Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-35679

	MADISON COUNTY FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

	Maryland			46-0658311
(State or other jurisdiction of Company or organization)			(I.R.S. Employer Identification Number)

	111 West Third Street, Madison, Nebraska			68748
(Address of Principal Executive Offices)			Zip Code

	(402) 454-6511
(Registrant’s telephone number)

	N/A
(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

As of November 1, 2014, 3,032,482 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

Madison County Financial, Inc.

Form 10-Q

Index

		Page

Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	1

	Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2014 and 2013 (unaudited)	2

	Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2014 and 2013 (unaudited)	3

	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	40

Part II. Other Information

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

	Signature Page	43

Part I. – Financial Information

Item 1. Financial Statements

Madison County Financial, Inc.

Condensed Consolidated Balance Sheets

(Dollars in Thousands, except share and per share data)

	September 30,			December 31,
	2014			2013
	(Unaudited)
Assets
Cash and due from banks	$	2,078		$	4,067
Interest-earning demand accounts		72			52
Cash and cash equivalents		2,150			4,119
Certificates of deposit		1,000			1,000
Investment securities:
Available for sale, at fair value		10,474			9,719
Held to maturity, at amortized cost (fair value of $35,243
and $32,892, respectively)		34,871			34,144
Loans held for sale		655			269
Loans receivable, net of allowance for losses of $7,101
and $6,171, respectively		233,850			224,345
Stock in Federal Home Loan Bank (“FHLB”) of Topeka		1,170			1,472
Premises and equipment, net		2,188			2,199
Bank-owned life insurance (“BOLI”)		6,394			4,750
Accrued interest receivable		4,786			3,807
Core deposit intangible		552			654
Goodwill		481			481
Other assets		3,358			3,136

Total assets	$	301,929		$	290,095

Liabilities and Stockholders’ Equity

Liabilities
Deposits	$	210,307		$	205,706
Borrowings		26,000			20,000
Accrued interest payable		98			99
Other liabilities		3,717			2,898
Total liabilities		240,122			228,703

Commitments and contingencies

Stockholders’ Equity
Common stock, $0.01 par value per share:
Issued and outstanding - 3,037,482 and 3,035,844 respectively		30			30
Additional paid in capital		26,693			28,035
Unearned employee stock ownership plan (ESOP)		(2,274	)		(2,350	)
Retained earnings		37,218			35,723
Accumulated other comprehensive income (loss)		140			(46	)
Total stockholders’ equity		61,807			61,392

Total liabilities and stockholders’ equity	$	301,929		$	290,095

See notes to condensed consolidated financial statements

Madison County Financial, Inc.

Condensed Consolidated Statements of Income

(Dollars in Thousands, except share and per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(Unaudited)
Interest and Dividend Income
Loans receivable, including fees	$	2,790	$	2,606	$	8,216	$	7,688
Investment securities - taxable		91		65		269		233
Investment securities - non-taxable		267		232		788		638
Other		10		12		26		57
Total interest income		3,158		2,915		9,299		8,616

Interest Expense
Deposits		388		374		1,155		1,130
Borrowings		66		55		183		163
Total interest expense		454		429		1,338		1,293

Net interest income		2,704		2,486		7,961		7,323
Provision for loan losses		360		305		930		815

Net Interest Income After Provision for Loan Losses		2,344		2,181		7,031		6,508

Other Income
Service charges on deposit accounts		75		57		204		159
ATM and credit card fees		41		35		116		100
Loan servicing income, net		55		55		166		156
Gain on sale of loans		133		119		323		413
Increase in surrender value of life insurance		51		37		144		113
Insurance commission income		175		177		346		360
Other income		25		17		76		101
Total other income		555		497		1,375		1,402

Other Expense
Salaries and employee benefits		1,094		1,014		3,216		2,977
Director fees and benefits		107		24		609		72
Net occupancy		135		128		394		407
Data processing fees		55		44		165		142
Professional fees		56		82		275		301
Advertising		25		29		76		84
Supplies		23		36		106		92
FDIC insurance premiums		33		33		100		102
Core deposit intangible amortization		34		39		102		117
Other expense		149		151		494		471
Total other expense		1,711		1,580		5,537		4,765

Income Before Income Tax Expense		1,188		1,098		2,869		3,145
Income tax expense		309		298		695		853
Net Income	$	879	$	800	$	2,174	$	2,292

Earnings Per Share:
Basic	$	0.31		0.27	$	0.76		0.78
Diluted		0.31		0.27		0.76		0.78
Dividends Per Share		-		-		0.24		0.28

See notes to condensed consolidated financial statements.

Madison County Financial, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
	(Unaudited)

Net Income	$	879	$	800		$	2,174	$	2,292

Other Comprehensive Income (Loss)

Unrealized gains (losses) on available-for-sale securities,
net of tax expense (benefit) of $4 (unaudited), $(18) (unaudited)
$96 (unaudited) and $(127) (unaudited) for the three months and
nine months ended September 30, 2014 and 2013, respectively		6		(37	)		186		(247	)


		6		(37	)		186		(247	)

Comprehensive Income	$	885	$	763		$	2,360	$	2,045

See notes to condensed consolidated financial statements.

Madison County Financial, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Dollars in Thousands, except share and per share data)

																Accumulated
	Common Stock															Other			Total
	Shares						Additional			Unearned			Retained			Comprehensive			Stockholders’
	Outstanding			Amount			Paid-in Capital			ESOP Shares			Earnings			Income (Loss)			Equity
	(Unaudited)

Balance, January 1, 2014		3,035,844		$	30		$	28,035		$	(2,350	)	$	35,723		$	(46	)	$	61,392

Net income														2,174						2,174
Other comprehensive income																	186			186
ESOP shares earned								62			76									138
Dividends paid ($0.24 per share)														(679	)					(679	)
Restricted Shares Issued		115,000			1			(1	)											-
Stock Based Compensation								629												629
Shares repurchased		(113,362	)		(1	)		(2,032	)											(2,033	)


Balance, September 30, 2014		3,037,482			30		$	26,693		$	(2,274	)	$	37,218		$	140		$	61,807


Balance, January 1, 2013		3,193,054		$	32		$	30,693		$	(2,452	)	$	33,530		$	261		$	62,064

Net income														2,292						2,292
Other comprehensive loss																	(247	)		(247	)
ESOP shares earned								53			77									130
Dividends paid ($0.28 per share)														(826	)					(826	)

Balance, September 30, 2013		3,193,054		$	32		$	30,746		$	(2,375	)	$	34,996		$	14		$	63,413

See notes to condensed consolidated financial statements.

Madison County Financial, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

	Nine Months Ended September 30,
	2014			2013
	(Unaudited)
Operating activities:
Net income	$	2,174		$	2,292
Items not requiring cash:
Provision for loan losses		930			815
Depreciation and amortization		160			165
Investment securities amortization, net		3			33
Core deposit intangible amortization		102			117
Loans originated for sale in the secondary market		(12,366	)		(20,473	)
Proceeds from loan sales in the secondary market		12,220			20,644
Gain on loans sold		(323	)		(413	)
Increase in surrender value of life insurance		(144	)		(113	)
Stock based compensation		629			-
Net change in:
Accrued interest receivable		(979	)		(430	)
Accrued interest payable		(1	)		(8	)
Other adjustments		70			483
Net cash provided by operating activities		2,475			3,112

Investing activities:
Net change in certificates of deposit		-			250
Purchases of investment securities available for sale		(2,477	)		(4,148	)
Proceeds from maturities of investment securities available for sale		2,000			2,650
Purchases of investment securities held to maturity		(4,191	)		(13,774	)
Proceeds from maturities of investment securities held to maturity		4,105			4,342
Purchase of FHLB Stock		(1,034	)		-
Proceeds from redemption of FHLB stock		1,348			634
Net change in loans receivable		(10,435	)		(5,160	)
Purchases of premises and equipment		(149	)		(117	)
Purchase of bank-owned life insurance		(1,500	)		-
Net cash used in investing activities		(12,333	)		(15,323	)

Financing activities:
Net change in checking and money market savings accounts		5,848			9,812
Net change in certificates of deposit		(1,247	)		(1,239	)
Net change in short-term borrowings		5,000			-
Repayment of FHLB advances		-			(300	)
Proceeds from FHLB advances		1,000			-
Repurchased shares		(2,033	)		-
Dividends paid		(679	)		(826	)
Net cash provided by financing activities		7,889			7,447

Net Change in Cash and Cash Equivalents		(1,969	)		(4,764	)

Cash and Cash Equivalents, Beginning of Period		4,119			7,918

Cash and Cash Equivalents, End of Period	$	2,150		$	3,154

Additional Cash Flows Information:
Interest paid	$	1,339		$	1,301
Taxes paid		651			1,151

See notes to condensed consolidated financial statements.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands, except share and per share data)

Notes to Condensed Consolidated Financial Statements

Madison County Bank (the “Bank”), a wholly owned subsidiary of Madison County Financial, Inc. (the “Company”), is engaged in providing a full range of banking and financial services to individual and corporate customers in the areas surrounding Madison, Nebraska. The Bank is subject to competition from other financial institutions. The Company is subject to the regulation of the Federal Reserve Board and the Bank is subject to the regulation of the Comptroller of the Currency (“OCC”) and both undergo periodic examinations by such authority.

On October 3, 2012, Madison County Holding Company, MHC, (the “MHC), the Bank’s former federally chartered mutual holding company, consummated its mutual-to-stock conversion and the Company consummated its initial stock offering.

In the Offering, the Company sold 3,193,054 shares of its common stock, par value $0.01 per share, at $10.00 per share in a subscription offering and community offering, including 255,444 shares, equal to 8.0% of the shares sold in the offering, to the Madison County Bank employee stock ownership plan.

The cost of the conversion and the stock offering were deferred and deducted from the proceeds of the offering. Conversion costs incurred for the year ended December 31, 2012 were $1,254.

In accordance with applicable federal conversion regulations, at the time of the completion of the mutual-to-stock conversion, we established a liquidation account in an amount equal to the Bank’s total equity as of the latest balance sheet date in the final prospectus used in the Conversion. Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Bank, and only in such event. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any December 31 and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance.

The Company may not declare, pay a dividend on, or repurchase any of its capital stock of the Bank, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

The conversion was accounted for as a change in corporate form with the historic basis of the MHC’s consolidated assets, liabilities and equity unchanged as a result.

Note 1: Basis of Presentation

The accompanying condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Company’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. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2014, are not necessarily indicative of the results which may be expected for the year ending December 31, 2014.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Note 2: Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 3: Earnings Per Share

The Company has granted stock compensation awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share (EPS) is computed using the two-class method as required by ASC 260-10-45. Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned.

The following table presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
	(Unaudited, Dollars in Thousands except share and per share data)

Net income	$	879		$	800	$	2,174		$	2,292
Allocated to participating securities		(32	)		-		(74	)		-
Net income allocated to common stockholders	$	847		$	800	$	2,100		$	2,292

Weighted average common shares outstanding, gross		3,049,955			3,193,054		3,065,576			3,193,054
Less: Average unearned ESOP shares and participating securities		329,335			239,249		316,394			241,778
Weighted average common shares outstanding, net		2,720,620			2,953,805		2,749,182			2,951,276
Effect of diluted based awards		-			-		-			-
Weighted average shares and common stock equivalents		2,720,620			2,953,805		2,749,182			2,951,276

Income per common share:
Basic	$	0.31		$	0.27	$	0.76		$	0.78
Diluted		0.31			0.27		0.76			0.78

Options excluded from the calculation due to their anti-dilutive effect on earnings per share		288,000			N/A		288,000			N/A

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Note 4: Investment Securities

The amortized cost and approximate fair values of investment securities are as follows:

	September 30, 2014
			Gross		Gross			Approximate
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
			(Unaudited)
Available for sale:
U.S. Treasuries	$	500	$	-	$	-		$	500
Federal agencies		9,762		277		(65	)		9,974
Total available for sale		10,262		277		(65	)		10,474

Held to maturity:
State and municipal		34,871		457		(85	)		35,243
Total held to maturity		34,871		457		(85	)		35,243

Total investment securities	$	45,133	$	734	$	(150	)	$	45,717

	December 31, 2013
			Gross		Gross			Approximate
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Available for sale:
U.S. Treasuries	$	500	$	-	$	-		$	500
Federal agencies		9,289		231		(301	)		9,219
Total available for sale		9,789		231		(301	)		9,719

Held to maturity:
State and municipal		34,144		140		(1,392	)		32,892
Total held to maturity		34,144		140		(1,392	)		32,892

Total investment securities	$	43,933	$	371	$	(1,693	)	$	42,611

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The amortized cost and fair value of investment securities at September 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
			(Unaudited)

Within one year	$	500	$	500	$	2,585	$	2,587
After one through five years		3,163		3,336		2,497		2,507
After five through ten years		4,344		4,405		4,565		4,649
After ten years		2,255		2,233		25,224		25,500

	$	10,262	$	10,474	$	34,871	$	35,243

The carrying value of investment securities pledged as collateral, to secure public deposits and for other purposes was $6,802 at September 30, 2014 (unaudited) and $5,560 at December 31, 2013.

There were no sales of investment securities available for sale for the three and nine months ended September 30, 2014 and 2013 (unaudited).

Certain investments in debt securities have fair values at an amount less than their historical cost. Total fair value of these investments at September 30, 2014 (unaudited) and December 31, 2013 was $8,995 and $24,933, which is approximately 20% and 59%, respectively, of the Company’s investment portfolio. These declines primarily resulted from changes in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these investment securities are temporary.

Should the impairment of any of these investment securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Investment securities with unrealized losses at September 30, 2014 were as follows:

	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
						(Unaudited)
Available for sale-
Federal agencies	$	-	$	-		$	3,225	$	(65	)	$	3,225	$	(65	)
Held to maturity-
State and municipal		373		(2	)		5,397		(83	)		5,770		(85	)

	$	373	$	(2	)	$	8,622	$	(148	)	$	8,995	$	(150	)

Investment securities with unrealized losses at December 31, 2013 were as follows:

	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

Available for sale-
Federal agencies	$	5,462	$	(250	)	$	449	$	(51	)	$	5,911	$	(301	)
Held to maturity-
State and municipal		18,354		(1,342	)		668		(50	)		19,022		(1,392	)

	$	23,816	$	(1,592	)	$	1,117	$	(101	)	$	24,933	$	(1,693	)

The unrealized losses on the Company’s investments in federal agencies and state and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2014.

Note 5: Loans and Allowance

The Company’s loan and allowance policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Premiums and discounts are amortized as a level yield adjustment over the respective term of the loan.

For loans not secured by real estate or loans secured by real estate with loan-to-value ratios of 80% or more, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. For loans secured by real estate with a loan-to-value ratio of less than 80%, the accrual of interest is discontinued after the loan is 120 days past due. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. There were no changes in the Company’s nonaccrual policy during the nine month-end periods ended September 30, 2014 and 2013 (unaudited).

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The allowance consists of general and allocated components. The general component covers non-impaired loans and is based on the product of the historical loss experience rate, adjusted by certain qualitative factors in basis points, and the portfolio balance for each loan segment. The historical loss experience rate is determined for each loan portfolio segment and is based on the actual loss history experienced by the Company over the prior four years. Management believes the four year historical loss experience methodology is appropriate in the current economic environment. The qualitative factors considered include changes in experience of lending staff, lending policies and procedures; changes in loan review and oversight, changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; changes in the underlying collateral and changes in current, national and local economic and business conditions.

The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

The fair values of collateral-dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial non-real estate, commercial real estate and multi-family real estate loans. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company generally does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Categories of loans receivable include:

	September 30,		December 31,
	2014		2013
	(Unaudited)
Real estate:
Agricultural	$	119,950	$	110,533
Commercial and multi-family		19,406		19,751
One- to four-family residential		39,549		38,322
Agricultural and commercial non-real estate		57,618		57,661
Consumer		4,428		4,249
		240,951		230,516
Less
Allowance for losses		7,101		6,171

Total loans	$	233,850	$	224,345

The risk characteristics of each loan portfolio segment are as follows:

Agricultural Real Estate

Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 70% and have amortization periods limited to twenty one years.

Agricultural and Commercial Non-Real Estate

Agricultural non-real estate loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry-developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary.

Commercial non-real estate loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial non-real estate loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Commercial and Multi-Family Real Estate

Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial and multi-family real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial and multi-family real estate portfolio are diverse, but virtually all of these loans are secured by properties in Nebraska. Management monitors and evaluates commercial real estate and multi-family real estate loans based on collateral, geography and risk grade criteria. In addition, the Company generally will not finance single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Residential Real Estate and Consumer

Residential real estate and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio of 80% of the sales price or appraised value, whichever is lower, and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2014, and 2013:

	Real Estate
			Commercial			One- to			Agricultural
			and			Four-Family			and
	Agricultural		Multi-Family			Residential			Commercial		Consumer			Total
						(Unaudited)
Three Months Ended September 30, 2014 (Unaudited)

Allowance for Loan Losses:
Balance, beginning of period	$	3,804	$	576		$	658		$	1,617	$	86		$	6,741
Provision for loan losses		219		(68	)		(54	)		240		23			360
Loans charged to the allowance		-		-			-			-		-			-
Recoveries of loans previously charged off		-		-			-			-		-			-

Balance, end of period	$	4,023	$	508		$	604		$	1,857	$	109		$	7,101

Nine Months Ended September 30, 2014 (Unaudited)

Allowance for Loan Losses:
Balance, beginning of period	$	3,340	$	597		$	510		$	1,638	$	86		$	6,171
Provision for loan losses		683		(89	)		94			219		23			930
Loans charged to the allowance		-		-			-			-		-			-
Recoveries of loans previously charged off		-		-			-			-		-			-

Balance, end of period	$	4,023	$	508		$	604		$	1,857	$	109		$	7,101

Three Months Ended September 30, 2013 (Unaudited)

Allowance for Loan Losses:
Balance, beginning of period	$	2,879	$	677		$	548		$	1,232	$	95		$	5,431
Provision for loan losses		202		(23	)		(67	)		198		(5	)		305
Loans charged to the allowance		-		-			-			-		-			-
Recoveries of loans previously charged off		-		-			-			-		-			-

Balance, end of period	$	3,081	$	654		$	481		$	1,430	$	90		$	5,736

Nine Months Ended September 30, 2013 (Unaudited)

Allowance for Loan Losses:
Balance, beginning of period	$	2,585	$	456		$	467		$	1,337	$	96		$	4,941
Provision for loan losses		496		198			34			93		(6	)		815
Loans charged to the allowance		-		-			(20	)		-		-			(20	)
Recoveries of loans previously charged off		-		-			-			-		-			-

Balance, end of period	$	3,081	$	654		$	481		$	1,430	$	90		$	5,736

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents by portfolio segment, allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2014 and December 31, 2013:

	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total

At September 30, 2014 (Unaudited)

Allowance:
Ending balance	$	4,023	$	508	$	604	$	1,857	$	109	$	7,101
Ending balance individually evaluated for impairment	$	-	$	111	$	13	$	-	$	-	$	124
Ending balance collectively evaluated for impairment	$	4,023	$	397	$	591	$	1,857	$	109	$	6,977

Loans:
Ending balance	$	119,950	$	19,406	$	39,549	$	57,618	$	4,428	$	240,951
Ending balance individually evaluated for impairment	$	-	$	120	$	18	$	-	$	-	$	138
Ending balance collectively evaluated for impairment	$	119,950	$	19,286	$	39,531	$	57,618	$	4,428	$	240,813

At December 31, 2013

Allowance:
Ending balance	$	3,340	$	597	$	510	$	1,638	$	86	$	6,171
Ending balance individually evaluated for impairment	$	-	$	148	$	14	$	-	$	-	$	162
Ending balance collectively evaluated for impairment	$	3,340	$	449	$	496	$	1,638	$	86	$	6,009

Loans:
Ending balance	$	110,533	$	19,751	$	38,322	$	57,661	$	4,249	$	230,516
Ending balance individually evaluated for impairment	$	-	$	148	$	22	$	-	$	-	$	170
Ending balance collectively evaluated for impairment	$	110,533	$	19,603	$	38,300	$	57,661	$	4,249	$	230,346

The following table presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2014:

	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total
					(Unaudited)

Pass	$	119,152	$	19,286	$	38,900	$	56,561	$	4,338	$	238,237
Special Mention		266		-		453		804		67		1,590
Substandard		532		120		196		253		23		1,124
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-

Total	$	119,950	$	19,406	$	39,549	$	57,618	$	4,428	$	240,951

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2013:


	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total

Pass	$	110,410	$	19,603	$	37,716	$	57,637	$	4,210	$	229,576
Special Mention		-		-		494		24		22		540
Substandard		123		148		112		-		17		400
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-

Total	$	110,533	$	19,751	$	38,322	$	57,661	$	4,249	$	230,516

The Company generally categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on a homogeneous basis and the related delinquent amounts are reflected in the aging analysis table below. The Company uses the following definitions for risk ratings:

The Pass asset quality rating encompasses assets that have generally performed as expected. With the exception of some smaller consumer and residential loans, these assets generally do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral. These borrowers generally have a history of consistent earnings and reasonable leverage.

The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential at this state and are not yet fully defined.

The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal and the accrual of interest has been suspended.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the bank is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.

The following table presents the Company’s loan portfolio aging analysis and nonperforming loans as of September 30, 2014:


	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total
	(Unaudited)
Past Due:
30-59 days	$	-	$	-	$	-	$	5	$	7	$	12
60-89 days		-		-		136		13		6		155
90 days or more		144		-		317		-		-		461
Total past due		144		-		453		18		13		628
Current		119,806		19,406		39,096		57,600		4,415		240,323

Total loans	$	119,950	$	19,406	$	39,549	$	57,618	$	4,428	$	240,951

Nonaccrual loans	$	118	$	120	$	179	$	-	$	15	$	432
Loans past due 90 days and still accruing		144		-		253		-		-		397

	$	262	$	120	$	432	$	-	$	15	$	829

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents the Company’s loan portfolio aging analysis and nonperforming loans as of December 31, 2013:


	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total

Past Due:
30-59 days	$	199	$	-	$	376	$	52	$	40	$	667
60-89 days		296		-		171		24		-		491
90 days or more		-		-		-		-		2		2
Total past due		495		-		547		76		42		1,160
Current		110,038		19,751		37,775		57,585		4,207		229,356

Total loans	$	110,533	$	19,751	$	38,322	$	57,661	$	4,249	$	230,516

Nonaccrual loans	$	123	$	148	$	112	$	-	$	17	$	400
Loans past due 90 days and still accruing		-		-		-		-		2		2

	$	123	$	148	$	112	$	-	$	19	$	402

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following table presents impaired loans and specific valuation allowance based on class level at September 30, 2014:


	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total
	(Unaudited)

Impaired loans with an allowance for loan losses	$	-	$	120	$	18	$	-	$	-	$	138
Impaired loans with no allowance for loan losses		-		-		-		-		-		-

Total impaired loans	$	-	$	120	$	18	$	-	$	-	$	138

Unpaid principal balance of impaired loans	$	-	$	120	$	18	$	-	$	-	$	138
Allowance for loan losses on impaired loans		-		111		13		-		-		124

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents average impaired loans based on class level for the three and nine months ended September 30, 2014 and 2013:


		Real Estate
				Commercial		One- to		Agricultural
				and		Four-Family		and
		Agricultural		Multi-Family		Residential		Commercial		Consumer		Total
	(Unaudited)

Three Months Ended September 30, 2014 (Unaudited)

Average recorded investment in impaired loans		$	-	$	129	$	19	$	-	$	-	$	148
Interest income recognized on impaired loans		$	-	$	3	$	1	$	-	$	-	$	4

Nine Months Ended September 30, 2014 (Unaudited)

Average recorded investment in impaired loans		$	-		134		19		-		-		153
Interest income recognized on impaired loans		$	-	$	7	$	1	$	-	$	-	$	8

Three Months Ended September 30, 2013 (Unaudited)

Average recorded investment in impaired loans		$	-	$	151	$	23	$	-	$	-	$	174
Interest income recognized on impaired loans		$	-	$	6	$	-	$	-	$	-	$	6

Nine Months Ended September 30, 2013 (Unaudited)

Average recorded investment in impaired loans		$	-		26		30		-		-		56
Interest income recognized on impaired loans		$	-	$	6	$	1	$	-	$	-	$	7

The following table presents impaired loans and specific valuation allowance based on class level at December 31, 2013:


	Real Estate
			Commercial		One- to		Agricultural
			and		Four-Family		and
	Agricultural		Multi-Family		Residential		Commercial		Consumer		Total

Impaired loans with an allowance for loan losses	$	-	$	148	$	22	$	-	$	-	$	170
Impaired loans with no allowance for loan losses		-		-		-		-		-		-

Total impaired loans	$	-	$	148	$	22	$	-	$	-	$	170

Unpaid principal balance of impaired loans	$	-	$	148	$	22	$	-	$	-	$	170
Allowance for loan losses on impaired loans		-		148		14		-		-		162
Average recorded investment in impaired loans		-		46		28		-		-		74

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

During the three and nine months ended September 30, 2014 and 2013 (unaudited), there were no new restructurings classified as troubled debt restructurings. At September, 2014 and 2013 (unaudited), there were no such loans restructured within the last twelve months that were in default.

Note 6: Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Recurring Measurements

The following is a description of the valuation methodologies and inputs used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions. Additionally, matrix pricing is used for certain investment securities and is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Level 1 securities include U. S. Treasuries. Level 2 securities include federal agencies. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2014 and December 31, 2013:


	September 30, 2014
	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)
	(Unaudited)
Available for sale:
U.S. Treasuries	$	500	$	500	$	-	$	-
Federal agencies		9,974		-		9,974		-
	$	10,474	$	500	$	9,974	$	-

	December 31, 2013
	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

Available for sale:
U.S. Treasuries	$	500	$	500	$	-	$	-
Federal agencies		9,219		-		9,219		-
	$	9,719	$	500	$	9,219	$	-

The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires a current independent appraisal of the collateral and applying a discount factor to the value. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following tables present the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall:


	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2014 (Unaudited)

Impaired loans	$	14	$	-	$	-	$	14

December 31, 2013

Impaired loans	$	8	$	-	$	-	$	8

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.


			Valuation		Weighted
	Fair Value		Technique	Unobservable Inputs	Average

At September 30, 2014: (Unaudited)

Collateral-dependent	$	14	Market comparable	Marketability discount		10	%
impaired loans			properties

At December 31, 2013:

Collateral-dependent	$	8	Market comparable	Marketability discount		10	%
impaired loans			properties

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Certificates of Deposit, Federal Home Loan Bank Stock, Accrued Interest Receivable and Accrued Interest Payable

The carrying amount approximates fair value.

Held-to-Maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans and Loans Held for Sale

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include checking and money market savings accounts. The carrying amount of these deposits approximates fair value. The fair value of fixed-maturity time deposits (certificates and other time deposits) is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Borrowings

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The following table presents estimated fair values of the Company’s financial instruments at September 30, 2014:


	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
	(Unaudited)
Financial assets:
Cash and cash equivalents	$	2,150	$	2,150	$	-	$	-
Certificates of deposit		1,000		1,000		-		-
Held to maturity investment securities		34,871		-		35,243		-
Loans held for sale		655		-		655		-
Loans, net		233,850		-		-		239,544
Stock in Federal Home Loan Bank of Topeka		1,170		-		1,170		-
Accrued interest receivable		4,786		-		4,786		-

Financial liabilities:
Deposits		210,307		185,206		-		25,150
Borrowings		26,000		-		26,158		-
Accrued interest payable		98		-		98		-

The following table presents estimated fair values of the Company’s financial instruments at December 31, 2013:


	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)

Financial assets:
Cash and cash equivalents	$	4,119	$	4,119	$	-	$	-
Certificates of deposit		1,000		1,000		-		-
Held to maturity investment securities		34,144		-		32,892		-
Loans held for sale		269		-		269		-
Loans, net		224,345		-		-		230,813
Stock in Federal Home Loan Bank of Topeka		1,472		-		1,472		-
Accrued interest receivable		3,807		-		3,807		-

Financial liabilities:
Deposits		205,706		179,358		-		26,429
Borrowings		20,000		-		20,274		-
Accrued interest payable		99		-		99		-

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

Note 7: Share Based Compensation (Unaudited)

In November, 2013, the Company’s stockholders approved the 2013 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to officers, employees and directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards is being recognized over the five-year vesting periods during which participants are required to provide services in exchange for the awards. Certain officers and employees have seven-year vesting periods. Vesting began March 1, 2014, for directors and will begin November 1, 2014, for certain other officers and employees.

Until such time as awards of stock are granted and vested or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 447,027. Total stock-based compensation expense for the three and nine months ended September 30, 2014 was $120 and $629, respectively.

Stock Options

The table below represents the stock option activity for the period shown:


			Weighted		Remaining
			average		contractual
	Options		exercise price		life (years)

Options outstanding at January 1, 2014		-	$	-		-
Granted		288,000		17.10		10.00
Exercised		-		-		-
Forfeited		-		-		-
Expired		-		-		-
Options outstanding at September 30, 2014		288,000	$	17.10		9.50

There were 288,000 stock options granted on February 14, 2014.

As of September 30, 2014, the Company had $583 of unrecognized compensation expense related to stock options. The cost of the stock options will be amortized in monthly installments over the noted five-year and seven-year vesting periods, with the first vesting date of March 1, 2014, for directors, and November 1, 2014, for certain other officers and employees. There were 32,820 stock options that vested in the nine months ended September 30, 2014. Stock option expense for the three and nine months ended September 30, 2014 was $31 and $161, respectively. The aggregate grant date fair value of the stock options was $743. The total intrinsic value of options as of September 30, 2014 was $619.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The fair value of the Company’s stock options was determined using the Black-Scholes option pricing formula. The following assumptions were used in the formula:


Expected volatility		13.78	%
Risk-free interest rate		2.27	%
Expected dividend yield		1.64	%
Expected life (in years)		7.5
Exercise price for the stock options	$	17.10

Expected volatility – Based on the historical volatility of share price for similar companies.

Risk-free interest rate – Based on the U. S. Treasury yield curve and expected life of the options at the time of grant.

Dividend yield – Madison County Financial, Inc. paid, at the time of valuation, an annual dividend of $0.28 per share.

Expected life – Based on average of the five-year and seven-year vesting periods and the ten year contractual term of the stock option plan.

Exercise price for the stock options – Based on the closing price of the Company’s stock on the date of grant.

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of the grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

Madison County Financial, Inc.

Form 10-Q

(Dollars in thousands)

The table below represents the restricted stock award activity for the period shown:


	Service-Based			Weighted
	Restricted			Average
	Stock			Grant Date
	Awards			Fair Value

Non-vested at January 1, 2014		-		$	-
Granted		115,000			17.10
Vested		(14,840	)		17.10
Forfeited		-			-
Non-vested at September 30, 2014		100,160		$	17.10

Restricted stock awards of 115,000 were granted on February 14, 2014.

As of September 30, 2014, the Company had $1,499 of unrecognized compensation expense related to restricted stock awards. The cost of the restricted stock awards will be amortized in monthly installments over the five-year and seven-year vesting periods. Restricted stock expense for the three and nine months ended September 30, 2014 was $88 and $468, respectively.

Note 8: Recent Accounting Pronouncements

The Company is an emerging growth company and as such will be subject to the effective dates noted for the private companies if they differ from the effective dates noted for public companies.

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” to amend Topic 220, Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The amendments require an entity to present, either in the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective for annual and interim periods beginning January 1, 2014. Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,” to allow the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the current benchmark rates of direct Treasury obligations of the U.S. government and LIBOR (London Interbank Offered Rate). The amendments were effective on a prospective basis for new or newly-designated hedging relationships on July 17, 2013. Adoption did not have a significant effect on the Company’s consolidated financial statements.

Madison County Financial, Inc.

Form 10-Q

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to require presentation in the financial statements of an unrecognized tax benefit or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward, except as follows. When an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or when the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for annual periods beginning after December 31, 2014, and interim periods within annual periods beginning after December 15, 2015. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for prepares and stakeholders. This issue changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of and individually significant component of an entity that does not qualify for discontinued operations presentation.” The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted only for disposals or classifications as held for sale. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

Madison County Financial, Inc.

Form 10-Q

In May 2014, the FASB, in joint cooperation with IASB, issued ASU 2014-09, Revenue from Contracts with Customers. The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion. The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing. This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.” The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation. This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for three and nine months ended September 30, 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.

Madison County Financial, Inc.

Form 10-Q

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●

statements of our goals, intentions and expectations;

●

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

●

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

●

estimates of our risks and future costs and benefits.

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

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

●

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

●

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

●

competition among depository and other financial institutions;

●

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

●

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

●

adverse changes in the securities markets;

●

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

●

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

●

changes in consumer spending, borrowing and savings habits;

●

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

●

changes in our organization, compensation and benefit plans;

Madison County Financial, Inc.

Form 10-Q

●

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 September 30, 1014 and December 31, 2013

Total assets increased $11.8 million, or 4.1%, to $301.9 million at September 30, 2014, from $290.1 million at December 31, 2013. The increase was due primarily to increases in net loans, investment securities and bank-owned life insurance, offset in part by a decrease in cash and cash equivalents.

Total cash and cash equivalents decreased $2.0 million, or 47.8%, to $2.1 million, at September 30, 2014, from $4.1 million at December 31, 2013. This was due primarily to a $1.5 million increase in securities, the purchase of $1.5 million in bank-owned life insurance, a $9.5 million increase in net loans receivable, and the repurchase of Company common stock in the amount of $2.0 million. The decrease was offset by a $4.6 million increase in deposits, and a $6.0 million increase in borrowings.

Net loans increased $9.5 million, or 4.2%, to $233.8 million at September 30, 2014, from $224.3 million at December 31, 2013. Agricultural real estate loans increased $9.4 million, or 8.5%, to $120.0 million at September 30, 2014. One- to four-family residential real estate loans increased $1.2 million, or 3.2%, to $39.5 million at September 30, 2014, from $38.3 million at December 31, 2013. The allowance for loan losses increased $930,000, or 15.1%, to $7.1 million at September 30, 2014, from $6.2 million at December 31, 2013. The increase in agricultural real estate loans reflects the continued agricultural real estate purchase activity by our current agricultural loan customers and the addition of new agricultural real estate borrowers. The increase in one- to four-family residential real estate loans reflects a slightly higher demand for housing in our market area combined with the decline in competition for these loans from community banks reflecting increased compliance changes. The increase in the allowance for loan losses was due primarily to our quarterly analysis indicating a continued increased risk in the agricultural portfolio primarily due to a significant decline in the market price of corn and soybeans. For many producers, the market price of corn is below its cost of production which produces operational loss and thereby increasing the likelihood that such customers will be unable to make scheduled payments on loans owed to us.

Investment securities classified as available for sale increased $755,000, or 7.8%, to $10.5 million at September 30, 2014, from $9.7 million at December 31, 2013. Investment securities classified as held to maturity increased $727,000, or 2.1%, to $34.9 million at September 30, 2014, from $34.1 million at December 31, 2013. Cashflow for these investments was provided by maturities and calls of investment securities, and an increase in deposits and borrowings.

Madison County Financial, Inc.

Form 10-Q

Bank-owned life insurance increased $1.6 million, or 34.6%, 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, investment securities and certificates of deposit owned increased $979,000, or 25.7%, to $4.8 million at September 30, 2014, from $3.8 million at December 31, 2013, due to the increase in net loans and investment securities at September 30, 2014, as compared to December 31, 2013, offset by a decrease in the average yield on loans to 4.82% at September 30, 2014, from 5.06% at December 31, 2013.

Deposits increased $4.6 million, or 2.2%, to $210.3 million at September 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 $4.8 million, or 4.2%, and $4.4 million, or 9.7%, respectively, and noninterest-bearing checking accounts decreased $3.4 million, or 16.8%. This net increase in our core deposits was due primarily to an overall increase in the number of accounts. Certificates and time deposits decreased $1.2 million, or 4.7%, reflecting continued customer preference for more liquid transaction accounts rather than long term deposits.

Borrowings increased $6.0 million, or 30.0%, to $26.0 million at September 30, 2014, from $20.0 million at December 31, 2013. We utilize borrowings as an alternative funding source and borrow periodically from the Federal Home Loan Bank of Topeka and as needed, from the Federal Reserve Bank of Kansas City and the Bankers’ Bank of the West.

Total stockholders’ equity increased $415,000, or 0.7%, to $61.8 million at September 30, 2014, from $61.4 million at December 31, 2013. The increase resulted primarily from net income of $2.2 million during the nine months ended September 30, 2014 and a $629,000 increase in additional paid-in capital related to stock compensation expense for the period related to grants of options and restricted stock. The increase was offset by $2.0 million in repurchased and retired common stock and the annual cash dividend of $0.24 per share, aggregating $679,000, that was declared and paid during 2014 on outstanding shares.

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

General. Net income increased $79,000, or 9.9%, to $879,000 for the three months ended September 30, 2014, from $800,000 for the three months ended September 30, 2013. The increase reflected an increase in interest income and other income, offset by increases in interest expense, provision for loan losses and other expenses.

Interest and Dividend Income. Interest and dividend income increased $243,000, or 8.3%, to $3.2 million for the quarter ended September 30, 2014, from $2.9 million for the quarter ended September 30, 2013. The increase reflected an increase in the average interest-earning assets to $278.8 million for the 2014 quarter compared to $266.5 million for the 2013 quarter, and an increase in the average yield on interest-earning assets to 4.49% during the 2014 quarter from 4.34% during the 2013 quarter.

Interest income and fees on loans increased $184,000, or 7.1%, to $2.8 million for the three months ended September 30, 2014, from $2.6 million for the three months ended September 30, 2013. This was the result of a $23.3 million increase in average loans outstanding, to $231.2 million for the quarter ended September 30, 2014, from $207.9 million for the quarter ended September 30, 2013, offset by a decrease in the average yield on loans to 4.79% during the 2014 quarter from 4.97% during the 2013 quarter. Interest income on taxable investment securities increased $26,000, or 40.0%, to $91,000 for the 2014 quarter from $65,000 for the 2013 quarter, reflecting a $1.0 million increase in the average balance of these securities to $13.4 million, from $12.4 million, quarter to quarter. Interest income on non-taxable investment securities increased $35,000, or 15.1%, to $267,000 for the 2014 quarter from $232,000 for the 2013 quarter, reflecting a $2.8 million increase in the average balance of these securities to $32.3 million, from $29.5 million, quarter to quarter.

Madison County Financial, Inc.

Form 10-Q

Interest Expense. Interest expense increased $25,000, or 5.8%, to $454,000 for the three months ended September 30, 2014, from $429,000 for the three months ended September 30, 2013. The increase reflected an increase $14.9 million in the average balance of interest-bearing liabilities to $210.2 million for the 2014 quarter from $195.3 million for the 2013 quarter.

Interest expense on interest-bearing deposits increased $14,000, or 3.7%, to $388,000 for the quarter ended September 30, 2014, from $374,000 for the quarter ended September 30, 2013, as the average balance of these deposits increased to $197.8 million for the 2014 quarter from $189.0 million for the 2013 quarter. Interest expense on borrowings increased $11,000, or 20.0%, to $66,000 for the quarter ended September 30, 2014, from $55,000 for the quarter ended September 30, 2013, reflecting an increase of $6.1 million in the average balance of borrowings to $12.4 million for the 2014 quarter from $6.3 million for the 2013 quarter. This was offset by a decrease in the average rate paid on borrowings to 2.08% from 3.47%, quarter to quarter. The decrease in average rate paid was primarily due to a change in the mix of borrowings. The 2014 period reflected a higher percentage of short-term borrowings which were at lower rates of interest than long-term borrowings.

Net Interest Income. Net interest income increased $218,000, or 8.8%, to $2.7 million for the quarter ended September 30, 2014, from $2.5 million for the quarter ended September 30, 2013. This increase reflected an increase in our net interest rate spread to 3.63% for the 2014 quarter from 3.47% for the 2013 quarter, and an increase in our net interest margin to 3.85% for the 2014 quarter from 3.70% for the 2013 quarter, offset by a decrease in the average net interest-earning assets, to $68.6 million for the 2014 quarter from $71.1 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 $1.1 million for the 2014 quarter from $14.5 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 132.6% for the 2014 quarter from 136.4% for the 2013 quarter. The increase in our net interest rate spread and net interest margin reflected the 15 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 $360,000 for the quarter ended September 30, 2014, which was an increase of $55,000, or 18.0%, from our provision of $305,000 for the quarter ended September 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 51.3% of net loans receivable at September 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 three months ended September 30, 2014 and 2013 reflected no charge-offs or recoveries. The allowance for loan losses was $7.1 million, or 2.9% of total loans, as September 30, 2014, compared to $5.7 million, or 2.6% of total loans, at September 30, 2013. Total nonperforming loans were $829,000 at September 30, 2014, compared to $464,000 at September 30, 2013. As a percentage of nonperforming loans, the allowance for loan losses was 857% at September 30, 2014, compared to 1,236% at September 30, 2013. Loans classified as substandard increased to $1.1 million at September 30, 2014 as compared to $400,000 as of December 31, 2013 and $386,000 at September 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 increased $58,000, or 11.7%, to $555,000 for the quarter ended September 30, 2014, from $497,000 for the quarter ended September 30, 2013. The increase was due primarily to an increase in service charges on deposit accounts, an increase in gain on sales of loans and an increase in surrender value of life insurance.

Other Expense. Other expense increased $131,000, or 8.3%, to $1.7 million for the quarter ended September 30, 2014, from $1.6 million for the quarter ended September 30, 2013, due primarily to an $80,000 increase in salaries and employee benefits expense and an $83,000 increase in directors fees and benefits expense, offset by a $26,000 decrease in professional and service fees. 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 $309,000 for the quarter ended September 30, 2014, compared to $298,000 for the quarter ended September 30, 2013, resulting primarily from an increase in net income, offset by an increase in tax exempt income. Our effective tax rate was 26.0% for the quarter ended September 30, 2014, compared to 27.1% for the quarter ended September 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 Nine Months Ended September 30, 2014 and 2013

General. Net income decreased $118,000, or 5.1%, to $2.2 million for the nine months ended September 30, 2014, from $2.3 million for the nine months ended September 30, 2013. The decrease reflected an increase in interest expense, an increase in provision for loan losses, an increase in other expenses, and a decrease in other income, offset by an increase in interest income.

Interest and Dividend Income. Interest and dividend income increased $683,000, or 7.9%, to $9.3 million for the nine months ended September 30, 2014, from $8.6 million for the nine months ended September 30, 2013. The increase reflected an increase in the average interest-earning assets to $277.0 million for the 2014 period compared to $268.4 million for the 2013 period, and an increase in the average yield on interest-earning assets to 4.49% during the 2014 period from 4.29% during the 2013 period.

Madison County Financial, Inc.

Form 10-Q

Interest income and fees on loans increased $528,000, or 6.9%, to $8.2 million for the nine months ended September 30, 2014, from $7.7 million for the nine months ended September 30, 2013. This was the result of a $24.5 million increase in average loans outstanding, to $227.7 million for the nine months ended September 30, 2014, from $203.2 million for the nine months ended September 30, 2013, offset by a decrease in the average yield on loans to 4.82% during the 2014 period from 5.06% during the 2013 period. Interest income on taxable investment securities increased $36,000, or 15.5%, to $269,000 for the 2014 period from $233,000 for the 2013 period, reflecting a $1.0 million increase in the average balance of these securities to $13.3 million, from $12.3 million, period to period. Interest income on non-taxable investment securities increased $150,000, or 23.5%, to $788,000 for the 2014 period from $638,000 for the 2013 period, reflecting a $6.1 million increase in the average balance of these securities to $32.1 million, from $26.0 million, period to period.

Interest Expense. Interest expense increased $45,000, or 3.5%, to $1.3 million for the nine months ended September 30, 2014, from $1.3 million for the nine months ended September 30, 2013. The increase reflected an increase $10.7 million in the average balance of interest-bearing liabilities to $208.0 million for the 2014 period from $197.2 million for the 2013 period.

Interest expense on interest-bearing deposits increased $25,000, or 2.2%, to $1.1 million for the nine months ended September 30, 2014, from $1.1 million for the nine months ended September 30, 2013, as the average balance of these deposits increased to $197.8 million for the 2014 period from $190.9 million for the 2013 period. Interest expense on borrowings increased $20,000, or 12.3%, to $183,000 for the period ended September 30, 2014, from $163,000 for the period ended September 30, 2013, reflecting an increase of $3.9 million in the average balance of borrowings to $10.2 million for the 2014 period from $6.3 million for the 2013 period. This was offset by a decrease in the average rate paid on borrowings to 2.41% from 3.46%, period to period.

Net Interest Income. Net interest income increased $638,000, or 8.7%, to $8.0 million for the nine months ended September 30, 2014, from $7.3 million for the nine months ended September 30, 2013. This increase reflected an increase in our net interest rate spread to 3.63% for the 2014 period from 3.41% for the 2013 period, and an increase in our net interest margin to 3.84% for the 2014 period from 3.65% for the 2013 period, offset by a decrease in the average net interest-earning assets, to $69.1 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 $3.0 million for the 2014 period from $24.5 million for the 2013 period, as a 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 133.2% for the 2014 period from 136.1% for the 2013 period. The increase in our net interest rate spread and net interest margin reflected the 20 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 $930,000 for the nine months ended September 30, 2014, which was an increase of $115,000, or 14.1%, from our provision of $815,000 for the nine months ended September 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 51.3% of net loans receivable at September 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 nine months ended September 30, 2014 reflected no charge-offs or recoveries, compared to the nine months ended September 30, 2013, which reflected chargeoffs of $20,000 and no recoveries. The allowance for loan losses was $7.1 million, or 2.9% of total loans, as September 30, 2014, compared to $5.7 million, or 2.6% of total loans, at September 30, 2013. Total nonperforming loans were $829,000 at September 30, 2014, compared to $464,000 at September 30, 2013. As a percentage of nonperforming loans, the allowance for loan losses was 857% at September 30, 2014, compared to 1,236% at September 30, 2013. Loans classified as substandard increased to $1.1 million at September 30, 2014 as compared to $400,000 as of December 31, 2013 and $386,000 at September 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 $27,000, or 1.9%, to $1.4 million for the nine months ended September 30, 2014, from $1.4 million for the nine months ended September 30, 2013. The decrease was due primarily to a decrease in gain on sales of loans, offset by an increase in service charges on deposit accounts and an increase in surrender value of life insurance.

Other Expense. Other expense increased $772,000, or 16.2%, to $5.5 million for the nine months ended September 30, 2014, from $4.8 million for the nine months ended September 30, 2013, due primarily to a $239,000 increase in salaries and employee benefits expense and a $537,000 increase in directors fees and benefits 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 $695,000 for the nine months ended September 30, 2014, compared to $853,000 for the nine months ended September 30, 2013, resulting primarily from a decrease in net income and an increase in tax-exempt income. Our effective tax rate was 24.2% for the nine months ended September 30, 2014, compared to 27.1% for the nine months ended September 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.

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 $2.5 million and $3.1 million for the nine months ended September 30, 2014 and 2013, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in purchases of/proceeds from maturities of investment securities was $12.3 million and $15.3 million for the nine months ended September 30, 2014 and 2013, respectively, principally due to an increase in loans receivable, the purchases of investment securities in excess of maturities and the purchase of additional bank-owned life insurance. Net cash provided by financing activities, which is comprised of net change in deposits and proceeds from and repayment of borrowings and dividends paid, was $7.9 million and $7.4 million for the nine months ended September 30, 2014 and 2013, respectively, and resulted primarily from an increase in borrowings, the declaration and payment of an annual cash dividend of $0.24 per share, and repurchased shares of Company common stock, offset by an increase in deposits.

At September 30, 2014, we exceeded all of our regulatory capital requirements with a Tier 1 (core) capital level of $51.8 million, or 16.7% of adjusted total assets, which is above the required level of $12.4 million, or 4.0%; and total risk-based capital of $55.8 million, or 17.9% of risk-weighted assets, which is above the required level of $24.9 million, or 8.0%. Accordingly Madison County Bank was categorized well capitalized at September 30, 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.

Madison County Financial, Inc.

Form 10-Q

At September 30, 2014, we had outstanding commitments to originate loans of $26.1 million and lines of credit of $20.8 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2014 totaled $18.1 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 Federal Home Loan Bank of Topeka advances or Federal Reserve Bank of Kansas City borrowings or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Risk Classification of Loans

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or criticized assets designated as special mention. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The risk rating guidance published by the OCC clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated substandard. An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. If an asset is considered uncollectible and of such little value that their continuance as assets is not warranted, they are promptly charged-off as required by applicable federal regulations. A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Loans classified as special mention increased to $1.6 million at September 30, 2014 as compared to $540,000 at December 31, 2013 and $526,000 at September 30, 2013. Loans classified as substandard increased to $1.1 million at September 30, 2014 as compared to $400,000 as of December 31, 2013 and $386,000 at September 30, 2013. The increases were primarily due to one loan relationship newly classified during the second quarter of 2014 as special mention and two loan relationships newly classified during the second quarter of 2014 as substandard.

The relationship classified as special mention totals $975,000 and is comprised of $266,000 in agricultural real estate loans, $669,000 in agricultural non-real estate loans and a $40,000 consumer loan. This loan relationship is to one borrower and management determined the classification of the relationship due to a breach of the borrower’s loan covenant to file income tax returns and provide copies of those returns to the Bank. All of these loans were current at September 30, 2014.

Madison County Financial, Inc.

Form 10-Q

Management classified a $250,000 farm operating loan as substandard as a result of the borrower’s loss in the farming operation. Because the farm operating debt cannot be liquidated from normal earnings, the debt results in the borrower’s current liabilities exceeding assets. This loan was current at September 30, 2014.

Management classified a loan relationship to one borrower, comprised of several loans totaling $427,000, as substandard. The classification resulted from the borrower’s historical pattern of late payments on three of the borrower’s six loans, resulting in lower principal amortization than the loan agreements contemplate. Three of the loans totaling $270,000 were current at September 30, 2014, two loans totaling $13,000 were between 72 and 87 days past due at September 30, 2014 and one loan totaling $144,000 was 91 days past due at September 30, 2014.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2014. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2014, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

We are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Registrant’s financial condition or results of operations.

Item 1A.

Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

Madison County Financial, Inc.

Form 10-Q

(c)

The Company’s board of directors has authorized three stock repurchase programs for an aggregate of 413,835 shares of the Company’s issued common stock. Under the first stock repurchase program, which was approved on September 16, 2013, the Company was authorized to repurchase up to 159,653 shares of the Company’s issued common stock, commencing on or after October 3, 2013, the one year anniversary of the consummation of the Company’s initial public offering. The first stock repurchase program was completed during the first quarter of 2014.

On November 13, 2013, a second repurchase program was approved, which authorized the repurchase up to 160,000 shares of the Company’s issued common stock.

On May 19, 2014, a third repurchase program was approved, which authorized the repurchase up to 94,182 shares of the Company’s issued common stock.

Under each repurchase program, repurchases were or will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to SEC Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time, depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the third quarter of 2014.


					Maximum Number
					of Shares that May
					Yet Be Purchased
	Total Number of		Average Price		Under the Plans or
Period	Shares Purchased		Paid Per Share		Programs

July 1 through July 31, 2014		10,000	$	18.00		156,763
August 1 through August 31, 2014		-		-		156,763
September 1 through September 30, 2014		13,500	$	18.92		143,263
Total		23,500	$	18.53		143,263

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Madison County Financial, Inc.

Form 10-Q

Item 6.

Exhibits

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Madison County Financial, Inc.

Date: November 13, 2014		/s/ David J. Warnemunde
		David J. Warnemunde
		President and Chief Executive Officer

Date: November 13, 2014		/s/ Brenda L. Borchers
		Brenda L. Borchers
		Chief Financial Officer

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David J. Warnemunde, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Madison County Financial, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2014		/s/ David J. Warnemunde
		David J. Warnemunde
		President and Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Brenda L. Borchers, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Madison County Financial, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2014		/s/ Brenda L. Borchers
		Brenda L. Borchers
		Chief Financial Officer

Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

David J. Warnemunde, President and Chief Executive Officer of Madison County Financial, Inc., (the “Company”) and Brenda L. Borchers, Chief Financial Officer of the Company, each certify in his and her capacity as an officer of the Company that he/she has reviewed the quarterly report on Form 10-Q for the quarter ended September 30, 2014 (the “Report”) and that to the best of his/her knowledge:

the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2014		/s/ David J. Warnemunde
		David J. Warnemunde
		President and Chief Executive Officer

Date: November 13, 2014		/s/ Brenda L. Borchers
		Brenda L. Borchers
		Chief Financial Officer

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