Management’s discussion and analysis of the financial condition and results of operations at and for three months ended March 31, 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:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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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:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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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;
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competition among depository and other financial institutions;
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our success in continuing to emphasize agricultural real estate and agricultural and commercial non-real estate loans;
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Madison County Financial, Inc.
Form 10-Q
(Dollars in thousands)
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changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;
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adverse changes in the securities markets;
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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;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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changes in consumer spending, borrowing and savings habits;
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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;
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changes in our organization, compensation and benefit plans;
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loan delinquencies and changes in the underlying cash flows of our borrowers;
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changes in our financial condition or results of operations that reduce capital available to pay dividends; and
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changes in the financial condition or future prospects of issuers of securities that we own.
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Critical Accounting Policies
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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 fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on March 28, 2013.
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Comparison of Financial Condition at March 31, 2013 and December 31, 2012
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Total assets increased $23.6 million, or 8.8%, to $290.9 million at March 31, 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, which was 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 from our farming customers and normal annual loan payments on agricultural real estate loans. Investment securities increased as we used funds received from loan pay-downs and from stock offering proceeds to purchase these securities.
Madison County Financial, Inc.
Form 10-Q
(Dollars in thousands)
Net loans decreased $15.0 million, or 7.2%, to $192.2 million at March 31, 2013, from $207.2 million at December 31, 2012. The decrease in our loan portfolio resulted from a decrease in agricultural and commercial non-real estate loans, which decreased $12.1 million, or 22.6%, to $41.5 million at March 31, 2013, from $53.6 million at December 31, 2012, a decrease in agricultural real estate loans, which decreased $1.0 million, or 1.1%, to $95.5 million at March 31, 2013, from $96.6 million at December 31, 2012, and a decrease in one- to four-family residential real estate loans of $1.2 million, or 3.4%, to $34.8 million at March 31, 2013, from $36.0 million at December 31, 2012. The decrease in agricultural and commercial non-real estate loans and the decrease in agricultural 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 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.
Investment securities classified as held to maturity increased $2.9 million, or 11.6%, to $27.9 million at March 31, 2013, from $25.0 million at December 31, 2012, and investment securities classified as available for sale increased $0.9 million, or 10.1%, to $9.9 million at March 31, 2013, from $9.0 million at December 31, 2012, as we used funds received from loan pay-downs and proceeds of the stock offering to purchase these securities.
Accrued interest receivable on loans decreased $1.4 million, or 38.9%, to $2.2 million at March 31, 2013, from $3.6 million, at December 31, 2012, due to the $15.0 decrease in net loans at March 31, 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 5.13% at March 31, 2013, from 5.63% at December 31, 2012.
Deposits increased $21.1 million, or 10.8%, to $216.3 million at March 31, 2013, from $195.2 million at December 31, 2012, due primarily to a net increase in our core deposits. Interest-bearing checking and money market savings accounts increased $16.9 million, or 15.6%, and $5.3 million, or 13.0%, respectively, at March 31, 2013, from December 31, 2012, offset by a slight decrease in noninterest-bearing checking of $307,000, or 1.0%, at March 31, 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 March 31, 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 March 31, 2013 from $6.3 million 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 and Seasonal Borrowing Agreement.
Total stockholders’ equity increased $768,000, or 1.2%, to $62.8 million at March 31, 2013, from $62.1 million at December 31, 2012. The increase resulted primarily from net income of $752,000 during the first quarter 2013.
Madison County Financial, Inc.
Form 10-Q
(Dollars in thousands)
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Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012
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General.
Net income decreased to $752,000 for the three months ended March 31, 2013, from $1.1 million for the three months ended March 31, 2012. The decrease reflected lower net interest income, an increase in our provision for loan losses, and an increase in other expense, offset partially by a decrease in income tax expense during the 2013 quarter.
Interest and Dividend Income.
Interest and dividend income decreased $225,000, or 7.2%, to $2.9 million for the quarter ended March 31, 2013 from $3.1 million for the quarter ended March 31, 2012. The decrease reflected a decrease in the average yield on interest-earning assets to 4.32% for the 2013 quarter from 5.78% 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, offset by an increase in average interest-earning assets to $268.0 million for the 2013 quarter compared to $215.9 million for the 2012 quarter.
Interest income and fees on loans decreased $293,000, or 10.2%, to $2.6 million for the three months ended March 31, 2013, from $2.9 million for the three months ended March 31, 2012, due to a decrease in the average yield on loans to 5.13% during the 2013 quarter from 6.34% in the 2012 quarter, reflecting lower market interest rates, and a decrease in pre-payment penalties, period to period. During the first quarter of 2012, we received pre-payment penalties in the amount of $288,000 from one farm customer as a result of early payoffs of a series of agricultural loans which totaled $5.8 million. Interest income on investment securities increased $58,000, or 26.1%, to $280,000 for the quarter ended March 31, 2013, from $222,000 for the quarter ended March 31, 2012, reflecting an increase in the average balance of such securities to $34.5 million for the 2013 period from $26.8 million during the 2012 period, offset by a 7 basis point decrease in the average yield on investment securities to 3.26% for 2013 from 3.33% in 2012, reflecting lower market interest rates.
Interest Expense.
Interest expense decreased $21,000, or 4.6%, to $437,000 for the three months ended March 31, 2013 from $458,000 for the three months ended March 31, 2012. The decrease reflected a decrease in the average rate paid on interest-bearing deposits and borrowings in the 2013 quarter to 0.89% compared to 1.03% during the 2012 quarter, offset in part by an increase in the average balance of interest-bearing deposits and borrowings to $197.8 million for the 2013 quarter from $179.6 million for the 2012 quarter.
Interest expense on interest-bearing deposits decreased $18,000, or 4.5%, to $383,000 for the quarter ended March 31, 2013 from $401,000 for the quarter ended March 31, 2012, as the average rate paid on these deposits decreased to 0.80% during the 2013 period from 0.94% during the 2012 period, offset in part by a $20.4 million increase in the average balance of these deposits to $191.5 million for the 2013 quarter from $171.1 million for the 2012 quarter ended March 31, 2012. Interest expense on borrowings decreased $3,000, or 5.3%, to $54,000 during the three months ended March 31, 2013, from $57,000 during the three months ended March 31, 2012, reflecting a decrease in the average balance of borrowings to $6.3 million for the 2013 quarter from $8.5 million for the 2012 quarter, offset in part by a higher rate paid on borrowings to 3.45% from 2.69% quarter to quarter, reflecting a larger percentage of long-term borrowings during the 2013 quarter compared to the 2012 quarter.
Madison County Financial, Inc.
Form 10-Q
(Dollars in thousands)
Net Interest Income.
Net interest income decreased $204,000, or 7.7%, to $2.4 million for the three months ended March 31, 2013, from $2.6 million for the three months ended March 31, 2012, reflecting a decrease in our net interest rate spread to 3.43% for the 2013 quarter from 4.75% 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, offset by an increase in our average net interest-earning assets to $70.3 million for 2013 from $36.3 million for 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 loans and other interest earning assets. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 135.5% for the 2013 quarter from 120.2% for the 2012 quarter. The decreases in our net interest rate spread and net interest margin reflected the 1.46% decrease in the average yield on our interest-earning assets which was only partially offset by a 14 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 March 31, 2013, an increase of $145,000, or 131.8%, from our provision of $110,000 for the three months ended March 31, 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 March 31, 2013 reflected no charge-offs or recoveries compared to net recoveries of $94,000 for the three months ended March 31, 2012. The allowance for loan losses was $5.2 million, or 2.6% of total loans, including loans held for sale, compared to $4.2 million, or 2.38% of total loans, including loans held for sale, at March 31, 2012. Total nonperforming loans were $278,000 at March 31, 2013 compared to $265,000 at March 31, 2012. As a percentage of nonperforming loans, the allowance for loan losses was 1,869% at March 31, 2013 compared to 1,593% at March 31, 2012.
Other Income.
Other income decreased $7,000, or 1.5%, to $458,000 for the three months ended March 31, 2013, from $465,000 for the three months ended March 31, 2012. The decrease was due primarily to a decrease in gain on sales of loans to $167,000 for the 2013 quarter from $176,000 for the 2012 quarter and a decrease in insurance commission income to $89,000 for the 2013 quarter from $94,000 for the 2012 quarter, offset by an increase in the loan servicing income to $49,000 for the 2013 quarter from $34,000 for the 2012 quarter. The increase in loan servicing income reflects the 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 loan interest rate environment.
Other Expense.
Other expense increased $221,000, or 15.9%, to $1.6 million for the three months ended March 31, 2013, from $1.4 million for the three months ended March 31, 2012, due primarily to an increase in professional fees to $135,000 for the 2013 quarter from $15,000 for the 2012 quarter, reflecting additional public company-required costs, and the timing of such services, a $78,000 increase in salaries and employee benefits expense to $1.0 million for the 2013 quarter compared to $872,000 for the 2012 quarter, reflecting normal annual salary increases and payouts under our benefit plans, and an increase of $10,000 in other expense reflecting normal expense increases, and an increase in our provision for the contingent liability related to sold loans.
Madison County Financial, Inc.
Form 10-Q
(Dollars in thousands)
Income Tax Expense.
The provision for income taxes was $286,000 for the three months ended March 31, 2013, compared to $486,000 for the three months ended March 31, 2012, reflecting a decrease in pretax income. Our effective tax rate was 27.6% for the quarter ended March 31, 2013 compared to 30.1% for the quarter ended March 31, 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 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 $2.9 million and $3.9 million for the three months ended March 31, 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 $11.9 million and $13.0 million for the three months ended March 31, 2013 and 2012, respectively, principally due to a decrease in loans receivable and by purchase 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 $21.1 million and $(7.9) million for the three months ended March 31, 2013 and 2012, respectively, and resulted primarily from the decline in short-term borrowings offset by an increase in deposits.
At March 31, 2013, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $47.8 million, or 18.7% of adjusted total assets, which is above the required level of $10.2 million, or 4.0%; and total risk-based capital of $51.0 million, or 19.9% of risk-weighted assets, which is above the required level of $20.5 million, or 8.0%. Accordingly Madison County Bank was categorized well capitalized at March 31, 2013. Management is not aware of any conditions or events since the most recent notification that would change our category.
At March 31, 2013, we had outstanding commitments to originate loans of $12.4 million and lines of credit of $34.6 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, 2013 totaled $8.2 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
Madison County Financial, Inc.
Form 10-Q
