**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF** |
|------------|------------|----------------------------------------------------------|
| ** ** | ** ** | **THE  SECURITIES EXCHANGE ACT OF 1934**                 |

 

**For the quarterly period ended June 30, 2007**

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

 

**For transition period from         to         **

**Commission File Number 0-33203**

**LANDMARK BANCORP, INC.**

(Exact name of Registrant asspecified in its charter)

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

 

**701Poyntz Avenue, Manhattan, Kansas          66502**

(Address of principalexecutive offices)**                    **(Zip Code)

**(785)565-2000**

(Registrant’s telephonenumber, including area code)

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.
| Large accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

Indicate the number ofshares outstanding of each of the Registrant’s classes of common stock as ofthe latest practicable date: as of August 3, 2007, the Registrant hadoutstanding 2,313,154 shares of its common stock, $.01 par value per share.

 

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**LANDMARK BANCORP, INC.**

**Form 10-QQuarterly Report**

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

 

1

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**ITEM 1.  FINANCIAL STATEMENTS ANDRELATED NOTES**

**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                 | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                 | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| ** **                                                                                                 | ** ** | **(Unaudited)**   | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                 |       |              |        |                  |       |
| Cash  and cash equivalents                                                                                 |       | $                 | 12,265,581  |                  | $          | 14,751,914 |   |
| Investment  securities available for sale, at fair value                                                   |       | 157,981,549       |        | 145,884,168           |       |
| Loans,  net                                                                                                |       | 380,179,102       |        | 379,323,581           |       |
| Loans  held for sale                                                                                       |       | 3,372,926         |        | 1,364,474             |       |
| Premises  and equipment, net                                                                               |       | 14,440,831        |        | 13,767,075            |       |
| Goodwill                                                                                                   |       | 13,009,167        |        | 13,009,167            |       |
| Other  intangible assets, net                                                                              |       | 3,571,044         |        | 4,030,709             |       |
| Bank  owned life insurance                                                                                 |       | 11,377,362        |        | 11,144,796            |       |
| Accrued  interest and other assets                                                                         |       | 7,156,726         |        | 7,292,352             |       |
|                                                                                                       |       |              |        |                  |       |
| Total assets                                                                                               |       | $                 | 603,354,288 |                  | $          | 590,568,236 |   |
|                                                                                                       |       |              |        |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                             | ** ** | ** **        | ** **  | ** **            | ** ** |
| Liabilities:                                                                                               |       |              |        |                  |       |
| Deposits                                                                                                   |       | $                 | 446,061,446 |                  | $          | 444,485,370 |   |
| Federal Home Loan Bank borrowings                                                                          |       | 70,223,473        |        | 61,920,421            |       |
| Other borrowings                                                                                           |       | 29,789,545        |        | 28,495,643            |       |
| Accrued expenses, taxes and other liabilities                                                              |       | 8,058,070         |        | 6,430,787             |       |
| Total liabilities                                                                                          |       | 554,132,534       |        | 541,332,221           |       |
|                                                                                                       |       |              |        |                  |       |
| Stockholders’  equity:                                                                                |       |              |        |                  |       |
| Common stock, $0.01 par, 5,000,000 shares authorized, 2,342,925 and  2,341,744 shares issued, respectively |       | 23,429            |        | 23,417                |       |
| Additional paid-in capital                                                                                 |       | 22,693,887        |        | 22,607,510            |       |
| Retained earnings                                                                                          |       | 28,469,937        |        | 26,758,056            |       |
| Treasury stock, at cost; 29,771 and 5,000 shares, respectively                                             |       | (839,195          | )           | (138,506              | )          |
| Accumulated other comprehensive loss                                                                       |       | (1,126,304        | )           | (14,462               | )          |
| Total stockholders’ equity                                                                            |       | 49,221,754        |        | 49,236,015            |       |
|                                                                                                       |       |              |        |                  |       |
| Total  liabilities and stockholders’ equity                                                           |       | $                 | 603,354,288 |                  | $          | 590,568,236 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

2

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

# **CONDENSED CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(Unaudited)**

** **
| ** **                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                     |       |                                                |       |                                              |       |   |   |   |   |
| Loans                                                |       | $                                                   | 7,212,091  |                                              | $          | 6,860,807 |   | $ | 14,348,373 |   | $ | 13,511,515 |   |
| Investment securities                                |       | 1,780,664                                           |       | 1,455,327                                         |       | 3,459,943 |   | 2,870,664 |   |
| Other                                                |       | 9,124                                               |       | 30,108                                            |       | 24,295 |   | 101,394 |   |
| Total interest income                                |       | 9,001,879                                           |       | 8,346,242                                         |       | 17,832,611 |   | 16,483,573 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Deposits                                             |       | 3,362,111                                           |       | 2,616,379                                         |       | 6,612,276 |   | 5,043,714 |   |
| Borrowed funds                                       |       | 1,173,313                                           |       | 1,182,976                                         |       | 2,254,680 |   | 2,247,585 |   |
| Total interest expense                               |       | 4,535,424                                           |       | 3,799,355                                         |       | 8,866,956 |   | 9,192,274 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net interest income                                  |       | 4,466,455                                           |       | 4,546,887                                         |       | 8,965,655 |   | 9,192,274 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Provision for loan losses                            |       | 60,000                                              |       | 15,000                                            |       | 125,000 |   | 75,000 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net interest income after provision  for loan losses |       | 4,406,455                                           |       | 4,531,887                                         |       | 8,840,655 |   | 9,117,274 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Non-interest income:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Fees and service charges                             |       | 1,010,384                                           |       | 1,128,463                                         |       | 1,911,515 |   | 2,135,335 |   |
| Gains on sale of loans                               |       | 256,116                                             |       | 322,983                                           |       | 439,408 |   | 586,364 |   |
| Losses on sale of investments                        |       | —                                              |       | (443,797                                          | )          | — |   | (300,356 | ) |
| Gains on sale of other assets                        |       | —                                              |       | 681,630                                           |       | — |   | 728,453 |   |
| Bank owned life insurance                            |       | 114,143                                             |       | 112,300                                           |       | 229,967 |   | 157,654 |   |
| Other                                                |       | 133,715                                             |       | 139,746                                           |       | 262,337 |   | 325,316 |   |
| Total non-interest income                            |       | 1,514,358                                           |       | 1,941,325                                         |       | 2,843,227 |   | 3,632,866 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Non-interest expense:                                |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and benefits                            |       | 2,033,323                                           |       | 2,112,612                                         |       | 4,076,558 |   | 4,248,576 |   |
| Occupancy and equipment                              |       | 676,389                                             |       | 687,102                                           |       | 1,375,358 |   | 1,396,022 |   |
| Amortization of intangibles                          |       | 236,188                                             |       | 259,679                                           |       | 470,097 |   | 524,172 |   |
| Data processing                                      |       | 202,290                                             |       | 187,543                                           |       | 405,610 |   | 348,990 |   |
| Professional fees                                    |       | 134,412                                             |       | 126,349                                           |       | 252,319 |   | 210,726 |   |
| Advertising                                          |       | 106,475                                             |       | 111,219                                           |       | 215,363 |   | 218,737 |   |
| Other                                                |       | 768,702                                             |       | 732,650                                           |       | 1,519,867 |   | 1,506,785 |   |
| Total non-interest expense                           |       | 4,157,779                                           |       | 4,217,154                                         |       | 8,315,172 |   | 8,454,008 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Earnings before income taxes                         |       | 1,763,034                                           |       | 2,256,058                                         |       | 3,368,710 |   | 4,296,132 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Income tax expense                                   |       | 409,431                                             |       | 659,968                                           |       | 770,487 |   | 1,279,128 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net earnings                                         |       | $                                                   | 1,353,603  |                                              | $          | 1,596,090 |   | $ | 2,598,223 |   | $ | 3,017,004 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Earnings per share:                                  |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.29 |   |
| Diluted                                              |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.28 |   |
|                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Dividends  per share                                 |       | $                                                   | 0.1900     |                                              | $          | 0.1619 |   | $ | 0.3800 |   | $ | 0.3238 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

3

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                             | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                   |       |                                              |       |   |   |
| Net cash provided by (used in) operating activities                    |       | $                                                 | 3,533,569  |   | $ | (3,961,226 | ) |
|                                                                   |       |                                              |       |   |   |
| Cash flows from investing activities:                                  |       |                                              |       |   |   |
| Net increase in loans                                                  |       | (1,306,378                                        | )          | (9,682,317 | ) |
| Maturities and prepayments of  investments                             |       | 7,680,469                                         |       | 22,388,576 |   |
| Purchase of investment  securities                                     |       | (21,648,983                                       | )          | (25,420,476 | ) |
| Proceeds from sale of  investment securities                           |       | —                                            |       | 17,943,322 |   |
| Net cash paid in FMB  acquisition                                      |       | —                                            |       | (9,147,605 | ) |
| Proceeds from sales of  premises and equipment and  foreclosed  assets |       | 339,357                                           |       | 564,923 |   |
| Purchases of premises and  equipment, net                              |       | (1,274,862                                        | )          | (1,979,916 | ) |
| Net cash used in investing  activities                                 |       | (16,210,397                                       | )          | (5,333,493 | ) |
|                                                                   |       |                                              |       |   |   |
| Cash flows from financing activities:                                  |       |                                              |       |   |   |
| Net increase (decrease) in  deposits                                   |       | 1,677,743                                         |       | (8,401,243 | ) |
| Federal Home Loan Bank advance  repayments                             |       | (18,384                                           | )          | (1,018,384 | ) |
| Federal Home Loan Bank line of  credit, net                            |       | 8,800,000                                         |       | 10,000,000 |   |
| Other borrowings, net                                                  |       | 1,293,902                                         |       | 1,802,446 |   |
| Purchase of treasury stock                                             |       | (700,689                                          | )          | — |   |
| Proceeds from issuance of  common stock under  stock option  plans     |       | 20,491                                            |       | 9,491 |   |
| Tax benefit related to stock  option plans                             |       | 3,774                                             |       | 2,503 |   |
| Payment of dividends                                                   |       | (886,342                                          | )          | (757,721 | ) |
| Net cash provided by financing  activities                             |       | 10,190,495                                        |       | 1,637,092 |   |
| Net decrease in cash and cash  equivalents                             |       | (2,486,333                                        | )          | (7,657,627 | ) |
| Cash and cash equivalents at  beginning of period                      |       | 14,751,914                                        |       | 21,490,512 |   |
| Cash and cash equivalents at  end of period                            |       | $                                                 | 12,265,581 |   | $ | 13,832,885 |   |
|                                                                   |       |                                              |       |   |   |
| Supplemental disclosure of cash flow information:                      |       |                                              |       |   |   |
| Cash paid during period for  interest                                  |       | $                                                 | 8,640,000  |   | $ | 6,329,000 |   |
| Cash paid during period for  taxes                                     |       | $                                                 | —     |   | $ | 560,000 |   |
| Supplemental schedule of non-cash investing activities:                |       |                                              |       |   |   |
| Transfer of loans to real  estate owned                                |       | $                                                 | 189,000    |   | $ | 25,000 |   |
| FMB acquisition:                                                       |       |                                              |       |   |   |
| Fair value of liabilities  assumed                                     |       | $                                                 | —     |   | $ | 123,965,000 |   |
| Fair value of assets acquired,  including goodwill                     |       | $                                                 | —     |   | $ | 133,112,000 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

4

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF EQUITY AND COMPREHENSIVE INCOME**

**(Unaudited)**
| ** **                                                                                            | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  loss** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------------------|------------|------------|------------|
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Balance December  31, 2005                                                                            |       | $                 | 22,443     |                             | 19,868,567 |                   | 25,322,019 |                | (414,514   | )                                           | (725,908   | )          | 44,072,607 |   |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Net earnings                                                                                          |       | —            |       | —                           |       | 3,017,004              |       | —              |       | —                                      |       | 3,017,004  |       |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Change in fair  value of investment securities available-for-sale and interest rate swap, net  of tax |       | —            |       | —                           |       | —                 |       | —              |       | (719,360                                    | )          | (719,360   | )          |
| Dividends paid  ($0.3238 per share)                                                                   |       | —            |       | —                           |       | (757,722               | )          | —              |       | —                                      |       | (757,722   | )          |
| Stock-based  compensation                                                                             |       | —            |       | 62,543                           |       | —                 |       | —              |       | —                                      |       | 62,543     |       |
| Exercise of  stock options, 667 shares, including tax benefit of $2,503                               |       | 7                 |       | 11,987                           |       |                   |       |                |       |                                        |       | 11,994     |       |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Balance June 30,  2006                                                                                |       | $                 | 22,450     |                             | 19,943,097 |                   | 27,581,301 |                | (414,514   | )                                           | (1,445,268 | )          | 45,687,066 |   |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Balance December  31, 2006                                                                            |       | $                 | 23,417     |                             | 22,607,510 |                   | 26,758,056 |                | (138,506   | )                                           | (14,462    | )          | 49,236,015 |   |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Net earnings                                                                                          |       | —            |       | —                           |       | 2,598,223              |       | —              |       | —                                      |       | 2,598,223  |       |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Change in fair  value of investment securities available-for-sale, net of tax                         |       | —            |       | —                           |       | —                 |       | —              |       | (1,111,842                                  | )          | (1,111,842 | )          |
| Dividends paid  ($0.38 per share)                                                                     |       | —            |       | —                           |       | (886,342               | )          | —              |       | —                                      |       | (886,342   | )          |
| Stock-based  compensation                                                                             |       | —            |       | 62,124                           |       | —                 |       | —              |       | —                                      |       | 62,124     |       |
| Exercise of  stock options, 1,181 shares, including tax benefit of $3,774                             |       | 12                |       | 24,253                           |       | —                 |       | —              |       | —                                      |       | 24,265     |       |
| Purchase of  24,771 treasury shares                                                                   |       | —            |       | —                           |       | —                 |       | (700,689            | )          | —                                      |       | (700,689   | )          |
|                                                                                                  |       |              |       |                             |       |                   |       |                |       |                                        |       |       |       |
| Balance June 30,  2007                                                                                |       | $                 | 23,429     |                             | 22,693,887 |                   | 28,469,937 |                | (839,195   | )                                           | (1,126,304 | )          | 49,221,754 |   |

 

* See accompanying notes to condensedconsolidated financial statements.*

5

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**LANDMARKBANCORP, INC. AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.           ****Interim Financial 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 U.S. generallyaccepted accounting principles for complete financial statements are containedin or consistent with the consolidated audited financial statementsincorporated by reference in the Company’s Form 10-K for the year endedDecember 31, 2006, such information and footnotes have not been duplicatedherein.  In the opinion of management,all adjustments, consisting of normal recurring accruals, considered necessaryfor a fair presentation of financial statements have been reflectedherein.  The December 31, 2006, condensedconsolidated balance sheet has been derived from the audited consolidatedbalance sheet as of that date.  Theresults of the interim period ended June 30, 2007 are not necessarilyindicative of the results expected for the year ending December 31, 2007.

**2.****                                      IncomeTax**

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Financial Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*” (“FIN 48”) onJanuary 1, 2007.  FIN 48 provides acomprehensive model for the financial statement recognition, measurement,presentation and disclosure of uncertain tax positions taken or expected to betaken in income tax returns.  Unrecognized tax benefits represent taxpositions for which reserves have been established.  The Company’s adoption of FIN 48 did not haveany effect on its consolidated financial statements.  As of the date of adoption, our grossunrecognized tax benefits totaled approximately $1.2 million.  The anticipated amount of unrecognized taxbenefits that, if recognized, would favorably impact our effective tax rate was$777,000.  Included in this unrecognizedtax benefit, are interest and penalties of $245,000.  We recognize interest and penalties related tounrecognized tax benefits as a component of income tax expense in ourconsolidated statements of earnings.

Tax years that remain open and subject to auditinclude the years 2003 through 2006 for both federal and state.  We believe that it is reasonably possiblethat a reduction in unrecognized tax benefits of approximately $200,000 ispossible during the next 12 months.

**3.****                                      StockBased Compensation**

Asummary of option activity during the first six months of 2007 is presentedbelow.
| ** **                                    | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006             |       | 246,226    |       | $                                      | 24.18      |                                                | 7.77 years |                            | $          | 755,000 |   |
| Granted                                       |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Cancelled                                     |       | —     |       | —                                 |       | —                                              |       | n/a                             |       |
| Exercised                                     |       | 1,181      |       | 17.35                                  |       | —                                              |       | $                               | 11,101     |   |
| Outstanding at  June 30, 2007                 |       | 245,045    |       | $                                      | 24.22      |                                                | 7.30 years |                            | $          | 1,005,000 |   |
| Exercisable at  June 30, 2007                 |       | 130,695    |       | $                                      | 22.90      |                                                | 6.39 years |                            | $          | 709,000 |   |
| Vested and expected to  vest at June 30, 2007 |       | 235,015    |       | $                                      | 24.16      |                                                | 7.27 years |                            | $          | 978,000 |   |

 

6

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Additional information about stock options exercisedis presented below.
|                                              | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Intrinsic value  of options exercised        |       | $                                                 | 11,101     |   | $ | 7,360 |   |
| Cash received  from options exercised        |       | $                                                 | 20,491     |   | $ | 9,491 |   |
| Tax benefit realized  from options exercised |       | $                                                 | 3,774      |   | $ | 2,503 |   |

 

As of June 30, 2007,there was $287,000 of total unrecognized compensation cost related tooutstanding options.  That cost isexpected to be recognized over a weighted-average period of 4 years.  The total fair value (at vest date) of sharesvested during the six month periods ended June 30, 2007 and 2006 was $348,000and $103,000 respectively.

**4.            Earnings per Share**

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

Theshares used in the calculation of basic and diluted earnings per share areshown below:
| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings  available to common stockholders      |       | $                                                   | 1,353,603  |                                              | $          | 1,596,090 |   | $ | 2,598,223 |   | $ | 3,017,004 |   |
|                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  common shares outstanding (basic) |       | 2,325,858                                           |       | 2,340,374                                         |       | 2,330,765 |   | 2,340,199 |   |
| Dilutive stock  options                             |       | 19,726                                              |       | 12,981                                            |       | 19,050 |   | 10,265 |   |
| Weighted average  common shares (diluted)           |       | 2,345,584                                           |       | 2,353,355                                         |       | 2,349,815 |   | 2,350,464 |   |
|                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net earnings per  share:                            |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                               |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.29 |   |
| Diluted                                             |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.28 |   |

 

**5.           OtherComprehensive Income**

The Company’s othercomprehensive loss consists of the unrealized holding gains and losses onavailable-for-sale securities and an unrealized gain on an interest rate swap,which was terminated in December 2006, as shown below.

** **
| ** **                                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Unrealized  holding losses on securities and interest rate swap     |       | $                                                   | (2,070,828 | )                                                 | $          | (1,392,755 | ) | $ | (1,793,293 | ) | $ | (1,460,516 | ) |
| Less  reclassification adjustment for net losses included in income |       | —                                              |       | (443,797                                          | )          | — |   | (300,256 | ) |
| Net unrealized losses                                               |       | (2,070,828                                          | )          | (948,958                                          | )          | (1,793,293 | ) | (1,160,260 | ) |
| Income tax  benefit                                                 |       | (786,914                                            | )          | (360,605                                          | )          | (681,451 | ) | (440,900 | ) |
| Other  comprehensive loss                                           |       | $                                                   | (1,283,914 | )                                                 | $          | (588,353 | ) | $ | (1,111,842 | ) | $ | (719,360 | ) |

 

7

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Accumulated other comprehensive loss related entirely to investment securities atJune 30, 2007.  The components at June30, 2006 were $113,000 in cash flow hedging activities and ($1,558,000) inavailable for sale investment securities.

**6.           Other IntangibleAssets**

The following isan analysis of changes in the core deposit intangible assets:
|                                 | ** ** | **Six months ended June, 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Fair value at  acquisition**                     | ** ** | **Accumulated  Amortization** | ** ** | **Fair value at  acquisition** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                  | 5,396,065  |   | $ | (1,667,478 | ) | $ | 2,818,602 |   | $ | (774,588 | ) |
| Additions                       |       | —                                             |       | — |   | 2,577,463 |   | — |   |
| Amortization                    |       | —                                             |       | (404,880 | ) | — |   | (453,937 | ) |
| Balance at end of  period       |       | $                                                  | 5,396,065  |   | $ | (2,072,358 | ) | $ | 5,396,065 |   | $ | (1,228,525 | ) |

 

The following is an analysis of changes in themortgage servicing rights:
|                                 | ** ** | **Six months ended June, 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Cost**                                           | ** ** | **Accumulated  Amortization** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  beginning of period |       | $                                                  | 791,840    |   | $ | (489,718 | ) | $ | 775,666 |   | $ | (401,467 | ) |
| Additions                       |       | 10,432                                             |       | — |   | 40,616 |   | — |   |
| Prepayments/maturities          |       | (27,691                                            | )          | 27,691 |   | (24,591 | ) | 24,591 |   |
| Amortization                    |       | —                                             |       | (65,217 | ) | — |   | (70,235 | ) |
| Balance at end of  period       |       | $                                                  | 774,581    |   | $ | (527,244 | ) | $ | 791,691 |   | $ | (447,111 | ) |

 

The Company adopted the provisions of FASB Statementof Financial Accounting Standards (“SFAS”) No. 156, “*Accountingfor Servicing of Financial Assets — an amendment of FASB Statement No. 140*”on January 1, 2007 and elected to maintain the amortized cost method and carrythe mortgage servicing rights at the lower of cost or market value.  The balance of the mortgage servicing rightscan fluctuate based on the performance of the underlying loans serviced.  The mortgage servicing rights correspond toloans serviced by the Company for unrelated third parties with outstandingprincipal balances of $95.6 million and $101.8 million at June 30, 2007 andDecember 31, 2006, respectively.  Grossservice fee income related to such loans was $62,000 and $67,000 for thequarters ended June 30, 2007 and June 30, 2006, respectively, which is includedin fees and service charges in the condensed consolidated statements ofearnings.  Gross service fee incomerelated to such loans was $126,000 and $135,000 for the six months ended June30, 2007 and June 30, 2006, respectively.

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Aggregate amortization expense for the quartersended June 30, 2007 and 2006, was $236,000 and $260,000, respectively and$470,000 and $524,000 for the six months ended June 30, 2007 and 2006,respectively.  The following depictsestimated amortization expense for the Company’s core deposit intangible assetsand mortgage servicing rights for the remainder of 2007 and in successive yearsending December 31:

| Year       | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | $          | 460,000    |   |
| 2008       |       | 832,000    |       |
| 2009       |       | 631,000    |       |
| 2010       |       | 500,000    |       |
| 2011       |       | 402,000    |       |
| Thereafter |       | 736,000    |       |
|            |            |            |            |  |

 

**7.           Impact of Recent AccountingPronouncements**

In February 2006, the FASB issued SFAS No. 155, “*Accounting for Certain Hybrid Financial Instruments - an amendment of FASBStatements No. 133 and 140*”. SFAS No. 155 permits fair value remeasurement for certain hybridfinancial instruments containing embedded derivatives, and clarifies thederivative accounting requirements for interest and principal-only strip securitiesand interests in securitized financial assets. It also clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives and eliminates a previousprohibition on qualifying special-purpose entities from holding certainderivative financial instruments.  SFASNo. 155 became effective for all financial instruments acquired or issued afterJanuary 1, 2007.  The adoption of SFASNo. 155 did not have any effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial Assets – an amendment of FASBStatement No. 140*”.  SFAS No.156 specifies situations in which servicing assets and servicing liabilitiesmust be recognized.  It requires theseassets and liabilities to be initially measured at fair value and specifiesacceptable measurement methods subsequent to their recognition.  Separate presentation in the financialstatements and additional disclosures are also required.  The Company adopted SFAS No. 156 effectiveJanuary 1, 2007.  The adoption of theSFAS No. 156 did not have any effect on our consolidated financial statements.

Also in March 2006, the FASB issued Staff Position85-4-1 (Position)*, “Accounting for Life Settlement Contractsby Third Party Investors*”. The Position provides initial and subsequent measurement guidance andfinancial statement presentation and disclosure guidance for investments bythird-party investors in life settlement contracts.  The investments must be accounted for byeither (a) recognizing the initial investment at transaction price plus directexternal costs and capitalizing continuing costs, with no gain recognized inearnings until the insured event occurs, or (b) recognizing the initialinvestment at transaction price and remeasuring the investment at fair value ateach reporting period, with fair value changes recognized in earnings as theyoccur.  The Company began applying theguidance in the Position beginning January 1, 2007.  The adoption of the Position did not have anyeffect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*”.  SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  It doesnot require any new fair value measurements for existing financialinstruments.  For calendar yearcompanies, SFAS 

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No. 157 is effective beginning January 1, 2008.  We do not expect that adoption of SFAS No.157 will have a material effect on our consolidated financial statements.

In September 2006, the Emerging Issues Task Force (“EITF”)Issue 06-4, “*Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*”, was ratified. EITF Issue 06-4 addresses accounting for separate agreements that splitlife insurance policy benefits between an employer and employee.  The EITF Issue 06-4 requires the employer torecognize a liability for future benefits payable to an employee under theseagreements.  The effects of applying EITFIssue 06-4 must be recognized through either a change in accounting principlethrough an adjustment to equity or through the retrospective application to allprior periods. For calendar year companies, the EITF Issue 06-4 is effectivebeginning January 1, 2008.  We do notexpect that adoption of the EITF Issue 06-4 will have a material effect on ourconsolidated financial statements.

In September 2006, the EITF Issue 06-5, “*Accounting for Purchases of Life Insurance — Determining the AmountThat Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4*”,was ratified.  The EITF Issue 06-5addresses accounting for what could be realized as an asset and providesclarification regarding additional amounts included in the contractual terms ofan individual policy in determining the amount that could be realized under theinsurance contract.  The effects ofapplying this issue must be recognized through an adjustment to equity orthrough the retrospective application to all prior periods.  The Company adopted EITF issue 06-5 effectivebeginning January 1, 2007.  The adoptionof EITF Issue 06-5 did not have any effect on our consolidated financialstatements.

In February 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets and Financial Liabilities*.”  SFAS No. 159 allows companies to electfair-value measurement of specified financial instruments and warranty andinsurance contracts when an eligible asset or liability is initially recognizedor when an event, such as a business combination triggers a new basis ofaccounting for that asset or liability. The election, called the “fair-value option,” will enable companies toreduce the volatility in reported earnings caused by measuring related assetsand liabilities differently.  Theelection is available for eligible assets or liabilities on acontract-by-contract basis without electing it for identical assets orliabilities under certain restrictions. For calendar year companies, SFAS No. 159 is effective beginning January1, 2008.  We do not expect that adoptionof SFAS No. 159 will have a material effect on our consolidated financialstatements.

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

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

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

Weare significantly impacted by prevailing economic conditions including federalmonetary and fiscal policies and federal regulations of financialinstitutions.  Deposit balances are influencedby numerous factors such as competing personal investments, the level ofpersonal income and 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.

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

We perform periodic and systematic detailed reviewsof our lending portfolio to assess overall collectability.  The level of the allowance for loan lossesreflects our estimate of the collectability of the loan portfolio.  While these estimates are based onsubstantive methods for determining allowance requirements, nevertheless,actual outcomes may differ significantly from estimated results.  Additional explanation of the methodologiesused in establishing this reserve is provided in the “Asset Quality andDistribution” section.

We report our investment securities at estimatedfair values based on published market ascertainable values, which are obtainedfrom independent sources.  We performperiodic reviews of the fair value of investment securities to determine if anydeclines in value might be considered other than temporary.  Our most recent review showed that thedecrease in fair value of the securities, resulting in an unrealized lossposition, was related to changes in interest rates.  None of the unrealized losses are related tocredit deterioration.  The Company hasthe ability and intent to hold these 

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securities until market values recover, including up to the maturitydate.  Although we believe that ourestimates of the fair values of investment securities to be reasonable,economic and market factors may affect the amounts that will ultimately be realizedfrom these investments.

The objectives of accounting for income taxes are torecognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or taxreturns.  Judgment is required inassessing the future tax consequences of events that have been recognized inour financial statements or tax returns. Under FIN 48, an income tax position will be recognized if it is morelikely than not that it will be sustained upon IRS examination, based upon itstechnical merits.  Once that status ismet, the amount recorded will be the largest amount of benefit that is greaterthan 50 percent likely of being realized upon ultimate settlement.  Changes in estimates regarding the actualoutcome of these future tax consequences, including the effects of IRSexaminations and examinations by other state agencies, could materially impactour financial position and results of operations.

Wehave completed severalbusiness and asset acquisitions which have generated significant amounts ofgoodwill and intangible assets and related amortization. The values assigned togoodwill and intangibles, as well as their related useful lives, are subject tojudgment and estimation by the Company. Goodwill and intangibles related to acquisitions are determined andbased on purchase price allocations.  Valuation of intangible assets isgenerally based on the estimated cash flows related to those assets, while theinitial value assigned to goodwill is the residual of the purchase price overthe fair value of all identifiable assets acquired and liabilities assumed.Performing such a discounted cash flow analysis involves the use of estimates andassumptions.  Useful lives are determinedbased on the expected future period of the benefit of the asset, the assessmentof which considers various characteristics of the asset, including thehistorical cash flows.  Due to the number of estimates involved related tothe allocation of purchase price and determining the appropriate useful livesof intangible assets, we have identified purchase accounting as a criticalaccounting policy.  If the carrying valueof the goodwill and other intangible assets exceeds the implied fair value ofthe goodwill, an impairment loss is recorded.

*Summaryof Results*.  Net earnings for the three months ended June30, 2007, decreased $242,000, or 15.2%, to $1.4 million as compared to thethree months ended June 30, 2006.  Thethree months ended June 30, 2007 resulted in diluted earnings per share of$0.58 compared to $0.68 for the same period in 2006.  Return on average assets, on an annualizedbasis, was 0.90% for the period compared to 1.07% for the same period in2006.  Return on average stockholders’equity, on an annualized basis, was 10.83% for the period compared to 14.05%for the same period in 2006.

Netearnings for the six months ended June 30, 2007, decreased $419,000, or 13.9%,to $2.6 million as compared to the six months ended June 30, 2006.  The six months ended June 30, 2007 resultedin diluted earnings per share of $1.11 compared to $1.28 for the same period in2006.  Return on average assets, on anannualized basis, was 0.87% for the period compared to 1.02% for the sameperiod in 2006.  Return on averagestockholders’ equity, on an annualized basis, was 10.51% for the periodcompared to 13.54% for the same period in 2006.

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Thefollowing table summarizes net earnings per share and key performance measuresfor the periods presented.
|                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net earnings:                |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings per share     |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.29 |   |
| Diluted earnings per share   |       | $                                                   | 0.58       |                                              | $          | 0.68 |   | $ | 1.11 |   | $ | 1.28 |   |
| Earnings ratios:             |       |                                                |       |                                              |       |   |   |   |   |
| Return on average assets (1) |       | 0.90                                                | %          | 1.07                                              | %          | 0.87 | % | 1.02 | % |
| Return on average equity (1) |       | 10.83                                               | %          | 14.05                                             | %          | 10.51 | % | 13.54 | % |
| Dividend payout ratio        |       | 32.76                                               | %          | 23.94                                             | %          | 34.23 | % | 25.19 | % |
| Net interest  margin (1) (2) |       | 3.50                                                | %          | 3.50                                              | %          | 3.54 | % | 3.54 | % |

 

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

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

*Interest Income.*  Interestincome for the three months ended June 30, 2007, increased $656,000, or 7.9%,to $9.0 million from $8.3 million in the same period of 2006, resulting fromincreased interest income on both investment securities and loans.  Average loans for the quarter ended June 30,2007 decreased to $383.9 million from $393.9 million for the quarter ended June30, 2006.  Offsetting the decline inaverage loans was the rise in interest rates experienced throughout 2006, whichcontributed to the increased interest income. As a result, interest income on loans increased $351,000, or 5.1%, to$7.2 million for the quarter ended June 30, 2007.  Average investment securities increased from$144.6 million for the quarter ended June 30, 2006, to $160.4 million for thequarter ended June 30, 2007.  Along withthe increase in average investments for the comparable periods, and despite theincreased holdings of tax exempt investments, interest income on investmentsecurities increased $325,000, or 22.4%, to $1.8 million for the second quarterof 2007, as compared to the same period of 2006.  The increase in interest rates, whichresulted in yields on our investments purchased being higher than the yields onthe investments which either matured or were sold during the past year, wasresponsible for the increase in income from investment securities.

Interest income for the six months ended June 30,2007, increased $1.3 million, or 8.2%, to $17.8 million from $16.5 million inthe same period of 2006, resulting from increased interest income on bothinvestment securities and loans.  Averageloans for the six months ended June 30, 2007 decreased to $383.7 million from$392.3 million for the six months ended June 30, 2006.  Offsetting the decline in average loans wasthe rise in interest rates experienced throughout 2006, which contributed tothe increased interest income.  As aresult, interest income on loans increased $837,000, or 6.2%, to $14.3 millionfor the six months ended June 30, 2007. Average investment securities increased from $149.1 million for the sixmonths ended June 30, 2006, to $156.7 million for the six months ended June 30,2007.  Along with the increase in averageinvestments for the comparable periods, and despite the increased holdings oftax exempt investments, interest income on investment securities increased$589,000, or 20.5%, to $3.5 million for the first six months of 2007, ascompared to the same period of 2006.  Theincrease in interest rates, which resulted in yields on our investmentspurchased being higher than the yields on the investments which either maturedor were sold during the past year, was responsible for the increase in incomefrom investment securities.

*Interest Expense*. Interest expense during the three months ended June 30, 2007, increased$736,000, or 19.4%, as compared to the same period of 2006.  For the three months ended June 30, 2007,interest expense on deposits increased $746,000, or 28.5%.  Average deposits increased from $389.8million during the quarter ended June 30, 2006 to $398.1 million for thequarter ended June 30,

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2007.  The increase in interestexpense on deposits resulted from higher deposit balances as well as therepricing of deposits due to the rise in interest rates.  Average borrowings for the quarter ended June30, 2007 decreased to $99.2 million from $107.4 million for the quarter endedJune 30, 2006.  Despite the lower averagebalances, interest expense on borrowings only decreased $10,000, or 0.8%, to$1.2 million.  The increase in interestrates, which increased the cost of our borrowings, offset the lower averageborrowings.

Interest expense during the six months ended June30, 2007, increased $1.6 million, or 21.6%, as compared to the same period of2006.  For the six months ended June 30,2007, interest expense on deposits increased $1.6 million, or 31.1%.  Average deposits increased from $392.6million during the six months ended June 30, 2006 to $397.6 million for the sixmonths ended June 30, 2007.  The increasein interest expense on deposits resulted from higher deposit balances as wellas the repricing of deposits due to the rise in interest rates.  Average borrowings for the six months endedJune 30, 2007 decreased to $96.5 million from $103.6 million for the six monthsended June 30, 2006.  Despite the loweraverage balances, interest expense on borrowings increased $7,000, or 0.3%, to$2.3 million.  The increase in interestrates, which increased the cost of our borrowings, more than offset the loweraverage borrowings.

*Net Interest Income*.  Netinterest income for the three months ended June 30, 2007, totaled $4.5 million,decreasing $80,000, or 1.8%, as compared to the three months ended June 30,2006.  This decline in net interestincome was due primarily to the increases in our cost of funding outpacing theincreases in our yields on interest earning assets.  Average earning assets increased during thesecond quarter of 2007, increasing to $544.3 million from $538.6 million forthe second quarter of 2006.  However, asa result of increased investments in tax exempt municipal securities, our netinterest margin on a tax equivalent basis remained at 3.50%.

Net interest income for the six months ended June30, 2007, totaled $9.0 million, decreasing $227,000, or 2.5%, as compared tothe six months ended June 30, 2006.  Thisdecline in net interest income was due primarily to the increases in our costof funding outpacing the increases in our yields on interest earningassets.  Average earning assets decreasedduring the first six months 2007, decreasing to $540.4 million from $541.4million for the first six months of 2006. However, as a result of increased investments in tax exempt municipalsecurities, our net interest margin on a tax equivalent basis remained at 3.54%.

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

The provision for loan losses for the three monthsended June 30, 2007, was $60,000, compared to a provision of $15,000 during thethree months ended June 30, 2006.  Theprovision for loan losses for the six months ended June 30, 2007, was $125,000,compared to a provision of $75,000 during the six months ended June 30,2006.  One measure of the adequacy of theallowance for estimated losses

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on loans is the ratio of the allowance to the total loanportfolio.  At June 30, 2007, andDecember 31, 2006, the allowance for loan losses was $4.1 million and $4.0million, or 1.1% of gross loans outstanding. For further discussion of the allowance for loan losses, refer to the “AssetQuality and Distribution” section.

*Non-interest Income*. Non-interest income decreased $427,000, or 22.0%, for the three monthsended June 30, 2007, to $1.5 million compared to the three months ended June30, 2006.  In the second quarter of 2006, a $682,000 gain was recognized with thesale of certain assets, primarily the 800 Poyntz facility, which was partiallyoffset by $444,000 in net losses on sale of investments.  These items comprised 55.7% of the decreasein non-interest income for the second quarter of 2007 as compared to 2006.  Additionally, this decline was the result ofa $67,000, or 20.7%, decrease in gains on sale of loans, a decrease in fees andservice charges, led by a decline in loan fees of $84,000 and a $34,000 declinein deposit related income.

Non-interest income decreased $790,000, or 21.7%,for the six months ended June 30, 2007, to $2.8 million compared to the sixmonths ended June 30, 2006.  Thisdecrease in 2007 primarily related to certain items recognized during the firstsix months of 2006, comprised of $728,000 in gains recognized in connectionwith the sale of certain assets, primarily the 800 Poyntz facility during thefirst six months of 2006, which was partially offset by $300,000 in net losseson sale of investments as we restructured our investment portfolio by sellinglower yielding, shorter-term investments and purchasing higher yielding,longer-term investments during the second quarter of 2006.  Furthering this decline was a decrease in gainson sale of loans of $147,000, or 25.1%, as well as a decrease in fees andservice charges led by a decline in loan fees of $142,000 and a decline of$82,000 in deposit related income. Offsetting these declines was a $70,000 increase in the cash surrendervalue of bank owned life insurance, which resulted from the purchase ofadditional policies totaling $7.5 million in March 2006.
|                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Non-interest  income:               |       |                                                |       |                                              |       |   |   |   |   |
|  Fees and service charges      |       | $                                                   | 1,010,384  |                                              | $          | 1,128,463 |   | $ | 1,911,515 |   | $ | 2,135,335 |   |
|  Gains on sale of loans        |       | 256,116                                             |       | 322,983                                           |       | 439,408 |   | 586,364 |   |
|  Losses on sale of investments |       | —                                              |       | (443,797                                          | )          | — |   | (300,256 | ) |
|  Gains on sale of other assets |       | —                                              |       | 681,630                                           |       | — |   | 728,453 |   |
|  Bank owned life insurance     |       | 114,143                                             |       | 112,300                                           |       | 229,967 |   | 157,654 |   |
|  Other                         |       | 133,715                                             |       | 139,746                                           |       | 262,337 |   | 325,316 |   |
| Total non-interest income           |       | $                                                   | 1,514,358  |                                              | $          | 1,941,325 |   | $ | 2,843,227 |   | $ | 3,632,866 |   |

 

*Non-interest Expense*. Non-interest expense decreased $59,000, or 1.4%, to $4.2 million for thethree months ended June 30, 2007, as compared to the three months ended June30, 2006.  Contributing to the reductionin non-interest expense was a $79,000 decrease in compensation and benefits anda $23,000 decrease in amortization expense. Offsetting those reductions were increases of $15,000 and $35,000 indata processing and other non-interest expense, respectively.

Non-interest expense decreased $139,000, or 1.6%, to$8.3 million for the six months ended June 30, 2007, as compared to the sixmonths ended June 30, 2006.  Contributingto the reduction in non-interest expense was a $172,000 decrease incompensation and benefits and a $54,000 decrease in amortization expense.  Offsetting those reductions were increases of$57,000 and $42,000 in data processing and professional fees, respectively.

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|                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Non-interest expense:       |       |                                                |       |                                              |       |   |   |   |   |
| Compensation and benefits   |       | $                                                   | 2,033,323  |                                              | $          | 2,122,612 |   | $ | 4,076,558 |   | $ | 4,248,576 |   |
| Occupancy and equipment     |       | 676,389                                             |       | 687,102                                           |       | 1,375,358 |   | 1,396,022 |   |
| Amortization of intangibles |       | 236,188                                             |       | 259,679                                           |       | 470,097 |   | 524,172 |   |
| Data processing             |       | 202,290                                             |       | 187,543                                           |       | 405,610 |   | 348,990 |   |
| Professional fees           |       | 134,412                                             |       | 126,349                                           |       | 252,319 |   | 210,726 |   |
| Advertising                 |       | 106,475                                             |       | 111,219                                           |       | 215,363 |   | 218,737 |   |
| Other                       |       | 768,702                                             |       | 732,650                                           |       | 1,519,867 |   | ,506,785 |   |
| Total non-interest expense  |       | $                                                   | 4,157,779  |                                              | $          | 4,217,154 |   | $ | 8,315,172 |   | $ | 8,454,008 |   |

 

*Income Tax Expense*. Income tax expense decreased $251,000, or 38.0%, from $660,000 for thethree months ended June 30, 2006, to $409,000 for the three months ended June30, 2007.  The decrease in income taxexpense was the result of a $493,000 decrease in earnings before income taxesfor the second quarter of 2007 as compared to the second quarter of 2006 andincreased purchases of tax exempt municipal bonds and bank owned lifeinsurance.  The effective tax rate forthe second quarter of 2007, decreased to 23.2% from 29.3% in the second quarterof 2006.

Income tax expense decreased $509,000, or 39.8%,from $1.3 million for the six months ended June 30, 2006, to $770,000 for thesix months ended June 30, 2007.  Thedecrease in income tax expense was the result of a $927,000 decrease inearnings before income taxes for the first six months of 2007 as compared tothe six months quarter of 2006 and increased purchases of tax exempt municipalbonds and bank owned life insurance.  Theeffective tax rate for the first quarter of 2007, decreased to 22.9% from 29.8%in the first six months of 2006.

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*Asset Quality and Distribution*.  Ourprimary investing activities are the origination of commercial, mortgage,consumer loans and the purchase of investment and mortgage-backedsecurities.  We have concentrated ongenerating commercial loans over the past few years and are pleased with thegrowth in this segment of our loan portfolio. Generally, we originate fixed-rate, residential mortgage loans withmaturities in excess of ten years for sale in the secondary market.  While the January 1, 2006 First ManhattanBancorporation, Inc. acquisition increased our one-to-four family residentialloan totals, as the majority of the acquired loans were residential, we plan tocontinue our strategy to expand our commercial lending activities.  Total assets increased to $603.4 million atJune 30, 2007, compared to $590.6 million at December 31, 2006.  While net loans, excluding loans held forsale, increased $856,000 to $380.2 million during the six months ended June 30,2007 as compared to December 31, 2006, the composition of loans changed moresubstantially as our commercial and commercial real estate loans increased by$16.4 million and our one-to-four family residential loans decreased by $15.6million.

Loans consist of the following:
|                                               | ** ** | **June 30, 2007** | ** **  | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| Real estate loans:                            |       |                        |        |                            |       |
| One-to-four family residential                |       | $                           | 135,712,108 |                            | $          | 151,299,911 |   |
| Commercial                                    |       | 107,807,342                 |        | 98,314,119                      |       |
| Construction                                  |       | 30,675,409                  |        | 33,600,313                      |       |
| Commercial loans                              |       | 100,571,287                 |        | 90,758,185                      |       |
| Consumer loans                                |       | 9,784,207                   |        | 9,595,428                       |       |
| Total                                         |       | 384,550,353                 |        | 383,567,956                     |       |
|                                          |       |                        |        |                            |       |
| Less: Deferred loan fees and loans in process |       | 266,122                     |        | 214,665                         |       |
| Less: Allowance for loan losses               |       | 4,105,129                   |        | 4,029,710                       |       |
| Loans, net                                    |       | $                           | 380,179,102 |                            | $          | 379,323,581 |   |

 

The allowance for loan losses is established througha provision for losses on loans based on our evaluation of the risk inherent inthe loan portfolio and changes in the nature and volume of its loanactivity.  Such evaluation, whichincludes a review of all loans with respect to which full collectibility maynot be reasonably assured, considers the fair value of the underlyingcollateral, economic conditions, historical loan loss experience, level ofclassified loans and other factors that warrant recognition in providing for anadequate allowance for loan losses.  Webelieve that we use the best information available to determine the allowancefor loan losses, unforeseen market conditions could result in adjustment to theallowance for loan losses.  In addition,net earnings could be significantly affected if circumstances differsubstantially from the assumptions used in establishing the allowance for loanlosses.

A summary of the activity in the allowance for loanlosses is as follows:
|                             | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Beginning  balance          |       | $                                                 | 4,029,710  |   | $ | 3,151,373 |   |
| Allowance of  acquired bank |       | —                                            |       | 891,374 |   |
| Provision for  loan losses  |       | 125,000                                           |       | 75,000 |   |
| Charge-offs                 |       | (85,873                                           | )          | (121,733 | ) |
| Recoveries                  |       | 36,292                                            |       | 52,610 |   |
| Ending balance              |       | $                                                 | 4,105,129  |   | $ | 4,048,624 |   |

 

17

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We believe that the quality of the loan portfoliocontinues to be strong.  Given the recentsubprime mortgage lending concerns within the industry, it is worth noting thatthis pipeline growth has occurred while continuing our practice of not offeringsubprime loan products.  As of June 30,2007, loans with a balance of $3.9 million were on non-accrual status, whichwas 1.0% of total loans, compared to loan balances totaling $3.6 million on non-accrualstatus, or 0.9% of total loans, as of December 31, 2006.  In addition, the ratio of non-performingassets as a percentage of total assets was 0.7% as of both December 31, 2006and June 30, 2007.  Net loan charge-offsfor the six months ended June 30, 2007 were $50,000 compared to $69,000 for thecomparable period of 2006.  Residentialhome loans comprised 57.7% of the $3.9 million non-accrual balance at June 30,2007.  These loans have been underwrittenaccording to our residential lending policies and are secured by real estatecollateral, and in many instances, private mortgage insurance or governmentguarantees.  We have historicallyincurred minimal losses on mortgage loans based upon collateral values andunderlying insurance or guarantees.  Weare aggressively pursuing collection activity of these loans which shouldenable the collection of outstanding principal.

*Liability Distribution*.  Ourprimary ongoing sources of funds are deposits, proceeds from principal andinterest payments on loans and investment securities and proceeds from the saleof mortgage loans and investment securities. While maturities and scheduled amortization of loans are a predictablesource of funds, deposit flows and mortgage prepayments are greatly influencedby general interest rates, economic conditions, competition and therestructuring of the financial services industry.  Total deposits increased $1.6 million to$446.1 million at June 30, 2007, from $444.5 million at December 31, 2006.  Borrowings increased $9.6 million to $100.0million at June 30, 2007, from $90.4 million at December 31, 2006.

Non-interest bearing demand accounts at June 30,2007, were $51.1 million, or 11.5% of deposits, compared to $48.4 million, or10.9% of deposits, at December 31, 2006. Certificates of deposit increased to $232.9 million, or 52.2% ofdeposits, at June 30, 2007, from $231.1 million, or 52.0% of deposits atDecember 31, 2006.  Money market and NOWdemand accounts decreased to $134.7 million at June 30, 2007, or 30.2% ofdeposits, from $137.3 million, or 30.9% of deposits, at December 31, 2006.Savings accounts decreased to $27.3 million at June 30, 2007, or 6.1% ofdeposits, from $27.7 million, or 6.2% of deposits, at December 31, 2006.

Certificates of deposit at June 30, 2007, which werescheduled to mature in one year or less, totaled $195.7 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.

18

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*ContractualObligations and Commercial Commitments*.  The following table presents our contractualobligations, defined as operating lease obligations and principal payments dueon non-deposit obligations with maturities in excess of one year as of June 30,2007, for the periods indicated. Unrealized tax benefits related to tax uncertainties which are not morelikely than not are not included in the following table as the timing andresolution of these unrealized benefits can not be reasonably estimated.
| Contractual obligations   | ** ** | **Total**  | ** **  | **One year  or less** | ** ** | **One to  three years** | ** ** | **Four to  five years** | ** ** | **More than  five years** | ** ** |
|--------------------------------|------------|------------|-------------|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-------------------------------------|------------|
| Operating leases               |       | $          | 157,708     |                            | $          | 64,884                            |       | $                                 | 91,944     |                                | $          | 880 |   | $ | — |   |
| Service  contracts             |       | 4,620,000  |        | 1,260,000                       |       | 2,520,000                         |       | 840,000                           |       | —                              |       |
| FHLB borrowings                |       | 70,223,473 |        | 8,800,000                       |       | 40,845,000                        |       | 16,150,057                        |       | 4,428,416                           |       |
| Other borrowings               |       | 29,789,545 |        | 7,143,545                       |       | 6,150,000                         |       | —                            |       | 16,496,000                          |       |
| Total  contractual obligations |       | $          | 104,790,726 |                            | $          | 17,268,429                        |       | $                                 | 49,606,944 |                                | $          | 16,990,937 |   | $ | 20,924,416 |   |

 

*Liquidity*.  Ourmost liquid assets are cash and cash equivalents and investment securitiesavailable for sale.  The levels of theseassets are dependent on the operating, financing, lending and investingactivities during any given period.  Theseliquid assets totaled $170.2 million at June 30, 2007, and $160.6 million atDecember 31, 2006.  During periods inwhich we are not able to originate a sufficient amount of loans and/or periodsof high principal prepayments, we increase our liquid assets by investing inshort-term U. S. Government and agency securities or high-grade municipalsecurities.

Liquidity management is both a daily and long-termfunction of our strategy.  Excess fundsare generally invested in short-term investments.  In the event we require funds beyond ourability to generate them internally, additional funds are generally availablethrough the use of Federal Home Loan Bank advances, a line of credit with theFederal Home Loan Bank or through sales of securities.  At June 30, 2007, we had outstanding FederalHome Loan Bank advances of $61.4 million and $8.8 million of borrowings againstour line of credit with the Federal Home Loan Bank.  At June 30, 2007, our total borrowingcapacity with the Federal Home Loan Bank was $111.7 million.  We also had other borrowings of $29.8 millionat June 30, 2007, which included $16.5 million of subordinated debentures, $6.2million of long-term debt and $7.1 million in repurchase agreements.

As a provider of financial services, we routinely issuefinancial guarantees in the form of financial and performance standby lettersof credit. Standby letters of credit are contingent commitments issued by usgenerally to guarantee the payment or performance obligation of a customer to athird party. While these standby letters of credit represent a potential outlayby us, a significant amount of the commitments may expire without being drawnupon. We have recourse against the customer for any amount the customer isrequired to pay to a third party under a standby letter of credit. The lettersof credit are subject to the same credit policies, underwriting standards andapproval process as loans originated by us. Most of the standby letters ofcredit are secured, and in the event of nonperformance by the customer, we havethe right to the underlying collateral, which could include commercial realestate, physical plant and property, inventory, receivables, cash andmarketable securities. The contract amount of these standby letters of credit,which represents the maximum potential future payments guaranteed by us, was$2.6 million at June 30, 2007.

At June 30, 2007, we had outstanding loancommitments, excluding standby letters of credit, of $69.3 million.  We anticipate that sufficient funds will beavailable to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments tofinance real estate loans.

19

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*Capital*.  TheFederal Reserve Board has established capital requirements for bank holdingcompanies which generally parallel the capital requirements for national banksunder the Office of the Comptroller of the Currency regulations.  The regulations provide that such standardswill generally be applied on a consolidated (rather than a bank-only) basis inthe case of a bank holding company with more than $150 million in totalconsolidated assets.  Banks and bankholding companies are generally expected to operate at or above the minimumcapital requirements.  Our ratios arewell in excess of regulatory minimums and should allow us to operate withoutcapital adequacy concerns.

AtJune 30, 2007, we continued to maintain a sound leverage ratio of 8.49% and atotal risk based capital ratio of 13.00%. As shown by the following table, our capital exceeded the minimumcapital requirements at June 30, 2007 (dollars in thousands):
|                           | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|---------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| **Company**               | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                  |       | $          | 49,990     |                                         | 8.49       | %                                      | $          | 23,557 |   | 4.0 | % | $ | 29,446 |   | 5.0 | % |
| Tier 1 Capital            |       | $          | 49,990     |                                         | 12.01      | %                                      | $          | 16,644 |   | 4.0 | % | $ | 24,966 |   | 6.0 | % |
| Total Risk Based  Capital |       | $          | 54,095     |                                         | 13.00      | %                                      | $          | 33,288 |   | 8.0 | % | $ | 41,610 |   | 10.0 | % |

 

AtJune 30, 2007, Landmark National Bank continued to maintain a sound leverageratio of 9.26% and a total risk based capital ratio of 14.35%.  As shown by the following table, the bank’scapital exceeded the minimum capital requirements at June 30, 2007 (dollars inthousands):
|                                      | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well-  capitalized** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| **Landmark National Bank** | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Leverage                             |       | $          | 54,347     |                                         | 9.26       | %                                      | $          | 23,468 |   | 4.0 | % | $ | 29,335 |   | 5.0 | % |
| Tier 1 Capital                       |       | $          | 54,347     |                                         | 13.35      | %                                      | $          | 16,290 |   | 4.0 | % | $ | 24,435 |   | 6.0 | % |
| Total Risk Based  Capital            |       | $          | 58,452     |                                         | 14.35      | %                                      | $          | 32,580 |   | 8.0 | % | $ | 40,725 |   | 10.0 | % |

 

20

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*Average Assets/Liabilities*.  The following table sets forth informationrelating to average balances of interest-earning assets and liabilities for thethree and six months ended June 30, 2007 and the same period for 2006.  The following table reflects the average taxequivalent yields on assets and average costs of liabilities for the periodsindicated (derived by dividing income or expense by the monthly average balanceof assets or liabilities, respectively) as well as “net interest margin” (whichreflects the effect of the net earnings balance) for the periods shown:
| ** **                                                                        | ** ** | **Three months ended  June 30, 2007** | ** ** | **Three months ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(Dollars in thousands)**                                              | ** ** | **Average   balance**                                | ** ** | **Interest**                                              | ** ** | **Average   annual   yield/rate** | ** ** | **Average   balance** | ** ** | **Interest** | ** ** | **Average   annual   yield/rate** | ** ** |
| ASSETS:                                                                           |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                         |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                        |       | $                                                         | 160,406    |                                                      | $          | 2,052 |   | 5.13 | % | $ | 144,623 |   | $ | 1,631 |   | 4.52 | % |
| Loans (2)                                                                         |       | 383,919                                                   |       | 7,229                                                     |       | 7.55 | % | 393,927 |   | 6,874 |   | 7.00 | % |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                    |       | 544,325                                                   |       | 9,281                                                     |       | 6.84 | % | 538,550 |   | 8,504 |   | 6.33 | % |
| Non-interest-earning  assets                                                      |       | 60,953                                                    |       |                                                      |       |   |   | 61,175 |   |   |   |   |   |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total                                                                             |       | $                                                         | 605,278    |                                                      |       |   |   |   | $ | 599,725 |   |   |   |   |   |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                       |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                    |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                          |       | $                                                         | 236,451    |                                                      | $          | 2,613 |   | 4.43 | % | $ | 225,581 |   | $ | 2,022 |   | 3.60 | % |
| Money market and  NOW accounts                                                    |       | 134,101                                                   |       | 728                                                       |       | 2.18 | % | 133,305 |   | 571 |   | 1.72 | % |
| Savings accounts                                                                  |       | 27,575                                                    |       | 20                                                        |       | 0.29 | % | 30,915 |   | 23 |   | 0.30 | % |
| FHLB advances  and other borrowings                                               |       | 99,249                                                    |       | 1,174                                                     |       | 4.74 | % | 107,350 |   | 1,183 |   | 4.42 | % |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                               |       | 497,376                                                   |       | 4,535                                                     |       | 3.66 | % | 497,151 |   | 3,799 |   | 3.07 | % |
| Non-interest-bearing  liabilities                                                 |       | 57,763                                                    |       |                                                      |       |   |   | 57,021 |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 50,139                                                    |       |                                                      |       |   |   | 45,553 |   |   |   |   |   |
| Total                                                                             |       | $                                                         | 605,278    |                                                      |       |   |   |   | $ | 599,725 |   |   |   |   |   |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                         |       |                                                      |       |                                                      |       | 3.18 | % |   |   |   |   | 3.26 | % |
| Net interest  margin (4)                                                          |       |                                                      |       | 4,746                                                     |       | 3.50 | % |   |   | 4,705 |   | 3.50 | % |
| Tax equivalent  interest - imputed                                                |       |                                                      |       | 280                                                       |       |   |   |   |   | 158 |   |   |   |
| Net interest  income                                                              |       |                                                      |       | $                                                         | 4,466      |   |   |   |   |   | $ | 4,547 |   |   |   |
|                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Ratio of average interest-earning assets to average  interest-bearing liabilities |       |                                                      |       | 109.4                                                     | %          |   |   |   |   | 108.3 | % |   |   |

 

21

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| ** **                                                                       | ** ** | **Six months ended  June 30, 2007** | ** ** | **Six months ended  June 30, 2006** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Dollars in thousands)**                                             | ** ** | **Average   balance**                              | ** ** | **Interest**                                            | ** ** | **Average  annual  yield/rate** | ** ** | **Average  balance** | ** ** | **Interest** | ** ** | **Average  annual  yield/rate** | ** ** |
| ASSETS:                                                                          |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                        |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Investment  securities (1)                                                       |       | $                                                       | 156,661    |                                                    | $          | 3,982 |   | 5.13 | % | $ | 149,075 |   | $ | 3,249 |   | 4.39 | % |
| Loans (2)                                                                        |       | 383,731                                                 |       | 14,379                                                  |       | 7.56 | % | 392,288 |   | 13,537 |   | 6.96 | % |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                                   |       | 540,392                                                 |       | 18,361                                                  |       | 6.85 | % | 541,363 |   | 16,785 |   | 6.25 | % |
| Non-interest-earning  assets                                                     |       | 60,746                                                  |       |                                                    |       |   |   | 60,151 |   |   |   |   |   |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total                                                                            |       | $                                                       | 601,138    |                                                    |       |   |   |   | $ | 601,514 |   |   |   |   |   |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                      |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                   |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Certificates of  deposit                                                         |       | $                                                       | 234,435    |                                                    | $          | 5,110 |   | 4.40 | % | $ | 225,569 |   | $ | 3,871 |   | 3.46 | % |
| Money market and  NOW accounts                                                   |       | 135,449                                                 |       | 1,461                                                   |       | 2.18 | % | 136,189 |   | 1,127 |   | 1.67 | % |
| Savings accounts                                                                 |       | 27,678                                                  |       | 41                                                      |       | 0.30 | % | 30,866 |   | 46 |   | 0.30 | % |
| FHLB advances  and other borrowings                                              |       | 96,503                                                  |       | 2,255                                                   |       | 4.71 | % | 103,648 |   | 2,247 |   | 4.37 | % |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                              |       | 494,065                                                 |       | 8,867                                                   |       | 3.62 | % | 496,272 |   | 7,291 |   | 2.96 | % |
| Non-interest-bearing  liabilities                                                |       | 57,242                                                  |       |                                                    |       |   |   | 57,900 |   |   |   |   |   |
| Stockholders’  equity                                                       |       | 49,831                                                  |       |                                                    |       |   |   | 45,553 |   |   |   |   |   |
| Total                                                                            |       | $                                                       | 601,138    |                                                    |       |   |   |   | $ | 599,725 |   |   |   |   |   |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest rate  spread (3)                                                        |       |                                                    |       |                                                    |       | 3.23 | % |   |   |   |   | 3.29 | % |
| Net interest  margin (4)                                                         |       |                                                    |       | 9,494                                                   |       | 3.54 | % |   |   | 9,494 |   | 3.54 | % |
| Tax equivalent  interest - imputed                                               |       |                                                    |       | 528                                                     |       |   |   |   |   | 302 |   |   |   |
| Net interest  income                                                             |       |                                                    |       | $                                                       | 8,966      |   |   |   |   |   | $ | 9,192 |   |   |   |
|                                                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Ratio of average interest-earning assets toaverage  interest-bearing liabilities |       |                                                    |       | 109.4                                                   | %          |   |   |   |   | 109.1 | % |   |   |

 

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(1)          Income on investment securitiesincludes all securities and interest bearing deposits in other financialinstitutions.  Income on tax exemptsecurities is presented on a fully taxable equivalent basis, using a 34%federal tax rate.

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

(3)          Interest rate spreadrepresents the difference between the average yield on interest-earning assetsand the average cost of interest-bearing liabilities

(4)          Net interest marginrepresents annualized net interest income divided by average interest-earningassets.

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**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

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

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

We have been successful in meeting the interest ratesensitivity objectives set forth in our policy. Simulation models are prepared to determine the impact on net interestincome for the coming twelve months, including one using rates at June 30,2007, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shift ininterest rates of 100 and 200 basis points rising and falling with an impact toour net interest income on a one year****horizon asfollows:
| Scenario                 | ** ** | **$ Change in Net Interest Income** | ** ** | **% of Net Interest Income** | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| 100 basis point  rising  |       | $                                                            | (258,000   | )                                                | (1.4       | )% |
| 200 basis point  rising  |       | $                                                            | (514,000   | )                                                | (2.9       | )% |
| 100 basis point  falling |       | $                                                            | (137,000   | )                                                | (0.8       | )% |
| 200 basis point falling  |       | $                                                            | (501,000   | )                                                | (2.8       | )% |

 

*Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995 - Forward-Looking Statements*.** **Thisdocument contains, and future oral and written statements of the Company andits management may contain, forward-looking statements, within the meaning ofsuch term in the Private Securities Litigation Reform Act of 1995, with respectto the financial condition, results of operations, plans, objectives, futureperformance and business of the Company. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of the Company’s management and on informationcurrently available to management, are generally identifiable by the use ofwords such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,”“will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in thisdocument, including forward-looking statements, speak only as of the date theyare made, and the Company undertakes no obligation to update any statement inlight of new information or future events.

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

· The strength of the United Stateseconomy in general and the strength of the local economies in which we conductour operations which may be less favorable than expected and may result in,among other things, a deterioration in the credit quality and value of ourassets.

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

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

23

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

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

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

· The timely development and acceptanceof products and services, including products and services offered throughalternative delivery channels such as the Internet.

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

· Our ability to develop and maintainsecure and reliable electronic systems.

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

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

· Business combinations and theintegration of acquired businesses which may be more difficult or expensivethan expected.

· The costs, effects and outcomes ofexisting or future litigation.

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

· Our ability to manage the risksassociated with the foregoing as well as anticipated.

These risks and uncertainties should be consideredin evaluating forward-looking statements and undue reliance should not beplaced on such statements.  Additionalinformation concerning us and our business, including other factors that couldmaterially affect our financial results, is included in our filings with theSecurities and Exchange Commission, including the “Risk Factors” section in ourForm 10-K.

**ITEM 4.  CONTROLS AND PROCEDURES**

An evaluation was performed under the supervisionand with the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s 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, 2007.  Based on that evaluation,the Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that the Company’s disclosure controls andprocedures were effective.

There were no changes in the Company’s internalcontrol over financial reporting during the quarter ended June 30, 2007 thatmaterially affected or were likely to materially affect the Company’s internalcontrol over financial reporting.

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**LANDMARK BANCORP, INC. AND SUBSIDIARY**

**PART II – OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

There is no material pendinglegal proceedings to which the Company or its subsidiaries is a party otherthan ordinary routine litigation incidental to their respective businesses.

**ITEM 1A.  RISK FACTORS**

There have been no material changes in the riskfactors applicable to the Company from those disclosed in Part I,Item 1A. “Risk Factors,” in the Company’s 2006 Annual Report on Form10-K.  Please refer to that section ofthe Company’s Form 10-K for disclosures regarding the risks and uncertaintiesrelated to the Company’s business.

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

The following table provides information about purchases by the Companyand its affiliated purchases during the quarter ended June 30, 2007, of equitysecurities that are registered by the Company pursuant to Section 12 of theExchange Act.

| Period           | ** ** | **Total   Number of   Shares   Purchased** | ** ** | **Average   Price Paid   per Share** | ** ** | **Total Number of   Shares Purchased as   Part of a Publicly   Announced Plan (1)** | ** ** | **Maximum Number   of Shares that May   Yet Be Purchased   Under the Plans (1)** | ** ** |
|------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1-30, 2007 |       | —                                                         |       | —                                                   |       | —                                                                                                                                          |       | 67,516                                                                                                                                       |       |
| May 1-31, 2007   |       | 12,866                                                         |       | $                                                        | 28.38      |                                                                                                                                            | 12,866     |                                                                                                                                         | 54,650     |   |
| June 1-30, 2007  |       | 7,385                                                          |       | $                                                        | 28.30      |                                                                                                                                            | 7,385      |                                                                                                                                         | 47,265     |   |
| Total            |       | 20,251                                                         |       | $                                                        | 28.35      |                                                                                                                                            | 20,251     |                                                                                                                                         | 47,265     |   |

 

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(1)In November 2004, our Board of Directors approved the repurchase by us of up to5%, or 101,700 shares, of our common stock. Unless terminated earlier by resolution of the Board of Directors, thecurrent repurchase program will expire when we have repurchased all sharesauthorized for repurchase thereunder.

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

None

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**ITEM 4.  SUBMISSION OF MATTERS TOVOTE OF SECURITY HOLDERS**

OnMay 23, 2007, the annual meeting of Landmark Bancorp, Inc. stockholders washeld.  There were 2,333,232 shares ofcommon stock eligible to vote at the annual meeting.  The voting on each item at the annual meetingwas as follows:

1.  Election of four Class IIIdirectors with terms expiring in 2010:
|                       | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|-------------|------------|-----------------------|------------|
| Patrick L.  Alexander |       | 2,046,540 |       | 6,005        |       | —      |       | —                |       |
| Jim W. Lewis          |       | 2,047,462 |       | 5,083        |       | —      |       | —                |       |
| Jerry R. Pettle       |       | 1,957,932 |       | 94,613       |       | —      |       | —                |       |
| Larry Schugart        |       | 2,040,983 |       | 11,562       |       | —      |       | —                |       |

 

2.  Ratification of theappointment of KPMG LLP as the Company’s independent registered publicaccounting firm for the year ending December 31, 2007:
|          | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|----------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
| KPMG LLP |       | 2,019,221 |       | 29,059      |       | 4,265       |       | —                |       |

 

**ITEM 5.  OTHER INFORMATION**

None

**ITEM 6.  EXHIBITS**

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

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                       | LANDMARK BANCORP, INC.                |
|-----------------------|---------------------------------------|
|                  |                                  |
|                  |                                  |
| Date: August 10, 2007 |                                  | /s/ Patrick L. Alexander |   |
|                  | Patrick L. Alexander                  |
|                  | President and Chief Executive Officer |
|                  |                                  |
|                  |                                  |
| Date: August 10, 2007 |                                  | /s/ Mark A. Herpich |   |
|                  | Mark A. Herpich                       |
|                  | Vice President, Secretary, Treasurer  |
|                  |  and Chief  Financial Officer    |
|                       |                                       |  |  |  |

 

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