**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, 2006

 

or |
| ** **                                                    | ** ** | ** **                                                                                         |
| **o**                                                         | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934** |

 

For transition periodfrom             to            

Commission File Number 0-33203

**LANDMARKBANCORP, INC.**

(Exact name of Registrant asspecified 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 telephonenumber, including area code)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer  o | Accelerated filer o | Non-accelerated filer x |
|---------------------------------|--------------------------|------------------------------|

 

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

Indicate the number ofshares outstanding of each of the Registrant’s classes of common stock as ofthe latest practicable date:  As ofOctober 31, 2006, the Registrant had outstanding 2,229,258 shares of its commonstock, $.01 par value per share.

 

 

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**LANDMARK BANCORP, INC.**

**Form 10-Q Quarterly Report**

 

**Table of Contents**

** **

**PART I**

 
|           | ** ** | ** **                                                                                  | ** ** | Page Number |
|-----------|------------|---------------------------------------------------------------------------------------------|------------|-------------|
|      | ** ** | ** **                                                                                  |       |        |
|      |       |                                                                                        |       |        |
| Item 1.   |       | Financial Statements and Related Notes                                                      |       | 2-11        |
| Item 2    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 12-24       |
| Item 3.   |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       | 25          |
| Item 4.   |       | Controls and Procedures                                                                     |       | 26          |
|      |       |                                                                                        |       |        |
|      | ** ** | **PART II**                                                                                 |       |        |
|      |       |                                                                                        |       |        |
| Item  1.  |       | Legal  Proceedings                                                                          |       | 27          |
| Item 1A.  |       | Risk Factors                                                                                |       | 27          |
| Item 2.   |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       | 27          |
| Item 3.   |       | Defaults Upon Senior Securities                                                             |       | 27          |
| Item 4.   |       | Submission of Matters to a Vote of Security Holders                                         |       | 27          |
| Item  5.  |       | Other  Information                                                                          |       | 27          |
| Item 6.   |       | Exhibits                                                                                    |       | 27          |
|      |       |                                                                                        |       |        |
| Form 10-Q |       | Signature Page                                                                              |       | 28          |

 

 

1

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                   | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| **ASSETS**                                                                                                   | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| Cash  and cash equivalents                                                                                   |       | $                      | 20,969,481  |                  | $          | 21,490,512 |   |
| Investment  securities available for sale, at fair value                                                     |       | 140,454,136            |        | 140,130,512           |       |
| Loans,  net                                                                                                  |       | 395,331,553            |        | 274,565,855           |       |
| Loans  held for sale                                                                                         |       | 1,947,954              |        | 1,163,211             |       |
| Premises  and equipment, net                                                                                 |       | 13,626,421             |        | 8,412,235             |       |
| Goodwill                                                                                                     |       | 13,009,167             |        | 7,535,584             |       |
| Other  intangible assets, net                                                                                |       | 4,261,905              |        | 2,418,213             |       |
| Accrued  interest and other assets                                                                           |       | 18,258,922             |        | 9,393,839             |       |
|                                                                                                         |       |                   |        |                  |       |
| Total assets                                                                                                 |       | $                      | 607,859,539 |                  | $          | 465,109,961 |   |
|                                                                                                         |       |                   |        |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                               | ** ** | ** **             | ** **  | ** **            | ** ** |
| Liabilities:                                                                                                 |       |                   |        |                  |       |
| Deposits                                                                                                     |       | $                      | 443,368,898 |                  | $          | 331,272,731 |   |
| Federal  Home Loan Bank borrowings                                                                           |       | 74,468,896             |        | 63,212,318            |       |
| Other  borrowings                                                                                            |       | 30,458,590             |        | 22,046,000            |       |
| Accrued  expenses, taxes and other liabilities                                                               |       | 11,053,639             |        | 4,506,305             |       |
| Total liabilities                                                                                            |       | 559,350,023            |        | 421,037,354           |       |
|                                                                                                         |       |                   |        |                  |       |
| Stockholders’  equity:                                                                                  |       |                   |        |                  |       |
| Common  stock, $0.01 par, 5,000,000 shares authorized,   2,244,994 and 2,244,327 shares issued, respectively |       | 22,450                 |        | 22,443                |       |
| Additional  paid-in capital                                                                                  |       | 19,957,707             |        | 19,868,567            |       |
| Retained  earnings                                                                                           |       | 28,665,975             |        | 25,322,019            |       |
| Accumulated  other comprehensive income (loss)                                                               |       | 277,898                |        | (725,908              | )          |
| Treasury  stock, at cost; 15,736 shares                                                                      |       | (414,514               | )           | (414,514              | )          |
| Total stockholders’ equity                                                                              |       | 48,509,516             |        | 44,072,607            |       |
|                                                                                                         |       |                   |        |                  |       |
| Total  liabilities and stockholders’ equity                                                             |       | $                      | 607,859,539 |                  | $          | 465,109,961 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

2

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**LANDMARK BANCORP,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(Unaudited)**
| ** **                                          | ** ** | **Three months ended September** | ** ** | **Nine months ended September** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                        | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest  income:                                   |       |                                            |       |                                           |       |   |   |   |   |
| Loans                                               |       | $                                               | 7,293,653  |                                           | $          | 4,431,829 |   | $ | 20,805,168 |   | $ | 12,822,321 |   |
| Investment securities                               |       | 1,517,481                                       |       | 1,246,246                                      |       | 4,388,145 |   | 3,404,758 |   |
| Other                                               |       | 26,337                                          |       | 38,958                                         |       | 127,731 |   | 92,203 |   |
| Total interest income                               |       | 8,837,471                                       |       | 5,717,033                                      |       | 25,321,044 |   | 16,319,282 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Interest  expense:                                  |       |                                            |       |                                           |       |   |   |   |   |
| Deposits                                            |       | 2,848,151                                       |       | 1,450,819                                      |       | 7,891,865 |   | 3,966,316 |   |
| Borrowed funds                                      |       | 1,266,940                                       |       | 897,937                                        |       | 3,514,525 |   | 2,653,547 |   |
| Total interest expense                              |       | 4,115,091                                       |       | 2,348,756                                      |       | 11,406,390 |   | 6,619,863 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Net interest income                                 |       | 4,722,380                                       |       | 3,368,277                                      |       | 13,914,654 |   | 9,699,419 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Provision  for loan losses                          |       | 80,000                                          |       | 100,000                                        |       | 155,000 |   | 325,000 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Net interest income after provision for loan losses |       | 4,642,380                                       |       | 3,268,277                                      |       | 13,759,654 |   | 9,374,419 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Non-interest  income:                               |       |                                            |       |                                           |       |   |   |   |   |
| Fees and service charges                            |       | 1,124,057                                       |       | 886,897                                        |       | 3,259,392 |   | 2,555,851 |   |
| Gains on sale of loans                              |       | 347,054                                         |       | 162,759                                        |       | 933,418 |   | 534,153 |   |
| Gains (losses) on sale of investments, net          |       | —                                          |       | —                                         |       | (300,256 | ) | 40,540 |   |
| Gains on repayments of FHLB borrowings              |       | —                                          |       | 406,572                                        |       | — |   | 406,572 |   |
| Gains (losses) on sale of other assets              |       | (11,638                                         | )          | 176                                            |       | 716,815 |   | 17,387 |   |
| Bank owned life insurance                           |       | 114,689                                         |       | 19,397                                         |       | 272,343 |   | 61,317 |   |
| Other                                               |       | 108,915                                         |       | 108,576                                        |       | 434,231 |   | 305,992 |   |
| Total non-interest income                           |       | 1,683,077                                       |       | 1,584,377                                      |       | 5,315,943 |   | 3,921,812 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Non-interest  expense:                              |       |                                            |       |                                           |       |   |   |   |   |
| Compensation and benefits                           |       | 2,140,241                                       |       | 1,567,125                                      |       | 6,388,817 |   | 4,529,987 |   |
| Occupancy and equipment                             |       | 705,523                                         |       | 504,612                                        |       | 2,101,545 |   | 1,478,954 |   |
| Data processing                                     |       | 183,695                                         |       | 130,490                                        |       | 532,685 |   | 400,723 |   |
| Amortization of intangibles                         |       | 258,732                                         |       | 116,669                                        |       | 782,904 |   | 299,631 |   |
| Professional fees                                   |       | 132,080                                         |       | 63,803                                         |       | 342,806 |   | 248,859 |   |
| Advertising                                         |       | 109,065                                         |       | 110,680                                        |       | 327,802 |   | 292,527 |   |
| Other                                               |       | 784,234                                         |       | 581,642                                        |       | 2,291,019 |   | 1,733,511 |   |
| Total non-interest expense                          |       | 4,313,570                                       |       | 3,075,021                                      |       | 12,767,578 |   | 8,984,192 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Earnings before income taxes                        |       | 2,011,887                                       |       | 1,777,633                                      |       | 6,308,019 |   | 4,312,039 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Income  tax expense                                 |       | 548,240                                         |       | 544,377                                        |       | 1,827,368 |   | 1,325,743 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Net earnings                                        |       | $                                               | 1,463,647  |                                           | $          | 1,233,256 |   | $ | 4,480,651 |   | $ | 2,986,296 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Earnings  per share:                                |       |                                            |       |                                           |       |   |   |   |   |
| Basic                                               |       | $                                               | 0.66       |                                           | $          | 0.55 |   | $ | 2.01 |   | $ | 1.34 |   |
| Diluted                                             |       | $                                               | 0.65       |                                           | $          | 0.55 |   | $ | 2.00 |   | $ | 1.34 |   |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Dividends per share                                 |       | $                                               | 0.1700     |                                           | $          | 0.1619 |   | $ | 0.5100 |   | $ | 0.4857 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

3

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**LANDMARK BANCORP,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                          | ** ** | **Nine months ended September 30,** | ** **  |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                          | ** ** | **2006**                                                | ** **  | **2005** | ** ** |
| Net  cash provided by operating activities                          |       | $                                                       | 1,935,194   |   | $ | 4,524,534 |   |
|                                                                |       |                                                    |        |   |   |
| Cash  flows from investing activities:                              |       |                                                    |        |   |   |
| Net (increase) decrease in loans                                    |       | (13,285,419                                             | )           | 6,929,364 |   |
| Maturities and prepayments of investments                           |       | 35,226,616                                              |        | 35,013,396 |   |
| Purchase of investment securities                                   |       | (45,048,007                                             | )           | (48,935,454 | ) |
| Proceeds from sale of investment securities                         |       | 21,631,222                                              |        | 140,540 |   |
| Net cash paid in FMB acquisition                                    |       | (8,023,721                                              | )           | — |   |
| Proceeds from sales of premises and equipment and foreclosed assets |       | 588,422                                                 |        | 387,132 |   |
| Net cash received in acquisition of Great Bend branches             |       | —                                                  |        | 30,410,720 |   |
| Purchases of premises and equipment, net                            |       | (2,825,405                                              | )           | (1,020,113 | ) |
| Net cash provided by (used in) investing activities                 |       | (11,736,292                                             | )           | 22,925,585 |   |
|                                                                |       |                                                    |        |   |   |
| Cash  flows from financing activities:                              |       |                                                    |        |   |   |
| Net increase (decrease) in deposits                                 |       | 5,323,486                                               |        | (7,127,815 | ) |
| Federal Home Loan Bank advance borrowings                           |       | —                                                  |        | 3,500,000 |   |
| Federal Home Loan Bank advance repayments                           |       | (1,027,576                                              | )           | (20,867,504 | ) |
| Federal Home Loan Bank line of credit borrowings, net               |       | 4,400,000                                               |        | (3,200,000 | ) |
| Proceeds from other borrowings                                      |       | 8,862,098                                               |        | 3,450,000 |   |
| Repayments on other borrowings                                      |       | (7,153,240                                              | )           | (2,370,000 | ) |
| Purchase of treasury stock                                          |       | —                                                  |        | (531 | ) |
| Proceeds from issuance of common stock under stock option plans     |       | 9,491                                                   |        | 196,088 |   |
| Tax benefit related to stock option plans                           |       | 2,503                                                   |        | 37,344 |   |
| Payment of dividends                                                |       | (1,136,695                                              | )           | (1,078,451 | ) |
| Net cash provided by (used in) financing activities                 |       | 9,280,067                                               |        | (27,460,869 | ) |
| Net decrease in cash and cash equivalents                           |       | (521,031                                                | )           | (10,750 | ) |
| Cash and cash equivalents at beginning of period                    |       | 21,490,512                                              |        | 7,845,438 |   |
| Cash and cash equivalents at end of period                          |       | $                                                       | 20,969,481  |   | $ | 7,834,688 |   |
|                                                                |       |                                                    |        |   |   |
| Supplemental  disclosure of cash flow information:                  |       |                                                    |        |   |   |
| Cash paid during period for interest                                |       | $                                                       | 9,990,000   |   | $ | 6,086,000 |   |
| Cash paid during period for taxes                                   |       | $                                                       | 560,000     |   | $ | — |   |
| Supplemental  schedule of non-cash investing activities:            |       |                                                    |        |   |   |
| Transfer of loans to real estate owned                              |       | $                                                       | 160,000     |   | $ | 534,000 |   |
| FMB acquisition:                                                    |       |                                                    |        |   |   |
| Fair value of liabilities assumed                                   |       | $                                                       | 131,988,000 |   | $ | — |   |
| Fair value of assets acquired, including goodwill                   |       | $                                                       | 123,964,000 |   | $ | — |   |
| Acquisition of branches:                                            |       |                                                    |        |   |   |
| Fair value of liabilities assumed                                   |       | $                                                       | —      |   | $ | 33,299,000 |   |
| Fair  value of assets acquired, including goodwill                  |       | $                                                       | —      |   | $ | 2,888,000 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

4

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**LANDMARK BANCORP,INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS 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 ($0.51  per share)                                                                    |       | —            |       | —                               |       | (1,136,695             | )          | —              |       | —                                                    |       | (1,136,695 | )          |
| Stock-based  compensation                                                                            |       | —            |       | 77,153                               |       | —                 |       | —              |       | —                                                    |       | 77,153     |       |
| Exercise of stock  options                                                                           |       | 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,  2004                                                                           |       | $                 | 22,322     |                                 | 19,969,551 |                   | 25,228,826 |                | (3,205,823 | )                                                         | 154,101    |       | 42,168,977 |   |
|                                                                                                 |       |              |       |                                 |       |                   |       |                |       |                                                      |       |       |       |
|                                                                                                 |       |              |       |                                 |       |                   |       |                |       |                                                      |       |       |       |
| Net earnings                                                                                         |       | —            |       | —                               |       | 2,986,296              |       | —              |       | —                                                    |       | 2,986,296  |       |
| Change in fair value of  investment securities available-for-sale and interest rate swap, net of tax |       | —            |       | —                               |       | —                 |       | —              |       | (483,940                                                  | )          | (483,940   | )          |
| Dividends paid ($0.4857  per share)                                                                  |       | —            |       | —                               |       | (1,078,451             | )          | —              |       | —                                                    |       | (1,078,451 | )          |
| Stock-based  compensation                                                                            |       | —            |       | 76,563                               |       | —                 |       | —              |       | —                                                    |       | 76,563     |       |
| Exercise of stock  options                                                                           |       | 121               |       | 233,311                              |       | —                 |       | —              |       | —                                                    |       | 233,432    |       |
| Purchase of treasury  stock — 18 shares                                                         |       | —            |       | —                               |       | —                 |       | (531                | )          | —                                                    |       | (531       | )          |
| Balance September 30,  2005                                                                          |       | $                 | 22,443     |                                 | 20,279,425 |                   | 27,136,671 |                | (3,206,354 | )                                                         | (329,839   | )          | 43,902,346 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

 

5

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**LANDMARK BANCORP,INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

The condensed consolidatedfinancial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiaryhave been prepared in accordance with the instructions to Form 10-Q.  To the extent that information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements are contained in or consistent with the consolidatedaudited financial statements incorporated by reference in the Company’sForm 10-K for the year ended December 31, 2005, 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, 2005, condensed consolidated balance sheet has beenderived from the audited consolidated balance sheet as of that date.  The results of the interim periods endedSeptember 30, 2006 are not necessarily indicative of the results expected forthe year ending December 31, 2006 and include the results of operations ofFirst Manhattan Bancorporation, Inc. (“FMB”) beginning on January 1, 2006.

**2.             Acquisition of First ManhattanBancorporation, Inc.**

The Company completed the acquisition of all of the outstanding equityof FMB effective January 1, 2006.  FMB’ssubsidiary thrift was merged into the Company’s wholly-owned subsidiary,Landmark National Bank, immediately following the acquisition.  This acquisition expanded our market share inManhattan and further expanded the Company’s presence in higher-growth marketareas.  At December 31, 2005, FMB hadtotal assets of $129 million, including loans and deposits of $109 million and$107 million, respectively.  The Companypaid cash in the amount of $12.9 million for all of the outstanding stockof FMB.  In connection with theacquisition, the Company recorded a core deposit intangible asset of $2.6 million,which is being amortized on an accelerated basis over 10 years.  The acquisition cost in excess of the netassets and identifiable intangible assets acquired, has been recorded asgoodwill of $5.5 million, none of which is deductible for tax purposes.  Pro forma information, for the three and ninemonths ended September 30, 2005, as if the acquisition was consummated January1, 2005, is as follows (in thousands, except per share data):

|                            | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|----------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Interest income            |       | $                                                              | 7,601      |                                                          | $          | 21,686 |   |
| Net earnings               |       | 1,335                                                          |       | 3,245                                                         |       |
| Basic earnings per  share  |       | 0.60                                                           |       | 1.46                                                          |       |
| Diluted earnings per share |       | 0.60                                                           |       | 1.45                                                          |       |
|                            |            |                                                                |            |                                                               |            |  |  |

 

6

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**3.             Stock Based Compensation**

In December 2004, The Financial Accounting StandardsBoard issued SFAS No. 123 (revised), Shared-Based Payment (123R).  The revision disallows the expenserecognition alternatives permitted in the original statement and requiresentities to recognize stock-based compensation cost in their statements of earnings.  The revision contains additional guidance inseveral areas including award modifications and forfeitures, measuring fairvalue, classifying an award as equity or as a liability, and attributingcompensation cost to reporting periods. It also contains additional disclosure requirements.  Prior to the adoption of SFAS No. 123R onJanuary 1, 2006, the Company recorded the fair value of options issued underthe plan as expense in accordance with SFAS No. 123, *Accounting for Stock Based Compensation*.  The Company’s adoption of the revisedStatement on January 1, 2006, did not have a material effect on itsconsolidated financial statements.

TheCompany has a stock option plan, the purpose of which is to provide additionalincentive to certain officers, directors, and key employees by facilitatingtheir purchase of a stock interest in the Company. The plan is administered bythe board of directors who selects employees to whom options are granted andthe number of shares granted. The option price may not be less than 100% of thefair market value of the shares on the date of the grant, and no option shallbe exercisable after the expiration of ten years from the grant date. Inthe case of any employee who owns more than 10% of the outstanding common stockat the time the option is granted, the option price may not be less than 110%of the fair market value of the shares on the date of the grant, and the optionshall not be exercisable after the expiration of ten years from the grantdate.   The Company intends to utilizeauthorized, but un-issued shares to satisfy option exercises.  The stock-based compensation cost that hasbeen recognized was $77,000 in the first nine months of 2006 and the first ninemonths of 2005.  Accordingly, a $26,000tax benefit was recognized for the first nine months of 2006 and the first ninemonths of 2005.  This compensationexpense is recognized over the option vesting period, which is typically fouryears.

Indetermining compensation cost, the Black-Scholes option-pricing model is usedto estimate the fair value of options on date of grant.  The Black-Scholes model is a closed-end modelthat uses the assumptions outlined below. Expected volatility is based on historical volatility of the Company’sstock and a consideration of other factors. The Company uses historical exercise behavior and other qualitativefactors to estimate the expected term of the options, which represents theperiod of time that the options granted are expected to be outstanding.  The risk-free rate for the expected term isbased on U.S. Treasury rates in effect at the time of grant.  The fair value of each option grant isestimated on the date of grant. The fair value of options granted wereestimated utilizing the following assumptions:

|                                     | ** ** | **Nine months**              | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **ended September 30,** | ** ** |
| ** **                          | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Dividend rate                       |       | 5.0%                              |       | 4.8% |   |
| Volatility                          |       | 19.1%                             |       | 18.0% |   |
| Risk-free interest rate             |       | 4.9%                              |       | 4.3% |   |
| Expected lives                      |       | 5 years                           |       | 5 years |   |
| Fair value per option at grant date |       | $                                 | 3.55       |   | $ | 3.40 |   |
|                                     |            |                                   |            |  |  |  |  |

 

 

7

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A summary of option activity during the first nine months of 2006 ispresented below.

|                                                   | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January  1, 2006                   |       | 127,340    |       | $                                      | 23.73      |                                                | 7.38 years |                            | n/a        |   |
| Granted                                           |       | 109,025    |       | 27.15                                  |       | —                                              |       | n/a                             |       |
| Cancelled                                         |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Exercised                                         |       | (667       | )          | 14.23                                  |       | —                                              |       | n/a                             |       |
| Outstanding at  September 30, 2006                |       | 235,698    |       | $                                      | 25.34      |                                                | 7.99 years |                            | $          | 656,000 |   |
| Exercisable at  September 30, 2006                |       | 76,334     |       | $                                      | 22.04      |                                                | 6.09 years |                            | $          | 465,000 |   |
| Vested and expected to vest at September 30, 2006 |       | 226,146    |       | $                                      | 25.27      |                                                | 7.96 years |                            | $          | 644,000 |   |

 

Additional informationabout stock options exercised is presented below.

|                                             | ** ** | **Nine months**              | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **ended September 30,** | ** ** |
| ** **                                  | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Intrinsic value of  options exercised       |       | $                                 | 16,852     |   | $ | 305,925 |   |
| Cash received from  options exercised       |       | $                                 | 9,491      |   | $ | 196,088 |   |
| Tax benefit realized from options exercised |       | $                                 | 2,503      |   | $ | 37,344 |   |

 

As of September 30, 2006,there was $390,000 of total unrecognized compensation cost related tooutstanding options.  That cost isexpected to be recognized over a weighted-average period of 4 years.  The total fair value (at vest date) of sharesvested during the nine month periods ended September 30, 2006 and 2005 was$103,000 and $93,000 respectively.

The number of sharesavailable for future grants at September 30, 2006 was 165,620.

**4.             Earnings per Share**

Basicearnings per share have been computed based upon the weighted average number ofcommon shares outstanding during each period. Diluted earnings per share include the effect of all potential commonshares outstanding during each period. Earnings and dividends per share for all prior periods presented havebeen adjusted to give effect to the 5% stock dividend paid by the Company inDecember 2005.

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

|                                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average common shares outstanding (basic) |       | 2,229,258                                            |       | 2,228,699                                           |       | 2,228,928 |   | 2,220,959 |   |
| Dilutive stock options                                                 |       | 9,730                                                |       | 7,925                                               |       | 9,752 |   | 10,807 |   |
| Weighted average common shares (diluted)                               |       | 2,238,988                                            |       | 2,236,624                                           |       | 2,238,680 |   | 2,231,766 |   |

 

** **

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** **

**5.             ComprehensiveIncome**

TheCompany’s other comprehensive income consists of the unrealized holding gainsand losses on available-for-sale securities and an unrealized gain on aninterest rate swap as shown below.

|                                                                                     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings                                                                        |       | $                                                    | 1,463,647  |                                                | $          | 1,233,256 |   | $ | 4,480,651 |   | $ | 2,986,296 |   |
|                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Change in unrealized  holding(gains)/losses                                         |       | 2,843,302                                            |       | (697,479                                            | )          | 1,336,785 |   | (803,009 | ) |
| Less — reclassification  adjustment for  gains/(losses) included in net income |       | —                                               |       | —                                              |       | (300,256 | ) | 40,540 |   |
| Net change in  unrealized (gains)/losses  on securities                             |       | 2,843,302                                            |       | (697,479                                            | )          | 1,637,041 |   | (843,549 | ) |
| Unrealized gain/(loss)  on interest rate swap                                       |       | (64,000                                              | )          | 54,000                                              |       | (18,000 | ) | 63,000 |   |
| Income tax  expense/(benefit)                                                       |       | 1,056,134                                            |       | (244,522                                            | )          | 615,235 |   | (296,609 | ) |
| Total comprehensive  income                                                         |       | $                                                    | 3,186,815  |                                                | $          | 834,299 |   | $ | 5,484,457 |   | $ | 2,502,356 |   |

 

**6.             Other Intangible Assets**

Thefollowing table presents information about the Company’s other intangibleassets:

|                                  | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Gross carrying  amount**  | ** ** | **Accumulated  amortization**   | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| **Amortized intangible assets:** |       |                             |       |                            |       |   |   |   |   |
| Core deposit  premium            |       | $                                | 5,396,065  |                            | $          | (1,451,946 | ) | $ | 2,818,602 |   | $ | (774,588 | ) |
| Mortgage  servicing rights       |       | 784,441                          |       | (466,655                        | )          | 775,666 |   | (401,467 | ) |
| Total                            |       | $                                | 6,180,506  |                            | $          | (1,918,601 | ) | $ | 3,594,268 |   | $ | (1,176,055 | ) |

 

Aggregate amortizationexpense for the three months ended September 30, 2006 and 2005, was $259,000and $117,000, respectively.  Aggregateamortization expense for the nine months ended September 30, 2006 and 2005, was$783,000 and $300,000, respectively.  Thefollowing depicts estimated amortization expense for the remainder of 2006 andin successive years ending December 31:

| Year | ** ** | **Amount** |    |
|------|------------|------------|---------|
| 2006 |       | $          | 290,000 |   |
| 2007 |       | 972,000    |    |
| 2008 |       | 697,000    |    |
| 2009 |       | 599,000    |    |
| 2010 |       | 500,000    |    |
|      |            |            |         |  |

 

9

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The mortgage servicing rights correspond to loansserviced by the Company for others with outstanding principal balances of$103.0 million and $107.2 million at September 30, 2006 and December 31, 2005,respectively.  Gross service fee incomerelated to such loans was $66,000 and $70,000 for the three months endedSeptember 30, 2006 and September 30, 2005, respectively, and was $201,000 and$209,000 for the nine months ended September 30, 2006 and September 30, 2005,respectively.  The income is included infees and service charges in the condensed consolidated statements of earnings.

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

|                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance at beginning of  period |       | $                                                    | 344,580    |                                                | $          | 416,377 |   | $ | 374,199 |   | $ | 446,332 |   |
| Additions                       |       | 8,517                                                |       | 25,274                                              |       | 49,133 |   | 76,394 |   |
| Amortization                    |       | (35,311                                              | )          | (45,380                                             | )          | (105,546 | ) | (126,455 | ) |
| Balance at end of period        |       | $                                                    | 317,786    |                                                | $          | 396,271 |   | $ | 317,786 |   | $ | 396,271 |   |

 

**7.             Impact of Recent AccountingPronouncements**

InFebruary 2006, the FASB issued Statement of Financial AccountingStandards No. 155, “Accounting for Certain Hybrid Financial Instruments - anamendment of FASB Statements No. 133 and 140”.  The Statement permits fairvalue remeasurement for certain hybrid financial instruments containingembedded derivatives, and clarifies the derivative accounting requirements forinterest and principal-only strip securities and interests in securitizedfinancial assets. It also clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives and eliminates a previousprohibition on qualifying special-purpose entities from holding certainderivative financial instruments.  Forcalendar year companies, this statement is effective for all financialinstruments acquired or issued after January 1, 2007.  The Company does not expect that adoption ofthe Statement will have a material effect on its consolidated financialstatements.

In March 2006, the FASB issued Statement ofFinancial Accounting Standards No. 156, “Accounting for Servicing of FinancialAssets — an amendment of FASB Statement No. 140”. The Statement specifies underwhat situations servicing assets and servicing liabilities must be recognized.It requires these assets and liabilities to be initially measured at fair valueand specifies acceptable measurement methods subsequent to their recognition.Separate presentation in the financial statements and additional disclosuresare also required. For calendar year companies, this statement is effectivebeginning January 1, 2007. The Company does not expect that adoption of theStatement will have a material effect on its consolidated financial statements.

Also in March 2006, the FASB issued Staff Position85-4-1, which provides initial and subsequent measurement guidance andfinancial statement presentation and disclosure guidance for investments bythird-party investors in life settlement contracts. 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 dies, or (b) recognizing theinitial investment at transaction price and remeasuring the investment at fairvalue at each reporting period, with fair value changes recognized in earningsas they occur. For calendar year companies, the guidance in this staff positionmust be applied beginning January 1, 2007. The 

 

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Company does not expect that adoption of the StaffPosition will have a material effect on its consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48(FIN 48), *Accounting For Uncertainty in Income Taxes*.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for IncomeTaxes. *This interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Thisinterpretation is effective for fiscal years beginning after December 15,2006.  The Company is evaluating anyimpact that the adoption of this Interpretation may have on the Company’sconsolidated financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, which providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment.  Prior year misstatementsmust be considered in quantifying misstatements in current year financialstatements and if the effect of those misstatements is material to the currentyear, the prior year financial statements must be corrected even though suchrevision previously was and continues to be immaterial to the prior yearfinancial statements.  The Company doesnot expect that adoption of the Bulletin will have a material effect on itsconsolidated financial statements.

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements”.   This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  It does not require anynew fair value measurements.  Forcalendar year companies, the Statement is effective beginning January 1,2008.  The Company does not expect thatadoption of the Statement will have a material effect on its consolidatedfinancial statements.

In September 2006, the Emerging Issues Task Force Issue 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements”, was ratified.  This EITF Issue addresses accounting forseparate agreements which split life insurance policy benefits between anemployer and employee. The Issue requires the employer to recognize a liabilityfor future benefits payable to the employee under these agreements.  The effects of applying this Issue must berecognized through either a change in accounting principle through anadjustment to equity or through the retrospective application to all priorperiods. For calendar year companies, the Issue is effective beginning January1, 2008.  The Company does not expect theadoption of the Issue to have a material effect on the Company’s consolidatedfinancial statements.

**8.             Other Events**

In August2006, the Company began operations at a new branch location in Topeka, Kansas.

 

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

*Overview*. Landmark Bancorp, Inc. is a bank holding company incorporated under thelaws of the State 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 realestate,  one-to-four family residentialmortgage loans, consumer loans, multi-family residential mortgage loans, andhome equity loans.

EffectiveJanuary 1, 2006 we completed our acquisition of FMB, which was a thrift holdingcompany.  Immediately following theacquisition, the Company merged the thrift into Landmark National Bank.  This acquisition expanded our market share inManhattan and further expanded the Company’s presence in higher-growth marketareas including Lawrence and Junction City, Kansas.  At December 31, 2005, FMB had total assets of$129 million, including loans and deposits of $109 million and $107 million,respectively.  We paid cash in the amountof $12.9 million for all of the outstanding stock of FMB.  In connection with the acquisition, theCompany recorded a core deposit intangible asset of $2.6 million, which isbeing amortized on an accelerated basis over 10 years, and goodwill of $5.5 million,none of which is deductible for tax purposes.

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

Weare significantly 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 the interest rate pricingcompetition from other lending institutions.

*Critical Accounting Policies.* Critical accounting policies are those whichare both most important to the portrayal of our financial condition and resultsof operations, and require our management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  Our critical accounting policies relate tothe allowance for loan losses, the valuation of investment securities,accounting for income taxes and the accounting related to businessacquisitions, all of which involve significant judgment by our management.

We perform periodic and systematic detailed reviewsof our lending portfolio to assess overall collectability.  The level of the allowance for loan lossesreflects our estimate of the collectability of the loan portfolio.  While these estimates are based onsubstantive methods for determining allowance 

12

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requirements, nevertheless, actual outcomes may differ significantlyfrom estimated results.  Additionalexplanation of the methodologies used in establishing this reserve is providedin the “Asset Quality and Distribution” section.

We report our investment securities at estimatedfair values based on published market ascertainable values, which are obtainedfrom independent sources.  We performperiodic reviews of the fair value of investment securities to determine if anydeclines in value might be considered other than temporary.  Our most recent review showed that thedecrease in fair value of the securities, resulting in an unrealized lossposition, was related to changes in interest rates.  None of the unrealized losses are related tocredit deterioration.  The Company hasthe ability and intent to hold these securities until market values recover,including up to the maturity date. Although we believe that our estimates of the fair values of investmentsecurities to be reasonable, economic and market factors may affect the amountsthat will ultimately be realized from these investments.

The objectives of accounting for income taxes are torecognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or taxreturns.  Judgment is required inassessing the future tax consequences of events that have been recognized inour financial statements or tax returns. Fluctuations in 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.

Wehave completed severalbusiness and asset acquisitions which have generated significant amounts ofgoodwill and intangible assets and related amortization. The values assigned togoodwill and intangibles, as well as their related useful lives, are subject tojudgment 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. If the carrying value of the goodwillexceeded the implied fair value of the goodwill, an impairment loss would berecorded in an amount equal to that excess. Performing such a discounted cashflow analysis 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.

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*Summaryof Results*.  Net earnings for the three months endedSeptember 30, 2006, increased $230,000, or 18.7%, to $1.5 million as comparedto the three months ended September 30, 2005. Our improved earnings were attributed primarily to our acquisition ofFMB along with continued improvement in our net interest margin.  The acquisition allowed for continued growthin non-interest income areas such as fees and service charges and gains on saleof loans.  At the same time, we were ableto realize some additional cost savings associated with the acquisition duringthe third quarter of 2006.

Netearnings for the nine months ended September 30, 2006, increased $1.5 million,or 50.0%, to $4.5 million as compared to the nine months ended September 30,2005.  Our improved earnings wereattributed primarily to our acquisition of FMB along with continued improvementin our net interest margin.  Theacquisition allowed for continued growth in non-interest income areas such asfees and service charges and gains on sale of loans.  At the same time, we were able to realizesome cost savings associated with the acquisition during the first nine monthsof 2006.  In addition, we realized gainson sale of other assets of approximately $717,000, which was partially offsetby losses of $300,000 on the sale of investments during 2006.  During 2005, we realized gains on therepayments of FHLB borrowings of $407,000.

Thethree months ended September 30, 2006 resulted in diluted earnings per share of$0.65 compared to $0.55 for the same period in 2005.  Return on average assets was 0.98% for theperiod compared to 1.08% for the same period in 2005.  Return on average stockholders’ equity was12.60% for the period compared to 11.21% for the same period in 2005.

Thenine months ended September 30, 2006 resulted in diluted earnings per share of$2.00 compared to $1.34 for the same period in 2005.  Return on average assets was 1.00% for theperiod compared to 0.89% for the same period in 2005.  Return on average stockholders’ equity was13.22% for the period compared to 9.33% for the same period in 2005.

Thefollowing table summarizes net earnings per share and key performance measuresfor the periods presented.

|                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                   | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings:                |       |                             |       |                            |       |   |   |   |   |
| Basic earnings per share     |       | $                                | 0.66       |                            | $          | 0.55 |   | $ | 2.01 |   | $ | 1.34 |   |
| Diluted earnings per share   |       | $                                | 0.65       |                            | $          | 0.55 |   | $ | 2.00 |   | $ | 1.34 |   |
| Earnings ratios:             |       |                             |       |                            |       |   |   |   |   |
| Return on average assets (1) |       | 0.98                             | %          | 1.08                            | %          | 1.00 | % | 0.89 | % |
| Return on average equity (1) |       | 12.60                            | %          | 11.21                           | %          | 13.22 | % | 9.33 | % |
| Dividend payout ratio        |       | 26.15                            | %          | 29.44                           | %          | 25.37 | % | 36.25 | % |
| Net interest  margin (1)     |       | 3.51                             | %          | 3.20                            | %          | 3.45 | % | 3.12 | % |

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

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*Interest Income.* Interest income for the three months ended September 30, 2006, increased$3.1 million, or 54.6%, to $8.8 million from $5.7 million in the same period of2005, resulting from increased interest income on both investment securitiesand loans.  Average loans for the quarterended September 30, 2006 increased to $396.8 million from $274.7 million forthe quarter ended September 30, 2005. The increase in average loans was primarily due to the $109.4 million inloans acquired in the FMB acquisition. Additionally, the rise in interest rates experienced during the pastyear contributed to the increased interest income.  As a result, interest income on loansincreased $2.9 million, or 64.6%, to $7.3 million for the quarter endedSeptember 30, 2006.  Average investmentsecurities decreased from $147.5 million for the quarter ended September 30,2005, to $136.5 million for the quarter ended September 30, 2006.  Even with the decrease in average investmentsfor the comparable periods, interest income on investment securities increased$271,000, or 21.8%, to $1.5 million for the third quarter of 2006, as comparedto the same period of 2005.  The increasein interest rates, which resulted in yields on our investments purchased beinghigher than the yields on the investments which either matured or were soldduring the past year, was responsible for the increase in investment income.

Interest income for the nine months ended September30, 2006, increased $9.0 million, or 55.2%, to $25.3 million from $16.3 millionin the same period of 2005, resulting largely from increased interest income oninvestment securities and loans.  Averageloans for the first nine months of 2006 increased to $393.8 million from $276.2million for the same period in 2005.  Theincrease in average loans was primarily due to the $109.4 million in loansacquired in the FMB acquisition. Additionally, the rise in interest rates experienced during the pastyear contributed to the increased interest income.  As a result, interest income on loansincreased $8.0 million, or 62.3%, to $20.8 million for the first nine months of2006.  Average investment securitiesincreased from $140.1 million for the nine months ended September 30, 2005, to$144.8 million for the nine months ended September 30, 2006.  Corresponding with the increase in averageinvestments for the comparable periods, interest income on investmentsecurities increased $983,000, or 28.9%, to $4.4 million for the first ninemonths of 2006, as compared to the same period of 2005.  Also contributing to the increased investmentincome was the increase in interest rates, which resulted in yields on ourinvestments purchased being higher than the yields on the investments whicheither matured or were sold during the past year.

*Interest Expense*. Interest expense during the three months ended September 30, 2006,increased $1.8 million, or 75.2%, as compared to the same period of 2005.  For the three months ended September 30,2006, interest expense on deposits increased $1.4 million, or 96.3%.  The increase in interest expense on depositsresulted from the addition of approximately $106.8 million in deposits that weacquired through the FMB acquisition, as well as from the repricing of depositsdue to the rise in interest rates. Average borrowings for the quarter ended September 30, 2006 increased to$107.8 million from $79.8 million for the quarter ended September 30,2005.  Corresponding with the increase inaverage borrowings for the comparable periods, interest expense on borrowingsincreased $369,000, or 41.1%, due to increased average borrowings as well asincreased interest rates.

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Interest expense during the nine months endedSeptember 30, 2006, increased $4.8 million, or 72.3%, as compared to the sameperiod of 2005.  For the nine monthsended September 30, 2006, interest expense on deposits increased $3.9 million,or 99.0%.  The increase in interestexpense on deposits resulted from the addition of approximately $106.8 millionin deposits that we acquired through the FMB acquisition, as well as from therepricing of deposits due to the rise in interest rates.  Average borrowings for the nine months endedSeptember 30, 2006 increased to $105.0 million from $92.7 million for the ninemonths ended September 30, 2005. Corresponding with the increase in average borrowings for the comparableperiods, interest expense on borrowings increased $861,000, or 32.5%, due toincreased average borrowings as well as increased interest rates.

*Net Interest Income*.  Netinterest income for the three months ended September 30, 2006, totaled $4.7million, increasing $1.4 million, or 40.2%, as compared to the three monthsended September 30, 2005.  This increaseresulted primarily from the increased level of average interest earning assetsassociated with the January 1, 2006 FMB acquisition.  Average earning assets increased during thethird quarter of 2006, increasing to $533.3 million from $422.2 million for thethird quarter of 2005.  Also contributingto the improvement in net interest income was an increase in our net interestmargin.  The net interest margin was3.51% for the third quarter of 2006, up from 3.20% during the third quarter of2005.

Net interest income for the nine months endedSeptember 30, 2006, totaled $13.9 million, increasing $4.2 million, or 43.5%,as compared to the nine months ended September 30, 2005.  This increase resulted primarily from theincreased level of average interest earning assets associated with the January1, 2006 FMB acquisition.  Average earningassets increased during the first nine months of 2006, increasing to $538.6million from $416.3 million for the first nine months of 2005.  Also contributing to the improvement in netinterest income was an increase in our net interest margin.  The net interest margin was 3.45% for thefirst nine months of 2006, up from 3.12% during the first nine months of 2005.

*Provision for Loan Losses*.  Wemaintain, and our Board of Directors monitors, an allowance for losses onloans. The allowance is established based upon management’s periodic evaluationof known and inherent risks in the loan portfolio, review of significantindividual loans and collateral, review of delinquent loans, past lossexperience, adverse situations that may affect the borrowers’ ability to repay,current and expected market conditions, and other factors management deemsimportant. Determining the appropriate level of reserves involves a high degreeof management judgment and is based upon historical and projected losses in theloan portfolio and the collateral value of specifically identified problemloans. Additionally, allowance strategies and policies are subject to periodicreview and revision in response to a number of factors, including currentmarket conditions, actual loss experience and management’s expectations.

16

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The provision for loan losses for the three monthsended September 30, 2006, was $80,000, compared to a provision of $100,000during the three months ended September 30, 2005.  Our regular review of the loan portfolioprompted a decrease in our provision, primarily as a result of improvement inthe asset quality of the commercial loan portfolio.  Our review also included the analysis of theFMB loans acquired along with the FMB allowance for loan losses acquired in theamount of $891,000.  One measure of theadequacy of the allowance for estimated losses on loans is the ratio of theallowance to the total loan portfolio. At September 30, 2006, and December 31, 2005, the allowance for loanlosses was $4.1 million and $3.2 million, or 1.0% and 1.1%, respectively, ofgross loans outstanding.  The provisionfor loan losses for the nine months ended September 30, 2006, was $155,000compared to a provision of $325,000 for the same period in 2005.  For further discussion of the provision forloan losses, refer to the “Asset Quality and Distribution” section.

*Non-interestIncome*.  Non-interest income increased $99,000, or6.2%, for the three months ended September 30, 2006, to $1.7 million comparedto the three months ended September 30, 2005. This improvement was primarily the result of a $184,000, or 113.2%,increase of gains on sale of loans, and an increase in fees and service chargesof $237,000, or 26.7%, both of which are attributable to volume increasesassociated with the FMB acquisition. Also contributing to the increased non-interest income during the thirdquarter was a $95,000 increase in bank owned life insurance income, whichresulted from the purchase of additional policies totaling $7.5 million inMarch 2006.  These improvements more thanoffset the lack of a $407,000 gain on prepayment of Federal Home Loan Bankborrowings recognized in the third quarter of 2005.

Non-interest income increased $1.4 million or 35.6%,for the nine months ended September 30, 2006, to $5.3 million compared to thenine months ended September 30, 2005. This improvement was primarily the result of a $399,000, or 74.8%,increase of gains on sale of loans, and an increase in fees and service chargesof $704,000, or 27.5%, both of which are attributable to volume increases associatedwith the FMB acquisition.  Additionally,total non-interest income included $717,000 in gains recognized with the saleof other assets, primarily our previous headquarters located at 800 Poyntz.  Also contributing to the increasednon-interest income during the first nine months of 2006 was a $211,000increase in bank owned life insurance income, which resulted from the purchaseof additional policies totaling $7.5 million in March 2006.  Partially offsetting these increases werelosses of $300,000 on the sale of investments during the nine months endedSeptember 30, 2006 compared to a gain of $41,000 for 2005.  The losses incurred during 2006 were theresult of repositioning our investment portfolio by selling some relativelyshort term, lower yielding investments and purchasing longer term, higheryielding investments.

 

|                                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Non-interest  income:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Fees and service charges                    |       | $                                                    | 1,124,057  |                                                | $          | 886,897 |   | $ | 3,259,392 |   | $ | 2,555,851 |   |
| Gains on sale of loans                      |       | 347,054                                              |       | 162,759                                             |       | 933,418 |   | 534,153 |   |
| Gains (losses) on sale of  investments, net |       | —                                               |       | —                                              |       | (300,256 | ) | 40,540 |   |
| Gains on repayments of FHLB  borrowings     |       | —                                               |       | 406,572                                             |       | — |   | 406,572 |   |
| Gains (losses) on sale of  other assets     |       | (11,638                                              | )          | 176                                                 |       | 716,815 |   | 17,387 |   |
| Bank owned life insurance                   |       | 114,689                                              |       | 19,397                                              |       | 272,343 |   | 61,317 |   |
| Other                                       |       | 108,915                                              |       | 108,576                                             |       | 434,231 |   | 305,992 |   |
| Total non-interest income                   |       | $                                                    | 1,683,077  |                                                | $          | 1,584,377 |   | $ | 5,315,943 |   | $ | 3,921,812 |   |

 

17

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*Non-interest Expense*.  Non-interest expense increased$1.2 million, or 40.3%, to $4.3 million for the three months ended September30, 2006, as compared to the three months ended September 30, 2005, resultingprimarily from the impact of the acquisition of FMB and the late August 2005acquisition of two branches in Great Bend, Kansas.  While we have made significant progressachieving cost savings by consolidating our personnel, operations andfacilities, the impact of the acquisition included a net increase in personnel,equipment and facilities and the number of accounts being processed.  Accordingly the impact of the acquisitionincluded increases in compensation and benefits of $573,000, occupancy andequipment of $201,000, amortization of acquired intangibles of $142,000 anddata processing costs of $53,000.

Non-interest expense increased $3.8 million, or42.1%, to $12.8 million for the nine months ended September 30, 2006, ascompared to the nine months ended September 30, 2005, resulting primarily fromthe impact of the acquisition of FMB and two branches in Great Bend,Kansas.  While we have made significantprogress achieving cost savings by consolidating our personnel, operations andfacilities, the impact of the acquisition included a net increase in personnel,equipment and facilities and the number of accounts being processed.  Accordingly the impact of the acquisitionincluded increases in compensation and benefits of $1.9 million, occupancy andequipment of $623,000, amortization of acquired intangibles of $483,000 anddata processing costs of $132,000.

|                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Non-interest expense:             |       |                             |       |                            |       |   |   |   |   |
|  Compensation and benefits   |       | $                                | 2,140,241  |                            | $          | 1,567,125 |   | $ | 6,388,817 |   | $ | 4,529,987 |   |
|  Occupancy and equipment     |       | 705,523                          |       | 504,612                         |       | 2,101,545 |   | 1,478,954 |   |
|  Data processing             |       | 183,695                          |       | 130,490                         |       | 532,685 |   | 400,723 |   |
|  Amortization of intangibles |       | 258,732                          |       | 116,669                         |       | 782,904 |   | 299,631 |   |
|  Professional fees           |       | 132,080                          |       | 63,803                          |       | 342,806 |   | 248,859 |   |
|  Advertising                 |       | 109,065                          |       | 110,680                         |       | 327,802 |   | 292,527 |   |
|  Other                       |       | 784,234                          |       | 581,642                         |       | 2,291,019 |   | 1,733,511 |   |
| Total non-interest expense        |       | $                                | 4,313,570  |                            | $          | 3,075,021 |   | $ | 12,767,578 |   | $ | 8,984,192 |   |

 

*Income Tax Expense*. Income tax expense increased $4,000, or 0.7%, from $544,000 for thethree months ended September 30, 2005, to $548,000 for the three months endedSeptember 30, 2006.  The increase intaxable income for the third quarter of 2006 as compared to the third quarterof 2005 was offset by the reduction in the effective tax rate for the thirdquarter of 2006, which decreased to 27.3% from 30.6% in the third quarter of2005.  The decrease in the effective taxrate was the result of an increase in the utilization of tax exempt municipalbonds and bank owned life insurance.

Income tax expense increased $502,000, or 37.8%,from $1.3 million for the nine months ended September 30, 2005, to $1.8 millionfor the nine months ended September 30, 2006. The increase in income tax expense for the nine months ended September30, 2006, resulted from the increase in taxable income for the first ninemonths of 2006 as compared to the first nine months of 2005.  The effective tax rate for the first ninemonths of 2006 decreased to 29.0% from 30.7% during the first nine months of2005 as a result of an increase in the utilization of tax exempt municipalbonds and bank owned life insurance.

18

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*Asset Quality and Distribution*. Total assets increased to $607.9 million at September 30, 2006, comparedto $465.1 million at December 31, 2005, primarily due to the FMBacquisition.  Our primary ongoing sourcesof funds are deposits, proceeds from principal and interest payments on loansand investment securities and proceeds from the sale of mortgage loans andinvestment securities.  While maturitiesand scheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interestrates, economic conditions, competition, and the restructuring of the financialservices industry.

Net loans, excluding loans held for sale, increasedby $120.8 million to $395.3 million during the nine months ended September 30,2006.  This increase was primarily theresult of the addition of $109.4 million in loans in the FMB acquisition.  We have concentrated on generating commercialloans over the past few years and are pleased that this segment of our loanportfolio has grown.  While the FMBacquisition increased our one-to-four family residential loan totals, as themajority of the acquired loans were residential, we plan to continue ourefforts to grow our commercial lending activities.

Our primary investing activities are the originationof commercial, mortgage, consumer loans and the purchase of investment andmortgage-backed securities.  Generally,we originate fixed-rate, residential mortgage loans with maturities in excessof ten years for sale in the secondary market.

The allowance for losses on loans is establishedthrough a provision for losses on loans based on our evaluation of the riskinherent in the loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans with respect to which full collectibility may notbe reasonably assured, considers the fair value of the underlying collateral,economic conditions, historical loan loss experience, level of classified loansand other factors that warrant recognition in providing for an adequateallowance for losses on loans.  Webelieve that we use the best information available to determine the allowancefor losses on loans, unforeseen market conditions could result in adjustment tothe allowance for losses on loans.  Inaddition, net earnings could be significantly affected if circumstances differsubstantially from the assumptions used in establishing the allowance forlosses on loans.

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

| Balance at December 31, 2005   |   | $        | 3,151,373 |   |
|--------------------------------|--------|----------|-----------|--------|
| Allowance of  acquired bank    |   | 891,374  |      |
| Provision for  loan losses     |   | 155,000  |      |
| Charge-offs                    |   | (182,226 | )         |
| Recoveries                     |   | 71,311   |      |
| Balance at September  30, 2006 |   | $        | 4,086,832 |   |

 

19

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We believe that the quality of the loan portfoliocontinues to be strong.  The loansacquired from FMB on January 1, 2006 did not have a material impact on ournon-accrual loan totals or our classified asset ratios as the fair market valueof impaired loans acquired were recorded in accordance with Statement ofPosition (SOP) 03-03, *Accounting for CertainLoans and Debt Securities Acquired in a Transfer*.  As of September 30, 2006, loans with abalance of $6.7 million were on non-accrual status, or 1.7% of total loans,compared to loan balances totaling $3.3 million on non-accrual status, or 1.2%of total loans, as of December 31, 2005. This increase was primarily related to three commercial loans, totaling$3.4 million, which became past due for payments in excess of 90 days atSeptember 30, 2006.  Management does notanticipate any significant loss exposure and is aggressively pursuingcollection activity on these loans.  Inaddition, the ratio of non-performing assets as a percentage of total assetsincreased from 0.9% as of December 31, 2005 to 1.2% as of September 30, 2006.  Residential home loans comprised 22.2% of the$6.7 million non-accrual balance at September 30, 2006.  These loans have been underwritten accordingto our residential lending policies and are well secured by real estatecollateral, and in many instances, private mortgage insurance or governmentguarantees.  We have historicallyincurred minimal losses on mortgage loans based upon collateral values andunderlying insurance or guarantees.  Weare aggressively pursuing collection activity of these loans which shouldenable the collection of outstanding principal.

*Liability Distribution*. Total deposits increased $112.1 million to $443.4 million at September30, 2006, from $331.3 million at December 31, 2005.  The amount of deposits acquired in theJanuary 1, 2006 FMB acquisition approximated $106.8 million.  Borrowings increased $19.6 million to $104.9million at September 30, 2006, from $85.3 million at December 31, 2005,resulting from borrowings utilized to fund the FMB acquisition, $5 million ofFHLB advances acquired in the FMB acquisition, and additional FHLB line ofcredit borrowings.

Non-interest bearing demand accounts at September30, 2006, were $59.0 million, or 13.3% of deposits, compared to $38.4 million,or 11.6% of deposits, at December 31, 2005. Certificates of deposit increased to $230.2 million at September 30,2006, from $163.1 million at December 31, 2005. Money market and NOW demand accounts increased to $125.5 million atSeptember 30, 2006, from $103.7 million at December 31, 2005, and were 28.3% oftotal deposits.  Savings accounts increasedto $28.6 million at September 30, 2006, from $26.1 million at December 31,2005.

Certificates of deposit at September 30, 2006, whichwere scheduled to mature in one year or less, totaled $165.9 million.  Historically, maturing deposits have generallyremained with our bank and we believe that a significant portion of thedeposits maturing in one year or less will remain with us upon maturity.

*Contractual Obligations andCommercial Commitments*.  Thefollowing table presents our contractual obligations, defined as operatinglease obligations and principal payments due on non-deposit obligations withmaturities in excess of one year as of September 30, 2006, for the periodsindicated.

 

| Contractual cash  obligations | ** ** | **Total**  | ** **  | **One year  or less** | ** ** | **One to  three years** | ** ** | **Four to  five years** | ** ** | **More than  five years** | ** ** |
|------------------------------------|------------|------------|-------------|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| Operating leases                   |       | $          | 336,739     |                            | $          | 102,132                           |       | $                                 | 197,133    |                                | $          | 37,474 |   | $ | — |   |
| Service  contracts                 |       | 5,565,000  |        | 1,260,000                       |       | 2,520,000                         |       | 1,785,000                         |       | —                              |       |
| FHLB borrowings                    |       | 74,468,896 |        | 12,300,000                      |       | 34,000,000                        |       | 23,712,904                        |       | 4,455,992                           |       |
| Other borrowings                   |       | 30,458,590 |        | 7,557,590                       |       | 6,405,000                         |       | —                            |       | 16,496,000                          |       |
| Total contractual obligations      |       | $          | 110,829,225 |                            | $          | 21,219,722                        |       | $                                 | 43,122,133 |                                | $          | 25,535,378 |   | $ | 20,951,992 |   |

* *

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*Liquidity*.  Ourmost liquid assets are cash and cash equivalents and investment securitiesavailable for sale.  The levels of theseassets are dependent on the operating, financing, lending and investingactivities during any given period. These liquid assets totaled $161.4 million at September 30, 2006, and$161.6 million at December 31, 2005. During periods in which we are not able to originate a sufficient amountof loans and/or periods of high principal prepayments, we increase our liquidassets by investing in short-term U. S. Government and agency securities orhigh-grade municipal securities.

Liquidity management is both a daily and long-termfunction of our strategy.  Excess fundsare generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are generally availablethrough the use of Federal Home Loan Bank advances, a line of credit with theFederal Home Loan Bank or through sales of securities.  At September 30, 2006, we had outstandingFederal Home Loan Bank advances of $66.7 million and $7.8 million borrowedagainst our line of credit with the Federal Home Loan Bank.  At September 30, 2006, our total borrowingcapacity with the Federal Home Loan Bank was $123.7 million.  We also had other borrowings of $30.5 millionat September 30, 2006, which included $16.5 million of subordinated debentures,$6.4 million of long-term debt and $7.6 million in repurchase agreements.

As a provider of financial services, we routinelyissue financial guarantees in the form of financial and performance standbyletters of credit. Standby letters of credit are contingent commitments issuedby us generally to guarantee the payment or performance obligation of acustomer to a third party. While these standby letters of credit represent a potentialoutlay by us, a significant amount of the commitments may expire without beingdrawn upon. We have recourse against the customer for any amount the customeris required to pay to a third party under a standby letter of credit. Theletters of credit are subject to the same credit policies, underwritingstandards and approval process as loans made by us. Most of the standby lettersof credit are secured, and in the event of nonperformance by the customers, wehave the right to the underlying collateral, which could include commercialreal estate, physical plant and property, inventory, receivables, cash andmarketable securities. The contract amount of these standby letters of credit,which represents the maximum potential future payments guaranteed by us, was$2.7 million at September 30, 2006.

At September 30, 2006, we had outstanding loancommitments, excluding standby letters of credit, of $65.6 million.  We anticipate that sufficient funds will beavailable to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments tofinance real estate loans.

 

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

At September 30, 2006, we continued to maintain asound leverage ratio of 8.19% and a total risk based capital ratio of13.04%.  As shown by the following table,our capital exceeded the minimum capital requirements at September 30, 2006(dollars in thousands):

| Company                  | ** ** | **Actual amount** | ** ** | **Actual percent** | ** ** | **Required  percent** | ** ** | **Required  amount** | ** ** |
|--------------------------|------------|------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|
| Leverage                 |       | $                      | 47,323     |                    | 8.19       | %                     | 4.0        | %                    | $          | 23,124 |   |
| Tier 1 Capital           |       | $                      | 47,323     |                    | 11.90      | %                     | 4.0        | %                    | $          | 15,902 |   |
| Total Risk Based Capital |       | $                      | 51,829     |                    | 13.04      | %                     | 8.0        | %                    | $          | 31,803 |   |

 

At September 30, 2006, Landmark National Bank continued to maintain asound leverage ratio of 9.06% and a total risk based capital ratio of14.19%.  As shown by the following table,the bank’s capital exceeded the minimum capital requirements at September 30,2006 (dollars in thousands):

| Landmark National Bank | ** ** | **Actual  amount** | ** ** | **Actual  percent** | ** ** | **Required  percent** | ** ** | **Required  amount** | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------|------------|-----------------------|------------|----------------------|------------|
| Leverage                         |       | $                  | 52,195     |                | 9.06       | %                     | 4.0        | %                    | $          | 23,052 |   |
| Tier 1 Capital                   |       | $                  | 52,195     |                | 13.16      | %                     | 4.0        | %                    | $          | 15,868 |   |
| Total Risk Based Capital         |       | $                  | 56,282     |                | 14.19      | %                     | 8.0        | %                    | $          | 31,735 |   |

 

Banks and bank holding companies are generallyexpected to operate at or above the minimum capital requirements.  The above ratios are well in excess ofregulatory minimums and should allow us to operate without capital adequacyconcerns.  The Federal Deposit InsuranceCorporation Improvement Act of 1991 establishes a bank rating system based onthe capital levels of banks.  As ofSeptember 30, 2006, we were rated “well capitalized”, which is the highestrating available under this capital-based rating system.

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*Average Assets/Liabilities*.  The following table sets forth informationrelating to average balances of interest-earning assets and liabilities for thethree months ended September 30, 2006 and the same period for 2005.  This table reflects the average yields onassets and average costs of liabilities for the periods indicated (derived bydividing income or expense by the monthly average balance of assets orliabilities, respectively) as well as “net interest margin” (which reflects theeffect of the net earnings balance) for the periods shown.
| ** **                                                                       | ** ** | **Three months ended  September 30, 2006** | ** ** | **Three months ended  September 30, 2005** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Average  balance**                                           | ** ** | **Interest**                                                   | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average   annual   yield/rate** | ** ** |
| ** **                                                                       | ** ** | **(Dollars in thousands)**                           | ** ** |
| ASSETS:                                                                          |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| ** **                                                                       | ** ** | ** **                                                     | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                       |       | $                                                              | 136,521    |                                                           | $          | 1,543 |   | 4.52 | % | $ | 147,528 |   | $ | 1,285 |   | 3.48 | % |
| Loans (2)                                                                        |       | 396,776                                                        |       | 7,294                                                          |       | 7.35 | % | 274,652 |   | 4,432 |   | 6.45 | % |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Total interest-earning  assets                                                   |       | 533,297                                                        |       | 8,837                                                          |       | 6.63 | % | 422,180 |   | 5,717 |   | 5.42 | % |
| Non-interest-earning  assets                                                     |       | 61,820                                                         |       |                                                           |       |   |   | 32,348 |   |   |   |   |   |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Total                                                                            |       | $                                                              | 595,117    |                                                           |       |   |   |   | $ | 454,528 |   |   |   |   |   |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                      |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                   |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                         |       | $                                                              | 226,375    |                                                           | $          | 2,248 |   | 3.97 | % | $ | 164,182 |   | $ | 1,147 |   | 2.79 | % |
| Money market and  NOW accounts                                                   |       | 127,385                                                        |       | 578                                                            |       | 1.81 | % | 93,779 |   | 286 |   | 1.22 | % |
| Savings accounts                                                                 |       | 29,647                                                         |       | 22                                                             |       | 0.30 | % | 24,302 |   | 18 |   | 0.30 | % |
| FHLB advances  and other borrowings                                              |       | 107,756                                                        |       | 1,267                                                          |       | 4.70 | % | 79,836 |   | 898 |   | 4.50 | % |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                              |       | 491,163                                                        |       | 4,115                                                          |       | 3.35 | % | 362,099 |   | 2,349 |   | 2.59 | % |
| Non-interest-bearing  liabilities                                                |       | 57,481                                                         |       |                                                           |       |   |   | 48,519 |   |   |   |   |   |
| Stockholders’  equity                                                       |       | 46,087                                                         |       |                                                           |       |   |   | 43,664 |   |   |   |   |   |
| Total                                                                            |       | $                                                              | 594,731    |                                                           |       |   |   |   | $ | 454,282 |   |   |   |   |   |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                             |       |                                                           |       | $                                                              | 4,722      |   |   |   |   |   | $ | 3,368 |   |   |   |
| Interest rate  spread (3)                                                        |       |                                                           |       |                                                           |       | 3.28 | % |   |   |   |   | 2.83 | % |
| Net interest  margin (4)                                                         |       |                                                           |       |                                                           |       | 3.51 | % |   |   |   |   | 3.20 | % |
|                                                                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Ratio of average interest-earning  assets toaverage interest-bearing liabilities |       |                                                           |       | 108.6                                                          | %          |   |   |   |   | 116.6 | % |   |   |

----

(1)             Incomeon investment securities includes all securities and interest bearing depositsin other financial institutions.

(2)             Includesloans classified as non-accrual.

(3)             Interestrate spread represents the difference between the average yield oninterest-earning assets and the average cost of interest-bearing liabilities

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

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The following table sets forth information relating to average balancesof interest-earning assets and liabilities for the nine months ended September30, 2006 and the same period for 2005.
| ** **                                                                        | ** ** | **Nine months ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Average  Balance**                                          | ** ** | **Interest**                                                  | ** ** | **Average  Annual  Yield/Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Annual  Yield/Rate** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands)**                          | ** ** |
| ASSETS:                                                                           |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| ** **                                                                        | ** ** | ** **                                                    | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                                                         |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                                             | 144,844    |                                                          | $          | 4,516 |   | 4.16 | % | $ | 140,147 |   | $ | 3,497 |   | 3.33 | % |
| Loans (2)                                                                         |       | 393,801                                                       |       | 20,805                                                        |       | 7.04 | % | 276,153 |   | 12,822 |   | 6.19 | % |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 538,645                                                       |       | 25,321                                                        |       | 6.27 | % | 416,300 |   | 16,319 |   | 5.23 | % |
| Non-interest-earning  assets                                                      |       | 60,685                                                        |       |                                                          |       |   |   | 31,162 |   |   |   |   |   |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                                                             | 599,330    |                                                          |       |   |   |   | $ | 447,462 |   |   |   |   |   |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                                             | 225,840    |                                                          | $          | 6,119 |   | 3.61 | % | $ | 161,737 |   | $ | 3,120 |   | 2.57 | % |
| Money market and  NOW accounts                                                    |       | 133,222                                                       |       | 1,705                                                         |       | 1.71 | % | 93,087 |   | 792 |   | 1.13 | % |
| Savings accounts                                                                  |       | 30,455                                                        |       | 68                                                            |       | 0.30 | % | 23,849 |   | 54 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 105,032                                                       |       | 3,514                                                         |       | 4.46 | % | 92,689 |   | 2,654 |   | 3.82 | % |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities                                               |       | 494,549                                                       |       | 11,406                                                        |       | 3.08 | % | 371,362 |   | 6,620 |   | 2.38 | % |
| Non-interest-bearing  liabilities                                                 |       | 56,754                                                        |       | 32,982                                                        |       |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                                        |       | 45,320                                                        |       |                                                          |       |   |   | 42,792 |   |   |   |   |   |
| Total                                                                             |       | $                                                             | 596,623    |                                                          |       |   |   |   | $ | 447,136 |   |   |   |   |   |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                              |       |                                                          |       | $                                                             | 13,915     |   |   |   |   |   | $ | 9,699 |   |   |   |
| Interest rate  spread (3)                                                         |       |                                                          |       |                                                          |       | 3.19 | % |   |   |   |   | 2.85 | % |
| Net interest  margin (4)                                                          |       |                                                          |       |                                                          |       | 3.45 | % |   |   |   |   | 3.12 | % |
|                                                                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                                                          |       | 108.9                                                         | %          |   |   |   |   | 112.1 | % |   |   |

 

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(1)             Incomeon investment securities includes all securities and interest bearing depositsin other financial institutions.

(2)             Includesloans classified as non-accrual.

(3)             Interestrate spread represents the difference between the average yield on interest-earningassets and the average cost of interest-bearing liabilities

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

24

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**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

*Quantitative and QualitativeDisclosures about Market Risk*.  Our assets and liabilities are principallyfinancial in nature and the resulting net interest income thereon is subject tochanges in market interest rates and the mix of various assets andliabilities.  Interest rates in thefinancial markets affect our decision on pricing our assets and liabilities,which impacts net interest income, a significant cash flow source for us.  As a result, a substantial portion of ourrisk management activities relates to managing interest rate risk.

Our Asset/Liability Management Committee monitorsthe interest rate sensitivity of our balance sheet using earnings simulationmodels and 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 30,2006, 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 as follows:

| Scenario                | ** ** | **$ Change in Net Interest Income** | ** ** | **% of Net Interest Income** | ** ** |
|-------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| 100 basis point rising  |       | (67,000                                                 | )          | (0.4                                             | )%         |
| 200 basis point rising  |       | (340,000                                                | )          | (1.8                                             | )%         |
| 100 basis point falling |       | (293,000                                                | )          | (1.6                                             | )%         |
| 200 basis point falling |       | (929,000                                                | )          | (5.0                                             | )%         |

 

*Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995 - Forward-Looking Statements*.** **Thisdocument contains, and future oral and written statements of the Company andits management may contain, forward-looking statements, within the meaning ofsuch term in the Private Securities Litigation Reform Act of 1995, with respectto the 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.

TheCompany’s ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. The factors which could have a materialadverse effect on the operations and future prospects of the Company and itssubsidiaries are detailed in the “Risk Factors” section included under Item 1A.of Part I of our Form 10-K.  In additionto the risk factors described in that section, there are other factors that mayimpact any public company, including ours, which could have a material adverseeffect on the operations and future prospects of the Company and itssubsidiaries.  These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.

25

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**ITEM 4.   CONTROLS AND PROCEDURES**

As required by Rules 13a-15(b) and 15d-15(b) underthe Securities Exchange Act of 1934, management has evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on their evaluation, management concludedour disclosure controls and procedures (as defined in Securities Exchange ActRules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2006 toensure that information required to be disclosed by us in reports that we fileor submit under the Securities Exchange Act is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms and were effective as of September 30, 2006.  These disclosure controls and proceduresinclude controls and procedures designed to ensure that information required tobe disclosed by us in the reports that we file or submit under the SecuritiesExchange Act is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended September 30, 2006, that have materially affected, orare reasonably likely to materially affect our internal control over financialreporting.

 

26

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**LANDMARK BANCORP,INC. AND SUBSIDIARYPART II — OTHER INFORMATION**

**ITEM 1.   LEGAL PROCEEDINGS**

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

**ITEM 1A.   RISK FACTORS**

There have been no material changes in the riskfactors applicable to the Company from those disclosed in Part I,Item 1A. “Risk Factors,” in the Company’s 2005 Annual Report on Form10-K.  Please refer to that section ofthe Company’s Form 10-K for disclosures regarding the risks and uncertaintiesrelated to the Company’s business.

**ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

None

**ITEM 3.   DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

None

**ITEM 5.   OTHER INFORMATION**

None

**ITEM 6.   EXHIBITS**

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

 

27

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                   |   | **LANDMARK BANCORP, INC.**                                                         |
|------------------------|--------|------------------------------------------------------------------------------------|
|                   |   |                                                                               |
|                   |   |                                                                               |
|                   |   |                                                                               |
| Date: November 3, 2006 |   | /s/ Patrick L. Alexander                                                           |
|                   |   | Patrick L. Alexander  President and Chief Executive Officer                        |
|                   |   |                                                                               |
|                   |   |                                                                               |
|                   |   |                                                                               |
| Date: November 3, 2006 |   | /s/ Mark A. Herpich                                                                |
|                   |   | Mark A. Herpich  Vice President, Secretary, Treasurer  and Chief Financial Officer |
|                   |   |                                                                               |
|                   |   |                                                                               |

 

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