Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MBRG > SEC Filings for MBRG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MIDDLEBURG FINANCIAL CORP

Form 10-Q for MIDDLEBURG FINANCIAL CORP


9-Nov-2012

Quarterly Report


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

The following discussion and analysis of the financial condition at September 30, 2012 and results of operations of the Company for the three and nine months ended September 30, 2012 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 2011 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 and the city of Richmond, Virginia. The Bank operates eleven financial service centers and one limited service facility. 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.

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

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

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

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.

Net income attributable to Middleburg Financial Corporation for the nine months ended September 30, 2012 increased 34.2% to $5.1 million from $3.8 million over the same period in 2011. Net income attributable to Middleburg Financial Corporation for the third quarter increased 21.4% to $1.7 million from $1.4 million during the third quarter of 2011. Earnings per fully diluted share for the nine months ended September 30, 2012 was $0.72 per share versus $0.55 per share for the same period in 2011 and $0.24 per share for the quarter ended September 30, 2012 versus $0.20 per share for the quarter ended September 30, 2011.


Index

Annualized return on total average assets for the three months ended September 30, 2012 was 0.56%, compared to 0.46% for the same period in 2011. 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 September 30, 2012 was 6.11%, compared to 5.07% for the same period in 2011.

As a result of the evaluation of the adequacy of the reserve for loan losses, a loan loss provision of $635,000 was made during the quarter ended September 30, 2012 compared to a provision of $1.0 million during the three months ended September 30, 2011.

Net interest income for the three months ended September 30, 2012 was $9.2 million compared to $9.5 million for the three months ended September 30, 2011. Total non-interest income increased $2.5 million to $8.3 million for the three months ended September 30, 2012 from $5.8 million for the three months ended September 30, 2011. Total non-interest expenses increased approximately $1.6 million to $13.8 million for the three months ended September 30, 2012 from $12.2 million for the same period in 2011.

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 rules and regulations throughout 2012 and beyond. While not fully 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 Company's liquidity, capital resources or results of operations.

Critical Accounting Policies

General

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

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

Allowance for Loan Losses

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.


Index

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of 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 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 $6.0 million in intangible assets and goodwill at September 30, 2012, a decrease of $129,000 or 2.1% since December 31, 2011 which was attributable to regular amortization of intangible assets.

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 merged into Middleburg Trust Company and its goodwill balance is reflected in the total goodwill balance reported for Middleburg Investment Group of $3.4 million. The remaining balance of unamortized identified intangible assets related to the acquisition of Middleburg Investment Advisors is approximately $770,000. Approximately $1.0 million of the $6.0 million in total intangible assets and goodwill at September 30, 2012 was attributable directly to the Company's investment in Middleburg Trust Company exclusive of the goodwill related to the former Middleburg Investment Advisors. 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 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two step goodwill impairment test. If a two step process is necessary, the first step is to identify whether or not any impairment exists. The second step measures the amount of the impairment loss, if any. The most recent evaluation of the Company's goodwill balance was conducted as of December 31, 2011.

As of September 30, 2012, 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 December 31, 2011 (the most recent fair value evaluation date) exceeded the carrying value as of that date. Management does not believe the estimated fair values have changed significantly from December 31, 2011 to September 30, 2012.


Index

                                      Allocation of Goodwill to Reporting Units
                                                    (Dollars in Thousands)
                                                                                                (1)
                                                                                          Percentage by
                                                                                              which
                                                                            (1)           Estimated Fair
                                                 (1)                  Estimated Fair          Value
                  Carrying Value of      Carrying Value of                 Value           of Reporting
                       Goodwill            Reporting Unit            of Reporting Unit     Unit Exceeds
Reporting Unit    December 31, 2011      December 31, 2011           December 31, 2011    Carrying Value
STM              $          1,867       $            6,039           $       6,828            13.07 %
MIG                         3,422                    5,891     (2)           6,691            13.58 %
Total            $          5,289       $           11,930           $      13,519            13.32 %

(1) Reported amounts reflect only Middleburg Financial Corporation shareholders' ownership interests. Estimated fair values are as of December 31, 2011. Management does not believe the estimated fair values have changed significantly from December 31, 2011 to September 30, 2012.

(2) Includes $900,000 of amortizing intangible assets at December 31, 2011.

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.

Other-Than-Temporary Impairment (OTTI)

There were no losses related to other-than-temporary impairment on securities for the nine months ended September 30, 2012.

Financial Condition

Assets, Liabilities and Shareholders' Equity

Total assets for the Company were $1.2 billion at September 30, 2012, an increase of $43.1 million or 3.6% compared to total assets at December 31, 2011. Total average assets increased 8.2% from $1.11 billion for the nine months ended September 30, 2011 to $1.20 billion for the nine months ended September 30, 2012. Total liabilities were $1.12 billion at September 30, 2012, compared to $1.08 billion at December 31, 2011. Total average liabilities increased $82.4 million or 8.2% to $1.1 billion for the nine months ended September 30, 2012 compared to $1.0 billion for the same period in 2011. Average shareholders' equity increased 8.5% or $8.6 million over the same periods.

Loans

Total loans, including loans held for sale at September 30, 2012 were at $784.8 million, higher by $20.9 million from the December 31, 2011 amount of $763.9 million. Loans held for sale were at $92.5 million at September 30, 2012, compared to $92.5 million at December 31, 2011, unchanged during the period. Southern Trust Mortgage originated $696.3 million in loans for the nine months ended September 30, 2012, compared to $470.0 million for the nine months ended September 30, 2011. The Company experienced an increase in real estate construction loans, which were $48.7 million at September 30, 2012, compared to $42.2 million at December 31, 2011. Real estate mortgage loans of $512.8 million at September 30, 2012


Index
increased from the December 31, 2011 amount of $512.2 million. Commercial loans, which are primarily loans to businesses, increased to $109.0 million at September 30, 2012, compared to $94.4 million at December 31, 2011. Net charge-offs were $2.84 million for the nine months ended September 30, 2012 versus $2.41 million for the same period in 2011. The provision for loan losses for the nine months ended September 30, 2012 was $2.2 million compared to $2.5 million for the same period in 2011 and $635,000 for the three months ended September 30, 2012 compared to $1.0 million for the three months ended September 30, 2011. The allowance for loan losses at September 30, 2012 was $13.9 million or 2.01% of total loans outstanding, excluding loans held for sale, compared to $14.6 million and 2.18% at December 31, 2011.

The following table presents information on the Company's nonperforming assets as of the dates indicated:

                                                          Nonperforming Assets
                                                    Middleburg Financial Corporation
                                  September 30,                        December 31,
                                      2012            2011          2010          2009          2008
                                                             (In thousands)
Nonperforming assets:
Nonaccrual loans                 $      22,683     $  25,346     $  29,386     $   8,606     $   6,890
Restructured loans (1)                   4,302         3,853         1,254         2,096             -
Accruing loans greater than 90
days past due                              860         1,233           909           908         1,117
Total nonperforming loans        $      27,845     $  30,432     $  31,549     $  11,610     $   8,007
Foreclosed property                     11,933         8,535         8,394         6,511         7,597
Total nonperforming assets       $      39,778     $  38,967     $  39,943     $  18,121     $  15,604

Allowance for loan losses        $      13,941     $  14,623     $  14,967     $   9,185     $  10,020

Nonperforming loans to period
end portfolio loans                       4.02 %        4.53 %        4.79 %        1.80 %        1.19 %
Allowance for loan losses to
nonperforming loans                      50.06 %       48.05 %       47.44 %       79.11 %      125.14 %
Nonperforming assets to period
end assets                                3.22 %        3.27 %        3.62 %        1.86 %        1.58 %

(1) Amount reflects restructured loans that are performing as agreed to the restructured terms and 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:


Index

                                     Allowance for Loan Losses
                                                                Nine Months Ended       Year Ended
                                                                                       December 31,
                                                                September 30, 2012         2011
Balance, beginning of year                                     $           14,623     $     14,967
Provision for loan losses                                                   2,156            2,884
Charge-offs:
Real estate loans:
Construction                                                                1,521              467
Secured by 1-4 family residential                                             740            2,062
Other real estate loans                                                       715              438
Commercial loans                                                              189              180
Consumer loans                                                                 46              318
Total charge-offs                                              $            3,211     $      3,465
Recoveries:
Real estate loans:
Construction                                                   $                1     $         29
Secured by 1-4 family residential                                             268               41
Other real estate loans                                                        65               98
Commercial loans                                                                9               41
Consumer loans                                                                 30               28
Total recoveries                                               $              373     $        237
Net charge-offs                                                             2,838            3,228
Balance, end of period                                         $           13,941     $     14,623

Ratio of allowance for loan losses to portfolio loans
outstanding at end of period                                                 2.01 %           2.18 %
Annualized ratio of net charge offs to average portfolio
loans outstanding during the period                                          0.55 %           0.44 %

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 September 30, 2012 and December 31, 2011:

                                      Allocation of Allowance for Loan Losses
                                                             Percent of                                Percent of
                                                              loans in                                  loans in
                                                                 each                                      each
                                                             category to                               category to
                                    September 30, 2012       total loans       December 31, 2011       total loans
Commercial, financial and
agricultural                       $              2,101             17.10 %   $             1,731             15.56 %
Real estate construction                          1,045              7.04 %                   897              6.29 %
Real estate mortgage                             10,599             74.06 %                11,850             76.29 %
Consumer loans                                      196              1.80 %                   145              1.86 %
Totals                             $             13,941            100.00 %   $            14,623            100.00 %

Non-performing Loans

Non-performing loans were $27.8 million at September 30, 2012 compared to $30.4 million at December 31, 2011.

Non-accrual loans were $22.7 million at the end of the third quarter of 2012 compared to $25.3 million as of December 31, 2011, representing a decrease of 10.3% during the first nine months of 2012. The decrease was primarily attributable to non-accrual loans being transferred to other real estate owned during the period.


Index

Restructured Loans

Included in the "Nonperforming Assets" table above are troubled debt . . .

  Add MBRG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MBRG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.