **Accumulated  Amortization** |   |
| Balance at  beginning of period |       | $                                    | 5,396,065  |   | $ | (1,667,478 | ) | $ | 2,818,602 |   | $ | (774,588 | ) |
| Additions                       |       | —                               |       | — |   | 2,577,463 |   | — |   |
| Amortization                    |       | —                               |       | (603,774 | ) | — |   | (677,358 | ) |
| Balance at end  of period       |       | $                                    | 5,396,065  |   | $ | (2,271,252 | ) | $ | 5,396,065 |   | $ | (1,451,946 | ) |

 

Thefollowing is an analysis of changes in the mortgage servicing rights:

 

| ** **                      | ** ** | **Nine  months ended September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
|                            |       | **2007**                             | ** ** | **2006** |   |
|                            |       | **Cost**                             | ** ** | **Accumulated  Amortization** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** |   |
| Balance at  beginning of period |       | $                                    | 791,840    |   | $ | (489,718 | ) | $ | 775,666 |   | $ | (401,467 | ) |
| Additions                       |       | 19,088                               |       | — |   | 49,133 |   | — |   |
| Prepayments/maturities          |       | (40,304                              | )          | 40,304 |   | (40,358 | ) | 40,358 |   |
| Amortization                    |       | —                               |       | (94,582 | ) | — |   | (105,546 | ) |
| Balance at end  of period       |       | $                                    | 770,624    |   | $ | (543,996 | ) | $ | 784,441 |   | $ | (466,655 | ) |

 

TheCompany adopted the provisions of FASB Statement of Financial AccountingStandards (“SFAS”) No. 156, “*Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140*” onJanuary 1, 2007 and elected to maintain the amortized cost method and carry themortgage servicing rights at the lower of cost or market value.  The balance of the mortgage servicing rightscan 

 

8

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fluctuate based on theperformance of the underlying loans serviced. The mortgage servicing rights correspond to loans serviced by theCompany for unrelated third parties with outstanding principal balances of$93.0 million and $101.8 million at September 30, 2007 and December 31, 2006,respectively.  Gross service fee incomerelated to such loans was $60,000 and $66,000 for the quarters ended September30, 2007 and September 30, 2006, respectively, which is included in fees andservice charges in the condensed consolidated statements of earnings.  Gross service fee income related to suchloans was $185,000 and $201,000 for the nine months ended September 30, 2007and September 30, 2006, respectively.

 

Aggregateamortization expense for the quarters ended September 30, 2007 and 2006, was$228,000 and $259,000, respectively and $698,000 and $783,000 for the ninemonths ended September 30, 2007 and 2006, respectively.  The following depicts estimated amortizationexpense for the remainder of 2007 and in successive years ending December 31:

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | $          | 222,000    |   |
| 2008       |       | 822,000    |       |
| 2009       |       | 669,000    |       |
| 2010       |       | 500,000    |       |
| 2011       |       | 402,000    |       |
| Thereafter |       | 736,000    |       |
|            |            |            |            |  |

 

**7.             Impact of Recent AccountingPronouncements**

# ** **

In February 2006, the FASBissued SFAS No. 155, “*Accounting for CertainHybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140*”.  SFAS No. 155 permits fair value remeasurementfor certain hybrid financial instruments containing embedded derivatives, andclarifies the derivative accounting requirements for interest andprincipal-only strip securities and interests in securitized financialassets.  It also clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives and eliminates a previous prohibition on qualifying special-purposeentities from holding certain derivative financial instruments.  SFAS No. 155 became effective for allfinancial instruments acquired or issued after January 1, 2007.  The adoption of SFAS No. 155 did not have anyeffect on our consolidated financial statements.

 

In March 2006, the FASBissued SFAS No. 156, “*Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140*”.  SFAS No. 156 specifies situations in whichservicing assets and servicing liabilities must be recognized.  It requires these assets and liabilities tobe initially measured at fair value and specifies acceptable measurementmethods subsequent to their recognition. Separate presentation in the financial statements and additionaldisclosures are also required.  TheCompany adopted SFAS No. 156 effective January 1, 2007.  The adoption of SFAS No. 156 did not have amaterial effect on our consolidated financial statements.

 

Also in March 2006, the FASBissued Staff Position 85-4-1*, “Accounting for LifeSettlement Contracts by Third Party Investors*”.  The Staff Position provides initial andsubsequent measurement guidance and financial statement presentation anddisclosure guidance for investments by third-party investors in life settlementcontracts.  The investments must beaccounted for by either (a) recognizing the initial investment at transactionprice plus direct external costs and capitalizing continuing costs, with nogain recognized in earnings until the insured event occurs, or (b) recognizingthe initial investment at transaction price and remeasuring the investment atfair value at each reporting period, 

 

 

 

9

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with fair value changes recognized inearnings as they occur.  The Companybegan applying the guidance in the Staff Position beginning January 1,2007.  The adoption of the Staff Positiondid not have any effect on our consolidated financial statements.

 

In September 2006, the FASBissued SFAS No. 157, “*Fair Value Measurements*”.  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements.  It does not require any new fair valuemeasurements for existing financial instruments.  For calendar year companies, SFAS No. 157 iseffective beginning January 1, 2008.  Wedo not expect that adoption of SFAS No. 157 will have a material effect on ourconsolidated financial statements.

 

In September 2006, theEmerging Issues Task Force (“EITF”) Issue 06-4, “*Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements*”, was ratified.  The EITF Issue 06-4 addresses accounting forseparate agreements that split life insurance policy benefits between anemployer and employee.  The EITF Issue06-4 requires the employer to recognize a liability for future benefits payableto an employee under these agreements. The effects of applying EITF Issue 06-4 must be recognized througheither a change in accounting principle through an adjustment to equity orthrough the retrospective application to all prior periods. For calendar yearcompanies, the EITF Issue 06-4 is effective beginning January 1, 2008.  We do not expect that adoption of the EITFIssue 06-4 will have a material effect on our consolidated financialstatements.

 

In September 2006, the EITFIssue 06-5, “*Accounting for Purchases of Life Insurance —Determining the Amount That Could Be Realized in Accordance with FASB TechnicalBulletin No. 85-4*”, was ratified. The EITF Issue 06-5 addresses accounting for what could be realized asan asset and provides clarification regarding additional amounts included inthe contractual terms of an individual policy in determining the amount thatcould be realized under the insurance contract. The effects of applying this issue must be recognized through anadjustment to equity or through the retrospective application to all priorperiods.  The Company adopted the EITFIssue 06-5 effective beginning January 1, 2007. The adoption of EITF Issue 06-5 did not have any effect on ourconsolidated financial statements.

 

In February 2007, the FASBissued 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 is effective beginning January1, 2008.  We do not expect that adoptionof SFAS No. 159 will have a material effect on our consolidated financialstatements.

 

 

10

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

 

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

 

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

 

                We aresignificantly impacted by prevailing economic conditions including federalmonetary and fiscal policies and federal regulations of financialinstitutions.  Deposit balances areinfluenced by numerous factors such as competing personal investments, thelevel of personal income and the personal rate of savings within our marketareas.  Factors influencing lendingactivities include the demand for housing and commercial loans as well as theinterest rate pricing competition from other lending institutions.

 

                *Critical Accounting Policies.* Critical accounting policiesare those which are both most important to the portrayal of our financialcondition and results of operations, and require our management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain.  Our critical accounting policies relate tothe allowance for loan losses, the valuation of investment securities, accountingfor income taxes and the accounting related to business acquisitions, all ofwhich involve significant judgment by our management.

 

                Weperform periodic and systematic detailed reviews of our lending portfolio toassess overall collectability.  The levelof the allowance for loan losses reflects our estimate of the collectability ofthe loan 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 ourinvestment securities at estimated fair values based on published marketascertainable values, which are obtained from independent sources.  We perform periodic reviews of the fair valueof investment securities to determine if any declines in value might beconsidered other than temporary.  Ourmost recent review showed that the securities that had experienced decreases infair value, resulting in unrealized loss positions, were related to changes ininterest rates and not to a 

 

11

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credit deterioration.  The Company has the ability and intent tohold these securities until market values recover, including up to the maturitydate.  Although we believe that ourestimates of the fair values of investment securities to be reasonable,economic and market factors may affect the amounts that will ultimately berealized from these investments.

 

The objectives of accountingfor income taxes are to recognize the amount of taxes payable or refundable forthe current year and deferred tax liabilities and assets for the future taxconsequences of events that have been recognized in an entity’s financialstatements or tax returns.  Judgment isrequired in assessing the future tax consequences of events that have beenrecognized 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.

 

                We have completedseveral business and asset acquisitions which have generated significantamounts of goodwill and intangible assets and related amortization. The valuesassigned to goodwill and intangibles, as well as their related useful lives,are subject to judgment and estimation by the Company.  Goodwill and intangibles related toacquisitions are determined and based on purchase price allocations. Valuation of intangible assets is generally based on the estimated cash flowsrelated to those assets, while the initial value assigned to goodwill is theresidual of the purchase price over the fair value of all identifiable assetsacquired and liabilities assumed. Performing such a discounted cash flowanalysis involves the use of estimates and assumptions.  Useful lives are determined based on theexpected future period of the benefit of the asset, the assessment of whichconsiders various characteristics of the asset, including the historical cashflows.  Due to the number of estimates involved related to the allocationof purchase price and determining the appropriate useful lives of intangibleassets, we have identified purchase accounting as a critical accounting policy.  If the carrying value of the goodwill andother intangible assets exceeds the implied fair value of the goodwill, animpairment loss is recorded.

 

*Summary of Results*.  During 2007 we experienced a decline inearnings as compared to 2006.  Thisdecline is primarily attributable to certain items recognized during 2006 thatdid not occur in 2007, as well as a decline in net interest margin.  During 2006 we recognized $717,000 in gainson the sale of certain assets, primarily the sale of our previous headquartersat 800 Poyntz.  These gains werepartially offset by $444,000 in losses on sale of investments as werestructured our investment portfolio by selling lower yielding, shorter-terminvestments and purchasing higher yielding, longer-term investments during thesecond quarter of 2006.  Our net interestmargin also declined from 3.58% during the first nine months of 2006 to 3.52%during the same period of 2007.  Thisdecline in net interest margin was primarily driven by increases in our cost offunding.  Our cost of funding increasedbecause of higher short-term interest rates and fed funds rate, as well asincreased competition for our deposits. Also contributing to the lower net interest margin was the increasedpercentage of investment securities as a portion of our interest bearingassets, which typically have a lower yield than loans.

 

Net earnings for the three months ended September 30, 2007, decreased$26,000, or 1.8%, to $1.4 million as compared to the three months endedSeptember 30, 2006.  The three monthsended September 30, 2007 and 2006, both resulted in diluted earnings per shareof $0.62.  Return on average assets, onan annualized basis, was 0.95% for the period ended September 30, 2007 comparedto 0.98% 

 

12

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for the same period in 2006. Return on average stockholders’ equity, on an annualized basis, was11.53% for the period compared to 12.60% for the same period in 2006.

 

                Net earnings forthe nine months ended September 30, 2007, decreased $445,000, or 9.9%, to $4.0million as compared to the nine months ended September 30, 2006.  The nine months ended September 30, 2007resulted in diluted earnings per share of $1.72 compared to $1.90 for the sameperiod in 2006.  Return on averageassets, on an annualized basis, was 0.90% for the period ended September 30,2007 compared to 1.00% for the same period in 2006.  Return on average stockholders’ equity, on anannualized basis, was 10.85% for the period compared to 13.22% for the sameperiod in 2006.

 

                The followingtable summarizes net earnings per share and key performance measures for theperiods presented.

 
| ** **                    | ** ** | **Three  months ended  September 30,** | ** ** | **Nine  months ended  September 30,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
|                          |       | **2007**                               | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** |   |
| Net earnings:                 |       |                                   |       |                                  |       |   |   |   |   |
| Basic earnings  per share     |       | $                                      | 0.62       |                                  | $          | 0.63 |   | $ | 1.74 |   | $ | 1.92 |   |
| Diluted earnings  per share   |       | $                                      | 0.62       |                                  | $          | 0.62 |   | $ | 1.72 |   | $ | 1.90 |   |
| Earnings ratios:              |       |                                   |       |                                  |       |   |   |   |   |
| Return on  average assets (1) |       | 0.95                                   | %          | 0.98                                  | %          | 0.90 | % | 1.00 | % |
| Return on  average equity (1) |       | 11.53                                  | %          | 12.60                                 | %          | 10.85 | % | 13.22 | % |
| Dividend payout  ratio        |       | 30.65                                  | %          | 26.15                                 | %          | 33.14 | % | 25.37 | % |
| Net interest  margin (1) (2)  |       | 3.47                                   | %          | 3.66                                  | %          | 3.52 | % | 3.58 | % |

----

(1)                                     The ratio hasbeen annualized and is not necessarily indicative of the results for the entireyear.

(2)                                     Net interestmargin is presented on a fully taxable equivalent basis, using a 34% federaltax rate.

 

*Interest Income.*  Interest income for the three months endedSeptember 30, 2007, increased $248,000, or 2.9%, to $9.1 million from $8.8million in the same period of 2006, resulting from increased interest income oninvestment securities.  Average loans forthe quarter ended September 30, 2007 decreased to $386.5 million from $396.8million for the quarter ended September 30, 2006.  Offsetting the decline in average loans wasthe rise in the yield we earned on those loans. As a result, interest income on loans only decreased $7,000, or 0.1%, to$7.3 million for the quarter ended September 30, 2007.  Average investment securities increased from$136.5 million for the quarter ended September 30, 2006, to $156.3 million forthe quarter ended September 30, 2007. Along with the increase in average investments for the comparableperiods, and despite the increased holdings of tax exempt investments, interestincome on investment securities increased $270,000, or 17.8%, to $1.8 millionfor the third quarter of 2007, as compared to the same period of 2006.

 

Interest income for the ninemonths ended September 30, 2007, increased $1.6 million, or 6.3%, to $26.9million from $25.3 million in the same period of 2006, resulting from increasedinterest income on both investment securities and loans.  Average loans for the nine months endedSeptember 30, 2007 decreased to $384.7 million from $393.8 million for the ninemonths ended September 30, 2006. Offsetting the decline in average loans was the rise in interest ratesexperienced during the first half of 2006, which contributed to the increasedinterest income.  As a result, interestincome on loans increased $830,000, or 4.0%, to $21.6 million for the nine monthsended September 30, 2007.  Averageinvestment securities increased from $144.8 million for the nine months endedSeptember 30, 2006, to $156.6 million for the nine months ended September 30,2007.  Along with the increase in averageinvestments for the comparable periods, and despite the increased holdings oftax exempt 

 

 

13

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investments, interest income on investmentsecurities increased $860,000, or 19.6%, to $5.2 million for the first ninemonths of 2007, as compared to the same period of 2006.  The increase in interest rates, whichresulted in yields on our investments purchased being higher than the yields onthe investments which either matured or were sold during the past year, wasresponsible for the increase in interest income on investments.

 

                *Interest Expense*. Interest expense during the three months ended September 30, 2007,increased $510,000, or 12.4%, as compared to the same period of 2006.  For the three months ended September 30,2007, interest expense on deposits increased $657,000, or 23.1%.  Average deposits increased from $383.4million during the quarter ended September 30, 2006 to $399.7 million for thequarter ended September 30, 2007.  Theincrease in interest expense on deposits resulted from higher rates on depositbalances as well as higher deposit balances. Average borrowings for the quarter ended September 30, 2007 decreased to$94.5 million from $107.8 million for the quarter ended September 30,2006.  Interest expense on borrowingsdecreased $147,000, or 11.6%, to $1.1 million for the three months endedSeptember 30, 2007 as compared to the same period in 2006.

 

Interest expense during thenine months ended September 30, 2007, increased $2.1 million, or 18.3%, ascompared to the same period of 2006.  Forthe nine months ended September 30, 2007, interest expense on depositsincreased $2.2 million, or 28.2%. Average deposits increased from $389.5 million during the nine monthsended September 30, 2006 to $398.3 million for the nine months ended September30, 2007.  The increase in interestexpense on deposits resulted from higher deposit balances as well as higherrates on those balances.  Average borrowingsfor the nine months ended September 30, 2007 decreased to $95.8 million from$105.0 million for the nine months ended September 30, 2006.  Interest expense on borrowings decreased$140,000, or 4.0%, to $3.4 million.

 

*Net Interest Income*.  Net interest income for the three monthsended September 30, 2007, totaled $4.5 million, decreasing $261,000, or 5.5%,as compared to the three months ended September 30, 2006.  This decline in net interest income was dueprimarily to the increases in our cost of funding outpacing the increases in ouryields on interest earning assets.  Averageinterest-earning assets increased during the third quarter of 2007 to $542.8million from $533.3 million for the third quarter of 2006.  Our net interest margin, on a tax equivalentbasis, declined to 3.47% for the three months ending September 30, 2007 from3.66%.

 

Net interest income for thenine months ended September 30, 2007, totaled $13.4 million, decreasing$488,000, or 3.5%, as compared to the nine months ended September 30,2006.  This decline in net interestincome was due primarily to the increases in our cost of funding outpacing theincreases in our yields on interest earning assets.  Average interest-earning assets increasedduring the first nine months of 2007 to $541.2 million from $538.6 million forthe first nine months of 2006.  Our netinterest margin, on a tax equivalent basis, declined to 3.52% from 3.58% overthe same time period.

 

                *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 problemloans. Allowance policies are subject to periodic review and revision inresponse to 

 

 

 

14

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a number of factors, including current marketconditions, actual loss experience and management’s expectations.

 

The provision for loanlosses for the three months ended September 30, 2007, was $70,000, compared toa provision of $80,000 during the three months ended September 30, 2006.  The provision for loan losses for the ninemonths ended September 20, 2007, was $195,000, compared to a provision of$155,000 during the nine months ended September 30, 2006.  One measure of the adequacy of the allowancefor estimated losses on loans is the ratio of the allowance to the total loanportfolio.  At September 30, 2007, andDecember 31, 2006, the allowance for loan losses was $4.1 million and $4.0million, or 1.1% of gross loans outstanding. For further discussion of the allowance for loan losses, refer to the “AssetQuality and Distribution” section.

 

                *Non-interest Income*. Non-interest income decreased $108,000, or 6.4%, for the three monthsended September 30, 2007, to $1.6 million, as compared to the three monthsended September 30, 2006.  Contributingto this decline was a decrease in gain on sale of loans of $46,000, which wasthe result of lower volumes of loans originated for sale in 2007 as compared to2006.

 

Non-interest incomedecreased $897,000, or 16.9%, for the nine months ended September 30, 2007, to$4.4 million compared to the nine months ended September 30, 2006.  This decrease in 2007 was attributableprimarily due to certain items recognized during the first nine months of2006.  During the first nine months of2006, we recognized $717,000 in gains on the sale of certain assets, primarilythe 800 Poyntz facility.  These gainswere partially offset by $444,000 in losses on sale of investments as werestructured our investment portfolio by selling lower yielding, shorter-term investmentsand purchasing higher yielding, longer-term investments during the secondquarter of 2006.  Furthering the declinein 2007 was a decrease in gains on sale of loans of $193,000, or 13.4%, as wellas a decline of $66,000 in deposit related income.  Offsetting these declines was a $144,000 gainon sale of investments during the first quarter of 2007 as well as a $75,000increase in the cash surrender value of bank owned life insurance, whichresulted from the purchase of additional policies totaling $7.5 million inMarch 2006.

 
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Non-interest  income:                  |       |                                  |       |                                 |       |   |   |   |   |
| Fees and service charges               |       | $                                     | 1,047,395  |                                 | $          | 1,124,057 |   | $ | 2,958,910 |   | $ | 3,259,392 |   |
| Gains on sale of loans                 |       | 300,661                               |       | 347,054                              |       | 740,069 |   | 933,418 |   |
| Losses on sale of investments, net     |       | —                                |       | —                               |       | — |   | (300,256 | ) |
| Gains (losses) on sale of other assets |       | —                                |       | (11,638                              | )          | — |   | 716,815 |   |
| Bank owned life insurance              |       | 117,468                               |       | 114,689                              |       | 347,435 |   | 272,343 |   |
| Other                                  |       | 109,925                               |       | 108,915                              |       | 372,262 |   | 434,231 |   |
| Total non-interest income              |       | $                                     | 1,575,449  |                                 | $          | 1,683,077 |   | $ | 4,418,676 |   | $ | 5,315,943 |   |

 

*Non-interest Expense*.  Non-interest expense decreased $152,000, or3.5%, to $4.2 million for the three months ended September 30, 2007, ascompared to the three months ended September 30, 2006.  Contributing to the reduction in non-interestexpense was a $51,000 decrease in professional fees, a $34,000 decrease inoccupancy and equipment, and a $30,000 decrease in amortization of intangibles.

 

Non-interest expense decreased$291,000, or 2.3%, to $12.5 million for the nine months ended September 30,2007, as compared to the nine months ended September 30, 2006.  Contributing to the reduction in non-interestexpense was a $192,000 decrease in compensation and benefits and a $85,000 

 

 

15

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decrease in amortization expense and a$55,000 decrease in occupancy and equipment. Offsetting those reductions was an increase of $57,000 in dataprocessing.

 
| ** **                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Non-interest expense:       |       |                                  |       |                                 |       |   |   |   |   |
| Compensation and benefits   |       | $                                     | 2,120,127  |                                 | $          | 2,140,241 |   | $ | 6,196,685 |   | $ | 6,388,817 |   |
| Occupancy and equipment     |       | 671,494                               |       | 705,523                              |       | 2,046,852 |   | 2,101,545 |   |
| Amortization of intangibles |       | 228,259                               |       | 258,732                              |       | 698,356 |   | 782,904 |   |
| Data processing             |       | 184,472                               |       | 183,695                              |       | 590,082 |   | 532,685 |   |
| Professional fees           |       | 81,124                                |       | 132,080                              |       | 333,443 |   | 342,806 |   |
| Advertising                 |       | 106,629                               |       | 109,065                              |       | 321,992 |   | 327,802 |   |
| Other                       |       | 769,349                               |       | 784,234                              |       | 2,289,216 |   | 2,291,019 |   |
| Total non-interest expense  |       | $                                     | 4,161,454  |                                 | $          | 4,313,570 |   | $ | 12,476,626 |   | $ | 12,767,578 |   |

 

*Income Tax Expense*.  Income tax expense decreased $181,000, or33.0%, from $548,000 for the three months ended September 30, 2006, to $367,000for the three months ended September 30, 2007. The decrease in income tax expense was the result of a $207,000 decreasein earnings before income taxes for the third quarter of 2007 as compared tothe third quarter of 2006, increased purchases of tax exempt municipal bonds,and the recognition of $50,000 of previously unrecognized tax benefits.  The effective tax rate for the third quarterof 2007, decreased to 20.4% from 27.3% in the second quarter of 2006, primarilyas a result of the tax exempt income on municipal bonds.

 

Income tax expense decreased$690,000, or 37.7%, from $1.8 million for the nine months ended September 30,2006, to $1.1 million for the nine months ended September 30, 2007.  The decrease in income tax expense was theresult of a $1.1 million decrease in earnings before income taxes for the firstnine months of 2007 as compared to the nine months of 2006, increased purchasesof tax exempt municipal bonds and bank owned life insurance, and therecognition of $50,000 of previously unrecognized tax benefits.  The effective tax rate for the nine months of2007 decreased to 22.0% from 29.0% in the first nine months of 2006.

 

*Asset Quality andDistribution*.  Our primaryinvesting activities are the origination of commercial, mortgage, consumerloans and the purchase of investment and mortgage-backed securities.  We have concentrated on generating commercialloans over the past few years and are pleased with the growth in this segmentof our loan portfolio.  We also originatefixed-rate, residential mortgage loans with maturities in excess of ten yearsfor sale in the secondary market.  Whilethe January 1, 2006 First Manhattan Bancorporation, Inc. acquisition increasedour one-to-four family residential loan totals, as the majority of the acquiredloans were residential, we plan to continue our strategy to expand ourcommercial lending activities.  Totalassets increased to $602.3 million at September 30, 2007, compared to $590.6million at December 31, 2006.  While netloans, excluding loans held for sale, increased $838,000 to $380.2 millionduring the nine months ended September 30, 2007 as compared to December 31,2006, the composition of loans changed more substantially as our commercial andcommercial real estate loans increased by $22.9 million and our one-to-fourfamily residential loans decreased by $22.0 million.

 

16

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Loans consist of thefollowing:

 
| ** **                                    | ** ** | **September 30, 2007** | ** **  | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| Real estate loans:                            |       |                   |        |                  |       |
| One-to-four family residential                |       | $                      | 129,295,120 |                  | $          | 151,299,911 |   |
| Commercial                                    |       | 115,341,149            |        | 98,314,119            |       |
| Construction                                  |       | 29,065,415             |        | 33,600,313            |       |
| Commercial loans                              |       | 101,197,366            |        | 90,758,185            |       |
| Consumer loans                                |       | 9,525,037              |        | 9,595,428             |       |
| Total                                         |       | 384,424,087            |        | 383,567,956           |       |
|                                          |       |                   |        |                  |       |
| Less: Deferred loan fees and loans in process |       | 144,425                |        | 214,665               |       |
| Less: Allowance for loan losses               |       | 4,117,924              |        | 4,029,710             |       |
| Loans, net                                    |       | $                      | 380,161,738 |                  | $          | 379,323,581 |   |

 

                Theallowance for loan losses is established through a provision for losses onloans based on our evaluation of the risk inherent in the loan portfolio andchanges in the nature and volume of its loan activity.  Such evaluation, which includes a review ofall loans with respect to which full collectibility may not be reasonablyassured, considers the fair value of the underlying collateral, economicconditions, historical loan loss experience, level of classified loans andother factors that warrant recognition in providing for an adequate allowancefor loan losses.  We believe that we usethe best information available to determine the allowance for loan losses,unforeseen market conditions could result in adjustment to the allowance forloan losses.  In addition, net earningscould be significantly affected if circumstances differ substantially from theassumptions used in establishing the allowance for loan losses.

 

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

                                

| ** **                  | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Beginning  balance          |       | $                                    | 4,029,710  |   | $ | 3,151,373 |   |
| Allowance of  acquired bank |       | —                               |       | 891,374 |   |
| Provision for  loan losses  |       | 195,000                              |       | 155,000 |   |
| Charge-offs                 |       | (166,280                             | )          | (182,226 | ) |
| Recoveries                  |       | 59,494                               |       | 71,311 |   |
| Ending balance              |       | $                                    | 4,117,924  |   | $ | 4,086,832 |   |

 

We believe that the qualityof the loan portfolio continues to be strong. Given the recent subprime mortgage lending concerns within the industry,it is worth noting that we have continued our practice of not offering subprimeloan products.  As of September 30, 2007,loans with a balance of $4.8 million were on non-accrual status, which was 1.3%of total loans, compared to loan balances totaling $3.6 million on non-accrualstatus, or 0.9% of total loans, as of December 31, 2006.  In addition, the ratio of non-performingassets as a percentage of total assets was 0.9% as of September 30, 2007compared to 0.7% as of December 31, 2006. Net loan charge-offs for the nine months ended September 30, 2007 were$107,000 compared to $111,000 for the comparable period of 2006.  Residential home loans comprised 53.9% of the$4.8 million non-accrual balance at September 30, 2007.  These loans have been underwritten accordingto our residential lending policies and are secured by real estate collateral,and in many instances, private mortgage insurance or governmentguarantees.  We have historicallyincurred minimal losses on mortgage loans based upon collateral values and 

 

 

17

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underlying insurance or guarantees.  We are aggressively pursuing collectionactivity of these loans which should enable the collection of outstandingprincipal.

 

                *Liability Distribution*. Our primary ongoing sources of funds are deposits, proceeds fromprincipal and interest payments on loans and investment securities and proceedsfrom the sale of mortgage loans and investment securities.  While maturities and scheduled amortizationof loans are a predictable source of funds, deposit flows and mortgageprepayments are greatly influenced by general interest rates, economicconditions, competition and the restructuring of the financial servicesindustry.  Total deposits increased $5.7million to $450.2 million at September 30, 2007, from $444.5 million atDecember 31, 2006.  Borrowings increased$2.2 million to $92.6 million at September 30, 2007, from $90.4 million atDecember 31, 2006.

 

                Non-interestbearing demand accounts at September 30, 2007, were $54.7 million, or 12.2% ofdeposits, compared to $48.4 million, or 10.9% of deposits, at December 31,2006.  Certificates of deposit increasedto $245.9 million, or 54.6% of deposits, at September 30, 2007, from $231.1million, or 52.0% of deposits at December 31, 2006.  Money market and NOW demand accountsdecreased to $123.9 million at September 30, 2007, or 27.5% of deposits, from$137.3 million, or 30.9% of deposits, at December 31, 2006. Savings accountsdecreased to $25.7 million at September 30, 2007, or 5.7% of deposits, from$27.7 million, or 6.2% of deposits, at December 31, 2006.

 

                Certificates ofdeposit at September 30, 2007, which were scheduled to mature in one year orless, totaled $211.6 million. Historically, maturing deposits have generally remained with our bankand we believe that a significant portion of the deposits maturing in one yearor less will remain with us upon maturity.

 

                *Contractual Obligations and Commercial Commitments*.  The following table presents our contractualobligations, defined as operating lease obligations and principal payments dueon non-deposit obligations with maturities in excess of one year as ofSeptember 30, 2007, for the periods indicated. Unrealized tax benefits related to tax uncertainties which are notclassified as more likely than not, are excluded in the following table as thetiming and resolution of these unrealized benefits can not be reasonablyestimated.

 

| **Contractual cash  obligations** | ** ** | **Total**  | ** ** | **One year  or less** | ** ** | **One to  three years** | ** ** | **Four to  five years** | ** ** | **More than  five years** | ** ** |
|-----------------------------------|------------|------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|
| Operating leases                  |       | $          | 141,487    |                  | $          | 64,884                  |       | $                       | 76,603     |                      | $          | — |   | $ | — |   |
| Service  contracts                |       | 4,305,000  |       | 1,260,000             |       | 2,520,000               |       | 525,000                 |       | —                    |       |
| FHLB borrowings                   |       | 65,174,999 |       | 4,000,000             |       | 50,614,375              |       | 6,141,400               |       | 4,419,224                 |       |
| Other borrowings                  |       | 27,468,446 |       | 6,832,446             |       | 4,140,000               |       | —                  |       | 16,496,000                |       |
| Total  contractual obligations    |       | $          | 97,089,932 |                  | $          | 12,157,330              |       | $                       | 57,350,978 |                      | $          | 6,666,400 |   | $ | 20,915,224 |   |

 

18

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*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$169.1 million at September 30, 2007, and $160.6 million at December 31,2006.  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.

 

                Liquiditymanagement is both a daily and long-term function of our strategy.  Excess funds are generally invested inshort-term investments.  In the event werequire funds beyond our ability to generate them internally, additional fundsare generally available through the use of Federal Home Loan Bank (“FHLB”)advances, a line of credit with the FHLB, or other borrowings or through salesof securities.  At September 30, 2007, wehad outstanding FHLB advances of $61.2 million and $4.0 million of borrowingsagainst our line of credit with the FHLB. At September 30, 2007, our total borrowing capacity with the FHLB was$123.0 million.  We also had otherborrowings of $27.5 million at September 30, 2007, which included $16.5 millionof subordinated debentures, $4.0 million of long-term debt and $7.0 million inrepurchase agreements.

 

                Asa provider of financial services, we routinely issue financial guarantees inthe form of financial and performance standby letters of credit. Standbyletters of credit are contingent commitments issued by us generally toguarantee the payment or performance obligation of a customer to a third party.While these standby letters of credit represent a potential outlay by us, asignificant amount of the commitments may expire without being drawn upon. Wehave recourse against the customer for any amount the bank is required to payto a third party under a standby letter of credit. The letters of credit aresubject to the same credit policies, underwriting standards and approvalprocess as loans originated by us. Most of the standby letters of credit aresecured, and in the event of nonperformance by the customer, we have the rightto the underlying collateral, which could include commercial real estate,physical plant and property, inventory, receivables, cash and marketablesecurities. The contract amount of these standby letters of credit, whichrepresents the maximum potential future payments guaranteed by us, was $2.3million at September 30, 2007.

 

                AtSeptember 30, 2007, we had outstanding loan commitments, excluding standbyletters of credit, of $74.8 million.  Weanticipate that sufficient funds will be available to meet current loancommitments.  These commitments consistof unfunded lines of credit and commitments to finance real estate loans.

 

19

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*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 capitalrequirements.  Our ratios are well inexcess of regulatory minimums and should allow us to operate without capitaladequacy concerns.

 

At September 30, 2007, we continued to maintain asound leverage ratio of 8.68% and a total risk based capital ratio of13.10%.  As shown by the following table,our capital exceeded the minimum capital requirements at September 30, 2007(dollars in thousands):

 
| ** **                | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|---------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| **Company**               | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                  |       | $          | 50,978     |                               | 8.68       | %                            | $          | 23,494 |   | 4.0 | % | $ | 29,368 |   | 5.0 | % |
| Tier 1 Capital            |       | $          | 50,978     |                               | 12.12      | %                            | $          | 16,825 |   | 4.0 | % | $ | 25,238 |   | 6.0 | % |
| Total Risk Based  Capital |       | $          | 55,096     |                               | 13.10      | %                            | $          | 33,650 |   | 8.0 | % | $ | 42,063 |   | 10.0 | % |
|                           |            |            |            |                                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

                At September 30,2007, Landmark National Bank continued to maintain a sound leverage ratio of9.09% and a total risk based capital ratio of 13.65%.  As shown by the following table, the bank’scapital exceeded the minimum capital requirements at September 30, 2007(dollars in thousands):

 
| ** **                 | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|----------------------------|------------|------------|------------|------------------------------------|------------|------------------------------|------------|
| **Landmark National Bank** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                   |       | $          | 53,190     |                               | 9.09       | %                            | $          | 23,415 |   | 4.0 | % | $ | 29,268 |   | 5.0 | % |
| Tier 1 Capital             |       | $          | 53,190     |                               | 12.67      | %                            | $          | 16,791 |   | 4.0 | % | $ | 25,187 |   | 6.0 | % |
| Total Risk Based  Capital  |       | $          | 57,308     |                               | 13.65      | %                            | $          | 33,582 |   | 8.0 | % | $ | 41,978 |   | 10.0 | % |

 

 

20

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*AverageAssets/Liabilities*.  Thefollowing table sets forth information relating to average balances ofinterest-earning assets and liabilities for the three and nine months endedSeptember 30, 2007 and the same period for 2006.  The following table reflects the average taxequivalent yields on assets and average costs of liabilities for the periodsindicated (derived by dividing income or expense by the monthly average balanceof assets or liabilities, respectively) as well as “net interest margin” (whichreflects the effect of the net earnings balance) for the periods shown:

 
| ** **                                                                        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| **(Dollars in thousands)**                                                        | ** ** | **Average  balance**   | ** ** | **Interest**           | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                      | 156,338    |                   | $          | 2,063 |   | 5.24 | % | $ | 136,521 |   | $ | 1,729 |   | 5.02 | % |
| Loans (2)                                                                         |       | 386,481                |       | 7,307                  |       | 7.50 | % | 396,776 |   | 7,310 |   | 7.31 | % |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 542,819                |       | 9,370                  |       | 6.85 | % | 533,297 |   | 9,039 |   | 6.72 | % |
| Non-interest-earning  assets                                                      |       | 60,688                 |       |                   |       |   |   | 61,778 |   |   |   |   |   |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                      | 603,507    |                   |       |   |   |   | $ | 595,075 |   |   |   |   |   |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                      | 242,774    |                   | $          | 2,809 |   | 4.59 | % | $ | 226,375 |   | $ | 2,248 |   | 3.94 | % |
| Money market and  NOW accounts                                                    |       | 130,109                |       | 676                    |       | 2.06 | % | 127,385 |   | 578 |   | 1.80 | % |
| Savings accounts                                                                  |       | 26,863                 |       | 20                     |       | 0.30 | % | 29,647 |   | 22 |   | 0.29 | % |
| FHLB advances  and other borrowings                                               |       | 94,525                 |       | 1,120                  |       | 4.70 | % | 107,756 |   | 1,267 |   | 4.66 | % |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 494,271                |       | 4,625                  |       | 3.71 | % | 491,163 |   | 4,115 |   | 3.32 | % |
| Non-interest-bearing  liabilities                                                 |       | 59,762                 |       |                   |       |   |   | 57,825 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 49,474                 |       |                   |       |   |   | 46,087 |   |   |   |   |   |
| Total                                                                             |       | $                      | 603,507    |                   |       |   |   |   | $ | 595,075 |   |   |   |   |   |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                   |       |                   |       | 3.14 | % |   |   |   |   | 3.40 | % |
| Net interest  margin (4)                                                          |       |                   |       | 4,745                  |       | 3.47 | % |   |   | 4,924 |   | 3.66 | % |
| Tax equivalent  interest - imputed                                                |       |                   |       | 284                    |       |   |   |   |   | 202 |   |   |   |
| Net interest  income                                                              |       |                   |       | $                      | 4,461      |   |   |   |   |   | $ | 4,722 |   |   |   |
|                                                                              |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                   |       | 109.8                  | %          |   |   |   |   | 108.6 | % |   |   |

 

 

21

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| ** **                                                                        | ** ** | **Nine months ended**  | ** **    | **Nine months ended**  | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|---------------|------------------------|------------|
| ** **                                                                        | ** ** | **September 30, 2007** | ** **    | **September 30, 2006** | ** ** |
| **(Dollars in thousands)**                                                        | ** ** | **Average  balance**   | ** **    | **Interest**           | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                           |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                      |  156,552 |                   | $          |  6,045 |   | 5.16 | % | $ |  144,844 |   | $ |  4,978 |   | 4.60 | % |
| Loans (2)                                                                         |       | 384,658                |          | 21,686                 |       | 7.54 | % | 393,804 |   | 20,847 |   | 7.08 | % |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 541,210                |          | 27,731                 |       | 6.85 | % | 538,645 |   | 25,825 |   | 6.41 | % |
| Non-interest-earning  assets                                                      |       | 60,726                 |          |                   |       |   |   | 58,835 |   |   |   |   |   |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                      |  601,936 |                   |       |   |   |   | $ |  597,480 |   |   |   |   |   |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:                                        |       |                   |          |                   |       |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                      |  237,245 |                   | $          |  7,919 |   | 4.46 | % | $ |  225,840 |   | $ |  6,119 |   | 3.62 | % |
| Money market and  NOW accounts                                                    |       | 133,649                |          | 2,138                  |       | 2.14 | % | 133,222 |   | 1,705 |   | 1.17 | % |
| Savings accounts                                                                  |       | 27,403                 |          | 61                     |       | 0.30 | % | 30,455 |   | 68 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 95,836                 |          | 3,374                  |       | 4.71 | % | 105,032 |   | 3,514 |   | 4.47 | % |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 494,133                |          | 13,492                 |       | 3.65 | % | 494,549 |   | 11,406 |   | 3.08 | % |
| Non-interest-bearing  liabilities                                                 |       | 57,092                 |          |                   |       |   |   | 57,611 |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 49,711                 |          |                   |       |   |   | 45,320 |   |   |   |   |   |
| Total                                                                             |       | $                      |  601,936 |                   |       |   |   |   | $ |  597,480 |   |   |   |   |   |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                   |          |                   |       | 3.20 | % |   |   |   |   | 3.33 | % |
| Net interest  margin (4)                                                          |       |                   |          | 14,239                 |       | 3.52 | % |   |   | 14,420 |   | 3.58 | % |
| Tax equivalent interest  - imputed                                                |       |                   |          | 812                    |       |   |   |   |   | 505 |   |   |   |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                              |       |                   |          | $                      | 13,427     |   |   |   |   |   | $ |  13,915 |   |   |   |
|                                                                              |       |                   |          |                   |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                   |          | 109.5                  | %          |   |   |   |   | 108.9 | % |   |   |

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

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

(3)          Interest rate spread represents the difference betweenthe average yield on interest-earning assets and the average cost of interest-bearingliabilities

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

 

 

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

 

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

 

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

 

                We have been successful in meeting the interest ratesensitivity objectives set forth in our policy. Simulation models are prepared to determine the impact on net interestincome for the coming twelve months, including one using rates at September 30,2007, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shift ininterest rates of 100 and 200 basis points rising and falling with an impact toour net interest income on a one year****horizon asfollows:

 

| **Scenario**             | ** ** | **$ Change  in Net Interest Income** | ** ** | **% of Net  Interest Income** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-------------------------------|------------|
| 100 basis point  rising  |       | ($92,000                                  | )          | (0.5%                         | )          |
| 200 basis point  rising  |       | ($516,000                                 | )          | (2.9%                         | )          |
| 100 basis point  falling |       | ($ 22,000                            | )          | (0.1%                         | )          |
| 200 basis point  falling |       | ($296,000                                 | )          | (1.7%                         | )          |

 

*SafeHarbor Statement under the Private Securities Litigation Reform Act of 1995 -Forward-Looking Statements*.** **This documentcontains, and future oral and written statements of the Company and itsmanagement may contain, forward-looking statements, within the meaning of suchterm in the Private Securities Litigation Reform Act of 1995, with respect tothe financial condition, results of operations, plans, objectives, futureperformance and business of the Company. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of the Company’s management and on informationcurrently available to management, are generally identifiable by the use ofwords 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 the Company undertakes no obligation to update any statement inlight of new information or future events.

 

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

 

•                    The strength of the United States economy in generaland the strength of the local economies in which we conduct our operationswhich may be less favorable than expected and may result in, among otherthings, a deterioration in the credit quality and value of our assets.

•                  The economic impact of pastand any future terrorist attacks, acts of war or threats thereof, and theresponse of the United States to any such threats and attacks.

•                  The effects of, and changesin, federal, state and local laws, regulations and policies affecting banking,securities, insurance and monetary and financial matters.

 

 

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•                  The effects of changes ininterest rates (including the effects of changes in the rate of prepayments ofour assets) and the policies of the Board of Governors of the Federal ReserveSystem.

•                  Our ability to compete withother financial institutions as effectively as we currently intend due toincreases in competitive pressures in the financial services sector.

•                  Our inability to obtain newcustomers and to retain existing customers.

•                  The timely development andacceptance of products and services, including products and services offeredthrough alternative delivery channels such as the Internet.

•                  Technological changesimplemented by us and by other parties, including third party vendors, whichmay be more difficult or more expensive than anticipated or which may haveunforeseen consequences to us and our customers.

•                  Our ability to develop andmaintain secure and reliable electronic systems.

•                  Our ability to retain keyexecutives and employees and the difficulty that we may experience in replacingkey executives and employees in an effective manner.

•                  Consumer spending and savinghabits which may change in a manner that affects our business adversely.

•                  Business combinations andthe integration of acquired businesses which may be more difficult or expensivethan expected.

•                  The costs, effects andoutcomes of existing or future litigation.

•                  Changes in accountingpolicies and practices, as may be adopted by state and federal regulatoryagencies and the Financial Accounting Standards Board.

•                  Our ability to manage therisks associated with the foregoing as well as anticipated.

 

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

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

An evaluation was performedunder the supervision and with the participation of the Company’s management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of1934, as amended) as of September 30, 2007. Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective as of September 30, 2007.

 

There were no changes in theCompany’s internal control over financial reporting during the quarter endedSeptember 30, 2007 that materially affected or were likely to materially affectthe Company’s internal control over financial reporting.

 

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**PART II — OTHER INFORMATION**

 

 

**ITEM1.  LEGAL PROCEEDINGS**

 

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

 

**ITEM1A.  RISK FACTORS**

 

There have been no materialchanges in the risk factors applicable to the Company from those disclosed inPart I, Item 1A. “Risk Factors,” in the Company’s 2006 Annual Reporton Form 10-K.  Please refer to thatsection of the Company’s Form 10-K for disclosures regarding the risks anduncertainties related to the Company’s business.

 

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

 

                Thefollowing table provides information about purchases by the Company and itsaffiliated purchases during the quarter ended September 30, 2007, of equitysecurities that are registered by the Company pursuant to Section 12 of theExchange Act.

 
| **Period**            | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares Purchased as  Part of a Publicly  Announced Plan (1)** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans (1)** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| July 1-31, 2007       |       | —                                  |       | —                             |       | —                                                                          |       | 47,265                                                                        |       |
| August 1-31,  2007    |       | 2,000                                   |       | $                                  | 27.30      |                                                                            | 2,000      |                                                                          | 45,265     |   |
| September 1-30,  2007 |       | 7,706                                   |       | $                                  | 27.20      |                                                                            | 7,706      |                                                                          | 37,559     |   |
| Total                 |       | 20,251                                  |       | $                                  | 27.22      |                                                                            | 9,706      |                                                                          | 37,559     |   |

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(1) In November 2004, our Board of Directorsapproved the repurchase by us of up to 5%, or 101,700 shares, of our commonstock.  Unless terminated earlier byresolution of the Board of Directors, the current repurchase program willexpire when we have repurchased all shares authorized for repurchasethereunder.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

                None

 

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

 

None

 

**ITEM5.  OTHER INFORMATION**

 

                None

 

**ITEM6.  EXHIBITS**

 
|   | Exhibits     |
|--------|--------------|
|   |         |
|   | Exhibit 31.1 | Certificate of Chief  Executive Officer Pursuant toRule 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**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                   | LANDMARK BANCORP, INC.                 |
|------------------------|----------------------------------------|
|                   |                                   |   |   |   |
| Date: November 9, 2007 | /s/ Patrick L. Alexander               |   |
|                   | Patrick L. Alexander                   |   |
|                   | President and Chief  Executive Officer |   |
|                   |                                   |   |   |   |
| Date: November 9, 2007 | /s/ Mark A. Herpich                    |   |
|                   | Mark A. Herpich                        |   |
|                   | Vice President, Secretary,  Treasurer  |   |
|                   |  and Chief Financial Officer      |   |

 

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