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EX-31 - MIDDLEBURG FINANCIAL CORPex312.htm
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EX-10 - MIDDLEBURG FINANCIAL CORPex102.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

xQuarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2009

 

or

 

[ ] 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes o

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. 6,901,843 shares of Common Stock as of November 9, 2009

 


 

MIDDLEBURG FINANCIAL CORPORATION

 

INDEX

 

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

8

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

Condition and Results of Operations

28

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

Item 4.

Controls and Procedures

46

 

 

Part II.

Other Information

 

 

Item 1.

Legal Proceedings

47

 

 

Item 1A.

Risk Factors

47

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

Item 3.

Defaults upon Senior Securities

47

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

47

 

 

Item 5.

Other Information

47

 

 

Item 6.

Exhibits

47

 

Signatures

48

 

 

 

 

2

PART I.  FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

 

 

(Unaudited)

 

 

 

 

September 30,

 

December 31,

 

 

2009

 

2008

Assets:

 

 

 

 

Cash and due from banks

 

$               80,646

 

$                 23,980

Interest bearing deposits in banks

 

 2,214

 

2,400

Federal funds sold

 

--

 

9,000

Securities available for sale

 

 168,049

 

181,312

Loans held for sale

 

 36,826

 

40,301

Loans, net of allowance for loan losses of $9,227,

 

 

 

 

September 30, 2009; and $10,020, December 31, 2008

 

 643,293

 

662,375

Premises and equipment, net

 

 22,848

 

22,987

Goodwill and identified intangibles

 

 6,574

 

6,744

Other real estate owned

 

 8,537

 

7,597

Accrued interest receivable and other assets

 

 28,790

 

28,495

Total assets

 

$              997,777

 

$               985,191

Liabilities and Shareholders' Equity:

 

 

 

 

Liabilities:

 

 

 

 

Deposits:

 

 

 

 

Non-interest bearing demand deposits

 

$              105,648

 

$                110,537

Savings and interest bearing demand deposits

 

 380,527

 

300,006

Time deposits

 

 301,453

 

334,239

Total deposits

 

$              787,628

 

$                744,782

Securities sold under agreements to repurchase

 

 19,808

 

22,678

Short-term borrowings

 

 7,112

 

40,944

Long-term debt

 

 43,000

 

84,000

Subordinated notes

 

 5,155

 

5,155

Accrued interest payable and other liabilities

 

 9,853

 

10,027

Commitments and contingent liabilities

 

 --

 

  --

Total liabilities

 

$               872,556

 

$                907,586

Shareholders' Equity:

 

 

 

 

Common stock, par value $2.50 per share,

 

 

 

 

authorized 20,000,000 shares;

 

 

 

 

issued and outstanding at September 30, 2009 - 6,901,843 shares

 

 

 

 

issued and outstanding at December 31, 2008 – 4,534,317 shares

 

$                 17,255

 

$                  11,336

Preferred stock, net of unamortized discount on warrants,

 

 

 

 

authorized 1,000,000 shares;

 

 

 

 

issued and outstanding at September 30, 2009 - 22,000 shares

 

 21,597

 

   --

Capital surplus

 

 42,703

 

23,967

Retained earnings

 

 43,076

 

43,555

Accumulated other comprehensive loss, net

 

 (2,203)

 

 (3,181)

Total Middleburg Financial Corporation shareholders' equity

 

$                122,428

 

$                   75,677

Non-controlling interest in consolidated subsidiary

 

 2,793

 

 1,928

Total shareholders' equity

 

$                125,221

 

$                   77,605

Total liabilities and shareholders' equity

 

$                997,777

 

$                 985,191

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

3

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In Thousands, Except Per Share Data)

 

 

Unaudited

 

Unaudited

 

For the Nine Months

 

For the Three Months

 

Ended September 30,

 

Ended September 30,

 

2009

 

2008

 

2009

 

2008

Interest and Dividend Income

 

 

 

 

 

 

 

Interest and fees on loans

$         37,793

 

$       36,052

 

$        11,973

 

$         11,968

Interest on tax-exempt investment securities

--

 

4

 

--

 

--

Interest and dividends on securities available for sale:

 

 

 

 

 

 

 

Taxable

3,622

 

3,709

 

1,159

 

1,313

Tax-exempt

2,248

 

1,524

 

774

 

548

Dividends

64

 

348

 

28

 

109

Interest on deposits in banks and federal funds sold

95

 

245

 

37

 

79

Total interest and dividend income

$        43,822

 

$      41,882

 

$       13,971

 

$         14,017

Interest Expense

 

 

 

 

 

 

 

Interest on deposits

$        11,981

 

$      11,229

 

$         3,866

 

$          3,793

Interest on securities sold under agreements to repurchase

32

 

784

 

7

 

137

Interest on short-term borrowings

518

 

1,721

 

51

 

416

Interest on long-term debt

2,341

 

3,408

 

691

 

1,105

Total interest expense

$        14,872

 

$      17,142

 

$         4,615

 

$          5,451

Net interest income

$        28,950

 

$      24,740

 

$         9,356

 

$          8,566

Provision for loan losses

3,584

 

4,689

 

964

 

318

Net interest income after provision for loan losses

$        25,366

 

$      20,051

 

$         8,392

 

$          8,248

Other Income

 

 

 

 

 

 

 

Trust and investment advisory fee income

$         2,402

 

$        2,909

 

$            813

 

$             947

Service charges on deposit accounts

1,419

 

1,481

 

474

 

503

Net gains on securities available for sale

1,345

 

522

 

275

 

316

Other-than-temporary impairment loss on securities

(712)

 

(1,565)

 

(533)

 

(1,100)

Commissions on investment sales

405

 

338

 

148

 

94

Net gains on loans held for sale

8,577

 

6,860

 

2,407

 

2,274

Fees on loans held for sale

722

 

1,190

 

195

 

443

Bank-owned life insurance

380

 

360

 

123

 

115

Other service charges, commissions and fees

400

 

439

 

103

 

114

Other operating income

235

 

515

 

52

 

271

Total other income

$        15,173

 

$       13,049

 

$         4,057

 

$          3,977

Other Expense

 

 

 

 

 

 

 

Salaries and employees’ benefits

$        21,855

 

$       19,015

 

$         6,925

 

$          5,964

Net occupancy and equipment expense

4,404

 

4,326

 

1,454

 

1,502

Other taxes

438

 

482

 

148

 

162

Advertising

549

 

544

 

184

 

137

Computer operations

946

 

811

 

285

 

268

Other real estate owned

2,163

 

391

 

703

 

242

FDIC Insurance

1,567

 

349

 

510

 

135

Other operating expenses

4,834

 

5,043

 

1,696

 

1,634

Total other expense

$        36,756

 

$      30,961

 

$        11,905

 

$        10,044

Income before income taxes

$          3,783

 

$        2,139

 

$            544

 

$          2,181

Income tax expense (benefit)

69

 

423

 

(92)

 

655

Net income

$          3,714

 

$        1,716

 

$            636

 

$          1,526

Less: net (income) loss attributable to non-controlling interest

 (1,307)

 

353

 

(26)

 

29

Net income attributable to Middleburg Financial Corporation

$          2,407

 

$        2,069

 

$            610

 

$          1,555

Amortization of discount on preferred stock

26

 

--

 

10

 

--

Dividend on preferred stock

733

 

--

 

275

 

--

Net income available to common shareholders

$         1,648

 

$        2,069

 

$            325

 

$          1,555

Earnings per share, basic

$           0.32

 

$         0.46

 

$           0.05

 

$            0.34

Earnings per share, diluted

$           0.32

 

$         0.45

 

$           0.05

 

$            0.34

Dividends per share

$           0.48

 

$         0.57

 

$           0.10

 

$            0.19

1 Consisting of $1,948 and $2,128 of total other-than-temporary impairment losses, net of $1,324 and $1,416 recognized in other comprehensive income,

for the quarter and nine months ended September 30, 2009, respectively.

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

4

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2009 and 2008

(In Thousands, Except Share Data)

(Unaudited)

 

 

Middleburg Financial Corporation Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Preferred

 

Common

 

Capital

 

Retained

 

Comprehensive

 

Comprehensive

 

Non-controlling

 

 

 

Stock

 

Stock

 

Surplus

 

Earnings

 

Loss1

 

Income

 

Interest

 

Total

Balances - December 31, 2007

$        --

 

$     11,316

 

$     23,817

 

$            43,773

 

$          (1,002)

 

 

 

$                 --

 

$      77,904

Consolidation of subsidiary shares from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

3,472

 

3,472

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

2,069

 

 

 

$         2,069

 

(353)

 

1,716

Other comprehensive losses net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

period (net of tax, $2,350)

 

 

 

 

 

 

 

 

 

 

(4,560)

 

 

 

 

Reclassification adjustment (net of tax, $355)

 

 

 

 

 

 

 

 

 

 

688

 

 

 

 

Other comprehensive loss (net of tax, $1,994)

 

 

 

 

 

 

 

 

(3,872)

 

$        (3,872)

 

 

 

(3,872)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

$        (1,803)

 

 

 

 

Cash dividends declared

 

 

 

 

 

 

(2,581)

 

 

 

 

 

 

 

(2,581)

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

(770)

 

(770)

Reduction due to change in pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

measurement date

 

 

 

 

 

 

(191)

 

 

 

 

 

 

 

(191)

Share-based compensation

 

 

 

 

45

 

 

 

 

 

 

 

 

 

45

Issuance of common stock (2,500 shares)

 

 

6

 

23

 

 

 

 

 

 

 

 

 

29

Balances – September 30, 2008

$        --

 

$      11,322

 

$     23,885

 

$           43,070

 

$          (4,874)

 

 

 

$           2,349

 

$      75,752

 

 

Balances - December 31, 2008

 

 

Balances - December 31, 2008

$        --

 

$     11,336

 

$     23,967

 

$           43,555

 

$          (3,181)

 

 

 

$            1,928

 

$       77,605

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

2,407

 

 

 

$        2,407

 

$            1,307

 

3,714

Other comprehensive income net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

period (net of tax, $719)

 

 

 

 

 

 

 

 

 

 

1,396

 

 

 

 

Reclassification adjustment (net of tax, $215)

 

 

 

 

 

 

 

 

 

 

(418)

 

 

 

 

Other comprehensive income (net of tax, $504)

 

 

 

 

 

 

 

 

978

 

$           978

 

 

 

978

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

$        3,385

 

 

 

 

Cash dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

(2,264)

 

 

 

 

 

 

 

(2,264)

Preferred stock

 

 

 

 

 

 

(596)

 

 

 

 

 

 

 

(596)

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

(442)

 

(442)

Share-based compensation

 

 

 

 

86

 

 

 

 

 

 

 

 

 

86

Issuance of preferred stock and related warrants

21,571

 

 

 

429

 

 

 

 

 

 

 

 

 

22,000

Amortization of preferred stock discount

26

 

 

 

 

 

(26)

 

 

 

 

 

 

 

--

Issuance of common stock (2,367,526 shares)

 

 

5,919

 

18,221

 

 

 

 

 

 

 

 

 

24,140

Balances – September 30, 2009

$ 21,597

.

$      17,255

.

$     42,703

.

$           43,076

.

$          (2,203)

.

 

.

$            2,793

.

$     125,221

1 Total accumulated other comprehensive income includes an other than temporary amount of $1,416, net of tax of $481 for the nine months ended September 30, 2009.

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

5

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

 

 

For the Nine Months Ended

 

September 30,

 

September 30,

 

2009

 

2008

Cash Flows from Operating Activities

 

 

 

Net income

$               2,407

 

$              2,069

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

 

 

 

Provision for loan losses

 3,584

 

4,689

Depreciation and amortization

 1,404

 

1,469

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

 71

 

(12)

Non-controlling interest in earnings (losses) in consolidated subsidiary

 1,307

 

(353)

Valuation adjustment on other real estate owned

 1,556

 

--

Net loss on sale of other real estate owned

 91

 

--

Net (gains) losses on securities available for sale

  (633)

 

1,043

Originations of loans held for sale

  (755,883)

 

(481,078)

Proceeds from sales of loans held for sale

 767,935

 

 490,455

Net (gains) on mortgages held sale

 (8,577)

 

(6,860)

Net loss on disposal of premises and equipment

1

 

7

Premium amortization on securities, net

 197

 

 105

Share-based compensation

 86

 

 45

(Increase) in other assets

 (1,140)

 

(1,004)

(Decrease) in other liabilities

 (27)

 

(365)

Net cash provided by operating activities

$              12,379

 

$             10,210

 

 

 

 

Cash Flows from Investing Activities

 

 

 

Proceeds from maturity, principal pay downs and calls on investment securities

$                     --

 

$                 155

Proceeds from maturity, principal pay downs and

 

 

 

calls of securities available for sale

 20,258

 

13,743

Proceeds from sale of investment securities

--

 

526

Proceeds from sale of securities available for sale

 79,908

 

46,655

Purchase of securities available for sale

  (84,984)

 

 (94,811)

Proceeds from sale of other real estate owned

 1,375

 

--

Net decrease in loans

 11,536

 

571

Investment by non-controlling interest in consolidated subsidiary

--

 

438

Proceeds from consolidation of subsidiary

--

 

1,616

Purchase of premises and equipment

(965)

 

(3,284)

Net cash provided by (used in) investing activities

$             27,128

 

$           (34,391)

 

 

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

6

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Continued)

(In Thousands)

(Unaudited)

 

 

 

 

 

For the Nine Months Ended

 

September 30,

 

September 30,

 

2009

 

2008

 

 

 

 

Cash Flows from Financing Activities

 

 

 

Net increase in non-interest bearing and interest

 

 

 

bearing demand deposits and savings accounts

$             75,632

 

$             62,980

Net (decrease) increase in certificates of deposits

 (32,786)

 

43,462

(Decrease) in securities sold under agreements to repurchase

 (2,870)

 

(26,392)

Net (decrease) in federal funds purchased

--

 

(500)

Proceeds from short-term borrowings

 357,118

 

 776,736

Payment on short-term borrowings

  (390,950)

 

  (821,267)

Proceeds from long-term debt

--

 

 16,000

Payment on long-term debt

 (41,000)

 

 (15,000)

Distributions by subsidiary to non-controlling interest

 (442)

 

--

Payment of dividends on preferred stock

 (596)

 

--

Payment of dividends on common stock

 (2,273)

 

 (2,676)

Issuance of preferred stock

22,000

 

--

Issuance of common stock

24,140

 

 29

Net cash provided by financing activities

$              7,973

 

$             33,372

Increase in cash and cash equivalents

$            47,480

 

$               9,191

 

 

 

 

Cash and Cash Equivalents

 

 

 

Beginning

35,380

 

20,216

Ending

$             82,860

 

$             29,407

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

Cash payments for:

 

 

 

Interest

$             15,505

 

$             18,443

Income taxes

854

 

765

 

 

 

 

Supplemental Disclosures for Non-Cash

 

 

 

Investing and Financing Activities

 

 

 

Unrealized gain (loss) on securities available for sale

1,482

 

(5,867)

Transfer of loans to other real estate owed

3,962

 

6,810

 

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

7

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDAIRIES

Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2009 and 2008

(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 September 30, 2009, the results of operations for the three months and the nine months ended September 30, 2009 and 2008 and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2009 and 2008, 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, 2008 (the “2008 Form 10-K”) of Middleburg Financial Corporation (the “Company”). The results of operations for the three month and the nine month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year. Subsequent events have been considered through November 9, 2009, the same date on which these financial statements were issued.

 

Note 2.

Stock–Based Compensation Plan

 

As of September 30, 2009, 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 granted 72,263 stock options on March 16, 2009. The stock options have an exercise price of $14.00 per share, a three year vesting period and a ten year life. As a result of this grant, the Company recognized $17,000 in compensation expense for the nine months ended September 30, 2009. The Company utilized a Black-Scholes option model to fair value the stock options. The key assumptions used to determine the relative fair value of the stock options included volatility of 26.6%, an expected life of six years and a risk-free rate of 2.23%. In addition, the Company assumed a dividend yield of 2.5%. For stock-based compensation granted in prior years, the Company recognized $68,000 in compensation expense for the nine months ended September 30, 2009.

 

 

 

8

 

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

 

 

September 30, 2009

 

 

Weighted

 

 

 

Average

Aggregate

 

 

Exercise

Intrinsic

 

Shares

Price

Value

Outstanding at beginning of year

--

$                  --

 

Granted

72,263

14.00

 

Exercised

--

--

 

Forfeited

--

--

 

Outstanding at end of period

72,263

$           14.00

$                        --

 

None of the stock options awarded under the 2006 Equity Compensation Plan were vested at the end of the period. At September 30, 2009 the exercise price of these stock options was greater than the market price. The weighted average grant date fair value for all share-based compensation outstanding under the 2006 Equity Compensation Plan was $6.31 at September 30, 2009.

 

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

 

 

September 30, 2009

 

 

Weighted

 

 

 

Average

Aggregate

 

 

Grant-Date

Intrinsic

 

Shares

Fair Value

Value

Outstanding at beginning of year

26,680

$             20.54

 

Granted

--

--

 

Vested

(2,853)

24.63

 

Forfeited

--

--

 

Non-vested at end of period

23,827

$             20.05

$               311,000

 

The weighted average remaining contractual term for non-vested restricted stock at September 30, 2009 was 1.8 years. As of September 30, 2009, there was $509,000 of total unrecognized compensation expense related to the non-vested awards under the 2006 Equity Compensation Plan.

 

 

 

9

The following table summarizes options outstanding under the Company’s 1997 Stock Incentive Plan at the end of the reportable period.

 

 

September 30, 2009

 

 

Weighted

 

 

 

Average

Aggregate

 

 

Exercise

Intrinsic

 

Shares

Price

Value

Outstanding at beginning of year

158,380

$             19.80

 

Granted

--

--

 

Exercised

(650)

12.38

 

Forfeited

(3,780)

15.63

 

Outstanding at end of period

153,950

$            19.93

$                         --

Exercisable at end of period

153,950

$            19.93

$                         --

 

The weighted average remaining contractual term for options outstanding and exercisable under the 1997 Stock Incentive Plan at September 30, 2009 was 2.2 years. The weighted average grant date fair value was $5.95 at September 30, 2009 for share-based compensation outstanding under the 1997 Stock Incentive Plan.

 

 

 

10

Note 3.

Securities

 

Amortized costs and fair values of securities available for sale at September 30, 2009 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

$                 15,907

 

$                  99

 

$                 --

 

$       16,006

Obligations of states and

 

 

 

 

 

 

 

Political subdivisions

   70,519

 

1,024

 

 (724)

 

 70,819

Mortgage-backed securities:

 

 

 

 

 

 

 

Agency

   46,246

 

936

 

 (20)

 

 47,162

Non-agency

   26,842

 

468

 

 (89)

 

 27,221

Corporate preferred stock

 38

 

--

 

(5)

 

33

Restricted stock

  6,225

 

--

 

--

 

 6,225

Other

  2,768

 

2

 

  (2,187)

 

583

 

$              168,545

 

$              2,529

 

$          (3,025)

 

$    168,049

 

 

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

 

 

 

 

Gross

 

Gross

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Market

 

Cost

 

Gains

 

(Losses)

 

Value

 

(In Thousands)

Obligations of states and

 

 

 

 

 

 

 

political subdivisions

$              64,251

 

$                  241

 

$            (4,569)

 

$        59,923

Mortgage-backed securities:

 

 

 

 

 

 

 

Agency

  107,376

 

  2,372

 

   (89)

 

   109,659

Non-agency

 1,728

 

--

 

    (103)

 

  1,625

Corporate preferred stock

39

 

--

 

   (9)

 

 30

Restricted stock

 6,416

 

--

 

--

 

  6,416

Other

 3,480

 

  1,211

 

      (1,032)

 

  3,659

 

$            183,290

 

$               3,824

 

$              (5,802)

 

$      181,312

 

 

 

 

11

At September 30, 2009, investments in an unrealized loss position that were temporarily impaired are as follows:

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

(Losses)

 

Fair Value

 

(Losses)

 

Fair Value

 

(Losses)

 

(In thousands)

Obligations of states

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$         2,154

 

$           (13)

 

$      20,821

 

$          (711)

 

$      22,975

 

$          (724)

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

Agency

1,310

 

(19)

 

1,092

 

(1)

 

2,402

 

(20)

Non-agency

3,862

 

(89)

 

--

 

--

 

3,862

 

(89)

Corporate preferred stock

33

 

(5)

 

--

 

--

 

33

 

(5)

Other

--

 

--

 

374

 

(771)

 

374

 

(771)

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$        7,359

 

$         (126)

 

$       22,287

 

$      (1,483)

 

$       29,646

 

$       (1,609)

 

 

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

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

(Losses)

 

Fair Value

 

(Losses)

 

Fair Value

 

(Losses)

 

(In thousands)

Obligations of states

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$       43,843

 

$       (3,918)

 

$         4,439

 

$          (651)

 

$      48,282

 

$      (4,569)

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

Agency

17,888

 

(70)

 

2,992

 

(19)

 

20,880

 

(89)

Non-agency

1,197

 

(55)

 

428

 

(48)

 

1,625

 

(103)

Corporate preferred stock

30

 

(9)

 

--

 

--

 

30

 

(9)

Other

1,710

 

(793)

 

453

 

(239)

 

2,163

 

(1,032)

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$       64,668

 

$       (4,845)

 

$          8,312

 

$          (957)

 

$       72,980

 

$       (5,802)

 

 

Certain of the other debt securities are related to corporate securities. For these investments within the scope of EITF 99-20 (ASC 320 Investments – Debt and Equity Securities) at acquisition, the Company evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Company considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information. The Company analyzed the cash flow characteristics of these securities.

 

 

 

12

The Company has identified three other than temporarily impaired securities within its portfolio and has elected to recognize losses through the income statement. During the nine months ended September 30, 2009, the Company recognized credit related impairment losses of $712,000 on trust preferred securities included within a collateralized debt obligation held by the Company.

 

The following table provides further information on these three securities as of September 30, 2009 (in thousands):

 

 

 

 

 

 

Cumulative

Amount of

 

 

Current

 

 

Estimated

Other

OTTI

 

Tranche

Moody's

Par

Book

Fair

Comprehensive

Related to

Security

Level

Ratings

Value

Value

Value

Loss

Credit Loss

MM Community Funding LTD

Class B-A

Ca

$   1,000

$      734

72

$    662

$   266

MM Community Funding LTD

Class B-A

Ca

     1,000

        734

72

      662

     266

Preferred Term XXII

Class D

NR

      1,979

       105

13

      92

     180

 

At September 30, 2009, the Company concluded that no other adverse change in cash flows occurred during the quarter and did not consider any other securities other-than-temporarily impaired. Based on this analysis and because the Company does not intend to sell these securities and it is more likely than not the Company will not be required to sell these securities before recovery of amortized cost basis, which may be at maturity; and, for debt securities related to corporate securities, determined that there was no other adverse change in the cash flows as viewed by a market participant, the Company does not consider the investments in these assets to be other-than-temporarily impaired at September 30, 2009. However, there is a risk that this review could result in recognition of other-than-temporary impairment charges in the future.

 

Of the temporarily impaired securities, 42 are investment grade, five are speculative grade and two are non-rated. Obligations of states and political subdivisions make up the largest amount of temporarily impaired securities. The speculative grade securities are asset backed securities that are collateralized by trust preferred issuances of financial institutions. One of the non-rated securities is issued by a local municipality within the Company’s market. The other non-rated security is issued by a corporate note and has a par value of $38,750. This security has a temporary impairment of $5,348. 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 by the Company and managed to provide an overall positive impact to the Company’s income statement and balance sheet.

 

 

 

 

13

Note 4.

Loan Portfolio

 

The consolidated loan portfolio was composed of the following:

 

 

September 30,

 

December 31,

 

2009

 

2008

 

(In Thousands)

 

 

 

 

Commercial, financial and agricultural

$                 41,615

 

$                44,127

Real estate construction

  81,699

 

 105,717

Real estate mortgage

  511,141

 

 502,701

Consumer installment

  17,310

 

 18,868

Total loans

  651,765

 

 671,413

Add: Deferred loan costs

755

 

982

Less: Allowance for loan losses

9,227

 

 10,020

Net loans

$              643,293

 

$              662,375

 

The Company had $36.8 million and $40.3 million in loans held for sale at September 30, 2009 and December 31, 2008, respectively.

 

 

The following table summarizes impaired loans:

 

 

September 30,

 

December 31,

 

2009

 

2008

 

(In Thousands)

Impaired loans for which,

 

 

 

a specific allowance has been provided

            $                        7,294

 

               $                11,339

a specific allowance has not been provided

        18,141

 

    12,052

Total impaired loans

            $                      25,435

 

                $                23,391

Allowance provided for impaired loans,

 

 

 

included in the allowance for loan losses

            $                        1,469

 

                $                  1,006

Average balance of impaired loans

            $                      25,964

 

                $                23,530

Interest income recognized

            $                           979

 

                $                  1,344

 

The Company had $2.4 million and $2.0 million in non-accrual loans excluded from the impaired loan disclosure at September 30, 2009 and December 31, 2008, respectively. If interest on these loans had been accrued, such income would have approximated $239,000 and $156,000 as of September 30, 2009 and December 31, 2008, respectively. There were $1.2 million and $540,000 in loans 90 days past due and still accruing interest on September 30, 2009 and December 31, 2008, respectively.

 

 

 

14

 

Note 5.

Allowance for Loan Losses

 

 

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

 

 

September 30,

 

December 31,

 

2009

 

2008

 

(In Thousands)

Balance at January 1

$                   10,020

 

$                 7,093

Southern Trust Mortgage consolidation

--

 

 1,238

Provision charged to operating expense

 3,584

 

 5,261

Recoveries added to the allowance

74

 

47

Loan losses charged to the allowance

 (4,451)

 

  (3,619)

Balance at the end of the period

$                      9,227

 

$               10,020

 

 

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.

 

 

Nine Months Ended

 

September 30, 2009

 

September 30, 2008

 

 

 

Per share

 

 

 

Per share

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

Basic earnings per share

5,208,624

 

$      0.32

 

4,527,225

 

$      0.46

Effect of dilutive securities:

 

 

 

 

 

 

 

stock options and grants

1,993

 

 

 

30,199

 

 

Diluted earnings per share

5,210,617

 

$      0.32

 

4,557,424

 

$      0.45

 

 

Three Months Ended

 

September 30, 2009

 

September 30, 2008

 

 

 

Per share

 

 

 

Per share

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

Basic earnings per share

6,256,800

 

$     0.05

 

4,528,476

 

$     0.34

Effect of dilutive securities:

 

 

 

 

 

 

 

stock options and grants

2,578

 

 

 

23,367

 

 

Diluted earnings per share

6,259,378

 

$    0.05

 

4,551,843

 

$     0.34

 

 

 

 

15

 

The following table shows earnings available to common shareholders used in computing earnings per share.

 

 

For the Nine Months

 

 

Ended September 30,

 

 

2009

 

2008

 

Net income

$              3,714

 

$              1,716

 

Less: net (income) loss attributable to non-controlling interest

  (1,307)

 

353

 

Net income attributable to Middleburg Financial Corporation

$              2,407

 

$              2,069

 

Less: effective dividends to preferred shareholders

 (759)

 

--

 

Net income available to common shareholders

$              1,648

 

$              2,069

 

 

At September 30, 2009 and 2008, stock options, restricted grants and warrants representing 284,110 and 100,500 shares, respectively, were not included in the calculation of earnings per share because they would have been anti-dilutive.

 

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 on deposit accounts.

 

Revenue from the wealth management activities is comprised of fees based upon the market value of the accounts under administration as well as commission on investment transactions. 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 Company recognizes gains on the sale of loans as part of Other Income. The mortgage banking services are conducted by Southern Trust Mortgage, LLC.

 

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 and a participation agreement 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.

 

 

 

16

The following table presents segment information for the nine months ended September 30, 2009 and 2008, respectively.

 

For the Nine Months Ended

 

September 30, 2009

 

Retail

 

Wealth

 

Mortgage

 

Inter-company

 

 

(In Thousands)

Banking

 

Management

 

Banking

 

Eliminations

 

Consolidated

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

37,020

 

 

$

5

 

 

$

7,766

 

 

$

(969)

 

 

$

43,822

 

Wealth management fees

 

--

 

 

 

2,862

 

 

 

--

 

 

 

(55)

 

 

 

2,807

 

Other income

 

2,860

 

 

 

--

 

 

 

9,600

 

 

 

(94)

 

 

 

12,366

 

Total operating income

$

39,880

 

 

$

2,867

 

 

$

17,366

 

 

$

(1,118)

 

 

$

58,995

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$

14,359

 

 

$

--

 

 

$

1,482

 

 

$

(969)

 

 

$

14,872

 

Salaries and employee benefits

 

10,017

 

 

 

2,245

 

 

 

9,593

 

 

 

--

 

 

 

21,855

 

Provision for loan losses

 

3,673

 

 

 

--

 

 

 

(89)

 

 

 

--

 

 

 

3,584

 

Other

 

10,581

 

 

 

1,136

 

 

 

3,333

 

 

 

(149)

 

 

 

14,901

 

Total operating expenses

$

38,630

 

 

$

3,381

 

 

$

14,319

 

 

$

(1,118)

 

 

$

55,212

 

Income before income taxes

$

1,250

 

 

$

(514)

 

 

$

3,047

 

 

$

--

 

 

$

3,783

 

Provision for income taxes

 

201

 

 

 

(132)

 

 

 

--

 

 

 

--

 

 

 

69

 

Net income

$

1,049

 

 

$

(382)

 

 

$

3,047

 

 

$

--

 

 

$

3,714

 

Non-controlling interest in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

consolidated subsidiary

 

--

 

 

 

--

 

 

 

--

 

 

 

1,307

 

 

 

1,307

 

Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Middleburg Financial Corporation

$

1,049

 

 

$

(382)

 

 

$

3,047

 

 

$

(1,307)

 

 

$

2,407

 

Total assets

$

1,007,416

 

 

$

6,315

 

 

$

48,813

 

 

$

(64,767)

 

 

$

997,777

 

Capital expenditures

$

923

 

 

$

10

 

 

$

32

 

 

$

--

 

 

$

965

 

Goodwill and identified intangibles

$

--

 

 

$

4,707

 

 

$

1,867

 

 

$

--

 

 

$

6,574