-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IK3KEIZhbD2ouP2Nf7YJ5BfXAKevTXoC2Ih9Fh5BviJ8i5HgT454k+wFHOd7j2JJ UdtYaRKt/ZKUoJfcPBDMvQ== 0001002105-08-000190.txt : 20080516 0001002105-08-000190.hdr.sgml : 20080516 20080516172903 ACCESSION NUMBER: 0001002105-08-000190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080516 DATE AS OF CHANGE: 20080516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDDLEBURG FINANCIAL CORP CENTRAL INDEX KEY: 0000914138 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541696103 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24159 FILM NUMBER: 08843381 BUSINESS ADDRESS: STREET 1: 111 W WASHINGTON ST STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 BUSINESS PHONE: 5406876377 MAIL ADDRESS: STREET 1: 111 WEST WASHINGTON STREET STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT COMMUNITY BANKSHARES INC DATE OF NAME CHANGE: 19931027 10-Q 1 f10q033108.htm

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 March 31, 2008

 

or

 

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 Number: 0-24159

 

MIDDLEBURG FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Virginia

(State or other jurisdiction of

incorporation or organization)

 

54-1696103

(I.R.S. Employer

Identification No.)

 

111 West Washington Street

Middleburg, Virginia

(Address of principal executive offices)

 

 

20117

(Zip Code)

 

(703) 777-6327

(Registrant’s telephone number, including area code)

 

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 filing requirements for the past 90 days.            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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer o

Accelerated filer x

 

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 4,526,817 shares of Common Stock as of May 12, 2008


 

Table of Contents

 

 

 

Part I. Financial Information

 

 

 

 

 

Page No.

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Income

4

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

 

Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

 

 

 

Part II. Other Information

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults upon Senior Securities

31

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

31

 

 

 

Signatures

32

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

 

(Unaudited)

 

 

 

 

March 31,

 

December 31,

 

 

2008

 

2007

Assets

 

 

 

 

Cash and due from banks

$

23,962 

$

19,413 

Interest bearing deposits in banks

 

642 

 

803 

Federal funds sold

 

2,500 

 

-- 

Securities (fair value: March 31, 2008,

 

 

 

 

$157,221; December 31, 2007, $129,146)

 

157,221 

 

129,142 

Loans held for sale, net of allowance for loan losses of $61

 

31,061 

 

-- 

Loans, net of allowance for loan losses of $8,616,

 

 

 

 

March 31, 2008; and $7,093, December 31, 2007

 

650,593 

 

638,692 

Premises and equipment, net

 

21,647 

 

20,639 

Accrued interest receivable and other assets

 

35,480 

 

32,711 

 

 

 

 

 

Total assets

 

923,106 

 

841,400 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

Liabilities

 

 

 

 

Deposits

 

 

 

 

Non-interest bearing demand deposits

 

124,062 

 

119,556 

Savings and interest bearing demand deposits

 

261,518 

 

238,992 

Time deposits

 

210,447 

 

230,221 

Total deposits

 

596,027 

 

588,769 

 

 

 

 

 

Federal funds purchased

 

-- 

 

500 

Securities sold under agreements to repurchase

 

53,097 

 

51,781 

Short-term borrowings

 

73,726 

 

22,000 

Long-term debt

 

104,000 

 

88,000 

Trust preferred capital notes

 

5,155 

 

5,155 

Accrued interest payable and other liabilities

 

10,046 

 

7,291 

Total liabilities

$

842,051 

$

763,496 

 

 

 

 

 

Minority interest in consolidated variable interest entity

 

4,123 

 

--

 

 

 

 

 

Shareholders' Equity

 

 

 

 

Common stock, par value $5.00 per

 

 

 

 

share, authorized 10,000,000 shares;

 

 

 

 

issued and outstanding at March 31, 2008 - 4,526,817 shares

 

 

 

 

issued and outstanding at December 31, 2007 – 4,526,317 shares

$

11,317 

$

11,316 

Capital surplus

 

23,836 

 

23,817 

Retained earnings

 

42,876 

 

43,773 

Accumulated other comprehensive loss, net

 

(1,097)

 

(1,002)

Total shareholders' equity

$

76,932 

$

77,904 

 

 

 

 

 

Total liabilities and shareholders' equity

$

923,106 

$

841,400 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

3


 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In Thousands, Except Per Share Data)

 

(Unaudited)

 

For the Three Months

 

Ended March 31,

 

2008

 

2007

Interest and Dividend Income

 

 

 

 

Interest and fees on loans

$

12,159 

$

9,983

Interest on investment securities:

 

 

 

 

Taxable

 

-- 

 

1

Nontaxable

 

 

14

Interest on securities available for sale:

 

 

 

 

Taxable

 

1,117 

 

1,126

Nontaxable

 

473 

 

472

Dividends

 

125 

 

97

Interest on deposits in banks and federal funds sold

 

99 

 

60

Total interest and dividend income

$

13,977 

$

11,753

Interest Expense

 

 

 

 

Interest on deposits

$

3,946 

$

3,518

Interest on securities sold under agreements to repurchase

 

385 

 

506

Interest on short-term debt

 

789 

 

434

Interest on long-term debt

 

1,130 

 

486

Total interest expense

$

6,250 

$

4,944

Net interest income

$

7,727 

$

6,809

Provision for loan losses

 

2,064 

 

152

Net interest income after provision for loan losses

$

5,663 

$

6,657

Other Income

 

 

 

 

Service charges on deposit accounts

$

473 

$

466

Trust and investment advisory fee income

 

984 

 

1,105

Net gains on securities available for sale

 

108 

 

--

Commissions on investment sales

 

117 

 

127

Equity in earnings of affiliate

 

-- 

 

52

Net gains on mortgages held for sale

 

2,266 

 

 

Fees on mortgages held for sale

 

435 

 

--

Other service charges, commissions and fees

 

147 

 

170

Bank-owned life insurance

 

114 

 

109

Other operating income

 

158 

 

28

Total other income

$

4,802 

$

2,057

Other Expense

 

 

 

 

Salaries and employees’ benefits

$

6,585 

$

3,340

Net occupancy and equipment expense

 

1,393 

 

817

Other taxes

 

160 

 

156

Computer operations

 

267 

 

258

Audits and examinations

 

98 

 

214

Legal fees

 

225 

 

78

Other operating expenses

 

1,779 

 

856

Total other expense

$

10,507 

$

5,719

Income (loss) before income taxes

$

(42)

$

2,995

Minority interest in consolidated variable interest entity

 

31 

 

--

Income tax expense (benefit)

 

(164)

 

849

Net income

$

153 

$

2,146

 

 

 

 

 

Net income per share, basic

$

0.03 

$

0.48

Net income per share, diluted

$

0.03 

$

0.47

Dividends per share

$

0.19 

$

0.19

 

See Accompanying Notes to Consolidated Financial Statements.

 

4


 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2008 and 2007

(In Thousands, Except Share Data)

(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

Capital

 

Retained

 

Comprehensive

 

Comprehensive

 

 

 

 

Stock

 

Surplus

 

Earnings

 

Loss

 

Income

 

Total

Balances - December 31, 2006

$

11,264  

$

23,503

$

44,139 

$

(1,008)

 

 

$

77,898  

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

2,146 

 

 

$

2,146 

 

2,146 

Other comprehensive income net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the

 

 

 

 

 

 

 

 

 

 

 

 

period (net of tax, $65)

 

 

 

 

 

 

 

 

 

126 

 

 

Other comprehensive income (net of tax, $65)

 

 

 

 

 

 

 

126 

$

126 

 

126 

Total comprehensive income

 

 

 

 

 

 

 

 

$

2,272 

 

 

Cash dividends declared

 

 

 

 

 

(856)

 

 

 

 

 

(856)

Share-based compensation

 

 

 

16

 

 

 

 

 

 

 

16 

Balances – March 31, 2007

$

11,264  

$

23,519

$

45,429 

$

(882)

 

 

$

79,330 

 

 

 

 

 

Balances - December 31, 2007

$

11,316 

$

23,817

$

43,773 

$

(1,002)

 

 

$

77,904 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

153 

 

 

$

153 

 

153 

Other comprehensive losses net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the

 

 

 

 

 

 

 

 

 

 

 

 

period (net of tax, $12)

 

 

 

 

 

 

 

 

 

(24)

 

 

Reclassification adjustment (net of tax, $37)

 

 

 

 

 

 

 

 

 

(71)

 

 

Other comprehensive loss (net of tax, $49)

 

 

 

 

 

 

 

(95)

$

(95)

 

(95)

Total comprehensive income

 

 

 

 

 

 

 

 

$

58 

 

 

Cash dividends declared

 

 

 

 

 

(860)

 

 

 

 

 

(860)

Reduction due to change in pension measurement date

 

 

 

 

 

(190)

 

 

 

 

 

(190)

Share-based compensation

 

 

 

14

 

 

 

 

 

 

 

14 

Issuance of common stock (500 shares)

 

1 

 

5

 

 

 

 

 

 

 

6 

Balances – March 31, 2008

$

11,317 

$

23,836

$

42,876 

$

(1,097)

 

 

$

76,932 

 

See Accompanying Notes to Consolidated Financial Statements.

 

5


 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

 

 

For the Three Months Ended

 

March 31,

 

March 31,

 

2008

 

2007

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income

$

153 

$

2,146 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Provision for loan losses

 

2,064 

 

152 

Depreciation and amortization

 

484 

 

433 

Equity in distributions in excess of earnings (undistributed earnings) of affiliate

 

(15)

 

38 

Discount (accretion) and premium amortization on securities, net

 

37 

 

(8)

Net (gain) loss on securities available for sale

 

(108)

 

-- 

Originations of loans held for sale

 

159,813 

 

-- 

Proceeds from sales of loans held for sale

 

(149,326)

 

-- 

(Gains) on mortgages held for sale

 

(2,266)

 

-- 

Loss on disposal of premises and equipment

 

-- 

 

11 

Share-based compensation

 

14 

 

16 

Minority interest in earnings of variable interest entity

 

(31)

 

-- 

(Increase) in other assets

 

(343)

 

(299)

Increase in other liabilities

 

1,818 

 

1,369 

Net cash provided by operating activities

$

12,294 

$

3,858 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Proceeds from maturity, principal paydowns and calls on investment securities

$

155 

$

125 

Proceeds from maturity, principal paydowns and calls of securities available for sale

 

5,660  

 

7,833 

Proceeds from sale of investment securities

 

526 

 

-- 

Proceeds from sale of securities available for sale

 

28,885 

 

1,913 

Purchase of securities available for sale

 

(63,378)

 

(8,285)

Net decrease (increase) in loans

 

6,322 

 

(15,006)

Investment by minority interest in variable interest entity

 

438 

 

-- 

Consolidation of variable interest entity

 

3,262 

 

-- 

Purchases of premises and equipment

 

(1,165)

 

(758)

Net cash (used in) investing activities

$

(19,295)

$

(14,178)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net (decrease) increase in non-interest bearing and interest

 

 

 

 

bearing demand deposits and savings accounts

$

27,032 

$

(1,508)

Net (decrease) in certificates of deposits

 

(19,774)

 

(12,258)

Net (decrease) in federal funds purchased

 

(500)

 

-- 

Proceeds from Federal Home Loan Bank advances

 

86,500 

 

87,500 

Payment on Federal Home Loan Bank advances

 

(95,831)

 

(57,500)

Payment on long-term debt

 

-- 

 

(5,000)

Proceeds from long-term debt

 

16,000 

 

-- 

Cash dividends paid

 

(860)

 

(856)

Issuance of common stock

 

6 

 

-- 

Increase in securities sold under agreements to repurchase

 

1,316 

 

1,448 

Net cash provided by financing activities

$

13,889 

$

11,826 

Increase (decrease) in cash and cash equivalents

$

6,888 

$

1,506 

CASH AND CASH EQUIVALENTS

 

 

 

 

Beginning

 

20,216 

 

18,556 

Ending

$

27,104 

$

20,062 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

Cash payments for:

 

 

 

 

Interest

$

5,762 

$

4,832 

Income taxes

 

-- 

 

33 

SUPPLEMENTAL DISCLOSURES FOR NON-CASH

 

 

 

 

INVESTING AND FINANCING ACTIVITIES

 

 

 

 

Unrealized gain (loss) on securities available for sale

 

(144)

 

191 

 

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

6


 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDAIRIES

Notes to Consolidated Financial Statements

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

 

Note 1.

General

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2008 and the results of operations, changes in shareholders’ equity and cash flows for the three months ended March 31, 2008 and 2007, in accordance with accounting principles generally accepted in the United States of America. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”) of Middleburg Financial Corporation (the “Company”). The results of operations for the three months ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year. See Note 10 for a discussion of the consolidation of Southern Trust Mortgage, LLC as a variable interest entity.

 

Note 2.

Stock –Based Employee Compensation Plan

 

As of March 31, 2008, the Company sponsored one stock-based compensation plan (the 2006 Equity Compensation Plan), which provides for the granting of stock options, stock appreciation rights, stock awards, performance share awards, incentive awards and stock units. The 2006 Equity Compensation Plan was approved by the Company’s shareholders at the Annual Meeting held on April 26, 2006 and has succeeded the Company’s 1997 Stock Incentive Plan. Under the plan, the Company may grant stock-based compensation to its directors, officers, employees and other persons the Company determines have contributed to the profits or growth of the Company. The Company may grant awards with respect to up to 255,000 shares of common stock under the 2006 Equity Compensation Plan.

 

The Company did not grant any stock awards during the three months ended March 31, 2008. For stock awards granted in prior years, the Company recognized $14,000 in compensation expense for the three months ended March 31, 2008.

 

The following table summarizes options outstanding under the Company’s 1997 Stock Incentive Plan at the end of the reportable periods. The weighted average remaining contractual term for options outstanding and exercisable at March 31, 2008 was 3.5 years.

 

 

March 31, 2008

 

December 31, 2007

 

 

Weighted

 

 

 

Weighted

 

 

 

Average

Aggregate

 

 

Average

Aggregate

 

 

Exercise

Intrinsic

 

 

Exercise

Intrinsic

 

Shares

Price

Value

 

Shares

Price

Value

Outstanding at beginning of year

166,380 

$     19.41

 

 

186,880 

$ 18.51

 

Granted

-- 

--

 

 

-- 

--

 

Exercised

(500)

11.75

 

 

(20,000)

10.63

 

Forfeited

-- 

--

 

 

(500)

37.00

 

Outstanding at end of period

165,880 

$     19.43

$   786,000

 

166,380 

$    19.41

$   318,000

Exercisable at end of period

165,880 

$     19.43

$   786,000

 

166,380 

$    19.41

$   318,000

 

 

7


 

The following table summarizes restricted stock awarded under the 2006 Equity Compensation Plan at the end of the reportable period.

 

March 31, 2008

 

 

Weighted

 

 

 

Average

Aggregate

 

 

Grant-Date

Intrinsic

 

Shares

Fair Value

Value

Outstanding at beginning of year

7,016

$ 32.30

 

Granted

--

--

 

Vested

(877)

32.30

 

Forfeited

--

--

 

Non-vested at end of period

6,139

$ 32.30

$ 148,000

 

The weighted average remaining contractual term for non-vested grants at March 31, 2008 was 2.0 years. As of March 31, 2008, there was $156,000 of total unrecognized compensation expense related to the non-vested awards under the 2006 Equity Compensation Plan.

 

Note 3.

Securities

 

Amortized costs and fair values of securities available for sale at March 31, 2008 are summarized as follows:

 

 

 

 

Gross

 

Gross

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Market

 

Cost

 

Gains

 

(Losses)

 

Value

 

(In Thousands)

U.S. Treasury securities

 

 

 

 

 

 

 

and obligations of U.S.

 

 

 

 

 

 

 

government corporations

 

 

 

 

 

 

 

and agencies

$                170

 

$               --

 

$               --

 

$            170

Corporate preferred stock

39

 

--

 

--

 

39

Obligations of states and

 

 

 

 

 

 

 

political subdivisions

48,026

 

530

 

(1,082)

 

47,474

Mortgage backed securities

95,501

 

682

 

(451)

 

95,732

Restricted stock

9,205

 

--

 

--

 

9,205

Other

5,133

 

--

 

(532)

 

4,601

 

$          158,074

 

$          1,212

 

$        (2,065)

 

$     157,221

 

 

8


 

At March 31, 2008, investments in an unrealized loss position that were temporarily impaired are as follows:

 

 

 

Less Than 12 Months

 

12 Months or More

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

Fair Value

 

(Losses)

 

Fair Value

 

(Losses)

 

 

(In thousands)

Obligations of states

 

 

 

 

 

 

 

 

and political subdivisions

 

$        25,004

 

$        (1,030)

 

$            948

 

$ (52)

Mortgage-backed

 

 

 

 

 

 

 

 

securities

 

24,574

 

(99)

 

14,616

 

(352)

Other

 

4,601

 

(532)

 

--

 

--

Total temporarily

 

 

 

 

 

 

 

 

impaired securities

 

$        54,179

 

$        (1,661)

 

$       15,564

 

$ (404)

 

The unrealized losses in the portfolio as of March 31, 2008 are considered temporary and are a result of the current interest rate environment and not increased credit risk. Of the temporarily impaired securities, 62 are investment grade and one is non-rated. Obligations of states and political subdivisions have the largest temporary impairment. Only one of these securities has been in an unrealized loss position for more than 12 months. The non-rated security is issued by a local municipality. As a result of this investment the Company receives credit under the Community Reinvestment Act. Market prices change daily and are affected by conditions beyond the control of the Company. Although the Company has the ability to hold these securities until the temporary loss is recovered, decisions by management may necessitate the sale before the loss is fully recovered. Investment decisions reflect the strategic asset/liability objectives of the Company. The investment portfolio is analyzed frequently and managed to provide an overall positive impact to the Company’s income statement and balance sheet.

 

Note 4.

Loan Portfolio

 

The consolidated loan portfolio, including loans held for sale, was composed of the following:

 

 

March 31,

 

December 31,

 

2008

 

2007

 

(In Thousands)

 

 

 

 

Commercial, financial and agricultural

$        45,592

 

$         46,482

Real estate construction

118,412

 

96,576

Real estate mortgage

476,910

 

481,554

Mortgages held for sale

31,122

 

--

Consumer installment

17,365

 

20,237

Total loans

689,401

 

644,849

Add: Deferred loan costs

930

 

936

Less: Allowance for loan losses

8,677

 

7,093

Net loans

$      681,654

 

$      638,692

 

 

 

 

9


 

 

The following table summarizes impaired loans:

 

 

March 31,

 

December 31,

 

2008

 

2007

 

(In Thousands)

Impaired loans for which,

 

 

 

A specific allowance has been provided

$      1,274

 

$         5,127

A specific allowance has not been provided

3,664

 

2,812

Total impaired loans

$      4,938

 

$         7,939

Allowance provided for impaired loans,

 

 

 

included in the allowance for loan losses

$         325

 

$            459

Average balance of impaired loans

$      4,624

 

$         7,419

Interest income recognized

$           73

 

$            482

 

The Company had $3.8 million and $2.0 million in non-accrual loans excluded from the impaired loan disclosure under SFAS No. 114, Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and 15” at March 31, 2008 and December 31, 2007, respectively. If interest on these loans had been accrued, such income would have approximated $129,000 and $77,000 as of March 31, 2008 and December 31, 2007, respectively. There were $141,000 and $30,000 in loans 90 days past due and still accruing interest on March 31, 2008 and December 31, 2007, respectively.

 

Note 5.

Allowance for Loan Losses

 

 

The following is a summary of transactions in the allowance for loan losses:

 

 

March 31,

 

December 31,

 

2008

 

2007

 

(In Thousands)

Balance at January 1

$           7,093

 

$           5,582

Southern Trust Mortgage consolidation

1,299

 

--

Provision charged to operating expense

2,064

 

1,786

Recoveries added to the allowance

7

 

64

Loan losses charged to the allowance

(1,786)

 

(339)

Balance at the end of the period

$           8,677

 

$           7,093

 

 

10


 

Note 6.

Earnings Per Share

 

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of potential dilutive common stock. Potential dilutive common stock has no effect on income available to common shareholders.

 

Three Months Ended

 

 

March 31, 2008

 

March 31, 2007

 

 

 

 

Per Share

 

 

 

Per Share

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

Basic EPS

4,526,383

 

$     0.03

 

4,505,605

 

$     0.48

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Stock options and grants

32,524

 

 

 

84,845

 

 

 

Diluted EPS

4,558,907

 

$     0.03

 

4,590,450

 

$     0.47

 

 

At March 31, 2008, stock options representing 11,500 shares were not included in the calculation of earnings per share because they would have been antidilutive.

 

Note 7.

Segment Reporting

 

The Company operates in a decentralized fashion in three principal business activities: retail banking services; wealth management services; and mortgage banking services. Revenue from retail banking activities consists primarily of interest earned on loans and investment securities and service charges.

 

Revenue from the wealth management activities is comprised of fees based upon the market value of the accounts under administration. The wealth management services are conducted by the two subsidiaries of Middleburg Investment Group, Inc - Middleburg Trust Company and Middleburg Investment Advisors, Inc. and the investment services department of Middleburg Bank.

 

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by Southern Trust Mortgage.

 

Middleburg Bank and the Company have assets in custody with Middleburg Trust Company and accordingly pay Middleburg Trust Company a monthly fee. Middleburg Bank also pays interest to Middleburg Trust Company, Middleburg Investment Advisors and Southern Trust Mortgage on deposit accounts that each company has at Middleburg Bank. Southern Trust Mortgage has an outstanding line of credit for which it pays interest to Middleburg Bank. Middleburg Bank provides office space and data processing services to Southern Trust Mortgage for which it receives rental and fee income. Middleburg Investment Advisors pays the Company a management fee each month for accounting and other services provided. Transactions related to these relationships are eliminated to reach consolidated totals.

 

 

 

 

11


 

The following table presents segment information for the three months ended March 31, 2008 and 2007, respectively.

 

For the Three Months Ended

 

March 31, 2008

 

Retail

 

Wealth

 

Mortgage

 

Inter-company

 

 

 

Banking

 

Management

 

Banking

 

Eliminations

 

Consolidated

(In Thousands)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Interest income

$       12,468

 

$              11

 

$          1,526

 

$                (28)

 

$          13,977

Trust and investment advisory

 

 

 

 

 

 

 

 

 

fee income

--

 

1,007

 

--

 

(23)

 

984

Other income

972

 

51

 

2,807

 

(12)

 

3,818

 

 

 

 

 

 

 

 

 

 

Total operating income

13,440

 

1,069

 

4,333

 

(63)

 

18,779

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Interest expense

5,664

 

--

 

614

 

(28)

 

6,250

Salaries and employee benefits

3,574

 

590

 

2,421

 

--

 

6,585

Provision for loan losses

1,892

 

--

 

172

 

--

 

2,064

Other

2,397

 

349

 

1,180

 

(4)

 

3,922

 

 

 

 

 

 

 

 

 

 

Total operating expenses

13,527

 

939

 

4,387

 

(32)

 

18,821

 

 

 

 

 

 

 

 

 

 

Income before income taxes

(87)

 

130

 

(54)

 

(31)

 

(42)

Minority interest in consolidated

 

 

 

 

 

 

 

 

 

variable interest entity

--

 

--

 

--

 

31

 

31

Provision for income taxes

(226)

 

62

 

--

 

--

 

(164)

 

 

 

 

 

 

 

 

 

 

Net income

$           139

 

$               68

 

$             (54)

 

$                  --

 

$               153

 

 

 

 

 

 

 

 

 

 

Total assets

$    964,132

 

$        13,353

 

$         44,212

 

$       (98,591)

 

$        923,106

Capital expenditures

$           897

 

$             252

 

$                 --

 

$                  --

 

$            1,149

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth

 

Mortgage

 

Inter-company

 

 

 

Banking

 

Management

 

Banking

 

Eliminations

 

Consolidated

(In Thousands)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Interest income

$         11,745

 

$ 14

 

$                  --

 

$ (6)

 

$           11,753

Trust and investment advisory

 

 

 

 

 

 

 

 

 

fee income

--

 

1,128

 

--

 

(23)

 

1,105

Other income

962

 

--

 

--

 

(10)

 

952

 

 

 

 

 

 

 

 

 

 

Total operating income

12,707

 

1,142

 

--

 

(39)

 

13,810

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Interest expense

4,950

 

--

 

--

 

(6)

 

4,944

Salaries and employee benefits

2,765

 

575

 

--

 

--

 

3,340

Provision for loan losses

152

 

--

 

--

 

--

 

152

Other

2,043

 

369

 

--

 

(33)

 

2,379

 

 

 

 

 

 

 

 

 

 

Total operating expenses

9,910

 

944

 

--

 

(39)

 

10,815

 

 

 

 

 

 

 

 

 

 

Income before income taxes

2,797

 

198

 

--

 

--

 

2,995

Provision for income taxes

764

 

85

 

--

 

--

 

849

 

 

 

 

 

 

 

 

 

 

Net income

$          2,033

 

$             113

 

$                  --

 

$                  --

 

$           2,146

 

 

 

 

 

 

 

 

 

 

Total assets

$      781,725

 

$          7,079

 

$                  --

 

$         (1,037)

 

$       787,767

Capital expenditures

$             758

 

$                --

 

$                  --

 

$                  --

 

$              758

 

 

12


 

 

Note 8.

Defined Benefit Pension Plan

 

 

The table below reflects the components of the Net Periodic Benefit Cost.

 

 

 

 

Three Months Ended

March 31,

 

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

Service cost

$            202

 

$            186

Interest cost

93

 

75

Expected return on plan assets

(105)

 

(99)

Amortization of net obligation

 

 

 

at transition

(1)

 

(1)

Net actuarial loss

6

 

7

Net periodic benefit cost

$            195

 

$            168

 

The Company previously disclosed in the 2007 Form 10-K that it does not expect to contribute to its pension plan in 2008. As of March 31, 2008, $330,000 has been contributed though.

 

Note 9.

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) will significantly change the financial accounting and reporting of business combination transactions. SFAS No. 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder's fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company has previously acquired ownership interest in several entities and may continue to do so in the future. Therefore, the Company expects that the implementation of SFAS No. 141(R) may have a material impact on its future consolidated financial statements, but does not anticipate a material effect on its consolidated financial statements at the date of adoption.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51. SFAS No. 160 requires the Company to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS No. 160 to have a material impact on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and how

 

13


 

derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of SFAS No. 161 to have a material impact on its consolidated financial statements.

 

Note 10.

Consolidation of Southern Trust Mortgage

 

In February 2008, Middleburg Bank approved a $5 million line of credit to Southern Trust Mortgage. The line of credit is secured by residential construction loans. As a result of the extension of credit, the Company is deemed to be the primary beneficiary as defined in FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.” Accordingly, the Company is required to consolidate the assets, liabilities, revenues and expenses of Southern Trust Mortgage and reflect the issued and outstanding interest not held by the Company in its financial statements as Minority Interest in Consolidated Variable Interest Entity. Prior periods have not been restated to reflect this accounting treatment and may affect comparability. At March 31, 2008, the Company owned 42.3% of the issued and outstanding membership interest units of Southern Trust Mortgage, through its subsidiary, Middleburg Bank.

 

 

14


 

Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the financial condition and results of operations of the Company at and for the three months ended March 31, 2008 should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report and in the 2007 Form 10K. It should also be read in conjunction with the “Caution About Forward Looking Statements” section at the end of this discussion.

 

Overview

 

The Company is headquartered in Middleburg, Virginia and conducts its primary operations through two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc and a consolidated variable interest entity, Southern Trust Mortgage, LLC. Middleburg Bank is a community bank serving the Virginia counties of Loudoun, Fairfax and Fauquier with seven financial service centers and two limited service facilities. Middleburg Investment Group is a non-bank holding company with two wholly owned subsidiaries, Middleburg Trust Company and Middleburg Investment Advisors, Inc. Middleburg Trust Company is a trust company headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank’s facilities. Middleburg Investment Advisors is a registered investment advisor headquartered in Alexandria, Virginia serving clients in 24 states. Southern Trust Mortgage is a regional mortgage company headquartered in Norfolk, Virginia and maintains offices in Virginia, Maryland, North Carolina and South Carolina.

 

The Company operates under a business model that makes all of its financial and wealth management services available to its clients at all of its financial service centers. Financial service centers are larger than most traditional retail banking branches in order to allow commercial, mortgage, retail and wealth management personnel and services to be readily available to serve clients. By working together in the financial service center and the market, the team at each financial service center becomes more effective in expanding relationships with current clients and new clients. The Company’s goal is to assist in the creation, preservation and ultimate transfer of the wealth of its clients.

 

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.

 

Middleburg Investment Group’s subsidiaries, Middleburg Trust Company and Middleburg Investment Advisors, generate fee income by providing investment management and trust services to their clients. Investment management and trust fees are generally based upon the value of assets under management and, therefore, can be significantly affected by fluctuation in the values of securities caused by changes in the capital markets.

 

Soutbern Trust Mortgage generates fees from the origination and sale of mortgage loans. Southern Trust Mortgage also maintains a real estate construction portfolio and receives interest and fee income from these loans.

 

Net income for the three months ended March 31, 2008 decreased to $153,000 from $2.1 million for the three months ended March 31, 2007. Annualized returns on average assets and average equity for the three months ended March 31, 2008 were 0.5% and 5.9%, respectively, compared to 1.1% and 10.7%

 

15


 

for the same period in 2007. The Company recognized losses in its loan portfolio resulting in net charge-offs against the reserves for loan losses of $1.8 million during the three months ended March 31, 2008. As a result of the evaluation of the adequacy of the reserves for loan losses, subsequent to the recognition of net charge-offs, the Company increased its reserves for loan losses at Middleburg Bank through the recognition of bad debt expense by $1.9 million. The Company also increased its reserves for loan losses at Southern Trust Mortgage by $172,000. The Company has also experienced an increase in non-performing loans in the first quarter of 2008. Net charge-offs of $1.7 million and the increase in non-performing assets can be traced back to the portfolio of one lender, who is no longer with the company. Management believes this is an isolated incident reflective of one individual and not a larger systemic problem.

 

Total interest income increased $2.2 million or 18.9%, for the three months ended March 31, 2008, when compared to the same period in 2007. Funding costs have continued to increase a result of competition for deposits accounts and the Company’s increased use of wholesale borrowings to fund asset growth. Total interest expense was $6.3 million for the three months ended March 31, 2008, compared to $4.9 million for the three months ended March 31, 2007. Other income increased $2.7 million to $4.8 million for the three months ended March 31, 2008, compared with the same period in 2007. The increase is due to the consolidation of fees on mortgages held for sale by Southern Trust Mortgage. Total other expense was $10.4 million for the three months ended March 31, 2008 compared to $5.7 million for the same period in 2007. During the first quarter of 2008, salary and employee benefits increased $3.2 million, which includes $2.4 million in salary and benefit expense at Southern Trust Mortgage. The consolidation of Southern Trust Mortgage has impacted several categories of the financial statements. The impact is described in greater detail in the Financial Condition and Results of Operations sections below, as necessary.

 

The Company is not aware of any current recommendations by any regulatory authorities that, if they were implemented, would have a material effect on the registrant’s liquidity, capital resources or results of operations.

 

Critical Accounting Policies

 

General

 

The financial condition and results of operations presented in the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and this section are, to a large degree, dependent upon the accounting policies of the Company. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

 

Presented below is discussion of those accounting policies that management believes are the most important (“Critical Accounting Policies”) to the portrayal and understanding of the Company’s financial condition and results of operations. The Critical Accounting Policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

 

Allowance for Loan Losses

 

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance the methodology is maintained in accordance with accounting principles generally accepted in the United

 

16


 

States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

 

The Company evaluates various loans individually for impairment as required by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

 

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

 

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

 

Intangibles and Goodwill

 

The Company had approximately $6.4 million in intangible assets and goodwill at March 31, 2008, an increase of $1.2 million since December 31, 2007. On April 1, 2002, the Company acquired Middleburg Investment Advisors, a registered investment advisor, for $6.0 million. Approximately $5.9 million of the purchase price was allocated to intangible assets and goodwill. In connection with this investment, a purchase price valuation (using SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as a guideline) was completed to determine the appropriate allocation to identified intangibles. The valuation concluded that approximately 42% of the purchase price was related to the acquisition of customer relationships with an amortizable life of 15 years. Another 19% of the purchase price was allocated to a non-compete agreement with an amortizable life of seven years. The remainder of the purchase price has been allocated to goodwill. Approximately $1.0 million of the $6.3 million in intangible assets and goodwill at March 31, 2008 was attributable to the Company’s investment in Middleburg Trust Company. With the consolidation of Southern Trust Mortgage, the Company recognized $1.3 million in goodwill as part of its equity investment.

 

17


 

The purchase price allocation process requires management estimates and judgment as to expectations for the life span of various customer relationships as well as the value that key members of management add to the success of the Company. For example, customer attrition rates were determined based upon assumptions that the past five years may predict the future. If the actual attrition rates, among other assumptions, differed from the estimates and judgments used in the purchase price allocation, the amounts recorded in the Consolidated Financial Statements could result in a possible impairment of the intangible assets and goodwill or require acceleration in the amortization expense.

 

In addition, SFAS No. 142 requires that goodwill be tested annually using a two-step process. The first step is to identify a potential impairment. The second step measures the amount of the impairment loss, if any. Processes and procedures have been identified for the two-step process.

 

When the Company completes its ongoing review of the recoverability of intangible assets and goodwill, factors that are considered important to determining whether impairment might exist include loss of customers acquired or significant withdrawals of the assets currently under management and/or early retirement or termination of key members of management. Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company’s financial condition and results of operations. The most recent review was performed in February 2008.

 

Financial Condition

 

Assets, Liabilities and Shareholders’ Equity

 

Total assets for the Company increased to $923.1 million at March 31, 2008, compared to $841.4 million at December 31, 2007, representing an increase of $81.7 million or 9.7%. Total average assets increased 13.4% from $776.0 million for the three months ended March 31, 2007 to $880.0 million for the same period in 2008. Total liabilities were $842.1 million at March 31, 2008, compared to $763.5 million at December 31, 2007. Total average liabilities increased $99.8 million or 14.3% to $796.8 million at March 31, 2008, compared to the same period in 2007. Average shareholders’ equity increased $187,000 over the same periods. The consolidation of Southern Trust Mortgage contributed $36.0 million to the increase in total assets, $26.3 million to the increase in total average assets and total average liabilities and $32.3 million to the increase in total liabilities.

 

Loans

 

Loans include both portfolio loans and mortgages held for sale. Total loans at March 31, 2008 were $689.4 million, an increase of $44.6 million from the December 31, 2007 amount of $644.8 million. The consolidation of Southern Trust Mortgage contributed $39.0 million to the increase in total loans, of which $31.1 million are mortgages held for sale. The remaining $7.9 million were real estate construction loans held by Southern Trust Mortgage. The Company continues to see increases in real estate construction loans, which were $118.4 million at March 31, 2008 or 17.2% of total loans, compared to $96.6 million at March 31, 2007. Real estate mortgage loans of $476.9 million at March 31, 2008 decreased from the December 31, 2007 amount of $481.6 million. The decrease in the real estate loans held by Middleburg Bank was due to a decline in demand as a result of the changes in the local economy. The decrease of $4.7 million in real estate mortgage loans held by Middleburg Bank was offset by the consolidation of $31.1 of real estate mortgage loans held for sale by Southern Trust Mortgage. Southern Trust Mortgage has a $5 million line of credit with Middleburg Bank, of which $4.7 million was outstanding at March 31, 2008. The line of credit is eliminated in the consolidation process and is not reflected in the Company’s financial statements. Net charge-offs were $1.8 million for the three months ended March 31, 2008. The provision for loan losses for the three months ended March 31, 2007 was

 

18


 

$2.1 million compared to $152,000 for the same period in 2007. The allowance for loan losses was $8.7 million or 1.26% of total loans outstanding at March 31, 2008.

 

Securities

 

Securities increased to $157.2 million at March 31, 2008 compared to $129.1 million at December 31, 2007. The Company increased its securities portfolio in an effort to maintain a source of collateral for public fund deposits and repurchase agreements as well as to invest in earning assets to offset the decline in the loan demand. The Company sold $29.4 million securities and purchased $63.4 million securities during the three months ended March 31, 2008. The securities sold during the three months ended March 31, 2008, included $639,000 in securities previously reported as held-to-maturity in the 2007 Form 10K. The held-to-maturity securities had maturities of less than 14 months. The Company had the ability to hold these securities, but elected to sell them as part of an adjustment to the securities portfolio. The remaining held-to-maturity portfolio included two mortgage backed securities with a book value of $26,000 which the Company has transferred to available for sale. The Company will not maintain a held-to-maturity portfolio for the foreseeable future. The Company will continue to maintain its securities portfolio as a source of liquidity and collateral. At March 31, 2008, the tax equivalent yield on the securities portfolio was 5.61%.

 

Premises and Equipment

 

Premises and equipment increased $1.0 million from $20.6 million at December 31, 2007 to $21.6 million at March 31, 2008. The consolidation of Southern Trust Mortgage contributed $193,000 to the increase. In February 2008, the Company’s subsidiary, Middleburg Trust Company opened an office in Williamsburg which contributed $252,000 to the increase. The remaining increases are the result of the relocation of the Ashburn Financial Service Center and other renovations within the Company’s existing facilities.

 

Other Assets

 

The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $13.4 million at March 31, 2008. The Company had $2.9 million other real estate owned, which includes $439,000 due to the consolidation of Southern Trust Mortgage. The Company is currently working to sell these assets. Goodwill and identified intangibles of $6.4 million are also included in other assets as of March 31, 2008. The $6.4 million is related to the acquisitions of Middleburg Trust Company and Middleburg Investment Advisors, as well as the consolidation of Southern Trust Mortgage.

 

Deposits

 

As deposits increased $7.2 million to $596.0 million at March 31, 2008 from $588.8 million at December 31, 2007, average deposits for the quarter ended March 31, 2008 increased 4.9% or $27.7 million compared to average deposits for the quarter ended March 31, 2007. The increase in deposits is primarily due to increases in interest checking. Average interest bearing deposits were $479.6 million for the three months ended March 31, 2008 compared to $448.3 million for the three months ended March 31, 2007.

 

The Company has an interest bearing product, known as Tredegar Institutional Select, that integrates the use of the cash within client accounts at Middleburg Trust Company for overnight funding at the Bank. The overall balance of this product was $50.8 million at March 31, 2008 and is reflected in both the “savings and interest bearing demand deposits” and the “securities sold under agreements to repurchase” amounts on the balance sheet. Excluding the Tredegar Institutional Select product, savings and interest bearing demand deposits grew by $16.5 million from December 31, 2007 to March 31, 2008.

 

19


 

Time deposits decreased $19.8 million from December 31, 2007 to $210.4 million at March 31, 2008. Time deposits include brokered certificates of deposit, which decreased $18.7 million to $20.7 million at March 31, 2008 from the December 31, 2007 amount of $39.4 million. The decrease is a result of the Company’s decision to use of wholesale funding as an alternative to higher cost time deposits in an effort to reduce funding costs while maintaining the ability to fund asset growth. The Company redeemed $5.8 million of its brokered certificates of deposit upon maturity during the three months ended March 31, 2008. The Company exercised its call option on $12.9 million of these deposits. The brokered certificates of deposit have maturities ranging from one month to three years. Securities sold under agreements to repurchase (“Repo Accounts”) increased $1.3 million from $51.8 million at December 31, 2007 to $53.1 million at March 31, 2008. The Repo Accounts include certain long-term commercial checking accounts with average balances that typically exceed $100,000 and the Tredegar Institutional Select account which includes accounts maintained by Middleburg Trust Company’s business clients.

 

Short-term Borrowings and Long-term Debt

 

Additional Federal Home Loan Bank (“FHLB”) borrowings funded the Company’s asset growth experienced during the three months ended March 31, 2008. FHLB overnight advances were $42.0 million at March 31, 2008 compared to $22.0 million at December 31, 2007. Southern Trust Mortgage has a line of credit that is primarily used to fund its mortgages held for sale. At March 31, 2008, this line had an outstanding balance of $31.7 million and is included in the total short-term borrowings. The line of credit is based on the London InterBank Offered Rate (“LIBOR”). Southern Trust Mortgage also has a $5.0 million line of credit with Middleburg Bank, of which $4.7 million was outstanding at March 31, 2008. The line of credit is eliminated in the consolidation process and is not reflected in the financial statements of the Company. Long-term debt increased to $104.0 million at March 31, 2008 from $88.0 million at December 31, 2007.

 

Minority Interest in Consolidated Variable Interest Entity

 

The Company owns 42.3% of the issued and outstanding membership interest units in Southern Trust Mortgage. The remaining 57.7% of issued and outstanding membership interest units are owned by other partners. The ownership interest of these partners is represented in the financial statements as “Minority Interest in Consolidated Variable Interest Entity.”

 

Capital

 

Shareholders’ equity was $76.9 million at March 31, 2008. This amount represents a decrease of 1.3% from the December 31, 2007 amount of $77.9 million. The book value per common share was $16.99 at March 31, 2008 and $17.21 at December 31, 2007.

 

Results of Operations

 

Net Interest Income

 

Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on earning assets and the interest expense paid on deposits and other interest bearing liabilities. Net interest income totaled $7.7 million for the first three months of 2008 compared to $6.8 million for the same period in 2007, an increase of 13.5%. Interest income increased 18.9% and interest expense increased 13.5% when comparing the three months ended March 31, 2008 to March 31, 2007. Average earning assets increased $106.6 million from $712.8 million for the three months ended March 31, 2007 to $819.4 million for the three months ended March 31, 2008. The consolidation of Southern Trust Mortgage increased average earning assets $27.4 million.

 

20


 

The following table reflects an analysis of the Company’s net interest income using the daily average balances of the Company’s assets and liabilities for the three month periods ended March 31, 2008 and 2007. Non-accrual loans are included in the loan balances.

 

Average Balances, Income and Expenses, Yields and Rates

 

Three Months Ended March 31,

 

 

 

2008

 

 

 

 

 

2007

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Balance

 

Expense

 

Rate (1)

 

Balance

 

Expense

 

Rate (1)

 

(Dollars in thousands)

Assets

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

$    98,025

 

$       1,242

 

5.10%

 

$      93,377

 

$ 1,223

 

5.31%

Tax-exempt (2) (3)

42,818

 

723

 

6.79%

 

41,182

 

737

 

7.26%

Total securities

$   140,843

 

$       1,965

 

5.61%

 

$    134,559

 

$ 1,960

 

5.91%

Loans:

 

 

 

 

 

 

 

 

 

 

 

Taxable

$   666,776

 

$     12,159

 

7.33%

 

$    573,281

 

$ 9,983

 

7.06%

Tax-exempt (2)

12

 

--

 

0.00%

 

20

 

--

 

0.00%

Total loans

$   666,788

 

$     12,159

 

7.33%

 

$    573,301

 

$ 9,983

 

7.06%

Federal funds sold

7,854

 

65

 

3.33%

 

4,351

 

54

 

5.03%

Interest-bearing deposits in

 

 

 

 

 

 

 

 

 

 

 

other financial institutions

3,948

 

34

 

3.46%

 

568

 

6

 

4.28%

Total earning assets

$   819,433

 

$     14,223

 

6.98%

 

$    712,779

 

$ 12,003

 

6.83%

Less: allowances for credit losses

(8,487)

 

 

 

 

 

(5,608)

 

 

 

 

Total nonearning assets

69,044

 

 

 

 

 

68,787

 

 

 

 

Total assets

$   879,990

 

 

 

 

 

$    775,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

Checking

$   154,814

 

$         854

 

2.22%

 

$    146,104

 

$          918

 

2.55%

Regular savings

54,305

 

289

 

2.14%

 

51,020

 

231

 

1.84%

Money market savings

41,683

 

113

 

1.09%

 

60,101

 

162

 

1.09%

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

$100,000 and over

137,087

 

1,573

 

4.62%

 

128,192

 

1,582

 

5.00%

Under $100,000

91,690

 

1,117

 

4.90%

 

62,846

 

625

 

4.03%

Total interest-bearing deposits

$   479,579

 

$       3,946

 

3.31%

 

$    448,263

 

$       3,518

 

3.18%

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

$     41,657

 

$          785

 

7.58%

 

$      36,417

 

$          426

 

4.74%

Securities sold under agreements

 

 

 

 

 

 

 

 

 

 

 

to repurchase

54,399

 

385

 

2.85%

 

45,597

 

506

 

4.50%

Long-term debt

98,078

 

1,130

 

4.63%

 

41,766

 

486

 

4.72%

Federal Funds purchased

679

 

4

 

2.37%

 

519

 

8

 

6.25%

Total interest-bearing liabilities

$   674,392

 

$       6,250

 

3.73%

 

$    572,562

 

$       4,944

 

3.50%

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

113,880

 

 

 

 

 

117,498

 

 

 

 

Other liabilities

8,495

 

 

 

 

 

6,920

 

 

 

 

Total liabilities

$   796,767

 

 

 

 

 

$    696,980

 

 

 

 

Minority interest in consolidated variable interest entity

4,058

 

 

 

 

 

--

 

 

 

 

Shareholders’ equity

79,165

 

 

 

 

 

78,978

 

 

 

 

Total liabilities and shareholders’

 

 

 

 

 

 

 

 

 

 

 

equity

$   879,990

 

 

 

 

 

$    775,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$       7,973

 

 

 

 

 

$       7,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

3.25%

 

 

 

 

 

3.33%

Interest expense as a percent of

 

 

 

 

 

 

 

 

 

 

 

average earning assets

 

 

 

 

3.07%

 

 

 

 

 

2.81%

Net interest margin

 

 

 

 

3.91%

 

 

 

 

 

4.02%

 

 

 

 

 

 

 

 

 

 

 

 

(1) All yields and rates have been annualized on a 366 day year.

(2) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%.

(3) Income and yields include dividends on preferred bonds which are 70% excludable for tax purposes.

 

 

21


 

 

Interest and fees on loans increased $2.2 million to $12.2 million for the three months ended March 31, 2008 compared to $10.0 million for the same period in 2007. The consolidation of Southern Trust Mortgage increased interest and fees on loans $1.5 million. Interest and fees on loans from Middleburg Bank contributed $685,000 to the increase, when compared to the three months ended March 31, 2007. The increase in Middleburg Bank’s interest and fees on loans is the result of loan growth experienced since March 31, 2007. The weighted average yield of loans increased 27 basis points from 7.06% for the three months ended March 31, 2007 to 7.33% for the three months ended March 31, 2008.

 

Interest income from the securities portfolio and interest bearing deposits in other financial institutions was relatively unchanged at $1.8 million for the three month period ended March 31, 2008 compared to the three month period ended March 31, 2007. In the first quarter of 2008, the Company sold $29.4 million securities and purchased $63.4 million securities as part of a restructuring of the securities portfolio. The tax equivalent yield on securities for the three months ended March 31, 2008 decreased 30 basis points to 5.61%, compared to the March 31, 2007 yield of 5.91%.

 

Average deposits increased $27.7 million from $565.8 million for the three months ended March 31, 2007 to $593.5 million for the three months ended March 31, 2008. Total interest expense on deposits increased $428,000 for the three months ended March 31, 2008, compared to the same period in 2007. Competition for local deposits continued to exert upward pressures on the cost of deposits as wholesale funding costs continued to decrease. The Company is focused on providing competitive deposit products, while simultaneously maximizing opportunities at the wholesale funding level. In the second quarter of 2008, the Company will begin marketing several deposit products and anticipates increased deposit growth and a corresponding increase in interest expense. The average balance of interest bearing demand accounts (interest bearing checking, savings and money market accounts) decreased 2.5% to $250.8 million at March 31, 2008. The costs of such funding decreased six basis points during the three months ended March 31, 2008. The average balance in time deposits increased 19.8% from March 31, 2007 to March 31, 2008, while the cost of such funding increased five basis points or $483,000 for the three months ended March 31, 2008 compared to the same period in 2007.

 

Interest expense for securities sold under agreements to repurchase, which includes Tredegar Institutional Select, decreased $121,000 from the three months ended March 31, 2007 to $385,000 for the three months ended March 31, 2008. Tredegar Institutional Select earns interest at a rate equal to approximately 90% of the Federal Home Loan Bank of Atlanta’s overnight rate.

 

The consolidation of Southern Trust Mortgage increased interest expense related to short-term borrowings $593,000, while interest expense on Federal Home Loan Bank short-term advances decreased $234,000. On a consolidated basis, interest expense related to short-term borrowings increased $359,000 to $785,000 for the three months ended March 31, 2008, compared to the same period in 2007. The average balance of short-term borrowings increased $5.2 million or 14.4% from March 31, 2007 to March 31, 2008, with the consolidation of Southern Trust Mortgage contributing $21.4 million to the increase in average short-term borrowings. Federal Home Loan Bank short-term advances decreased by $16.2 million on average during the three months ended March 31, 2008 compared to the same period in 2007.

 

Interest expense related to long-term debt increased $644,000 to $1.1 million for the three months ended March 31, 2008 when compared to the three months ended March 31, 2007, while the cost of such funding decreased 9 basis points. Long-term debt includes fixed and variable interest rate borrowings with maturities ranging from one year to 25 years.

 

The net interest margin, on a tax equivalent basis, was 3.91% for the three months ended March 31, 2008 compared to 4.02% for the same period in 2007. The Company’s net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial service industry to determine how profitably earning assets are funded.

 

22


 

The net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is non-taxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is non-taxable to total interest income, then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2008 and 2007 is 34%. The reconciliation of tax equivalent net interest income, which is not a measurement under accounting principles generally accepted in the United States, to net interest income is reflected in the table below.

 

Reconciliation of Net Interest Income to

Tax Equivalent Net Interest Income

 

 

 

For the Quarter Ended

 

 

March 31,

(in thousands)

 

2008

 

2007

GAAP measures:

 

 

 

 

Interest income – loans

 

$   12,159

 

$      9,983

Interest income - investments & other

 

1,818

 

1,770

Interest expense – deposits

 

3,946

 

3,518

Interest expense - other borrowings

 

2,304

 

1,426

Total net interest income

 

$     7,727

 

$      6,809

Plus:

 

 

 

 

Non-GAAP measures:

 

 

 

 

Tax benefit realized on non-taxable interest income - loans

 

$           --

 

$            --

Tax benefit realized on non-taxable interest income - municipal securities

 

246

 

250

Tax benefit realized on non-taxable interest income - corporate securities

 

--

 

--

Total tax benefit realized on non-taxable interest income

 

$        246

 

$        250

Total tax equivalent net interest income

 

$     7,973

 

$     7,059

 

The 11 basis point decline in tax equivalent net interest margin was attributed to the flat yield curve and intense competition for loans and deposits in the Company’s markets. The Company’s total average earning assets increased $106.6 million from March 31, 2007 to March 31, 2008, while the yield on average earnings assets increased by 15 basis points when comparing the same periods. Total average interest bearing liabilities increased $101.8 million from March 31, 2007 to March 31, 2008, while the rate on average interest bearing liabilities increased by 23 basis points when comparing the same periods.

 

Non-interest Income

 

Non-interest income includes, among other items, fees generated by the retail banking and investment services departments of Middleburg Bank, fees on mortgages held for sale generated by Southern Trust Mortgage, and trust and investment advisory fees generated by Middleburg Trust Company and Middleburg Investment Advisors. Non-interest income increased 133.5% to $4.8 million for the first three months of 2008 compared to the same period in 2007. The increase is primarily attributable to the consolidation of Southern Trust Mortgage’s fees and gains on mortgages held for sale.

 

Trust and investment advisory fee income decreased 11.0% or $121,000 to $984,000 for the three month period ended March 31, 2008 compared to the same period in 2007. Consolidated investment advisory fees provided by Middleburg Investment Advisors totaled $473,000 and $548,000 for the three months ended March 31, 2008 and 2007, respectively. At March 31, 2008, assets under administration at Middleburg Investment Advisors had decreased $68.3 million from $580.2 million at March 31, 2007 to

 

23


 

$511.9 million. The majority of this decrease is the result of distributions and not account closings. Consolidated fiduciary fees for services, provided by Middleburg Trust Company, decreased 8.0% to $511,000 for the three months ended March 31, 2008 from $556,000 for the three months ended March 31, 2007. Fiduciary fees are based upon the market value of the accounts under administration. At March 31, 2008, Middleburg Trust Company had $596.4 million in assets under administration, including intercompany assets of $129.2 million, a decrease of 0.9% or $5.5 million from assets under administration of $601.9 million, including intercompany assets of $98.4 million, at March 31, 2007. Intercompany assets include portions of the investment portfolios of Middleburg Bank, Middleburg Trust Company and the holding company, Middleburg Financial Corporation. Fiduciary fees on intercompany assets have been eliminated in consolidation.

 

Service charges on deposits increased 1.5% to $473,000 for the three months ended March 31, 2008, compared to $466,000 for the same period in 2007. In particular, ATM and Visa check card fees increased approximately $13,000 for the three months ended March 31, 2008 when compared to the same period in 2007.

 

The Company sold $29.4 million securities and purchased $63.4 million securities during the three months ended March 31, 2008. As a result of the sales of securities, the Company realized a net gain of $108,000. The Company did not realize gains or losses on the sale of securities in the three months ended March 31, 2007.

 

Commissions on investment sales decreased 7.9% to $117,000 for the three months ended March 31, 2008, compared to $127,000 for the three months ended March 31, 2007. During the first quarter of 2008, the Company employed two experienced financial consultants and has recently hired two new financial consultants, compared to two financial consultants in 2007. The financial consultants are available to each of the Company’s financial service centers.

 

Equity in earnings from affiliate has been reclassified in 2008 due to the consolidation of Southern Trust Mortgage. The revenues and expenses of Southern Trust Mortgage for the three months ended March 31, 2008 are reflected in the Company’s financial statements on a consolidated basis, with the proportionate share not owned by the Company reported as “Minority Interest in Consolidated Variable Interest Entity.” Accordingly, gains and fees on mortgages held for sale of $2.7 million, which were generated by Southern Trust Mortgage during the three months ended March 31, 2008, are being reported as part of the consolidated other income. For the three months ended March 31, 2007, the Company reported $52,000 from its equity investment in Southern Trust Mortgage. The 2007 amount represents the Company’s share of Southern Trust Mortgage’s net income.

 

Income earned from the Bank’s $11.3 million investment in Bank Owned Life Insurance (BOLI) contributed $114,000 to total other income for the three months ended March 31, 2008. The Company purchased $6.0 million of BOLI in the third quarter of 2004, $4.8 million in the fourth quarter of 2004 and an additional $485,000 in the second quarter of 2007 to help subsidize increasing employee benefit costs and expenses related to the restructure of its supplemental retirement plans.

 

Other service charges, commissions and fees decreased 13.5% to $147,000 for the three months ended March 31, 2008, compared to $170,000 for the same period in 2007. In particular, safe deposit box rent decreased approximately $16,000 for the three months ended March 31, 2008 when compared to the same period in 2007.

 

Other operating income increased $130,000 to $158,000 for the three months ended March 31, 2008, compared to the same period in 2007. The consolidation of Southern Trust Mortgage increased other operating income by $83,000.

 

24


 

 

Non-interest Expense

 

Total non-interest expense includes employee-related costs, occupancy and equipment expense and other overhead. Total non-interest expense increased 83.7% or $4.8 million from $5.7 million for the three months ended March 31, 2007 to $10.5 million for the three months ended March 31, 2008. When taken as a percentage of total average assets, the quarter’s non-interest expense was 1.2% of total average assets for the three months ended March 31, 2008 compared to 0.7% for the three months ended March 31, 2007.

 

Salaries and employee benefits increased $3.2 million or 97.2% when comparing the three months ended March 31, 2008 to the three months ended March 31, 2007. The consolidation of Southern Trust Mortgage contributed $2.4 million to the increase in salaries and employee benefits. During the three months ended March 31, 2008, the Company converted its time and attendance tracking system. This conversion necessitated a change in the Company’s pay periods from a current basis to an arrears basis. As a result of this change, the Company incurred an additional semi-monthly payroll expense of $440,000 to facilitate the transition from a current basis to an arrears basis. The remainder of the increase is the result of increases in staff.

 

Net occupancy expense increased by $576,000 or 70.5% from $817,000 for the three months ended March 31, 2007 to $1.4 million for the three months ended March 31, 2008. The increase is the result of the Company’s growth as well as maintenance and improvements of the Company’s facilities. As growth efforts continue to progress, the Company anticipates higher levels of occupancy expense to be incurred. The consolidation of Southern Trust Mortgage contributed $427,000 to the increase in net occupancy expense.

 

Other tax expense increased 2.6% to $160,000 for the three months ended March 31, 2008 from $156,000 for the three months ended March 31, 2007. Other tax expense includes the state franchise tax paid by Middleburg Bank and Middleburg Trust Company in lieu of an income tax. The tax is based on each subsidiary’s equity capital at January 1st, net of adjustments, respectively. Total capital of Middleburg Bank increased 0.2% from January 1, 2007 to January 1, 2008, while total capital for Middleburg Trust Company increased 2.2% during the same period.

 

Computer operations expense increased from $258,000 for the three months ended March 31, 2007 to $267,000 for the three months ended March 31, 2008. The consolidation of Southern Trust Mortgage contributed $11,000 to the increase in computer operations expense.

 

Audit and examinations expense decreased from $214,000 for the three months ended March 31, 2007 to $98,000 for the three months ended March 31, 2008. During the three months ended March 31, 2007, the Company recorded $60,000 in additional accruals for independent audits and regulatory examinations as well as $97,000 in expenses incurred for audit testing.

 

Legal expense increased $147,000 from the three months ended March 31, 2007 to $225,000 for the three months ended March 31, 2008. The increase is the result of additional legal fees incurred by Middleburg Bank. The consolidation of Southern Trust Mortgage contributed $37,000 to the increase in legal expense.

 

Other expense increased 107.8% or $923,000 to $1.8 million for the three months ended March 31, 2008 from $856,000 for the three months ended March 31, 2007. The consolidation of Southern Trust Mortgage contributed $676,000 to the increase in other expense. The additional increase resulted from small increases in various expense categories, including advertising, office supplies, recruiting, courier services and business entertainment, due to the Company’s growth.

 

25


 

 

Allowance for Loan Losses

 

The allowance for loan losses at March 31, 2008 was $8.7 million compared to $5.7 million at March 31, 2007. The allowance for loan losses at Middleburg Bank was 0.98% of total loans outstanding at March 31, 2007 and 1.10% of total loans outstanding at March 31, 2008. For total loans reported by Southern Trust Mortgage, the allowance for loan losses was 3.77% at March 31, 2008. The allowance for loan losses on a consolidated basis at March 31, 2008 was 1.26%. The provision for loan losses was $2.1 million for the three months ended March 31, 2008 and $152,000 for the three months ended March 31, 2007. For the three months ended March 31, 2008, net loan charge-offs totaled $1.8 million, compared to $6,000 for the same period in 2007. Total loans past due 90 days or more at March 31, 2008 were $100,000. There were $5.1 million in non-performing loans at March 31, 2008 compared to none at March 31, 2007. At March 31, 2008, total loans greater than 30 days and less than 90 days past due totaled $3.3 million. Management believes that the allowance for loan losses was adequate to cover credit losses inherent in the loan portfolio at March 31, 2008. Loans classified as loss, doubtful, substandard or special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved.

 

Capital Resources

 

Shareholders’ equity at March 31, 2008 and December 31, 2007 was $77.1 million and $77.9 million, respectively. Total common shares outstanding at March 31, 2008 were 4,526,817.

 

At March 31, 2008, the Company’s tier 1 and total risk-based capital ratios were 11.1% and 12.1%, respectively, compared to 11.6% and 12.6% at December 31, 2007. The Company’s leverage ratio was 9.2% at March 31, 2008 compared to 9.4% at December 31, 2007. The leverage ratio is a measure of the relationship between the Company’s tier 1 capital and total average assets. The Company’s capital structure places it above the well capitalized regulatory guidelines, which affords the Company the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business.

 

Liquidity

 

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale and loans and securities maturing within one year. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

 

The Company has relied on wholesale funding and issued trust preferred securities to support its growth in the past. The Company will continue to evaluate funding alternatives as necessary to support future growth.

 

The Company also maintains additional sources of liquidity through a variety of borrowing arrangements. The Company maintains federal funds lines with large regional and money-center banking institutions. These available lines totaled $8.0 million, none of which were outstanding at March 31, 2008. Federal funds purchased during the first three months of 2008 averaged $679,000 compared to an average of $519,000 during the same period in 2007. At March 31, 2008 and December 31, 2007, the

 

26


 

Company had $53.1 million and $51.8 million, respectively, of outstanding borrowings pursuant to repurchase agreements, with maturities of one day.

 

The Company has a credit line in the amount of $229.5 million at the Federal Home Loan Bank of Atlanta. This line may be utilized for short and/or long-term borrowing. The Company utilized the credit line for both overnight and long-term funding throughout the first three months of 2008. Short-term and long-term advances averaged $41.7 million and $98.0 million, respectively, for the three months ended March 31, 2008.

 

At March 31, 2008, cash, interest bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were 36.0% of total deposits.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

Commitments to extend credit decreased $2.3 million to $95.1 million at March 31, 2008 compared to $97.4 million at December 31, 2007. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent expected future cash flows. Standby letters of credit were $3.5 million at March 31, 2008. This amount is an increase from $3.3 million at December 31, 2007.

 

Contractual obligations decreased $6.3 million to $126.7 million at March 31, 2008 compared to $133.0 million at December 31, 2007. This change results from maturities on certain long-term debt obligations and decreases in operating lease obligations. Additional information on commitments to extend credit, standby letters of credit and contractual obligations is included in the 2007 Form 10-K.

 

Caution About Forward Looking Statements

 

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

 

Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

 

 

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

 

changes in interest rates and interest rate policies;

 

changes in general economic and business conditions in the Company’s market area;

 

the ability to continue to attract low cost core deposits to fund asset growth;

 

the ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;

 

maintaining cost controls and asset qualities as the Company opens or acquires new branches;

 

risks inherent in making loans such as repayment risks and fluctuating collateral values;

 

reliance on the Company’s management team, including its ability to attract and retain key personnel;

 

demand, development and acceptance of new products and services;

 

27


 

 

problems with technology utilized by the Company;

 

changing trends in customer profiles and behavior;

 

changes in banking and other laws and regulations applicable to the Company;

 

maintaining capital levels adequate to support the Company’s growth; and

 

other factors described in Item 1A, “Risk Factors,” included in the 2007 Form 10K.

 

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk, though it should be noted that the assets under management by Middleburg Trust Company are affected by equity price risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (“ALCO”) of Middleburg Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

 

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk. The model prepared for March 31, 2008 did not include assets and liabilities of Southern Trust Mortgage.

 

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and updated four times during each year. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward shift and a 200 basis point downward shift in interest rates. A parallel shift in rates over a 12-month period is assumed. The following reflects the range of the Company’s net interest income sensitivity analysis during the three months ended March 31, 2008 and the year ended December 31, 2007.

 

28


 

 

For the Three Months Ended March 31, 2008

 

Rate Change

Estimated Net Interest Income Sensitivity

 

 

High

Low

Average

 

+ 200 bp

1.75%

1.75%

1.75%

 

- 200 bp

(2.90%)

(2.90%)

(2.90%)

 

 

For the Year Ended December 31, 2007

 

Rate Change

Estimated Net Interest Income Sensitivity

 

 

High

Low

Average

 

+ 200 bp

(3.31%)

(1.55%)

(1.50%)

 

- 200 bp

(2.90%)

(1.38%)

(0.23%)

 

 

At March 31, 2008, the Company’s interest rate risk model indicated that, in a rising rate environment of 100 basis points over a 12 month period, net interest income could increase by 1.03% on average. For the same time period the interest rate risk model indicated that in a declining rate environment of 100 basis points over a 12 month period net interest income could decrease by 1.26% on average. While these numbers are subjective based upon the parameters used within the model, management believes the balance sheet is very balanced with little risk to rising rates in the future.

 

Since December 31, 2007, the Company’s balance sheet has grown by $81.8 million. The consolidation of Southern Trust Mortgage, along with borrowings from the Federal Home Loan Bank has resulted in the level of asset growth seen in the first quarter of 2008. The Company’s interest rate profile is symmetrical for the next 12 months. Based upon a March 31, 2008 simulation, the Company could expect an average negative impact to net interest income of $1.9 million over the next 12 months if rates rise 200 basis points. If rates were to decline 200 basis points, the Company could expect an average positive impact to net interest income of $1.4 million over the next 12 months.

 

The Company maintains an interest rate risk management strategy that has used derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility. The Company’s specific goal is to lower (where possible) the cost of its borrowed funds. The Company had no derivatives at March 31, 2008.

 

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

 

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

 

29


 

 

Item 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

30


 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

 

Item 1A. Risk Factors

 

As of May 10, 2008, there were no material changes to the risk factors previously disclosed in the 2007 Form 10K.

 

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

 

 

None

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Submission of Matters to a Vote of Security Holders

 

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

 

3.1

Bylaws of Middleburg Financial Corporation attached as Exhibit 3.1 to the current report on Form 8-K, filed with the Commission on May 1, 2008, incorporated herein by reference.

 

31.1

Rule 13a-14(a) Certification of Chief Executive Officer

 

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

 

32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

31


 

SIGNATURES

 

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

 

 

MIDDLEBURG FINANCIAL CORPORATION

 

(Registrant)

 

 

Date: May 16, 2008

/s/ Joseph L. Boling

 

Joseph L. Boling

 

Chairman of the Board

 

& Chief Executive Officer

 

 

Date: May 16, 2008

/s/ Kathleen J. Chappell

 

Kathleen J. Chappell

Senior Vice President& Chief Financial Officer

 

 

32


 

EXHIBIT INDEX

 

Exhibits

 

3.1

Bylaws of Middleburg Financial Corporation attached as Exhibit 3.1 to the current report on Form 8-K, filed with the Commission on May 1, 2008, incorporated herein by reference.

31.1

Rule 13a-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

EX-31 2 ex311.htm

Exhibit 31.1

 

CERTIFICATION

 

I, Joseph L. Boling, certify that:

 

 

1.

I have reviewed the Quarterly Report on Form 10-Q of Middleburg Financial Corporation for the period ended March 31, 2008;

 

 

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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

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;

 

 

(b)

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;

 

 

(c)

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

 

 

(d)

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

 

 

(a)

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

 

 

(b)

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: May 16, 2008

 

 

/s/ Joseph L. Boling  

 

Joseph L. Boling

 

Chairman of the Board and

Chief Executive Officer

 

 

 

EX-31 3 ex312.htm

Exhibit 31.2

 

CERTIFICATION

 

I, Kathleen J. Chappell, certify that:

 

 

1.

I have reviewed the Quarterly Report on Form 10-Q of Middleburg Financial Corporation for the period ended March 31, 2008;

 

 

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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

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;

 

 

(b)

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;

 

 

(c)

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

 

 

(d)

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

 

 

(a)

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

 

 

(b)

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: May 16, 2008

 

 

/s/ Kathleen J. Chappell

 

Kathleen J. Chappell

 

Senior Vice President and

 

Chief Financial Officer

 

 

 

EX-32 4 ex32.htm

Exhibit 32.1

 

STATEMENT OF CHIEF EXECUTIVE OFFICER AND

CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION1350

 

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2008 (the “Form 10-Q”) of Middleburg Financial Corporation (the “Company”), we, Joseph L. Boling, Chief Executive Officer of the Company, and Kathleen J. Chappell, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

 

 

(a)

the Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

 

 

(b)

the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Form 10-Q.

 

 

By

:/s/ Joseph L. Boling

 

Date: May 16, 2008

 

Joseph L. Boling

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Kathleen J. Chappell

 

Date: May 16, 2008

 

Kathleen J. Chappell

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

-----END PRIVACY-ENHANCED MESSAGE-----