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MCBK > SEC Filings for MCBK > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for MADISON COUNTY FINANCIAL, INC.

Form 10-Q for MADISON COUNTY FINANCIAL, INC.


14-May-2014

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 months ended March 31, 2014 and 2013 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, 2013, as filed with the Securities and Exchange Commission on March 28, 2014.

Comparison of Financial Condition at March 31, 1014 and December 31, 2013

Total assets decreased $2.5 million, or 0.9%, to $287.6 million at March 31, 2014, from $290.1 million at December 31, 2013. The decrease was due primarily to a decrease in net loans and interest receivable and investment in Federal Home Loan Bank stock, offset by increases in cash and cash equivalents, investment securities classified as available for sale and bank-owned life insurance. The decrease in net loans and the increase in cash and cash equivalents resulted primarily from normal seasonal pay-downs from our farming customers and normal annual loan payments on agricultural real estate loans. Investment securities increased as we used the funds received from the pay-downs to purchase these securities.

Madison County Financial, Inc.
Form 10-Q

Net loans decreased $7.7 million, or 3.4%, to $216.7 million at March 31, 2014, from $224.3 million at December 31, 2013. Agricultural and commercial non-real estate loans decreased $8.4 million, or 14.6%, to $49.2 million at March 31, 2014, from $57.7 million at December 31, 2013. One- to four-family residential real estate loans decreased $840,000, or 2.2%, to $37.5 million at March 31, 2014, from $38.3 million at December 31, 2013. The decrease in agricultural non-real estate loans resulted from seasonal loan pay-downs relating primarily to the cash flow cycle of our farming customers. One- to four-family residential mortgages decreased primarily due to the origination and sale of these loans. Agricultural real estate loans increased $2.5 million, or 2.3%, to $113.1 million at March 31, 2014, from $110.5 million at December 31, 2013. This increase in agricultural real estate loans resulted from the continued above-normal market activity in agricultural real estate purchases by our customers.

Investment securities classified as available for sale increased $1.6 million, or 16.7%, to $11.3 million at March 31, 2014, from $9.7 million at December 31, 2013. Agricultural loan customers paid down lines of credit in the first quarter and the funds received from these repayments were used to purchase investment securities. Investment in Federal Home Loan Bank stock decreased $269,000, or 18.3%, to $1.2 million at March 31, 2014, from $1.5 million at December 31, 2013, due to the Federal Home Loan Bank of Topeka's repurchase of our excess Class A and Class B common stock.

Bank-owned life insurance increased $1.5 million, or 32.5%, as we increased our investment in consideration of the implementation of our equity incentive plan and the additional expense which would be incurred in the event of the death of a director or executive officer.

Accrued interest receivable on loans decreased $1.2 million, or 30.5%, to $2.6 million at March 31, 2014, from $3.8 million at December 31, 2013, due to the decrease in net loans at March 31, 2014, as compared to December 31, 2013, the timing of interest payments due on our loans, and the decrease in the average yield on loans to 4.82% at March 31, 2014, from 5.01% at December 31, 2013.

Deposits increased $9.7 million, or 4.7%, to $215.4 million at March 31, 2014, from $205.7 million at December 31, 2013, due primarily to a net increase in core deposits. Interest-bearing checking and money market savings accounts increased $11.0 million, or 9.6%, and $4.0 million, or 8.8%, respectively at March 31, 2014, from December 31, 2013. This increase was offset by a decrease in noninterest-bearing checking accounts of $4.8 million, or 23.5%, at March 31, 2014, from December 31, 2013. This 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 $1.0 million, or 2.3%, to $25.7 million at March 31, 2014, from $26.3 million at December 31, 2013, reflecting continued customer preference for more liquid transaction accounts rather than long term deposits.

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. Our borrowings from the FHLB-Topeka decreased $13.0 million, or 65.0%, to $7.0 million at March 31, 2014, from $20.0 million at December 31, 2013. 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.

Madison County Financial, Inc.
Form 10-Q

Total stockholders' equity decreased $288,000, or 0.5%, to $61.1 million at March 31, 2014, from $61.4 million at December 31, 2013. The decrease resulted primarily from the stock repurchase of 74,362 shares for a total of $1.3 million, offset by the stock based compensation of $390,000 and net income of $515,000 during the first quarter 2014.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. Net income decreased $237,000, or 31.5%, to $515,000 for the three months ended March 31, 2014, from $752,000 for the three months ended March 31, 2013. The decrease reflected increases in our provision for loan losses and other expense, due almost exclusively to the implementation and associated expense from our equity incentive plan, and a decrease in other income, offset by an increase in interest income and a decrease in income tax expense during the 2014 quarter.

Interest and Dividend Income. Interest and dividend income increased $153,000, or 5.3%, to $3.0 million for the quarter ended March 31, 2014, from $2.9 million for the quarter ended March 31, 2013. The increase reflected an increase in average interest-earning assets to $275.9 million for the 2014 quarter compared to $268.0 million for the 2013 quarter, and an increase in the average yield on interest-earning assets to 4.46% during the 2014 quarter from 4.36% during the 2013 quarter.

Interest income and fees on loans increased $101,000, or 3.9%, to $2.7 million for the three months ended March 31, 2014, from $2.6 million for the three months ended March 31, 2013. This was a result of a $23.5 million increase in average loans outstanding, to $225.4 million for the quarter ending March 31, 2014, from $202.0 million for the quarter ending March 31, 2013, offset by a decrease in the average yield on loans to 4.82% during the 2014 quarter from 5.18% during the 2013 quarter. Interest income on non-taxable investment securities increased $61,000, or 31.0%, to $258,000 for the 2014 quarter from $197,000 for the 2013 quarter, reflecting a $9.0 million increase in the average balance of these securities to $31.7 million for the quarter ended March 31, 2014, from $22.7 million for the quarter ended March 31, 2013. This increase was offset by a decrease in the average yield on such securities to 3.30% from 3.51%, quarter to quarter.

Interest Expense. Interest expense remained unchanged at $437,000 for the three months ended March 31, 2014 and 2013, respectively. The average balance of interest-bearing liabilities increased $7.7 million, or 3.9%, to $205.5 million for the quarter ending March 31, 2014, from $197.8 million for the quarter ending March 31, 2013, and was offset in part by a 4 basis point decrease in the average rate paid on interest-bearing liabilities during the 2014 quarter to 0.86% compared to 0.90% during the 2013 quarter.

Interest expense on interest-bearing deposits decreased $2,000, or 0.5%, to $381,000 for the quarter ended March 31, 2014, from $383,000 for the quarter ended March 31, 2013, as the average rate paid on these deposits decreased to 0.78% during the 2014 quarter from 0.81% during the 2013 quarter, offset by a $6.2 million increase in the average balance of these deposits to $197.7 million for the 2014 quarter from $191.5 million for the 2013 quarter. Interest expense on borrowings increased $2,000, or 3.7%, to $56,000 for the three months ended March 31, 2014, from $54,000 for the three months ended March 31, 2013, reflecting an increase of $1.5 million, or 23.6%, in the average balance of borrowings to $7.8 million for the 2014 quarter from $6.3 million for the 2013 quarter, offset by a decrease in the rate paid on borrowings to 2.92% from 3.48%, quarter to quarter.

Madison County Financial, Inc.
Form 10-Q

Net Interest Income. Net interest income increased $153,000, or 6.3%, to $2.6 million for the three months ended March 31, 2014, from $2.4 million for the three months ended March 31, 2013. This increase reflected a $142,000 increase in our average net interest-earning assets, to $70.4 million for the 2014 period from $70.3 million for the 2013 period, and an increase in our net interest rate spread to 3.60% for the 2014 quarter from 3.46% for the 2013 quarter, and an increase in our net interest margin to 3.81% for the 2014 quarter from 3.69% for the 2013 quarter. The increase in our average net interest earning assets resulted primarily from the reinvestment of the capital raised in the conversion stock offering and earnings into loans and investment securities. The ratio of our average interest-earning assets to average interest-bearing liabilities decreased to 134.3% for the 2014 quarter from 135.5% for the 2013 quarter. The increase in our net interest rate spread and net interest margin reflected the 10 basis point increase in the average yield on our interest-earning assets and a 3 basis point decrease in the average cost of our interest-bearing liabilities, quarter to quarter.

Provision for Loan Losses. We recorded a provision for loan losses of $285,000 for the three months ended March 31, 2014, which was an increase of $30,000, or 11.8%, from our provision of $255,000 for the three months ended March 31, 2013. The increase in our provision resulted from various factors which necessitate upward adjustments in the allowance for loan losses. Agricultural real estate loans comprise 52.2% of net loans receivable at March 31, 2014, and management has determined that a possible asset bubble in agricultural real estate may be forming. This is due to the continued increase in the farmland prices at a double-digit rate over the past several years and the corresponding decline in gross operating income on most farming options. There are no longer any ethanol subsidies paid by the Federal Government. Furthermore, in October, 2013, the Environmental Protection Agency issued a proposed rule reducing the federal government ethanol blending mandate, which proposal, if enacted, would substantially decrease the volume of ethanol required to be blended in the nation's fuel supply and would have a negative effect on the demand for #2 Yellow Corn, our market area's most important agricultural commodity. In addition, the Agricultural Act of 2014 was signed into law on February 7, 2014, and the most significant change to farm programs in this Act is the elimination of a subsidy known as "direct payments", which supplement farm income. This could adversely impact our agricultural borrowers and the risks associated with these types of loans.

The provision for loan losses for the three months ended March 31, 2014 and 2013, reflected no charge-offs or recoveries. The allowance for loan losses was $6.5 million, or 2.9% of total loans, at March 31, 2014, compared to $5.2 million, or 2.6% of total loans, at March 31, 2013. Total nonperforming loans were $408,000 at March 31, 2014, compared to $278,000 at March 31, 2013. As a percentage of nonperforming loans, the allowance for loan losses was 1,582% at March 31, 2014, compared to 1,869% at March 31, 2013.

Other Income. Other income decreased $74,000, or 16.2%, to $384,000 for the three months ended March 31, 2014, from $458,000 for the three months ended March 31, 2013. The decrease was due primarily to a decrease in gains on sales of loans, resulting from a decline in the volume of loans sold, quarter to quarter.

Madison County Financial, Inc.
Form 10-Q

Other Expense. Other expense increased $451,000, or 28.1%, to $2.1 million for the three months ended March 31, 2014, from $1.6 million for the three months ended March 31, 2013, due primarily to a $136,000 increase in salaries and employee benefits expense and a $368,000 increase in director fees and benefits and a $48,000 decrease in other expense. Salaries and employee benefits expense and director fees and benefits increased primarily as a result of the expense associated with the stock based compensation plan that was approved by the stockholders in November, 2013, and, to a much lesser extent, normal annual salary increases.

Income Tax Expense. The provision for income taxes was $121,000 for the three months ended March 31, 2014, compared to $286,000 for the three months ended March 31, 2013, reflecting a decrease in pretax income. Our effective tax rate was 19.0% for the quarter ended March 31, 2014, compared to 27.6% for the quarter ended March 31, 2013. This difference resulted primarily from the levels of tax-exempt income derived from our municipal bond investment portfolio and from bank-owned life insurance as a percentage of our net income. Tax-exempt income increased while net income has declined.

Liquidity and Capital Resources

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales 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.

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 $1.6 million and $2.9 million for the three months ended March 31, 2014 and 2013, 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 $6.3 million and $11.9 million for the three months ended March 31, 2014 and 2013, respectively, principally due to a decrease in loans receivable and the 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 and dividends paid, was $(4.7) million and $21.1 million for the three months ended March 31, 2014 and 2013, respectively, and resulted primarily from the repayment of advances.

Madison County Financial, Inc.
Form 10-Q

At March 31, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $50.5 million, or 17.6% of adjusted total assets, which is above the required level of $11.5 million, or 4.0%; and total risk-based capital of $54.1 million, or 18.9% of risk-weighted assets, which is above the required level of $23.0 million, or 8.0%. Accordingly Madison County Bank was categorized well capitalized at March 31, 2014. Management is not aware of any conditions or events since the most recent notification that would change our category.

In July 2013, the OCC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

At March 31, 2014, we had outstanding commitments to originate loans of $27.5 million and lines of credit of $25.9 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 March 31, 2014 totaled $19.4 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 levels of interest expense.

Madison County Financial, Inc.
Form 10-Q

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