LANDMARK BANCORP INC - Quarter Report: 2006 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND 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, 2006

 

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 as specified in its charter)

 

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

 

 

 

701 Poyntz Avenue, Manhattan, Kansas	66502
(Address of principal executive offices)	(Zip Code)

 

(785) 565-2000
(Registrant’s telephone number, including area code)

 

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

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

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

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

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

 

 

LANDMARK BANCORP, INC.
Form 10-Q Quarterly Report

Table of Contents

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

 

1

 

LANDMARK BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,			December 31,
		2006			2005
ASSETS		(Unaudited)
Cash and cash equivalents		$	13,832,885		$	21,490,512
Investment securities available for sale, at fair value		134,557,744			140,130,512
Loans, net		392,953,154			274,565,855
Loans held for sale		4,137,150			1,163,211
Premises and equipment, net		12,992,315			8,412,235
Goodwill		13,009,167			7,535,584
Other intangible assets, net		4,512,120			2,418,213
Accrued interest and other assets		17,582,041			9,393,839
Total assets		$	593,576,576		$	465,109,961
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits		$	429,796,665		$	331,272,731
Federal Home Loan Bank borrowings		80,317,370			63,212,318
Other borrowings		30,552,178			22,046,000
Accrued expenses, taxes and other liabilities		7,223,297			4,506,305
Total liabilities		547,889,510			421,037,354
Stockholders’ equity:
Common stock, $0.01 par, 5,000,000 shares authorized,
2,244,994 and 2,244,327 shares issued, respectively		22,450			22,443
Additional paid-in capital		19,943,097			19,868,567
Retained earnings		27,581,301			25,322,019
Accumulated other comprehensive loss		(1,445,268		)	(725,908		)
Treasury stock, at cost; 15,736 shares		(414,514		)	(414,514		)
Total stockholders’ equity		45,687,066			44,072,607
Total liabilities and stockholders’ equity		$	593,576,576		$	465,109,961

See accompanying notes to condensed consolidated financial statements.

2

---

LANDMARK BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

		Three Months Ended June 30,
		2006			2005
Interest income:
Loans		$	6,860,807		$	4,288,778
Investment securities		1,455,327			1,121,711
Other		30,108			40,175
Total interest income		8,346,242			5,450,664
Interest expense:
Deposits		2,616,379			1,355,432
Borrowed funds		1,182,976			874,884
Total interest expense		3,799,355			2,230,316
Net interest income		4,546,887			3,220,348
Provision for loan losses		15,000			105,000
Net interest income after
provision for loan losses		4,531,887			3,115,348
Non-interest income:
Fees and service charges		1,128,463			892,928
Gains on sale of loans		322,983			205,818
Gains (losses) on sale of investments, net		(443,797		)	40,540
Gains on sale of other assets		681,630			—
Bank owned life insurance		112,300			20,287
Other		139,746			117,447
Total non-interest income		1,941,325			1,277,020
Non-interest expense:
Compensation and benefits		2,112,612			1,505,144
Occupancy and equipment		687,102			484,108
Data processing		187,543			141,237
Amortization of intangibles		259,679			86,932
Professional fees		126,349			98,913
Advertising		111,219			97,007
Other		732,650			597,588
Total non-interest expense		4,217,154			3,010,929
Earnings before income taxes		2,256,058			1,381,439
Income tax expense		659,968			431,775
Net earnings		$	1,596,090		$	949,664
Earnings per share:
Basic		$	0.72		$	0.43
Diluted		$	0.71		$	0.43
Dividends per share		$	0.1700		$	0.1619

See accompanying notes to condensed consolidated financial statements.

3

---

LANDMARK BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

		Six Months Ended June 30,
		2006			2005
Interest income:
Loans		$	13,511,515		$	8,390,492
Investment securities		2,870,664			2,158,512
Other		101,394			53,245
Total interest income		16,483,573			10,602,249
Interest expense:
Deposits		5,043,714			2,515,497
Borrowed funds		2,247,585			1,755,610
Total interest expense		7,291,299			4,271,107
Net interest income		9,192,274			6,331,142
Provision for loan losses		75,000			225,000
Net interest income after
provision for loan losses		9,117,274			6,106,142
Non-interest income:
Fees and service charges		2,135,335			1,668,954
Gains on sale of loans		586,364			371,394
Gains (losses) on sale of investments, net		(300,256		)	40,540
Gains on sale of other assets		728,453			17,211
Bank owned life insurance		157,654			41,920
Other		325,316			197,416
Total non-interest income		3,632,866			2,337,435
Non-interest expense:
Compensation and benefits		4,248,576			2,962,862
Occupancy and equipment		1,396,022			974,342
Data processing		348,990			270,233
Amortization of intangibles		524,172			182,962
Professional fees		210,726			185,056
Advertising		218,737			181,847
Other		1,506,785			1,151,869
Total non-interest expense		8,454,008			5,909,171
Earnings before income taxes		4,296,132			2,534,406
Income tax expense		1,279,128			781,366
Net earnings		$	3,017,004		$	1,753,040
Earnings per share:
Basic		$	1.35		$	0.79
Diluted		$	1.35		$	0.79
Dividends per share		$	0.3400		$	0.3238

See accompanying notes to condensed consolidated financial statements.

4

---

LANDMARK BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended June 30,
		2006			2005
Net cash provided by (used in) operating activities		$	(4,193,736	)	$	3,846,525
Cash flows from investing activities:
Net increase in loans		(10,573,691		)	(429,630		)
Maturities and prepayments of investments		22,388,576			21,712,032
Purchase of investment securities		(27,281,977		)	(27,804,212		)
Proceeds from sale of investment securities		19,804,823			140,540
Net cash paid in FMB acquisition		(8,023,721		)	—
Proceeds from sales of premises and equipment and foreclosed assets		564,923			247,943
Purchases of premises and equipment, net		(1,979,916		)	(258,374		)
Net cash used in investing activities		(5,100,983		)	(6,391,701		)
Cash flows from financing activities:
Net increase (decrease) in deposits		(8,401,243		)	59,891
Federal Home Loan Bank advance borrowings		—			3,500,000
Federal Home Loan Bank advance repayments		(1,018,384		)	(5,018,384		)
Federal Home Loan Bank line of credit borrowings, net		10,000,000			2,400,000
Proceeds from other borrowings		6,675,686			2,375,000
Repayments on other borrowings		(4,873,240		)	(725,000		)
Purchase of treasury stock		—			(531		)
Proceeds from issuance of common stock under stock option plans		9,491			147,566
Tax benefit related to stock option plans		2,503			32,541
Payment of dividends		(757,721		)	(717,597		)
Net cash provided by financing activities		1,637,092			2,053,486
Net decrease in cash and cash equivalents		(7,657,627		)	(491,690		)
Cash and cash equivalents at beginning of period		21,490,512			7,845,438
Cash and cash equivalents at end of period		$	13,832,885		$	7,353,748
Supplemental disclosure of cash flow information:
Cash paid during period for interest		$	6,329,000		$	3,829,000
Cash paid during period for taxes		$	560,000		$	—
Supplemental schedule of non-cash investing activities:
Transfer of loans to real estate owned		$	25,000		$	486,000
FMB Acquisition:
Fair value of liabilities assumed		131,988,000			—
Fair value of assets acquired, including goodwill		123,964,000			—

See accompanying notes to condensed consolidated financial statements.

5

---

LANDMARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      Interim Financial Statements

The condensed consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared in accordance with the instructions to Form 10-Q.  To the extent that information and footnotes required by U.S. generally accepted accounting principles for complete financial statements are contained in or consistent with the consolidated audited financial statements incorporated by reference in the Company’s Form 10-K for the year ended December 31, 2005, such information and footnotes have not been duplicated herein.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein.  The December 31, 2005, condensed consolidated balance sheet has been derived from the audited consolidated balance sheet as of that date.  The results of the interim periods ended June 30, 2006 are not necessarily indicative of the results expected for the year ending December 31, 2006 and include the results of operations of First Manhattan Bancorporation, Inc. (“FMB”) beginning on January 1, 2006.

2.      Acquisition of First Manhattan Bancorporation, Inc.

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

 

 

6

---

3.      Stock Based Compensation

In December 2004, The Financial Accounting Standards Board issued SFAS No. 123 (revised), Shared-Based Payment (123R).  The revision disallows the expense recognition alternatives permitted in the original statement and requires entities to recognize stock-based compensation cost in their statements of earnings.  The revision contains additional guidance in several areas including award modifications and forfeitures, measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods.  It also contains additional disclosure requirements.  Prior to the adoption of SFAS No. 123R on January 1, 2006, the Company recorded the fair value of options issued under the plan as expense in accordance with SFAS No. 123, Accounting for Stock Based Compensation.  The Company’s adoption of the revised Statement on January 1, 2006, did not have a material effect on its consolidated financial statements.

The Company has a stock option plan, the purpose of which is to provide additional incentive to certain officers, directors, and key employees by facilitating their purchase of a stock interest in the Company. The plan is administered by the board of directors who selects employees to whom options are granted and the number of shares granted. The option price may not be less than 100% of the fair market value of the shares on the date of the grant, and no option shall be exercisable after the expiration of ten years from the grant date. In the case of any employee who owns more than 10% of the outstanding common stock at the time the option is granted, the option price may not be less than 110% of the fair market value of the shares on the date of the grant, and the option shall not be exercisable after the expiration of ten years from the grant date.   The Company intends to utilize authorized, but un-issued shares to satisfy option exercises.  The stock-based compensation cost that has been recognized was $63,000 in the first six months of 2006 and $55,000 in the first six months of 2005.

In determining compensation cost, the Black-Scholes option-pricing model is used to estimate the fair value of options on date of grant.  The Black-Scholes model is a closed-end model that uses the assumptions outlined below.  Expected volatility is based on historical volatility of the Company’s stock and a consideration of other factors.  The Company uses historical exercise behavior and other factors to estimate the expected term of the options, which represents the period of time that the options granted are expected to be outstanding.  The risk-free rate for the expected term is based on U.S. Treasury rates in effect at the time of grant.  The fair value of each option grant is estimated on the date of grant. The fair value of options granted in 2005 were estimated utilizing the following assumptions: dividend rate of 4.8%, volatility of 18.0%, risk-free interest rate of 4.3%, and expected lives of five years, resulting in a fair value of $3.40 per option at grant date.  The fair value of options granted in 2006 were estimated utilizing the following assumptions: dividend rate of 5.0%, volatility of 19.1%, risk-free interest rate of 4.9%, and expected lives of five years, resulting in a fair value of $3.55 per option at grant date.

7

---

A summary of option activity during the first six months of 2006 is presented below.

 

(Dollars in thousands, except per share data)		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2006		127,340		$	23.73		7.38 years		n/a
Granted		109,025		27.15			—		n/a
Cancelled		—		—			—		n/a
Exercised		(667	)	14.23			—		n/a
Outstanding at June 30, 2006		235,698		$	25.34		8.25 years		$	569,000
Exercisable at June 30, 2006		76,334		$	22.04		6.35 years		$	436,000
Vested and expected to vest at June 30, 2006		226,146		$	25.27		8.22 years		$	561,000

 

Additional information about stock options exercised is presented below.

 

As of June 30, 2006, there was $404,000 of total unrecognized compensation cost related to the options.  That cost is expected to be recognized over a weighted-average period of 4 years.  The total fair value (at vest date) of shares vested during the six month periods ended June 30, 2006 and 2005 was $103,000 and $93,000 respectively.

4.      Earnings per Share

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

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

 

8

---

5.      Comprehensive Income

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

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Net earnings		$	1,596,090		$	949,664		$	3,017,004		$	1,753,040
Change in unrealized holding(gains)/losses		(1,409,756		)	715,178			(1,506,517		)	(105,530		)
Less — reclassification adjustment for gains/(losses) included in net income		(443,797		)	40,540			(300,256		)	40,540
Net change in unrealized (gains)/losses on securities		(965,959		)	674,638			(1,206,261		)	(146,070		)
Unrealized gain/(loss) on interest rate swap		17,000			(49,000		)	46,000			9,000
Income tax expense/(benefit)		(360,604		)	237,742			(440,899		)	(52,087		)
Total comprehensive income		$	1,007,735		$	1,337,560		$	2,297,642		$	1,668,057

 

6.      Other Intangible Assets

The following table presents information about the Company’s other intangible assets:

		June 30, 2006						December 31, 2005
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Amortized intangible assets:
Core deposit premium		$	5,396,065		$	(1,228,525	)	$	2,818,602		$	(774,588	)
Mortgage servicing rights		791,691			(447,111		)	775,666			(401,467		)
Total		$	6,187,756		$	(1,675,636	)	$	3,594,268		$	(1,176,055	)

 

Aggregate amortization expense for the three months ended June 30, 2006 and 2005, was $260,000 and $87,000, respectively.  Aggregate amortization expense for the six months ended June 30, 2006 and 2005, was $524,000 and $183,000, respectively.  The following depicts estimated amortization expense for the remainder of 2006 and in successive years ending December 31:

 

9

---

The mortgage servicing rights correspond to loans serviced by the Company for others with outstanding principal balances of $105.9 million and $107.2 million at June 30, 2006 and December 31, 2005, respectively.  Gross service fee income related to such loans was $67,000 and $69,000 for the three months ended June 30, 2006 and June 30, 2005, respectively, and was $135,000 and $139,000 for the six months ended June 30, 2006 and June 30, 2005, respectively.  The income is included in fees and service charges in the condensed consolidated statements of earnings.

The following is an analysis of the changes in mortgage servicing rights:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Balance at beginning of period		$	356,973		$	442,786		$	374,199		$	446,332
Additions		21,692			10,954			40,616			51,120
Amortization		(34,085		)	(37,363		)	(70,235		)	(81,075		)
Balance at end of period		$	344,580		$	416,377		$	344,580		$	416,377

 

7.      Impact of Recent Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140”.  The Statement permits fair value remeasurement for certain hybrid financial instruments containing embedded derivatives, and clarifies the derivative accounting requirements for interest and principal-only strip securities and interests in securitized financial assets. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and eliminates a previous prohibition on qualifying special-purpose entities from holding certain derivative financial instruments.  For calendar year companies, this statement is effective for all financial instruments acquired or issued after January 1, 2007.  The Company does not expect that adoption of the Statement will have a material effect on its consolidated financial statements.

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

10

---

Also in March 2006, the FASB issued Staff Position 85-4-1, which provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. The investments must be accounted for by either (a) recognizing the initial investment at transaction price plus direct external costs and capitalizing continuing costs, with no gain recognized in earnings until the insured dies, or (b) recognizing the initial investment at transaction price and remeasuring the investment at fair value at each reporting period, with fair value changes recognized in earnings as they occur. For calendar year companies, the guidance in this staff position must be applied beginning January 1, 2007. The Company does not expect that adoption of the Staff Position will have a material effect on its consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting For Uncertainty in Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation is effective for fiscal years beginning after December 15, 2006.  The Company is evaluating any impact that the adoption of this Interpretation may have on the Company’s consolidated financial statements.

8.      Other Events

The Company has entered into an agreement to construct a new branch location in Topeka, Kansas, which is anticipated to be completed in August 2006.

 

11

 

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

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

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

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

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

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

12

---

 

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

We report our investment securities at estimated fair values based on published market ascertainable values, which are obtained from independent sources.  We perform periodic reviews of the fair value of investment securities to determine if any declines in value might be considered other than temporary.  Our most recent review showed that the decrease in fair value of the securities, resulting in an unrealized loss position, was related to changes in interest rates.  None of the unrealized losses are related to credit deterioration.  The Company has the ability to hold these securities until market values recover, including up to the maturity date.  Although we believe that our estimates of the fair values of investment securities to be reasonable, economic and market factors may affect the amounts that will ultimately be realized from these investments.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.  Fluctuations in the actual outcome of these future tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially impact our financial position and results of operations.

We have completed several business and asset acquisitions which have generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by the Company. Goodwill and intangibles related to acquisitions are determined and based on purchase price allocations.  Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis involves the use of estimates and assumptions.  Useful lives are determined based on the expected future period of the benefit of the asset, the assessment of which considers various characteristics of the asset, including the historical cash flows.  Due to the number of estimates involved related to the allocation of purchase price and determining the appropriate useful lives of intangible assets, we have identified purchase accounting as a critical accounting policy.

13

---

 

Summary of Results.  Net earnings for the three months ended June 30, 2006, increased $646,000, or 68.1%, to $1.6 million as compared to the three months ended June 30, 2005.  Our improved earnings were attributed primarily to our acquisition of FMB along with continued improvement in our net interest margin.  The acquisition allowed for continued growth in non-interest income areas such as fees and service charges and gains on sale of loans.  At the same time, we were able to realize some cost savings associated with the acquisition during the second quarter of 2006.  In addition, we realized gains on sale of other assets of approximately $682,000, which was partially offset by losses of $444,000 on the sale of investments.

Net earnings for the six months ended June 30, 2006, increased $1.3 million, or 72.1%, to $3.0 million as compared to the six months ended June 30, 2005.  Our improved earnings were attributed primarily to our acquisition of FMB along with continued improvement in our net interest margin.  The acquisition allowed for continued growth in non-interest income areas such as fees and service charges and gains on sale of loans.  At the same time, we were able to begin realizing some cost savings associated with the acquisition during the first six months of 2006.  In addition, we realized gains on sale of other assets of approximately $728,000, which was partially offset by losses of $300,000 on the sale of investments.

The three months ended June 30, 2006 resulted in diluted earnings per share of $0.71 compared to $0.43 for the same period in 2005.  Return on average assets was 1.07% for the period compared to 0.85% for the same period in 2005.  Return on average stockholders’ equity was 14.05% for the period compared to 8.99% for the same period in 2005.

The six months ended June 30, 2006 resulted in diluted earnings per share of $1.35 compared to $0.79 for the same period in 2005.  Return on average assets was 1.02% for the period compared to 0.80% for the same period in 2005.  Return on average stockholder’s equity was 13.54% for the period compared to 8.35% for the same period in 2005.

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Net earnings:
Basic earnings per share		$	0.72		$	0.43		$	1.35		$	0.79
Diluted earnings per share		$	0.71		$	0.43		$	1.35		$	0.79
Earnings ratios:
Return on average assets (1)		1.07		%	0.85		%	1.02		%	0.80		%
Return on average equity (1)		14.05		%	8.99		%	13.54		%	8.35		%
Dividend payout ratio		23.94		%	37.78		%	25.19		%	40.96		%
Net interest margin (1)		3.39		%	3.10		%	3.42		%	3.09		%

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

14

---

 

Interest Income.  Interest income for the three months ended June 30, 2006, increased $2.9 million, or 53.1%, to $8.3 million from $5.4 million in the same period of 2005, resulting from increased interest income on both investment securities and loans.  Average loans for the quarter ended June 30, 2006 increased to $393.9 million from $279.0 million for the quarter ended June 30, 2005.  The increase in average loans was primarily due to the $109.4 million in loans acquired in the FMB acquisition.  Additionally, the rise in interest rates experienced during the past year contributed to the increased interest income.  As a result, interest income on loans increased $2.6 million, or 60.0%, to $6.9 million for the quarter ended June 30, 2006.  Average investment securities increased from $134.7 million for the quarter ended June 30, 2005, to $143.8 million for the quarter ended June 30, 2006.  Corresponding with the increase in average investments for the comparable periods, interest income on investment securities increased $334,000, or 29.7%, to $1.5 million for the second quarter of 2006, as compared to the same period of 2005.  Also contributing to the increased investment income was the increase in interest rates, which resulted in yields on our investments purchased during the past year being higher than the yields on our maturing investments.

Interest income for the six months ended June 30, 2006, increased $5.9 million, or 55.5%, to $16.5 million from $10.6 million in the same period of 2005, resulting largely from increased interest income on investment securities and loans.  Average loans for the first six months of 2006 increased to $392.3 million from $279.3 million for the same period in 2005.  The increase in average loans was primarily due to the $109.4 million in loans acquired in the FMB acquisition.  Additionally, the rise in interest rates experienced during the past year contributed to the increased interest income.  As a result, interest income on loans increased $5.1 million, or 61.0%, to $13.5 million for the first six months of 2006.  Average investment securities increased from $132.8 million for the six months ended June 30, 2005, to $145.9 million for the six months ended June 30, 2006.  Corresponding with the increase in average investments for the comparable periods, interest income on investment securities increased $712,000, or 33.0%, to $2.9 million for the first six months of 2006, as compared to the same period of 2005.  Also contributing to the increased investment income was the increase in interest rates, which resulted in yields on our investments purchased during the past year being higher than the yields on our maturing investments.

Interest Expense.  Interest expense during the three months ended June 30, 2006, increased $1.6 million, or 70.4%, as compared to the same period of 2005.  For the three months ended June 30, 2006, interest expense on deposits increased $1.3 million, or 93.0%.  The increase in interest expense on deposits resulted from the addition of approximately $106.8 million in deposits that we acquired through the FMB acquisition on January 1, 2006 and from the rise in interest rates and the associated repricing of deposits as they matured.  Average borrowings for the quarter ended June 30, 2006 increased to $107.3 million from $91.5 million for the quarter ended June 30, 2005.  Corresponding with the increase in average borrowings for the comparable periods, interest expense on borrowings increased $308,000, or 35.2%.  Also contributing to the increased interest expense was the increase in interest rates.

15

---

 

Interest expense during the six months ended June 30, 2006, increased $3.0 million, or 70.7%, as compared to the same period of 2005.  For the six months ended June 30, 2006, interest expense on deposits increased $2.5 million, or 100.5%.  The increase in interest expense on deposits resulted from the addition of approximately $106.8 million in deposits that we acquired through the FMB acquisition on January 1, 2006 and from the rise in interest rates and the associated repricing of deposits as they matured.  Average borrowings for the six months ended June 30, 2006 increased to $103.6 million from $92.9 million for the six months ended June 30, 2005.  Corresponding with the increase in average borrowings for the comparable periods, interest expense on borrowings increased $492,000, or 28.0%.  Also contributing to the increased interest expense was the increase in interest rates.

Net Interest Income.  Net interest income for the three months ended June 30, 2006, totaled $4.5 million, increasing $1.3 million, or 41.2%, as compared to the three months ended June 30, 2005.  This increase resulted primarily from the increased level of average interest earning assets associated with the January 1, 2006 FMB acquisition.  Average earning assets increased during the second quarter of 2006, increasing to $538.5 million from $416.6 million for the second quarter of 2005.  Also contributing to the improvement in net interest income was an increase in our net interest margin.  The net interest margin was 3.39% for the second quarter of 2006, up from 3.10% during the second quarter of 2005.

Net interest income for the six months ended June 30, 2006, totaled $9.2 million, increasing $2.9 million, or 45.2%, as compared to the six months ended June 30, 2005.  This increase resulted primarily from the increased level of average interest earning assets associated with the January 1, 2006 FMB acquisition.  Average earning assets increased during the first six months of 2006, increasing to $541.4 million from $413.3 million for the first six months of 2005.  Also contributing to the improvement in net interest income was an increase in our net interest margin.  The net interest margin was 3.42% for the first six months of 2006, up from 3.09% during the first six months of 2005.

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

16

---

 

The provision for loan losses for the three months ended June 30, 2006, was $15,000, compared to a provision of $105,000 during the three months ended June 30, 2005.  Our continuous review of the loan portfolio prompted a decrease in our provision primarily as a result of improvement in the asset quality of the commercial loan portfolio.  Our review also included the analysis of the FMB loans acquired along with the FMB allowance for loan losses acquired in the amount of $891,000.  One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio.  At June 30, 2006, and December 31, 2005, the allowance for loan losses was $4.0 million and $3.2 million, or 1.0% and 1.1%, respectively, of gross loans outstanding.  The provision for loan losses for the six months ended June 30, 2006, was $75,000 compared to a provision of $225,000 for the same period in 2005.  For further discussion of the provision for loan losses, refer to the “Asset Quality and Distribution” section.

Non-interest Income.  Non-interest income increased $664,000, or 52.0%, for the three months ended June 30, 2006, to $1.9 million compared to the three months ended June 30, 2005.  This improvement was primarily the result of a $117,000, or 56.9%, increase of gains on sale of loans, and an increase in fees and service charges of $236,000, or 26.4%, both of which are attributable to volume increases associated with the FMB acquisition.  Additionally, total non-interest income included $682,000 in gains recognized with the sale of other assets, primarily our previous headquarters located at 800 Poyntz, during the second quarter of 2006.  Also contributing to the increased non-interest income during the second quarter was the increase in bank owned life insurance income, which resulted from the purchase of additional policies totaling $7.5 million in March 2006. Partially offsetting these increases were losses of $444,000 on the sale of investments as we repositioned our investment portfolio by selling some relatively short term, lower yielding investments and purchasing longer term, higher yielding investments.

Non-interest income increased $1.3 million or 55.4%, for the six months ended June 30, 2006, to $3.6 million compared to the six months ended June 30, 2005.  This improvement was primarily the result of a $215,000, or 57.9%, increase of gains on sale of loans, and an increase in fees and service charges of $466,000, or 27.9%, both of which are attributable to volume increases associated with the FMB acquisition.  Additionally, total non-interest income included $728,000 in gains recognized with the sale of other assets, primarily our previous headquarters located at 800 Poyntz. Also contributing to the increased non-interest income during the first six months of 2006 was the increase in bank owned life insurance income, which resulted from the purchase of additional policies totaling $7.5 million in March 2006. Partially offsetting these increases were losses of $300,000 on the sale of investments as we repositioned our investment portfolio by selling some relatively short term, lower yielding investments and purchasing longer term, higher yielding investments.

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Non-interest income:
Fees and service charges		$	1,128,463		$	892,928		$	2,135,335		$	1,668,954
Gains on sales of loans		322,983			205,818			586,364			371,394
Gains (losses) on sale of investments, net		(443,797		)	40,540			(300,256		)	40,540
Gains on sale of other assets		681,630			—			728,453			17,211
Bank owned life insurance		112,300			20,287			157,654			41,920
Other		139,746			117,447			325,316			197,416
Total non-interest income		$	1,941,325		$	1,277,020		$	3,632,866		$	2,337,435

 

17

---

 

Non-interest Expense.  Non-interest expense increased $1.2 million, or 40.1%, to $4.2 million for the three months ended June 30, 2006, as compared to the three months ended June 30, 2005, resulting primarily from the impact of the acquisition of FMB on January 1, 2006 and the late August 2005 acquisition of two branches in Great Bend, Kansas.  While we have made significant progress achieving cost savings by consolidating our personnel, operations and facilities, the impact of the acquisition includes a net increase in personnel, equipment and facilities and the number of accounts being processed.  Accordingly the impact of the acquisition includes increases in compensation and benefits of $607,000, occupancy and equipment of $203,000, amortization of acquired intangibles of $173,000 and data processing costs of $46,000.

Non-interest expense increased $2.5 million, or 43.1%, to $8.5 million for the six months ended June 30, 2006, as compared to the six months ended June 30, 2005, resulting primarily from the impact of the acquisition of FMB on January 1, 2006 and the late August 2005 acquisition of two branches in Great Bend, Kansas.  While we have made significant progress achieving cost savings by consolidating our personnel, operations and facilities, the impact of the acquisition includes a net increase in personnel, equipment and facilities and the number of accounts being processed.  Accordingly the impact of the acquisition includes increases in compensation and benefits of $1.3 million, occupancy and equipment of $422,000, amortization of acquired intangibles of $341,000 and data processing costs of $79,000.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
Non-interest expense:
Compensation and benefits		$	2,112,612		$	1,505,144		$	4,248,576		$	2,962,862
Occupancy and equipment		687,102			484,108			1,396,022			974,342
Amortization of intangible assets		259,679			86,932			524,172			182,962
Professional fees		126,349			98,913			210,726			185,056
Data processing		187,543			141,237			348,990			270,233
Advertising		111,219			97,007			218,737			181,847
Other		732,650			597,588			1,506,785			1,151,869
Total non-interest expense		$	4,217,154		$	3,010,929		$	8,454,008		$	5,909,171

 

Income Tax Expense.  Income tax expense increased $228,000, or 52.9%, from $432,000 for the three months ended June 30, 2005, to $660,000 for the three months ended June 30, 2006.  The increase in income tax expense for the three months ended June 30, 2006, resulted from the increase in taxable income for the second quarter of 2006 as compared to the second quarter of 2005.  The effective tax rate for the second quarter of 2006 decreased to 29.3% from 31.3% in the second quarter of 2005 as a result of an increase in the utilization of tax exempt investments.

Income tax expense increased $498,000, or 63.7%, from $781,000 for the six months ended June 30, 2005, to $1.3 million for the six months ended June 30, 2006.  The increase in income tax expense for the six months ended June 30, 2006, resulted from the increase in taxable income for the first six months of 2006 as compared to the first six months of 2005.  The effective tax rate for the first six months of 2006 decreased to 29.8% from 30.8% during the first six months of 2005 as a result of an increase in the utilization of tax exempt investments.

18

---

 

Asset Quality and Distribution.  Total assets increased to $593.6 million at June 30, 2006, compared to $465.1 million at December 31, 2005, resulting from the FMB acquisition.  Our primary ongoing sources of funds are deposits, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities.  While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition, and the restructuring of the financial services industry.

Net loans, excluding loans held for sale, increased by $118.4 million to $393.0 million during the six months ended June 30, 2006.  This increase was primarily the result of the addition of $109.4 million in loans in the FMB acquisition.  We have concentrated on generating commercial loans over the past years and are pleased that this segment of our loan portfolio has grown.  While the FMB acquisition increased our one-to-four family residential loan totals, as the majority of the acquired loans were residential, we plan to continue our efforts to grow our commercial lending activities.

Our primary investing activities are the origination of commercial, mortgage, consumer loans and the purchase of investment and mortgage-backed securities.  Generally, we originate fixed-rate, residential mortgage loans with maturities in excess of ten years for sale in the secondary market.  We do not originate and warehouse these fixed-rate residential loans for resale in order to speculate on interest rates.

The allowance for losses on loans is established through a provision for losses on loans based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of its loan activity.  Such evaluation, which includes a review of all loans with respect to which full collectibility may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an adequate allowance for losses on loans.  We believe that we use the best information available to determine the allowance for losses on loans, unforeseen market conditions could result in adjustment to the allowance for losses on loans.  In addition, net earnings could be significantly affected if circumstances differ substantially from the assumptions used in establishing the allowance for losses on loans.

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

19

---

 

We believe that the quality of the loan portfolio continues to be strong as evidenced by our low levels of past due and non-accrual loans.  The loans acquired from FMB on January 1, 2006 did not have a material impact on our non-accrual loan totals or our classified asset ratios as the fair market value of impaired loans acquired were recorded in accordance with Statement of Position (SOP) 03-03, Accounting for Certain Loans and Debt Securities Acquired in a Transfer.  As of June 30, 2006, loans with a balance of $4.9 million were on non-accrual status, or 1.2% of total loans, compared to loan balances totaling $3.3 million on non-accrual status, or 1.2% of total loans, as of December 31, 2005.  This increase was primarily related to a $1.2 million commercial loan, which became past due for payments in excess of 90 days at June 30, 2006.  Management does not anticipate any significant loss exposure on this loan.  In addition, the ratio of non-performing assets as a percentage of total assets remained constant at 0.9% as of December 31, 2005 and June 30, 2006.  Residential home loans comprised 40.5% of the $4.9 million non-accrual balance at June 30, 2006.  These loans have been underwritten according to our residential lending policies and are well secured by real estate collateral, and in many instances, private mortgage insurance or government guarantees.  We have historically incurred minimal losses on mortgage loans based upon collateral values and underlying insurance or guarantees.  We are aggressively pursuing collection activity of these loans which should enable the collection of principal.

Liability Distribution.  Total deposits increased $98.5 million to $429.8 million at June 30, 2006, from $331.3 million at December 31, 2005.  The amount of deposits acquired in the January 1, 2006 FMB acquisition approximated $106.8 million.  Borrowings increased $25.6 million to $110.9 million at June 30, 2006, from $85.3 million at December 31, 2005, resulting from borrowings utilized to fund the FMB acquisition, $5 million of FHLB advances acquired in the FMB acquisition, and additional FHLB line of credit borrowings.

Non-interest bearing demand accounts at June 30, 2006, were $49.2 million, or 11.4% of deposits, compared to $38.4 million, or 11.6% of deposits, at December 31, 2005.  Certificates of deposit increased to $216.2 million at June 30, 2006, from $163.1 million at December 31, 2005.  Money market and NOW demand accounts increased to $133.8 million at June 30, 2006, from $103.7 million at December 31, 2005, and were 31.1% of total deposits.  Savings accounts increased to $30.6 million at June 30, 2006, from $26.1 million at December 31, 2005.

Certificates of deposit at June 30, 2006, which were scheduled to mature in one year or less, totaled $150.0 million.  Historically, maturing deposits have generally remained with our bank and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity.

Contractual Obligations and Commercial Commitments.  The following table presents our contractual obligations, defined as operating lease obligations and principal payments due on non-deposit obligations with maturities in excess of one year as of June 30, 2006, for the periods indicated.

Contractual Cash  Obligations		Total			One Year or Less			One to Three Years			Four to Five Years			More than Five Years
Operating leases		$	362,272		$	102,132		$	200,664		$	59,476		$	—
Service contracts		5,880,000			1,260,000			2,520,000			2,100,000			—
FHLB borrowings		80,317,370			17,900,000			34,000,000			22,767,500			5,649,870
Other borrowings		30,552,178			5,916,178			8,140,000			—			16,496,000
Total contractual obligations		$	117,111,820		$	25,178,310		$	44,860,664		$	24,926,976		$	22,145,870

 

20

---

 

Liquidity.  Our most liquid assets are cash and cash equivalents and investment securities available for sale.  The levels of these assets are dependent on the operating, financing, lending and investing activities during any given period.  These liquid assets totaled $148.4 million at June 30, 2006, and $161.6 million at December 31, 2005.  During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we increase our liquid assets by investing in short-term U. S. Government and agency securities or high-grade municipal securities.

Liquidity management is both a daily and long-term function of our strategy.  Excess funds are generally invested in short-term investments.  In the event we require funds beyond our ability to generate them internally, additional funds are generally available through the use of Federal Home Loan Bank advances, a line of credit with the Federal Home Loan Bank or through sales of securities.  At June 30, 2006, we had outstanding Federal Home Loan Bank advances of $66.9 million and $13.4 million borrowed against our line of credit with the Federal Home Loan Bank.  At June 30, 2006, our total borrowing capacity with the Federal Home Loan Bank was $125.8 million.  We also had other borrowings of $30.6 million at June 30, 2006, which included $16.5 million of subordinated debentures, $8.2 million of long-term debt and $5.9 million in repurchase agreements.

As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $2.8     million at June 30, 2006.

At June 30, 2006, we had outstanding loan commitments, excluding standby letters of credit, of $62.4 million.  We anticipate that sufficient funds will be available to meet current loan commitments.  These commitments consist of  unfunded lines of credit and commitments to finance real estate loans.

21

---

 

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

At June 30, 2006, we continued to maintain a sound leverage ratio of 7.83% and a total risk based capital ratio of 12.76%.  As shown by the following table, our capital exceeded the minimum capital requirements at June 30, 2006 (dollars in thousands):

 

Company		Actual  Amount			Actual  Percent		Required Percent		Required Amount
Leverage		$	45,633		7.83	%	4.0	%	$	23,301
Tier 1 Capital		$	45,633		11.54	%	4.0	%	$	15,816
Total Risk Based Capital		$	50,467		12.76	%	8.0	%	$	31,632

 

At June 30, 2006, Landmark National Bank continued to maintain a sound leverage ratio of 9.07% and a total risk based capital ratio of 14.37%.  As shown by the following table, the bank’s capital exceeded the minimum capital requirements at June 30, 2006 (dollars in thousands):

 

Landmark National Bank		Actual Amount			Actual Percent		Required Percent		Required Amount
Leverage		$	52,646		9.07	%	4.0	%	$	23,220
Tier 1 Capital		$	52,646		13.35	%	4.0	%	$	15,778
Total Risk Based Capital		$	56,695		14.37	%	8.0	%	$	31,557

 

Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements.  The above ratios are well in excess of regulatory minimums and should allow us to operate without capital adequacy concerns.  The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a bank rating system based on the capital levels of banks.  As of June 30, 2006, we were rated “well capitalized”, which is the highest rating available under this capital-based rating system.

 

22

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

We have been successful in meeting the interest rate sensitivity objectives set forth in our policy.  Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including one using rates at June 30, 2006, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shift in interest rates of 100 and 200 basis points rising and falling with an impact to our net interest income on a one year horizon as follows:

 

Scenario		$ Change in Net Interest Income		% of Net Interest Income
100 basis point rising		(155,000)		(0.8)%
200 basis point rising		(296,000)		(1.6)%
100 basis point falling		(283,000)		(1.5)%
200 basis point falling		(907,000)		(4.9)%

 

During July 2006, FHLB convertible advances totaling $20.0 million were converted from fixed rates to variable rates.  The table presented above includes the impact of this conversion on our interest rate sensitivity position.  We believe that no additional significant changes in our interest rate sensitivity position have occurred since June 30, 2006.

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

23

---

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

24

---

ITEM 4.  CONTROLS AND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, management concluded our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2006 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of June 30, 2006.  These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

25

---

LANDMARK BANCORP, INC. AND SUBSIDIARY
PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

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

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

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

26

---

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On May 17, 2006, the annual meeting of Landmark Bancorp, Inc. stockholders was held.  At the meeting, Richard A. Ball, Susan E. Roepke, and C. Duane Ross were elected to serve as Class II directors with terms expiring in 2009.  Continuing as Class I directors (term expires in 2008) are Brent A. Bowman, Joseph L. Downey, and David H. Snapp and continuing as Class III directors (term expires in 2007) are Patrick L. Alexander, Jim W. Lewis, Jerry R. Pettle, and Larry Schugart.  The stockholders also ratified the appointment of KPMG LLP as Landmark Bancorp, Inc.’s independent registered public accounting firm for the year ending December 31, 2006.

There were 2,228,591 shares of common stock eligible to vote at the annual meeting.  The voting on each item at the annual meeting was as follows:

 

		For		Withheld/ Against		Abstain		Broker Non-Votes
Richard A. Ball		2,007,302		78,915		—		—
Susan E. Roepke		2,076,632		9,585		—		—
C. Duane Ross		2,074,869		11,348		—		—
KPMG LLP		2,035,953		49,429		835		—

 

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS

 

27