UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2009





OR





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


SECURITIES
EXCHANGE ACT OF 1934


For
transition period from ________ to ________





Commission
File Number 0-33203





LANDMARK BANCORP,
INC.


(Exact
name of Registrant as specified in its charter)





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





701 Poyntz Avenue, Manhattan, Kansas66502(Address
      of principal executive offices)
                  (Zip
      Code)





(785)
565-2000


(Registrant's
telephone number, including area code)





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





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





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


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


(Do not
check if a smaller reporting company)





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





Indicate the number of shares
outstanding of each of the Registrant's classes of common stock as of the latest
practicable date: as of November 10, 2009, the Registrant had outstanding
2,371,450 shares of its common stock, $.01 par value per share.





LANDMARK
BANCORP, INC.


Form
10-Q Quarterly Report





Table
of Contents




Page NumberPART
      IItem
      1.
                            Financial
      Statements and Related Notes
                            2 -
      18Item
      2.
                            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            19
      – 28Item
      3.
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            28
      - 29Item
      4.
                            Controls
      and Procedures
                            29PART
      IIItem
      1.
                            Legal
      Proceedings
                            30Item
      1A.
                            Risk
      Factors
                            30Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            30Item
      3.
                            Defaults
      Upon Senior Securities
                            30Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            30Item
      5.
                            Other
      Information
                            30Item
      6.
                            Exhibits
                            30Form
      10-Q Signature Page
                            31




1


ITEM
1.  FINANCIAL STATEMENTS AND RELATED NOTES





LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





(Dollars
      in thousands)
                
                September 30,
                
                
                December 31,2009
                
                
                2008AssetsCash
      and cash equivalents
                
                $
                20,681
                
                
                $
                13,788Investment
      securities:Available
      for sale, at fair value
                
                
                170,596
                
                
                
                162,245Other
      securities
                
                
                7,950
                
                
                
                9,052Loans,
      net
                
                
                348,752
                
                
                
                365,772Loans
      held for sale
                
                
                3,974
                
                
                
                1,487Premises
      and equipment, net
                
                
                16,490
                
                
                
                13,956Goodwill
                
                
                12,894
                
                
                
                12,894Other
      intangible assets, net
                
                
                2,590
                
                
                
                2,407Bank
      owned life insurance
                
                
                12,368
                
                
                
                11,996Accrued
      interest and other assets
                
                
                7,626
                
                
                
                8,617Total
      assets
                
                $
                603,921
                
                
                $
                602,214Liabilities
      and Stockholders’ EquityLiabilities:Deposits:Non-interest
      bearing demand
                
                $
                48,939
                
                
                $
                49,823Money
      market and NOW
                
                
                158,633
                
                
                
                150,116Savings
                
                
                28,377
                
                
                
                26,203Time,
      $100,000 and greater
                
                
                61,441
                
                
                
                49,965Time,
      other
                
                
                153,452
                
                
                
                163,439Total
      deposits
                
                
                450,842
                
                
                
                439,546Federal
      Home Loan Bank borrowings
                
                
                61,060
                
                
                
                77,319Other
      borrowings
                
                
                29,664
                
                
                
                27,047Accrued
      expenses, taxes and other liabilities
                
                
                7,933
                
                
                
                6,896Total
      liabilities
                
                
                549,499
                
                
                
                550,808Stockholders'
      equity:Preferred
      stock, $0.01 par, 200,000 shares authorized, none issued
                
                
                -
                
                
                
                -Common
      stock, $0.01 par, 7,500,000 shares authorized, 2,411,412 shares issued, at
      September 30, 2009 and December 31, 2008
                
                
                24
                
                
                
                24Additional
      paid-in capital
                
                
                23,991
                
                
                
                23,873Retained
      earnings
                
                
                28,601
                
                
                
                27,819Treasury
      stock, at cost; 39,962 and 39,162 shares at September 30, 2009 and
      December 31, 2008, respectively
                
                
                (947
                )
                
                
                (935
                )Accumulated
      other comprehensive income
                
                
                2,753
                
                
                
                625Total
      stockholders' equity
                
                
                54,422
                
                
                
                51,406Total
      liabilities and stockholders' equity
                
                $
                603,921
                
                
                $
                602,214





See
accompanying notes to condensed consolidated financial
statements.


2


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF EARNINGS


(Unaudited)





(Dollars
      in thousands, except per share data)
                                
                                Three
      months ended
                                  September
      30,
                                
                                
                                Nine
      months ended
                                  September
      30,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Interest
      income:Loans:Taxable
                                
                                $
                                5,062
                                
                                
                                $
                                5,900
                                
                                
                                $
                                15,365
                                
                                
                                $
                                18,626Tax-exempt
                                
                                
                                55
                                
                                
                                
                                52
                                
                                
                                
                                168
                                
                                
                                
                                152Investment
      securities:Taxable
                                
                                
                                1,045
                                
                                
                                
                                1,213
                                
                                
                                
                                3,230
                                
                                
                                
                                3,634Tax-exempt
                                
                                
                                637
                                
                                
                                
                                596
                                
                                
                                
                                1,867
                                
                                
                                
                                1,791Other
                                
                                
                                3
                                
                                
                                
                                2
                                
                                
                                
                                10
                                
                                
                                
                                39Total
      interest income
                                
                                
                                6,802
                                
                                
                                
                                7,763
                                
                                
                                
                                20,640
                                
                                
                                
                                24,242Interest
      expense:Deposits
                                
                                
                                1,401
                                
                                
                                
                                2,259
                                
                                
                                
                                4,598
                                
                                
                                
                                7,996Borrowed
      funds
                                
                                
                                793
                                
                                
                                
                                984
                                
                                
                                
                                2,483
                                
                                
                                
                                2,792Total
      interest expense
                                
                                
                                2,194
                                
                                
                                
                                3,243
                                
                                
                                
                                7,081
                                
                                
                                
                                10,788Net
      interest income
                                
                                
                                4,608
                                
                                
                                
                                4,520
                                
                                
                                
                                13,559
                                
                                
                                
                                13,454Provision
      for loan losses
                                
                                
                                1,900
                                
                                
                                
                                500
                                
                                
                                
                                3,000
                                
                                
                                
                                1,400Net
      interest income after provision for loan losses
                                
                                
                                2,708
                                
                                
                                
                                4,020
                                
                                
                                
                                10,559
                                
                                
                                
                                12,054Non-interest
      income:Fees
      and service charges
                                
                                
                                1,191
                                
                                
                                
                                1,093
                                
                                
                                
                                3,289
                                
                                
                                
                                3,174Gains
      on sale of loans
                                
                                
                                722
                                
                                
                                
                                398
                                
                                
                                
                                2,629
                                
                                
                                
                                1,137Gain
      on prepayment of FHLB borrowings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                246Bank
      owned life insurance
                                
                                
                                126
                                
                                
                                
                                120
                                
                                
                                
                                373
                                
                                
                                
                                354Other
                                
                                
                                71
                                
                                
                                
                                130
                                
                                
                                
                                358
                                
                                
                                
                                408Total
      non-interest income
                                
                                
                                2,110
                                
                                
                                
                                1,741
                                
                                
                                
                                6,649
                                
                                
                                
                                5,319Investment
      securities gains (losses), net:Impairment
      losses on investment securities
                                
                                
                                (885
                                )
                                
                                
                                -
                                
                                
                                
                                (1,795
                                )
                                
                                
                                -Less
      noncredit-related losses
                                
                                
                                752
                                
                                
                                
                                -
                                
                                
                                
                                1,086
                                
                                
                                
                                -Net
      impairment losses
                                
                                
                                (133
                                )
                                
                                
                                -
                                
                                
                                
                                (709
                                )
                                
                                
                                -Gains
      on sales of investment securities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                497Investment
      securities gains (losses), net
                                
                                
                                (133
                                )
                                
                                
                                -
                                
                                
                                
                                (709
                                )
                                
                                
                                497Non-interest
      expense:Compensation
      and benefits
                                
                                
                                2,360
                                
                                
                                
                                2,214
                                
                                
                                
                                6,739
                                
                                
                                
                                6,439Occupancy
      and equipment
                                
                                
                                716
                                
                                
                                
                                687
                                
                                
                                
                                2,030
                                
                                
                                
                                2,121Federal
      deposit insurance premiums
                                
                                
                                176
                                
                                
                                
                                32
                                
                                
                                
                                656
                                
                                
                                
                                58Data
      processing
                                
                                
                                189
                                
                                
                                
                                183
                                
                                
                                
                                583
                                
                                
                                
                                586Amortization
      of intangibles
                                
                                
                                196
                                
                                
                                
                                196
                                
                                
                                
                                574
                                
                                
                                
                                605Professional
      fees
                                
                                
                                190
                                
                                
                                
                                109
                                
                                
                                
                                554
                                
                                
                                
                                342Advertising
                                
                                
                                121
                                
                                
                                
                                88
                                
                                
                                
                                361
                                
                                
                                
                                265Other
                                
                                
                                878
                                
                                
                                
                                802
                                
                                
                                
                                2,729
                                
                                
                                
                                2,447Total
      non-interest expense
                                
                                
                                4,826
                                
                                
                                
                                4,311
                                
                                
                                
                                14,226
                                
                                
                                
                                12,863Earnings
      (losses) before income taxes
                                
                                
                                (141
                                )
                                
                                
                                1,450
                                
                                
                                
                                2,273
                                
                                
                                
                                5,007Income
      tax (benefit) expense
                                
                                
                                (254
                                )
                                
                                
                                300
                                
                                
                                
                                139
                                
                                
                                
                                1,214Net
      earnings
                                
                                $
                                113
                                
                                
                                $
                                1,150
                                
                                
                                $
                                2,134
                                
                                
                                $
                                3,793Earnings
      per share:Basic
                                
                                $
                                0.05
                                
                                
                                $
                                0.48
                                
                                
                                $
                                0.90
                                
                                
                                $
                                1.57Diluted
                                
                                $
                                0.05
                                
                                
                                $
                                0.48
                                
                                
                                $
                                0.90
                                
                                
                                $
                                1.57Dividends
      per share
                                
                                $
                                0.19
                                
                                
                                $
                                0.18
                                
                                
                                $
                                0.57
                                
                                
                                $
                                0.54





See
accompanying notes to condensed consolidated financial
statements.


3


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





(Dollars
      in thousands)
                  
                  Nine
      months ended September 30,2009
                  
                  
                  2008Net
      cash provided by operating activities
                  
                  $
                  4,089
                  
                  
                  $
                  3,628Cash
      flows from investing activities:Net
      decrease in loans
                  
                  
                  16,286
                  
                  
                  
                  383Maturities
      and prepayments of investment securities
                  
                  
                  37,167
                  
                  
                  
                  13,377Purchase
      of investment securities
                  
                  
                  (43,133
                  )
                  
                  
                  (29,793
                  )Proceeds
      from sales of investment securities
                  
                  
                  1,210
                  
                  
                  
                  10,408Proceeds
      from sales of premises and equipment and foreclosed assets
                  
                  
                  1,954
                  
                  
                  
                  1,409Purchases
      of premises and equipment, net
                  
                  
                  (676
                  )
                  
                  
                  (572
                  )Net
      cash paid in branch acquisition
                  
                  
                  (130
                  )
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  12,678
                  
                  
                  
                  (4,788
                  )Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                  
                  
                  4,900
                  
                  
                  
                  (17,289
                  )Federal
      Home Loan Bank advance borrowings
                  
                  
                  -
                  
                  
                  
                  35,000Federal
      Home Loan Bank advance repayments
                  
                  
                  (10,027
                  )
                  
                  
                  (13,528
                  )Federal
      Home Loan Bank line of credit, net
                  
                  
                  (6,000
                  )
                  
                  
                  (8,400
                  )Other
      borrowings, net
                  
                  
                  2,617
                  
                  
                  
                  5,742Purchase
      of treasury stock
                  
                  
                  (12
                  )
                  
                  
                  (3,296
                  )Proceeds
      from issuance of stock under stock option plans
                  
                  
                  -
                  
                  
                  
                  30Excess
      tax benefit related to stock option plans
                  
                  
                  -
                  
                  
                  
                  5Payment
      of dividends
                  
                  
                  (1,352
                  )
                  
                  
                  (1,318
                  )Net
      cash used in financing activities
                  
                  
                  (9,874
                  )
                  
                  
                  (3,054
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  6,893
                  
                  
                  
                  (4,214
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  13,788
                  
                  
                  
                  14,739Cash
      and cash equivalents at end of period
                  
                  
                  20,681
                  
                  
                  $
                  10,525Supplemental
      disclosure of cash flow information:Cash
      paid during period for interest
                  
                  $
                  7,210
                  
                  
                  $
                  11,187Cash
      paid during period for taxes, net
                  
                  
                  872
                  
                  
                  
                  578Supplemental
      schedule of non-cash investing and financing activities:Transfer
      of loans to real estate owned
                  
                  $
                  1,827
                  
                  
                  $
                  1,346Branch
      acquisition:Fair
      value of liabilities assumed
                  
                  
                  6,650
                  
                  
                  
                  -Fair
      value of assets acquired
                  
                  
                  6,520
                  
                  
                  
                  -





See
accompanying notes to condensed consolidated financial
statements.


4


LANDMARK
BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME


(Unaudited)





Common
                                  
                                  
                                  Additional
                                    paid-in
                                  
                                  
                                  Retained
                                  
                                  
                                  Treasury
                                  
                                  
                                  Accumulated
                                    other
                                    comprehensive(Dollars
      in thousands, except per share
      data)
                                  
                                  stock
                                  
                                  
                                  capital
                                  
                                  
                                  earnings
                                  
                                  
                                  stock
                                  
                                  
                                  income
                                  
                                  
                                  TotalBalance
      at December 31, 2007
                                  
                                  $
                                  24
                                  
                                  
                                  $
                                  24,304
                                  
                                  
                                  $
                                  27,493
                                  
                                  
                                  $
                                  (206
                                  )
                                  
                                  $
                                  681
                                  
                                  
                                  $
                                  52,296Comprehensive
      income:
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Net
      earnings
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,793
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,793Change
      in fair value of investment securities available-for-sale, net of
      tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,275
                                  )
                                  
                                  
                                  (1,275
                                  )Total
      comprehensive income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,793
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,275
                                  )
                                  
                                  
                                  2,518Dividends
      paid ($0.54 per share)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,318
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,318
                                  )Stock-based
      compensation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  96
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  96Exercise
      of stock options, 1,882 shares, including tax benefit of
      $5,010
                                  
                                  
                                  -
                                  
                                  
                                  
                                  35
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  35Purchase
      of 134,385 treasury shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,296
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,296
                                  )Adoption
      of EITF 06-4
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (335
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (335
                                  )Balance
      September 30, 2008
                                  
                                  $
                                  24
                                  
                                  
                                  $
                                  24,435
                                  
                                  
                                  $
                                  29,633
                                  
                                  
                                  $
                                  (3,502
                                  )
                                  
                                  $
                                  (594
                                  )
                                  
                                  $
                                  49,996Balance
      at December 31, 2008
                                  
                                  $
                                  24
                                  
                                  
                                  $
                                  23,873
                                  
                                  
                                  $
                                  27,819
                                  
                                  
                                  $
                                  (935
                                  )
                                  
                                  $
                                  625
                                  
                                  
                                  $
                                  51,406Comprehensive
      income:Net
      earnings
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,134
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,134Change
      in fair value of investment securities available-for-sale for which a
      portion of an other than temporary impairment has been recorded in net
      earnings, net of tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  233
                                  
                                  
                                  
                                  233Change
      in fair value of all other investment securities available-for-sale, net
      of tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,895
                                  
                                  
                                  
                                  1,895Total
      comprehensive income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,134
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,128
                                  
                                  
                                  
                                  4,262Dividends
      paid ($0.57 per share)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,352
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,352
                                  )Stock-based
      compensation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  118
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  118Purchase
      of 800 treasury shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (12
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (12
                                  )Balance
      at September 30, 2009
                                  
                                  $
                                  24
                                  
                                  
                                  $
                                  23,991
                                  
                                  
                                  $
                                  28,601
                                  
                                  
                                  $
                                  (947
                                  )
                                  
                                  $
                                  2,753
                                  
                                  
                                  $
                                  54,422




See
accompanying notes to condensed consolidated financial
statements.


5


LANDMARK
BANCORP, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.          Interim
Financial Statements





The condensed consolidated financial
statements of Landmark Bancorp, Inc. (the “Company”) and subsidiary have been
prepared in accordance with the instructions to Form 10-Q.  To the
extent that information and footnotes required by U.S. generally accepted
accounting principles (“GAAP”) for complete financial statements are contained
in or consistent with the consolidated audited financial statements incorporated
by reference in the Company’s Form 10-K for the year ended December 31, 2008,
such information and footnotes have not been duplicated herein.  In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of financial statements
have been reflected herein.  The December 31, 2008, condensed
consolidated balance sheet has been derived from the audited consolidated
balance sheet as of that date.  The results of the interim period
ended September 30, 2009 are not necessarily indicative of the results expected
for the year ending December 31, 2009.  Subsequent events have been
evaluated for potential recognition or disclosure through the time of the filing
on November 12, 2009, which represents the date the consolidated financial
statements were issued.





2.  Goodwill
and Other Intangible Assets





The Company tests goodwill for
impairment annually or more frequently if circumstances
warrant.  During the first quarter of 2009, the decline in the
Company’s stock price coupled with current market conditions in the financial
services industry, constituted a triggering event which required an impairment
test to be performed.  The Company performed an impairment test as of
March 31, 2009 by comparing the fair value of the Company’s single reporting
unit to its carrying value.  Fair value was determined using
observable market data including the Company’s market capitalization and
valuation multiples compared to recent financial industry acquisition multiples
for similar institutions to estimate the fair value of the Company’s single
reporting unit.  Based on the results of
the March 31, 2009 impairment testing which indicated no impairment, along with
the Company’s conclusion that no triggering events occurred during the second or
third quarters of 2009, the Company concluded its goodwill was not impaired as
of September 30, 2009.





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





Three
      months ended September 30,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Fair
      value at
                      acquisition
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Fair
      value at
                      acquisition
                    
                    
                    Accumulated
                      AmortizationBalance
      at beginning of period
                    
                    $
                    5,482
                    
                    
                    $
                    (3,467
                    )
                    
                    $
                    5,396
                    
                    
                    $
                    (2,818
                    )Additions
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Amortization
                    
                    
                    -
                    
                    
                    
                    (154
                    )
                    
                    
                    -
                    
                    
                    
                    (174
                    )Balance
      at end of period
                    
                    $
                    5,482
                    
                    
                    $
                    (3,621
                    )
                    
                    $
                    5,396
                    
                    
                    $
                    (2,992
                    )





Nine
      months ended September 30,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Fair
      value at
                      acquisition
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Fair
      value at
                      acquisition
                    
                    
                    Accumulated
                      AmortizationBalance
      at beginning of period
                    
                    $
                    5,396
                    
                    
                    $
                    (3,159
                    )
                    
                    $
                    5,396
                    
                    
                    $
                    (2,462
                    )Additions
                    
                    
                    86
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Amortization
                    
                    
                    -
                    
                    
                    
                    (462
                    )
                    
                    
                    -
                    
                    
                    
                    (530
                    )Balance
      at end of period
                    
                    $
                    5,482
                    
                    
                    $
                    (3,621
                    )
                    
                    $
                    5,396
                    
                    
                    $
                    (2,992
                    )


6


Mortgage
servicing rights are related to loans serviced by the Company for unrelated
third parties.  The outstanding principal balances of such loans was
$134.4 million and $82.0 million at September 30, 2009 and December 31, 2008,
respectively.  Gross service fee income related to such loans was
$79,000 and $54,000 for the quarters ended September 30, 2009 and 2008,
respectively, which is included in fees and service charges in the consolidated
statements of earnings.  Gross service fee income for the nine months
ended September 30, 2009 and 2008 was $194,000 and $167,000,
respectively.  The following is an analysis of changes in the mortgage
servicing rights:





Three
      months ended September 30,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    AmortizationBalance
      at beginning of period
                  
                  $
                  1,211
                  
                  
                  $
                  (617
                  )
                  
                  $
                  771
                  
                  
                  $
                  (581
                  )Additions
                  
                  
                  177
                  
                  
                  
                  -
                  
                  
                  
                  22
                  
                  
                  
                  -Prepayments/maturities
                  
                  
                  (12
                  )
                  
                  
                  12
                  
                  
                  
                  (22
                  )
                  
                  
                  22Amortization
                  
                  
                  -
                  
                  
                  
                  (42
                  )
                  
                  
                  -
                  
                  
                  
                  (22
                  )Balance
      at end of period
                  
                  $
                  1,376
                  
                  
                  $
                  (647
                  )
                  
                  $
                  771
                  
                  
                  $
                  (581
                  )





Nine
      months ended September 30,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
                    AmortizationBalance
      at beginning of period
                  
                  $
                  772
                  
                  
                  $
                  (602
                  )
                  
                  $
                  770
                  
                  
                  $
                  (560
                  )Additions
                  
                  
                  671
                  
                  
                  
                  -
                  
                  
                  
                  45
                  
                  
                  
                  -Prepayments/maturities
                  
                  
                  (67
                  )
                  
                  
                  67
                  
                  
                  
                  (43
                  )
                  
                  
                  43Amortization
                  
                  
                  -
                  
                  
                  
                  (112
                  )
                  
                  
                  -
                  
                  
                  
                  (75
                  )Balance
      at end of period
                  
                  $
                  1,376
                  
                  
                  $
                  (647
                  )
                  
                  $
                  772
                  
                  
                  $
                  (592
                  )





Aggregate
core deposit and mortgage servicing rights amortization expense for the quarters
ended September 30, 2009 and 2008, was $196,000 in both quarters and $574,000
and $605,000 for the nine months ended September 30, 2009 and 2008,
respectively.  The following depicts estimated amortization expense
for all intangible assets for the remainder of 2009 and in successive years
ending December 31:





Year
                    
                    Amount (in thousands)Remainder
      of 2009
                    
                    $
                    1882010
                    
                    
                    6832011
                    
                    
                    5842012
                    
                    
                    4872013
                    
                    
                    402Thereafter
                    
                    
                    246


7


3.  Investments





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





As
      of September 30, 2009Gross
                    
                    
                    GrossAmortized
                    
                    
                    unrealized
                    
                    
                    unrealized
                    
                    
                    Estimated(Dollars
      in thousands)
                    
                    cost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    fair
      valueU.
      S. federal agency obligations
                    
                    $
                    23,575
                    
                    
                    $
                    509
                    
                    
                    $
                    (1
                    )
                    
                    $
                    24,083Municipal
      obligations
                    
                    
                    67,739
                    
                    
                    
                    3,435
                    
                    
                    
                    (21
                    )
                    
                    
                    71,153Mortgage-backed
      securities
                    
                    
                    62,655
                    
                    
                    
                    1,796
                    
                    
                    
                    (18
                    )
                    
                    
                    64,433Pooled
      trust preferred securities
                    
                    
                    1,780
                    
                    
                    
                    -
                    
                    
                    
                    (1,516
                    )
                    
                    
                    264Common
      stocks
                    
                    
                    692
                    
                    
                    
                    189
                    
                    
                    
                    (12
                    )
                    
                    
                    869Certificates
      of deposit
                    
                    
                    9,794
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,794Total
                    
                    $
                    166,235
                    
                    
                    $
                    5,929
                    
                    
                    $
                    (1,568
                    )
                    
                    $
                    170,596





As
      of December 31, 2008Gross
                    
                    
                    GrossAmortized
                    
                    
                    unrealized
                    
                    
                    unrealized
                    
                    
                    Estimated(Dollars
      in thousands)
                    
                    cost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    fair
      valueU.
      S. federal agency obligations
                    
                    $
                    28,566
                    
                    
                    $
                    950
                    
                    
                    $
                    (2
                    )
                    
                    $
                    29,514Municipal
      obligations
                    
                    
                    63,711
                    
                    
                    
                    1,532
                    
                    
                    
                    (934
                    )
                    
                    
                    64,309Mortgage-backed
      securities
                    
                    
                    55,752
                    
                    
                    
                    934
                    
                    
                    
                    (104
                    )
                    
                    
                    56,582Pooled
      trust preferred securities
                    
                    
                    2,488
                    
                    
                    
                    —
                    
                    
                    
                    (1,748
                    )
                    
                    
                    740Common
      stocks
                    
                    
                    693
                    
                    
                    
                    389
                    
                    
                    
                    (8
                    )
                    
                    
                    1,074Certificates
      of deposit
                    
                    
                    10,026
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    10,026Total
                    
                    $
                    161,236
                    
                    
                    $
                    3,805
                    
                    
                    $
                    (2,796
                    )
                    
                    $
                    162,245





Included in the September 30, 2009
gross unrealized losses above, are noncredit-related losses of $1.1 million,
recorded in accumulated other comprehensive income, related to two $1.0 million
par investments in pools of trust preferred securities, which were determined to
be other than temporarily impaired.  The amortized cost of the two
other than temporarily impaired investments, after recognition of $709,000 of
impairment losses, was $1.3 million at September 30, 2009.  The fair
value of these two securities totaled $215,000 at September 30, 2009 compared to
$554,000 at December 31, 2008, while the unrealized losses included in
accumulated other comprehensive income were $1.1 million at September 30, 2009
and $1.4 million at December 31, 2008.


8


The
summary of available-for-sale investment securities shows that some of the
securities in the available-for-sale investment portfolio had unrealized losses,
or were temporarily impaired, as of September 30, 2009 and December 31,
2008.  This temporary impairment represents the estimated amount of
loss that would be realized if the securities were sold on the valuation
date.  Securities which were temporarily impaired are shown below,
along with the length of the impairment period.





(Dollars
      in thousands)
                    
                    
                    
                    
                    As
      of September 30, 2009Number
                    
                    
                    Less
      than 12 months
                    
                    
                    12
      months or longer
                    
                    
                    Totalof
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealizedsecurities
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    lossesU.
      S. federal agency obligations
                    
                    
                    3
                    
                    
                    $
                    149
                    
                    
                    $
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    149
                    
                    
                    $
                    (1
                    )Municipal
      obligations
                    
                    
                    4
                    
                    
                    
                    611
                    
                    
                    
                    (11
                    )
                    
                    
                    770
                    
                    
                    
                    (10
                    )
                    
                    
                    1,381
                    
                    
                    
                    (21
                    )Mortgage-backed
      securities
                    
                    
                    2
                    
                    
                    
                    1,949
                    
                    
                    
                    (18
                    )
                    
                    
                    6
                    
                    
                    
                    -
                    
                    
                    
                    1,955
                    
                    
                    
                    (18
                    )Pooled
      trust preferred securities
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    264
                    
                    
                    
                    (1,516
                    )
                    
                    
                    264
                    
                    
                    
                    (1,516
                    )Common
      stocks
                    
                    
                    3
                    
                    
                    
                    54
                    
                    
                    
                    (12
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    54
                    
                    
                    
                    (12
                    )Total
                    
                    
                    15
                    
                    
                    $
                    2,763
                    
                    
                    $
                    (42
                    )
                    
                    $
                    1,040
                    
                    
                    $
                    (1,526
                    )
                    
                    $
                    3,803
                    
                    
                    $
                    (1,568
                    )





(Dollars
      in thousands)
                    
                    
                    
                    
                    As
      of December 31, 2008Number
                    
                    
                    Less
      than 12 months
                    
                    
                    12
      months or longer
                    
                    
                    Totalof
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealizedsecurities
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    losses
                    
                    
                    value
                    
                    
                    lossesU.
      S. federal agency obligations
                    
                    
                    3
                    
                    
                    $
                    64
                    
                    
                    $
                    -
                    
                    
                    $
                    133
                    
                    
                    $
                    (2
                    )
                    
                    $
                    197
                    
                    
                    $
                    (2
                    )Municipal
      obligations
                    
                    
                    56
                    
                    
                    
                    13,282
                    
                    
                    
                    (466
                    )
                    
                    
                    8,542
                    
                    
                    
                    (468
                    )
                    
                    
                    21,824
                    
                    
                    
                    (934
                    )Mortgage-backed
      securities
                    
                    
                    80
                    
                    
                    
                    12,219
                    
                    
                    
                    (78
                    )
                    
                    
                    3,400
                    
                    
                    
                    (26
                    )
                    
                    
                    15,619
                    
                    
                    
                    (104
                    )Pooled
      trust preferred securities
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    740
                    
                    
                    
                    (1,748
                    )
                    
                    
                    740
                    
                    
                    
                    (1,748
                    )Common
      stocks
                    
                    
                    3
                    
                    
                    
                    13
                    
                    
                    
                    (2
                    )
                    
                    
                    18
                    
                    
                    
                    (6
                    )
                    
                    
                    31
                    
                    
                    
                    (8
                    )Total
                    
                    
                    145
                    
                    
                    $
                    25,578
                    
                    
                    $
                    (546
                    )
                    
                    $
                    12,834
                    
                    
                    $
                    (2,250
                    )
                    
                    $
                    38,412
                    
                    
                    $
                    (2,796
                    )





The Company’s assessment of other than
temporary impairment is based on its reasonable judgment of the specific facts
and circumstances impacting each individual security at the time such
assessments are made.  The Company reviews and considers factual
information, including expected cash flows, the structure of the security, the
credit quality of the underlying assets and the current and anticipated market
conditions.  As of January 1, 2009, the Company early adopted the
guidance on other than temporary impairments in Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 320 “Investments - Debt and
Equity Securities,” which changed the accounting for other than temporary
impairments of debt securities and separates the impairment into credit-related
and other factors.





The receipt of principal, at par, and
interest on mortgage-backed securities is guaranteed by the respective
government-sponsored agency guarantor, such that the Company believes that its
mortgage-backed securities do not expose the Company to credit related
losses.  Based on these factors, along with the Company’s intent to
not sell the security and that it is more likely than not that the Company will
not be required to sell the security before recovery of its cost basis, the
Company believes that the mortgage-backed securities identified in the tables
above were temporarily depressed as of September 30, 2009 and December 31,
2008.  The Company’s mortgage-backed securities portfolio consisted of
securities underwritten to the standards of and guaranteed by the
government-sponsored agencies of FHLMC, FNMA and GNMA.





At September 30, 2009, the Company does
not intend to sell and it is more likely than not that the Company will not be
required to sell its municipal obligations in an unrealized loss position until
the recovery of its cost.  Due to the issuers’ continued satisfaction
of the securities’ obligations in accordance with their contractual terms and
the expectation that they will continue to do so, the evaluation of the
fundamentals of the issuers’ financial condition and other objective evidence,
and management’s intention not to sell and belief that it is more likely than
not that the Company will not have to sell such securities prior to the recovery
of the Company’s amortized cost, the Company believes that the municipal
obligations identified in the tables above were temporarily depressed as of
September 30, 2009 and December 31, 2008.


9


At
September 30, 2009, the Company owned three pooled trust preferred securities
with an original cost basis of $2.5 million, which represent investments in
pools of debt obligations issued by financial institutions and insurance
companies.  The market for these securities is considered to be
inactive according to the guidance issued in ASC Topic 820-10-15,which the Company early
adopted as of January 1, 2009.  The Company used discounted
cash flow models to estimate the fair value of its pooled trust preferred
securities.  The Company also used discounted cash flow models to
assess if the present value of the cash flows expected to be collected was less
than the amortized cost, which would result in an other than temporary
impairment.  The assumptions used in preparing the discounted cash
flow models include the following: estimated discount rates (using yields of
comparable traded instruments adjusted for illiquidity and other risk factors),
estimated deferral and default rates on collateral, and estimated cash
flows.  The discounted cash flow analysis included a review of all
issuers within the collateral pool and incorporated higher deferral and default
rates, as compared to historical rates, in the cash flow projections through
maturity.  The Company also reviewed a stress test of these securities
to determine the additional estimated deferrals or defaults in the collateral
pool in excess of what the Company believes is likely, before the payments on
the individual securities are negatively impacted.





At September 30, 2009, the analysis of
the Company’s three investments in pooled trust preferred securities indicated
that the unrealized loss was temporary on a $0.5 million investment in a pooled
trust preferred security and that it is more likely than not that the Company
would be able to recover the cost basis of this security.  At
September 30, 2009 83% of the collateral in this pool of trust preferred
securities was performing according to the contractual terms of the
agreements.  At September 30, 2009 the cash flow model of this
investment indicated that the present value of the cash flows that the Company
expects to receive was greater than the amortized cost of the
investment.  However, the Company determined that a portion of the
unrealized loss on the remaining two $1.0 million investments in pooled trust
preferred securities was other than temporary.  The amount of actual
and projected deferrals and/or defaults by the financial institutions underlying
these pooled trust preferred securities increased significantly since the
beginning of 2009.  One of the investments experienced an increase in
the percentage of the pool that was not performing according to the contractual
terms of the agreements from 9% at December 31, 2008 to 43% at September 30,
2009, while the second investment’s nonperforming percentage increased from 6%
at December 31, 2008 to 26% at September 30, 2009.  The increase in
nonperforming collateral resulted in total other than temporary impairments of
$709,000 on these two securities as of September 30, 2009.  The
Company follows ASC Topic 320-10-65 in determining the amount of the other than
temporary impairment recorded to earnings.  The Company performed a
discounted cash flow analysis, using the factors noted above to determine the
amount of the other than temporary impairment that was applicable to either
credit losses or other factors.  The amount associated with credit
losses, $709,000, has  been realized through a charge to earnings for
the nine months ended September 30, 2009 as an impairment loss, while the
$339,000 change in the unrealized loss associated with other factors was
recorded in other comprehensive income.  During the three months ended
September 30, 2009 the Company realized a net credit loss of $133,000 associated
with an other than temporary impairment.  During the three and nine
months ended September 30, 2008 the Company did not record any impairment
losses.





The following table reconciles the
changes in the Company’s credit losses recognized in earnings.





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





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


10


Maturities
of investment securities at September 30, 2009 are as follows:





(Dollars in thousands)
                        
                        Amortized
                          cost
                        
                        
                        Estimated
                          fair valueDue
      in less than one year
                        
                        $
                        27,175
                        
                        
                        $
                        25,616Due
      after one year but within five years
                        
                        
                        24,651
                        
                        
                        
                        25,520Due
      after five years
                        
                        
                        51,062
                        
                        
                        
                        54,158Mortgage-backed
      securities and common stock
                        
                        
                        63,347
                        
                        
                        
                        65,302Total
                        
                        $
                        166,235
                        
                        
                        $
                        170,596





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





Other investment securities include
investments in Federal Home Loan Bank of Topeka (“FHLB”) and Federal Reserve
Bank (“FRB”) stock.  The carrying value of the FHLB stock at September
30, 2009 and December 31, 2008 was $6.2 million and $7.3 million, respectively,
and the carrying value of the FRB stock at September 30, 2009 and December 31,
2008 was $1.8 million and 1.7 million, respectively.  These securities
are not readily marketable and are required for regulatory purposes and
borrowing availability.  Since there are no available observable
market values, these securities are carried at cost.  Redemption of
these investments is at the option of the FHLB or FRB.





4.  Loans





Loans consisted of the
following:





(Dollars in thousands)
                  
                  September 30,
                    2009
                  
                  
                  Percent of
                    total
                  
                  
                  December 31,
                    2008
                  
                  
                  Percent of
                    totalReal
      estate loans:One-to-four
      family residential
                  
                  $
                  101,131
                  
                  
                  
                  28.6
                  %
                  
                  $
                  112,815
                  
                  
                  
                  30.5
                  %Commercial
                  
                  
                  127,947
                  
                  
                  
                  36.1
                  %
                  
                  
                  126,977
                  
                  
                  
                  34.4
                  %Construction
                  
                  
                  12,399
                  
                  
                  
                  3.5
                  %
                  
                  
                  19,618
                  
                  
                  
                  5.3
                  %Commercial
      loans
                  
                  
                  104,886
                  
                  
                  
                  29.6
                  %
                  
                  
                  101,976
                  
                  
                  
                  27.6
                  %Consumer
      loans
                  
                  
                  7,935
                  
                  
                  
                  2.2
                  %
                  
                  
                  7,937
                  
                  
                  
                  2.2
                  %Total
      gross loans
                  
                  
                  354,298
                  
                  
                  
                  100.0
                  %
                  
                  
                  369,323
                  
                  
                  
                  100.0
                  %Deferred
      loan fees/costs and loans in process
                  
                  
                  (318
                  )
                  
                  
                  
                  
                  
                  
                  320Allowance
      for loan losses
                  
                  
                  (5,228
                  )
                  
                  
                  
                  
                  
                  
                  (3,871
                  )Total
      net loans
                  
                  $
                  348,752
                  
                  
                  
                  
                  
                  
                  $
                  365,772





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





Three
      months ended
                    September
      30,
                  
                  
                  Nine
      months ended
                    September
      30,(Dollars
      in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  4,827
                  
                  
                  $
                  3,326
                  
                  
                  $
                  3,871
                  
                  
                  $
                  4,172Provision
      for loan losses
                  
                  
                  1,900
                  
                  
                  
                  500
                  
                  
                  
                  3,000
                  
                  
                  
                  1,400Charge-offs
                  
                  
                  (1,543
                  )
                  
                  
                  (60
                  )
                  
                  
                  (1,923
                  )
                  
                  
                  (1,840
                  )Recoveries
                  
                  
                  44
                  
                  
                  
                  22
                  
                  
                  
                  280
                  
                  
                  
                  56Ending
      balance
                  
                  $
                  5,228
                  
                  
                  $
                  3,788
                  
                  
                  $
                  5,228
                  
                  
                  $
                  3,788





During
the three months ended September 30, 2009 we had net loan charge-offs of $1.5
million compared to $38,000 for the comparable period of 2008.  During
the nine months ended September 30, 2009 we had net loan charge-offs of $1.6
million compared to $1.8 million for the comparable period of
2008.


11


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





(Dollars
      in thousands)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Real
      estate loans:One-to-four
      family residential
                  
                  $
                  963
                  
                  
                  $
                  1,358Commercial
                  
                  
                  2,887
                  
                  
                  
                  2,041Construction
                  
                  
                  4,605
                  
                  
                  
                  759Commercial
      loans
                  
                  
                  3,783
                  
                  
                  
                  1,537Consumer
      loans
                  
                  
                  16
                  
                  
                  
                  53Total
      non-accrual loans
                  
                  $
                  12,254
                  
                  
                  $
                  5,748





A summary
of the nonperforming assets is as follows:





(Dollars
      in thousands)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Total
      non-accrual loans
                  
                  $
                  12,254
                  
                  
                  $
                  5,748Accruing
      loans over 90 days past due
                  
                  
                  -
                  
                  
                  
                  -Other
      real estate owned
                  
                  
                  1,793
                  
                  
                  
                  1,934Total
      nonperforming assets
                  
                  $
                  14,047
                  
                  
                  $
                  7,682Total
      nonperforming loans to total net loans
                  
                  
                  3.5
                  %
                  
                  
                  1.6
                  %Total
      nonperforming assets to total assets
                  
                  
                  2.3
                  %
                  
                  
                  1.3
                  %Allowance
      for loan losses to gross loans outstanding
                  
                  
                  1.5
                  %
                  
                  
                  1.0
                  %Allowance
      for loan losses to total nonperforming loans
                  
                  
                  42.7
                  %
                  
                  
                  67.3
                  %





Loans
past due more than a month totaled $14.5 million at September 30, 2009, compared
to $9.4 million at December 31, 2008.  At September 30, 2009, $12.3
million in loans were on non-accrual status, or 3.5% of net loans, compared to a
balance of $5.7 million in loans on non-accrual status, or 1.6% of net loans, at
December 31, 2008.  Non-accrual loans consist primarily of loans
greater than ninety days past due and which are also included in the past due
loan balances.  There were no loans 90
days delinquent and still accruing interest at September 30, 2009 or December
31, 2008.  The increase in non-accrual and past due loans was
primarily driven by a $4.2 million construction loan relationship and a $2.9
million commercial agriculture loan that were classified as non-accrual and past
due during the first nine months of 2009.





A summary of the impaired loans is as
follows:




(Dollars
      in thousands)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Impaired
      loans for which an allowance has been provided
                  
                  $
                  8,954
                  
                  
                  $
                  1,867Impaired
      loans for which no allowance has been provided
                  
                  
                  3,260
                  
                  
                  
                  5,192Total
      impaired loans
                  
                  
                  12,214
                  
                  
                  
                  7,059Allowance
      related to impaired loans
                  
                  $
                  2,288
                  
                  
                  $
                  705





Our impaired loans increased primarily
because of the same two loans impacting non-accrual and past due loan
balances.  Our analysis of these two impaired loans concluded that the
potential exists that the updated collateral values or sources of repayment may
not be sufficient to fully cover the outstanding loan balances at September 30,
2009.


12


5.          Fair
Value Measurements





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





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


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


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





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





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





The
Company classifies its pooled trust preferred securities as Level
3.  The portfolio consists of three investments in pooled trust
preferred securities issued by various financial companies.  The
Company has determined that the observable market data associated with these
assets do not represent orderly transactions in accordance with FASB ASC 820 and
reflect forced liquidations or distressed sales.  Based on the lack of
observable market data, the Company estimated fair value based on the observable
data available and reasonable unobservable market assumptions.  The
Company estimated fair value based on a discounted cash flow model which used
appropriately adjusted discount rates reflecting credit and liquidity
risks.





The following table represents the
Company’s investment securities that are measured at fair value on a recurring
basis at September 30, 2009 and December 31, 2008 allocated to the appropriate
fair value hierarchy:





As
      of September 30, 2009Fair
      value hierarchy(Dollars
      in thousands)
                  
                  Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Assets:Available-for-sale
      securities
                  
                  $
                  170,596
                  
                  
                  $
                  809
                  
                  
                  $
                  169,523
                  
                  
                  $
                  264Derivative
      financial instruments
                  
                  
                  37
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  37





As
      of December 31, 2008Fair
      value hierarchy(Dollars
      in thousands)
                  
                  Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Assets:Available-for-sale
      securities
                  
                  $
                  162,245
                  
                  
                  $
                  1,014
                  
                  
                  $
                  160,490
                  
                  
                  $
                  740Derivative
      financial instruments
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18




13


The following table reconciles the
changes in the Company’s Level 3 instruments during the first nine months of
2009.





DerivativeAvailable-for
                    
                    
                    financial(Dollars
      in thousands)
                    
                    sale-securities
                    
                    
                    instrumentsLevel
      3 asset fair value at December 31, 2008
                    
                    $
                    740
                    
                    
                    $
                    18Transfers
      into Level 3
                    
                    
                    -Total
      gains (losses)Included
      in earnings
                    
                    
                    (709
                    )
                    
                    
                    19Included
      in other comprehensive income
                    
                    
                    233
                    
                    
                    
                    -Level
      3 asset fair value at September 30, 2009
                    
                    $
                    264
                    
                    
                    $
                    37





Changes in the fair value of
available-for-sale securities are included in other comprehensive income to the
extent the changes are not considered other than temporary
impairments.  Other than temporary impairment tests are performed on a
quarterly basis and any decline in the fair value of an individual security
below its cost that is deemed to be other than temporary results in a write-down
of that security’s cost basis.  During the first nine months of 2009
the Company recorded a $709,000 impairment loss on two $1.0 million par
investments in pooled trust preferred securities.





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





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





The Company’s other investment
securities include investments in Federal Home Loan Bank of Topeka (“FHLB”) and
Federal Reserve Bank (“FRB”) stock, which are held for regulatory
purposes.  These investments generally have restrictions on the sale
and/or liquidation of stock and the carrying value is approximately equal to
fair value.  Fair value measurements for these securities are
classified as Level 3 based on the undeliverable nature and related credit
risk.





The Company does not value its loan
portfolio at fair value, however adjustments are recorded on certain loans to
reflect the impaired value on the underlying collateral.  Collateral
values are generally reviewed on a loan-by-loan basis through independent
appraisals.  Appraised values may be discounted based on management’s
historical knowledge, changes in market conditions and/or management’s expertise
and knowledge of the client and the client’s business.  Because many
of these inputs are unobservable the valuations are classified as Level
3.  The carrying value of the Company’s impaired loans was $12.2
million, before an allocated allowance of $2.3 million at September 30, 2009,
compared to a carrying value of $7.1 million and allocated allowance of $705,000
at December 31, 2008.





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





The Company’s measure of
its goodwill is based on market based valuation techniques, includingreviewing the Company’s stock price and valuation multiples as compared
to recent similar financial industry acquisition multiples to estimate the fair
value of the Company’s single reporting unit.  The fair value
measurements are classified as Level 3.





Core deposit intangibles are recognized
at the time core deposits are acquired, using valuation techniques which
calculate the present value of the estimated net cost savings relative to the
Company’s alternative costs of funds over the expected remaining economic life
of the deposits.  Subsequent evaluations are made when facts or
circumstances indicate potential impairment may have occurred.  The
models incorporate market discount rates, estimated average core deposit lives
and alternative funding rates.  The fair value measurements are
classified as Level 3.


14


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





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


The following table represents the
Company’s assets that are measured at fair value on a nonrecurring basis at
September 30, 2009 allocated to the appropriate fair value
hierarchy:





(Dollars
      in thousands)
                  
                  
                  
                  
                  Fair
      value hierarchy
                  
                  
                  Total
      gainsAssets:
                  
                  Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  (losses)Other
      investment securities
                  
                  $
                  7,950
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  7,950
                  
                  
                  $
                  -Impaired
      loans
                  
                  
                  9,926
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,926
                  
                  
                  
                  (2,288
                  )Loans
      held for sale
                  
                  
                  4,180
                  
                  
                  
                  -
                  
                  
                  
                  4,180
                  
                  
                  
                  -
                  
                  
                  
                  -Mortgage
      servicing rights
                  
                  
                  2,116
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,116
                  
                  
                  
                  -Other
      real estate owned
                  
                  
                  1,793
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,793
                  
                  
                  
                  -





6.          Fair
Value of Financial Instruments





Fair value estimates of the Company’s
financial instruments as of September 30, 2009 and December 31, 2008, including
methods and assumptions utilized, are set forth below:





As
      of September 30, 2009
                                    
                                    
                                    As
      of December 31, 2008(Dollars
      in thousands)Carrying
                                    
                                    
                                    Estimated
                                    
                                    
                                    Carrying
                                    
                                    
                                    Estimatedamount
                                    
                                    
                                    fair
      value
                                    
                                    
                                    amount
                                    
                                    
                                    fair
      valueCash
      and cash equivalents
                                    
                                    $
                                    20,681
                                    
                                    
                                    $
                                    20,681
                                    
                                    
                                    $
                                    13,788
                                    
                                    
                                    $
                                    13,788Investment
      securities
                                    
                                    
                                    178,546
                                    
                                    
                                    
                                    178,546
                                    
                                    
                                    
                                    171,297
                                    
                                    
                                    
                                    171,297Loans,
      net of unearned feesand
      allowance for loan losses
                                    
                                    
                                    348,752
                                    
                                    
                                    
                                    351,244
                                    
                                    
                                    
                                    365,772
                                    
                                    
                                    
                                    368,558Loans
      held for sale
                                    
                                    
                                    3,974
                                    
                                    
                                    
                                    4,180
                                    
                                    
                                    
                                    1,487
                                    
                                    
                                    
                                    1,749Mortgage
      servicing rights
                                    
                                    
                                    729
                                    
                                    
                                    
                                    2,116
                                    
                                    
                                    
                                    170
                                    
                                    
                                    
                                    1,008Accrued
      interest receivable
                                    
                                    $
                                    3,297
                                    
                                    
                                    $
                                    3,297
                                    
                                    
                                    $
                                    3,766
                                    
                                    
                                    $
                                    3,766Non-interest
      bearing demand deposits
                                    
                                    
                                    48,939
                                    
                                    
                                    
                                    48,939
                                    
                                    
                                    
                                    49,823
                                    
                                    
                                    
                                    49,823Money
      market and NOW deposits
                                    
                                    
                                    158,633
                                    
                                    
                                    
                                    158,633
                                    
                                    
                                    
                                    150,116
                                    
                                    
                                    
                                    150,116Savings
      deposits
                                    
                                    
                                    28,377
                                    
                                    
                                    
                                    28,377
                                    
                                    
                                    
                                    26,203
                                    
                                    
                                    
                                    26,203Time
      deposits
                                    
                                    
                                    214,893
                                    
                                    
                                    
                                    216,441
                                    
                                    
                                    
                                    213,404
                                    
                                    
                                    
                                    214,859Total
      deposits
                                    
                                    
                                    450,842
                                    
                                    
                                    
                                    463,245
                                    
                                    
                                    
                                    439,546
                                    
                                    
                                    
                                    441,001FHLB
      borrowings
                                    
                                    
                                    61,060
                                    
                                    
                                    
                                    64,081
                                    
                                    
                                    
                                    77,319
                                    
                                    
                                    
                                    81,986Other
      borrowings
                                    
                                    
                                    29,664
                                    
                                    
                                    
                                    23,465
                                    
                                    
                                    
                                    27,047
                                    
                                    
                                    
                                    23,298Accrued
      interest payable
                                    
                                    $
                                    1,262
                                    
                                    
                                    $
                                    1,262
                                    
                                    
                                    $
                                    1,673
                                    
                                    
                                    $
                                    1,673





Methods
and Assumptions Utilized





The carrying amount of cash, cash
equivalents, repurchase agreements and federal funds sold are considered to
approximate fair value and are included in the cash and cash
equivalents.  The carrying amounts of accrued interest receivable and
payable are also considered to approximate fair value.





A detailed description of the estimated
fair value of investment securities, mortgage serving rights and loans
held-for-sale is available in Note 5.


15


The estimated fair value of the
Company’s loan portfolio is based on the segregation of loans by collateral
type, interest terms, and maturities.  In estimating the fair value of
each category of loans, the carrying amount of the loan is reduced by an
allocation of the allowance for loan losses.  Such allocation is based
on management’s loan classification system, which is designed to measure the
credit risk inherent in each classification category.  The estimated
fair value of performing variable rate loans is the carrying value of such
loans, reduced by an allocation of the allowance for loan losses.  The
estimated fair value of performing fixed rate loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the interest rate risk inherent in the loan, reduced
by an allocation of the allowance for loan losses.  The estimate of
maturity is based on the Company’s historical experience with repayments for
each loan classification, modified, as required, by an estimate of the effect of
current economic and lending conditions.  The fair value for
nonperforming loans is the estimated fair value of the underlying collateral
based on recent external appraisals or other available information, which
generally approximates carrying value, reduced by an allocation of the allowance
for loan losses.





The estimated fair value of deposits
with no stated maturity, such as non-interest bearing demand deposits, savings,
money market accounts, and NOW accounts, is equal to the amount payable on
demand.  The fair value of interest bearing time deposits is based on
the discounted value of contractual cash flows of such deposits.  The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.





The fair value of advances from the
FHLB is estimated using current market rates offered for similar
borrowings.  The fair values of other borrowings are estimated using
current market rates offered for similar borrowings.





Off-Balance
Sheet Financial Instruments





The fair value of letters of credit and
commitments to extend credit is based on the fees currently charged to enter
into similar agreements.  The aggregate of these fees is not
material.





Limitations





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





7.          Earnings
per Share





Basic earnings per share have been
computed based upon the weighted average number of common shares outstanding
during each period.  Diluted earnings per share includes the effect of
all potential common shares outstanding during each period.  Earnings
and dividends per share for prior periods have been adjusted to give effect to
the 5% stock dividend paid by the Company in December 2008.





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





(Dollars
      in thousands, except per share data)
                
                Three
      months ended
                  September
      30,
                
                
                Nine
      months ended
                  September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      earnings available to common stockholders
                
                $
                113
                
                
                $
                1,150
                
                
                $
                2,134
                
                
                $
                3,793Weighted
      average common shares outstanding – basic
                
                
                2,371,450
                
                
                
                2,382,302
                
                
                
                2,371,620
                
                
                
                2,411,714Dilutive
      stock options
                
                
                4,844
                
                
                
                6,875
                
                
                
                4,912
                
                
                
                8,156Weighted
      average common shares – diluted
                
                
                2,376,294
                
                
                
                2,389,177
                
                
                
                2,376,532
                
                
                
                2,419,870Net
      earnings per share:Basic
                
                $
                0.05
                
                
                $
                0.48
                
                
                $
                0.90
                
                
                $
                1.57Diluted
                
                $
                0.05
                
                
                $
                0.48
                
                
                $
                0.90
                
                
                $
                1.57




16


8.           Comprehensive
Income





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




(Dollars
      in thousands)
                  
                  Three
      months ended
                    September
      30,
                  
                  
                  Nine
      months ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      earnings
                  
                  $
                  113
                  
                  
                  $
                  1,150
                  
                  
                  $
                  2,134
                  
                  
                  $
                  3,793Unrealized
      holding losses on available for sale securities for which a portion of an
      other than temporary impairment has been recorded in
    earnings
                  
                  
                  (154
                  )
                  
                  
                  -
                  
                  
                  
                  (339
                  )
                  
                  
                  -Unrealized
      holding losses on all other available for sale securities
                  
                  
                  3,462
                  
                  
                  
                  (554
                  )
                  
                  
                  2,982
                  
                  
                  
                  (1,559
                  )Reclassification
      adjustment for losses (gains) included in earnings
                  
                  
                  133
                  
                  
                  
                  -
                  
                  
                  
                  709
                  
                  
                  
                  (497
                  )Net
      unrealized gains (losses)
                  
                  
                  3,441
                  
                  
                  
                  (554
                  )
                  
                  
                  3,352
                  
                  
                  
                  (2,056
                  )Income
      tax expense (benefit)
                  
                  
                  1,270
                  
                  
                  
                  (210
                  )
                  
                  
                  1,224
                  
                  
                  
                  (781
                  )Total
      comprehensive income
                  
                  $
                  2,284
                  
                  
                  $
                  806
                  
                  
                  $
                  4,262
                  
                  
                  $
                  2,518





9.          Acquisition





The
Company completed the acquisition, by its wholly-owned subsidiary, Landmark
National Bank, of a branch located at 4621 W. 6th Street, in Lawrence, Kansas
from CornerBank, N.A. effective May 8, 2009.  Pursuant to the
agreement, Landmark National Bank purchased approximately $4.0 million in loans,
assumed approximately $6.4 million in deposits and acquired approximately $2.6
million in related branch premises and equipment.  The transaction
expands Landmark National Bank’s banking presence in Lawrence, Kansas and gives
the bank a second location in the community.





10.           Impact
of Recent Accounting Pronouncements





In
December 2007, the FASB revised accounting guidance on accounting for business
combinations.  GAAP retains the fundamental requirements of the
acquisition method of accounting for business combinations, but broadens the
scope of and contains improvements to the application of this
method.  The new guidance requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that
date.  Costs incurred to effect the acquisition are to be recognized
separately from the acquisition.  Assets and liabilities arising from
contingent considerations must be measured at fair value as of the acquisition
date.  The revisions also change the accounting for negative goodwill
arising from a bargain purchase, requiring recognition in earnings instead of
allocation to assets acquired.  The Company adopted this guidance on
January 1, 2009.





In March
2008, the FASB required enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for, and how these activities affect its financial position, financial
performance, and cash flows. The Company adopted this guidance on January 1,
2009.  The adoption did not have a material effect on our consolidated
financial statements given the Company’s limited use of derivative
instruments.





In April
2009, the FASB issued guidance on the recognition and presentation of other than
temporary impairments, which amends guidance for recognizing and reporting other
than temporary impairments of debt securities and improves the presentation of
other than temporary impairments in financial statements for both debt and
equity securities.  Companies are now required to separate an other
than temporary impairment of a debt security into credit related losses and
other factors when management asserts that it does not have the intent to sell
the security and it is more likely than not that it will not be required to sell
the security before recovery of its cost basis.  The amount of other
than temporary impairment related credit losses is recognized in earnings while
the amount related to other factors is recorded in other comprehensive
income.  The Company adopted the accounting guidance effective January
1, 2009 and applied the principles to its other than temporary impairment
analysis during the first nine months of 2009, including its pooled trust
preferred investment securities which resulted in the recognition of a credit
related impairment of $709,000 in earnings while the noncredit-related loss of
$1.1 million is recognized in accumulated other comprehensive
income.


17


In April
2009, the FASB issued additional guidance for estimating fair value in
accordance when the volume and level of activity for an asset or liability, in
relation to normal market activity, has significantly decreased.  The
guidance emphasizes that the objective of fair value measurement remains the
same, determining the price that would be received or paid in an orderly
transaction between market participants at the measurement date under current
market conditions.  The Company adopted this guidance as of January 1,
2009 and has applied the guidance to its pooled trust preferred
securities.





In April
2009, the FASB expanded disclosures on the fair value of financial instruments
to include interim reporting periods, in addition to annual
disclosures.  The Company adopted the guidance on April 1, 2009 and
has included the required disclosures in the attached footnotes.





In May
2009, the FASB established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued.  In particular this statement sets forth the period after
the balance sheet date during which management should evaluate events or
transactions for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize subsequent
events or transactions and the disclosures required.  The Company
adopted this guidance for the quarter ended June 30, 2009 and has concluded
there were no material subsequent events through November 12, 2009, the date
that financial statements were issued.





In June
2009, the FASB clarified and improved the reporting requirements of accounting
for transfers and servicing of financial assets and extinguishments of
liabilities and eliminated the concept of qualifying special purpose entities
for accounting purposes.  For calendar year companies, this guidance
is effective for annual periods ending on December 31, 2009 and for all interim
and annual periods thereafter.  The Company does not expect that the
adoption of this guidance will have a material effect on consolidated financial
statements.





In June
2009, the FASB improved the financial reporting of variable interest entities
and provided clarification as a result of the elimination of qualifying special
purpose entities.  For calendar year companies, this statement is
effective for annual periods ending on December 31, 2009 and for all interim and
annual periods thereafter.  The Company does not expect that the
adoption of this guidance will have a material effect on consolidated financial
statements.





In June
2009, the FASB established the Accounting Standards Codification (Codification)
as the source of authoritative U.S. GAAP.  Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants.  On the effective date the Codification will supersede
all then-existing non-SEC accounting and reporting standards.  Going
forward the Board will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it
will issue Accounting Standards Updates.  The Board will not consider
Accounting Standards Updates as authoritative in their own
right.  Accounting Standards Updates will serve only to update the
Codification, provide background information about the guidance, and provide the
bases for conclusions on the change(s) in the Codification.  The
Company applied this guidance beginning with the interim reporting period of
September 30, 2009.  The adoption did not have a material effect on
our consolidated financial statements.




18


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





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





Our results of operations depend
generally on net interest income, which is the difference between interest
income from interest-earning assets and interest expense on interest-bearing
liabilities.  While net interest income was stable for the second
quarter of 2009, results were affected by certain non-interest related
items.  Net interest income is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows.  In addition, we are subject to interest rate risk to the
degree that our interest-earning assets mature or reprice at different times, or
at different speeds, than our interest-bearing liabilities.  Our
results of operations are also affected by non-interest income, such as service
charges, loan fees and gains from the sale of newly originated loans and gains
or losses on investments.  Our principal operating expenses, aside
from interest expense, consist of compensation and employee benefits, occupancy
costs, data processing expenses and provision for loan losses.





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





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





Information
about our critical accounting policies is included under Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2008.  The
only change in our critical accounting policies since December 31, 2008 is a
result of the change in U.S. GAAP related to the recognition and presentation of
other than temporary impairment included in ASC Topic 320-10-65.Based on the
guidance, now if we deem a decline in the fair value of a debt security to be
other than temporary, we lower the cost basis, through a charge to earnings, by
the amount of credit losses inherent in the investment versus writing the
security down to fair value through a charge to
earnings.





Summary of
Results.  During the third
quarter of 2009, our net earnings declined by $1.0 million, to $113,000, as
compared to net earnings of $1.2 million in the same period of
2008.  The decline in earnings was primarily the result of a $1.4
million increase in our provision for loan losses, which increased from $500,000
during the three months ended September 30, 2008 to $1.9 million for the three
months ended September 30, 2009.  Our provision for loan losses was
higher in 2009 based on the analysis of our loan portfolio, which indicated the
additional provision for loan losses was warranted given the impact of declining
residential and commercial real estate values impacting the underlying
collateral in our loan portfolio, increased levels of non-accrual and past due
loans and the impact of the current economic environment on our loan
customers.  Our provision for loan losses was higher in both 2009 and
2008 as compared to historical levels prior to 2008, due to the difficult
conditions that continue to exist in the economy and its impact on our loan
portfolio as well as increased levels of charge-offs and nonperforming loans
experienced in the difficult economic and credit environments that have existed
during both 2008 and 2009.  Also during the third quarter of 2009 we
identified a $1.0 million par investment in a pooled trust preferred security as
other than temporarily impaired.  The credit-related impairment charge
for this security was $133,000.  Absent the $1.4 million increase in
provision for loan losses and the $133,000 net impairment loss, our 2009 third
quarter earnings before income taxes were relatively flat compared to the prior
year.  Our non-interest expenses increased by $515,000, to $4.8
million, during the third quarter of 2009 as compared to $4.3 million during the
third quarter of 2008, primarily as the result of a $144,000 increase in FDIC
insurance premiums due to higher assessment rates, which have been imposed on
all financial institutions, and the depletion of our FDIC credits as well as
expenses related to the acquisition and operation of a branch in Lawrence,
KS.  Partially offsetting the increased expenses was an increase in
non-interest income, which was primarily attributable to a $324,000 increase in
gains on sale of loans, driven by higher origination volumes of residential real
estate loans that were sold in the secondary market.


19





During
the first nine months of 2009, our net earnings declined by $1.7 million to $2.1
million as compared to net earnings of $3.8 million in the same period of
2008.  The decline in earnings was primarily the result of a $1.6
million increase in our provision for loan losses, which increased from $1.4
million during the nine months ended September 30, 2008 to $3.0 million for the
nine months ended September 30, 2009.  Our provision for loan losses
was higher in 2009 based on the analysis of our loan portfolio, which indicated
the higher levels of provision for loan losses was warranted given the impact of
declining residential and commercial real estate values impacting the underlying
collateral in our loan portfolio, increased levels of non-accrual and past due
loans and the impact of the current economic environment on our loan
customers.  Our provision for loan losses was higher in both 2009 and
2008 as compared to historical levels prior to 2008, due to the difficult
conditions that continue to exist in the economy and its impact on our loan
portfolio as well as increased levels of charge-offs and nonperforming loans
experienced in the difficult economic and credit environments that have existed
during both 2008 and 2009.  During the first nine months of 2009 we
identified two $1.0 million par investments in pooled trust preferred securities
as other than temporarily impaired.  The net credit-related impairment
charge related to these securities was approximately $709,000 for the nine
months ended September 30, 2009.  Our non-interest expenses increased
by $1.4 million, to $14.2 million, during the first nine months of 2009 as
compared to the first nine months of 2008, primarily as a result of a $598,000
increase in FDIC insurance premiums.  Our FDIC insurance premiums
increased by $598,000 as the result of a $277,000 special assessment, higher
assessment rates and the depletion of our FDIC credits.  We also
experienced increases in expenses relating to the acquisition and operation of a
branch in Lawrence, KS and foreclosure and other real estate
costs.  Partially offsetting the increased expenses was a $1.3 million
increase in non-interest income, which was primarily attributable to a $1.5
million increase in gains on sale of loans driven by higher origination volumes
of residential real estate loans that were sold in the secondary
market.  Results for the first nine months of 2008 included a $246,000
gain from the prepayment of a FHLB advance, which represented the remaining
unamortized fair value adjustment recorded in purchase accounting and $497,000
of gains on sales of investment securities.





Our net
interest margin increased from 3.47% for the third quarter of 2008 to 3.59% for
the third quarter of 2009.  For the nine months ended September 30,
2008 and 2009, our net interest margin increased from 3.48% to
3.54%.  For each period, we were able to reduce our cost of deposits
and borrowings enough to offset the lower yields earned on loans and investment
securities in markets that experienced a dramatic decline in benchmark interest
rates that began in late 2007 and continued throughout 2008 and
2009.  The lower cost of funding allowed us to maintain our net
interest margin in a market that as of September 30, 2009 exhibited interest
rates that are still very low compared to historical levels.





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





(Dollars in thousands)
                  
                  Three months ended September
                    30,
                  
                  
                  Nine months ended September
                    30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      earnings:Net
      earnings
                  
                  $
                  113
                  
                  
                  $
                  1,576
                  
                  
                  $
                  2,134
                  
                  
                  $
                  3,793Basic
      earnings per share
                  
                  $
                  0.05
                  
                  
                  $
                  0.66
                  
                  
                  $
                  0.90
                  
                  
                  $
                  1.57Diluted
      earnings per share
                  
                  $
                  0.05
                  
                  
                  $
                  0.66
                  
                  
                  $
                  0.90
                  
                  
                  $
                  1.57Earnings
      ratios:Return
      on average assets (1)
                  
                  
                  0.07
                  %
                  
                  
                  0.75
                  %
                  
                  
                  0.47
                  %
                  
                  
                  0.83
                  %Return
      on average equity (1)
                  
                  
                  0.84
                  %
                  
                  
                  9.11
                  %
                  
                  
                  5.43
                  %
                  
                  
                  9.96
                  %Equity
      to total assets
                  
                  
                  9.01
                  %
                  
                  
                  8.27
                  %
                  
                  
                  9.01
                  %
                  
                  
                  8.27
                  %Net
      interest margin (1) (2)
                  
                  
                  3.59
                  %
                  
                  
                  3.47
                  %
                  
                  
                  3.54
                  %
                  
                  
                  3.48
                  %Dividend
      payout ratio
                  
                  
                  380.00
                  %
                  
                  
                  37.25
                  %
                  
                  
                  63.33
                  %
                  
                  
                  34.55
                  %





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


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





Interest
Income.  Interest income for the quarter ended September 30,
2009, decreased $961,000, or 12.4%, to $6.8 million from $7.8 million in the
same period of 2008.  Interest income on loans decreased $835,000, or
14.0%, to $5.1 million for the quarter ended September 30, 2009 due to decreases
in the yields earned on our loans as rates declined during 2008 and decreased
outstanding loan balances.  Our tax equivalent yields earned on loans
declined from 6.27% during the third quarter of 2008 to 5.67% during the third
quarter of 2009.  Average loan balances for the quarter ended
September 30, 2009 decreased to $359.8 million from $379.5 million for the same
period in 2008.  Interest income on investment securities decreased
$126,000, or 7.0%, to $1.7 million for the third quarter of 2009, as compared to
2008.  Average investment securities increased from $172.1 million for
the quarter ended September 30, 2008, to $186.3 million for
2009.  Offsetting the increase in average investments for the
comparable period were lower yields earned on the investments, which declined
from 4.82% during the third quarter of 2008 to 4.23% during the third quarter of
2009.  The increased levels of investments were the result of the
increased liquidity primarily from lower outstanding loan
balances.


20





Interest
income for the nine months ended September 30, 2009, decreased $3.6 million, or
14.9%, to $20.6 million from $24.2 million in the same period of
2008.  Interest income on loans decreased $3.2 million, or 17.3%, to
$15.5 million for the nine months ended September 30, 2009 due primarily to
decreases in the yields earned on our loans as rates declined during 2008 and as
a result of decreased outstanding loan balances.  Our tax equivalent
yields earned on loans declined from 6.63% to 5.74% during the first nine months
of 2008 as compared to the first nine months of 2009.  Average loans
for the nine months ended September 30, 2009 decreased to $363.5 million from
$380.1 million for 2008.  Interest income on investment securities
decreased $357,000, or 6.5%, to $5.1 million for the first nine months of 2009,
as compared to 2008.  Average investment securities increased from
$170.8 million for the nine months ended September 30, 2008, to $184.5 million
for 2009.  Offsetting the increase in average investments for the
comparable period were lower yields earned on the investments, which declined
from 4.90% during the first nine months of 2008 to 4.34% during the first nine
months of 2009.  The higher levels of investments were the result of
the increased liquidity from lower outstanding loan balances.





Interest
Expense.  Interest expense
during the quarter ended September 30, 2009 decreased $1.0 million, or 32.3%, as
compared to the same period of 2008.  For the third quarter of 2009
interest expense on interest-bearing deposits decreased $858,000, or 38.0% as a
result of lower rates on deposit balances, primarily consisting of lower rates
for our maturing certificates of deposit and lower rates on money market and NOW
accounts due to the decline in interest rates experienced during 2008 and
continuing into 2009.  Our total cost of deposits declined from 2.32%
during the third quarter of 2008 to 1.38% during the same period of
2009.  Partially offsetting the lower rates were increased average
deposit balances, which increased from $388.2 million for the third quarter of
2008 to $401.8 million for the third quarter of 2009.  For the first
nine months of 2009 interest expense on borrowings decreased $191,000, or 19.4%,
due primarily to lower outstanding balances on our borrowings.  Our
cost of borrowing decreased from 3.51% in the third quarter of 2008 to 3.48% in
the same period of 2009 while our average outstanding borrowings declined from
$111.7 million to $90.3 million over the same periods.





Interest
expense during the nine months ended September 30, 2009 decreased $3.7 million,
or 34.4%, as compared to the same period of 2008.  For the first nine
months of 2009 interest expense on interest-bearing deposits decreased $3.4
million, or 42.5%, as a result of lower rates on deposit balances, primarily
consisting of lower rates for our maturing certificates of deposit and lower
rates on money market and NOW accounts due to the decline in interest
rates.  Our total cost of deposits declined from 2.70% during the
first nine months of 2008 to 1.53% during the same period of
2009.  Offsetting the lower cost of deposits was an increase in the
average deposit balances from $395.5 million to $401.2 million during the third
quarters of 2008 and 2009, respectively.  For the first nine months of
2009 interest expense on borrowings decreased $309,000, or 11.1%, due primarily
to lower outstanding borrowings.  Our average outstanding borrowings
declined from $104.4 million during the first nine months of 2008 to $94.0
million during the same period of 2009.  Our cost of borrowing
declined from 3.57% in the first nine months of 2008 to 3.53% in the same period
of 2009.





Net Interest
Income.  Net interest
income for the quarter ended September 30, 2009 totaled $4.6 million, increasing
$88,000, or 1.9%, as compared to the $4.5 million of net interest income for the
quarter ended September 30, 2008.  Our net interest margin, on a tax
equivalent basis, increased from 3.47% during the third quarter of 2008 to 3.59%
during the third quarter of 2009.  The increase in net interest margin
occurred primarily because we were able to reduce our costs of funding by more
than our yields declined on our interest earning assets as our interest earning
assets and our interest bearing liabilities continue to reprice lower in this
low interest rate environment.  The improvement in net interest margin
from interest rates more than offset the lower average balances of interest
earning assets which declined from $551.7 million in the third quarter of 2008
to $546.2 million in the third quarter of 2009.


Net
interest income for the nine months ended September 30, 2009 totaled $13.6
million, increasing $105,000, or 0.8%, as compared to the $13.5 million of net
interest income for the nine months ended September 30, 2008.  Our net
interest margin, on a tax equivalent basis, increased from 3.48% for the nine
months ending September 30, 2008 to 3.54% for the same period in
2009.  The increase in net interest margin occurred primarily because
we were able to reduce our costs of funding by more than our yields declined on
our interest earning assets as our interest earning assets and our interest
bearing liabilities continue to reprice lower in this low interest rate
environment.  The improvement in net interest margin from interest
rates more than offset the lower average balances of interest earning assets
which declined from $550.9 million in the nine months ending September 30, 2008
to $548.0 million for the nine months ending September 30,
2009.


21





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


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





The
provision for loan losses for the quarter ended September 30, 2009 was $1.9
million, compared to a provision of $500,000 during the same period of
2008.  For the nine months ended September 30, 2009 our provision for
loan losses was $3.0 million as compared to $1.4 million for the same period of
2008.  Our provision for loan losses was higher in 2009 based on the
analysis of our loan portfolio, which indicated the additional provision for
loan losses was warranted given the impact of declining residential and
commercial real estate values impacting the underlying collateral in our loan
portfolio, increased levels of non-accrual and past due loans and the impact of
the current economic environment on our loan customers.  Our provision
for loan losses was higher in both 2009 and 2008 than compared to historical
levels prior to 2008, due to the difficult conditions that continue to exist in
the economy and its impact on our loan portfolio as well as increased levels of
charge-offs and nonperforming loans experienced in the difficult economic and
credit environments that have existed during both 2008 and 2009.  We
have been working diligently to identify and address the credit weaknesses in
our loan portfolio.  In addition we have reduced our outstanding
construction loans from $19.6 million at December 31, 2009 to $12.4 million at
September 30, 2009.  During the third of 2009 our non-accrual loans
declined from $13.6 million at June 30, 2009 to $12.3 million at September 30,
2009.  While it is difficult to forecast future events, we believe
that our current allowance for loan losses, coupled with our capital levels,
loan portfolio management and underlying fundamental earnings before the
provision for loan losses, positions us to deal with this challenging
environment.  For further discussion of the allowance for loan losses,
refer to the “Asset Quality and Distribution” section.





Non-interest
Income.  Non-interest
income increased $369,000, or 21.2%, for the quarter ended September 30, 2009,
to $2.1 million, as compared to $1.7 million in the nine months ended September
30, 2008.  The increase was primarily attributable to an increase of
$324,000, or 81.3%, in gains on sale of loans.  The increased gains on
sales of loans were driven by higher origination volumes of residential real
estate loans that were sold in the secondary market.





Non-interest
income increased $1.3 million, or 25.0%, for the nine months ended September 30,
2009, to $6.6 million, as compared to $5.3 million in the nine months ended
September 30, 2008.  The increase was primarily attributable to an
increase of $1.5 million in gains on sale of loans.  The increased
gains on sales of loans were driven by higher origination volumes of residential
real estate loans that were sold in the secondary market.  Partially
offsetting the increased gains on sales of loans, was a $246,000 gain that was
recognized during the nine months ended September 30, 2008 from the prepayment
of a FHLB advance, which represented the remaining unamortized fair value
adjustment required by purchase accounting.





Investment
Securities Gains (Losses).  During the third
quarter of 2009, we identified a $1.0 million par investment in a pooled trust
preferred security as other than temporarily impaired.  The investment
experienced increased levels of deferrals and defaults during the third quarter
of 2009, which exceeded our expectations resulting in a net credit-related
impairment loss on this security of $133,000.





During
the first nine months of 2009, we identified two $1.0 million par investments in
pooled trust preferred securities as other than temporarily
impaired.  The net credit-related impairment losses totaled $709,000
on these two investments.  In the second quarter of 2008, we recorded
$497,000 of gains on sales of investment securities.





Non-interest
Expense.  Non-interest
expense increased $515,000, or 12.0%, to $4.8 million for the quarter ended
September 30, 2009, as compared to the same period of 2008.  The
increase was primarily driven by increases of $146,000 in compensation and
benefits, $143,000 in FDIC insurance premiums, and $81,000 in professional
fees.  The increase in compensation and benefits was driven by higher
salary costs and the addition of employees resulting from the acquisition of a
branch in Lawrence, Kansas.  The increase in FDIC insurance premiums
was the result of higher assessment rates, which have been imposed on all
deposit institutions, and the depletion of our FDIC assessment
credits.  We anticipate that our FDIC insurance premiums will remain
higher than what we have historically paid.  The increases in
professional fees are primarily associated with outsourcing part of our IT
management, compliance with Section 404 of the Sarbanes-Oxley Act and increases
in other legal fees.


22





Non-interest
expense increased $1.4 million, or 10.6%, to $14.2 million for the nine months
ended September 30, 2009, as compared to the same period of 2008.  The
increase was primarily driven by increases of $598,000 in FDIC insurance
premiums, $300,000 in compensation and benefits, $212,000 in professional fees
and $155,000 in foreclosure and other real estate expenses.  The
increase in FDIC insurance premiums was the result of a $277,000 special
assessment, which affected all FDIC insured institutions, as well as higher
assessment rates which have been imposed on all deposit institutions, and the
depletion of our FDIC assessment credits.  The increase in
compensation and benefits was driven by higher salary costs and the addition of
employees resulting from the acquisition of a branch in Lawrence,
Kansas.  The increases in professional fees are primarily associated
with our branch acquisition, but were also elevated due to costs associated with
outsourcing part of our IT management and compliance with Section 404 of the
Sarbanes-Oxley Act.  The increase in foreclosure and other real estate
expenses, which is included in other non-interest expense, was the result of
increased foreclosure activity and other real estate balances.





Income Tax
Expense.  Income tax
expense decreased $554,000, from an expense of $300,000 for the quarter ended
September 30, 2008 to a tax benefit of $254,000 for the quarter ended September
30, 2009.  The decline in the income tax expense was the result of
lower taxable earnings, primarily from the higher levels of provisions for loan
losses and the other than temporary impairment losses.





Income
tax expense decreased $1.1 million, or 88.6%, from $1.2 million for the nine
months ended September 30, 2008, to $139,000 for the nine months ended September
30, 2009.  Our earnings before income taxes declined by $2.7 million
during the first nine months of 2009 as compared to 2008, which resulted in an
effective tax rate for the first nine months of 2009 of 6.1% as compared to
24.3% during the first nine months of 2008.  The decline in the
effective tax rate was primarily driven by lower taxable income as a percentage
of earnings before income taxes, while tax exempt income remained relatively
constant between the periods.  The declines in taxable income were
primarily from the higher levels of provisions for loan losses and the other
than temporary impairment losses.





Asset Quality and
Distribution.  Our primary
investing activities are the origination of commercial, commercial real estate,
mortgage and consumer loans and the purchase of investment
securities.  Total assets increased to $603.9 million at September 30,
2009, compared to $602.2 million at December 31, 2008.  Net loans,
excluding loans held for sale, decreased to $348.8 million at September 30, 2009
from $365.8 million at December 31, 2008.  The reduction in our total
loans is primarily the result of reducing our exposure to construction loans in
response to the current issues affecting real estate markets in addition to our
normal one-to-four family residential loan runoff.  Our portfolio of
one-to-four family residential loans declines as we typically sell most of our
new one-to-four family residential loan originations while the existing
portfolio refinances or pays off their loan balances.





The allowance for losses on loans is
established through a provision for losses on loans based on our evaluation of
the risk inherent in the loan portfolio and changes in the nature and volume of
its loan activity.  Such evaluation, which includes a review of all
loans with respect to which full collectibility may not be reasonably assured,
considers the fair value of the underlying collateral, economic conditions,
historical loan loss experience, level of classified loans and other factors
that warrant recognition in providing for an adequate allowance for losses on
loans.  During 2009, we have experienced an increase in our
non-performing assets due to the difficult conditions that continue to exist in
the economy and its impact on our loan portfolio.  As a result of the
impact of declining residential and commercial real estate values on the
underlying collateral in our loan portfolio, increased levels of non-accrual and
past due loans and the current economic environment on our loan customers, we
have increased our provision for loan losses.  During the nine months
ended September 30, 2009 our provision for loan losses totaled $3.0 million as
compared to $1.4 million during the nine months ended September 30,
2008.  As a result, our allowance for loan losses has increased to
$5.2 million at September 30, 2009 from $3.9 million at December 31,
2009.  We feel that higher levels of provisions for loan losses are
justified based upon our analysis of our loan portfolio as well as the effects
of the depressed market conditions on our loan portfolio.  We feel the
external risks within the environment which we operate remain present today and
will need to be continuously monitored.  We have identified the
stresses in our loan portfolio and are working to reduce the risks of certain
loan exposures, including significantly reducing our exposure to construction
and land development loans.  Although we believe that we use the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustment to the allowance for loan
losses.  In addition, net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in establishing the
allowance for loan losses.


23





Loans past due more than a month
totaled $14.5 million at September 30, 2009, compared to $9.4 million at
December 31, 2008.  At September 30, 2009, $12.3 million in loans were
on non-accrual status, or 3.5% of net loans, compared to a balance of $5.7
million in loans on non-accrual status, or 1.6% of net loans, at December 31,
2008.  Non-accrual loans consist primarily of loans greater than
ninety days past due and which are also included in the past due loan
balances.  There were no loans 90
days delinquent and still accruing interest at September 30, 2009 or December
31, 2008.  The increase in non-accrual and past due loans was
primarily driven by a $4.2 million construction loan relationship and a $2.9
million commercial agriculture loan that were classified as non-accrual and past
due during the first nine months of 2009.  Our impaired loans
increased from $7.1 million at December 31, 2008 to $12.2 million at September
30, 2009 primarily because of the same two loans that increased the non-accrual
and past due loan balances.  Our analysis of the two nonperforming
loans mentioned above concluded that the potential exists that the updated
collateral values or sources of repayment may not be sufficient to fully cover
the outstanding loan balances.  As part of the Company’s credit risk
management, we continue to aggressively manage the loan portfolio to identify
problem loans and have placed additional emphasis on its commercial real estate
and construction relationships.  During the three months ended
September 30, 2009 we had net loan charge-offs of $1.5 million compared to
$38,000 of net loan charge-offs for the comparable period of
2008.  During the nine months ended September 30, 2009 we had net loan
charge-offs of $1.6 million compared to $1.8 million of net loan charge-offs for
the comparable period of 2008.  During the third quarter of 2009 we
charged-off $1.1 million relating to one commercial loan relationship that went
out of business during 2009.





Liability
Distribution.  Our primary
ongoing sources of funds are deposits, proceeds from principal and interest
payments on loans and investment securities and proceeds from the sale of
mortgage loans.  While maturities and scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, competition
and the restructuring of the financial services industry.  Total
deposits increased $11.3 million to $450.8 million at September 30, 2009, from
$439.5 million at December 31, 2008.  The increase was related to
seasonal fluctuations, increased retail deposits, and the $6.4 million of
deposits assumed with our branch purchase.  Total borrowings decreased
$13.7 million to $90.7 million at September 30, 2009, from $104.4 million at
December 31, 2008.  The decline was primarily from repaying a $10.0
million FHLB advance and the outstanding borrowings on our FHLB line of
credit.





Certificates
of deposit at September 30, 2009, which were scheduled to mature in one year or
less, totaled $162.1 million.  Historically, maturing deposits have
generally remained with our bank and we believe that a significant portion of
the deposits maturing in one year or less will remain with us upon
maturity.





Liquidity.Our most liquid assets are
cash and cash equivalents and investment securities available for
sale.  The levels of these assets are dependent on the operating,
financing, lending and investing activities during any given
period.  These liquid assets totaled $191.3 million at September 30,
2009 and $176.0 million at December 31, 2008.  During periods in which
we are not able to originate a sufficient amount of loans and/or periods of high
principal prepayments, we increase our liquid assets by investing in short-term
U. S. federal agency obligations, high-grade municipal securities or FDIC
insured certificates of deposits with other financial institutions.





Liquidity management is both a daily
and long-term function of our strategy.  Excess funds are generally
invested in short-term investments.  In the event we require funds
beyond our ability to generate them internally, additional funds are generally
available through the use of FHLB advances, a line of credit with the FHLB,
other borrowings or through sales of securities.  At September 30,
2009, we had outstanding FHLB advances of $61.1 million and no borrowings
against our line of credit with the FHLB.  At September 30, 2009, our
total borrowing capacity with the FHLB was $103.6 million.  At
September 30, 2009, we had no borrowings through the Federal Reserve discount
window, while our borrowing capacity was $14.7 million.  We also have
various other fed funds agreements, both secured and unsecured, with
correspondent banks totaling approximately $48.8 million at September 30, 2009,
which had no borrowings against at that time.  We had other borrowings
of $29.7 million at September 30, 2009, which included $16.5 million of
subordinated debentures and $8.1 million in repurchase
agreements.  Additionally, we have a $9.0 million line of credit from
an unrelated financial institution maturing on November 19, 2009 with an
interest rate that adjusts daily based on the prime rate less
0.25%.  This line of credit has covenants specific to capital and
other ratios, which the Company was in compliance with at September 30,
2009.  The outstanding balance on the line of credit at September 30,
2009 was $5.1 million, which was also included in other
borrowings.  We are currently in discussions to renew our line of
credit with the same financial institution.  Based on the
negotiations, we anticipate that we will renew the line of credit for another
one year period with a borrowing capacity of $7.5 million.  If we are
unable to renew the line of credit, we will attempt to refinance with another
financial institution, which may not be on similar terms, or repay the
facility.


24





As a provider of financial services, we
routinely issue financial guarantees in the form of financial and performance
standby letters of credit. Standby letters of credit are contingent commitments
issued by us generally to guarantee the payment or performance obligation of a
customer to a third party. While these standby letters of credit represent a
potential outlay by us, a significant amount of the commitments may expire
without being drawn upon. We have recourse against the customer for any amount
the bank is required to pay to a third party under a standby letter of credit.
The letters of credit are subject to the same credit policies, underwriting
standards and approval process as loans originated by us. Most of the standby
letters of credit are secured, and in the event of nonperformance by the
customer, we have the right to the underlying collateral, which could include
commercial real estate, physical plant and property, inventory, receivables,
cash and marketable securities. The contract amount of these standby letters of
credit, which represents the maximum potential future payments guaranteed by us,
was $2.0 million at September 30, 2009.





At September 30, 2009, we had
outstanding loan commitments, excluding standby letters of credit, of $56.4
million.  We anticipate that sufficient funds will be available to
meet current loan commitments.  These commitments consist of unfunded
lines of credit and commitments to finance real estate loans.





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





At
September 30, 2009, we continued to remain well capitalized, with a leverage
ratio of 9.01% and a total risk based capital ratio of 14.62%.  As
shown by the following table, our capital exceeded the minimum capital
requirements at September 30, 2009:





(dollars in thousands)
                  
                  Actual
                  
                  
                  For capital
                    adequacy purposes
                  
                  
                  To be well-
                    capitalizedCompany
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioLeverage
                  
                  $
                  53,554
                  
                  
                  
                  9.01
                  %
                  
                  $
                  23,777
                  
                  
                  
                  4.0
                  %
                  
                  $
                  29,722
                  
                  
                  
                  5.0
                  %Tier
      1 Capital
                  
                  $
                  53,554
                  
                  
                  
                  13.35
                  %
                  
                  $
                  16,047
                  
                  
                  
                  4.0
                  %
                  
                  $
                  24,070
                  
                  
                  
                  6.0
                  %Total
      Risk Based Capital
                  
                  $
                  58,650
                  
                  
                  
                  14.62
                  %
                  
                  $
                  32,094
                  
                  
                  
                  8.0
                  %
                  
                  $
                  40,117
                  
                  
                  
                  10.0
                  %





At September 30, 2009, Landmark
National Bank continued to remain well capitalized, with a leverage ratio of
9.71% and a total risk based capital ratio of 15.63%.  As shown by the
following table, the bank’s capital exceeded the minimum capital requirements at
September 30, 2009:





(dollars in thousands)
                  
                  Actual
                  
                  
                  For capital
                    adequacy purposes
                  
                  
                  To be well-
                    capitalizedLandmark National Bank
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioLeverage
                  
                  $
                  57,514
                  
                  
                  
                  9.71
                  %
                  
                  $
                  23,700
                  
                  
                  
                  4.0
                  %
                  
                  $
                  29,624
                  
                  
                  
                  5.0
                  %Tier
      1 Capital
                  
                  $
                  57,514
                  
                  
                  
                  14.40
                  %
                  
                  $
                  15,982
                  
                  
                  
                  4.0
                  %
                  
                  $
                  23,972
                  
                  
                  
                  6.0
                  %Total
      Risk Based Capital
                  
                  $
                  62,453
                  
                  
                  
                  15.63
                  %
                  
                  $
                  31,963
                  
                  
                  
                  8.0
                  %
                  
                  $
                  39,954
                  
                  
                  
                  10.0
                  %


25


Average
Assets/Liabilities.  The following
tables set forth information relating to average balances of interest-earning
assets and liabilities for the three and nine months ended September 30, 2009
and 2008.  The following tables reflect the average tax equivalent
yields on assets and average costs of liabilities for the periods indicated
(derived by dividing income or expense by the monthly average balance of assets
or liabilities, respectively) as well as “net interest margin” (which reflects
the effect of the net earnings balance) for the periods shown:





Three months ended
                  
                  
                  Three months endedSeptember 30, 2009
                  
                  
                  September 30, 2008(Dollars in thousands)
                  
                  Average
                    balance
                  
                  
                  Interest
                  
                  
                  Average
                    annual
                    yield/rate
                  
                  
                  Average
                    balance
                  
                  
                  Interest
                  
                  
                  Average
                    annual
                    yield/rateASSETS:Interest-earning
      assets:Investment
      securities (1)
                  
                  $
                  186,316
                  
                  
                  $
                  1,987
                  
                  
                  
                  4.23
                  %
                  
                  $
                  172,133
                  
                  
                  $
                  2,083
                  
                  
                  
                  4.82
                  %Loans
      (2)
                  
                  
                  359,839
                  
                  
                  
                  5,144
                  
                  
                  
                  5.67
                  %
                  
                  
                  379,547
                  
                  
                  
                  5,979
                  
                  
                  
                  6.27
                  %Total
      interest-earning assets
                  
                  
                  546,155
                  
                  
                  
                  7,131
                  
                  
                  
                  5.18
                  %
                  
                  
                  551,680
                  
                  
                  
                  8,062
                  
                  
                  
                  5.81
                  %Non-interest-earning
      assets
                  
                  
                  62,391
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  59,768Total
                  
                  $
                  608,546
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  611,448LIABILITIES
      AND STOCKHOLDERS' EQUITY:Interest-bearing
      liabilities:Certificates
      of deposit
                  
                  $
                  219,699
                  
                  
                  $
                  1,232
                  
                  
                  
                  2.22
                  %
                  
                  $
                  219,393
                  
                  
                  $
                  1,862
                  
                  
                  
                  3.38
                  %Money
      market and NOW accounts
                  
                  
                  153,167
                  
                  
                  
                  151
                  
                  
                  
                  0.39
                  %
                  
                  
                  140,912
                  
                  
                  
                  376
                  
                  
                  
                  1.06
                  %Savings
      accounts
                  
                  
                  28,884
                  
                  
                  
                  18
                  
                  
                  
                  0.25
                  %
                  
                  
                  27,916
                  
                  
                  
                  21
                  
                  
                  
                  0.30
                  %Total
      deposits
                  
                  
                  401,750
                  
                  
                  
                  1,401
                  
                  
                  
                  1.38
                  %
                  
                  
                  388,221
                  
                  
                  
                  2,259
                  
                  
                  
                  2.32
                  %FHLB
      advances and other borrowings
                  
                  
                  90,277
                  
                  
                  
                  793
                  
                  
                  
                  3.48
                  %
                  
                  
                  111,649
                  
                  
                  
                  984
                  
                  
                  
                  3.51
                  %Total
      interest-bearing liabilities
                  
                  
                  492,027
                  
                  
                  
                  2,194
                  
                  
                  
                  1.77
                  %
                  
                  
                  499,870
                  
                  
                  
                  3,243
                  
                  
                  
                  2.58
                  %Non-interest-bearing
      liabilities
                  
                  
                  63,267
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  61,362Stockholders'
      equity
                  
                  
                  53,252
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  50,216Total
                  
                  $
                  608,546
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  611,448Interest
      rate spread (3)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.41
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.23
                  %Net
      interest margin (4)
                  
                  
                  
                  
                  
                  
                  4,937
                  
                  
                  
                  3.59
                  %
                  
                  
                  
                  
                  
                  
                  4,819
                  
                  
                  
                  3.47
                  %Tax
      equivalent interest – imputed
                  
                  
                  
                  
                  
                  
                  329
                  
                  
                  
                  0.24
                  %
                  
                  
                  
                  
                  
                  
                  299
                  
                  
                  
                  0.22
                  %Net
      interest income
                  
                  
                  
                  
                  
                  $
                  4,608
                  
                  
                  
                  3.35
                  %
                  
                  
                  
                  
                  
                  $
                  4,520
                  
                  
                  
                  3.26
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  111.0
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  110.4
                  %





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


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


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


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


26





Nine months ended
                  
                  
                  Nine months endedSeptember 30, 2009
                  
                  
                  September 30, 2008(Dollars in thousands)
                  
                  Average
                    balance
                  
                  
                  Interest
                  
                  
                  Average
                    annual
                    yield/rate
                  
                  
                  Average
                    balance
                  
                  
                  Interest
                  
                  
                  Average
                    annual
                    yield/rateASSETS:Interest-earning
      assets:Investment
      securities (1)
                  
                  $
                  184,506
                  
                  
                  $
                  5,988
                  
                  
                  
                  4.34
                  %
                  
                  $
                  170,838
                  
                  
                  $
                  6,272
                  
                  
                  
                  4.90
                  %Loans
      (2)
                  
                  
                  363,533
                  
                  
                  
                  15,615
                  
                  
                  
                  5.74
                  %
                  
                  
                  380,055
                  
                  
                  
                  18,851
                  
                  
                  
                  6.63
                  %Total
      interest-earning assets
                  
                  
                  548,039
                  
                  
                  
                  21,603
                  
                  
                  
                  5.27
                  %
                  
                  
                  550,893
                  
                  
                  
                  25,123
                  
                  
                  
                  6.09
                  %Non-interest-earning
      assets
                  
                  
                  61,081
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  59,922Total
                  
                  $
                  609,120
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  610,810LIABILITIES
      AND STOCKHOLDERS' EQUITY:Interest-bearing
      liabilities:Certificates
      of deposit
                  
                  $
                  218,318
                  
                  
                  $
                  4,047
                  
                  
                  
                  2.48
                  %
                  
                  $
                  224,570
                  
                  
                  $
                  6,482
                  
                  
                  
                  3.86
                  %Money
      market and NOW accounts
                  
                  
                  154,328
                  
                  
                  
                  493
                  
                  
                  
                  0.43
                  %
                  
                  
                  143,843
                  
                  
                  
                  1,453
                  
                  
                  
                  1.35
                  %Savings
      accounts
                  
                  
                  28,550
                  
                  
                  
                  58
                  
                  
                  
                  0.27
                  %
                  
                  
                  27,129
                  
                  
                  
                  61
                  
                  
                  
                  0.30
                  %Total
      deposits
                  
                  
                  401,196
                  
                  
                  
                  4,598
                  
                  
                  
                  1.53
                  %
                  
                  
                  395,542
                  
                  
                  
                  7,996
                  
                  
                  
                  2.70
                  %FHLB
      advances and other borrowings
                  
                  
                  94,010
                  
                  
                  
                  2,483
                  
                  
                  
                  3.53
                  %
                  
                  
                  104,422
                  
                  
                  
                  2,792
                  
                  
                  
                  3.57
                  %Total
      interest-bearing liabilities
                  
                  
                  495,206
                  
                  
                  
                  7,081
                  
                  
                  
                  1.91
                  %
                  
                  
                  499,964
                  
                  
                  
                  10,788
                  
                  
                  
                  2.88
                  %Non-interest-bearing
      liabilities
                  
                  
                  61,374
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  59,971Stockholders'
      equity
                  
                  
                  52,540
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  50,880Total
                  
                  $
                  609,120
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  610,815Interest
      rate spread (3)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.36
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.21
                  %Net
      interest margin (4)
                  
                  
                  
                  
                  
                  
                  14,522
                  
                  
                  
                  3.54
                  %
                  
                  
                  
                  
                  
                  
                  14,335
                  
                  
                  
                  3.48
                  %Tax
      equivalent interest – imputed
                  
                  
                  
                  
                  
                  
                  963
                  
                  
                  
                  0.23
                  %
                  
                  
                  
                  
                  
                  
                  881
                  
                  
                  
                  0.21
                  %Net
      interest income
                  
                  
                  
                  
                  
                  $
                  13,559
                  
                  
                  
                  3.31
                  %
                  
                  
                  
                  
                  
                  $
                  13,454
                  
                  
                  
                  3.26
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  110.7
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  110.2
                  %





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


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


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


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


27


Rate/Volume
Table.  The following
table describes the extent to which changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing
liabilities affected the Company’s interest income and expense for the quarter
and nine months ended September 30, 2009 as compared the quarter and nine months
ended September 30, 2008.  The table distinguishes between (i) changes
attributable to rate (changes in rate multiplied by prior volume), (ii) changes
attributable to volume (changes in volume multiplied by prior rate), and (iii)
net change (the sum of the previous columns).  The net changes
attributable to the combined effect of volume and rate, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.




Three months ended September 30, 2009
                      compared with the same period of 2008
                    
                    
                    Nine months ended September 30, 2009
                      compared with the same period in 2008Increase/(Decrease) Attributable to
                    
                    
                    Increase/(Decrease) Attributable to(Dollars in thousands)
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    Net
                    
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    NetInterest
      income:Investment
      securities
                    
                    $
                    117
                    
                    
                    $
                    (214
                    )
                    
                    $
                    (97
                    )
                    
                    $
                    383
                    
                    
                    $
                    (667
                    )
                    
                    $
                    (284
                    )Loans
                    
                    
                    (285
                    )
                    
                    
                    (550
                    )
                    
                    
                    (835
                    )
                    
                    
                    (712
                    )
                    
                    
                    (2,524
                    )
                    
                    
                    (3,236
                    )Total
                    
                    
                    (168
                    )
                    
                    
                    (764
                    )
                    
                    
                    (932
                    )
                    
                    
                    (329
                    )
                    
                    
                    (3,191
                    )
                    
                    
                    (3,520
                    )Interest
      expense:Deposits
                    
                    
                    45
                    
                    
                    
                    (903
                    )
                    
                    
                    (858
                    )
                    
                    
                    64
                    
                    
                    
                    (3,462
                    )
                    
                    
                    (3,398
                    )Borrowings
                    
                    
                    (184
                    )
                    
                    
                    (7
                    )
                    
                    
                    (191
                    )
                    
                    
                    (280
                    )
                    
                    
                    (29
                    )
                    
                    
                    (309
                    )Total
                    
                    
                    (139
                    )
                    
                    
                    (910
                    )
                    
                    
                    (1,049
                    )
                    
                    
                    (216
                    )
                    
                    
                    (3,491
                    )
                    
                    
                    (3,707
                    )Net
      interest income
                    
                    $
                    (29
                    )
                    
                    $
                    146
                    
                    
                    $
                    117
                    
                    
                    $
                    (113
                    )
                    
                    $
                    300
                    
                    
                    $
                    187




ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





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





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





We have been successful in meeting the
interest rate sensitivity objectives set forth in our
policy.  Simulation models are prepared to determine the impact on net
interest income for the coming twelve months, including one using rates at
September 30, 2009, and forecasting volumes for the twelve-month
projection.  This position is then subjected to a shift in interest
rates of 100 and 200 basis points rising and 100 basis points falling with an
impact to our net interest income on a one yearhorizon as
follows:





Dollar change in net
                    
                    
                    Percent change inScenario
                    
                    interest income ($000’s)
                    
                    
                    net interest income200
      basis point rising
                    
                    $
                    1,483
                    
                    
                    
                    7.5
                    %100
      basis point rising
                    
                    $
                    785
                    
                    
                    
                    4.0
                    %100
      basis point falling
                    
                    $
                    (603
                    )
                    
                    
                    (3.0
                    )%


28


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





Forward-Looking
Statements





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





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




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


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


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


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


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


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


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


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


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


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


·
            Our
      ability to successfully integrate acquired
  businesses.


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


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


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





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





ITEM
4.  CONTROLS AND PROCEDURES





An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
Exchange Act of 1934, as amended) as of September 30, 2009.  Based on
that evaluation, the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, concluded that the Company’s disclosure controls
and procedures were effective as of September 30, 2009.





There
were no changes in the Company’s internal control over financial reporting
during the quarter ended September 30, 2009 that materially affected or were
likely to materially affect the Company’s internal control over financial
reporting.


29


LANDMARK
BANCORP, INC. AND SUBSIDIARY


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





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





ITEM
1A.  RISK FACTORS





There
have been no material changes in the risk factors applicable to the Company from
those disclosed in Part I, Item 1A. “Risk Factors,” in the Company's
2008 Annual Report on Form 10-K.





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





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





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


30





SIGNATURES





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





LANDMARK
      BANCORP, INC.Date:
      November 12, 2009
                      /s/ Patrick L. AlexanderPatrick
      L. AlexanderPresident
      and Chief Executive OfficerDate:
      November 12, 2009
                      /s/ Mark A. HerpichMark
      A. HerpichVice
      President, Secretary, Treasurerand
      Chief Financial Officer


31