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MCBK > SEC Filings for MCBK > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for MADISON COUNTY FINANCIAL, INC.

Form 10-Q for MADISON COUNTY FINANCIAL, INC.


13-Aug-2013

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 six months ended June 30, 2013 and 2012 is intended to assist in understanding the financial condition and results of operations of the Company 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 in 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;

Madison County Financial, Inc.
Form 10-Q

? 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 Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on March 28, 2013.

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

Total assets increased $12.7 million, or 4.8%, to $280.0 million at June 30, 2013 from $267.3 million at December 31, 2012. The increase was due primarily to increases in cash and cash equivalents, investment securities classified as available for sale, and investment securities classified as held to maturity, offset in part by a decrease in net loans and interest receivable. The decrease in net loans and the increase in cash and cash equivalents resulted primarily from normal seasonal pay-downs and normal annual loan payments on agricultural real estate loans. Investment securities increased as we used funds received from loan pay-downs to purchase these securities.

Madison County Financial, Inc.
Form 10-Q

Net loans decreased $10.4 million, or 5.0%, to $196.7 million at June 30, 2013, from $207.2 million at December 31, 2012, as we experienced a decrease in all loan categories. Agricultural and commercial non-real estate loans decreased $8.2 million, or 15.3%, to $45.4 million at June 30, 2013, from $53.6 million at December 31, 2012, along with a slight decrease of $492,000, or 0.5%, in agricultural real estate loans, to $96.1 million at June 30, 2013, from $96.6 million at December 31, 2012, which resulted from seasonal loan paydowns relating primarily to the cash flow cycle of our farming customers. One- to four-family residential mortgages decreased $585,000, or 1.6%, to $35.4 million at June 30, 2013, from $36.0 million at December 31, 2012, due primarily to the refinancing and sale of these loans and our decision not to actively compete for these loans in the current interest rate environment. Commercial and multi-family mortgage loans decreased $332,000, or 1.6%, to $20.9 million at June 30, 2013, from $21.2 million at December 31, 2012, and consumer loans decreased $329,000, or 6.9%, to $4.4 million at June 30, 2013, from $4.7 million at December 31, 2012.

Investment securities classified as available for sale increased $1.1 million, or 12.4%, to $10.1 million at June 30, 2013, from $9.0 million at December 31, 2012 and investment securities classified as held to maturity increased $5.6 million, or 22.2%, to $30.6 million at June 30, 2013, from $25.0 million at December 31, 2012, as we used funds received from loan pay-downs and the additional capital raised in the public stock offering which closed October 3, 2012, to purchase these securities.

Accrued interest receivable on loans decreased $1.0 million, or 25.0%, to $2.9 million at June 30, 2013, from $3.8 million at December 31, 2012, due to the decrease in net loans at June 30, 2013 as compared to December 31, 2012, the timing of interest payments due on our loans, and the decrease in the average yield on loans to 5.09% at June 30, 2013, from 5.63% at December 31, 2012.

Deposits increased $11.8 million, or 6.0%, to $207.0 million at June 30, 2013, from $195.2 million at December 31, 2012, due primarily to a net increase in core deposits. Interest-bearing checking and money market savings accounts increased $8.3 million, or 7.6%, and $4.6 million, or 11.3%, respectively, at June 30, 2013, from December 31, 2012, offset by a slight decrease in noninterest-bearing checking of $94,000, or 0.5%, at June 30, 2013, from December 31, 2012. We believe the net increase in our core deposits resulted from our continued efforts to build relationships with our existing customers as well as our marketing efforts with new customers. Certificates and time deposits decreased $1.1 million, or 3.7%, to $27.2 million at June 30, 2013, from $28.3 million at December 31, 2012, reflecting customer preference for more liquid transaction accounts rather than longer term deposits 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 remained at $6.3 million at June 30, 2013 from $6.3 million at December 31, 2012. We continue to utilize borrowings as an alternative funding source, and 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 under our Line of Credit.

Total stockholders' equity increased $541,000, or 0.9%, to $62.6 million at June 30, 2013, from $62.1 million at December 31, 2012. The increase resulted primarily from net income of $1.5 million during the six months ended June 30, 2013, offset by an annual cash dividend of $0.28 per share, for an aggregate of $826,000, that was declared and paid during the period. In addition, accumulated other comprehensive income declined by $210,000.

Madison County Financial, Inc.
Form 10-Q

Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012

General. Net income decreased $170,000, or 18.7%, to $740,000 for the three months ended June 30, 2013, from $910,000 for the three months ended June 30, 2012. The decrease reflected an increase in our provision for loan losses and an increase in other expense, offset in part by an increase in net interest income, an increase in other income and a decrease in income tax expense during the 2013 quarter.

Interest and Dividend Income. Interest and dividend income increased $44,000, or 1.6%, to $2.8 million for the quarter ended June 30, 2013 from $2.8 million for the quarter ended June 30, 2012. The increase reflected an increase in average interest-earning assets to $270.6 million for the 2013 quarter compared to $221.9 million for the 2012 quarter, offset by a decrease in the average yield on interest-earning assets to 4.19% for the 2013 quarter from 5.04% for the 2012 quarter, as the 2013 quarter included a higher percentage of assets held in cash and cash equivalents as a result of our public stock offering which closed October 3, 2012.

Interest income and fees on loans decreased $6,000, or 0.2%, to $2.5 million for the three months ended June 30, 2013, from $2.5 million for the three months ended June 30, 2012, due to a decrease in the average yield on loans to 5.05% during the 2013 quarter from 5.50% during the 2012 quarter, reflecting lower market interest rates, offset by an increase in average loans outstanding quarter to quarter. Interest income on taxable investment securities decreased $5,000, or 5.6%, to $85,000 for the 2013 quarter from $90,000 for the 2012 quarter. Interest income on non-taxable investment securities increased $42,000, or 25.1%, to $209,000 for the quarter ended June 30, 2013 from $167,000 for the quarter ended June 30, 2012, reflecting an increase in the average balance of such securities to $25.7 million during the 2013 quarter from $16.9 million during the 2012 quarter. This increase was offset in part by a decrease in the average yield on such securities to 3.27% from 3.97%, quarter to quarter, reflecting lower market interest rates.

Interest Expense. Interest expense decreased $39,000, or 8.4%, to $427,000 for the three months ended June 30, 2013 from $466,000 for the three months ended June 30, 2012. The decrease reflected a decrease in the average rate paid on interest-bearing liabilities in the 2013 quarter to 0.86% compared to 1.02% during the 2012 quarter, offset in part by an increase in the average balance of interest-bearing liabilities to $198.6 million for the 2013 quarter from $183.8 million for the 2012 quarter.

Interest expense on interest-bearing deposits decreased $37,000, or 9.0%, to $373,000 for the quarter ended June 30, 2013 from $410,000 for the quarter ended June 30, 2012, as the average rate paid on these deposits decreased to 0.78% during the 2013 quarter from 0.93% during the 2012 quarter, offset in part by a $15.2 million increase in the average balance of these deposits to $192.3 million during the 2013 quarter from $177.2 million during the 2012 quarter. Interest expense on borrowings decreased $2,000, or 3.6%, to $54,000 during the three months ended June 30, 2013, from $56,000 during the three months ended June 30, 2012, reflecting a decrease in the average balance of borrowings to $6.3 million for the 2013 quarter from $6.6 million for the 2012 quarter, offset in part by a slightly higher rate paid on borrowings to 3.45% from 3.41% quarter to quarter, reflecting a larger percentage of long-term borrowings during the 2013 quarter as compared to the 2012 quarter.

Madison County Financial, Inc.
Form 10-Q

Net Interest Income. Net interest income increased $83,000, or 3.6%, to $2.4 million for the three months ended June 30, 2013, from $2.3 million for the three months ended June 30, 2012, reflecting a $33.9 million increase in our average net interest-earning assets, to $72.0 million for 2013 from $38.1 million for 2012, offset by a decrease in our net interest rate spread to 3.33% for the 2013 quarter from 4.02% for the 2012 quarter, and a decrease in our net interest margin to 3.56% for the 2013 quarter from 4.19% for the 2012 quarter, as the 2013 quarter included a higher percentage of assets held in cash and cash equivalents as a result of our public stock offering which was closed October 3, 2012. The increase in our average net interest-earning assets resulted primarily from the additional capital raised in the conversion stock offering and earnings which were reinvested in investment securities and other interest-earning assets. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 136.2% for the 2013 quarter from 120.8% for the 2012 quarter. The decreases in our net interest rate spread and net interest margin reflected the 0.85% decrease in the average yield on our interest-earning assets which was partially offset by a 16 basis point decrease in the average cost of our interest-bearing liabilities.

Provision for Loan Losses. We recorded a provision for loan losses of $255,000 for the three months ended June 30, 2013, an increase of $180,000, or 240.0%, from our provision of $75,000 for the three months ended June 30, 2012. Our determination to increase our provision resulted in part from management's consideration of the continuing increases in the cost of agricultural real estate in our market area as well as the increases in the costs of crop production. Furthermore, effective December 31, 2011, the federal government allowed a major ethanol subsidy to expire which could adversely impact the price of corn and thus, adversely impact our agricultural borrowers and the risks associated with these types of loans.

The provision for loan losses for the three months ended June 30, 2013 reflected charge-offs of $20,000 and no recoveries. The allowance for loan losses was $5.4 million, or 2.7% of total loans, including loans held for sale, compared to $4.3 million, or 2.3% of total loans, including loans held for sale, at June 30, 2012. Total nonperforming loans were $452,000 at June 30, 2013 compared to $380,000 at June 30, 2012. As a percentage of nonperforming loans, the allowance for loan losses was 1,202% at June 30, 2013 compared to 1,131% at June 30, 2012.

Other Income. Other income increased $8,000, or 1.8%, to $447,000 for the three months ended June 30, 2013, from $439,000 for the three months ended June 30, 2012. The increase was due primarily to an increase in service charges on deposit accounts and an increase in loan servicing income offset by a decrease in gains on sales of loans, quarter to quarter. The increase in loan servicing income reflects the continuing refinancing activity and the steady growth in the portfolio of serviced loans. The decline in gains on sales of loans resulted from a decline in the volume of loans sold, quarter to quarter.

Madison County Financial, Inc.
Form 10-Q

Other Expense. Other expense increased $172,000, or 12.2%, to $1.6 million for the three months ended June 30, 2013, from $1.4 million for the three months ended June 30, 2012, due primarily to a $155,000 increase in salaries and employee benefits expense. Salaries and employees benefits increased due to a $48,000 increase in ESOP-related expenses, and other normal annual salary increases and payouts under our benefit plans.

Income Tax Expense. The provision for income taxes was $269,000 for the three months ended June 30, 2013, compared to $360,000 for the three months ended June 30, 2012, reflecting a decrease in pretax income. Our effective tax rate was 26.7% for the quarter ended June 30, 2013 compared to 28.4% for the quarter ended June 30, 2012. 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 Six Months Ended June 30, 2013 and 2012

General. Net income decreased $547,000, or 26.8%, to $1.5 million for the six months ended June 30, 2013, from $2.0 million for the six months ended June 30, 2012. The decrease reflected a decrease in net interest income, an increase in our provision for loan losses and an increase in other expense, offset in part by a slight increase in other income and a decrease in income tax expense during the 2013 period.

Interest and Dividend Income. Interest and dividend income decreased $181,000, or 3.1%, to $5.7 million for the six months ended June 30, 2013 from $5.9 million for the six months ended June 30, 2012. The decrease resulted from a decrease in the average yield on interest-earning assets to 4.26% for the 2013 period from 5.40% for the 2012 period, offset by an increase in average interest-earning assets to $269.3 million for the 2013 period compared to $218.9 million for the 2012 period. The decrease in the average yield on interest-earning assets for the 2013 period resulted from a higher percentage of assets held in cash and cash equivalents as a result of our public stock offering which was closed October 3, 2012.

Interest income and fees on loans decreased $299,000, or 5.6%, to $5.1 million for the six months ended June 30, 2013, from $5.4 million for the six months ended June 30, 2012, due to a decrease in the average yield on loans to 5.09% during the 2013 period from 5.92% during the 2012 period, reflecting lower market interest rates, offset by an increase in average loans outstanding period to period. Interest income on taxable investment securities decreased $6,000 to $168,000 for the 2013 period from $174,000 for the 2012 period, offset in part by an increase in the average yield on such securities to 2.76% from 2.61%, period to period. Interest income on non-taxable investment securities increased $101,000, or 33.1%, to $406,000 for the six months ended June 30, 2013, from $305,000 for the six months ended June 30, 2012, reflecting an increase in the average balance of such securities to $24.2 million during the 2013 period from $15.2 million during the 2012 period. This increase was offset in part by a decrease in the average yield on such securities to 3.37% from 4.04%, period to period, reflecting lower market interest rates.

Madison County Financial, Inc.
Form 10-Q

Interest Expense. Interest expense decreased $60,000, or 6.5%, to $864,000 for the six months ended June 30, 2013 from $924,000 for the six months ended June 30, 2012. The decrease reflected a decrease in the average rate paid on total interest-bearing liabilities for the six months ended June 30, 2013, to 0.88% compared to 1.02% for the six months ended June 30, 2012, offset by an increase of $16.5 million in the average balance of these interest-bearing liabilities to $198.2 million for the 2013 period from $181.7 million for the 2012 period.

Interest expense on interest-bearing deposits decreased $55,000, or 6.8%, to $756,000 for the six months ended June 30, 2013 from $811,000 for the six months ended June 30, 2012, as the average rate paid on these deposits decreased to 0.79% during the 2013 period from 0.94% during the 2012 period, offset in part by an increase of $17.8 million in the average balance of these deposits to $191.9 million from $174.1 million, period to period. Interest expense on borrowings decreased $5,000, or 4.4%, to $108,000 during the six months ended June 30, 2013, from $113,000 for the six months ended June 30, 2012, reflecting a decrease in the average balance of borrowings to $6.3 million for the 2013 period from $7.6 million for the 2012 period, offset in part by a higher rate paid on such borrowings to 3.45% from 3.00%, period to period, reflecting a larger percentage of long-term borrowings during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.

Net Interest Income. Net interest income decreased $121,000, or 2.4%, to $4.8 million for the six months ended June 30, 2013, from $5.0 million for the six months ended June 30, 2012, reflecting a decrease in our net interest rate spread to 3.38% for the 2013 period from 4.38% for the 2012 period, as the 2013 period included a higher percentage of assets held in cash and cash equivalents as a result of our public stock offering which was closed October 3, 2012, and a decrease in the net interest margin to 3.61% for the 2013 period from 4.55% for the 2012 period, offset by an increase in our average net interest-earning assets to $71.1 million for the 2013 period from $37.2 million for the 2012 period. The increase in our average net interest-earning assets resulted primarily from the additional capital raised in the conversion stock offering and earnings which were reinvested in loans, investment securities and other interest-earning assets. The decreases in our net interest rate spread and net interest margin reflected the 1.14% decrease in the average yield on our interest-earning assets, offset in part by a 14 basis point decrease in the average cost of our interest-bearing liabilities. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 135.9% for the 2013 period from 120.5% for the 2012 period.

Provision for Loan Losses. We recorded a provision for loan losses of $510,000 for the six months ended June 30, 2013, an increase of $325,000, or 175.7%, from our provision of $185,000 for the six months ended June 30, 2012. Our determination to increase our provision resulted in part from management's consideration of the continuing increases in the cost of agricultural real estate in our market area as well as the increases in the costs of crop production. Furthermore, effective December 31, 2011, the federal government allowed a major ethanol subsidy to expire which could adversely impact the price of corn and thus, adversely impact our agricultural borrowers and the risks associated with these types of loans.

Madison County Financial, Inc.
Form 10-Q

The provision for loan losses for the six months ended June 30, 2013 reflected charge-offs of $20,000 and no recoveries. The allowance for loan losses was $5.4 million, or 2.7% of total loans, including loans held for sale, at June 30, 2013, compared to $4.3 million, or 2.3% of total loans, including loans held for sale, at June 30, 2012. Total nonperforming loans were $452,000 at June 30, 2013 compared to $380,000 at June 30, 2012. As a percentage of nonperforming loans, the allowance for loan losses was 1,202% at June 30, 2013 compared to 1,131% at June 30, 2012.

Other Income. Other income increased slightly by $1,000, or 0.1%, to $905,000 for the six months ended June 30, 2013, from $904,000 for the six months ended June 30, 2012. The increase was due primarily to an increase in service charges on deposit accounts and an increase in loan servicing income offset by a decrease in gains on sales of loans. The increase in loan servicing income reflects the continuing refinancing activity and the steady growth in the portfolio of serviced loans. The decline in gains on sales of loans resulted from stronger market competition and a compression in the pricing offered by the purchasers of sold loans, offset by a slight increase in the volume of loans sold.

Other Expense. Other expense increased $393,000, or 14.1%, to $3.2 million for the six months ended June 30, 2013, from $2.8 million for the six months ended June 30, 2012, due primarily to a $233,000 increase in salaries and employee benefits expense and a $120,000 increase in professional fees. Salaries and employees benefits increased due to an $89,000 increase in ESOP-related expenses, and other normal annual salary increases and payouts under our benefit plans. Professional fees increased as a result of additional public company-required costs and the timing of such services, period to period.

Income Tax Expense. The provision for income taxes was $555,000 for the six months ended June 30, 2013, compared to $846,000 for the six months ended June 30, 2012, reflecting a decrease in pretax income. Our effective tax rate was 27.1% for the six months ended June 30, 2013 compared to 29.3% for the six months ended June 30, 2012. 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 and second calendar quarters 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.

Madison County Financial, Inc.
Form 10-Q

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 $3.1 million and $4.1 million for the six months ended June 30, 2013 and 2012, respectively. Net cash provided by investing activities, which consists primarily of net change in loans receivable and net change in purchases of/proceeds from maturities of investment securities was $2.9 million and $1.7 million for the six months ended June 30, 2013 and 2012, respectively, principally due to a decrease in loans receivable and by purchases of investment securities in excess of maturities. Net cash provided by (used in) financing activities, which is comprised of net change in deposits and proceeds from and repayment of borrowings, was $11.0 million and $(7.4) million for the six months ended June 30, 2013 and 2012, respectively, and resulted primarily from the decline in short-term borrowings, and the declaration and payment of an annual cash dividend of $0.28 per share, offset by an increase in deposits.

At June 30, 2013, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $47.8 million, or 18.3% of adjusted total assets, which is above the required level of $10.4 million, or 4.0%; and total risk-based capital of $51.0 million, or 19.5% of risk-weighted assets, which is above the required level of $20.9 million, or 8.0%. Accordingly Madison County . . .

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