** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

Washington, D.C.  20549

 

 

**FORM 10-Q**

 

 

| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |       |
|------------|------------|------------------------------------------------------------------------------------------------|------------|
|       |       | For the quarterly  period ended June 30, 2004                                                  |       |
|       |       |                                                                                           |       |
|       |       | OR                                                                                             |       |
|       |       |                                                                                           |       |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|       |       | For transition period  from _______ to _______                                                 |       |

 

Commission File Number0-33203

 

 

| **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) |   |
|                                                                                            |   |   |
|                                                                                            |   |   |
| **800  Poyntz Avenue, Manhattan,  Kansas        66502** |
| (Address of principal  executive offices)     (Zip Code)                    |
|                                                                                            |
| **(785)  565-2000**                                                                             |
| (Registrant’s telephone  number, including area code)                                      |
|                                                                                                 |  |  |  |  |  |

 

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes X No __

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes __  No X

 

Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock as of the latest practicabledate:  As of August 10, 2004, theRegistrant had outstanding 2,077,754 shares of its common stock, $.01 par valueper share.

 

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**LANDMARK BANCORP, INC.**

**Form 10-Q Quarterly Report**

 

**Table of Contents**

 

 
| PART I                   |
|--------------------------|
|                     |   |
|                     | Page Number |
|                     |   |
| Item 1.                  | Financial Statements and Related Notes | 2 - 9 |
| Item  2.                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10  - 20 |
| Item  3.                 | Quantitative  and Qualitative Disclosures about Market Risk | 21-23 |
| Item 4.                  | Controls and  Procedures | 24 |
|                     |   |   |
|                     |   |   |
| PART II                  |
|                     |   |   |
| Item 1.                  | Legal Proceedings | 25 |
| Item 2.                  | Changes in Securities, Use  of Proceeds and Issuer Purchases of Equity Securities | 25 |
| Item 3.                  | Defaults upon Senior  Securities | 25 |
| Item 4.                  | Submission of Matters to a  Vote of Security Holders | 26 |
| Item 5.                  | Other Information | 26 |
| Item 6.                  | Exhibits and Reports on  Form 8-K | 26-27 |
|                     |   |   |
|                     |   |   |
| Form 10-Q Signature Page | 28 |

 

1

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

** **
|                                                                                                       |   | June 30,2004 |        | December 31,2003 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------|-------------|------------------|--------|
| **ASSETS**                                                                                                 |   | (Unaudited)  |        |             |   |
| Cash and cash equivalents                                                                                  |   | $            | 13,936,660  |             | $      | 7,708,115 |   |
| Investment securities available for sale                                                                   |   | 151,213,921  |        | 99,746,365       |   |
| Loans, net                                                                                                 |   | 288,729,831  |        | 214,295,940      |   |
| Loans held for sale                                                                                        |   | 608,128      |        | 734,456          |   |
| Premises and equipment, net                                                                                |   | 5,353,241    |        | 3,631,102        |   |
| Goodwill                                                                                                   |   | 8,118,166    |        | 1,971,178        |   |
| Other intangible assets, net                                                                               |   | 1,576,168    |        | 959,532          |   |
| Accrued interest and other assets                                                                          |   | 8,245,335    |        | 4,999,601        |   |
|                                                                                                       |   |         |        |             |   |
| Total assets                                                                                               |   | $            | 477,781,450 |             | $      | 334,046,289 |   |
|                                                                                                       |   |         |        |             |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                              |   |         |        |             |   |
| Liabilities:                                                                                               |   |         |        |             |   |
| Deposits                                                                                                   |   | $            | 337,453,225 |             | $      | 253,108,220 |   |
| Federal Home Loan Bank borrowings                                                                          |   | 79,134,382   |        | 25,257,104       |   |
| Other borrowings                                                                                           |   | 15,453,000   |        | 8,498,000        |   |
| Accrued expenses, taxes and other liabilities                                                              |   | 3,356,836    |        | 4,610,862        |   |
| Total liabilities                                                                                          |   | 435,397,443  |        | 291,474,186      |   |
|                                                                                                       |   |         |        |             |   |
| Stockholders’ equity:                                                                                 |   |         |        |             |   |
| Common stock, $0.01 par, 3,000,000 shares authorized, 2,230,435 and  2,207,807 shares issued, respectively |   | 22,304       |        | 22,078           |   |
| Additional paid-in capital                                                                                 |   | 19,676,678   |        | 19,332,130       |   |
| Retained earnings                                                                                          |   | 26,524,812   |        | 25,213,188       |   |
| Accumulated other comprehensive (loss) income                                                              |   | (62,229)     |        | 796,932          |   |
| Treasury stock, at cost; 152,681 and 119,657 shares, respectively                                          |   | (3,777,558)  |        | (2,792,225)      |   |
| Total stockholders’ equity                                                                            |   | 42,384,007   |        | 42,572,103       |   |
|                                                                                                       |   |         |        |             |   |
| Total liabilities and stockholders’ equity                                                            |   | $            | 477,781,450 |             | $      | 334,046,289 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

2

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

# **CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

 
| ** **                                           | ** ** | Three Months Ended June 30, | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | 2004                        |       | 2003 | ** ** |
| Interest income:                                     |       |                        |       |   |   |
| Loans                                                |       | $                           | 4,130,635  |   | $ | 3,655,231 |   |
| Investment securities                                |       | 1,204,938                   |       | 642,076 |   |
| Other                                                |       | 10,769                      |       | 14,291 |   |
| Total interest income                                |       | 5,346,342                   |       | 4,311,598 |   |
|                                                 |       |                        |       |   |   |
| Interest expense:                                    |       |                        |       |   |   |
| Deposits                                             |       | 1,035,768                   |       | 1,159,028 |   |
| Borrowed funds                                       |       | 880,225                     |       | 295,022 |   |
| Total interest expense                               |       | 1,915,993                   |       | 1,454,050 |   |
|                                                 |       |                        |       |   |   |
| Net interest income                                  |       | 3,430,349                   |       | 2,857,548 |   |
|                                                 |       |                        |       |   |   |
| Provision for loan losses                            |       | 120,000                     |       | 60,000 |   |
|                                                 |       |                        |       |   |   |
| Net  interest income after provision for loan losses |       | 3,310,349                   |       | 2,797,548 |   |
|                                                 |       |                        |       |   |   |
| Non-interest income:                                 |       |                        |       |   |   |
| Fees and service charges                             |       | 931,422                     |       | 670,655 |   |
| Gains on sale of loans                               |       | 223,145                     |       | 492,290 |   |
| Gains on sale of investments                         |       | 32,103                      |       | - |   |
| Other                                                |       | 107,515                     |       | 82,111 |   |
| Total non-interest income                            |       | 1,294,185                   |       | 1,245,056 |   |
|                                                 |       |                        |       |   |   |
| Non-interest expense:                                |       |                        |       |   |   |
| Compensation and benefits                            |       | 1,515,074                   |       | 1,209,841 |   |
| Occupancy and equipment                              |       | 424,622                     |       | 312,547 |   |
| Amortization                                         |       | 108,219                     |       | 111,791 |   |
| Professional fees                                    |       | 82,222                      |       | 65,504 |   |
| Data processing                                      |       | 130,500                     |       | 83,169 |   |
| Other                                                |       | 740,123                     |       | 507,148 |   |
| Total non-interest expense                           |       | 3,000,760                   |       | 2,290,000 |   |
|                                                 |       |                        |       |   |   |
| Earnings before income taxes                         |       | 1,603,774                   |       | 1,752,604 |   |
|                                                 |       |                        |       |   |   |
| Income tax expense                                   |       | 528,987                     |       | 537,198 |   |
|                                                 |       |                        |       |   |   |
| Net earnings                                         |       | $                           | 1,074,787  |   | $ | 1,215,406 |   |
|                                                 |       |                        |       |   |   |
| Earnings per share:                                  |       |                        |       |   |   |
| Basic                                                |       | $                           | 0.52       |   | $ | 0.58 |   |
| Diluted                                              |       | $                           | 0.51       |   | $ | 0.57 |   |
|                                                 |       |                        |       |   |   |
| Dividends per share                                  |       | $                           | 0.17       |   | $ | 0.1524 |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

3

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

# **CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(Unaudited)**

** **
|                                                 |   | Six Months Ended June 30, | ** ** |
|------------------------------------------------------|--------|---------------------------|------------|
|                                                 |   | 2004                      |       | 2003 | ** ** |
| Interest income:                                     |   |                      |       |   |   |
| Loans                                                |   | $                         | 7,358,144  |   | $ | 7,475,065 |   |
| Investment securities                                |   | 2,016,263                 |       | 1,448,463 |   |
| Other                                                |   | 19,101                    |       | 23,235 |   |
| Total interest income                                |   | 9,393,508                 |       | 8,946,763 |   |
|                                                 |   |                      |       |   |   |
| Interest expense:                                    |   |                      |       |   |   |
| Deposits                                             |   | 1,968,569                 |       | 2,407,925 |   |
| Borrowed funds                                       |   | 1,229,669                 |       | 595,543 |   |
| Total interest expense                               |   | 3,198,238                 |       | 3,003,468 |   |
|                                                 |   |                      |       |   |   |
| Net interest income                                  |   | 6,195,270                 |       | 5,943,295 |   |
|                                                 |   |                      |       |   |   |
| Provision for loan losses                            |   | 180,000                   |       | 120,000 |   |
|                                                 |   |                      |       |   |   |
| Net  interest income after provision for loan losses |   | 6,015,270                 |       | 5,823,295 |   |
|                                                 |   |                      |       |   |   |
| Non-interest income:                                 |   |                      |       |   |   |
| Fees and service charges                             |   | 1,464,157                 |       | 1,282,652 |   |
| Gains on sale of loans                               |   | 458,030                   |       | 1,126,797 |   |
| Gains on sale of investments                         |   | 129,790                   |       | 25,682 |   |
| Other                                                |   | 189,016                   |       | 151,153 |   |
| Total non-interest income                            |   | 2,240,993                 |       | 2,586,284 |   |
|                                                 |   |                      |       |   |   |
| Non-interest expense:                                |   |                      |       |   |   |
| Compensation and benefits                            |   | 2,732,878                 |       | 2,422,941 |   |
| Occupancy and equipment                              |   | 743,668                   |       | 624,924 |   |
| Amortization                                         |   | 183,366                   |       | 223,110 |   |
| Professional fees                                    |   | 160,916                   |       | 188,283 |   |
| Data processing                                      |   | 209,365                   |       | 163,248 |   |
| Other                                                |   | 1,227,888                 |       | 1,020,684 |   |
| Total non-interest expense                           |   | 5,258,081                 |       | 4,643,190 |   |
|                                                 |   |                      |       |   |   |
| Earnings before income taxes                         |   | 2,998,182                 |       | 3,766,389 |   |
|                                                 |   |                      |       |   |   |
| Income tax expense                                   |   | 974,634                   |       | 1,227,450 |   |
|                                                 |   |                      |       |   |   |
| Net earnings                                         |   | $                         | 2,023,548  |   | $ | 2,538,939 |   |
|                                                 |   |                      |       |   |   |
| Earnings per share:                                  |   |                      |       |   |   |
| Basic                                                |   | $                         | 0.97       |   | $ | 1.21 |   |
| Diluted                                              |   | $                         | 0.96       |   | $ | 1.19 |   |
|                                                 |   |                      |       |   |   |
| Dividends per share                                  |   | $                         | 0.34       |   | $ | 0.3048 |   |

 

*See accompanying notes tocondensed consolidated financial statements.*

 

4

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
|                                                                          |   | Six  Months Ended June 30, |              |
|-------------------------------------------------------------------------------|--------|----------------------------|-------------------|
|                                                                          |   | 2004                       |              | 2003 |   |
|                                                                          |   |                       |              |   |   |
| Net cash provided by (used in) operating activities                           |   | $                          | 3,040,227         |   | $ | (775,674) |   |
|                                                                          |   |                       |              |   |   |
| INVESTING ACTIVITIES                                                          |   |                       |              |   |   |
| Net (increase) decrease in loans                                              |   | (1,249,834)                |              | 15,974,584 |   |
| Maturities and prepayments of investments available for sale                  |   | 14,228,672                 |              | 27,593,951 |   |
| Purchase of investment securities available for sale                          |   | (4,674,989)                |              | (25,308,886) |   |
| Proceeds from sale of investment securities available for sale                |   | 241,874                    |              | 58,000 |   |
| Payments received and proceeds from sale of foreclosed assets                 |   | 66,915                     |              | 318,635 |   |
| Net cash paid in FKAN acquisition                                             |   | (8,788,732)                |              | - |   |
| Purchases of premises and equipment, net                                      |   | (320,364)                  |              | (221,895) |   |
| Net cash (used in) provided by investing activities                           |   | (496,458)                  |              | 18,414,389 |   |
|                                                                          |   |                       |              |   |   |
| FINANCING ACTIVITIES                                                          |   |                       |              |   |   |
| Net increase (decrease) in deposits                                           |   | 300,643                    |              | (9,362,948) |   |
| Federal Home Loan Bank borrowings                                             |   | 18,300,000            |              | 22,650,000  |   |
| Federal Home Loan Bank repayments                                             |   | (20,518,384)               |              | (23,361,248) |   |
| Proceeds from other borrowings                                                |   | 7,395,000             |              | - |   |
| Repayments on other borrowings                                                |   | (440,000)                  |              | - |   |
| Purchase of 33,024 and 34,841 shares of treasury stock                        |   | (985,333)                  |              | (831,036) |   |
| Issuance of 22,628 and 20,456 shares of common stock under stock option  plan |   | 344,774                    |              | 287,731 |   |
| Payment of dividends                                                          |   | (711,924)                  |              | (641,500) |   |
| Net cash provided by (used in) financing activities                           |   | 3,684,776                  |              | (11,259,001) |   |
| Net increase in cash and cash equivalents                                     |   | 6,228,545                  |              | 6,379,714 |   |
| Cash and cash equivalents at beginning of period                              |   | 7,708,115                  |              | 11,448,684 |   |
| Cash and cash equivalents at end of period                                    |   | $                          | 13,936,660        |   | $ | 17,828,398 |   |
|                                                                          |   |                       |              |   |   |
| Supplemental disclosure of cash flow information:                             |   |                       |              |   |   |
| Cash paid during period for interest                                          |   | $                          | 2,536,000         |   | $ | 3,033,000 |   |
| Cash paid during period for taxes                                             |   | $                          | 650,000           |   | $ | 1,325,000 |   |
|                                                                          |   |                       |              |   |   |
| Supplemental schedule of noncash investing activities:                        |   |                       |              |   |   |
| Transfer of loans to real estate owned                                        |   | $                          | 442,000      |   | $ | 214,000 |   |
| Bank acquisition:                                                             |   |                       |              |   |   |
| Fair value of liabilities assumed                                             |   | $                          | 140,619,000  |   | $ | - |   |
| Fair value of assets acquired                                                 |   | $                          | 149,408,000       |   | $ | - |   |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

5

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**LANDMARK BANCORP, INC. ANDSUBSIDIARY**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

** **

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

 

The condensed consolidated financial statements ofLandmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared inaccordance with the instructions to Form 10-Q. To the extent that information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements are contained in or consistent with the consolidatedaudited financial statements incorporated by reference in the Company’s Form10-K for the year ended December 31, 2003, such information and footnotes havenot been duplicated herein.  In theopinion of management, all adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of financial statementshave been reflected herein.  The December31, 2003, condensed consolidated balance sheet has been derived from theaudited consolidated balance sheet as of that date.  The results of the interim periods ended June30, 2004, are not necessarily indicative of the results expected for the yearending December 31, 2004.

 

**2.****                                     ****Acquisition of First KansasFinancial Corporation**

 

On April 1, 2004, theCompany acquired all of the outstanding stock of First Kansas FinancialCorporation (“First Kansas”) at a cost of $19.00 per share in cash.  First Kansas was a single thrift holdingcompany based in Osawatomie, Kansas.  AtMarch 31, 2004, First Kansas had total assets of approximately $150 million,including loans and deposits of approximately $74 million and $84 million,respectively.  The acquisition of FirstKansas by the Company was accounted for using the purchase method ofaccounting.  The cost in excess of thetangible and identifiable intangible net assets acquired has been recorded asgoodwill.  The Company recorded a coredeposit intangible of $710,000 and goodwill attributable to the acquisition ofFirst Kansas of $6.1 million, none of which is expected to be deductible for taxpurposes.

 

The accompanyingconsolidated financial statements as of and for the three months ended June 30,2004, include the accounts of the Company and, commencing April 1, 2004, FirstKansas.  The consolidated financial statementsfor periods prior to April 1, 2004, are Landmark Bancorp, Inc.’s historicalfinancial statements.  Pro formainformation, as if the acquisition was consummated January 1, 2003, is asfollows:

 

6

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|                        |   | Three Months Ended  June 30, |   | Six Months Ended  June 30, |   |
|-----------------------------|--------|------------------------------|--------|----------------------------|--------|
|                        |   | 2004                         |   | 2003                       |   | 2004 |   | 2003 |   |
|                        |   | (Actual)                     |   |                       |   |   |   |   |   |
| Revenue                     |   | $6,640,527                   |   | $7,550,000                 |   | $13,463,000 |   | $15,537,000 |   |
| Net earnings                |   | $1,074,787                   |   | $1,390,000                 |   | $  2,101,000 |   | $ 2,859,000 |   |
| Diluted earnings  per share |   | $0.51                        |   | $0.66                      |   | $1.00 |   | $1.35 |   |

 

 

**3.****                                  ****Stock Based Compensation**

 

The Company utilizes thefair value recognition provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123 establishes a fair-value methodof accounting for employee stock options or similar equity instruments. Thefair value of stock-based awards to employees is calculated through the use ofoption pricing models, even though such models were developed to estimate thefair value of freely tradable, fully transferable options without vestingrestrictions, which significantly differ from the Company’s stock optionawards. These models also require subjective assumptions, including futurestock price volatility and expected time to exercise, which greatly affect thecalculated values. The Company uses the Black-Scholes option pricing model toestimate the grant date fair value of its stock options. The fair value isrecognized as additional compensation expense over the option vesting period,which is typically three to five years.

 

 

**4.****                                      Earningsper Share**

 

Basic earnings per share have been computed based uponthe weighted average number of common shares outstanding during eachperiod.  Diluted earnings per shareinclude the effect of all potential common shares outstanding during each period.  Earnings and dividends per share for allperiods presented have been adjusted to give effect to the 5% stock dividendpaid by the Company in December 2003.

 

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

 
| ** **                                          | ** ** | Three Months Ended  June 30, |      | Six Months Ended  June 30, |   |
|-----------------------------------------------------|------------|------------------------------|-----------|----------------------------|--------|
|                                                |       | 2004                         |      | 2003                       |   | 2004 |   | 2003 |   |
| Weighted average  common shares outstanding (basic) |       |                         | 2,080,581 |                       |   | 2,082,574 |   |   | 2,085,623 |   |   | 2,090,647 |   |
| Dilutive stock  options                             |       |                         | 13,133    |                       |   | 31,534 |   |   | 15,352 |   |   | 34,718 |   |
| Weighted average  common shares (diluted)           |       |                         | 2,093,714 |                       |   | 2,114,108 |   |   | 2,100,975 |   |   | 2,125,365 |   |

 

7

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**5.****                                      ComprehensiveIncome/(Loss)**

 

The Company’s only component of other comprehensiveincome/(loss) is the unrealized holding gains/(losses) on available for salesecurities.

 

 
| ** **                                                           | ** ** | Three Months Ended  June 30, |        | Six Months Ended  June 30, |   |
|----------------------------------------------------------------------|------------|------------------------------|-------------|----------------------------|--------|
|                                                                 |       | 2004                         |        | 2003                       |   | 2004 |   | 2003 |   |
| Net earnings                                                         |       |                         | $           | 1,074,787                  |   |   | $ | 1,215,406 |   |   | $ | 2,023,548 |   |   | $ | 2,538,939 |   |
|                                                                 |       |                         |        |                       |   |   |   |   |   |   |   |   |   |
| Unrealized holding  (losses)/gains                                   |       |                         | (1,717,684) |                       |   | (229,681) |   |   | (1,255,955) |   |   | (542,731) |   |
| Less  reclassification adjustment for gains included in net earnings |       |                         | 32,103      |                       |   | - |   |   | 129,790 |   |   | 25,682 |   |
| Net unrealized  (losses)/gains on securities                         |       |                         | (1,749,787) |                       |   | (229,681) |   |   | (1,385,745) |   |   | (568,413) |   |
|                                                                 |       |                         |        |                       |   |   |   |   |   |   |   |   |   |
| Income tax  (benefit)/expense                                        |       |                         | (664,919)   |                       |   | (87,279) |   |   | (526,584) |   |   | (215,997) |   |
| Total  comprehensive income                                          |       |                         | $           | (10,081)                   |   |   | $ | 1,073,004 |   |   | $ | 1,164,387 |   |   | $ | 2,186,523 |   |

 

**6.****                                     ****OtherIntangible Assets**

 

The following tablepresents information about the Company’s other intangible assets, which arebeing amortized in accordance with SFAS No. 142:

 
|                         |   | June 30, 2004         |    | December 31, 2003       |   |
|------------------------------|--------|-----------------------|---------|-------------------------|--------|
| Amortized intangible assets: |   | Gross  CarryingAmount |    | AccumulatedAmortization |   | Gross  CarryingAmount |   | AccumulatedAmortization |   |
| Core deposit  premium        |   |                  | $       | 1,490,000               |   |   | $ | (386,818) |   |   | $ | 780,000 |   |   | $ | (297,818) |   |
| Mortgage  servicing rights   |   |                  | 756,153 |                    |   | (283,167) |   |   | 727,158 |   |   | (249,808) |   |
| Total                        |   |                  | $       | 2,246,153               |   |   | $ | (669,985) |   |   | $ | 1,507,158 |   |   | $ | (547,626) |   |

 

Aggregate amortizationexpense for the three months ended June 30, 2004, and June 30, 2003, was$108,000 and $111,000, respectively. Aggregate amortization expense for the six months ended June 30, 2004,and June 30, 2003, was $183,000 and $223,000, respectively.  The following is estimated amortizationexpense for the years ending December 31:

 

| Year | Amount   |
|------|----------|
| 2004 | $351,000 |
| 2005 | 359,000  |
| 2006 | 332,000  |
| 2007 | 206,000  |
| 2008 | 132,000  |

 

8

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**7.****                                     ****Guarantees**

 

The Company, as a providerof financial services, routinely issues financial guarantees in the form offinancial and performance commercial and standby letters of credit. As many ofthe commitments are expected to expire without being drawn upon, the totalcommitment does not necessarily represent future cash requirements.

 

The Company guaranteespayments to holders of certain trust preferred securities issued by a whollyowned grantor trust. The securities are due in 2034 and are redeemablebeginning in 2009. The maximum potential future payments guaranteed by theCompany, which includes future interest and principal payments throughmaturity, was approximately $18.2 million at June 30, 2004.  The Company had a recorded liability of $8.3million of principal and accrued interest to date, representing amounts owed tothe Trust, at June 30, 2004.

 

# **8.**                                   Recent Accounting Pronouncements

# ** **

In March 2004, theSecurities and Exchange Commission staff issued Staff Accounting Bulletin No.105, “Application of Accounting Principles to Loan Commitments” (SAB 105).  SAB 105 provides additional guidance indetermining the fair market value of mortgage loan commitments.  The new guidance prohibits the inclusion ofthe expected cash flows related to the associated servicing of the loan whendetermining the fair value of the loan commitment.  This change in accounting tends to reduce thefair market value of the loan commitment and defers the income recognitionresulting from the valuation of the commitment. SAB 105 is effective for loan commitments accounted for as derivativesand entered into on or after April 1, 2004, at which time the Company beganexcluding these expected cash flows in its determination of fair value.  The effect of the change was not material tothe Company’s financial statements.

 

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

## ** **

*General.*  Landmark Bancorp, Inc. is a one-bank holdingcompany incorporated under the laws of the State of Delaware and is engaged inthe banking business through its wholly-owned subsidiary, Landmark NationalBank.  Landmark Bancorp is listed on theNasdaq Stock Market National Market System under the symbol “LARK”.  Landmark National Bank is dedicated to providingquality financial and banking services to its local communities.  Landmark National Bank originates commercialreal estate and non-real estate loans, one-to-four family residential mortgageloans, consumer loans, multi-family residential mortgage loans, and home equityloans.

 

Our accounting principlesand the methods of applying these principles conform with accounting principlesgenerally accepted in the United States and with general practices within thebanking industry.  Our critical accountingpolicies relate to the allowance for loan losses, the valuation of investmentsecurities, and accounting for income taxes. A description of these policies, which significantly affect thedetermination of our financial position, results of operations and cash flows,are summarized in Note 2, Summary of Significant Accounting Policies in theNotes included in our Annual Report on Form 10-K for the year ended December31, 2003.

 

On April 1, 2004, we completed the cash acquisition ofFirst Kansas Financial Corporation (“First Kansas”), which had total assets ofapproximately $150 million, including loans and deposits of $74 million and $84million, respectively.  First Kansas hadbranches in Osawatomie, Paola, Louisburg, Fort Scott, Beloit, and Phillipsburg,Kansas.  Our acquisition of First Kansas was accountedfor using the purchase method of accounting. The cost in excess of the tangible and identifiable intangible netassets acquired has been recorded as goodwill. We recorded a core deposit intangible of $710,000 and goodwillattributable to the acquisition of First Kansas of $6.1 million, none of whichis expected to be deductible for tax purposes. All financial information presented for periods prior to April 1,2004, reflects only the operations of Landmark Bancorp.  The results for the quarter ended June 30,2004, include First Kansas’ results of operations since April 1, 2004.

 

During June 2004, we entered into definitiveagreements to sell our newly acquired Beloit and Phillipsburg branchesprimarily because these small branches are outside our current geographic rangeof operations.  The transactions aresubject to regulatory approval and are expected to close during the thirdquarter of 2004.  Upon consummation ofthe transactions, we will sell approximately $8.4 million in deposits andapproximately $2.4 million in loans and fixed assets associated with the Beloitbranch and approximately $5.2 million in deposits and approximately $936,000 inloans and fixed assets related to the Phillipsburg branch.  No gain or loss will result from thesetransactions, rather proceeds received in excess of the net assets sold willresult in an adjustment to goodwill and other intangible assets.

 

Our results of operationsdepend primarily on net interest income, which is the difference betweeninterest income from interest-earning assets and interest expense oninterest-bearing liabilities.  Netinterest income is affected by regulatory, economic and competitive factorsthat influence interest rates, loan demand and deposit flows.  In addition, we are subject to interest raterisk

 

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tothe degree that our interest-earning assets mature or reprice at differenttimes, or at different speeds, than our interest-bearing liabilities.  Our results of operations are also affectedby non-interest income, such as service charges, loan fees and gains and lossesfrom the sale of newly originated loans and investments.  Our principal operating expenses, aside frominterest expense, consist of compensation and employee benefits, occupancycosts, federal deposit insurance costs, data processing expenses and provisionfor loan losses.

 

We are significantlyimpacted by prevailing economic conditions including federal monetary andfiscal policies and federal regulations of financial institutions.  Deposit balances are influenced by numerousfactors such as competing personal investments, the level of personal incomeand the personal rate of savings within our market areas.  Factors influencing lending activitiesinclude the demand for housing and the interest rate pricing competition fromother lending institutions.

 

*Summary of Results*.  Net earnings for the three months ended June30, 2004, decreased $141,000, or 11.6%, to $1.1 million as compared to thethree months ended June 30, 2003.  Thisdecline in net earnings was generally attributable to increased non-interestexpense which was partially offset by an improvement in net interest income.

 

Net earnings for the six months ended June 30, 2004,decreased $515,000, or 20.3%, to $2.0 million as compared to the six monthsended June 30, 2003.  This decline in netearnings was generally attributable to decreased gains on sales of loans andincreased non-interest expense which was offset by a slight increase in netinterest income.

 

The three months ended June 30, 2004, resulted indiluted earnings per share of $0.51 compared to $0.57 for the same period in2003.  Return on average assets was 0.90%for the period compared to 1.49% for the same period in 2003.  Return on average stockholders’ equity was10.11% for the period compared to 11.62% for the same period in 2003.

 

The six months ended June 30, 2004, resulted indiluted earnings per share of $0.96 compared to $1.19 for the same period in2003.  Return on average assets was 1.00%for the period compared to 1.55% for the same period in 2003.  Return on average stockholders’ equity was9.55% for the period compared to 12.26% for the same period in 2003.

 

We continued our stock repurchase program during thefirst six months of 2004, resulting in the repurchase of an additional 33,024shares.  Under the current stockrepurchase program authorized by our Board of Directors, as of June 30, 2004,we can repurchase an additional 44,800 shares of our common stock.  As of June 30, 2004, we held 152,681 sharesas treasury stock at an average cost per share of $24.74.

 

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The following table summarizes net earnings and keyperformance measures for the periods presented.

 
| ** **                    | ** ** | Three Months Ended  June 30, |   | Six Months Ended  June 30, |   |
|-------------------------------|------------|------------------------------|--------|----------------------------|--------|
| ** **                    | ** ** | 2004                         |   | 2003                       |   | 2004 |   | 2003 |   |
| Net earnings:                 |       |                         |   |                       |   |   |   |   |   |
| Basic earnings  per share     |       | $0.52                        |   | $0.58                      |   | $0.97 |   | $1.21 |   |
| Diluted earnings  per share   |       | $0.51                        |   | $0.57                      |   | $0.96 |   | $1.19 |   |
| Earnings ratios:              |       |                         |   |                       |   |   |   |   |   |
| Return on  average assets (1) |       | 0.90%                        |   | 1.49%                      |   | 1.00% |   | 1.55% |   |
| Return on  average equity (1) |       | 10.11%                       |   | 11.62%                     |   | 9.55% |   | 12.26% |   |
| Dividend payout  ratio        |       | 33.33%                       |   | 26.74%                     |   | 35.42% |   | 25.61% |   |
| Net interest  margin (1)      |       | 3.08%                        |   | 3.84%                      |   | 3.26% |   | 3.70% |   |

 

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

 

*Interest Income.*  Interest income for the three months endedJune 30, 2004, increased $1.0 million, or 24.0%, to $5.3 million from $4.3million in the same period of 2003, primarily as a result of the First Kansasacquisition.  Average loans for thequarter ended June 30, 2004, increased to $286.9 million from $218.2 millionfor the quarter ended June 30, 2003.  The increase in average loans was primarily the result of theacquisition of First Kansas, which had approximately $74.1 million in grossloans at March 31, 2004.  Interest incomeon loans increased $475,000, or 13.0%, to $4.1 million for the quarter ended June30, 2004.  Average investment securitiesalso increased as a result of the First Kansas acquisition, from $87.6 millionfor the quarter ended June 30, 2003, to $157.1 million for the quarter endedJune 30, 2004.  First Kansas hadapproximately $62.8 million in investment securities at March 31, 2004.  Interest income on investment securitiesincreased $563,000, or 87.7%, to $1.2 million for the quarter ended June 30,2004.

 

Interest income for the six months ended June 30,2004, increased $447,000, or 5.0%, to $9.4 million from $8.9 million in thesame period of 2003.  This increase wasprimarily the result of the First Kansas acquisition, being offset by thedecrease in interest rates experienced as interest earning assets repricedduring 2003 and the first six months of 2004. Average loans for the first six months of 2004 increased from to $250.9million from $221.2 million for the first six months of 2003.  The increase in average loans was primarilythe result of the acquisition of First Kansas. Interest income on loans decreased $117,000, or 1.6%, to $7.4 millionfor the six months ended June 30, 2004. Average investment securities also increased as a result of the FirstKansas acquisition, from $88.5 million for the six months ended June 30, 2003,to $128.2 million for the same period of 2004. Interest income on investment securities increased $564,000, or 38.9%,to $2.0 million for the six months ended June 30, 2004.

 

*Interest Expense*.  Interest expense during the three monthsended June 30, 2004, increased $462,000, or 31.8%, as compared to the sameperiod of 2003.  For the three monthsended June 30, 2004, interest expense on deposits decreased $123,000, or10.6%.  The decrease in interest expenseon deposits resulted primarily from the decline in interest rates andassociated repricing of deposits as

 

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they matured.  Interest expense on borrowings increased$585,000, or 198.4%.  The increase ininterest expense on borrowings resulted primarily from additional advances fromthe Federal Home Loan Bank of approximately $56.4 million which we assumedthrough the acquisition of First Kansas, the $8.2 million in trust preferredsecurities that we issued in December 2003, and the $7.0 million that weborrowed in April 2004 from an unaffiliated financial institution to consummatethe acquisition of First Kansas.  Thefull commitment of this loan was $9.0 million at an interest rate equal toprime less 0.5%.  Concurrently, weentered into a swap agreement that fixed the rate on $3.0 million of theseborrowings at 5.68% for five years.

 

Interest expense during the six months ended June 30,2004, increased $195,000, or 6.5%, as compared to the same period of 2003.  For the six months ended June 30, 2004,interest expense on deposits decreased $439,000, or 35.2%.  The decrease in interest expense on depositsresulted primarily from the decline in interest rates and the repricing ofmaturing deposits at these lower rates.  Interestexpense on borrowings increased $634,000, or 106.5%.  The increase in interest expense onborrowings resulted primarily from additional advances from the Federal HomeLoan Bank of approximately $56.4 million which we assumed through theacquisition of First Kansas, the $8.2 million in trust preferred securitiesthat we issued in December 2003, and the $7.0 million that we borrowed in April2004 to consummate the acquisition of First Kansas.

 

*Net Interest Income.* Net interest income for the three months endedJune 30, 2004, totaled $3.4 million, a 20.1% increase, as compared to $2.9million for the three months ended June 30, 2003, resulting primarily from theacquisition of First Kansas.  Averageearning assets also increased during the second quarter of 2004 as a result ofthe First Kansas acquisition, increasing to $448.1 million from $309.6 millionfor the second quarter of 2003.  The netinterest margin on earning assets was 3.08% for the second quarter of 2004,down from 3.70% during the second quarter of 2003.  The refinancings and paydowns in theresidential mortgage portfolio exceeded the commercial loan growth during 2003,resulting in the excess liquidity being invested into lower yielding investmentsecurities.  In addition, the prolongedlow-rate environment has caused the net interest margin to compress as assets havecontinued to reprice downward with little room left for liability repricing.

 

Net interest income for the six months ended June 30,2004, totaled $6.2 million, a 4.2% increase, as compared to $5.9 million forthe six months ended June 30, 2003, primarily as a result of the First Kansasacquisition.  Average earning assets alsoincreased during the first six months of 2004 as a result of the acquisition ofFirst Kansas, increasing to $381.7 million from $312.4 million for the sameperiod of 2003.  The net interest marginon earning assets was 3.26% for the first six months of 2004, down from 3.84%during the first six months of 2003.  Therefinancings and paydowns in the residential mortgage portfolio exceeded the commercialloan growth during 2003, resulting in the excess liquidity being invested intolower yielding investment securities.  Inaddition, the prolonged low-rate environment has caused the net interest marginto compress as assets have continued to reprice with little room left forliability repricing.

 

*Provision for Loan Losses.*  The provision for loan losses for the threemonths ended June 30, 2004, was $120,000, compared to a provision of $60,000during the three months ended June 30, 2003. Our continuous review of the loan portfolio prompted an increase in ourprovision relating primarily to our commercial loan growth.  At June 30, 2004, and December 31, 2003, theallowance

 

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for loan losses was $2.8million and $2.3 million, or 1.0% and 1.1%, respectively, of gross loansoutstanding.  The provision for loanlosses for the six months ended June 30, 2004, was $180,000 compared to aprovision of $120,000 for the same period in 2003.  First Kansas had an allowance for loan lossesapproximating $352,000 at March 31, 2004.

 

*Non-interest Income.*  Non-interest income increased $49,000, or4.0%, for the three months ended June 30, 2004, to $1.3 million compared to thethree months ended June 30, 2003.  Theincrease in non-interest income reflected increased fees and service chargesfrom $671,000 for the three months ended June 30, 2003, to $931,000 for thethree months ended June 30, 2004, relating primarily to increased depositservice charges as a result of the First Kansas acquisition.  Also contributing to the increase innon-interest income was the gain on sale of investments of $32,000 during thesecond quarter of 2004.  Offsetting theincrease in non-interest income was a decline of 54.7% in the gains on sale ofloans from $492,000 for the three months ended June 30, 2003, to $223,000 forthe same period of 2004.  In addition,loan fees were lower during the second quarter of 2004 as compared to thesecond quarter of 2003.  Mortgagerefinancing and prepayments were much lower during the second quarter of 2004as compared to the same period of 2003 as many mortgage holders had alreadytaken advantage of the low interest rates favorable for mortgage refinancingand because rates have risen.  Mortgageorigination and refinancing activity is expected to continue at levels similarto the second quarter of 2004 during the third quarter.

 

Non-interest income decreased $345,000, or 13.4%, forthe six months ended June 30, 2004, to $2.2 million compared to the six monthsended June 30, 2003.  The decrease innon-interest income reflects a 59.4% decline in the gains on sale of loans from$1.1 million for the six months ended June 30, 2003, to $458,000 for the sixmonths ended June 30, 2004.  Loan feeswere also lower during the six months ended June 30, 2004, as compared to thesame period of 2003.  The decrease innon-interest income was partially offset by increased fees and service chargesof $182,000 to $1.5 million for the six months ended June 30, 2004, as comparedto the same period of 2003, relating primarily to increased deposit servicecharges as a result of the First Kansas acquisition.   An increase of $104,000 in gains on sale ofinvestments for the six month period ended June 30, 2004, as compared to the sixmonths ended June 30, 2003, also partially offset the overall decrease innon-interest income.  Mortgagerefinancing and prepayments were much lower during the first half of 2004 ascompared to the same period of 2003 as many mortgage holders had already takenadvantage of the low interest rates favorable for mortgage refinancing andbecause rates have risen.  Mortgageorigination and refinancing activity is expected to remain relatively stableduring the remainder of 2004.

 

The increases in gains onsale of investments for the three months ended and six months ended June 30,2004, resulted from equity security sales from our holding company’s investmentportfolio.  We periodically sell equitysecurities based on performance and other indicators, and we could selladditional equity securities in future periods. Our equity securities portfolio was $1.4 million, including unrealizedgains of $500,000, at June 30, 2004. Although circumstances could change, we do not anticipate anysignificant gains on sale of investments during the third quarter 2004.

 

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|                           |   | Three Months Ended  June 30, |                       | Six Months Ended  June 30, |   |
|--------------------------------|--------|------------------------------|----------------------------|----------------------------|--------|
|                           |   | 2004                         |                       | 2003                       |   | 2004 |   | 2003 |   |
| Non-interest  income:          |   |                         |                       |                       |   |   |   |   |   |
| Fees and service  charges      |   |                         | $   931,422 |                       |   | $  670,655 |   |   | $1,464,157 |   |   | $1,282,652 |   |
| Gains on sales  of loans       |   |                         | 223,145                    |                       |   | 492,290 |   |   | 458,030 |   |   | 1,126,797 |   |
| Gains on sales  of investments |   |                         | 32,103                     |                       |   | - |   |   | 129,790 |   |   | 25,682 |   |
| Other                          |   |                         | 107,515                    |                       |   | 82,111 |   |   | 189,016 |   |   | 151,153 |   |
| Total  non-interest income     |   |                         | $1,294,185                 |                       |   | $1245,056 |   |   | $2,240,993 |   |   | $2,586,284 |   |

 

*Non-interestExpense.*  Non-interestexpense increased $711,000, or 31.0%, to $3.0 million for the three monthsended June 30, 2004, as compared to the three months ended June 30, 2003.  This increase in non-interest expenseresulted primarily from increased expenses associated with the operations ofthe branches acquired from First Kansas including compensation and benefits,occupancy and equipment and data processing.

 

Non-interestexpense increased $615,000, or 13.2%, to $5.3 million for the six months endedJune 30, 2004, as compared to the six months ended June 30, 2003.  The increase in non-interest expense for thefirst six months of 2004 as compared to the same period of 2003 resultedprimarily from expenses associated with the operations of the branches acquiredfrom First Kansas.  Offsetting thisincrease in non-interest expense was a decrease of $27,000 in professional fees, and a $40,000decrease in amortization expense for the six months ended June 30, 2004,compared to the six months ended June 30, 2003. Professional fees were higher for the six months ended June 30, 2003, asapproximately $25,000 in legal fees had been incurred related to securing our“Landmark” trade name.  Amortizationexpense has decreased as prepayment speeds on our mortgage servicing portfoliohave slowed.

 
|                       |   | Three Months Ended  June 30, |       | Six Months Ended  June 30, |   |
|----------------------------|--------|------------------------------|------------|----------------------------|--------|
|                       |   | 2004                         |       | 2003                       |   | 2004 |   | 2003 |   |
| Non-interest expense:      |   |                         |       |                       |   |   |   |   |   |
| Compensation and benefits  |   |                         | $1,515,074 |                       |   | $1,209,841 |   |   | $2,732,878 |   |   | $2,422,941 |   |
| Occupancy and equipment    |   |                         | 424,622    |                       |   | 312,547 |   |   | 743,668 |   |   | 624,924 |   |
| Amortization               |   |                         | 108,219    |                       |   | 111,791 |   |   | 183,366 |   |   | 223,110 |   |
| Professional fees          |   |                         | 82,222     |                       |   | 65,504 |   |   | 160,916 |   |   | 188,283 |   |
| Data processing            |   |                         | 130,500    |                       |   | 83,169 |   |   | 209,365 |   |   | 163,248 |   |
| Other                      |   |                         | 740,123    |                       |   | 507,148 |   |   | 1,227,888 |   |   | 1,020,684 |   |
| Total non-interest expense |   |                         | $3,000,760 |                       |   | $2,290,000 |   |   | $5,258,081 |   |   | $4,643,190 |   |

 

*Income Tax Expense*.  Income tax expense decreased $8,000, or 1.5%,from $537,000 for the three months ended June 30, 2003, to $529,000 for thethree months ended June 30, 2004.  Thedecrease in income tax expense for the three months ended June 30, 2004,resulted primarily from a decrease in taxable income.  The effective tax rate for the second quarterof 2004 was 33.0% compared to 30.7% for the second quarter of 2003.  The increase in the effective tax rate forthe 

 

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second quarter of 2004 ascompared to the second quarter of 2003 resulted from reduced taxes recordedduring the second quarter of 2003 related to revised projections on investmenttax credits received during that quarter.

 

Income tax expense decreased $253,000, or 20.6%, from$1.2 million for the six months ended June 30, 2003, to $975,000 for the sixmonths ended June 30, 2004.  The decreasein income tax expense for the six months ended June 30, 2004, resultedprimarily from a decrease in taxable income. The effective tax rate for the six months ended June 30, 2004, was 32.5%compared to 32.6% for the same period of 2003.

 

*Asset Quality and Distribution.*  Total assets increased to $477.8 million atJune 30, 2004, compared to $334.0 million at December 31, 2003.  This increase was primarily attributable tothe acquisition of First Kansas consummated on April 1, 2004.  Our primary ongoing sources of funds aredeposits, proceeds from principal and interest payments on loans and investmentsecurities and proceeds from the sale of mortgage loans and investmentsecurities.  While maturities andscheduled amortization of loans are a predictable source of funds, depositflows and mortgage prepayments are greatly influenced by general interestrates, economic conditions, competition, and the restructuring of the financialservices industry.

 

Net loans, excluding loans held for sale, increased$74.4 million during the six months ended June 30, 2004.  This increase was primarily the result of theacquisition of First Kansas on April 1, 2004. The majority of loans acquired from First Kansas were one-to-four familyresidential loans.  As of June 30, 2004,our one-to-four family residential loans comprised 49.8% of totals loans.  We plan to continue to diversify our loanportfolio composition through our continued planned expansion of commerciallending activities.

 

Our primary investingactivities are the origination of mortgage, consumer, and commercial loans andthe purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate,residential mortgage loans with maturities in excess of ten years for sale inthe secondary market.  We do notoriginate and warehouse these fixed-rate residential loans for resale in orderto speculate on interest rates.

 

The allowance for losses onloans is established through a provision for losses on loans based on ourevaluation of the risk inherent in the loan portfolio and changes in the natureand volume of its loan activity.  Suchevaluation, which includes a review of all loans with respect to which fullcollectibility may not be reasonably assured, considers the fair value of theunderlying collateral, economic conditions, historical loan loss experience,level of classified loans and other factors that warrant recognition inproviding for an adequate allowance for losses on loans.

 

We believe that the qualityof the loan portfolio continues to be strong as evidenced by our low levels ofpast due and non-accrual loans.  Loanspast due more than one month and less than 90 days as of June 30, 2004, totaled$4.7 million, as compared to $2.3 million at December 31, 2003.  This increase was impacted by one commercialreal estate loan with a balance of approximately $1.5 million at June 30,2004.  This loan was past due as a resultof technical document exceptions which were in the process of being resolved atJune 30, 2004, and were subsequently resolved in early July.  As of 

 

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June30, 2004, loans with a balance of $1.7 million were on non-accrual status, or0.59% of total loans, compared to a balance of $1.2 million loans onnon-accrual status, or 0.55% of total loans, as of December 31, 2003.  In addition, the ratio of non-performingassets as a percentage of total assets increased from 0.45% as of December 31,2003, to 0.58% as of June 30, 2004. While the non-accrual loans and non-performing asset ratios haveincreased, the majority of the increase occurred in the one-to-four familyresidential loan portfolio.  Residentialhome loans comprised 86.5% of the $1.7 million non-accrual balance at June 30,2004.  These loans have been underwrittenaccording to our residential lending policies and are well secured by realestate collateral, and in many instances, private mortgage insurance orgovernment guarantees.  We havehistorically incurred minimal losses on mortgage loans based upon collateralvalues and underlying insurance or guarantees. We are aggressively pursuing collection activity of these loans whichshould enable the collection of principal.

 

A slowdown in economicactivity beginning in 2001 severely impacted several major industries as wellas the economy as a whole.  We arepleased that there appear to be numerous indications of emerging strength inthe economy, including the Federal Open Market Committee raising the target forthe Federal Funds rate by 25 basis points on June 30, 2004, and again by 25basis points on August 10, 2004.  Theoutlook of the economy for the remainder of 2004, however, depends on whetherthe strengthening will be sustainable and how quickly consumer confidenceresponds to the positive effects, if any, on the economy.  Based on the outcomes, these events couldadversely affect cash flows for both commercial and individual borrowers, as aresult of which, we could experience increases in problem assets, delinquenciesand losses on loans.  Many financialinstitutions have experienced an increase in non-performing assets during therecent difficult economic period, as even well-established business borrowersdeveloped cash flow, profitability and other business-related problems.  We believe that the allowance for losses onloans at June 30, 2004, is adequate. While we believe that we use the best information available to determinethe allowance for losses on loans, unforeseen market conditions could result inadjustment to the allowance for losses on loans.  In addition, net earnings could besignificantly affected if circumstances differ substantially from theassumptions used in establishing the allowance for losses on loans.

 

*Liability Distribution.*  Total deposits increased $84.3 million to $337.4million at June 30, 2004, from $253.1 million at December 31, 2003.  The amount of deposits acquired in the April2004 acquisition of First Kansas approximated $84.2 million.  Borrowings increased $60.8 million to $94.6million at June 30, 2004, from $33.8 million at December 31, 2003.  The amount of borrowings acquired in theFirst Kansas acquisition approximated $56.4 million.  In April 2004, we borrowed $7.0 million froman unrelated financial institution to fund the acquisition of First Kansas.

 

Non-interest bearing demand accounts at June 30, 2004,were $25.4 million, or 7.5% of deposits, compared to $20.5 million, or 8.1% ofdeposits, at December 31, 2003. Certificates of deposit increased to $170.2 million at June 30, 2004,from $140.8 million at December 31, 2003. Money market and NOW demand accounts increased to $116.1 million at June30, 2004, from $77.0 million at December 31, 2003, and were 34.4% of totaldeposits.  Savings accounts increased to$25.8 million at June 30, 2004, from $14.8 million at December 31, 2003.

 

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Certificates of deposit at June 30, 2004, which werescheduled to mature in one year or less, totaled $105.7 million.  Historically, maturing deposits havegenerally remained with our bank and we believe that a significant portion ofthe deposits maturing in one year or less will remain with us upon maturity.

 

*Contractual Obligations andCommercial Commitments.*  The following table presentsour contractual obligations, defined as operating lease obligations andprincipal payments due on non-deposit obligations with maturities in excess ofone year as of June 30, 2004, for the periods indicated.

 
| Contractual Cash                                                  |   |       |       | One Year  |   | One to      |   | Four to    |       | More than  |   |
|-------------------------------------------------------------------|--------|------------|------------|-----------|--------|-------------|--------|------------|------------|------------|--------|
| Obligations          |   | Total      |       | or Less   |   | Three Years |   | Five Years |       | Five Years |   |
|                                                              |   |       |       |      |   |        |   |       |       |       |   |
| Operating leases                                                  |   | $          | 10,400     |      | $      | 9,600       |   | $          | 800        |       | $      | - |   | $ | - |   |
| Service  contracts                                                |   | 2,665,000  |       | 780,000   |   | 1,885,000   |   | -          |       | -          |   |
| Real estate  contract                                             |   | 423,014    |       | 423,014   |   | -           |   | -          |       | -          |   |
| FHLB advances                                                     |   | 79,134,382 |       | 7,125,353 |   | 9,376,059   |   | 35,125,353 |       | 27,507,617 |   |
| Other borrowings                                                  |   | 15,203,000 |       | -         |   | 1,142,500   |   | 5,812,500  |       | 8,248,000  |   |
| Total  contractual obligations                                    |   | $          | 97,435,796 |      | $      | 8,337,967   |   | $          | 12,404,359 |       | $      | 40,937,853 |   | $ | 35,755,617 |   |

 

*Liquidity.*  Our most liquid assets are cash and cashequivalents and investment securities available for sale.  The levels of these assets are dependent onthe operating, financing, lending and investing activities during any givenperiod.  These liquid assets totaled$165.2 million at June 30, 2004, and $107.5 million at December 31, 2003.  The amount of investments acquired in theApril 2004 acquisition of First Kansas approximated $62.8 million.  During periods in which we are not able tooriginate a sufficient amount of loans and/or periods of high principalprepayments, we increase our liquid assets by investing in short-term U. S.Government and agency securities or high-grade municipal securities.

 

Liquidity management is botha daily and long-term function of our strategy. Excess funds are generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are generally availablethrough the use of Federal Home Loan Bank advances, a line of credit with theFederal Home Loan Bank or through sales of securities.  At June 30, 2004, we had outstanding FederalHome Loan Bank advances of $79.1 million and no borrowings outstanding on ourline of credit with the Federal Home Loan Bank. At June 30, 2004, our total borrowing capacity with the Federal HomeLoan Bank was $53.3 million.  We also hadother borrowings of $15.5 million at June 30, 2004, which included $8.2 millionof subordinated debentures and $250,000 in repurchase agreements.  During the first quarter of 2004, we obtained$9.0 million in loan commitments from an unrelated financial institution toprovide financing for the First Kansas acquisition.  On April 1, 2004, we borrowed $7.0 million onthese loans to consummate the acquisition of First Kansas.  The balance of these loans at June 30, 2004,was $7.0 million and is included in other borrowings.

 

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At June 30, 2004, we hadoutstanding loan commitments, excluding standby letters of credit, of $39.8million.  We anticipate that sufficientfunds will be available to meet current loan commitments.  These commitments consist of letters ofcredit, unfunded lines of credit and commitments to finance real estate loans.

 

*Capital.*  The Federal Reserve Board has establishedcapital requirements for bank holding companies which generally parallel thecapital requirements for national banks under the Office of the Comptroller ofthe Currency regulations.  The regulationsprovide that such standards will generally be applied on a consolidated (ratherthan a bank-only) basis in the case of a bank holding company with more than$150 million in total consolidated assets.

 

At June 30, 2004, wecontinued to maintain a sound leverage ratio of 8.9% and a total risk basedcapital ratio of 16.0%.  As shown by thefollowing table, our capital exceeded the minimum capital requirements at June30, 2004 (dollars in thousands):

 
|                      |   | ActualAmount |   | Actual Percent |   | RequiredPercent |   | RequiredAmount |   |
|---------------------------|--------|--------------|--------|----------------|--------|-----------------|--------|----------------|--------|
| Leverage                  |   | $41,734      |   | 8.9            | %      | 4.0             | %      | $18,823        |   |
| Tier 1 Capital            |   | $41,734      |   | 14.9           | %      | 4.0             | %      | $11,179        |   |
| Total Risk Based  Capital |   | $44,564      |   | 16.0           | %      | 8.0             | %      | $22,358        |   |

 

At June 30, 2004, oursubsidiary bank continued to maintain a sound leverage ratio of 9.9% and atotal risk based capital ratio of 17.8%. As shown by the following table, our bank’s capital exceeded the minimumcapital requirements at June 30, 2004 (dollars in thousands):

 
| ** **                | ** ** | ActualAmount |   | ActualPercent |   | RequiredPercent |   | RequiredAmount |   |
|---------------------------|------------|--------------|--------|---------------|--------|-----------------|--------|----------------|--------|
| Leverage                  |       | $46,854      |   | 9.9           | %      | 4.0             | %      | $19,014        |   |
| Tier 1 Capital            |       | $46,854      |   | 16.8          | %      | 4.0             | %      | $11,154        |   |
| Total Risk Based  Capital |       | $49,684      |   | 17.8          | %      | 8.0             | %      | $22,308        |   |

 

Banks and bank holdingcompanies are generally expected to operate at or above the minimum capitalrequirements.  The above ratios are wellin excess of regulatory minimums and should allow us to operate without capitaladequacy concerns.  The Federal DepositInsurance Corporation Improvement Act of 1991 establishes a bank rating systembased on the capital levels of banks.  Asof June 30, 2004, we were rated “well capitalized”, which is the highest ratingavailable under this capital-based rating system.

 

During December 2003, we issued $8.2 million in trust preferredsecurities.  In accordance with currentregulatory capital guidelines, this amount has been included in our Tier 1capital ratios as of June 30, 2004.  Cashdistributions on the securities are payable quarterly, are deductible forincome tax purposes and are included in interest expense in the consolidatedfinancial statements.

 

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OnMay 6, 2004, the Board of Governors of the Federal Reserve System issued aNotice of Proposed Rulemaking in which it proposed to allow the continuedinclusion of trust preferred securities in the Tier 1 capital ofbank holding companies, subject to stricter standards.  The Federal Reserve is proposing to limit theaggregate amount of a bank holding company’s cumulative perpetual preferredstock, trust preferred securities and other minority interests to 25% ofthe company’s core capital elements, net of goodwill.  Current regulations do not require thededuction of goodwill.  The proposalalso provides that amounts of qualifying trust preferred securities and certainminority interests in excess of the 25% limit may be included in Tier 2 capitalbut would be limited, together with subordinated debt and limited-lifepreferred stock, to 50% of Tier 1 capital. The proposal provides a three-year transition period for bankholding companies to meet these quantitative limitations.

 

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

 

*Quantitative and QualitativeDisclosures About Market Risk*.  Our assetsand liabilities are principally financial in nature and the resulting netinterest income thereon is subject to changes in market interest rates and themix of various assets and liabilities. Interest rates in the financial markets affect our decision on pricingour assets and liabilities which impacts net interest income, a significantcash flow source for us.  As a result, asubstantial portion of our risk management activities relates to managinginterest rate risk.

 

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

 

We have been successfulin meeting the interest rate sensitivity objectives set forth in ourpolicy.  Simulation models are preparedto determine the impact on net interest income for the coming twelve months,including one using rates at December 31, 2003, and forecasting volumes for thetwelve-month projection.  This positionis then subjected to a shift in interest rates of 100 and 200 basis pointsrising and 100 basis points falling with an impact to our net interest incomeon a one year horizon as follows:

 

| Scenario                |   | $ Change in Net  Interest Income |   | % of Net Interest  Income |
|-------------------------|--------|---------------------------------------|--------|---------------------------|
| 100 basis point rising  |   | $297,471                              |   |                      | 2.6% |
| 200 basis point rising  |   | 580,195                               |   |                      | 5.0% |
| 100 basis point falling |   | (273,293)                             |   |                      | (2.3%) |

 

We believe that no significant changes in our interest rate sensitivityposition have occurred since December 31, 2003. We also believe we are appropriately positioned for future interest ratemovements, although we may experience some fluctuations in net interest incomedue to short-term timing differences between the repricing of assets andliabilities.

 

*Recent RegulatoryDevelopments. *On June17, 2004, the Securities and Exchange Commission, the ”SEC,” issued aProposed Rule in which it described the parameters under which banks may sellsecurities to their customers without having to register as broker-dealers withthe SEC in accordance with Title II of the Gramm-Leach-Bliley Act of 1999.  The proposal, which is designated asRegulation B, clarifies, among other things: (i) the limitations on the amountthat unregistered bank employees may be compensated for making referrals inconnection with a third-party brokerage arrangement; (ii) the manner bywhich banks may be compensated for effecting securities transactions for itscustomers in a fiduciary capacity; and (iii) the extent to which banks mayengage in certain securities transactions as a custodian.

 

*Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995 - Forward-Looking Statements.*** **This document contains,and future oral and written statements of the Company and its management maycontain, forward-looking statements, within the meaning of such term in thePrivate Securities Litigation Reform Act of 1995, with respect to the financialcondition, results of

 

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operations, plans, objectives, future performance and business of theCompany.  Forward-looking statements,which may be based upon beliefs, expectations and assumptions of the Company’smanagement and on information currently available to management, are generallyidentifiable by the use of words such as “believe,” “expect,” “anticipate,”“plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” orother similar expressions.  Additionally,all statements in this document, including forward-looking statements, speakonly as of the date they are made, and the Company undertakes no obligation toupdate any statement in light of new information or future events.

 

Our ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain.  Factors which could have amaterial adverse effect on our operations and future prospects include, but arenot limited to, the following:

 

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

 

•                                         The economicimpact of past and future terrorist attacks, acts of war or threatsthereof,   and the response of the UnitedStates to any such threats and attacks.

 

•                                         The effects of,and changes in, federal, state and local laws, regulations and policiesaffecting banking, securities, insurance and monetary and financial matters.

 

•                                         The effects ofchanges in interest rates (including the effects of changes in the rate ofprepayments our assets) and the policies of the Board of Governors of theFederal Reserve System.

 

•                                         Our ability tocompete with other financial institutions as effectively as we currently intenddue to increases in competitive pressures in the financial services sector.

 

•                                         Our inabilityto obtain new customers and to retain existing customers.

 

•                                         The timelydevelopment and acceptance of products and services, including products andservices offered through alternative delivery channels such as the Internet.

 

•                                         Technologicalchanges implemented by us and by other parties, including third party vendors,which may be more difficult or more expensive than anticipated or which mayhave unforeseen consequences to us and our customers.

 

•                                         Our ability todevelop and maintain secure and reliable electronic systems.

 

•                                         Our ability toretain key executives and employees and the difficulty that we may experiencein replacing key executives and employees in an effective manner.

 

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•                                         Consumerspending and saving habits which may change in a manner that affects ourbusiness adversely.

 

•                                         Businesscombinations and the integration of acquired businesses which may be moredifficult or expensive than expected.

 

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

 

•                                         Changes inaccounting policies and practices, as may be adopted by state and federalregulatory agencies and the Financial Accounting Standards Board.

 

•                                         Our ability tomanage the risks associated with the foregoing as well as anticipated.

 

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.  Additional information concerning us and ourbusiness, including other factors that could materially affect our financialresults, is included in our filings with the Securities and Exchange Commission.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

An evaluation was performed under the supervision andwith the participation of our management, including the Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a-15(e)promulgated under the Securities and Exchange Act of 1934, as amended) as ofJune 30, 2004.  Based on that evaluation,our management, including the Chief Executive Officer and Chief FinancialOfficer, concluded that our disclosure controls and procedures wereeffective.  There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls.

 

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**PART II – OTHERINFORMATION**

 

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

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

 

 

**ITEM 2.  CHANGES IN SECURITI****ES, USE OF PROCEEDS AND ISSUERPURCHASES OF EQUITY SECURITIES.**

 

The following table providesinformation about purchases by the Company and its affiliated purchasers duringthe quarter ended June 30, 2004, of equity securities that are registered bythe Company pursuant to Section 12 of the Exchange Act:

 
| Period           |   | Total  Number  of SharesPurchased(1) |   | Average  Price Paidper Share |   | Total Number of  Shares Purchased  as Part of a  PubliclyAnnounced Plan(2) |   | Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet Be PurchasedUnder the Plan |   |
|------------------|--------|--------------------------------------|--------|------------------------------|--------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|
| April 1-30, 2004 |   |                                 | -      |                         |   |                                                                       | -      |                                                                                               |   |   | - |   |   |   | 58,417 |   |   |
| May 1-31, 2004   |   |                                 | 13,553 |                         |   |                                                                       | $29.52 |                                                                                               |   |   | 13,553 |   |   |   | 44,864 |   |   |
| June 1-30, 2004  |   |                                 | -      |                         |   |                                                                       | -      |                                                                                               |   |   | - |   |   |   | 44,864 |   |   |
| Total            |   |                                 | 13,553 |                         |   |                                                                       | $29.52 |                                                                                               |   |   | 13,553 |   |   |   | 44,864 |   |   |

 

(1)          We have repurchased an aggregate of 55,936 shares of our common stockpursuant to the repurchase program that we publicly announced in November 2003.

(2)          Our Board of Directors approved the repurchase by us up to an aggregateof 100,800 shares of our common stock pursuant to the repurchase program.  Unless terminated earlier by resolution ofthe Board of Directors, the repurchase program will expire when we haverepurchased all shares authorized for repurchase thereunder.

 

 

**ITEM 3.  DEFAULTS UPON SENI****OR SECURITIES.**

 

None

 

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**ITEM 4.  SUBMISSION OF MATT****ERS TO VOTE OF SECURITY HOLDERS.**

 

On May 19, 2004, the annualmeeting of Landmark Bancorp, Inc. stockholders was held.  At the meeting, Patrick L. Alexander, Jim W.Lewis, Jerry R. Pettle and Larry Schugart were elected to serve as Class IIIdirectors with terms expiring in 2007. Continuing as Class I directors (term expires in 2005) are Brent A.Bowman, Joseph L. Downey and David H. Snapp and continuing as Class IIdirectors (term expires in 2006) are Richard Ball, Susan E. Roepke and C. DuaneRoss.  The stockholders also ratified theappointment of KPMG LLP as Landmark Bancorp, Inc.’s independent publicaccountants for the year ending December 31, 2004, and approved the amendmentto the 2001 Stock Incentive Plan.

 

There were 1,820,699 sharesof common stock eligible to vote at the annual meeting.  The voting on each item at the annual meetingwas as follows:

 

|                 |   |      |   | Withheld/ |   |    |   | Broker    |
|----------------------|--------|-----------|--------|-----------|--------|---------|--------|-----------|
|                 |   | For       |   | Against   |   | Abstain |   | Non-Votes |
|                 |   |      |   |      |   |    |   |      |
| Patrick L. Alexander |   | 1,795,719 |   | 24,980    |   | -       |   | -         |
| Jim W. Lewis         |   | 1,811,993 |   | 8,706     |   | -       |   | -         |
| Jerry R. Pettle      |   | 1,764,237 |   | 56,462    |   | -       |   | -         |
| Larry Schugart       |   | 1,809,317 |   | 11,382    |   | -       |   | -         |
| KPMG LLP             |   | 1,777,970 |   | 29,648    |   | 13,081  |   | -         |
| Stock Incentive Plan |   | 1,302,672 |   | 5,623     |   | 16,508  |   | 415,896   |

 

 

**ITEM 5.  OTHER INFORMATION****.**

 

None

 

 

**ITEM 6.  EXHIBITS AND REPOR****TS ON FORM 8-K.**

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

 

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B.                                     Reports on Form 8-K

 

A report on Form 8-K wasfiled on August 5, 2004, to report pursuant to Item 12 that the Company hadissued a press release announcing earnings for the quarter and six months endedJune 30, 2004, and the declaration of a cash dividend to stockholders.

 

A report on Form 8-K wasfiled on June 22, 2004, to report pursuant to Item 5 that the Company hadissued a press release announcing the agreements to sell the Beloit, Kansasbranch to Central National Bank and to sell the Phillipsburg, Kansas branch toFarmers State Bank.

 

A report on Form 8-K wasfiled on April 1, 2004, to report pursuant to Item 2 that the Company hadissued a press release announcing the consummation of the acquisition of FirstKansas Financial Corporation.  On May 10,2004, the Company amended this report on Form 8-K/A to report First KansasFinancial Corporation’s historical financial statements and pro forma financialinformation for the combined companies as of March 31, 2004.

 

A report on Form 8-K wasfiled on April 30, 2004, to report pursuant to Item 12 that the Company hadissued a press release announcing earnings for the three months ended March 31,2004, and the declaration of a cash dividend to stockholders.

 

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**SIGNATURES**

 

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

 
|                  |   | LANDMARK BANCORP, INC.                           |
|-----------------------|--------|--------------------------------------------------|
|                  |   |                                             |
|                  |   |                                             |
| Date: August 13, 2004 |   | /s/    Patrick  L. Alexander |
|                  |   | Patrick L. Alexander                             |
|                  |   | President and Chief  Executive Officer           |
|                  |   |                                             |
|                  |   |                                             |
| Date: August 13, 2004 |   | /s/    Mark  A. Herpich           |
|                  |   | Mark A. Herpich                                  |
|                  |   | Vice President, Secretary,  Treasurer            |
|                  |   |  and Chief Financial Officer                |

 

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