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MCBK > SEC Filings for MCBK > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for MADISON COUNTY FINANCIAL, INC.

Form 10-Q for MADISON COUNTY FINANCIAL, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Management's discussion and analysis of the financial condition and results of operations at and for three and nine months ended September 30, 2012 and 2011 is intended to assist in understanding the financial condition and results of operations of the MHC on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:

? statements of our goals, intentions and expectations;

? statements regarding our business plans, prospects, growth and operating strategies;

? statements regarding the asset quality of our loan and investment portfolios; and

? estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

? general economic conditions, either nationally or in our market areas, that are worse than expected;

? changes in government policy towards farming subsidies, and especially towards the production of ethanol which is highly dependent upon #2 Yellow Corn, the primary commodity produced in our market area;

? competition among depository and other financial institutions;

? our success in continuing to emphasize agricultural real estate and agricultural and commercial non-real estate loans;

? changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;

? adverse changes in the securities markets;


? changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;

? our ability to enter new markets successfully and capitalize on growth opportunities;

? changes in consumer spending, borrowing and savings habits;

? changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

? changes in our organization, compensation and benefit plans;

? loan delinquencies and changes in the underlying cash flows of our borrowers;

? changes in our financial condition or results of operations that reduce capital available to pay dividends; and

? changes in the financial condition or future prospects of issuers of securities that we own.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Madison County Financial, Inc.'s Prospectus dated August 10, 2012, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 20, 2012.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets increased $17.2 million, or 7.2%, to $255.9 million at September 30, 2012, from $238.7 million at December 31, 2011. The increase was primarily the result of an increase in cash and cash equivalents of $7.6 million, or 117.4%, to $14.0 million at September 30, 2012, from $6.5 million at December 31, 2011, and an increase in investment securities classified as held to maturity of $7.9 million, or 51.1%, to $23.3 million at September 30, 2012, from $15.4 million at December 31, 2011, primarily as a result of the investment of the stock conversion proceeds held in escrow of $26.9 million.

Net loans receivable increased $3.1 million, or 1.6%, to $192.1 million at September 30, 2012 from $189.0 million, at December 31, 2011. Agricultural and commercial non-real estate loans increased $5.5 million, or 11.7%, to $52.1 million at September 30, 2012, from $46.6 million at December 31, 2011. The increase resulted primarily from normal and seasonally expected advances for crop production on agricultural lines of credit. One- to four-family residential mortgages decreased $966,000 to $36.4 million at September 30, 2012, from $37.4 million at December 31, 2011, due primarily to refinancing and sale of these loans, and commercial real estate and multi-family loans decreased $550,000, or 2.6%, to $20.5 million at September 30, 2012, from $21.0 million at December 31, 2011. Other assets, consisting primarily of receivables, a deferred tax asset and capitalized stock conversion expenses, increased $1.7 million, or 79.3%, to $3.8 million at September 30, 2012, from $2.1 million at December 31, 2011 resulting from a $1.2 million increase in capitalized stock conversion expenses. Accrued interest receivable on investment securities, certificates of deposit owned and loans decreased $117,000, or 2.8%, to $4.0 million at September 30, 2012 from $4.1 million at December 31, 2011. The decrease resulted primarily from the timing of interest payments due on our loans, offset by an increase in net loans of $3.1 million, or 1.6%, to $192.1 million at September 30, 2012, from $189.0 million at December 31, 2011.


Core deposit intangible, which resulted from our November 2005 acquisition of First National Bank of Albion, decreased $135,000, or 13.7%, to $854,000 at September 30, 2012, from $989,000 at December 31, 2011.

Deposits increased $6.6 million, or 3.7%, to $185.8 million at September 30, 2012, from $179.2 million at December 31, 2011. Interest-bearing checking accounts and money market savings accounts increased $13.3 million, or 10.4%, at September 30, 2012, from December 31, 2011, while noninterest-bearing checking accounts decreased $1.8 million, or 11.4%, at September 30, 2012, from December 31, 2011, and certificates and time deposits decreased $5.0 million, or 14.0%, at September 30, 2012, from December 31, 2011. Customers continue to invest in transaction accounts rather than locking in deposits for longer terms in the current low interest rate environment.

We borrow periodically from the Federal Home Loan Bank of Topeka ("FHLB-Topeka") and the Federal Reserve Bank of Kansas City ("FRB-Kansas City"), and, as needed, to a lesser extent from the Bankers' Bank of the West. Although we expect advances from the FHLB-Topeka and short-term borrowings from FRB-Kansas City to remain an integral part of our funding strategy, our borrowings from the FHLB-Topeka and FRB-Kansas City decreased $20.6 million, or 76.6%, to $6.3 million at September 30, 2012, from $26.9 million at December 31, 2011. This decrease reflects our normal and expected liquidity profile due to the seasonal nature of loan pay-downs as well as our expectation to be able to use the stock conversion proceeds (which was consummated on October 3, 2012) for additional liquidity as necessary. Despite this decrease, we expect to continue to utilize borrowings as an alternative funding source. Our borrowings from the FHLB-Topeka generally consist of advances with laddered terms of up to 10 years, and our borrowings from the FRB-Kansas City are short-term borrowings related to our Line of Credit and Seasonal Borrowing Agreement.

Stock conversion proceeds in escrow increased to $26.9 million at September 30, 2012, from $0 at December 31, 2011. The stock conversion was completed on October 3, 2012.

Total equity increased $3.0 million, or 10.0%, to $33.1 million at September 30, 2012, from $30.1 million at December 31, 2011. The increase resulted primarily from net income of $3.0 million for the nine months ended September 30, 2012.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income decreased to $945,000 for the three months ended September 30, 2012, from $984,000 for the three months ended September 30, 2011. The decrease in net income resulted primarily from an increase in provision for loan losses and noninterest expense, offset in part by an increase in noninterest income, and a decrease in income tax expense.

Interest and Dividend Income. Interest and dividend income decreased $62,000, or 2.1%, to $2.9 million for the quarter ended September 30, 2012, from $3.0 million for the quarter ended September 30, 2011. The decrease reflected a decrease in the average yield on interest-earning assets to 5.10% for the 2012 quarter from 5.51% for the 2011 quarter, offset in part by an increase in average interest-earning assets to $226.8 million for the 2012 quarter compared to $214.4 million for the 2011 quarter.


Interest income and fees on loans decreased $113,000, or 4.1%, to $2.6 million for the three months ended September 30, 2012 from $2.7 million for the three months ended September 30, 2011, reflecting a decrease in the average yield on loans to 5.45% for the 2012 quarter from 5.84% for the 2011 quarter, offset in part by an increase in average loans outstanding to $192.3 million for the 2012 quarter from $187.1 million for the 2011 quarter. Interest income on taxable investment securities decreased to $89,000 for the 2012 quarter from $98,000 for the 2011 quarter, reflecting a decrease in the average balance of such securities to $11.3 million for the 2012 quarter from $14.4 million for the 2011 quarter. This decrease was offset in part by an increase in the average yield on such securities to 3.12% from 2.71%, quarter to quarter. Interest income on non-taxable investment securities increased $60,000, or 53.1%, to $173,000 for the quarter ended September 30, 2012, from $113,000 for the quarter ended September 30, 2012, reflecting an increase in the average balance of such securities to $18.9 million during the 2012 quarter from $11.1 million for the 2011 quarter. This increase was offset in part by a decrease in the average yield on such securities to 3.64% from 4.06%, quarter to quarter.

Interest Expense. Interest expense decreased $68,000, or 12.3%, to $484,000 for the three months ended September 30, 2012, from $552,000 for the three months ended September 30, 2011. The decrease reflected a decrease in the average rate paid on total interest-bearing liabilities in the 2012 quarter to 1.04% compared to 1.19% during the 2011 quarter, offset in part by a slight increase in the average balance of total interest-bearing liabilities to $184.6 million for the 2012 quarter from $184.1 million for the 2011 quarter.

Interest expense on interest-bearing deposits decreased $58,000, or 12.0%, to $426,000 for the quarter ended September 30, 2012, from $484,000 for the quarter ended September 30, 2011, as the average rate paid on these deposits decreased to 0.96% during the 2012 quarter from 1.19% during the 2011 quarter, offset by an increase of $14.8 million in the average balance of these deposits to $176.2 million for the quarter ended September 30, 2012, from $161.4 million for the quarter ended September 30, 2011. Interest expense on borrowings decreased $10,000, or 14.7%, to $58,000 during the three months ended September 30, 2012 from $68,000 during the three months ended September 30, 2011, reflecting a decrease in the average balance of borrowings for the 2012 quarter to $8.5 million from $22.7 million during the 2011 quarter, offset in part by higher rates paid on such borrowings to 2.72% from 1.19% quarter to quarter, reflecting a larger percentage of long-term borrowings during the 2012 quarter as compared to the 2011 quarter.

Net Interest and Dividend Income. Net interest and dividend income increased $6,000, or 0.2%, to $2.4 million for the three months ended September 30, 2012, from $2.4 million for the three months ended September 30, 2011. Our net interest rate spread decreased to 4.06% for the 2012 quarter from 4.32% for the 2011 quarter, and our net interest margin decreased to 4.25% for the third quarter of 2012 from 4.48% during the third quarter of 2011. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 122.8% for the 2012 quarter from 116.5% for the 2011 quarter. The decreases in our net interest rate spread and net interest margin reflected the decline in the average yield on our interest-earning assets, which was offset in part by an increase in the average balance of these assets, and further offset by the continuing decline in the cost of our deposits as the composition of our deposits has shifted to lower cost core deposits.

Provision for Loan Losses. We recorded a provision for loan losses of $250,000 for the three months ended September 30, 2012, an increase of $40,000, or 19.0%, from our provision of $210,000 for the three months ended September 30, 2011. The increase in our provision resulted primarily from the increase in net loans.

The provision for loan losses for the three months ended September 30, 2012, reflected no charge-offs or recoveries compared to the three months ended September 30, 2011, which reflected net recoveries of $1,000. The allowance for loan losses was $4.5 million, or 2.31% of total loans, including loans held for sale, at September 30, 2012, compared to $4.0 million, or 2.07% of total loans, including loans held for sale, at December 31, 2011. Total nonperforming loans were $220,000 at September 30, 2012, compared to $240,000 at December 31, 2011. As a percentage of nonperforming loans, the allowance for loan losses was 2,066% compared to 1,674% at December 31, 2011.


Other Income. Other income increased $104,000, or 23.0%, to $557,000 for the three months ended September 30, 2012, from $453,000 for the three months ended September 30, 2011. The increase in other income was due primarily to a $170,000 increase in gains on sales of mortgage loans, to $251,000 for the 2012 quarter from $81,000 for the 2011 quarter, as the proceeds from loan sales increased to $9.5 million during the 2012 quarter from $4.8 million for the 2011 quarter reflecting continuing refinancing activity and management's decision to continue to sell long-term, fixed-rate one-to four-family residential real estate loans in the current rate environment.

Other Expense. Other expense increased $164,000, or 13.1%, to $1.4 million for the three months ended September 30, 2012, from $1.2 million for the three months ended September 30, 2011. The increase was due primarily to increased salaries and employee benefits expense to $949,000 for the 2012 quarter from $799,000 for the 2011 quarter, reflecting normal annual salary increases and payouts under our benefits plans.

Income Tax Expense. The provision for income taxes was $372,000 for the three months ended September 30, 2012, compared to $427,000 for the three months ended September 30, 2011, reflecting a decrease in pretax income. Our effective tax rate was 28.2% for the 2012 quarter compared to 30.3% for the 2011 quarter. This difference resulted primarily from the levels of tax-exempt income derived from our municipal bond investment portfolio and from bank-owned life insurance.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

General. Net income increased to $3.0 million for the nine months ended September 30, 2012, from $2.7 million for the nine months ended September 30, 2011. The increase reflected higher net interest income and other income and a decrease in our interest expense and provision for loan losses during the 2012 period versus the 2011 period, offset partially by higher other expense.

Interest and Dividend Income. Interest and dividend income increased $86,000, or 1.0%, to $8.8 million for the nine months ended September 30, 2012, from $8.7 million for the nine months ended September 30, 2011. The increase reflected an increase in average interest-earning assets to $221.5 million for the nine months ended September 30, 2012 compared to $209.0 million for the nine months ended September 30, 2011, offset in part by a decrease in the average yield on interest-earning assets to 5.30% for the 2012 period from 5.57% for the 2011 period.

Interest income and fees on loans decreased $73,000, or 0.9%, to $8.0 million for the nine months ended September 30, 2012, from $8.1 million for the nine months ended September 30, 2011, reflecting a decrease in the average yield on loans to 5.75% for the 2012 period from 5.87% for the 2011 period, offset in part by a slight increase in average loans outstanding to $186.0 million for the 2012 period compared to $184.2 million for the 2011 period. There was no change in the interest income on taxable investment securities, with income of $263,000 reflected for the nine months ended September 30, 2012 and for the nine months ended September 30, 2011. Interest income on non-taxable investment securities increased $155,000, or 48.0%, to $478,000 for the nine months ended September 30, 2012, from $323,000 for the nine months ended September 30, 2011, reflecting an increase in the average balance of such securities to $16.4 million during the 2012 period from $10.4 million for the 2011 period. This increase was offset in part by a decrease in the average yield on such securities to 3.89% from 4.14%, period to period.

Interest Expense. Interest expense decreased $303,000, or 17.7%, to $1.4 million for the nine months ended September 30, 2012, from $1.7 million for the nine months ended September 30, 2011. The decrease reflected a decrease in the average rate paid on total interest-bearing liabilities for the nine months ended September 30, 2012, to 1.03% compared to 1.28% for the nine months ended September 30, 2011, offset in part by an increase in the average balance of total interest-bearing liabilities to $182.7 million for the 2012 period from $179.0 million for the 2011 period.


Interest expense on interest-bearing deposits decreased $272,000, or 18.0%, to $1.2 million for the nine months ended September 30, 2012, from $1.5 million for the nine months ended September 30, 2011, as the average rate paid on these deposits decreased to 0.95% during the 2012 period from 1.26% during the 2011 period, offset in part by an increase of $15.0 million in the average balance of these deposits to $174.8 million for the nine months ended September 30, 2012, from $159.8 million for the nine months ended September 30, 2011. Interest expense on borrowings decreased $31,000, or 15.3%, to $171,000 for the nine months ended September 30, 2012, from $202,000 for the nine months ended September 30, 2011, reflecting a decrease in the average balance of borrowings for the 2012 period to $7.9 million from $19.2 million for the 2011 period, offset in part by an increase in the average rate paid on borrowings to 2.90% during the 2012 period from 1.41% during the 2011 period, reflecting a larger percentage of long-term borrowings during the 2012 period as compared to the 2011 period.

Net Interest and Dividend Income. Net interest and dividend income increased $389,000, or 5.6%, to $7.4 million for the nine months ended September 30, 2012, from $7.0 million for the nine months ended September 30, 2011. Our net interest rate spread decreased to 4.27% for the 2012 period from 4.29% for the 2011 period, and our net interest margin decreased to 4.45% for the 2012 period from 4.47% during the 2011 period. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 121.3% for the 2012 period from 116.8% for the 2011 period. The decreases in our net interest rate spread and net interest margin reflected the decline in the average yield on our interest-earning assets, which was offset in part by an increase in the average balance of these assets, and further offset by the continuing decline in the cost of our deposits as the composition of our deposits has shifted to lower cost core deposits.

Provision for Loan Losses. We recorded a provision for loan losses of $435,000 for the nine months ended September 30, 2012, a decrease of $5,000, or 1.1%, from our provision of $440,000 for the nine months ended September 30, 2011.

The provision for loan losses for the nine months ended September 30, 2012, reflected no charge-offs, and net recoveries of $94,000 compared to the nine months ended September 30, 2011, which reflected recoveries of $4,000. The allowance for loan losses was $4.5 million, or 2.31% of total loans, including loans held for sale, at September 30, 2012, compared to $4.0 million, or 2.07% of total loans, including loans held for sale, at December 31, 2011. Total nonperforming loans were $220,000 at September 30, 2012, compared to $240,000 at December 31, 2011. As a percentage of nonperforming loans, the allowance for loan losses was 2,066% compared to 1,674% at December 31, 2011.

Other Income. Other income increased $359,000, or 32.6%, to $1.5 million for the nine months ended September 30, 2012, from $1.1 million for the nine months ended September 30, 2011. The increase in other income was due primarily to a $405,000 increase in gains on sales of mortgage loans, to $591,000 for the 2012 period from $186,000 for the 2011 period as the proceeds from loan sales increased to $25.5 million during the 2012 period from $11.4 million for the 2011 period.

Other Expense. Other expense increased $363,000, or 9.4%, to $4.2 million for the nine months ended September 30, 2012, from $3.8 million for the nine months ended September 30, 2011. The increase was due primarily to increased salaries and employee benefits expense which increased to $2.7 million for the 2012 period from $2.4 million for the 2011 period, reflecting normal annual salary increases and payouts under our benefit plans, an increase of $69,000 in professional and service fees to $111,000 for the 2012 period from $42,000 for the 2011 period reflecting additional costs associated with audits performed in preparation of conversion filings, and an increase of $74,000 in other expense reflecting normal expense increases, and an increase in our provision for the contingent liability related to sold loans. These increases were offset in part by a $35,000 decrease in federal deposit insurance premiums due to a change in how the premium is calculated.


Income Tax Expense. The provision for income taxes was $1.2 million for the nine months ended September 30, 2012, compared to $1.1 million for the nine months ended September 30, 2011, reflecting an increase in pretax income. Our effective tax rate was $28.9% for the 2012 period compared to 29.7% for the 2011 period. This difference resulted primarily from the levels of tax-exempt income derived from our municipal bond investment portfolio and from bank-owned life insurance.

Liquidity and Capital Resources

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sale of loans, proceeds from maturities and calls of securities, advances from the Federal Home Loan Bank-Topeka and borrowings from the Federal Reserve Bank of Kansas City, and to a lesser extent from the Bankers' Bank of the West, and other income including income from our insurance agency subsidiary. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Additionally, we historically have experienced significant increases in our deposits during the first calendar quarter of each year as a result of our farm customers depositing proceeds from the sale of agricultural commodities during this period. Similarly, our borrowings have historically increased during the fourth calendar quarter of each year in response to increased loan demand from our farm customers during this period, many of whom purchase their crop production supplies (seed, fertilizer, fuel and chemicals) during October through December.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.9 million and $2.9 million for the nine months ended September 30, 2012 and 2011, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in purchases of/proceeds from maturities of investment securities was $9.2 million and $9.3 million for the nine months ended September 30, 2012 and 2011, respectively, principally due to a decrease in loans receivable and by purchases of investment securities in excess of maturities and sales. Net cash used in financing activities, which is comprised of net change in deposits and proceeds from and repayment of borrowings, was $12.9 million and $6.6 million for the nine months ended September 30, 2012 and 2011, respectively, and resulted primarily from the decline in short-term borrowings offset by an increase in deposits, and an increase in stock conversion proceeds.

At September 30, 2012, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $31.2 million, or 13.1% of adjusted total assets, which is above the required level of $9.5 million, or 4.0%; and total risk-based capital of $34.2 million, or 14.3% of risk-weighted assets, which is above the required level of $19.1 million, or 8.0%. Accordingly Madison County Bank was categorized well capitalized at September 30, 2012. Management is not aware of any conditions or events since the most recent notification that would change our category.

At September 30, 2012, we had outstanding commitments to originate loans of $12.1 million and lines of credit of $25.2 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2012 totaled $23.4 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB-Topeka advances or FRB-Kansas City borrowings or raise interest rates on deposits to attract new accounts, which may result in higher

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