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MCBK > SEC Filings for MCBK > Form 10-Q on 13-Aug-2014All Recent SEC Filings

Show all filings for MADISON COUNTY FINANCIAL, INC.

Form 10-Q for MADISON COUNTY FINANCIAL, INC.


13-Aug-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 and six months ended June 30, 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.

Madison County Financial, Inc.
Form 10-Q

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.

Madison County Financial, Inc.
Form 10-Q

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 June 30, 1014 and December 31, 2013

Total assets increased $1.0 million, or 0.3%, to $291.1 million at June 30, 2014, from $290.1 million at December 31, 2013. The increase was due primarily to increases in investment securities classified as available for sale, investment securities classified as held to maturity, and bank-owned life insurance, offset by decreases in cash and cash equivalents, net loans and investment in Federal Home Loan Bank stock.

Total cash and cash equivalents decreased $1.4 million, or 35.0%, to $2.7 million, at June 30, 2014, from $4.1 million at December 31, 2013. This was due primarily to a $2.4 million increase in securities, the purchase of $1.5 million in bank-owned life insurance, and the repurchase of Company common stock in the amount of $1.6 million, offset by a $676,000 decrease in Federal Home Loan Bank stock, and other activities, including normal seasonal paydowns and normal annual loan payments on agricultural lines of credit.

Net loans decreased $596,000, or 0.3%, to $223.7 million at June 30, 2014, from $224.3 million at December 31, 2013, primarily as a result of a decrease in agricultural and commercial non-real estate loans of $4.9 million, or 8.4%, to $52.8 million at June 30, 2014 from $57.7 million at December 31, 2013 and an increase in the allowance for loan losses of $570,000, or 9.2%, to $6.7 million at June 30, 2014 from $6.2 million at December 31, 2013, offset by an increase of $5.2 million, or 4.7%, in agricultural real estate loans to $115.7 million at June 30, 2014, from $110.5 million at December 31, 2013. The decrease in agricultural and commercial non-real estate loans was due to seasonal loan pay-downs relating primarily to the cash flow cycle of our farming customers. The increase in the allowance for loan losses was due primarily to our quarterly analysis in which it was determined that there is an increased risk in the agricultural portfolio primarily due to a significant decline in the market price of corn and soybeans which occurred during the second quarter. For many producers, the market price of corn is below its cost of production which produces operational loss and this increases the likelihood that such customers will be unable to make scheduled payments on loans owed to us. The increase in agricultural real estate loans resulted from the continued agricultural real estate purchases by our customers, and the addition of new agricultural real estate borrowers.

Investment securities classified as available for sale increased $1.3 million, or 13.0%, to $11.0 million at June 30, 2014, from $9.7 million at December 31, 2013. Investment securities classified as held to maturity increased $1.2 million, or 3.4%, to $35.3 million at June 30, 2014, from $34.1 million at December 31, 2013. Cashflow for these investments was provided by maturities and calls of investment securities, seasonal repayments of lines of credit from agricultural loan customers and the repurchase by the Federal Home Loan Bank of Topeka (FHLB) of $676,000 of our excess Class A and Class B FHLB common stock.

Bank-owned life insurance increased $1.6 million, or 33.5%, 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.

Madison County Financial, Inc.
Form 10-Q

Accrued interest receivable on loans, investment securities and certificates of deposit owned decreased $539,000, or 14.2%, to $3.3 million at June 30, 2014, from $3.8 million at December 31, 2013, due to the decrease in net loans at June 30, 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 4.84% at June 30, 2014, from 5.01% at December 31, 2013.

Deposits increased $8.1 million, or 3.9%, to $213.8 million at June 30, 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 $9.5 million, or 8.4%, and $4.5 million, or 9.8%, respectively, and noninterest-bearing checking accounts decreased $4.9 million, or 24.5%. This net increase in our core deposits was due primarily to an overall increase in the number of accounts. Certificates and time deposits decreased $1.0 million, or 3.7%, reflecting continued customer preference for more liquid transaction accounts rather than long term deposits.

Borrowings decreased $7.9 million, or 39.5%, to $12.1 million at June 30, 2014, from $20.0 million at December 31, 2013. We continue to utilize borrowings as an alternative funding source, and our borrowings from the Federal Home Loan Bank of Topeka generally consist of advances with laddered terms of up to 10 years and our borrowings from the Federal Reserve Bank of Kansas City are short-term borrowings under our Line of Credit.

Total stockholders' equity decreased $202,000, or 0.3%, to $61.2 million at June 30, 2014, from $61.4 million at December 31, 2013. The primary reasons for the decrease include $1.6 million in repurchased and retired common stock and $679,000 in dividends declared and paid on outstanding shares (other than unallocated ESOP shares), offset by net income for the first six months of 2014 of $1.3 million and a $509,000 increase in additional paid-in capital related to stock compensation expense for the period of grants of options and restricted stock.

Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

General. Net income increased $40,000, or 5.4%, to $780,000 for the three months ended June 30, 2014, from $740,000 for the three months ended June 30, 2013. The increase reflected an increase in interest income, offset by increases in provision for loan losses and other expenses, and a decrease in other income.

Interest and Dividend Income. Interest and dividend income increased $287,000, or 10.2%, to $3.1 million for the quarter ended June 30, 2014, from $2.8 million for the quarter ended June 30, 2013. The increase reflected an increase in average interest-earning assets to $276.5 million for the 2014 quarter compared to $270.6 million for the 2013 quarter, and an increase in the average yield on interest-earning assets to 4.51% during the 2014 quarter from 4.18% during the 2013 quarter.

Interest income and fees on loans increased $243,000, or 9.7%, to $2.7 million for the three months ended June 30, 2014, from $2.5 million for the three months ended June 30, 2013. This was the result of a $26.7 million increase in average loans outstanding, to $226.3 million for the quarter ended June 30, 2014, from $199.6 million for the quarter ended June 30, 2013, offset by a decrease in the average yield on loans to 4.87% during the 2014 quarter from 5.03% during the 2013 quarter. Interest income on non-taxable investment securities increased $54,000, or 25.8%, to $263,000 for the 2014 quarter from $209,000 for the 2013 quarter, reflecting a $6.6 million increase in the average balance of these securities to $32.3 million, from $25.7 million, quarter to quarter.

Madison County Financial, Inc.
Form 10-Q

Interest Expense. Interest expense increased $20,000, or 4.7%, to $447,000 for the three months ended June 30, 2014 from $427,000 for the three months ended June 30, 2013. The increase reflected an increase of $9.5 million in the average balance of interest-bearing liabilities to $208.2 million for the 2014 quarter from $198.6 million for the 2013 quarter.

Interest expense on interest-bearing deposits increased $13,000, or 3.5%, to $386,000 for the quarter ended June 30, 2014, from $373,000 for the quarter ended June 30, 2013, as the average balance of these deposits increased to $197.9 million for the 2014 quarter from $192.3 million for the 2013 quarter. Interest expense on borrowings increased $7,000, or 13.0%, to $61,000 for the quarter ended June 30, 2014, from $54,000 for the quarter ended June 30, 2013, reflecting an increase of $4.0 million in the average balance of borrowings to $10.3 million for the 2014 quarter from $6.3 million for the 2013 quarter, offset by a decrease in the average rate paid on borrowings to 2.38% from 3.44%, quarter to quarter.

Net Interest Income. Net interest income increased $267,000, or 11.1%, to $2.7 million for the quarter ended June 30, 2014, from $2.4 million for the quarter ended June 30, 2013. This increase reflected an increase in our net interest rate spread to 3.65% for the 2014 quarter from 3.32% for the 2013 quarter, and an increase in our net interest margin to 3.86% for the 2014 quarter from 3.55% for the 2013 quarter, offset by a decrease in our average net interest-earning assets, to $68.3 million for the 2014 quarter from $72.0 million for the 2013 quarter. The decrease in our average net interest-earning assets resulted primarily from the decrease in the average other interest-earning assets, to $3.1 million for the 2014 quarter from $30.5 million for the 2013 quarter, as the result of the deployment of the funds from the stock offering which was closed October 3, 2012. The ratio of our average interest-earning assets to average interest-bearing liabilities decreased to 132.8% for the 2014 quarter from 136.2% for the 2013 quarter. The increase in our net interest rate spread and net interest margin reflected the 33 basis point increase in the average yield on our interest-earning assets, quarter to quarter.

Provision for Loan Losses. We recorded a provision for loan losses of $285,000 for the quarter ended June 30, 2014, which was an increase of $30,000, or 11.8%, from our provision of $255,000 for the quarter ended June 30, 2013. The increase in our provision resulted from various factors which necessitated upward adjustments in the allowance for loan losses. Agricultural real estate loans comprise 51.7% of net loans receivable at June 30, 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, as the commodity price of #2 Yellow Corn is declining below the cost of production in some instances. 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 quarter ended June 30, 2014 reflected no charge-offs or recoveries. The provision for loan losses for the quarter ended June 30, 2013, reflected charge-offs of $20,000 and no recoveries. The allowance for loan losses was $6.7 million, or 2.9% of total loans, at June 30, 2014, compared to $5.4 million, or 2.7% of total loans, at June 30, 2013. Total nonperforming loans were $601,000 at June 30, 2014, compared to $452,000 at June 30, 2013. As a percentage of nonperforming loans, the allowance for loan losses was 1,122% at June 30, 2014, compared to 1,202% at June 30, 2013. Loans classified as special mention increased to $1.4 million at June 30, 2014 as compared to $540,000 at December 31, 2013 and $541,000 at June 30, 2013. Loans classified as substandard increased to $1.2 million at June 30, 2014 as compared to $400,000 as of December 31, 2013 and $410,000 at June 30, 2013. The increase in special mention and substandard loans was primarily due to the classification of three borrowers. See the "Risk Classification of Loans" section for additional information.

Madison County Financial, Inc.
Form 10-Q

Other Income. Other income decreased $11,000, or 2.5%, to $436,000 for the quarter ended June 30, 2014, from $447,000 for the quarter ended June 30, 2013. The decrease was due primarily to a decrease in gain on sales of loans, resulting from a decline in the volume of loans sold, quarter to quarter, offset by an increase in service charges on deposit accounts and an increase in surrender value of life insurance.

Other Expense. Other expense increased $189,000, or 12.0%, to $1.8 million for the quarter ended June 30, 2014, from $1.6 million for the quarter ended June 30, 2013, due primarily to a $23,000 increase in salaries and employee benefits expense, an $86,000 increase in director fees and benefits expense and a $72,000 increase in other expense. Salaries and employee benefits expense and directors fees and benefits expense increased primarily as a result of initial grants under the approved equity incentive plan as disclosed in Note 7 of the notes to the consolidated financial statements.

Income Tax Expense. The provision for income taxes was $266,000 for the quarter ended June 30, 2014, compared to $269,000 for the quarter ended June 30, 2013, resulting primarily from an increase in tax-exempt income, offset by an increase in net income. Our effective tax rate was 25.4% for the quarter ended June 30, 2014, compared to 26.7% for the quarter ended June 30, 2013. This difference was due primarily from the levels of tax-exempt income derived from our municipal bond investment portfolio and from our bank-owned life insurance as a percentage of our net income.

Comparison of Operating Results for the Six Months Ended June 30, 2014 and 2013

General. Net income decreased $197,000, or 13.2%, to $1.3 million for the six months ended June 30, 2014 from $1.5 million for the six months ended June 30, 2013. The decrease reflected increases in our provision for loan losses and other expense, due primarily 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 period.

Interest and Dividend Income. Interest and dividend income increased $440,000, or 7.7%, to $6.1 million for the six months ended June 30, 2014, from $5.7 million for the six months ended June 30, 2013. The increase reflected an increase in average interest-earning assets to $276.2 million for the 2014 period compared to $269.3 million for the 2013 period, and an increase in the average yield on interest-earning assets to 4.48% during the 2014 period from 4.27% during the 2013 period.

Interest income and fees on loans increased $344,000, or 6.8%, to $5.4 million for the six months ended June 30, 2014, from $5.1 million for the six months ended June 30, 2013. This was the result of a $25.1 million increase in average loans outstanding, to $225.9 million for the period ended June 30, 2014, from $200.8 million for the period ended June 30, 2013, offset by a decrease in the average yield on loans to 4.84% during the 2014 period from 5.10% during the 2013 period. Interest income on non-taxable investment securities increased $115,000, or 28.3%, to $521,000 for the 2014 period from $406,000 for the 2013 period, reflecting a $7.8 million increase in the average balance of these securities to $32.0 million, from $24.2 million, period to period.

Madison County Financial, Inc.
Form 10-Q

Interest Expense. Interest expense increased $20,000, or 2.3%, to $884,000 for the six months ended June 30, 2014 from $864,000 for the six months ended June 30, 2013. The average balance of interest-bearing liabilities increased $8.6 million, or 4.3% to $206.8 million for the 2014 period from $198.2 million for the 2013 period, and was offset in part by a 2 basis point decrease in the average rate paid on interest-bearing liabilities to 0.86% during the 2014 period compared to 0.88% during the 2013 period.

Interest expense on interest-bearing deposits increased $11,000, or 1.5%, to $767,000 for the six months ended June 30, 2014, from $756,000 for the six months ended June 30, 2013, as the average balance of these deposits increased $5.9 million to $197.8 million for the 2014 period from $191.9 million for the 2013 period. Interest expense on borrowings increased $9,000, or 8.3%, to $117,000 for the period ended June 30, 2014, from $108,000 for the period ended June 30, 2013, reflecting an increase of $2.7 million in the average balance of borrowings to $9.0 million for the 2014 period from $6.3 million for the 2013 period, offset by a decrease in the average rate paid on borrowings to 2.61% from 3.46%, period to period.

Net Interest Income. Net interest income increased $420,000, or 8.7%, to $5.3 million for the six months ended June 30, 2014, from $4.8 million for the six months ended June 30, 2013. This increase reflected an increase in our net interest rate spread to 3.62% for the 2014 period from 3.39% for the 2013 period, and an increase in our net interest margin to 3.84% for the 2014 period from 3.62% for the 2013 period, offset by a decrease in our average net interest-earning assets, to $69.3 million for the 2014 period from $71.1 million for the 2013 period. The decrease in our average net interest-earning assets resulted primarily from the decrease in the average other interest-earning assets, to $4.0 million for the 2014 quarter from $30.0 million for the 2013 quarter, as the result of the deployment of the funds from the stock offering which was closed October 3, 2012. The ratio of our average interest-earning assets to average interest-bearing liabilities decreased to 133.5% for the 2014 period from 135.9% for the 2013 period. The increase in our net interest rate spread and net interest margin reflected the 21 basis point increase in the average yield on our interest-earning assets, period to period.

Provision for Loan Losses. We recorded a provision for loan losses of $570,000 for the six months ended June 30, 2014, which was an increase of $60,000, or 11.8%, from our provision of $510,000 for the six months ended June 30, 2013. The increase in our provision resulted from various factors which necessitated upward adjustments in the allowance for loan losses. Agricultural real estate loans comprised 51.7% of net loans receivable at June 30, 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, as the commodity price of #2 Yellow Corn is declining below the cost of production in some instances. 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.

Madison County Financial, Inc.
Form 10-Q

The provision for loan losses for the six months ended June 30, 2014, reflected no charge-offs or recoveries. 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 $6.7 million, or 2.9% of total loans, at June 30, 2014, compared to $5.4 million, or 2.7% of total loans, at June 30, 2013. Total nonperforming loans were $601,000 at June 30, 2014, compared to $452,000 at June 30, 2013. As a percentage of nonperforming loans, the allowance for loan losses was 1,122% at June 30, 2014, compared to 1,202% at June 30, 2013. Loans classified as special mention increased to $1.4 million at June 30, 2014 as compared to $540,000 at December 31, 2013 and $541,000 at June 30, 2013. Loans classified as substandard increased to $1.2 million at June 30, 2014 as compared to $400,000 as of December 31, 2013 and $410,000 at June 30, 2013. The increase in special mention and substandard loans was primarily due to the classification of three borrowers. See the "Risk Classification of Loans" section for additional information.

Other Income. Other income decreased $85,000, or 9.4%, to $820,000 for the six months ended June 30, 2014, from $905,000 for the six months ended June 30, 2013. The decrease was due primarily to a decrease in gain on sales of loans, resulting from a decline in the volume of loans sold, period to period, offset by an increase in service charges on deposit accounts and an increase in surrender value of life insurance.

Other Expense. Other expense increased $640,000, or 20.1%, to $3.8 million for the six months ended June 30, 2014, from $3.2 million for the six months ended June 30, 2013, due primarily to a $159,000 increase in salaries and employee benefits expense, a $454,000 increase in director fees and benefits expense and a $24,000 increase in other expense. Salaries and employee benefits expense and directors fees and benefits expense increased primarily as a result of initial grants under the approved equity incentive plan as disclosed in Note 7 of the notes to the consolidated financial statements.

Income Tax Expense. The provision for income taxes was $387,000 for the six months ended June 30, 2014, compared to $555,000 for the six months ended June 30, 2013, reflecting a decrease in pretax income. Our effective rate was 23.0% for the six months ended June 30, 2014, compared to 27.1% for the six months ended June 30, 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 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.

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 $3.1 million for the . . .

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