Attached files
file | filename |
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EX-31.2 - MIDDLEBURG FINANCIAL CORP | ex31-2.htm |
EX-32.1 - MIDDLEBURG FINANCIAL CORP | ex32-1.htm |
EX-31.1 - MIDDLEBURG FINANCIAL CORP | ex31-1.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, 2011
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)
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(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 R
|
No £
|
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 £
|
No £
|
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 £
|
Accelerated filer R
|
Non-accelerated filer £ (Do not check if a smaller reporting company)
|
Smaller reporting company £
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £
|
No R
|
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 6,942,315 shares of Common Stock as of May 4, 2011
MIDDLEBURG FINANCIAL CORPORATION
INDEX
Part I. Financial Information
|
Page No.
|
|||
Item 1.
|
Financial Statements
|
|||
|
||||
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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
|
31
|
|||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
50
|
||
Item 4.
|
Controls and Procedures
|
51
|
||
|
||||
Part II. Other Information
|
||||
|
||||
Item 1.
|
Legal Proceedings
|
52
|
||
Item 1A.
|
Risk Factors
|
52
|
||
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
52
|
||
Item 3.
|
Defaults upon Senior Securities
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52
|
||
Item 4.
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Removed and Reserved
|
52
|
||
Item 5.
|
Other Information
|
52
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||
Item 6.
|
Exhibits
|
52
|
||
Signatures
|
54
|
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
|
||||||||
(In thousands, except for share and per share data)
|
||||||||
(Unaudited)
|
||||||||
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
ASSETS
|
||||||||
Cash and due from banks
|
$ | 22,060 | $ | 21,955 | ||||
Interest-bearing deposits with other institutions
|
39,237 | 42,769 | ||||||
Total cash and cash equivalents
|
61,297 | 64,724 | ||||||
Securities available for sale
|
258,412 | 252,042 | ||||||
Loans held for sale
|
34,407 | 59,361 | ||||||
Restricted securities, at cost
|
6,746 | 6,296 | ||||||
Loans receivable, net of allowance for loan losses of $14,575 at
|
||||||||
March 31, 2011 and $14,967 at December 31, 2010
|
647,985 | 644,345 | ||||||
Premises and equipment, net
|
20,908 | 21,112 | ||||||
Goodwill and identified intangibles
|
6,317 | 6,360 | ||||||
Other real estate owned, net of valuation allowance of
|
||||||||
$1,187 at March 31, 2011 and $1,486 at December 31, 2010
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7,825 | 8,394 | ||||||
Prepaid federal deposit insurance
|
4,791 | 5,154 | ||||||
Accrued interest receivable and other assets
|
35,601 | 36,779 | ||||||
TOTAL ASSETS
|
$ | 1,084,289 | $ | 1,104,567 | ||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Non-interest-bearing demand deposits
|
$ | 122,888 | $ | 130,488 | ||||
Savings and interest-bearing demand deposits
|
448,065 | 436,718 | ||||||
Time deposits
|
294,502 | 323,100 | ||||||
Total deposits
|
865,455 | 890,306 | ||||||
Securities sold under agreements to repurchase
|
27,963 | 25,562 | ||||||
Short-term borrowings
|
4,244 | 13,320 | ||||||
Long-term debt
|
72,912 | 62,912 | ||||||
Subordinated notes
|
5,155 | 5,155 | ||||||
Accrued interest payable and other liabilities
|
7,353 | 7,319 | ||||||
TOTAL LIABILITIES
|
983,082 | 1,004,574 | ||||||
SHAREHOLDERS' EQUITY
|
||||||||
Common stock ($2.50 par value; 20,000,000 shares authorized,
|
||||||||
6,945,261 issued; 6,942,315 and 6,925,437 outstanding at
|
||||||||
March 31, 2011 and December 31, 2010, respectively)
|
17,314 | 17,314 | ||||||
Capital surplus
|
43,105 | 43,058 | ||||||
Retained earnings
|
38,473 | 37,593 | ||||||
Accumulated other comprehensive loss
|
(480 | ) | (1,012 | ) | ||||
Total Middleburg Financial Corporation shareholders' equity
|
98,412 | 96,953 | ||||||
Non-controlling interest in consolidated subsidiary
|
2,795 | 3,040 | ||||||
TOTAL SHAREHOLDERS' EQUITY
|
101,207 | 99,993 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 1,084,289 | $ | 1,104,567 | ||||
See accompanying notes to the consolidated financial statements.
|
3
MIDDLEBURG FINANCIAL CORPORATION
|
||||||||
CONSOLIDATED STATEMENTS OF INCOME
|
||||||||
(In thousands, except for per share data)
|
||||||||
Unaudited
|
||||||||
For the Three Months
|
||||||||
Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
INTEREST INCOME
|
||||||||
Interest and fees on loans
|
$ | 9,735 | $ | 10,445 | ||||
Interest and dividends on securities available for sale
|
||||||||
Taxable
|
1,399 | 938 | ||||||
Tax-exempt
|
561 | 693 | ||||||
Dividends
|
36 | 21 | ||||||
Interest on deposits in banks and federal funds sold
|
27 | 35 | ||||||
Total interest and dividend income
|
11,758 | 12,132 | ||||||
INTEREST EXPENSE
|
||||||||
Interest on deposits
|
2,308 | 3,174 | ||||||
Interest on securities sold under agreements to
|
||||||||
repurchase
|
56 | 20 | ||||||
Interest on short-term borrowings
|
63 | 44 | ||||||
Interest on long-term debt
|
296 | 438 | ||||||
Total interest expense
|
2,723 | 3,676 | ||||||
NET INTEREST INCOME
|
9,035 | 8,456 | ||||||
Provision for loan losses
|
454 | 929 | ||||||
NET INTEREST INCOME AFTER PROVISION
|
||||||||
FOR LOAN LOSSES
|
8,581 | 7,527 | ||||||
NONINTEREST INCOME
|
||||||||
Service charges on deposit accounts
|
489 | 441 | ||||||
Trust services income
|
867 | 815 | ||||||
Net gains on loans held for sale
|
2,847 | 2,630 | ||||||
Net gains on securities available for sale
|
35 | 506 | ||||||
Total other-than-temporary impairment (loss) on securities
|
(17 | ) | (151 | ) | ||||
Portion of loss recognized in other comprehensive income
|
16 | - | ||||||
Net impairment loss on securities
|
(1 | ) | (151 | ) | ||||
Commissions on investment sales
|
180 | 144 | ||||||
Fees on mortgages held for sale
|
154 | 358 | ||||||
Other service charges, commissions and fees
|
115 | 113 | ||||||
Bank-owned life insurance
|
123 | 125 | ||||||
Other operating income
|
94 | 91 | ||||||
Total noninterest income
|
4,903 | 5,072 | ||||||
NONINTEREST EXPENSE
|
||||||||
Salaries and employees' benefits
|
7,316 | 6,924 | ||||||
Net occupancy and equipment expense
|
1,676 | 1,604 | ||||||
Advertising
|
156 | 180 | ||||||
Computer operations
|
365 | 328 | ||||||
Other real estate owned
|
344 | 210 | ||||||
Other taxes
|
197 | 196 | ||||||
Federal deposit insurance expense
|
407 | 801 | ||||||
Other operating expenses
|
1,709 | 1,700 | ||||||
Total noninterest expense
|
12,170 | 11,943 | ||||||
Income before income taxes
|
1,314 | 656 | ||||||
Income tax expense
|
317 | 87 | ||||||
NET INCOME
|
997 | 569 | ||||||
Net loss attributable to non-controlling interest
|
230 | 245 | ||||||
Net income attributable to Middleburg
|
||||||||
Financial Corporation
|
$ | 1,227 | $ | 814 | ||||
Earnings per share:
|
||||||||
Basic
|
$ | 0.18 | $ | 0.12 | ||||
Diluted
|
$ | 0.18 | $ | 0.12 | ||||
Dividends per common share
|
$ | 0.05 | $ | 0.10 | ||||
See accompanying notes to the consolidated financial statements.
|
4
MIDDLEBURG FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
For the Three months ended March 31, 2011 and 2010
(In Thousands, Except Share Data)
(Unaudited)
Middleburg Financial Corporation Shareholders
|
||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||||||||||||||
Common
|
Capital
|
Retained
|
Comprehensive
|
Comprehensive
|
Noncontrolling
|
Comprehensive
|
||||||||||||||||||||||||||
Stock
|
Surplus
|
Earnings
|
Income (Loss)
|
Income
|
Interest
|
Income
|
Total
|
|||||||||||||||||||||||||
Balances - December 31, 2009
|
$ | 17,273 | $ | 42,807 | $ | 42,706 | $ | (2,474 | ) | $ | 3,047 | $ | 103,359 | |||||||||||||||||||
Comprehensive income (loss)
|
||||||||||||||||||||||||||||||||
Net income (loss)
|
814 | $ | 814 | (245 | ) | $ | 569 | 569 | ||||||||||||||||||||||||
Other comprehensive income net of tax:
|
||||||||||||||||||||||||||||||||
Unrealized holding gains arising during the
|
||||||||||||||||||||||||||||||||
period (net of tax, $518)
|
1,005 | 1,005 | 1,005 | 1,005 | ||||||||||||||||||||||||||||
Reclassification adjustment (net of tax, $172)
|
(334 | ) | (334 | ) | (334 | ) | (334 | ) | ||||||||||||||||||||||||
Unrealized losses on securities
|
||||||||||||||||||||||||||||||||
for which other-than-temporary impairment
|
||||||||||||||||||||||||||||||||
has been recognized in earnings (net of tax, $ 51)
|
100 | 100 | 100 | 100 | ||||||||||||||||||||||||||||
Total other comprehensive income
|
771 | 771 | - | $ | 771 | 771 | ||||||||||||||||||||||||||
Total comprehensive income (loss)
|
$ | 1,585 | (245 | ) | $ | 1,340 | 1,340 | |||||||||||||||||||||||||
Cash dividends declared
|
(692 | ) | (692 | ) | ||||||||||||||||||||||||||||
Distributions to non-controlling interest
|
(136 | ) | (136 | ) | ||||||||||||||||||||||||||||
Share-based compensation
|
- | 19 | 19 | |||||||||||||||||||||||||||||
Balances - March 31, 2010
|
$ | 17,273 | $ | 42,826 | $ | 42,828 | $ | (1,703 | ) | $ | 2,666 | $ | 103,890 | |||||||||||||||||||
Balances - December 31, 2010
|
$ | 17,314 | $ | 43,058 | $ | 37,593 | $ | (1,012 | ) | $ | 3,040 | $ | 99,993 | |||||||||||||||||||
Comprehensive income (loss)
|
||||||||||||||||||||||||||||||||
Net income (loss)
|
1,227 | $ | 1,227 | (230 | ) | $ | 997 | 997 | ||||||||||||||||||||||||
Other comprehensive income net of tax:
|
||||||||||||||||||||||||||||||||
Unrealized holding gains arising during the
|
||||||||||||||||||||||||||||||||
period (net of tax, $265)
|
514 | 514 | - | 514 | 514 | |||||||||||||||||||||||||||
Reclassification adjustment (net of tax, $12)
|
(23 | ) | (23 | ) | - | (23 | ) | (23 | ) | |||||||||||||||||||||||
Unrealized losses on securities
|
||||||||||||||||||||||||||||||||
for which other-than-temporary impairment
|
||||||||||||||||||||||||||||||||
has been recognized in earnings (net of tax, $0)
|
1 | 1 | - | 1 | 1 | |||||||||||||||||||||||||||
Unrealized gain on intrest rate swap (net of tax, 20)
|
40 | 40 | - | 40 | 40 | |||||||||||||||||||||||||||
Total other comprehensive income
|
532 | 532 | - | 532 | 532 | |||||||||||||||||||||||||||
Total comprehensive income (loss)
|
$ | 1,759 | (230 | ) | $ | 1,529 | 1,529 | |||||||||||||||||||||||||
Cash dividends declared
|
(347 | ) | (347 | ) | ||||||||||||||||||||||||||||
Distributions to non-controlling interest
|
(15 | ) | (15 | ) | ||||||||||||||||||||||||||||
Share-based compensation
|
- | 47 | 47 | |||||||||||||||||||||||||||||
Balances - March 31, 2011
|
$ | 17,314 | $ | 43,105 | $ | 38,473 | $ | (480 | ) | $ | 2,795 | $ | 101,207 |
See Accompanying Notes to Consolidated Financial Statements.
5
MIDDLEBURG FINANCIAL CORPORATION
|
||||||||
Consolidated Statements of Cash Flows
|
||||||||
(In Thousands)
|
||||||||
Unaudited
|
||||||||
For the three months ended
|
||||||||
March 31,
|
March 31,
|
|||||||
2011
|
2010
|
|||||||
Cash Flows From Operating Activities
|
||||||||
Net income
|
$ | 997 | $ | 569 | ||||
Adjustments to reconcile net income to net cash
|
||||||||
provided by operating activities:
|
||||||||
Depreciation and amortization
|
470 | 447 | ||||||
Equity in (undistributed earnings) of affiliate
|
(22 | ) | (15 | ) | ||||
Provision for loan losses
|
454 | 929 | ||||||
Net (gain) on securities available for sale
|
(35 | ) | (506 | ) | ||||
Other than temporary impairment loss
|
1 | 151 | ||||||
Net loss on disposal of assets
|
39 | - - | ||||||
Premium amortization on securities, net
|
766 | 448 | ||||||
Deferred income tax benefit
|
- - | (340 | ) | |||||
Origination of loans held for sale
|
(136,432 | ) | (149,392 | ) | ||||
Proceeds from sales of loans held for sale
|
164,233 | 154,196 | ||||||
Net (gains) on mortgages held for sale
|
(2,847 | ) | (2,630 | ) | ||||
Equity compensation
|
47 | 19 | ||||||
Net loss on sale of other real estate owned
|
66 | 85 | ||||||
Valuation adjustment on other real estate owned
|
200 | 244 | ||||||
Decrease in prepaid FDIC insurance
|
363 | 768 | ||||||
Changes in assets and liabilities:
|
||||||||
Decrease (increase) in other assets
|
306 | (1,866 | ) | |||||
Increase in other liabilities
|
34 | 131 | ||||||
Net cash provided by operating activities
|
$ | 28,640 | $ | 3,238 | ||||
Cash Flows from Investing Activities
|
||||||||
Proceeds from maturity, principal paydowns
|
||||||||
and calls of securities available for sale
|
$ | 18,799 | $ | 7,281 | ||||
Proceeds from sale of securities
|
||||||||
available for sale
|
9,412 | 16,117 | ||||||
Purchase of securities available for sale
|
(34,565 | ) | (29,377 | ) | ||||
Purchase of restricted stock
|
(450 | ) | - - | |||||
Purchases of bank premises and equipment
|
(253 | ) | (109 | ) | ||||
Net (increase) in loans
|
(3,122 | ) | (13,931 | ) | ||||
Proceeds from sale of other real estate owned
|
- - | 399 | ||||||
Net cash (used in) investing activities
|
$ | (10,179 | ) | $ | (19,620 | ) |
See Accompanying Notes to Consolidated Financial Statements.
6
MIDDLEBURG FINANCIAL CORPORATION
|
||||||||
Consolidated Statements of Cash Flows
|
||||||||
(Continued)
|
||||||||
(In Thousands)
|
||||||||
For the three months ended
|
||||||||
March 31,
|
March 31,
|
|||||||
2011
|
2010
|
|||||||
Cash Flows from Financing Activities
|
||||||||
Net increase in non-interest-bearing and interest-
|
||||||||
bearing demand deposits and savings accounts
|
$ | 3,747 | $ | 25,152 | ||||
Net (decrease) in certificates of deposit
|
(28,598 | ) | (3,412 | ) | ||||
Increase in securities sold under agreements
|
||||||||
to repurchase
|
2,401 | 7,087 | ||||||
Proceeds from short-term borrowings
|
19,302 | 16,047 | ||||||
Payments on short-term borrowings
|
(28,378 | ) | (16,195 | ) | ||||
Proceeds from FHLB borrowings
|
20,000 | 12,912 | ||||||
Payments on FHLB borrowings
|
(10,000 | ) | - - | |||||
Distributions to non-controlling interest
|
(15 | ) | (136 | ) | ||||
Payment of dividends on common stock
|
(347 | ) | (692 | ) | ||||
Net cash (used in) provided by financing activities
|
$ | (21,888 | ) | $ | 40,763 | |||
(Decrease) increase in cash and and cash equivalents
|
(3,427 | ) | 24,381 | |||||
Cash and Cash Equivalents
|
||||||||
Beginning
|
64,724 | 43,210 | ||||||
Ending
|
$ | 61,297 | $ | 67,591 | ||||
Supplemental Disclosures of Cash Flow Information
|
||||||||
Cash payments for:
|
||||||||
Interest
|
$ | 2,667 | $ | 3,543 | ||||
Income taxes
|
$ | - | $ | - | ||||
Supplemental Disclosure of Noncash Transactions
|
||||||||
Unrealized gain on securities available for sale
|
$ | 745 | $ | 1,168 | ||||
Change in market value of interest rate swap
|
$ | 60 | $ | - | ||||
Transfer of loans to other real estate owned
|
$ | 407 | $ | 87 | ||||
Loans originated from sale of other real estate owned
|
$ | 533 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
|
7
MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDAIRIES
Notes to Consolidated Financial Statements
For the Three Months Ended March 31, 2011 and 2010
(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, 2011 and December 31, 2010, the results of operations for the three months ended March 31, 2011 and 2010, and, changes in shareholders’ equity and cash flows for the three months ended March 31, 2011 and 2010, 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, 2010 (the “2010 Form 10-K”) of Middleburg Financial Corporation (the “Company”). The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.
In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no additional material subsequent events to be disclosed at this time.
Note 2. Stock–Based Compensation Plan
As of March 31, 2011, 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 recognized $47,000 for stock-based compensation expenses for the three months ended March 31, 2011.
8
The following table summarizes stock options awarded under the 2006 Equity Compensation Plan and remaining unexercised options under the 1997 Stock Incentive Plan at the end of the reporting period.
March 31, 2011 | ||||||||||
Weighted
|
||||||||||
Average
|
Aggregate
|
|||||||||
Exercise
|
Intrinsic
|
|||||||||
Shares
|
Price
|
Value
|
||||||||
Outstanding at beginning of year
|
165,915 | $ | 20.18 | |||||||
Granted
|
-- | -- | ||||||||
Exercised
|
-- | -- | ||||||||
Forfeited
|
-- | -- | ||||||||
Outstanding at end of period
|
165,915 | $ | 20.18 | $ |
--
|
As of the end of the reporting period, 132,958 options were vested and exercisable representing 100,000 shares issued under the original 1997 plan and 32,958 vested options under the 2006 Plan. At March 31, 2011 the weighted average exercise price of these stock options was greater than the aggregate market price. The weighted average remaining contractual term for options outstanding and exercisable at March 31, 2011 was 3.2 years. As of March 31, 2011 there was $59,000 of total unrecognized compensation expense related to stock option awards under the 2006 Equity Compensation Plan.
The following table summarizes restricted stock awarded under the 2006 Equity Compensation Plan at the end of the reportable period.
March 31, 2011 | ||||||||||
Weighted
|
||||||||||
Average
|
Aggregate
|
|||||||||
Grant-Date
|
Intrinsic
|
|||||||||
Shares
|
Fair Value
|
Value
|
||||||||
Outstanding at beginning of year
|
38,580 | $ | 15.13 | |||||||
Granted
|
-- | -- | ||||||||
Vested
|
(2,628 | ) | (13.92 | ) | ||||||
Forfeited
|
-- | -- | ||||||||
Non-vested at end of period
|
35,952 | $ | 15.22 | $ |
554,380
|
The weighted average remaining contractual term for non-vested restricted stock at March 31, 2011 was 1.47 years. As of March 31, 2011, there was $532,000 of total unrecognized compensation expense related to the non-vested restricted stock awards under the 2006 Equity Compensation Plan.
9
Note 3. Securities
Amortized costs and fair values of securities available for sale at March 31, 2011 are summarized as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Available for Sale
|
||||||||||||||||
U.S. government agencies
|
$ | 5,759 | $ | 19 | $ | (105 | ) | $ | 5,673 | |||||||
Obligations of states and
|
||||||||||||||||
political subdivisions
|
61,163 | 407 | (1,999 | ) | 59,571 | |||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Agency
|
162,873 | 1,629 | (310 | ) | 164,192 | |||||||||||
Non-agency
|
19,280 | 89 | (206 | ) | 19,163 | |||||||||||
Corporate stock
|
68 | - | (22 | ) | 46 | |||||||||||
Corporate securities
|
9,611 | 20 | (107 | ) | 9,524 | |||||||||||
Trust-preferred securities
|
521 | - | (278 | ) | 243 | |||||||||||
Total
|
$ | 259,275 | $ | 2,164 | $ | (3,027 | ) | $ | 258,412 |
Amortized costs and fair values of securities available for sale at December 31, 2010 are summarized as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Available for Sale
|
||||||||||||||||
U.S. government agencies
|
$ | 4,699 | $ | 17 | $ | (67 | ) | $ | 4,649 | |||||||
Obligations of states and
|
||||||||||||||||
political subdivisions
|
61,187 | 174 | (2,221 | ) | 59,140 | |||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Agency
|
150,952 | 1,722 | (370 | ) | 152,304 | |||||||||||
Non-agency
|
26,168 | 150 | (237 | ) | 26,081 | |||||||||||
Corporate stock
|
39 | - | (26 | ) | 13 | |||||||||||
Corporate securities
|
9,609 | 7 | (84 | ) | 9,532 | |||||||||||
Trust-preferred securities
|
998 | - | (675 | ) | 323 | |||||||||||
Total
|
$ | 253,652 | $ | 2,070 | $ | (3,680 | ) | $ | 252,042 |
The amortized cost and fair value of securities available for sale as of March 31, 2011, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
10
March 31, 2011
|
||||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
(In Thousands)
|
||||||||
Due in one year or less
|
$ | 564 | $ | 568 | ||||
Due after one year through
|
||||||||
five years
|
10,528 | 10,392 | ||||||
Due after five years through
|
||||||||
ten years
|
37,025 | 36,161 | ||||||
Due after ten years
|
28,416 | 27,647 | ||||||
Mortgage-backed securities
|
182,153 | 183,355 | ||||||
Corporate Stock
|
68 | 46 | ||||||
Trust Preferred
|
521 | 243 | ||||||
Total
|
$ | 259,275 | $ | 258,412 |
Proceeds from the sale of securities during the quarter ended March 31, 2011 were $9,412,000 and net gains of $35,000 were realized on those sales. Additionally, $1,000 in losses was recognized for impaired securities during the quarter. The tax expense applicable to the net realized gains of $34,000 amounted to $12,000.
The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies and for other purposes as required by law amounted to $110,067,000 at March 31, 2011.
At March 31, 2011, investments in an unrealized loss position that were temporarily impaired are as follows:
Less than Twelve Months
|
Twelve Months or Greater
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
U.S. government agencies
|
$ | 3,308 | $ | (105 | ) | $ | - | $ | - | $ | 3,308 | $ | (105 | ) | ||||||||||
Obligations of states and
|
||||||||||||||||||||||||
political subdivisions
|
33,070 | (1,691 | ) | 4,298 | (308 | ) | 37,368 | (1,999 | ) | |||||||||||||||
Mortgage backed securities:
|
||||||||||||||||||||||||
Agency
|
48,007 | (310 | ) | - | - | 48,007 | (310 | ) | ||||||||||||||||
Non-agency
|
12,475 | (206 | ) | - | - | 12,475 | (206 | ) | ||||||||||||||||
Corporate preferred stock
|
- | - | 16 | (22 | ) | 16 | (22 | ) | ||||||||||||||||
Corporate securities
|
6,363 | (107 | ) | - | - | 6,363 | (107 | ) | ||||||||||||||||
Trust-preferred securities
|
- | - | 243 | (278 | ) | 243 | (278 | ) | ||||||||||||||||
Total
|
$ | 103,223 | $ | (2,419 | ) | $ | 4,557 | $ | (608 | ) | $ | 107,780 | $ | (3,027 | ) |
At December 31, 2010, investments in an unrealized loss position that were temporarily impaired are as follows:
11
Less than Twelve Months
|
Twelve Months or Greater
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
U.S. government agencies
|
$ | 3,408 | $ | (67 | ) | $ | - | $ | - | $ | 3,408 | $ | (67 | ) | ||||||||||
Obligations of states and
|
||||||||||||||||||||||||
political subdivisions
|
40,579 | (1,876 | ) | 4,266 | (345 | ) | 44,845 | (2,221 | ) | |||||||||||||||
Mortgage backed securities:
|
||||||||||||||||||||||||
Agency
|
50,338 | (370 | ) | - | - | 50,338 | (370 | ) | ||||||||||||||||
Non-agency
|
18,341 | (237 | ) | - | - | 18,341 | (237 | ) | ||||||||||||||||
Corporate preferred stock
|
- | - | 12 | (26 | ) | 12 | (26 | ) | ||||||||||||||||
Corporate securities
|
9,385 | (84 | ) | - | - | 9,385 | (84 | ) | ||||||||||||||||
Trust-preferred securities
|
- | - | 323 | (675 | ) | 323 | (675 | ) | ||||||||||||||||
Total
|
$ | 122,051 | $ | (2,634 | ) | $ | 4,601 | $ | (1,046 | ) | $ | 126,652 | $ | (3,680 | ) |
A total of 97 securities have been identified by the Company as temporarily impaired at March 31, 2011. Of the 97 securities, 94 are investment grade and 3 are speculative grade. Agency, non-agency mortgage-backed securities, and municipal securities make up the majority of temporarily impaired securities at March 31, 2011. The speculative grade securities are asset backed securities that are collateralized by trust preferred issuances of financial institutions. 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 a sale before the loss is fully recovered. No such sales are anticipated or required as of March 31, 2011. 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.
Trust preferred securities
Trust preferred securities were evaluated within the scope of EITF 99-20 (ASC 320 Investments – Debt and Equity Securities) for potential impairment. The Company reviews 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.
All of the pooled trust preferred securities in the Company’s portfolio have floating rate coupons. In performing the present value analysis of expected cash flows, we incorporate expected deferral and default rates. The deferral/default assumptions for each pooled trust preferred security were developed by reviewing the underlying collateral or issuing banks. The present value of expected future cashflows is discounted at the effective purchase yield, which in the case of the floating rate securities is equal to the credit spread at time of purchase plus the current 3-month LIBOR rate. We then compare the present value to the current book value for purposes of determining if there is an other-than-temporary impairment (“OTTI”). The discount rate used to determine OTTI for all periods is the effective purchase yield or the credit spread at time of purchase plus the 3-month LIBOR rate.
12
The Company reviewed the list of issuers underlying each trust preferred security as of March 31, 2011, and ranked each bank in order of expectations for future defaults and deferrals. We reviewed data on each bank such as earnings, capital ratios, credit metrics and loan loss reserves. We then assigned a default rate to each ranking, then the default rates were applied to each bank that was performing as of the reporting date. Finally, we summed the defaults and divided by the total remaining performing collateral in each pool. For Trust Preferred IV, the default rate was 50 basis points, for Trust Preferred V, the default rate was 0 basis points, and for Trust Preferred XXII, the default rate was 75. MM Community Funding Class B was sold during the period and is not presented in the tables below.
In connection with the preparation of the financial statements included in this Form 10-Q and using the evaluation procedures described above, the Company identified three securities with other-than-temporary impairment within its portfolio. During the three months ended March 31, 2011, the Company recognized credit related impairment losses of $1,000 compared to $151,000 for the three months ended March 31, 2010 related to these securities. Additionally, two securities previously recognized as other than temporarily impaired were sold during the quarter ended March 31, 2011. These securities had a cumulative other-than-temporary impairment related to credit loss of $1.5 million. An additional $16,000 loss was recognized in earnings upon sale of these two securities.
The following table provides further information on the Company’s trust preferred securities that are considered other-than-temporarily impaired as of March 31, 2011 (in thousands):
Cumulative
|
Amount
|
|||||||||||||||||||||||||||||||||||||||||
Current
|
Other
|
of OTTI
|
(1) | (2) |
Expected
|
|||||||||||||||||||||||||||||||||||||
Moody's
|
Par
|
Book
|
Fair
|
Comprehensive
|
Related to
|
Excess
|
Inst.
|
Deferrals/
|
Default
|
Expected
|
Lag
|
|||||||||||||||||||||||||||||||
Security
|
Class
|
Rating
|
Value
|
Value
|
Value
|
Loss
|
Credit Loss
|
Subord.
|
Perf.
|
Defaults
|
Rate
|
Recovery
|
Years
|
|||||||||||||||||||||||||||||
MM Community Funding LTD
|
A | B1 | $ | 208 | $ | 208 | $ | 167 | $ | 41 | $ | - | 126.56 | % | 7 | 25.32 | % | 1.50 | % | 15 | % | 2 | ||||||||||||||||||||
Trust Preferred XXII
|
D | C | 1,979 | - | - | - | 1,979 | -38.26 | % | 62 | 31.70 | % | 0.75 | % | 15 | % | 2 | |||||||||||||||||||||||||
Trust Preferred V
|
Mez
|
Caa3
|
304 | 69 | - | 69 | 367 | -768.50 | % | - | 100.00 | % | 0.00 | % | 15 | % | 2 | |||||||||||||||||||||||||
$ | 2,491 | $ | 277 | $ | 167 | $ | 110 | $ | 2,346 | |||||||||||||||||||||||||||||||||
(1) Excess subordination. See explanation in text below tables.
|
||||||||||||||||||||||||||||||||||||||||||
(2) Number of institutions in class performing.
|
The Company also has the following investment in a trust preferred security not considered other than-temporarily impaired as of March 31, 2011 (in thousands):
Cumulative
|
||||||||||||||||||||||||||||||||||||||||||
Current
|
Other
|
(1) |
Expected
|
|||||||||||||||||||||||||||||||||||||||
Tranche
|
Moody's
|
Par
|
Book
|
Fair
|
Comprehensive
|
Institutions
|
Excess
|
Deferrals/
|
Default
|
Expected
|
Lag
|
|||||||||||||||||||||||||||||||
Security
|
Level
|
Rating
|
Value
|
Value
|
Value
|
Loss
|
Performing
|
Subord.
|
Defaults
|
Rate
|
Recovery
|
Years
|
||||||||||||||||||||||||||||||
Trust Preferred IV
|
Mez
|
Ca
|
$ | 244 | $ | 244 | $ | 76 | $ | 168 | 4 | 19.35 | % | 27.10 | % | 0.50 | % | 15 | % | 2 | ||||||||||||||||||||||
$ | 244 | $ | 244 | $ | 76 | $ | 168 | |||||||||||||||||||||||||||||||||||
(1) Excess subordination. See explanation in text below tables.
|
Both of the preceding tables present data on the excess subordination existing in each of the trust preferred issuances included in the Company’s investment portfolio. Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are pari passu and senior to the class owned by the Company. Negative excess subordination indicates that there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to the classes owned by the Company.
The credit deferral/default assumptions utilized in the Company’s OTTI analysis methodology and included in the above tables considers specific collateral underlying each trust preferred security.
The following table presents a roll-forward of the credit loss component amount of OTTI recognized in earnings:
13
OTTI Credit Losses Recognized in Earnings
|
||||
Rollforward
|
||||
Amount recognized through December 31, 2010
|
$ | 3,871 | ||
Additions related to intial impairments
|
- | |||
Additions related to subsequent impairments
|
1 | |||
Deductions for bonds sold during period (1)
|
(1,526 | ) | ||
Net impairment losses recognized in earnings through March 31, 2011
|
$ | 2,346 |
(1)
|
Two securities were sold during March, 2011 with a combined cumulative OTTI related to credit loss of $1,526,000. An additional $16,000 was recognized in earnings upon sale of these bonds.
|
At March 31, 2011, 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 March 31, 2011. However, there is a risk that the Company’s continuing reviews could result in recognition of other-than-temporary impairment charges in the future.
14
Note 4. Loan Portfolio
The Company segregates its loan portfolio into three primary loan segments: Real Estate Loans, Commercial Loans, and Consumer Loans. Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans. Other real estate loans include commercial real estate loans. The consolidated loan portfolio was composed of the following on the dates indicated:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Outstanding
|
Percent of
|
Outstanding
|
Percent of
|
|||||||||||||
Balance
|
Total Portfolio
|
Balance
|
Total Portfolio
|
|||||||||||||
(In Thousands)
|
(In Thousands)
|
|||||||||||||||
Real estate loans:
|
||||||||||||||||
Construction
|
$ | 59,711 | 9.0 | % | $ | 68,110 | 10.3 | % | ||||||||
Secured by farmland
|
11,516 | 1.7 | 11,532 | 1.7 | ||||||||||||
Secured by 1-4 family residential
|
239,648 | 36.2 | 242,620 | 36.8 | ||||||||||||
Other real estate loans
|
275,733 | 41.7 | 268,262 | 40.7 | ||||||||||||
Commercial loans
|
63,913 | 9.6 | 56,385 | 8.6 | ||||||||||||
Consumer loans
|
12,039 | 1.8 | 12,403 | 1.9 | ||||||||||||
662,560 | 100.0 | % | 659,312 | 100.0 | % | |||||||||||
Less allowance for loan losses
|
14,575 | 14,967 | ||||||||||||||
Net loans
|
$ | 647,985 | $ | 644,345 |
Loans presented in the table above exclude loans held for sale. The Company had $34.4 and $59.4 million in mortgages held for sale at March 31, 2011 and December 31, 2010, respectively.
The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2011 and December 31, 2010.
March 31, 2011 (In thousands) | |||||||||||||||||||||||||
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Total
|
|||||||||||||||||||||
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
Loans
|
||||||||||||||||||||
Real estate loans:
|
|||||||||||||||||||||||||
|
Construction
|
$ | 7,636 | $ | - | $ | 1,856 | $ | 9,492 | $ | 50,219 | $ | 59,711 | ||||||||||||
|
Secured by farmland
|
- | - | - | - | 11,516 | 11,516 | ||||||||||||||||||
|
Secured by 1-4 family residential
|
3,465 | 65 | 10,693 | 14,223 | 225,425 | 239,648 | ||||||||||||||||||
Other real estate loans
|
2,421 | 682 | 6,216 | 9,319 | 266,414 | 275,733 | |||||||||||||||||||
Commercial loans
|
237 | - | 1,959 | 2,196 | 61,717 | 63,913 | |||||||||||||||||||
Consumer loans
|
21 | - | - | 21 | 12,018 | 12,039 | |||||||||||||||||||
- | - | - | - | - | - | ||||||||||||||||||||
Total
|
$ | 13,780 | $ | 747 | $ | 20,724 | $ | 35,251 | $ | 627,309 | $ | 662,560 |
December 31, 2010 (In thousands)
|
|||||||||||||||||||||||||
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Total
|
|||||||||||||||||||||
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
Loans
|
||||||||||||||||||||
Real estate loans:
|
|||||||||||||||||||||||||
|
Construction
|
$ | 83 | $ | 7,423 | $ | 1,791 | $ | 9,297 | $ | 58,813 | $ | 68,110 | ||||||||||||
|
Secured by farmland
|
- | - | - | - | 11,532 | 11,532 | ||||||||||||||||||
|
Secured by 1-4 family residential
|
2,938 | - | 7,729 | 10,667 | 231,953 | 242,620 | ||||||||||||||||||
Other real estate loans
|
4,438 | 3,887 | 1,385 | 9,710 | 258,552 | 268,262 | |||||||||||||||||||
Commercial loans
|
1,801 | 28 | 243 | 2,072 | 54,313 | 56,385 | |||||||||||||||||||
Consumer loans
|
22 | 41 | 242 | 305 | 12,098 | 12,403 | |||||||||||||||||||
- | - | - | - | - | - | ||||||||||||||||||||
Total
|
$ | 9,282 | $ | 11,379 | $ | 11,390 | $ | 32,051 | $ | 627,261 | $ | 659,312 |
The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of March 31, 2011 and December 31, 2010:
15
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Past due 90
|
Past due 90
|
|||||||||||||||
days or more
|
days or more
|
|||||||||||||||
Nonaccrual
|
and still accruing
|
Nonaccrual
|
and still accruing
|
|||||||||||||
(In Thousands) | ||||||||||||||||
Real estate loans:
|
||||||||||||||||
Construction
|
$ | 8,247 | $ | 77 | $ | 8,871 | $ | - | ||||||||
Secured by farmland
|
- | - | - | - | ||||||||||||
Secured by 1-4 family residential
|
10,585 | 4,878 | 10,817 | 676 | ||||||||||||
Other real estate loans
|
6,856 | 1,629 | 7,509 | 218 | ||||||||||||
Commercial loans
|
1,950 | 9 | 1,950 | 12 | ||||||||||||
Consumer loans
|
- | - | 239 | 3 | ||||||||||||
Total
|
$ | 27,638 | $ | 6,593 | $ | 29,386 | $ | 909 |
If interest on nonaccrual loans had been accrued, such income would have approximated $432,000 and $365,000 for the quarters ended March 31, 2011 and March 31, 2010 respectively.
The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio. Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, “Doubtful” and “Loss”.
Special Mention: Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.
Substandard: Loans classified as substandard have a well-defined weakness that jeopardizes the liquidation of the debt. Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.
Doubtful: Loans classified as doubtful have a very high possibility of loss. However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status may be determined.
Loss: Loans are classified as loss when they are deemed uncollectable and are charged off immediately.
The following tables present a summary of loan classifications by class of loan as of March 31, 2011 and December 31, 2010:
March 31, 2011 (In thousands)
|
||||||||||||||||||||||||||||
Real Estate
|
Real Estate
|
|||||||||||||||||||||||||||
Real Estate
|
Secured by
|
Secured by 1-4
|
Other Real
|
|||||||||||||||||||||||||
Construction
|
Farmland
|
Family Residential
|
Estate Loans
|
Commercial
|
Consumer
|
Total
|
||||||||||||||||||||||
Pass
|
$ | 32,108 | $ | 10,058 | 209,625 | $ | 241,831 | $ | 56,586 | $ | 11,961 | $ | 562,169 | |||||||||||||||
Special Mention
|
6,927 | 1,458 | 14,609 | 20,293 | 4,877 | 67 | 48,231 | |||||||||||||||||||||
Substandard
|
20,629 | - | 13,496 | 13,609 | 2,450 | 11 | 50,195 | |||||||||||||||||||||
Doubtful
|
47 | - | 1,918 | - | - | - | 1,965 | |||||||||||||||||||||
Loss
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Ending Balance
|
$ | 59,711 | $ | 11,516 | 239,648 | $ | 275,733 | $ | 63,913 | $ | 12,039 | $ | 662,560 |
16
December 31, 2010 (In thousands)
|
||||||||||||||||||||||||||||
Real Estate
|
Real Estate
|
|||||||||||||||||||||||||||
Real Estate
|
Secured by
|
Secured by 1-4
|
Other Real
|
|||||||||||||||||||||||||
Construction
|
Farmland
|
Family Residential
|
Estate Loans
|
Commercial
|
Consumer
|
Total
|
||||||||||||||||||||||
Pass
|
$ | 31,744 | $ | 10,070 | 212,531 | $ | 244,982 | $ | 50,660 | $ | 12,016 | $ | 562,003 | |||||||||||||||
Special Mention
|
15,580 | 1,462 | 14,810 | 13,067 | 3,394 | 92 | 48,405 | |||||||||||||||||||||
Substandard
|
20,561 | - | 14,616 | 9,939 | 2,331 | 295 | 47,742 | |||||||||||||||||||||
Doubtful
|
225 | - | 663 | 274 | - | - | 1,162 | |||||||||||||||||||||
Loss
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Ending Balance
|
$ | 68,110 | $ | 11,532 | 242,620 | $ | 268,262 | $ | 56,385 | $ | 12,403 | $ | 659,312 |
The following table presents loans individually evaluated for impairment by class of loans as of and for the quarter ended March 31, 2011:
March 31, 2011 (In thousands)
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
Construction
|
$ | 2,346 | $ | 2,376 | $ | - | $ | 2,767 | $ | - | ||||||||||
Secured by farmland
|
- | - | - | - | ||||||||||||||||
Secured by 1-4 family residential
|
6,062 | 6,846 | - | 6,111 | - | |||||||||||||||
Other real estate loans
|
1,278 | 1,278 | - | 1,220 | - | |||||||||||||||
Commercial loans
|
1,721 | 1,721 | - | 1,721 | - | |||||||||||||||
Consumer loans
|
- | - | - | - | - | |||||||||||||||
Total with no related allowance
|
11,407 | 12,221 | - | 11,819 | - | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
Construction
|
5,556 | 6,137 | 2,031 | 5,620 | - | |||||||||||||||
Secured by farmland
|
- | - | - | - | ||||||||||||||||
Secured by 1-4 family residential
|
4,523 | 5,666 | 1,040 | 4,542 | - | |||||||||||||||
Other real estate loans
|
5,361 | 5,404 | 1,091 | 5,455 | - | |||||||||||||||
Commercial loans
|
229 | 250 | 210 | 229 | - | |||||||||||||||
Consumer loans
|
- | - | - | - | - | |||||||||||||||
Total with a related allowance
|
15,669 | 17,457 | 4,372 | 15,846 | - | |||||||||||||||
Total
|
$ | 27,076 | $ | 29,678 | $ | 4,372 | $ | 27,665 | $ | - |
17
The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2010:
December 31, 2010 (In thousands)
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
Construction
|
$ | 3,415 | $ | 3,415 | $ | - | $ | 3,470 | $ | 4 | ||||||||||
Secured by farmland
|
- | - | - | - | ||||||||||||||||
Secured by 1-4 family residential
|
5,450 | 6,281 | - | 5,992 | - | |||||||||||||||
Other real estate loans
|
1,303 | 1,303 | - | 1,316 | - | |||||||||||||||
Commercial loans
|
1,823 | 1,844 | - | 2,032 | - | |||||||||||||||
Consumer loans
|
- | - | - | 28 | - | |||||||||||||||
Total with no related allowance
|
11,991 | 12,843 | - | 12,838 | 4 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||
Construction
|
5,755 | 6,366 | 1,876 | 6,108 | - | |||||||||||||||
Secured by farmland
|
- | - | - | - | ||||||||||||||||
Secured by 1-4 family residential
|
5,422 | 6,518 | 1,099 | 6,076 | - | |||||||||||||||
Other real estate loans
|
7,056 | 7,201 | 2,010 | 7,235 | 48 | |||||||||||||||
Commercial loans
|
127 | 127 | 108 | 128 | - | |||||||||||||||
Consumer loans
|
239 | 239 | 239 | 240 | - | |||||||||||||||
Total with a related allowance
|
18,599 | 20,452 | 5,332 | 19,787 | 48 | |||||||||||||||
Total
|
$ | 30,590 | $ | 33,295 | $ | 5,332 | $ | 32,625 | $ | 52 |
The “Recorded Investment” amounts in the tables above represent the outstanding principal balance on each loan represented in the tables plus any accrued interest receivable on such loans. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the tables plus any amounts that have been charged off on each loan.
Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDR’s”) that were classified as impaired. The total balance of TDR’s at March 31, 2011 was $9.5 million of which $8.2 million were included in the Company’s non-accrual loan totals at that date and $1.3 million represented loans performing as agreed to the restructured terms. This compares with $4.5 million in total restructured loans at December 31, 2010, an increase of $5.0 million or 111.1%. The amount of the valuation allowance related to total TDR’s was $1.4 million and $532,000 as of March 31, 2011 and December 31, 2010 respectively.
The $8.2 million in nonaccrual TDR’s as of March 31, 2011 is comprised of $1.5 million in real estate construction loans, $1.6 million in 1-4 family real estate loans, and $5.1 million in non-residential real estate loans. The $1.3 million in TDR’s which were performing as agreed under restructured terms as of March 31, 2011 is comprised of $291,000 in real estate construction loans, $113,000 in 1-4 family real estate loans, and $850,000 in other real estate loans. All loans classified as TDR’s are considered to be impaired as of March 31, 2011.
18
Note 5. Allowance for Loan Losses
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan class and based on impairment evaluation method as of March 31, 2011 and December 31, 2010. A rollforward of the changes in the allowance for loan losses balance by class of loan is also presented for the period ended March 31, 2011.
March 31, 2011 (In thousands)
|
||||||||||||||||||||||||||||
Real Estate
|
Real Estate
|
|||||||||||||||||||||||||||
Real Estate
|
Secured by
|
Secured by 1-4
|
Other Real
|
|||||||||||||||||||||||||
Construction
|
Farmland
|
Family Residential
|
Estate Loans
|
Commercial
|
Consumer
|
Total
|
||||||||||||||||||||||
Allowance for loan losses:
|
||||||||||||||||||||||||||||
Balance at December 31, 2010
|
$ | 4,684 | $ | 107 | $ | 3,965 | $ | 4,771 | $ | 1,055 | $ | 385 | $ | 14,967 | ||||||||||||||
Chargeoffs
|
- | - | (541 | ) | (23 | ) | (82 | ) | (288 | ) | (934 | ) | ||||||||||||||||
Recoveries
|
44 | - | 11 | 4 | 18 | 11 | 88 | |||||||||||||||||||||
Provision
|
24 | 3 | 365 | (525 | ) | 574 | 14 | 454 | ||||||||||||||||||||
Balance at March 31, 2011
|
$ | 4,752 | $ | 110 | $ | 3,800 | $ | 4,227 | $ | 1,565 | $ | 122 | $ | 14,575 | ||||||||||||||
Ending allowance balance:
|
||||||||||||||||||||||||||||
Ending allowance balance attributable to loans:
|
||||||||||||||||||||||||||||
Individually evaluated for impairment
|
$ | 2,031 | $ | - | $ | 1,040 | $ | 1,091 | $ | 210 | $ | - | $ | 4,371 | ||||||||||||||
Collectively evaluated for impairment
|
2,721 | 110 | 2,760 | 3,136 | 1,355 | 122 | 10,204 | |||||||||||||||||||||
Total ending allowance balance
|
$ | 4,752 | $ | 110 | $ | 3,800 | $ | 4,227 | $ | 1,565 | $ | 122 | $ | 14,575 | ||||||||||||||
Ending loan balances:
|
||||||||||||||||||||||||||||
Individually evaluated for impairment
|
$ | 7,902 | $ | - | $ | 10,585 | $ | 6,639 | $ | 1,950 | $ | - | $ | 27,076 | ||||||||||||||
Collectively evaluated for impairment
|
51,809 | 11,516 | 229,063 | 269,094 | 61,963 | 12,039 | 635,484 | |||||||||||||||||||||
Total ending loans balance
|
$ | 59,711 | $ | 11,516 | $ | 239,648 | $ | 275,733 | $ | 63,913 | $ | 12,039 | $ | 662,560 |
December 31, 2010 (In thousands)
|
||||||||||||||||||||||||||||
Real Estate
|
Real Estate
|
|||||||||||||||||||||||||||
Real Estate
|
Secured by
|
Secured by 1-4
|
Other Real
|
|||||||||||||||||||||||||
Construction
|
Farmland
|
Family Residential
|
Estate Loans
|
Commercial
|
Consumer
|
Total
|
||||||||||||||||||||||
Allowance for loan losses:
|
||||||||||||||||||||||||||||
Ending allowance balance attributable to loans:
|
||||||||||||||||||||||||||||
Individually evaluated for impairment
|
$ | 1,876 | $ | - | $ | 1,099 | $ | 2,010 | $ | 108 | $ | 239 | $ | 5,332 | ||||||||||||||
Collectively evaluated for impairment
|
2,808 | 107 | 2,866 | 2,761 | 947 | 146 | 9,635 | |||||||||||||||||||||
Total ending allowance balance
|
$ | 4,684 | $ | 107 | $ | 3,965 | $ | 4,771 | $ | 1,055 | $ | 385 | $ | 14,967 | ||||||||||||||
Loans:
|
||||||||||||||||||||||||||||
Individually evaluated for impairment
|
$ | 9,170 | $ | - | $ | 10,872 | $ | 8,359 | $ | 1,950 | $ | 239 | $ | 30,590 | ||||||||||||||
Collectively evaluated for impairment
|
58,940 | 11,532 | 231,748 | 259,903 | 54,435 | 12,164 | 628,722 | |||||||||||||||||||||
Total ending loans balance
|
$ | 68,110 | $ | 11,532 | $ | 242,620 | $ | 268,262 | $ | 56,385 | $ | 12,403 | $ | 659,312 |
19
Changes in the allowance for loan losses for the year ended December 31, 2010 is summarized as follows:
Year
|
|||||
Ended
|
|||||
December 31, 2010
|
|||||
Balance, beginning of year
|
$ | 9,185 | |||
Provision for loan losses
|
12,005 | ||||
Southern Trust Mortgage consolidation
|
- | ||||
Charge-offs:
|
|||||
Real estate loans:
|
|||||
|
Construction
|
1,226 | |||
|
Secured by 1-4 family residential
|
3,256 | |||
Other real estate loans
|
460 | ||||
Commercial loans
|
942 | ||||
Consumer loans
|
500 | ||||
Total charge-offs
|
$ | 6,384 | |||
Recoveries:
|
|||||
Real estate loans:
|
|||||
|
Construction
|
$ | - | ||
|
Secured by 1-4 family residential
|
37 | |||
Other real estate loans
|
4 | ||||
Commercial loans
|
68 | ||||
Consumer loans
|
52 | ||||
Total recoveries
|
$ | 161 | |||
Net charge-offs
|
6,223 | ||||
Balance, end of period
|
$ | 14,967 | |||
Ratio of allowance for loan losses
|
|||||
to portfolio loans outstanding at end of period
|
2.27 | % |
Note 6. Earnings Per Share
The following table shows the weighted average number of common 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.
20
Three months ended
|
||||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||
Per share
|
Per share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic earnings per share
|
6,940,154 | $ | 0.18 | 6,909,293 | $ | 0.12 | ||||||||||
Effect of dilutive securities:
|
||||||||||||||||
stock options and grants
|
3,035 | 2,880 | ||||||||||||||
Diluted earnings per share
|
6,943,189 | $ | 0.18 | 6,912,173 | $ | 0.12 |
At March 31, 2011 and 2010, stock options, restricted grants and warrants representing 210,652 and 275,809 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 Middleburg Trust Company 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 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. Transactions related to these relationships are eliminated to reach consolidated totals.
21
The following table presents segment information for the three months ended March 31, 2011 and 2010, respectively.
For the Three Months Ended
|
For the Three Months Ended
|
|||||||||||||||||||||||||||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||||||||||||||||||||||||||
Retail
|
Wealth
|
Mortgage
|
Intercompany
|
Retail
|
Wealth
|
Mortgage
|
Intercompany
|
|||||||||||||||||||||||||||||||||
Banking
|
Management
|
Banking
|
Eliminations
|
Consolidated
|
Banking
|
Management
|
Banking
|
Eliminations
|
Consolidated
|
|||||||||||||||||||||||||||||||
(In Thousands)
|
||||||||||||||||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||||||||||
Interest income
|
$ | 11,313 | $ | 3 | $ | 691 | $ | (249 | ) | $ | 11,758 | $ | 11,587 | $ | 2 | $ | 775 | $ | (232 | ) | $ | 12,132 | ||||||||||||||||||
Trust and investment advisory
|
||||||||||||||||||||||||||||||||||||||||
fee income
|
- | 895 | (28 | ) | 867 | - | 839 | (24 | ) | 815 | ||||||||||||||||||||||||||||||
Other income
|
936 | - | 3,101 | (1 | ) | 4,036 | 1,216 | - | 3,041 | - | 4,257 | |||||||||||||||||||||||||||||
Total operating income
|
12,249 | 898 | 3,792 | (278 | ) | 16,661 | 12,803 | 841 | 3,816 | (256 | ) | 17,204 | ||||||||||||||||||||||||||||
Expenses:
|
||||||||||||||||||||||||||||||||||||||||
Interest expense
|
2,661 | - | 311 | $ | (249 | ) | 2,723 | 3,594 | - | 314 | $ | (232 | ) | 3,676 | ||||||||||||||||||||||||||
Salaries and employee benefits
|
3,661 | 609 | 3,046 | - | 7,316 | 3,113 | 736 | 3,075 | - | 6,924 | ||||||||||||||||||||||||||||||
Provision for loan losses
|
454 | - | - | 454 | 949 | - | (20 | ) | 929 | |||||||||||||||||||||||||||||||
Other
|
3,613 | 297 | 973 | (29 | ) | 4,854 | 3,794 | 229 | 1,020 | (24 | ) | 5,019 | ||||||||||||||||||||||||||||
Total operating expenses
|
10,389 | 906 | 4,330 | (278 | ) | 15,347 | 11,450 | 965 | 4,389 | (256 | ) | 16,548 | ||||||||||||||||||||||||||||
Income before income taxes
|
||||||||||||||||||||||||||||||||||||||||
and non-controlling interest
|
1,860 | (9 | ) | (537 | ) | - | 1,314 | 1,353 | (124 | ) | (573 | ) | - | 656 | ||||||||||||||||||||||||||
Income tax expense
|
322 | (5 | ) | - | - | 317 | 114 | (27 | ) | - | - | 87 | ||||||||||||||||||||||||||||
Net Income
|
1,537 | (4 | ) | (537 | ) | - | 997 | 1,239 | (97 | ) | (573 | ) | - | 569 | ||||||||||||||||||||||||||
Non-controlling interest in
|
||||||||||||||||||||||||||||||||||||||||
consolidated subsidiary
|
(230 | ) | (230 | ) | (245 | ) | (245 | ) | ||||||||||||||||||||||||||||||||
Net income attributable to
|
||||||||||||||||||||||||||||||||||||||||
Middleburg Financial Corporation
|
$ | 1,537 | $ | (4 | ) | $ | (307 | ) | $ | - | $ | 1,227 | $ | 1,239 | $ | (97 | ) | $ | (573 | ) | $ | 245 | $ | 814 | ||||||||||||||||
Total assets
|
$ | 1,071,689 | $ | 11,981 | $ | 44,718 | $ | (44,099 | ) | $ | 1,084,289 | $ | 1,007,918 | $ | 15,829 | $ | 52,737 | $ | (57,857 | ) | $ | 1,018,627 | ||||||||||||||||||
Capital expenditures
|
$ | 250 | $ | 3 | $ | - | $ | 253 | $ | 103 | $ | 1 | $ | 5 | $ | 109 | ||||||||||||||||||||||||
Goodwill and other intangibles
|
$ | - | $ | 4,449 | $ | 1,868 | $ | - | $ | 6,317 | $ | - | $ | 4,621 | $ | 1,868 | $ | - | $ | 6,489 |
Note 8. Defined Benefit Pension Plan
The Company has a noncontributory, defined benefit pension plan covering substantially all full-time employees of Middleburg Bank and Middleburg Trust Company. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. Benefit accruals and eligibility were frozen as of September 30, 2009. This had the effect of reducing the Projected Benefit Obligation by an estimated $1,577,000, which was recorded as a curtailment gain in 2009.
The defined benefit pension plan has been amended to be terminated and the amendment will be been submitted to the Internal Revenue Service and the Pension Benefit Guarantee Corporation for approval. Although an application for termination approval is in process, the date of possible Internal Revenue Service approval is unknown and there can be no assurance that the plan will be terminated during 2011.
The table below reflects the components of the Net Periodic Benefit Cost related to the Company’s defined benefit pension plan.
Three months ended March 31,
|
||||||||
2011
|
2010
|
|||||||
(In Thousands)
|
||||||||
Interest cost
|
$ | 46 | $ | 80 | ||||
Expected return on plan assets
|
(15 | ) | (97 | ) | ||||
Amortization of unrecognized net actuarial loss
|
305 | -- | ||||||
Net periodic benefit cost (income)
|
$ | 336 | $ | (17 | ) |
22
Note 9. Capital Purchase Program
During 2009, the Company participated in the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 and issued 22,000 shares of preferred stock to the Treasury as well as a warrant (“the Warrant”) to purchase 208,202 shares of the Company’s common stock at an initial exercise price of $15.85 per share. As a result of the completion of the Company’s public stock offering in August 2009, the number of shares of common stock underlying the Warrant was reduced by one-half to 104,101. On December 23, 2009, the Company redeemed all of the shares of preferred stock issued to the Treasury. Pursuant to the purchase agreement with the Treasury, the Company may repurchase the Warrant now that it has fully redeemed its Preferred Stock. The price for the purchase of the Warrant is subject to negotiation and there can be no assurance that the Warrant will be repurchased. At this time, the Company has not repurchased the Warrant and the Warrant remains outstanding to the Treasury. The Company expects that the warrant will be sold by the U.S. Treasury at public auction.
Note 10.
|
Fair Value Measurements
|
The Company adopted ASC 820, Fair Value Measurements, on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
Level II:
|
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
|
|
Level III:
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
Measured on recurring basis
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:
23
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level I). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level II).
Derivatives
Derivatives are recorded at fair value on a recurring basis. Third party vendors compile prices from various sources and may determine the fair value of identical or similar instruments by using pricing models that consider observable market data (Level II).
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.
March 31, 2011 (In thousands)
|
||||||||||||||||
Total
|
Level I
|
Level II
|
Level III
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S. government agency
|
||||||||||||||||
securities
|
$ | 5,673 | $ | - | $ | 5,673 | $ | - | ||||||||
Obligations of states and
|
||||||||||||||||
political subdivision
|
59,571 | - | 59,571 | - | ||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Agency
|
164,192 | - | 164,192 | - | ||||||||||||
Non-agency
|
19,163 | - | 19,163 | - | ||||||||||||
Corporate preferred stock
|
46 | - | 46 | - | ||||||||||||
Corporate bonds
|
9,524 | - | 9,524 | - | ||||||||||||
Trust preferred securities
|
243 | - | 243 | - | ||||||||||||
Derivative financial instruments
|
372 | - | 372 | - |
December 31, 2010 (In thousands)
|
||||||||||||||||
Total
|
Level I
|
Level II
|
Level III
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S. government agency
|
||||||||||||||||
securities
|
$ | 4,649 | $ | - | $ | 4,649 | $ | - | ||||||||
Obligations of states and
|
||||||||||||||||
political subdivision
|
59,140 | - | 59,140 | - | ||||||||||||
Mortgage-backed securities:
|
||||||||||||||||
Agency
|
152,304 | - | 152,304 | - | ||||||||||||
Non-agency
|
26,081 | - | 26,081 | - | ||||||||||||
Corporate preferred stock
|
13 | - | 13 | - | ||||||||||||
Corporate bonds
|
9,532 | - | 9,532 | - | ||||||||||||
Trust preferred securities
|
323 | - | 323 | - | ||||||||||||
Derivative financial instruments
|
312 | - | 312 | - |
There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the three months ended March 31, 2011. Additionally, there were no changes in unrealized gains and losses recorded in earnings for the quarters ended March 31, 2011 or December 31, 2010 for Level III assets that were still held at March 31, 2011 and December 31, 2010.
24
Measured on nonrecurring basis
Certain financial assets and certain financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or impairment of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level II). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the three months ended March 31, 2011. Gains and losses on the sale of loans are recorded within income from mortgage banking on the consolidated statements of income.
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level II). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level III. As of March 31, 2011, one loan with a net balance of $345,000 was categorized as a Level III valuation due to the date of the last appraisal. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level III). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
When collateral-dependent loans are performing in accordance with the original terms of their contract, the Company continues to use the appraisal that was done at origination as the basis for the collateral value. When collateral-dependent loans are considered non-performing, they are assessed to determine the next appropriate course of action: either foreclosure or modification with forbearance agreement. The loans would then be re-appraised prior to foreclosure or before a forbearance agreement is executed. Thereafter, collateral for loans under a forbearance agreement may be re-appraised as the circumstances warrant. This process does not vary by loan type.
25
The Company’s procedure to monitor the value of collateral for collateral dependent impaired loans between the receipt of an original appraisal and an updated appraisal is to review tax assessment records when they change annually. At the time of any change in tax assessment, an appropriate adjustment is made to the appraised value. Information considered in a determination not to order an updated appraisal includes the availability and reliability of tax assessment records and significant changes in capitalization rates for income properties since the original appraisal. Other facts and circumstances on a case by case basis may be considered relative to a decision not to order an updated appraisal. If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal would be obtained.
Circumstances that may warrant a re-appraisal for non-performing loans might include foreclosure proceedings or a material adverse change in the borrower’s condition or that of the collateral underlying the loan. Examples include bankruptcy filing by the debtor or guarantors, loss of a major tenant in an income property, or a significant increase in capitalization rates for income properties. In some cases, management may decide that an updated appraisal for a non-performing loan is not necessary. In such cases, an estimate of the fair value of the collateral for the loans would be made by management by reference to current tax assessment records, the latest appraised value, and knowledge of collateral value fluctuations in a loan’s market area. If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal would be obtained.
For the purpose of the evaluation of the adequacy of our allowance for loan losses, new appraisals are discounted 10% for selling costs when determining the amount of the specific reserve. Thereafter, for collateral dependent impaired loans, we consider each loan on a case-by-case basis to determine whether or not the recorded values are appropriate given current market conditions. When warranted, new appraisals are obtained. If an appraisal is less than 12 months old, the only adjustment made to appraised values is the 10% discount for selling costs. If an appraisal is older than 12 months, management will use judgment based on knowledge of current market values and specific facts surrounding any particular property to determine if an additional valuation adjustment may be necessary.
For real estate-secured loans, if the Company doesn’t have an adequate appraisal a new one is ordered to determine fair value. An appraisal that would be considered adequate for real estate-secured loans is less than 12 months or one that is more than 12 months old but alternative methods with which to monitor the collateral value exist, such as reference to frequently updated tax assessments. Appraisals that would be considered inadequate for real estate-secured loans include appraisals older than 12 months and with a property located in a jurisdiction that does not reassess property values on a regular basis, or with a property to which substantial changes have been made since the last assessment. If the loan is secured by assets other than real estate and an appraisal is neither available nor feasible, the loan is treated as unsecured.
It is the Company’s policy to account for partially charged-off loans consistently both before and after updated appraisals are obtained. Partially charged-off loans are placed in non-accrual status and remain in that status until the borrower has made a minimum of six consecutive monthly payments on a timely basis and there is evidence that the borrower has the ability to repay the balance of the loan plus accrued interest in full. Partially charged-off loans are not returned to accrual status when updated appraisals are obtained.
26
Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010:
March 31, 2011 (In thousands)
|
||||||||||||||||
Total
|
Level I
|
Level II
|
Level III
|
|||||||||||||
Assets:
|
||||||||||||||||
Loans held for sale
|
$ | 34,407 | $ | - | $ | 34,407 | $ | - | ||||||||
Impaired loans
|
11,297 | - | 10,952 | 345 | ||||||||||||
December 31, 2010 (In thousands)
|
||||||||||||||||
Description
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Assets:
|
||||||||||||||||
Loans held for sale
|
$ | 59,361 | $ | - | $ | 59,361 | $ | - | ||||||||
Impaired loans
|
13,267 | - | 12,528 | 739 |
Other Real Estate Owned
The value of other real estate owned (“OREO”) is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser independent of the Company using observable market data (Level II). For other real estate owned properties, the Company’s policy is to obtain “as-is” appraisals on an annual basis as opposed to “as-completed” appraisals. This approach provides current values without regard to completion of any construction or renovation that may be in process on OREO properties. Accordingly, the Company considers the valuations to be Level II valuations even though some properties may be in process of renovation or construction. As of March 31, 2011, the Company had 2 OREO properties considered to be in construction with a carrying value of approximately $1.4 million.
For the purpose OREO valuations, appraisals are discounted 10% for selling and holding costs and it is the policy of the Company to obtain annual appraisals for properties held in OREO.
Any fair value adjustments are recorded in the period incurred as loss on other real estate owned on the consolidated statements of operations.
27
The following table summarizes the Company’s non-financial assets that were measured at fair value on a nonrecurring basis during the period.
March 31, 2011 (In thousands)
|
||||||||||||||||
Total
|
Level I
|
Level II
|
Level III
|
|||||||||||||
Assets:
|
||||||||||||||||
Other real estate owned
|
$ | 7,825 | $ | - | $ | 7,825 | $ | - | ||||||||
December 31, 2010 (In thousands)
|
||||||||||||||||
Description
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Assets:
|
||||||||||||||||
Other real estate owned
|
$ | 8,394 | $ | - | $ | 8,394 | $ | - |
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. U.S. generally accepted accounting principles excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
For those cash equivalents, the carrying amount is a reasonable estimate of fair value.
Loans, Net and Loans Held for Sale
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate fair values.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.
28
Securities Sold Under Agreements to Repurchase and Short-Term Debt
The carrying amounts approximate fair values.
Long-Term and Subordinated Debt
For variable rate long-term debt, fair values are based on carrying values. For fixed rate debt, fair values are estimated based on observable market prices and discounted cash flow analysis using interest rates for borrowings of similar remaining maturities and characteristics. The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2011 and December 31, 2010, the fair values of loan commitments and standby letters of credit were deemed immaterial; therefore, they have not been included in the table below.
The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows as of the indicated dates:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Financial assets:
|
||||||||||||||||
Cash and cash equivalents
|
$ | 61,297 | $ | 61,297 | $ | 64,724 | $ | 64,724 | ||||||||
Securities
|
258,412 | 258,412 | 252,042 | 252,042 | ||||||||||||
Loans
|
682,392 | 700,809 | 703,706 | 723,629 | ||||||||||||
Accrued interest receivable
|
3,534 | 3,534 | 3,655 | 3,655 | ||||||||||||
Interest rate swap
|
372 | 372 | 312 | 312 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Deposits
|
$ | 865,455 | $ | 836,559 | $ | 890,306 | $ | 869,606 | ||||||||
Securities sold under agreements
|
||||||||||||||||
to repurchase
|
27,963 | 27,963 | 25,562 | 25,562 | ||||||||||||
Short-term debt
|
4,244 | 4,244 | 13,320 | 13,320 | ||||||||||||
Long-term debt
|
72,912 | 73,223 | 62,912 | 63,512 | ||||||||||||
Trust preferred capital notes
|
5,155 | 5,177 | 5,155 | 5,167 | ||||||||||||
Accrued interest payable
|
823 | 823 | 879 | 879 |
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.
29
Note 11. Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting”, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide
30
interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.
In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition at March 31, 2011 and results of operations of the Company for the three months ended March 31, 2011 and 2010 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 2010 Form 10-K. 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 majority owned subsidiary, Southern Trust Mortgage, LLC. Middleburg Bank is a community bank serving the Virginia counties of Loudoun, Fairfax, Fauquier and western Prince William as well as the town of Williamsburg, Virginia. The Bank operates seven financial service centers and two limited service facilities. Middleburg Investment Group is a non-bank holding company that was formed in the fourth quarter of 2005. It has one wholly-owned subsidiary, Middleburg Trust Company which is headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank’s facilities. Southern Trust Mortgage is a regional mortgage company headquartered in Virginia Beach, Virginia and maintains offices in Virginia, Maryland, Georgia, North Carolina and South Carolina.
31
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.
Southern 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, which, net of interest expense, is included in net interest income.
Annualized return on total average assets for the three months ended March 31, 2011 was 0.46%, compared to 0.33% for the same period in 2010. Annualized return on total average equity of Middleburg Financial Corporation, which excludes the non-controlling interest in Southern Trust Mortgage, for the three months ended March 31, 2011, was 5.11%, compared to 3.25% for the same period in 2010. As a result of the evaluation of the adequacy of the reserve for loan losses, the Company decreased its reserve for loan losses by $392,000, during the three months ended March 31, 2011. The provision for loan losses was $454,000 for the three months ended March 31, 2011.
Net income for the three months ended March 31, 2011 was $1.2 million compared to net income of $1.6 million for the three months ended December 31, 2010. Total interest income decreased by $330,000 or 3.0%, for the three months ended March 31, 2011, when compared to the period ended December 31, 2010. Interest and fees on loans decreased 2.0% for the three months ended March 31, 2011 to $9.7 million, compared to $9.9 million for the period ended December 31, 2010. Total interest expense was $2.7 million for the three months ended March 31, 2011, compared to $3.1 million for the three months ended December 31, 2010, a decrease of 13.0%. Interest expense on deposits for the three months ended March 31, 2011 was $2.3 million compared to $2.6 million for the period ended December 31, 2010. Other income was $4.9 million for the three months ended March 31, 2011, compared to $8.0 million when compared to the period ended December 31, 2010, a decrease of 38.7%. Total other expense was $12.2 million for the three months ended March 31, 2011 compared to $14.1 million for the period ended December 31, 2010, a decrease of 13.5%.
Net income for the three months ended March 31, 2011 increased to $1.2 million from income of $814,000 for the same period in 2010. Total interest income decreased by $374,000 or 3.1%, for the three months ended March 31, 2011, when compared to the same period in 2010. Interest and fees on loans decreased 6.8% for the three months ended March 31, 2011 to $9.7 million, compared to $10.4 million for the same period in 2010. Total interest expense decreased $953,000 or 26.0%, for the three months ended March 31, 2011, when compared to the same period in 2010. Other income decreased by $169,000 or 3.3% for the three months ended March 31, 2011, when compared to the same period in 2010. Total other expense increased by $227,000 or 2.0% for the three months ended March 31, 2011 compared to the same period in 2010. Net charge-offs against the reserves for loan losses were $846,000 during the three months ended March 31, 2011 and the provision for loan losses was $454,000.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains significant modifications to the current bank regulatory structure and requires various federal agencies to adopt a broad range of new implementing rules and regulations throughout 2011 and beyond. While not determinable at this time, the impact of the Dodd-Frank Act and the rules and regulations that will be promulgated thereunder could significantly affect our operations, increase our operating costs and divert management resources. Other than the potential impact of this legislation, the Company is not aware of any current recommendations by any regulatory authorities that, if implemented, would have a material effect on the registrant’s liquidity, capital resources or results of operations.
32
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
Middleburg Bank monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. Middleburg Bank 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 they are maintained in accordance with accounting principles generally accepted in the United 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.
Middleburg Bank evaluates various loans individually for impairment as required by applicable accounting standards. 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 with a group of loans that have similar characteristics.
For loans without individual measures of impairment, Middleburg Bank makes estimates of losses for groups of loans as required by applicable accounting standards. 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 loans losses. This estimate of losses is compared to the allowance for loan losses of Middleburg Bank 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
33
reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. Middleburg Bank 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 $6.3 million in intangible assets and goodwill at March 31, 2011, a decrease of $43,000 or 0.7% since December 31, 2010. On April 1, 2002, the Company acquired Middleburg Investment Advisors 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 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. On January 3, 2011, Middleburg Investment Advisors was consolidated into Middleburg Trust Company and ceased operating as an independent entity. The goodwill and intangible assets of the former Middleburg Investment Advisors are now reflected in the records of Middleburg Trust Company. Approximately $1.0 million of the $6.3 million in intangible assets and goodwill at March 31, 2011 was attributable directly to the Company’s investment in Middleburg Trust Company. With the consolidation of Southern Trust Mortgage, the Company recognized $1.9 million in goodwill as part of its equity investment.
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, current accounting standards require 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. The most recent evaluation was conducted as of September 30, 2010.
As of March 31, 2011, the Company recognized two consolidated subsidiaries as reporting units for the purpose of goodwill evaluation and reporting: Southern Trust Mortgage (“STM”) and Middleburg Investment Group (“MIG”). MIG is the parent company of Middleburg Trust Company and the former Middleburg Investment Advisors. The following table shows the allocation of goodwill between the two reporting units and the percentage by which the fair value of each reporting unit as of September 30, 2010 (the most recent fair value evaluation date) exceeded the carrying value as of that date:
34
Allocation of Goodwill to Reporting Units
|
|||||||||||||||||
(Dollars in Thousands)
|
|||||||||||||||||
Percentage by
|
|||||||||||||||||
(1) | (1) |
which Fair Value
|
|||||||||||||||
Carrying Value
|
Carrying Value
|
Estimated Fair Value
|
of Reporting
|
||||||||||||||
Reporting
|
of Goodwill
|
of Reporting Unit
|
of Reporting Unit
|
Unit Exeeds
|
|||||||||||||
Unit
|
September 30, 2010
|
September 30, 2010
|
September 30, 2010
|
Carrying Value
|
|||||||||||||
STM
|
$ | 1,867 | $ | 6,547 | $ | 7,797 | 19.09 | % | |||||||||
MIG
|
3,422 | 5,952 | (2 | ) | 6,790 | 14.08 | % | ||||||||||
Total
|
$ | 5,289 | $ | 12,499 | $ | 14,587 | 16.71 | % | |||||||||
(1) Reported amounts reflect only Middleburg Financial Corporation shareholders' ownership interests.
|
|||||||||||||||||
Estimated fair values are as of September 30, 2010. Management does not believe the estimated fair
|
|||||||||||||||||
values have changed significantly from September 30, 2010 to March 31, 2011.
|
|||||||||||||||||
(2) Includes $1.1 million of amortizing intangible assets.
|
Management estimates fair value utilizing multiple methodologies which include discounted cash flows, comparable companies, third-party sale and assets under management analysis. Determining the fair value of the Company’s reporting units requires management to make judgments and assumptions related to various items, including estimates of future operating results, allocations of indirect expenses, and discount rates. Management believes its estimates and assumptions are reasonable; however, the fair value of each reporting unit could be different in the future if actual results or market conditions differ from the estimates and assumptions used.
The Company’s forecasted cash flows for its reporting units assume a stable economic environment and consistent long-term growth in loan originations and assets under management over the projected periods. Additionally, expenses are assumed to be consistently correlated with projected asset and revenue growth over the time periods projected. Although we believe the key assumptions underlying the financial forecasts to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond the control of the Company. Accordingly, there can be no assurance that the forecasted results will be realized and variations from the forecast may be material. If weak economic conditions continue or worsen for a prolonged period of time, or if the reporting unit loses key personnel, the fair value of the reporting unit may be adversely affected which may result in impairment of goodwill or other intangible assets in the future. 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.
Tax-Equivalent Interest Income
Tax-equivalent interest income is gross interest income adjusted for the non-taxable interest income earned on loans, municipal securities and corporate securities, which are dividend-received deduction eligible. The effective tax rate of 34% is used in calculating tax equivalent income related to loans, municipal securities and corporate securities.
35
Other-Than-Temporary Impairment (OTTI)
Approximately $1,000 in losses related to other-than-temporary impairment on trust-preferred securities was recognized for the three months ended March 31, 2011. At March 31, 2011, the Company had $521,000 in trust-preferred securities in its portfolio.
In accordance with applicable accounting guidance, we determine the other-than-temporary impairment for the trust preferred securities in the securities portfolio based on an evaluation of the underlying collateral. We developed cash flow projections based upon assumptions of default/deferral rates, recovery rates and prepayment rates for the collateral. The present value of the projected cash flows was calculated by discounting the projected cash flows using the effective yield at purchase in accordance with applicable accounting guidance. Finally, the present values of the projected cash flows were compared to the carrying values of the securities. If the present values were less than the carrying value, we determined that the security had an other-than-temporary impairment equal to the difference between the present value and the carrying value of the bond.
The Company may need to recognize additional other-than-temporary impairments related to trust preferred securities during the remainder of 2011. We evaluate default assumptions and cash flow projections in relation to the credit performance of the collateral that underlies the trust preferred securities. Should additional deferrals/defaults occur on the collateral, projected cash flows from the collateral could be reduced which could result in additional other-than-temporary impairments in 2011.
Financial Condition
Assets, Liabilities and Shareholders’ Equity
Total assets for the Company were at $1.1 billion at March 31, 2011, a decrease of $20.3 million or 1.8% compared to total assets at December 31, 2010. Total average assets increased 8.8% from $988.9 million for the three months ended March 31, 2010 to $1.08 billion for the same period in 2011. Total liabilities were $983.1 million at March 31, 2011, compared to $1.0 billion at December 31, 2010. Total average liabilities increased $90.9 million or 10.3% to $975.5 million for the three months ended March 31, 2011, compared to the same period in 2010. Average shareholders’ equity decreased 4.0% or $4.1 million over the same periods.
Loans
Total loans, including loans held for sale at March 31, 2011 decreased $21.7 million to $697.0 million from the December 31, 2010 amount of $718.7 million. Loans held for sale decreased to $34.4 million at March 31, 2011, compared to $59.4 million at December 31, 2010, a decrease of 42.0% during the period. The primary reason for the decrease in loans held for sale was a decline in mortgage originations during the first quarter of 2011 compared to the previous quarter. Southern Trust Mortgage originated $136.4 million in loans for the three months ended March 31, 2011, compared to $149.0 million for the three months ended March 31, 2010. The Company experienced a decrease in real estate construction loans, which were $59.7 million at March 31, 2011, compared to $68.1 million at December 31, 2010. Real estate mortgage loans of $515.4 million at March 31, 2011 increased from the December 31, 2010 amount of $510.9 million. Commercial loans, which are primarily loans to businesses, increased to $63.9 million at March 31, 2011, compared to $56.4 at December 31, 2010. Southern Trust Mortgage has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank. The line of credit and the participation amounts are eliminated in the consolidation process and are not reflected in the Company’s consolidated financial statements. Net charge-offs were $846,000 for the three months ended March 31, 2011. The provision for loan losses for the three months ended March 31,
36
2011 was $454,000 compared to $929,000 for the same period in 2010. The allowance for loan losses at March 31, 2011 was $14.6 million or 2.2% of total loans outstanding, excluding loans held for sale, compared to $15.0 million or 2.3% at December 31, 2010.
The following table presents information on the Company’s nonperforming assets as of the dates indicated:
Nonperforming Assets
|
||||||||||||||||||||
Middleburg Financial Corporation
|
||||||||||||||||||||
March 31,
|
December 31,
|
|||||||||||||||||||
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
(In thousands)
|
||||||||||||||||||||
Nonperforming assets:
|
||||||||||||||||||||
Nonaccrual loans
|
$ | 27,638 | $ | 29,386 | $ | 8,606 | $ | 6,890 | $ | 6,635 | ||||||||||
Restructured loans (1)
|
1,254 | 1,254 | 2,096 | - | - | |||||||||||||||
Accruing loans greater than
|
||||||||||||||||||||
90 days past due
|
6,593 | 909 | 908 | 1,117 | 30 | |||||||||||||||
Total nonperforming loans
|
$ | 35,485 | $ | 31,549 | $ | 11,610 | $ | 8,007 | $ | 6,665 | ||||||||||
Foreclosed property
|
7,825 | 8,394 | 6,511 | 7,597 | - | |||||||||||||||
Total Nonperforming assets
|
$ | 43,310 | $ | 39,943 | $ | 18,121 | $ | 15,604 | $ | 6,665 | ||||||||||
Allowance for loan losses
|
$ | 14,575 | $ | 14,967 | $ | 9,185 | $ | 10,020 | $ | 7,093 | ||||||||||
Nonperforming loans to
|
||||||||||||||||||||
period end portfolio loans
|
5.36 | % | 4.79 | % | 1.80 | % | 1.19 | % | 1.03 | % | ||||||||||
Allowance for loan losses
|
||||||||||||||||||||
to nonperforming loans
|
41 | % | 47 | % | 79 | % | 125 | % | 106 | % | ||||||||||
Nonperforming assets to
|
||||||||||||||||||||
period end assets
|
3.99 | % | 3.62 | % | 1.86 | % | 1.58 | % | 0.79 | % | ||||||||||
(1) Amount reflects restructured loans that are not included in nonaccrual loans.
|
The Company utilizes the ratios included in the above table to evaluate the relative level of nonperforming assets included in the Company’s balance sheet. Changes in the ratios assist management in evaluating the overall adequacy of the allowance for loan losses and any reserve against other real estate owned.
Our accounting policy for foreclosed property does not include any allowance for loan loss amounts subsequent to the reclassification event which writes the loan down to fair value when moved into foreclosed property.
The following table depicts the transactions, in summary form, that occurred to the allowance for loan losses in each period presented:
Allowance for Loan Losses | |||||||||
Three Months
|
Year
|
||||||||
Ended
|
Ended
|
||||||||
March 31,2011
|
December 31, 2010
|
||||||||
Balance, beginning of year
|
$ | 14,967 | $ | 9,185 | |||||
Provision for loan losses
|
454 | 12,005 | |||||||
Charge-offs:
|
|||||||||
Real estate loans:
|
|||||||||
|
Construction
|
$ | - | $ | 1,226 | ||||
|
Secured by 1-4 family residential
|
541 | 3,256 | ||||||
Other real estate loans
|
23 | 460 | |||||||
Commercial loans
|
82 | 942 | |||||||
Consumer loans
|
288 | 500 | |||||||
Total charge-offs
|
$ | 934 | $ | 6,384 | |||||
Recoveries:
|
|||||||||
Real estate loans:
|
|||||||||
|
Construction
|
$ | 44 | $ | - | ||||
|
Secured by 1-4 family residential
|
11 | 37 | ||||||
Other real estate loans
|
4 | 4 | |||||||
Commercial loans
|
18 | 68 | |||||||
Consumer loans
|
11 | 52 | |||||||
Total recoveries
|
$ | 88 | $ | 161 | |||||
Net charge-offs
|
846 | 6,223 | |||||||
Balance, end of period
|
$ | 14,575 | $ | 14,967 | |||||
Ratio of allowance for loan losses
|
|||||||||
to portfolio loans outstanding at end of period
|
2.20 | % | 2.27 | % | |||||
Ratio of net charge offs to average
|
The following table shows the balance of the allowance for loan losses allocated to each major loan type and the percent of loans in each category to total loans as of March 31, 2011 and December 31, 2010:
Allocation of Allowance for Loan Losses | ||||||||||||||||
Percent of loans
|
Percent of loans
|
|||||||||||||||
March 31,
|
in each category
|
December 31,
|
in each category
|
|||||||||||||
2011
|
to total loans
|
2010
|
to total loans
|
|||||||||||||
Commercial, financial and agricultural
|
$ | 1,675 | 11.38 | % | $ | 1,162 | 5.40 | % | ||||||||
Real estate construction
|
4,752 | 9.01 | % | 4,684 | 16.80 | % | ||||||||||
Real estate mortgage
|
8,027 | 77.79 | % | 8,736 | 74.54 | % | ||||||||||
Consumer loans
|
122 | 1.82 | % | 385 | 3.26 | % | ||||||||||
Totals
|
$ | 14,575 | 100.00 | % | $ | 14,967 | 100.00 | % |
37
Non-performing Loans
Non-performing loans increased by $3.9 million in the first quarter to $35.5 million, largely as the result of two credit relationships totaling $6.1 million that were 90 days and still accruing during the quarter.
1)
|
Credit Relationship for $4.5 million –The loan has matured and negotiations are underway with the borrower to resolve the delinquency status. Management believes that the reserve provided for on this loan at March 31, 2011 is adequate.
|
2)
|
Credit Relationship for $1.6 million – The loan is secured with commercial real estate which is undergoing a tenant transition and is expected to be brought current in the near future. Management believes that the loan is adequately collateralized and that no additional reserve is needed as of March 31, 2011.
|
Non-accrual loans were $27.6 million at the end of the first quarter compared to $29.4 million as of December 31, 2010, representing a decrease of 6.1% during the first quarter. Approximately 50% of the decrease was due to principal reductions made by borrowers under work-out plans and the remainder of the decrease resulted from additional charge-offs taken on non-accrual loans during the quarter.
Restructured Loans
Included in the “Nonperforming Assets” table above are troubled debt restructurings (“TDR’s”) that were classified as impaired as of March 31, 2011. The total balance of TDR’s at March 31, 2011 was $9.5 million of which $8.2 million were included in the Company’s non-accrual loan totals at that date and $1.3 million represented loans performing as agreed to the restructured terms. This compares with $4.5 million in TDR’s at December 31, 2010, an increase of $5.0 million or 111.1%. The amount of the valuation allowance related to total TDR’s was $1.4 million and $532,000 as of March 31, 2011 and December 31, 2010 respectively.
The $8.2 million in non-accrual TDR’s as of March 31, 2011 is comprised of $1.5 million in real estate construction loans, $1.6 million in 1-4 family real estate loans, and $5.1 million in non-residential real estate loans. The $1.3 million in TDR’s which were performing as agreed under restructured terms as of March 31, 2011 is comprised of $291,000 in real estate construction loans, $113,000 in 1-4 family real estate loans, and $850,000 in other real estate loans. All loans classified as TDR’s are considered to be impaired as of March 31, 2011.
The Company requires six timely consecutive monthly payments before a restructured loan that has been placed on non-accrual can be returned to accrual status. No restructured loans were charged off during the quarter ended March 31, 2011. The Company does not utilize formal modification programs or packages when loans are considered for restructuring. Any loan restructuring is based on the borrower’s circumstances and may include modifications to more than one of the terms and conditions of the loan.
The Company has not performed any commercial real estate or other type of loan workout whereby the existing loan would have been structured into multiple new loans.
38
Securities
Securities, excluding Federal Reserve and Federal Home Loan Bank stock, increased to $258.4 million at March 31, 2011 compared to $252.0 million at December 31, 2010, an increase of 2.5% during the period. The balance in interest-bearing bank balances decreased to $39.2 million as of March 31, 2011 versus $42.8 million for the same period in 2010. The Company sold $9.4 million in securities, received proceeds of $18.8 million from maturities and principal payments, and purchased securities of $34.6 million as of March 31, 2011. Approximately $1,000 in losses related to other-than-temporary impairments on trust-preferred securities was recognized for the three months ended March 31, 2011. At March 31, 2011, the Company had $521,000 in trust-preferred securities in its portfolio of which $277,000 are considered other-than-temporarily impaired.
The Company will continue to maintain its securities portfolio as a source of liquidity and collateral. At March 31, 2011, the year-to-date tax equivalent yield on the securities portfolio was 3.58%.
Premises and Equipment
Premises and equipment decreased $204,000 from $21.1 million at December 31, 2010 to $20.9 million at March 31, 2011. The decrease is the net of the change in accumulated depreciation and additions to premises and equipment during the period.
Goodwill and Other Identified Intangibles
Goodwill and other identified intangibles decreased $43,000 to $6.3 million at March 31, 2011 as the result of amortization of identified intangibles related to the acquisition of Middleburg Investment Advisors.
Other Real Estate Owned
Other real estate owned decreased $569,000 to $7.8 million at March 31, 2011 from $8.4 million at December 31, 2010. The change in balance is the net of real estate loans charged-off and subsequently added to other real estate owned, valuation adjustments and sales of other real estate owned properties during the period. During the three months ended March 31, 2011, the Company received proceeds of $663,000 from the sale of other real estate owned properties and incurred a net loss of $66,000 on the sales. Valuation adjustments to properties held in OREO were approximately $200,000 during the quarter ended March 31, 2011.
Other Assets
Other assets decreased $1.2 million to $35.6 million at March 31, 2011, when compared to December 31, 2010. The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $15.7 million and net deferred tax assets in the amount of $9.4 million at March 31, 2011.
Deposits
Deposits decreased $24.8 million to $865.5 million at March 31, 2011 from $890.3 million at December 31, 2010. Average deposits for the three months ended March 31, 2011 increased 6.6% or $53.4 million compared to average deposits for the three months ended December 31, 2010. Average interest bearing demand deposits were $287.0 million for the three months ended March 31, 2011 compared to $279.7 million for the three months ended March 31, 2010. Average interest bearing deposits were $736.7 million for the three months ended March 31, 2011 compared to $699.4 million for the three months ended March 31, 2010.
39
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 $33.5 million at March 31, 2011 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 increased by $6.3 million from December 31, 2010 to March 31, 2011.
Time deposits decreased $28.6 million from December 31, 2010 to $294.5 million at March 31, 2011. Time deposits include brokered certificates of deposit, which decreased $29.2 million to $93.1 million at March 31, 2011 from the December 31, 2010 amount of $122.3 million. The brokered certificates of deposit have maturities ranging from four months to five years. Securities sold under agreements to repurchase (“Repo Accounts”) increased $2.4 million from $25.6 million at December 31, 2010 to $28.0 million at March 31, 2011. 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. All repurchase agreement transactions entered into by the Company are accounted for as collateralized financings and not as sales.
Short-term Borrowings and Long-term Debt
The Company had no FHLB overnight advances at March 31, 2011 and December 31, 2010, respectively. Southern Trust Mortgage has a line of credit with a regional bank that is primarily used to fund its loans held for sale. At March 31, 2011, this line had an outstanding balance of $4.2 million compared to $13.3 million at December 31, 2010. The line of credit is based on the London Inter-Bank Offered Rate (“LIBOR”). Southern Trust Mortgage also has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank. The line of credit and the outstanding balance under the participation agreement are eliminated in the consolidation process and are not reflected in the consolidated financial statements of the Company. Long-term debt increased by $10.0 million at March 31, 2011 from $62.9 million at December 31, 2010. The increase in long-term debt was used to fund loan originations and securities purchases
Other Liabilities
Other liabilities increased by $34,000 to $7.4 million at March 31, 2011, when compared to December 31, 2010. The other liabilities section of the balance sheet includes escrows payable in the amount of $125,000 at March 31, 2011, compared to $573,000 at December 31, 2010.
Non-controlling Interest in Consolidated Subsidiary
The Company, through Middleburg Bank owns 57.1% of the issued and outstanding membership interest units in Southern Trust Mortgage. The remaining 42.9% 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 “Non-controlling Interest in Consolidated Subsidiary.” The non-controlling
40
interest is reflected in total shareholders’ equity. Southern Trust Mortgage also has preferred stock of $865,000 issued and outstanding at March 31, 2011. The Company, through Middleburg Bank owns 70.4% of the issued and outstanding preferred stock in Southern Trust Mortgage. The remaining 29.6% of issued and outstanding preferred stock is owned by other partners. The preferred stock held by these other partners is reflected in other liabilities.
Capital
Total shareholders’ equity, including the non-controlling interest in Southern Trust Mortgage, was $101.2 million at March 31, 2011. This amount represents an increase of 1.2% from the December 31, 2010 amount of $100.0 million. Middleburg Financial Corporation’s shareholders’ equity, which excludes the non-controlling interest, was $98.4 million at March 31, 2011, compared to $97.0 million at December 31, 2010. The book value of common shareholders was $14.18 per share at March 31, 2011 and $14.02 at December 31, 2010. The following table shows the Company’s risk-based capital ratios as of March 31, 2011 and December 31, 2010:
March 31,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Total risk-based capital ratio
|
14.5 | % | 14.1 | % | ||||
Tier 1 risk-based capital ratio
|
13.3 | % | 12.8 | % | ||||
Tier 1 leverage ratio
|
9.4 | % | 9.0 | % |
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 $9.0 million for the first three months of 2011, which was unchanged compared to the quarter ended December 31, 2010. Total interest income decreased 2.7% and total interest expense decreased 11.5% when comparing the three months ended March 31, 2011 to the quarter ended December 31, 2010. The primary reason for the decline in total interest income was the lower balance of mortgage loans held-for-sale in the first quarter. The primary reasons for the decrease in total interest expense were fewer interest bearing deposits and re-pricing of time deposits during the first quarter. Average earning assets declined 3.1% compared to the previous quarter. The primary reason for the decline in earning assets during the first quarter was a reduction in balances of mortgage loans held-for-sale. Net interest income for the three months ended March 31, 2011 was $9.0 million, compared to $8.5 million for the same period in 2010. Total interest income for the three months ended March 31, 2011 was $11.8 million compared to $12.1 million for the three months ended March 31, 2010 representing a decrease of 3.1%. Total interest expense was $2.7 million for the three months ended March 31, 2011 compared to $3.7 million for the same period in 2010 representing a decrease of 26.0%. Average earning assets increased by $88.1 million to $995.3 million for the three months ended March 31, 2011 from $907.2 million for the three months ended March 31, 2010. Average
41
interest bearing liabilities increased by $74.4 million to $846.5 million for the three months ended March 31, 2011 when compared to the same period in 2010.
The following tables reflect an analysis of the Company’s net interest income using the daily average balances of the Company’s assets and liabilities for the periods indicated. Non-accrual loans are included in the loan balances.
42
Average Balances, Income and Expenses, Yields and Rates
|
||||||||||||||||||||||||
Three Months Ended March 31
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
|||||||||||||||||||
Balance
|
Expense
|
Rate (2)
|
Balance
|
Expense
|
Rate (2)
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
Assets :
|
||||||||||||||||||||||||
Securities:
|
||||||||||||||||||||||||
Taxable
|
$ | 204,725 | $ | 1,435 | 2.84 | % | $ | 119,744 | $ | 959 | 3.25 | % | ||||||||||||
Tax-exempt (1)
|
53,974 | 850 | 6.39 | % | 63,929 | 1,050 | 6.66 | % | ||||||||||||||||
Total securities
|
$ | 258,699 | $ | 2,285 | 3.58 | % | $ | 183,673 | $ | 2,009 | 4.44 | % | ||||||||||||
Loans
|
||||||||||||||||||||||||
Taxable
|
$ | 694,628 | $ | 9,735 | 5.68 | % | $ | 678,854 | $ | 10,445 | 6.24 | % | ||||||||||||
Total loans (3)
|
$ | 694,628 | $ | 9,735 | 5.68 | % | $ | 678,854 | $ | 10,445 | 6.24 | % | ||||||||||||
Interest bearing deposits in
|
||||||||||||||||||||||||
other financial institutions
|
41,980 | 27 | 0.26 | % | 44,677 | 35 | 0.32 | % | ||||||||||||||||
Total earning assets
|
$ | 995,307 | $ | 12,047 | 4.91 | % | $ | 907,204 | $ | 12,489 | 5.58 | % | ||||||||||||
Less: allowances for credit losses
|
(14,747 | ) | (9,104 | ) | ||||||||||||||||||||
Total nonearning assets
|
95,185 | 90,757 | ||||||||||||||||||||||
Total assets
|
$ | 1,075,745 | $ | 988,857 | ||||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Interest-bearing deposits:
|
||||||||||||||||||||||||
Checking
|
$ | 287,005 | $ | 486 | 0.69 | % | $ | 279,655 | $ | 601 | 0.87 | % | ||||||||||||
Regular savings
|
89,650 | 187 | 0.85 | % | 70,393 | 183 | 1.05 | % | ||||||||||||||||
Money market savings
|
60,872 | 101 | 0.67 | % | 50,957 | 115 | 0.92 | % | ||||||||||||||||
Time deposits:
|
||||||||||||||||||||||||
$100,000 and over
|
130,641 | 605 | 1.88 | % | 161,447 | 1,152 | 2.89 | % | ||||||||||||||||
Under $100,000
|
168,537 | 929 | 2.24 | % | 136,953 | 1,123 | 3.33 | % | ||||||||||||||||
Total interest-bearing deposits
|
$ | 736,705 | $ | 2,308 | 1.27 | % | $ | 699,405 | $ | 3,174 | 1.84 | % | ||||||||||||
Short-term borrowings
|
5,739 | 63 | 4.45 | % | 4,843 | 44 | 3.68 | % | ||||||||||||||||
Securities sold under agreements
|
||||||||||||||||||||||||
to repurchase
|
29,308 | 56 | 0.77 | % | 21,643 | 20 | 0.37 | % | ||||||||||||||||
Long-term debt
|
74,734 | 296 | 1.61 | % | 46,136 | 438 | 3.85 | % | ||||||||||||||||
Total interest-bearing liabilities
|
$ | 846,486 | $ | 2,723 | 1.30 | % | $ | 772,027 | $ | 3,676 | 1.93 | % | ||||||||||||
Non-interest bearing liabilities
|
||||||||||||||||||||||||
Demand Deposits
|
122,118 | 105,994 | ||||||||||||||||||||||
Other liabilities
|
6,873 | 6,563 | ||||||||||||||||||||||
Total liabilities
|
$ | 975,477 | $ | 884,584 | ||||||||||||||||||||
Non-controlling interest
|
2,830 | 2,725 | ||||||||||||||||||||||
Shareholders' equity
|
97,438 | 101,548 | ||||||||||||||||||||||
Total liabilities and shareholders'
|
||||||||||||||||||||||||
equity
|
$ | 1,075,745 | $ | 988,857 | ||||||||||||||||||||
Net interest income
|
$ | 9,324 | $ | 8,813 | ||||||||||||||||||||
Interest rate spread
|
3.61 | % | 3.65 | % | ||||||||||||||||||||
Interest expense as a percent of
|
||||||||||||||||||||||||
average earning assets
|
1.11 | % | 1.64 | % | ||||||||||||||||||||
Net interest margin
|
3.80 | % | 3.94 | % | ||||||||||||||||||||
(1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%.
|
||||||||||||||||||||||||
(2) All yields and rates have been annualized on a 365 day year.
|
||||||||||||||||||||||||
(3) Total average loans include loans on non-accrual status.
|
43
Interest and fee income from loans decreased $100,000 to $9.7 million for the three months ended March 31, 2011 compared to $9.8 million for the three months ended December 31, 2010. The tax equivalent weighted average yield of loans increased 26 basis points from 5.42% for the three months ended December 31, 2010 to 5.68% for the three months ended March 31, 2011. For the three months ended March 31, 2011, interest income from loans was $9.7 million compared to $10.4 million for the three months ended March 31, 2010. The tax equivalent weighted average yield of loans decreased 56 basis points from 6.24% for the three months ended March 31, 2010 to 5.68% for the three months ended March 31, 2011.
Interest income from the securities portfolio and short-term investments decreased by $200,000 to $2.0 million for the three month period ended March 31, 2011 from $2.2 million for the three month period ended December 31,, 2010. For the three months ended March 31, 2011, the tax equivalent yield on securities was 3.58% compared to 3.79% for the period ended December 31, 2010. For the three month period ended March 31, 2011, interest income from the securities portfolio increased by $344,000 to $2.0 million compared to the same period in 2010. The tax equivalent yield on securities for the three months ended March 31, 2011 decreased 86 basis points to 3.58% compared to 4.44% for the three months ended March 31, 2010.
Interest expense on deposits decreased $315,000 to $2.3 million for the three months ended March 31, 2011, compared to $2.6 million for the period ended December 31, 2010. The mix of demand and savings deposits versus time deposits changed slightly to 67.3% in demand and savings deposits, and 32.7% in time deposits at March 31, 2011. At December 31, 2010, the mix was 65.0% in savings and demand deposits, versus 35.0% in time deposits. For the three months ended March 31, 2011, average deposits decreased $48.5 million to $858.8 million, compared to the period ended December 31, 2010. Interest expense on deposits for the three months ended March 31, 2011, decreased $900,000 compared to the same period in 2010. For the three months ended March 31, 2011, average deposits increased $53.4 million to $858.8 million, compared to the same period in 2010.
Interest expense for securities sold under agreements to repurchase, which includes Tredegar Institutional Select, decreased $5,000 for the three months ended March 31, 2011 compared to the period ended December 31, 2010. Tredegar Institutional Select earns interest at a rate equal to approximately 10% of the Federal Home Loan Bank of Atlanta’s overnight rate. Interest expense related to Federal funds purchased and short-term borrowings decreased $185,000 from $148,000 for the three months ended December 31, 2010 to $63,000 for the three months ended March 31, 2011. Interest expense related to long-term debt increased $50,000 from $246,000 for the three months ended December 31, 2010 to $296,000 for the three months ended March 31, 2011. Interest expense for securities sold under agreements to repurchase increased to $56,000 for the three months ended March 31, 2011 from $20,000 for the three months ended March 31, 2010. Interest expense related to short-term borrowings increased $19,000 from $44,000 for the three months ended March 31, 2010 to $63,000 for the three months ended March 31, 2011. Interest expense related to long-term debt decreased $142,000 from $438,000 for the three months ended March 31, 2010 to $296,000 for the three months ended March 31, 2011.
The net interest margin, on a tax equivalent basis, was 3.80% for the three months ended March 31, 2011 compared to 3.60% for the three months ended December 31, 2010 and 3.94% for the three-month period ended March 31, 2010. The average yield on earning assets was 4.91% for the quarter ended March 31, 2011 compared to 4.78% for the previous quarter and 5.58% for the quarter ended March 31, 2010, representing an increase of 13 basis points from the previous quarter and a decrease of 67 basis points from the quarter ended March 31, 2010. The increase in yields on earning assets from the previous quarter reflected a decrease of 21 basis points in the yield of the securities portfolio and a 26 basis point increase in yields for the loan portfolio. The Company’s net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common
44
measure used by the financial service industry to determine how profitably earning assets are funded. 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 nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 34.0% for all periods presented. 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 Three months ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
GAAP measures:
|
(in thousands)
|
|||||||
Interest Income – Loans
|
$ | 9,735 | $ | 10,445 | ||||
Interest Income - Investments & Other
|
2,023 | 1,687 | ||||||
Interest Expense – Deposits
|
2,308 | 3,174 | ||||||
Interest Expense - Other Borrowings
|
415 | 502 | ||||||
Total Net Interest Income
|
$ | 9,035 | $ | 8,456 | ||||
NON-GAAP measures:
|
||||||||
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities
|
289 | 357 | ||||||
Total Tax Benefit Realized on Non-Taxable Interest Income
|
$ | 289 | $ | 357 | ||||
Total Tax Equivalent Net Interest Income
|
$ | 9,324 | $ | 8,813 |
The Company’s total average earning assets decreased by $35.0 million when comparing the three months ended March 31, 2011 to the three months ended December 31, 2010, while the yield on average earnings assets increased by 13 basis points when comparing the same periods. Average balances in interest checking, regular savings and money market accounts increased by $9.1 million when comparing the three months ended March 31, 2011 to the three months ended December 31, 2010. The weighted average cost of these accounts for the three months ended March 31, 2011 and December 31, 2010 was .71% and .77%, respectively. The average balance of certificates of deposits decreased $36.3 million when comparing the three months ended December 31, 2010 to the three months ended March 31, 2011. The weighted average cost of the Company’s certificates of deposits decreased by 9 basis points to 2.05% for the three months ended March 31, 2011 versus the three months ended December 31, 2010.
When comparing the three months ended March 31, 2011 to the same period in 2010, the Company’s total average earning assets increased $88.1 million, while the yield on average earnings assets decreased by 67 basis points when comparing the same periods. Average balances in interest checking, regular savings and money market accounts increased by $36.5 million when comparing the three months ended March 31, 2011 to the same period in 2010. The weighted average cost of these accounts for the three months ended March 31, 2011 and 2010 was .71% and 0.90%, respectively. The average balance of certificates of deposits increased by $778,000 when comparing the three months ended March 31, 2011 to the three months ended March 31, 2010. The weighted average cost of the Company’s certificates of deposits decreased by 100 basis points to 2.05% for the three months ended March 31, 2011 versus the three months ended March 31, 2010.
45
Other Income
Other income includes, among other items, fees generated by the retail banking and investment services departments of the Bank as well as by Middleburg Trust Company. Other income also includes income from the Company’s 57.1% ownership interest in Southern Trust Mortgage, LLC. Other income decreased 37.7% to $4.9 million for the three months ended March 31, 2011 compared to the three month period ended December 31, 2010. Other income decreased 3.3% to $4.9 million for the three months ended March 31, 2011 compared to the same period in 2010.
Trust and investment advisory service fees earned by Middleburg Trust Company (“MTC”) increased by 3.5% when comparing the quarter ended March 31, 2011 to the previous quarter, and increased by 6.4% compared to the quarter ended March 31, 2010. On January 3, 2011, Middleburg Investment Advisers was merged into Middleburg Trust Company and ceased operating as an independent company. Trust and investment advisory fees are based primarily upon the market value of the accounts under administration. Total consolidated assets under administration by MTC were at $1.2 billion at March 31, 2011, a decrease of 7.6% relative to December 31, 2010 and an increase of 5.9% relative to March 31, 2010.
Service charges on deposits increased 0.2% to $489,000 for the three months ended March 31, 2011, compared to the three months ended December 31, 2010. For the three months ended March 31, 2011, service charges on deposits increased 10.9% compared to the same period in 2010.
The Company sold $9.4 million in securities and purchased $34.6 million in securities during the three months ended March 31, 2011. The Company realized a net gain of $35,000 on the sale of securities in the three months ended March 31, 2011. The Company has identified three other-than-temporarily impaired securities in its portfolio and has elected to recognize decreases in the fair market value of the security through earnings. During the three months ended March 31, 2011, the Company realized a loss of $1,000 related to the other-than-temporarily impaired securities.
Commissions on investment sales increased 6.5% to $180,000 for the three months ended March 31, 2011, compared to $169,000 for the three months ended December 31, 2010. For the three months ended March 31, 2011, commissions on investment sales increased 25.0% compared to the three months ended March 31, 2010.
The revenues and expenses of Southern Trust Mortgage for the three months ended March 31, 2011 are reflected in the Company’s financial statements on a consolidated basis, with the proportionate share not owned by the Company reported as “Non-controlling Interest in Consolidated Subsidiary.” Southern Trust Mortgage originated $136.4 million in mortgage loans during the quarter ended March 31, 2011 compared to $227.7 million originated during the previous quarter, a decrease of 40.1%, and $149.0 million originated during the quarter ended March 31, 2010, a decrease of 8.7% when comparing calendar quarters. Gains on mortgage loan sales decreased by 48.6% when comparing the quarter ended March 31, 2011 to the previous quarter. Gains on mortgage loan sales increased by 8.2% when comparing the quarter ended March 31, 2011 to the quarter ended March 31, 2010. The decline in mortgage originations and the decrease in gain-on-sale revenue in the first quarter of 2011 was driven by an increase in mortgage rates during the first quarter.
46
Income earned from the Bank’s $15.7 million investment in Bank Owned Life Insurance (BOLI) contributed $123,000 to total other income for the three months ended March 31, 2011. The Company purchased $6.0 million of BOLI in the third quarter of 2004, $4.8 million in the fourth quarter of 2004, $485,000 in the second quarter of 2007, $453,000 in the fourth quarter of 2009, and $682,000 in the second quarter of 2010 to help subsidize increasing employee benefit costs and expenses related to the restructure of its supplemental retirement plans.
Other service charges, commissions and fees increased 1.8% to $115,000 for the three months ended March 31, 2011, compared to $113,000 for the same period in 2010.
Other operating income decreased by 9.1% to $94,000 for the three months ended March 31, 2011, compared to the three months ended December 31, 2010. For the three months ended March 31, 2011, other operating income increased 3.3% compared to the three months ended March 31, 2010.
Other Expense
Total other expense includes employee-related costs, occupancy and equipment expense and other overhead. Total other expense decreased by $1.9 million from $14.1 million for the three months ended December 31, 2010 to $12.2 million for the three months ended March 31, 2011. When taken as a percentage of total average assets on an annualized basis, other expense was 4.6% of total average assets for the three months ended March 31, 2011 versus 4.9% for the same period in 2010. Total other expense increased $227,000 from $11.9 million for the three months ended March 31, 2010 to $12.2 million for the three months ended March 31, 2011.
Salaries and employee benefit expenses decreased by $432,000 or 5.6% when comparing the first quarter of 2011 to the quarter ended December 31, 2010, primarily due to a decline in commission expenses. Salaries and employee benefit expenses increased $392,000 or 5.6% when comparing the quarter ended March 31, 2011 to the same period in 2010.
Net occupancy expense increased by $78,000 or 4.9% for the three months ended March 31, 2011 compared to the three months ended December 31, 2010. For the three months ended March 31, 2011, net occupancy expense increased $72,000 or 4.5 % to $1.7 million from March 31, 2010. The year to date 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.
Other tax expense increased 0.5% to $197,000 for the three months ended March 31, 2011 from $196,000 for the three months ended March 31, 2010. 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 of each year, net of adjustments.
Advertising expense decreased $230,000 to $156,000 for the three months ended March 31, 2011 compared to $386,000 for the three months ended December 31, 2010. For the three months ended March 31, 2011, advertising expense was $156,000, compared to $180,000 for the three months ended March 31, 2010.
Other real estate owned expense decreased by $498,000 to $344,000 for the three months ended March 31, 2011 compared to the three months ended December 31, 2010. The decrease in the first quarter was primarily due to a decrease in legal expenses related to foreclosure, valuation adjustments and fewer losses on the sales of these assets. For the three months ended March 31, 2011, other real estate owned expense increased $134,000 to $344,000 compared to the same period in 2010.
47
FDIC insurance expense increased by $21,000 to $407,000 for the three months ended March 31, 2011 compared to the three months ended December 31, 2010. For the three months ended March 31, 2011 compared to the same period in 2010, FDIC insurance expense decreased $394,000 or 49.2%.
Other expenses increased 0.5% or $9,000 to $1.7 million for the three months ended March 31, 2011 compared to the same period in 2010.
Allowance for Loan Losses
The allowance for loan losses at March 31, 2011 was $14.6 million, or 2.2% of total portfolio loans, compared to $15.0 million, or 2.3% of total portfolio loans at December 31, 2010. The provision for loan losses was $454,000 for the three months ended March 31, 2011, compared to $929,000 for the three months ended March 31, 2010. For the three months ended March 31, 2011, net loan charge-offs totaled $846,000, compared to net loan charge-offs of $244,000 for the same period in 2010. There were $6.6 million in loans past due 90 days or more and still accruing at March 31, 2011, compared to $909,000 at December 31, 2010. Non-performing loans were $35.5 million at March 31, 2011, compared to $31.5 million at December 31, 2010. Management believes that the allowance for loan losses was adequate to cover credit losses inherent in the loan portfolio at March 31, 2011. Loans classified as loss, doubtful, substandard and special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved. Approximately $1.4 million has been included in the allowance for loan losses related to restructured loans.
Non-performing assets increased from $39.9 million or 3.6% of total assets at December 31, 2010 to $43.3 million or 4.0% of total assets as of March 31, 2011. The increase was primarily due to two loan relationships moving to the “accruing loans greater than 90 days past due” category during the quarter. Non-accrual loans decreased from $29.4 million at December 31, 2010 to $27.6 million at March 31, 2011.
Capital Resources
Total shareholders’ equity at March 31, 2011 and December 31, 2010 was $101.2 million and $100.0 million, respectively. Total common shares outstanding at March 31, 2011 were 6,942,315.
At March 31, 2011, the Company’s tier 1 and total risk-based capital ratios were 13.3% and 14.5%, respectively, compared to 12.8% and 14.1% at December 31, 2010. The Company’s leverage ratio was 9.4% at March 31, 2011 compared to 9.0% at December 31, 2010. 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.
48
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 $24.0 million, none of which were outstanding at March 31, 2011. At March 31, 2011 and December 31, 2010, the Company had $27.9 million and $25.6 million, respectively, of outstanding borrowings pursuant to repurchase agreements.
The Company has a credit line in at the Federal Home Loan Bank of Atlanta with an available borrowing capacity of $153.6 million. 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 2011. Southern Trust Mortgage has a $25.0 million revolving line of credit with a regional bank, which is primarily used to fund its loans held for sale. Middleburg Bank guarantees up to $10 million of borrowings on this line. At March 31, 2011, this line had an outstanding balance of $4.2 million and is included in total short-term borrowings on the Company’s balance sheet. Short-term and long-term advances averaged $5.7 million and $74.7 million, respectively, for the three months ended March 31, 2011.
At March 31, 2011, cash, interest bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were 32.7% of total deposits.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments to extend credit (excluding standby letters of credit) decreased $2.1 million to $81.2 million at March 31, 2011 compared to $83.3 million at December 31, 2010. 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 $2.7 million at March 31, 2011 representing an increase of $300,000 from December 31, 2010.
Contractual obligations increased $16.2 million to $86.3 million at March 31, 2011 compared to $70.1 million at December 31, 2010 excluding certificates of deposit and short-term borrowings. This change resulted primarily from additional long term debt of $17.9 million assumed during the three months ended March 31, 2011. Additional information on commitments to extend credit, standby letters of credit and contractual obligations is included in the Company’s 2010 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:
·
|
changes in general economic and business conditions in the Company’s market area;
|
·
|
changes in banking and other laws and regulations applicable to the Company;
|
·
|
maintaining asset qualities;
|
·
|
risks inherent in making loans such as repayment risks and fluctuating collateral values;
|
49
·
|
changing trends in customer profiles and behavior;
|
·
|
maintaining cost controls and asset qualities as the Company opens or acquires new branches;
|
·
|
changes in interest rates and interest rate policies;
|
·
|
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;
|
·
|
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;
|
·
|
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;
|
·
|
problems with technology utilized by the Company;
|
·
|
maintaining capital levels adequate to support the Company’s growth; and
|
·
|
other factors described in Item 1A, “Risk Factors,” included in our quarterly reports on Form 10-Q and the 2010 Form 10-K.
|
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 administration by Middleburg Trust Company are affected by equity price risk. The ongoing monitoring and management of this 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 the 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, 2011 did not include the 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
50
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 Company’s net interest income sensitivity analysis as of March 31, 2011 and December 31, 2010.
Estimated Net Interest Income Sensitivity
|
||
Rate Change
|
As of March 31, 2011
|
As of December 31, 2010
|
+ 200 bp
|
(6.8%)
|
(6.4%)
|
- 200 bp
|
(11.1%)
|
(12.4%)
|
At March 31, 2011, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points, net interest income could decrease by 6.8% on average over the next 12 months. For the same time period the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could decrease by 11.1% on average over the next 12 months. While these numbers are subjective based upon the parameters used within the model, management believes the balance sheet is properly structured and is working to minimize risks to rising rates in the future.
Based upon a March 31, 2011 simulation, the Company could expect an average negative impact to net interest income of $2.4 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 negative impact to net interest income of $3.9 million over the next 12 months. The Company’s specific goal is to lower (where possible) the cost of its borrowed funds.
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 cashflows. 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.
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
51
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 Middleburg Bank, Southern Trust Mortgage, Middleburg Investment Group, Middleburg Investment Advisors and Middleburg Trust Company) 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.
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
Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities. The risk factors that are applicable to us are outlined in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes in our risk factors from those disclosed in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Removed and Reserved
Item 5. Other Information
None
Item 6. Exhibits
31.1
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer
|
52
32.1
|
Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350
|
53
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 10, 2011
|
/s/ Gary R. Shook
|
||
Gary R. Shook
|
|||
President & Chief Executive Officer
|
|||
Date: May 10, 2011
|
/s/ Raj Mehra
|
||
Raj Mehra
|
|||
Executive Vice President
|
|||
& Chief Financial Officer
|
54
EXHIBIT INDEX
Exhibits
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. § 1350
|