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Middleburg Financial 10-Q 2011 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)
(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.
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).
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
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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)
See Accompanying Notes to Consolidated Financial Statements.
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See Accompanying Notes to Consolidated Financial Statements.
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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.
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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.
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.
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.
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Note 3. Securities
Amortized costs and fair values of securities available for sale at March 31, 2011 are summarized as follows:
Amortized costs and fair values of securities available for sale at December 31, 2010 are summarized as follows:
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.
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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:
At December 31, 2010, investments in an unrealized loss position that were temporarily impaired are as follows:
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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.
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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):
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):
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