Landmark Bancorp - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

Commission File Number 0-33203

LANDMARK BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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 ý  No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).  Yes o  No ý

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date:  As of August 4, 2003, the Registrant had outstanding 1,995,449 shares of its common stock, $.01 par value per share.

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

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LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

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LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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LANDMARK BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 accounting principles generally accepted in the United States of America 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, 2002, 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, 2002, 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, 2003, are not necessarily indicative of the results expected for the year ending December 31, 2003.

2.             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 2002.

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

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3.             Comprehensive Income

The Company’s only component of other comprehensive income is the unrealized holding gains on available for sale securities.

4.             Stock Based Compensation

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

5.             Intangible Assets

Effective October 1, 2001, the Company adopted certain provisions of Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and certain provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001.  Effective January 1, 2002, the Company adopted the remaining provisions of SFAS No. 142.  The Company’s goodwill and core deposit intangible resulted from its acquisition of MNB Bancshares on October 9, 2001.  Pursuant to certain provisions in SFAS No. 142, goodwill resulting from the merger with MNB Bancshares is not amortized; however, it is tested for impairment on a periodic basis.

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The following table presents information about the Company’s intangible assets, which are being amortized in accordance with SFAS No. 142:

Aggregate amortization expense for the three months ended June 30, 2003, and June 30, 2002, was $111,789 and $83,284, respectively.  Aggregate amortization expense for the six months ended June 30, 2003, and June 30, 2002, was $223,111 and $173,260, respectively.  The following is estimated amortization expense for the years ending:

6.             Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others.”  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company does not believe that the adoption of Interpretation No. 45 will have a significant impact on its consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.”  This Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” elaborates on the financial statement disclosures to be made by enterprises involved with variable interest entities, including requiring consolidation of entities in which an enterprise has a controlling financial interest that is not controlled through voting interests.  The requirements in this Interpretation are effective for variable interest entities created after January 31, 2003, and the first fiscal or interim period beginning after June 15, 2003, for variable interest entities acquired before that date.  The Company does not believe that the adoption of Interpretation No. 46 will have a significant impact on its consolidated financial statements.

SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The amendments (i) reflect decisions of the Derivatives Implementation Group; (ii) reflect decisions made

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by the FASB in conjunction with other projects dealing with financial instruments; and (iii) address implementation issues related to the application of the definition of a derivative.  SFAS No. 149 also modifies various other existing pronouncements to conform with the changes made to SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, with all provisions applied prospectively. Adoption of SFAS No. 149 on July 1, 2003, did not have a significant impact on the Company’s financial statements.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuer classify financial instruments that are within its scope as a liability, in most circumstances.  Such financial instruments include (i) financial instruments that are issued in the form of shares that are mandatorily redeemable; (ii) financial instruments that embody an obligation to repurchase the issuer’s equity shares, or are indexed to such an obligation, and that require the issuer to settle the obligation by transferring assets; (iii) financial instruments that embody an obligation that the issuer may settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation is predominately based on a fixed amount, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares; and (iv) certain freestanding financial instruments.  SFAS No. 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  Adoption of SFAS No. 150 on July 1, 2003, did not have a significant impact on the Company’s financial statements.

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LANDMARK BANCORP, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General.  Landmark Bancorp, Inc. is a one-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 Stock Market National Market System (symbol “LARK”).  Landmark National Bank is dedicated to providing quality financial and banking services to its local communities and continues to originate commercial real estate and non-real estate loans, small business loans, residential mortgage loans, consumer loans, and home equity loans.

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.  Our 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.

Our accounting principles and the methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry.  Critical accounting policies relate to loans and related earnings, investment securities and income taxes.  A description of these policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 2, Summary of Significant Accounting Policies in the Notes included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Summary of Results.  Net earnings for the three months ended June 30, 2003, increased $36,000, or 3.0%, to $1.2 million as compared to the three months ended June 30, 2002.  This improvement in net earnings was generally attributable to increased fees and service charges and increased gains on sale of loans.

Net earnings for the six months ended June 30, 2003, increased $401,000, or 18.8%, to $2.5 million as compared to the six months ended June 30, 2002.  This improvement in net earnings was generally attributable to increased fees and service charges and increased gains on sale of loans which was offset by a reduction of net interest income and an increase in the provision.

The three months ended June 30, 2003, resulted in diluted earnings per share of $0.61 compared to $0.55 for the same period in 2002.  Return on average assets was 1.49% for the period compared to 1.43% for the same period in 2002.  Return on average stockholders’ equity was 11.62% for the period compared to 12.06% for the same period in 2002.

The six months ended June 30, 2003, resulted in diluted earnings per share of $1.27 compared to $0.98 for the same period in 2002.  Return on average assets was 1.55% for the period compared to 1.27% for the same period in 2002.  Return on average stockholders’ equity was 12.26% for the period compared to 10.75% for the same period in 2002.

We continued our stock repurchase program during the first six months of 2003, resulting in the repurchase of an additional 34,841 shares.  As of June 30, 2003, we held 182,872 shares as treasury stock at an average cost per share of $22.41.

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

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

Interest Income.  Interest income for the three months ended June 30, 2003, decreased $644,000, or 13.0%, to $4.3 million from $5.0 million in the same period of 2002.  This decrease was partially related to the decrease in interest rates experienced as interest earning assets repriced during 2002 and throughout the second quarter of 2003.  Also contributing to the decrease was a decline in average loans for the quarter ended June 30, 2003, which were $218.2 million, compared to $232.9 million for the quarter ended June 30, 2002.  The decline was primarily the result of refinancings and paydowns in our residential mortgage portfolio.  Offsetting the decline attributable to lower loans outstanding was an increase in average investment securities from $85.1 million for the quarter ended June 30, 2002, to $87.6 million for the quarter ended June 30, 2003.

Interest income for the six months ended June 30, 2003, decreased $1.1 million, or 10.5%, to $8.9 million from $10.0 million in the same period of 2002.  This decrease was partially related to the decrease in interest rates experienced as interest earning assets repriced during 2002 and the first six months of 2003.  Also contributing to the decrease was a continued decline in average loans for the first six months of 2003, which were $221.2 million, compared to $234.9 million for the first six months of 2002.  The decline was primarily the result of refinancings and paydowns in our residential mortgage portfolio.  Offsetting the decline attributable to lower loans outstanding was an increase in average investment securities from $82.1 million for the six months ended June 30, 2002, to $88.5 million for the six months ended June 30, 2003.

Interest Expense.  Interest expense during the three months ended June 30, 2003, decreased $328,000, or 18.4%, as compared to the same period of 2002.  For the three months ended June 30, 2003, interest expense on deposits decreased $281,000, or 19.5%, and interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Topeka, decreased $47,000, or 13.8%.  This decrease in interest expense resulted primarily from the decline in interest rates.  Reduced borrowings from the Federal Home Loan Bank precipitated the reduced interest expense on borrowings.

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Interest expense during the six months ended June 30, 2003, decreased $856,000, or 22.2%, as compared to the same period of 2002.  For the six months ended June 30, 2003, interest expense on deposits decreased $766,000, or 24.1%, and interest expense on borrowings, consisting of advances from the Federal Home Loan Bank of Topeka, decreased $90,000, or 13.2%.  This decrease in interest expense resulted primarily from the decline in interest rates.  Reduced borrowings from the Federal Home Loan Bank precipitated the reduced interest expense on borrowings.

Net Interest Income.  Net interest income for the three months ended June 30, 2003, totaled $2.9 million, a 10.0% decrease, as compared to $3.2 million for the three months ended June 30, 2002.  Average earning assets during the second quarter of 2003 totaled $309.6 million, versus $319.4 million during the second quarter of 2002.  The net interest margin on earning assets was 3.70% for the first six months of 2003, down from 3.99% during the second quarter of 2002.  The refinancings and paydowns in the residential mortgage portfolio exceeded the commercial loan growth during 2002 and throughout the second quarter of 2003, resulting in the excess liquidity being invested into lower yielding investment securities.  In addition, the prolonged low-rate environment is causing the net interest margin to compress as assets continue to reprice with little room left for liability repricing.

Net interest income for the six months ended June 30, 2003, totaled $5.9 million, a 3.2% decrease, as compared to $6.1 million for the six months ended June 30, 2002.  Average earning assets during the first six months of 2003 totaled $312.4 million, versus $323.7 million during the same period of 2002.  The net interest margin on earning assets was 3.84% for the first six months of 2003, up slightly from 3.82% during the first six months of 2002.  The refinancings and paydowns in the residential mortgage portfolio exceeded the commercial loan growth during 2002 and the first six months of 2003, resulting in the excess liquidity being invested into lower yielding investment securities.  In addition, the prolonged low-rate environment is causing the net interest margin to compress as assets continue to reprice with little room left for liability repricing.

Provision for Loan Losses.  The provision for loan losses for the three months ended June 30, 2003, was $60,000, compared to a provision of $33,000 during the three months ended June 30, 2002.  Our continuous review of the loan portfolio prompted an increase in our provision, primarily as a result of increased commercial loan balances and some limited deterioration in the asset quality of the commercial and consumer loan portfolios as a result of poor economic conditions.  At June 30, 2003, and December 31, 2002, the allowance for loan losses was $2.5 million and $2.6 million, or 1.2% and 1.1%, respectively, of gross loans outstanding.  The provision for loan losses for the six months ended June 30, 2003, was $120,000 compared to a provision of $66,500 for the same period in 2002.

Non-interest Income.  Non-interest income increased $384,000, or 44.6%, for the three months ended June 30, 2003, to $1.2 million compared to the three months ended June 30, 2002.  The increase in non-interest income reflected increased fees and service charges from $482,000 for the three months ended June 30, 2002, to $671,000 for the three months ended June 30, 2003, relating primarily to the enhancement of our fee-based services and product offerings during 2002.  Also contributing to the increase in non-interest income was an improvement of 109.2% in gains on sale of loans from $235,000 for the three months ended June 30, 2002, to $492,000 for the three months ended June 30, 2003, as residential mortgage financing activity increased due to the low home mortgage rates.  Mortgage refinancing activity is expected to diminish during 2003 as many mortgage holders have already taken advantage of the low interest rates favorable for mortgage originations.

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Non-interest income increased $994,000, or 62.4%, for the six months ended June 30, 2003, to $2.6 million compared to the six months ended June 30, 2002.  The increase in non-interest income reflected increased fees and service charges from $882,000 for the six months ended June 30, 2002, to $1.3 million for the six months ended June 30, 2003, relating primarily to the enhancement of our fee-based services and product offerings during 2002.  Also contributing to the increase in non-interest income was an improvement of 132.1% in gains on sale of loans from $485,000 for the six months ended June 30, 2002, to $1.1 million for the six months ended June 30, 2003, as residential mortgage financing activity increased due to the low home mortgage rates.  Mortgage refinancing activity is expected to diminish during the remainder of 2003 as many mortgage holders have already taken advantage of the low interest rates favorable for mortgage originations.

Non-interest Expense.  Non-interest expense increased $83,000, or 3.8%, to $2.3 million for the three months ended June 30, 2003, compared to the same period in 2002.  The increase in non-interest expense was primarily related to an increase of $30,000 in occupancy and equipment expense and an increase of $29,000 in amortization expense for the three months ended June 30, 2003, compared to the three months ended June 30, 2002.  The increase in occupancy and equipment expense was primarily related to the depreciation of our enhanced computer system while amortization expense increased as prepayment speeds on our mortgage servicing portfolio have accelerated.

Non-interest expense increased $220,000, or 5.0%, to $4.6 million for the six months ended June 30, 2003, as compared to the same period in 2002.  The increase in non-interest expense was primarily related to an increase of $58,000 in professional fees, a $56,000 increase in occupancy and equipment expense and an increase of $50,000 in amortization expense for the six months ended June 30, 2003, compared to the six months ended June 30, 2002.  The increase in occupancy and equipment expense was primarily related to the depreciation of our enhanced computer system while amortization expense increased as prepayment speeds on our mortgage servicing portfolio have accelerated.  The increase in professional fees was primarily due to legal fees incurred related to securing our “Landmark” trade name.

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Income Tax Expense.  Income tax expense for the three months ended June 30, 2003, decreased $78,000, or 12.7%, from $615,000 for the three months ended June 30, 2002.  The decrease in income tax expense for the three months ended June 30, 2003, resulted primarily from revised projections regarding investment tax credits.  The effective tax rate for the second quarter of 2003 was 30.7% compared to 34.3% for the second quarter of 2002.  The reduction in the effective tax rate for the second quarter of 2003 as compared to the second quarter of 2002 resulted primarily from the revised projections related to investment tax credits.

Income tax expense for the six months ended June 30, 2003, increased $124,000, or 11.3%, from $1.1 million for the six months ended June 30, 2002.  The increase in income tax expense for the six months ended June 30, 2003, resulted primarily from an increase in taxable income.    The effective tax rate for the six months ended June 30, 2003, was 32.6% compared to 34.0% for the same period of 2002.  The reduction in the effective tax rate for the first six months of 2003 as compared to the first six months of 2002 resulted from an increased level of non-taxable municipal investments and from revised projections related to investment tax credits.

Asset Quality and Distribution.  Total assets declined to $327.7 million at June 30, 2003, compared to $341.3 million at December 31, 2002.  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, decreased $16.3 million during the six months ended June 30, 2003.  The decline was primarily the result of refinancings and paydowns in our residential mortgage portfolio.  Our loan portfolio composition continues to diversify as a result of pay downs and our planned expansion of commercial lending activities.  This is evidenced by our one-to-four family residential real estate loans comprising 44.7% of total loans as of December 31, 2002, and 35.8% of total loans as of June 30, 2003.

Our primary investing activities are the origination of mortgage, consumer, and commercial loans and the purchase of investment and mortgage-backed securities.  Generally, we originate long- term, fixed-rate, residential mortgage loans for immediate sale in the secondary market and do not originate and warehouse those loans for resale in order to speculate on interest rates.

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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 the quality of the loan portfolio continues to be strong as evidenced by the small number and amount of loans past due one month or more.  As of June 30, 2003, loans with a balance of $1.1 million were on non-accrual status, or 0.51% of total loans, compared to a balance of $925,000 loans on non-accrual status, or 0.40% of total loans, as of December 31, 2002.  In addition, the ratio of non-performing assets as a percentage of total assets remained relatively flat at 0.43% as of June 30, 2003, compared to 0.41% as of December 31, 2002.

Residential home loans comprised 21.7% of the $1.1 million non-accrual balance at June 30, 2003.  We have historically incurred minimal losses on mortgage loans based upon collateral values.  We have experienced some isolated asset quality deterioration relating to the commercial and consumer loan portfolios during the second quarter of 2003 as a result of the current economic downturn.  We feel that these isolated instances have been appropriately addressed as either charges against the allowance for loan losses during the quarter ended June 30, 2003, or through the increased provisions to the reserve during the past six months.

We have a concern for the outlook of the economy during the remainder of 2003.  A slowdown in economic activity beginning in 2001 severely impacted several major industries as well as the economy as a whole.  Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable.  In addition, consumer confidence may be negatively impacted by the recent slowness in economic activity.  These events could adversely affect cash flows for both commercial and individual borrowers, as a result of which, we could experience increases in problem assets, delinquencies and losses on loans.  Many financial institutions have experienced an increase in non-performing assets during this difficult economic period, as even well-established business borrowers have developed cash flow, profitability and other business-related problems.  We believe that the allowance for losses on loans at June 30, 2003, was adequate.  While 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.

Liability Distribution.  Total deposits decreased $9.4 million to $254.9 million at June 30, 2003, from $264.3 million at December 31, 2002.  Borrowings decreased $777,000 to $25.4 million at June 30, 2003, from $26.2 million at December 31, 2002.

Non-interest bearing demand accounts at June 30, 2003, were $20.7 million, or 8.1% of deposits, compared to $23.4 million, or 8.9% of deposits, at December 31, 2002.  Certificates of deposit decreased to $143.3 million at June 30, 2003, from $147.4 million at December 31, 2002.  Money market and NOW demand accounts decreased to $76.2 million at June 30, 2003, from $78.4 million at December 31, 2002, and were 29.9% of total deposits.  Savings accounts decreased to $14.8

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million at June 30, 2003, from $15.0 million at December 31, 2002.  The reduction of certificate of deposit is reflective of our excess liquidity position in that we have not bid aggressively on public deposits during the past six months.

Certificates of deposit at June 30, 2003, which were scheduled to mature in one year or less, totaled $82.3 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, 2003, for the periods indicated.

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 $103.6 million at June 30, 2003, and $100.7 million at December 31, 2002.  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 the management strategy.  Excess funds are generally invested in short-term investments.  In the event funds are required beyond the 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, 2003, we had outstanding Federal Home Loan Bank advances of $25.2 million and had no borrowings outstanding on our line of credit with the Federal Home Loan Bank.  At June 30, 2003, our total borrowings capacity with the Federal Home Loan Bank was $66.3 million.

At June 30, 2003, we had outstanding loan commitments of $40.8 million.  We anticipate that sufficient funds will be available to meet current loan commitments.  These commitments consist of letters of credit, unfunded lines of credit and commitments to fund loans.

Capital.  The Federal Reserve Board has established capital requirements for bank holding companies which generally parallel the capital requirements for national banks under the Office of the Comptroller of the Currency regulations.  The regulations provide that such standards will generally

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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, 2003, we continued to maintain a sound leverage ratio of 11.8% and a total risk based capital ratio of 19.8%.  As shown by the following table, our capital exceeded the minimum capital requirements at June 30, 2003 (dollars in thousands):

At June 30, 2003, our subsidiary bank continued to maintain a sound leverage ratio of 10.8% and a total risk based capital ratio of 18.2%.  As shown by the following table, our bank’s capital exceeded the minimum capital requirements at June 30, 2003 (dollars in thousands):

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, 2003, we were rated “well capitalized”, which is the highest rating available under this capital-based rating system.

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LANDMARK BANCORP, INC. AND SUBSIDIARY

QUANTITATIVE AND QUALITATIVE DISCLOSURES

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 December 31, 2002, and forecasting volumes for the twelve-month projection.  This position is then subjected to a shift in interest rates of 100 and 200 basis points rising and 100 basis points falling with an impact to our net interest income on a one year horizon as follows:

We believe that no significant changes in our interest rate sensitivity position have occurred since December 31, 2002.  We also believe we are appropriately positioned for future interest rate movements, although we may experience some fluctuations in net interest income due to short-term timing differences between the repricing of assets and liabilities.

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.

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

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

•                                         The economic impact of past and future terrorist attacks, acts of war or threats thereof,   and the response of the 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.

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

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

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

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

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

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

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

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

•                                         Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

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

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

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

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

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LANDMARK BANCORP, INC. AND SUBSIDIARY

CONTROLS AND PROCEDURES

Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2003.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.

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PART II

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 2.                  CHANGES IN SECURITIES.

None

ITEM 3.                  DEFAULTS UPON SENIOR SECURITIES.

None

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

On May 21, 2003, the annual meeting of Landmark Bancorp, Inc. stockholders was held.  At the meeting, Richard Ball, Susan E. Roepke and C. Duane Ross were elected to serve as Class II directors with terms expiring in 2006.  Continuing as Class I directors (term expires in 2005) are Brent A. Bowman, Joseph L. Downey and David H. Snapp and continuing as Class III directors (term expires in 2004) 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 public accountants for the year ending December 31, 2003.

There were 1,993,465 shares of common stock eligible to vote at the annual meeting.  The voting on each item at the annual meeting was as follows:

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ITEM 5.                  OTHER INFORMATION.

None

ITEM 6.                  EXHIBITS AND REPORTS ON FORM 8-K.

A.            Exhibits

B.            Reports on Form 8-K

A report on Form 8-K was filed on July 31, 2003, to report pursuant to Item 12 that the Company had issued a press release announcing earnings for the quarter and six months ended June 30, 2003, and the declaration of a cash dividend to stockholders.

A report on Form 8-K was filed on April 30, 2003, to report pursuant to Item 12 that the Company had issued a press release announcing earnings for the three months ended March 31, 2003, and the declaration of a cash dividend to stockholders.

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SIGNATURES

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

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