-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FxaxZlWEbQQ6cxAGnO2RnMxcnS8bow6PSmmaDblbgGjXtNj9e65xTl0XWzmh7pC9 C6/AqN64pnuuDfwaLhxBbQ== 0001002105-02-000104.txt : 20020814 0001002105-02-000104.hdr.sgml : 20020814 20020814174910 ACCESSION NUMBER: 0001002105-02-000104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDDLEBURG FINANCIAL CORP CENTRAL INDEX KEY: 0000914138 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541696103 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24159 FILM NUMBER: 02737385 BUSINESS ADDRESS: STREET 1: 111 W WASHINGTON ST STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 BUSINESS PHONE: 5406876377 MAIL ADDRESS: STREET 1: 111 WEST WASHINGTON STREET STREET 2: C/O MIDDLEBURG BANK CITY: MIDDLEBURG STATE: VA ZIP: 22117 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT COMMUNITY BANKSHARES INC DATE OF NAME CHANGE: 19931027 10-Q 1 mfc10q.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 [ ] Transition Report under 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 54-1696103 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 111 West Washington Street Middleburg, Virginia 20117 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (703) 777-6327 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,852,682 shares of common stock, par value $5.00 per share, outstanding as of August 14, 2002 MIDDLEBURG FINANCIAL CORPORATION INDEX
Part I. Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information Item 1. Legal Proceedings 18 Item 2. Change in Securities and Use of Proceeds 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS MIDDLEBURG FINANCIAL CORPORATION Consolidated Balance Sheets (In Thousands, Except Share Data)
(Unaudited) June 30, December 31, 2002 2001 --------------- ------------------ Assets: Cash and due from banks $10,456 10,053 Interest-bearing balances in banks 258 200 Temporary investments: Federal funds sold - 925 Other money market investments 1,802 1,797 Securities (fair value: June 30, 2002, $141,208 , December 31, 2001, $124,522 ) 140,966 124,351 Loans held for sale 6,953 6,652 Loans, net of allowances for loan losses of $2,202 in 2002 and $2,060 in 2001 210,010 194,340 Bank premises and equipment, net 10,357 8,069 Other assets 13,288 7,714 ----------- ----------- Total assets $ 394,090 $ 354,101 =========== =========== Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest bearing demand deposits $ 75,603 $ 68,771 Savings and interest-bearing demand deposits 124,568 111,148 Time deposits 94,480 91,812 ---------- ----------- Total deposits $ 294,651 $ 271,731 Securities sold under agreements to repurchase $ 13,398 $ 12,011 Federal funds purchased 1,100 - Federal Home Loan Bank Advances 3,000 7,000 Long-term debt 31,675 20,805 Trust preferred debt 10,000 10,000 Other liabilities 3,492 2,216 ---------- ---------- Total liabilities $ 357,316 $ 323,763 ---------- ---------- Shareholders' Equity Common stock par value $5.00 per share, authorized 10,000,000 shares; issued and outstanding at June 30, 2002 - 1,846,607 issued and outstanding at December 31, 2001 - $1,752,258 $ 9,233 $ 8,761 Capital surplus 3,359 741 Retained earnings 23,196 21,084 Accumulated other comprehensive income (loss) 986 (248) ---------- --------- Total shareholders' equity $ 36,774 $ 30,338 ---------- --------- Total liabilities and shareholders' equity $ 394,090 $ 354,101 ========== =========
See Accompanying Notes to Consolidated Financial Statements. 3 MIDDLEBURG FINANCIAL CORPORATION Consolidated Statements of Income (In Thousands, Except Per Share Data)
Unaudited Unaudited ------------------------------------------- For the Six Months For the Quarter Ended June 30, Ended June 30, 2002 2001 2002 2001 ------------------------------------------- Interest Income Interest and fees on loans $ 8,022 $ 8,048 $ 4,043 $ 4,072 Interest on investment securities Taxable 2 12 1 6 Exempt from federal income taxes 125 154 59 74 Interest on securities available for sale Taxable 2,608 1,373 1,374 685 Exempt from federal income taxes 792 792 393 411 Dividends 140 143 69 72 Interest on federal funds sold and other 47 132 24 85 --------------------- -------------------- Total interest income $11,736 $10,654 $ 5,963 $ 5,405 --------------------- -------------------- Interest expense Interest on deposits 2,169 3,040 1,069 1,519 Interest on long-term debt 980 465 544 221 Interest on short-term borrowings 141 606 60 242 --------------------- -------------------- Total interest expense $ 3,290 $ 4,111 $ 1,673 $ 1,982 --------------------- -------------------- Net interest income $ 8,446 $ 6,543 $ 4,290 $ 3,423 Provision for loan losses 150 150 75 75 --------------------- -------------------- Net interest income after provision for loan losses $ 8,296 $ 6,393 $ 4,215 $ 3,348 --------------------- -------------------- Other Income Trust fee income $ 1,138 $ 657 $ 819 $ 299 Service charges on deposit accounts 822 711 471 399 Net gains (losses) on securities available for sale (47) 246 33 (6) Fees on loans held for resale 746 574 403 275 Other operating income 293 322 122 123 --------------------- -------------------- Total other income $ 2,952 $ 2,510 $ 1,848 $ 1,090 --------------------- -------------------- Other Expense Advertising $ 238 $ 170 $ 140 $ 101 Salaries and employee benefits 4,131 3,428 2,188 1,688 Net occupancy expense of premises 750 581 404 308 Other operating expenses 1,721 1,392 980 733 --------------------- -------------------- Total other expense $ 6,840 $ 5,571 $ 3,712 $ 2,830 --------------------- -------------------- Income before income taxes $ 4,408 $ 3,332 $ 2,351 $ 1,608 Income taxes 1,208 841 665 409 --------------------- -------------------- Net income 3,200 2,491 1,686 1,199 ===================== ==================== Earnings per share, basic $ 1.79 $ 1.43 $ 0.92 $ 0.69 Earnings per share, diluted $ 1.74 $ 1.40 $ 0.90 $ 0.67 Dividends per share $ 0.60 $ 0.50 $ 0.30 $ 0.25
See Accompanying Notes to Consolidated Financial Statements. 4 MIDDLEBURG FINANCIAL CORPORATION Consolidated Statement of Changes in Shareholders' Equity For the Six Months ended June 30, 2002 and 2001 (In Thousands) (Unaudited)
Accumulated Other Common Capital Retained Comprehensive Comprehensive Stock Surplus Earnings Income (Loss) Income Total ------------ --------------------------- ----------------------------------- ----------- Balances - December 31, 2000 $ 8,696 $ 556 $ 17,616 $ 403 $ - $ 27,271 Comprehensive Income Net income 2,491 - 2,491 2,491 Issuance of common stock (13,011 shares) 65 185 250 Other comprehensive income net of tax: Unrealized gain on available for sale securities (net of tax $36) 69 Reclassification adjustment for gains realized in net income (net of tax $84) (162) ------------- Other comprehensive income (net of tax $48) (93) (93) (93) ------------- Total comprehensive income $ 2,398 ============= Cash dividends declared (873) (873) ---------- ----------- ----------- -------------- ----------- Balances - June 30, 2001 $ 8,761 $ 741 $ 19,234 $ 310 $ 29,046 ========== =========== =========== ============== =========== Balances - December 31, 2001 $ 8,761 $ 741 $ 21,084 $ (248) $ 30,338 Comprehensive Income Net income 3,200 3,200 3,200 Issuance of common stock (94,349 shares) 472 2,618 3,090 Other comprehensive income net of tax: Unrealized gain on available for sale securities (net of tax $620) 1,203 Reclassification adjustment for losses realized in net income (net of tax $16) 31 ------------ Other comprehensive income (net of tax $636) 1,234 1,234 1,234 ------------ Total comprehensive income $ 4,434 ============ Cash dividends declared (1,088) (1,088) ---------- ----------- ----------- -------------- ----------- Balances -June 30, 2002 $ 9,233 $ 3,359 $ 23,196 $ 986 $ 36,774 ============ =========================== ================== ===========
See Accompanying Notes to Consolidated Financial Statements. 5 MIDDLEBURG FINANCIAL CORPORATION Consolidated Statements of Cash Flows (In Thousands)
Unaudited For the Six Months Ended ------------------------------------ June 30, June 30, 2002 2001 -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,200 $ 2,491 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 150 150 Depreciation and amortization 512 368 Net (gains) losses on securities available for sale 47 (246) Net (gains) losses on sales of equipment (3) 3 Discount accretion and premium amortization on securities, net (46) (51) Originations of loans held for sale (47,518) (36,819) Proceeds from sales of loans held for sale 47,217 30,282 Decrease (increase) in other assets (1,616) (1,216) Increase in other liabilities 1,319 586 -------------- --------------- Net cash provided by (used in) operating activities $ 3,262 $ (4,452) -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity, principal paydowns and calls on investment securities $ 896 $ 797 Proceeds from maturity, principal paydowns and calls of securities available for sale 6,211 3,614 Proceeds from sale of securities available for sale 14,757 16,383 Purchase of securities available for sale (36,612) (29,048) Purchase of subsidiary (1,240) - Net (increase) in loans (16,820) (10,586) Proceeds from sale of bank premises and equipment 20 31 Purchases of bank premises and equipment (2,712) (690) -------------- --------------- Net cash (used in) investing activities $ (35,500) $ (19,499) -------------- --------------- CASH FLOWS FROM FINANCING ACTIVTIES Net increase in demand deposits, NOW accounts, and savings accounts $ 20,252 $ 9,333 Net increase in certificates of deposits 2,668 4,042 Net increase in Fed Funds purchased 1,100 - Proceeds from Federal Home Loan Bank advances 62,000 26,600 Payment on Federal Home Loan Bank advances (66,000) (22,600) Proceeds from long term debt 11,000 - Payments on long-term debt (130) (365) Cash dividends paid (1,088) (800) Issuance of common stock 590 250 Increase (decrease) in securities sold under agreement to repurchase 1,387 (1,201) -------------- --------------- Net cash provided by financing activities $ 31,779 $ 15,259 -------------- --------------- Decrease in cash and cash equivalents $ (459) $ (8,692) CASH AND CASH EQUIVALENTS Beginning $ 12,975 $ 17,147 ============== =============== Ending $ 12,516 8,455 ============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors 2,604 3,073 Income taxes 1,207 1,069 SUPPLEMENTAL DISCLOSURES FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Unrealized gain (losses) on securities available for sale 1,868 (141) Stock issuance for purchase of subsidiary 2,500 - Note receivable forgiven in connection with purchase of subsidiary 1,000 - Exercise of option to purchase subsidiary 1,200
See Accompanying Notes to Consolidated Financial Statements. 6 MIDDLEBURG FINANCIAL CORPORATION Notes to Consolidated Financial Statements For the Six Months Ended June 30, 2002 and 2001 (Unaudited) Note 1. 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 as of June 30, 2002 and the results of operations and changes in cash flows for the six months ended June 30, 2002 and 2001. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. The results of operations for the six-month periods ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. Note 2. Securities Securities being held to maturity as of June 30, 2002 are summarized as follows:
------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market Cost Gains (Losses) Value ------------------------------------------------------------ (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ - $ - $ - $ - Obligations of states and political subdivisions 4,592 242 - 4,834 Mortgaged backed securities 55 - - 55 ----------------- --------------- ------------- ----------- $ 4,647 $ 242 $ - $ 55 ================= =============== ============= ===========
7 Securities available for sale as of June 30, 2002 are summarized below:
------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market Cost Gains (Losses) Value ------------------------------------------------------------ (In Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 249 $ 21 $ - $ 270 Corporate securities 2,131 84 (35) 2,180 Obligations of states and political subdivisions 31,495 885 (52) 32,328 Mortgaged backed securities 87,435 947 (161) 88,221 Other 13,508 162 (350) 13,320 -------------- ---------------- ------------- ----------- $134,818 $ 2,099 $ (598) $ 136,319 ============== ================ ============= ============
Note 3. The consolidated loan portfolio is composed of the following:
------------------------------------ June 30, December 31, 2002 2001 ------------------------------------ (In Thousands) Commercial, financial and agricultural $ 22,839 $ 22,993 Real estate construction 25,850 24,174 Real estate mortgage 151,050 137,332 Installment loans to individuals 12,473 11,901 ------------------ ----------------- Total loans $ 212,212 $ 196,400 Less: Allowance for loan losses 2,202 2,060 ------------------ ----------------- Loans, net $ 210,010 $ 194,340 ================== =================
The Company had $137,051 in non-performing assets at June 30, 2002. 8 Note 4. Allowance for Loan Losses The following is a summary of transactions in the allowance for loan losses:
--------------------------------- June 30, December 31, 2002 2001 --------------------------------- --------------------------------- (In Thousands) Balance at January 1 $ 2,060 $ 1,804 Provision charged to operating expense 150 300 Recoveries 6 39 Loan losses (14) (83) ---------------- ---------------- Balance at the end of the period $ 2,202 $ 2,060 ================ ================
Note 5. Earnings Per Share The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of potential dilutive common stock. Potential dilutive common stock has no effect on income available to common shareholders. There were no anti-dilutive effects from options at June 30, 2002.
June 30, 2002 June 30, 2001 Per share Per share Shares Amount Shares Amount ------------------------------------------------------ Basic EPS $ 1,788,771 $ 1.79 $ 1,739,890 $ 1.43 ============= ============ Effect of dilutive securities: stock options 51,068 34,023 ------------- ------------- Diluted EPS $ 1,839,839 $ 1.74 $1,773,914 $ 1.40 ============= ============= ============= ============
Note 6. Derivative Financial Instruments Interest rate swap agreements: During May 2000, the Company entered into two agreements to assume variable market-indexed interest payments in exchange for fixed-rate interest payments (interest rate swaps). The agreements matured on May 15, 2002. The notional principal amount of interest rate swaps outstanding during the contract period was $8,525,000. The original term to maturity was 24 months. The weighted-average fixed payment rate was 7.0% during the life of the agreement period. Variable interest payments received are based on three-month LIBOR. At May 15, 2002, the weighted average rate of variable market-indexed interest payment obligations to the Company was 1.56%. The effect of these agreements was to transform fixed rate liabilities to variable rate liabilities. The net income from these agreements was $169,774 for the six month period ended June 30, 2002, which was charged to income as it accrued. 9 Note 7. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets - that will potentially impact the accounting for goodwill and other intangible assets. Statement 141 eliminates the pooling method of accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangible assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Company in its 2002 financial statements. The adoption of these standards will not have a material impact on the financial statements. Note 8. Acquisition of Subsidiary On August 9, 1999, the Company purchased one percent of the issued and outstanding capital stock of Gilkison Patterson Investment Advisors, Inc. ("GPIA"), an investment advisory firm based in Alexandria, Virginia. The Company also acquired the right to purchase all of the remaining authorized, issued and outstanding shares of GPIA capital stock on or after July 1, 2001. This option was extended through June 30, 2002. On April 1, 2002, the Company completed the acquisition of GPIA. The terms of the transaction include a total purchase price of $6 million, which included 59,874 shares ($2.5 million value) of the Company's common stock issued to the shareholders of GPIA. Based on a purchase price valuation, the Company allocated approximately 60% of the purchase price to identified intangibles with a weighted-average life of 12.5 years. The remaining 40% of the purchase price has been treated as goodwill. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements and management's discussion and analysis are, to a large degree, dependent upon the accounting policies of Middleburg Financial Corporation (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. These 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. See also Note 1 of the Notes to Consolidated Financial Statements. Allowance for Loan Losses The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan and lease portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance 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 and lease portfolio; and the loan grading system. The Company evaluates various loans individually for impairment as required by Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loans that have similar characteristics. For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans and leases, 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. 11 The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loans and lease losses. This estimate of losses is compared to the allowance for loan and lease losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements. Valuation of Derivatives The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative financial instruments. The Company has used derivative financial instruments only for asset/liability management through the hedging of a specific transaction or position, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended impact on the Company's financial condition or results of operations. See further information regarding derivatives in Note 6 (page 9) of the Notes to Consolidated Financial Statements. Intangibles and Goodwill The Company has approximately $7.1 million in intangible assets and goodwill at June 30, 2002, an increase of $6.1 million since December 31, 2001. The increase is associated with the April 1, 2002 acquisition of Gilkison Patterson Investment Advisors, Inc. ("GPIA"), a registered investment advisor. In connection with this investment, a purchase price valuation (using FAS 141 and 142 as a guideline) was completed to determine the appropriate allocation to identified intangibles. The valuation concluded that approximately 42% of the purchase price was related to the acquisition of customer relationships with an amortizable life of 15 years. Another 19% of the purchase price was allocated to a non-compete agreement with an amortizable life of 7 years. The remainder of the purchase price has been allocated to goodwill. 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 financial statements could result in a possible impairment of the intangible assets and goodwill or require an acceleration in the amortization expense. In addition, FAS 142 requires that goodwill be tested annually using a two-step process. The first step is to identify a potential impairment. The second step measures the amount of the impairment loss, if any. Processes and procedures have been identified for the two-step process. 12 When the Company completes its ongoing review of the recoverability of intangible assets and goodwill, factors that are considered important to determining whether an impairment might exist include loss of customers acquired or significant withdrawals of the assets currently under management and/or early retirement or termination of key members of management. Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company's financial condition and results of operations. Financial Summary Net income for the six months ended June 30, 2002 increased 28.5% to $3.2 million or $1.74 per diluted share compared to $2.5 million or $1.40 per diluted share for the first six months of 2001. Annualized returns on average assets and equity for the six months ended June 30, 2002 were 1.7% and 19.1%, respectively, compared to 1.6% and 17.1% for the same period in 2001. Total assets for the Company increased to $394.1 million at June 30, 2002 compared to $354.1 million at December 31, 2001, representing an increase of $40.0 million or 11.3%. Total loans at June 30, 2002 were $210.0 million, an increase of $15.7 million from the December 31, 2001 balance of $194.3 million. The Company is located in one of the fastest growing counties and metropolitan areas in the United States. In addition, the Company has increased its customer base as a result of increased advertising and consolidation in the banking industry within its local market. These factors have contributed to the solid loan and deposit growth experienced over the past year. To better accommodate the Company's expanding employee base, a two story, 19,000 square foot operations center was constructed and was placed in service during June 2002. Nearly half of the Company's employees are now working in the operations center. In addition to the operations and administrative staff, the center also houses the Company's mortgage banking operations. The facility is adjacent to the Company's Leesburg, Virginia branch. Approximately $2.5 million was spent on the land and construction of the operations center. The investment portfolio increased 13.4% to $141.0 million at June 30, 2002 compared to $124.4 million at December 31, 2001. Deposits increased $22.9 million to $294.7 million at June 30, 2002 from $271.7 million at December 31, 2001. Growth in the transactional accounts and time deposits accounts for $20.3 million and $2.6 million, respectively, of the increase during the first six months of 2002. Securities sold under agreements to repurchase with commercial checking accounts increased $1.4 million from $12.0 million at December 31, 2001 to $13.4 million at June 30, 2002. Shareholders' equity was $36.8 million at June 30, 2002. This amount represents an increase of 21.2% from the December 31, 2001 balance of $30.3 million. The majority of the increase resulted from the shares of common stock issued by the Company for the acquisition of GPIA on April 1, 2002. The company issued 59,874 shares of common stock for the acquisition. The book value per common share was $19.91 at June 30, 2002 and $17.31 at December 31, 2001. 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 $8.4 million for the first six months of 2002 compared to $6.5 million for the same period in 2001. The increase is attributed to both the significant growth in average earning assets as well as the effect that the lower interest rate environment had on the amount of interest expense paid on deposits. Average earning assets increased $69.2 million from $277.0 million at June 30, 2001 to $346.2 million at June 30, 2002. Accordingly, interest income increased 13 10.2% compared to the six month period ended June 30 , 2001. The Company continues to experience growth in its lower-cost deposit products. Average deposits increased $54.3 from $229.0 million at June 30, 2001. Increases in lower cost deposit products combined with the lower interest rate environment resulted in a 20.0% decrease in interest expense for the six months ended June 30, 2002 compared to the same period in 2001. Noninterest Income Noninterest income consisting of fees from deposit accounts, fiduciary activities and mortgage banking increased 17.6% to $3.0 million for the first six months of 2002 compared to $2.5 million for the same period in 2001. The Company realized $47,000 in net losses on the investment portfolio for the six months ended June 30, 2002. Mortgage refinancings and purchases have remained strong in the local market and have provided significant volume increases in mortgage fees on loans held for sale. Fees on loans held for resale increased 30.0% to $746,000 at June 30, 2002 from the $574,000 balance at June 30, 2001. Service charges on deposit accounts for the first six months of 2002 totaled $822,000 compared to $711,000 for the same period in 2001, an increase of 15.6%. Commissions and fees from fiduciary activities were $1.1 million for the six-month period ended June 30, 2002 compared to $657,000 for the same period in 2001. GPIA, the Company's newest subsidiary, contributed nearly $502,000 in gross fees to the commission and fees from fiduciary activities total. Other operating income decreased $29,000 to $293,000 for the six months ended June 30, 2002 compared to $322,000 for the same period in 2001. Noninterest Expense Total noninterest expense includes employee-related costs, occupancy and equipment expense and other overhead. Total noninterest expense was $6.8 million for the first six months of 2002 compared to $5.6 million for the same period in 2001. This is a 22.8% increase from the six months ended June 30, 2001 to the six months ended June 30, 2002. Salary and benefit expense increased 20.5% from $3.4 million for the six months ended June 30, 2001 to $4.1 million for the six months ended June 30, 2002. The Company has increased its staffing in both the business development and operations areas to support the significant asset growth over the past three years. Commissions paid to employees for fee related business, such as mortgage originations and investment sales have increased by $65,000 to $402,000 as a result in the increase in sales volume. Net occupancy expense of premises increased $169,000 from $581,000 for the six months ended June 30, 2001 to $750,000 for the six months ended June 30, 2002. Allowance for Loan Losses The allowance for loan losses at June 30, 2002 was $2.2 million compared to $1.9 million at June 30, 2001. The provision for loan losses was unchanged at $150,000 for the six months ended June 30, 2002, and June 30, 2001. The allowance for loan losses was 1.04% of total loans outstanding at June 30, 2002 and 1.03% of total loans outstanding at June 30, 2001. At June 30, 2002, net loan charge offs totaled $8,000. Total loans past due 90 days or more at June 30, 2002 were approximately $92,000. Non-performing loans decreased to .07% of total loans outstanding at June 30, 2002 compared to .08% at June 30, 2001. Management believes that the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at June 30, 2002. Loans classified as loss, doubtful, substandard or special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved. 14 Capital Resources Shareholders' equity at June 30, 2002 and June 30, 2001 was $36.8 million and $29.0 million, respectively. Total common shares outstanding at June 30, 2002 were 1,846,607. At June 30, 2002 the Company's tier 1 and total risk-based capital ratios were 15.8% and 14.9%, respectively, compared to 16.4% and 17.3% at December 31, 2001. The Company's leverage ratio was 10.0% at June 30, 2002 compared to 12.5% at December 31, 2001. The Company's capital structure places it above the 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. 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, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. 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. 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market and Interest Rate Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company's primary market risk exposure is interest rate risk, though it should be noted that the assets under management by its trust subsidiary, Tredegar 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 Company's banking subsidiary, Middleburg Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company's asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change, affecting net interest income, the primary component of the Company's earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet. The simulation model is prepared and updated four times during each year. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. The following reflects the range of the Company's net interest income sensitivity analysis during the six months ended June 30, 2002 as well as the fiscal year of 2001 compared to the 10% Board-approved policy limit. For the Six Months Ended June 30, 2002 Rate Change Estimated Net Interest Income Sensitivity ----------- ----------------------------------------- High Low Average + 200 bp (2.51%) (2.18%) (2.35%) - 200 bp 2.62% 1.24% 1.93% For the Year Ended December 31, 2001 Rate Change Estimated Net Interest Income Sensitivity ----------- ----------------------------------------- High Low Average + 200 bp (2.21%) (.32%) (1.32%) - 200 bp 3.24% 1.57% 2.44% 16 Since December 31, 2001, the company's balance sheet has grown by nearly $40.0 million. Deposit inflows provided the funding for the growth in the loan and securities portfolios. Overall, the Company continues to have minimal interest rate risks to either falling or rising interest rates. The addition of fixed rate assets during the first six months of 2002 has made the Company somewhat more liability sensitive in the short term, reducing its exposure to falling rates but slightly increasing the potential exposure to rising rates. Based upon first six months of 2002's simulation, the Company could expect an average negative impact to net interest income of $405,000 over the next 12 months if rates rise 200 basis points. If rates decline 200 basis points, the Company could expect a positive impact to net interest income of $330,000 over the next 12 months. During 2001, the Company was able to test the parameters and assumptions of its simulation model in light of the 4.75% decrease in short term rates over 11 months. The simulation model proved to be accurate in its presentation of a company that benefits from falling interest rates. As presented in the table above, the Company has had minimal interest rate risks to either falling or rising interest rates over the past 15 months. The Company could expect a negative impact to net interest income of $364,000 if rates rise 200 basis points over the next 12 months. If rates decline 200 basis points, the Company could expect a positive impact to net interest income of $386,000 over the next 12 months. 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 anticipation of changes in interest rates. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Change in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on Wednesday, April 17, 2002 in Middleburg, Virginia. The shareholders were asked to vote on the election of the directors of the Company and to change the name of the Company from "Independent Community Bankshares, Inc." to "Middleburg Financial Corporation". The votes cast for or withheld for the election of the directors were as follows: NAME FOR WITHHELD ---- --- -------- Howard M. Armfield 1,255,645 32,105 Joseph L. Boling 1,250,666 37,084 Childs Frick Burden 1,255,658 32,092 J. Lynn Cornwell, Jr. 1,255,545 32,205 William F. Curtis 1,287,150 600 Robert C. Gilkison 1,287,237 513 C. Oliver Iselin, III 1,255,558 32,192 Gary D. LeClair 1,255,658 32,092 Thomas W. Nalls 1,255,658 32,092 John Sherman 1,255,658 32,092 Millicent W. West 1,255,545 32,205 Edward T. Wright 1,287,250 500 The votes cast for, against or abstain to approve an amendment to the Company's Articles of Incorporation to change the name of the Company to "Middleburg Financial Corporation" were as follows: FOR AGAINST ABSTAIN --- ------- ------- Name Change to Middleburg Financial Corporation 1,232,581 35,849 19,315 Item 5. Other Information None 18 Item 6. Exhibits and Reports on Form 8-K a) Exhibits 99.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 b) Reports on Form 8-K On May 15, 2002, the Company filed a Current Report on Form 8-K dated May 15, 2002 to disclose, under Item 5, the announcement of the change in the name of the Company to "Middleburg Financial Corporation." 19 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDDLEBURG FINANCIAL CORPORATION (Registrant) Date: August 14, 2002 /s/Joseph L. Boling ------------------------------------ Joseph L. Boling Chairman of the Board & CEO Date: August 14, 2002 /s/Alice P. Frazier ------------------------------------ Alice P. Frazier Executive Vice President & CFO (Chief Accounting Officer) 20 EX-99 3 exhibit99-1.txt EXHIBIT 99.1 Exhibit 99.1 STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. ss. 1350 In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the "Form 10-Q") of Middleburg Financial Corporation (the "Company"), we, Joseph L. Boling, Chief Executive Officer of the Company, and Alice P. Frazier, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge: (a) the Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Form 10-Q. By: /s/Joseph L. Boling Date: August 14, 2002 -------------------------------- --------------------- Joseph L. Boling Chief Executive Officer By: /s/Alice P. Frazier Date: August 14, 2002 -------------------------------- --------------------- Alice P. Frazier Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----