-----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, OzJ+IaQs5mUbEsP1ay3RazrKXYrsT89PbctiR1+pPlDE1i12LZoKAkzhbfc6OJE+ w/sidYt8j3b0l3OY3n+ofw== 0001002105-02-000150.txt : 20021114 0001002105-02-000150.hdr.sgml : 20021114 20021114172410 ACCESSION NUMBER: 0001002105-02-000150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02826407 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 form10q.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2002 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 September 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- 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 November 1, 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 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Change in Securities and Use of Proceeds 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS MIDDLEBURG FINANCIAL CORPORATION Consolidated Balance Sheets (In Thousands, Except Share Data)
(Unaudited) September 30, December 31, 2002 2001 ------------- ------------ Assets: Cash and due from banks $ 14,876 $ 10,053 Interest-bearing balances in banks 278 200 Temporary investments: Federal funds sold 9,000 925 Other money market investments 1,277 1,797 Securities (fair value: September 30, 2002, $145,743 , December 31, 2001, $124,522 ) 145,452 124,351 Loans held for sale 12,567 6,652 Loans, net of allowances for loan losses of $2,240 in 2002 and $2,060 in 2001 207,278 194,340 Bank premises and equipment, net 11,768 8,069 Other assets 11,704 7,714 --------- --------- Total assets $ 414,200 $ 354,101 ========= ========= Liabilities and Shareholders' Equity Liabilities: Deposits: Non-interest bearing demand deposits 85,784 68,771 Savings and interest-bearing demand deposits 130,752 111,148 Time deposits 99,340 91,812 --------- --------- Total deposits $ 315,876 $ 271,731 Securities sold under agreements to repurchase $ 13,386 $ 12,011 Federal Home Loan Bank Advances - 7,000 Long-term debt 31,610 20,805 Trust preferred debt 10,000 10,000 Other liabilities 3,550 2,216 --------- --------- Total liabilities $ 374,422 $ 323,763 --------- --------- Shareholders' Equity Common stock par value $5.00 per share, authorized 10,000,000 shares; issued and outstanding at September 30, 2002 - 1,846,607 issued and outstanding at December 31, 2001 - 1,752,258 $ 9,263 $ 8,761 Capital surplus 3,433 741 Retained earnings 24,272 21,084 Accumulated other comprehensive income (loss) 2,810 (248) --------- --------- Total shareholders' equity $ 39,778 $ 30,338 --------- --------- Total liabilities and shareholders' equity $ 414,200 $ 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 Nine Months For the Quarter Ended September 30, Ended September 30, 2002 2001 2002 2001 --------- --------- -------- --------- Interest Income Interest and fees on loans $ 12,153 $ 12,197 $ 4,131 $ 4,149 Interest on investment securities Taxable 3 17 1 5 Exempt from federal income taxes 183 226 58 72 Interest on securities available for sale Taxable 3,998 2,157 1,391 784 Exempt from federal income taxes 1,182 1,199 389 407 Dividends 179 208 39 65 Interest on federal funds sold and other 67 169 20 37 --------- -------- --------- --------- Total interest income $ 17,765 $ 16,173 $ 6,029 $ 5,519 --------- -------- --------- --------- Interest Expense Interest on deposits $ 3,188 $ 4,519 $ 1,019 $ 1,479 Interest on long-term debt 1,153 759 173 294 Interest on short-term borrowings 587 798 446 192 --------- -------- --------- --------- Total interest expense $ 4,928 $ 6,076 $ 1,638 $ 1,965 --------- -------- --------- --------- Net interest income $ 12,837 $ 10,097 $ 4,391 $ 3,554 Provision for loan losses 225 225 75 75 --------- -------- --------- --------- Net interest income after provision for loan losses $ 12,612 $ 9,872 $ 4,316 $ 3,479 --------- -------- --------- --------- Other Income Trust and investment advisory fee income $ 1,934 $ 976 $ 796 $ 319 Service charges on deposit accounts 1,344 1,063 522 352 Net gains (losses) on securities available for sale (78) 312 (31) 66 Fees on loans held for sale 1,310 1,028 564 454 Other operating income 472 451 179 129 --------- -------- --------- --------- Total other income $ 4,982 $ 3,830 $ 2,030 $ 1,320 --------- -------- --------- --------- Other Expense Salaries and employee benefits $ 6,618 $ 5,189 $ 2,487 $ 1,761 Net occupancy expense of premises 1,245 872 495 291 Other operating expenses 2,707 2,215 986 823 Advertising 327 224 89 54 --------- -------- --------- --------- Total other expense $ 10,897 $ 8,500 $ 4,057 $ 2,929 --------- -------- --------- --------- Income before income taxes $ 6,697 $ 5,202 $ 2,289 $ 1,870 Income taxes 1,855 1,322 647 481 --------- -------- --------- --------- Net income $ 4,842 $ 3,880 $ 1,642 $ 1,389 ========= ======== ========= ========= Earnings per weighted average share: Earnings per share, basic $ 2.68 $ 2.22 $ 0.89 $ 0.79 Earnings per share, diluted $ 2.61 $ 2.18 $ 0.87 $ 0.77 Dividends per share $ 0.90 $ 0.75 $ 0.30 $ 0.25
See Accompanying Notes to Consolidated Financial Statements. 4 MIDDLEBURG FINANCIAL CORPORATION Consolidated Statement of Changes in Shareholders' Equity For the Nine Months ended September 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 3,880 3,880 - Issuance of common shares in stock option plan (13,011 shares) 65 185 250 Other comprehensive income net of tax: Unrealized gain on available for sale securities (net of tax $452) 873 Reclassification adjustment for gains realized in net income (net of tax $106) (206) ------- Other comprehensive income (net of tax $346) 667 667 667 ------- Total comprehensive income $ 4,547 ======= Cash dividends declared (1,311) (1,311) ------- ------- --------- -------- -------- Balances - September 30, 2001 $ 8,761 $ 741 $ 20,185 $ 1,070 $26,877 ======= ======= ========= ========= ======= Balances - December 31, 2001 $ 8,761 $ 741 $ 21,084 $ (248) $ - $30,338 Net income 4,842 4,842 4,842 Issuance of common stock (100,424 shares) 502 2,692 3,194 Other comprehensive income net of tax: Unrealized gains on available for sale securities (net of tax $1,548) 3,007 Reclassification adjustment for losses realized in net income (net of tax $27) 51 ---------- Other comprehensive income (net of tax $1,575) 3,058 3,058 3,058 ---------- Total comprehensive income $ 7,900 Cash dividends declared (1,654) ========== (1,654) ------- ------- --------- -------- -------- Balances - September 30, 2002 $ 9,263 $ 3,433 $ 24,272 $ 2,810 $39,778 ======= ======= ========= ========= =======
See Accompanying Notes to Consolidated Financial Statements. 5 MIDDLEBURG FINANCIAL CORPORATION Consolidated Statements of Cash Flows (In Thousands)
Unaudited For the Nine Months Ended ---------------------------------- September 30, September 30, 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,842 $ 3,880 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 225 225 Depreciation and amortization 866 564 Net (gains) losses on securities available for sale 78 (312) Net (gains) losses on sales of equipment (3) 3 Discount accretion and premium amortization on securities, net (76) (105) Originations of loans held for sale (85,297) (64,035) Proceeds from sales of loans held for sale 79,382 55,356 Decrease (increase) in other assets 126 (2,136) Increase in other liabilities 51 1,149 ----------- -------- Net cash provided by (used in) operating activities $ 194 $ (5,411) ----------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity, principal paydowns and calls on investment securities $ 896 987 Proceeds from maturity, principal paydowns and calls of securities available for sale 11,147 5,984 Proceeds from sale of securities available for sale 19,572 20,426 Purchase of securities available for sale (48,084) (42,335) Purchase of subsidiary (1,240) - Net (increase) in loans (14,163) (17,459) Proceeds from sale of bank premises and equipment 31 34 Purchases of bank premises and equipment (4,379) (1,552) ------------ --------- Net cash (used in) investing activities $ (36,220) $ (33,915) ------------ --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, and savings accounts $ 29,482 $ 19,506 Net increase in certificates of deposits 14,663 13,794 Proceeds from Federal Home Loan Bank advances 87,000 49,100 Payment on Federal Home Loan Bank advances (94,000) (44,100) Proceeds from long term debt 11,000 - Payments on long-term debt (195) (430) Cash dividends paid (1,538) (1,238) Issuance of common stock 695 250 Increase (decrease) in securities sold under agreement to repurchase 1,375 (557) ----------- --------- Net cash provided by financing activities $ 48,482 $ 36,325 ----------- --------- Increase (decrease) in cash and cash equivalents $ 12,456 $ (3,001) CASH AND CASH EQUIVALENTS Beginning $ 12,975 $ 17,147 =========== ========= Ending $ 25,431 $ 14,146 =========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest paid 5,118 4,596 Income taxes 1,774 1,567 SUPPLEMENTAL DISCLOSURES FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Unrealized gain on securities available for sale 4,633 1,013 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 Nine Months Ended September 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 September 30, 2002 and the results of operations and changes in cash flows for the three and nine months ended September 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 three-month and nine-month periods ended September 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 September 30, 2002 are summarized as follows:
--------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains (Losses) Value --------------------------------------------------------- (In Thousands) Obligations of states and political subdivisions $ 4,592 $ 291 $ - $ 4,883 Mortgaged backed securities 54 - - 54 -------- ---------- ------- --------- $ 4,646 $ 291 $ - $ 4937 ======== ========== ======= =========
7 Securities available for sale as of September 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 26 $ - $ 275 Corporate securities 2,224 77 (35) 2,266 Obligations of states and political subdivisions 31,444 1,721 - 33,165 Mortgaged backed securities 89,216 2,673 (6) 91,883 Other 13,411 177 (371) 13,217 --------- --------- --------- --------- $ 136,544 $ 4,674 $ (412) $ 140,806 ========= ========= ========= =========
Note 3. The consolidated loan portfolio is composed of the following: -------------------------------- September 30, December 31, 2002 2001 ------------------------------- (In Thousands) Commercial, financial and agricultural $ 21,493 $ 22,993 Real estate construction 19,821 24,174 Real estate mortgage 156,537 137,332 Installment loans to individuals 11,667 11,901 Total loans 209,518 196,400 Less: Allowance for loan losses 2,240 2,060 Loans, net $207,278 $194,340 The Company had $633,000 in non-performing assets at September 30, 2002. 8 Note 4. Allowance for Loan Losses The following is a summary of transactions in the allowance for loan losses: ---------------------------------- September 30, December 31, 2002 2001 ---------------------------------- ---------------------------------- (In Thousands) Balance at January 1 $ 2,060 $ 1,804 Provision charged to operating expense 225 300 Recoveries 16 39 Charge offs (61) (83) ------- ------- Balance at the end of the period $ 2,240 $ 2,060 ======= ======= Note 5. Earnings Per Share The following tables show 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.
For the Nine Months Ended September 30, 2002 September 30, 2001 Per share Per share Shares Amount Shares Amount ---------------------------------------------------------- Basic EPS 1,810,048 $ 2.68 1,744,013 $ 2.22 ------- --------- Effect of dilutive securities: stock options 44,787 36,075 --------- --------- Diluted EPS 1,854,835 $ 2.61 1,780,088 $ 2.18 ========= ======= ========= =========
For the Quarter Ended September 30, 2002 September 30, 2001 Per share Per share Shares Amount Shares Amount ---------------------------------------------------------- Basic EPS 1,852,602 $ 0.89 1,752,258 $ 0.79 ========== ========== Effect of dilutive securities: stock options 32,225 44,332 --------- --------- Diluted EPS 1,884,827 $ 0.87 1,796,590 $ 0.77 ==========================================================
9 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 received was 7.0% during the life of the agreement period. Variable interest payments were based on three-month LIBOR. 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 nine-month period ended September 30, 2002, which was charged to income as it accrued. Note 7. Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board issued Statement 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002, with early application encouraged. In June 2002, the Financial Accounting Standards Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31 2002, with early application encouraged. The Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets 10 acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. Paragraph 5 of this Statement, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The transition provisions state that if the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill as of the later of the date of acquisition or the date Statement 142 was first applied (fiscal years beginning after December 15, 2001). Any previously issued interim statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense. The carrying amounts of any recognized intangible assets that meet the recognition criteria of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have been maintained shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill. The adoption of theses standards will not have a material impact on the company's 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 61% of the purchase price to identified intangibles with a weighted-average life of 12.5 years. The remaining 39% of the purchase price has been treated as goodwill. 11 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 in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 (the "Form 10-KSB"). 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. 12 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 in the Company's Form 10-KSB. Intangibles and Goodwill The Company has approximately $7.1 million in intangible assets and goodwill at September 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. 13 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 nine months ended September 30, 2002 increased 24.8% to $4.8 million or $2.60 per diluted share compared to $3.9 million or $2.18 per diluted share for the first nine months of 2001. Annualized returns on average assets and equity for the nine months ended September 30, 2002 were 1.7% and 18.3%, respectively, compared to 1.7% and 17.5% for the same period in 2001. Total assets for the Company increased to $414.2 million at September 30, 2002 compared to $354.1 million at December 31, 2001, representing an increase of $60.1 million or 17.0%. Total loans at September 30, 2002 were $207.3 million, an increase of $13.0 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. However, decreased loan demand and increased loan prepayments as a result of the current business cycle rather than increased competition hampered loan growth in the third quarter of 2002. The investment portfolio increased 17.0% to $145.5 million at September 30, 2002 compared to $124.4 million at December 31, 2001. Deposits increased $44.2 million to $315.9 million at September 30, 2002 from $271.7 million at December 31, 2001. Growth in the demand and low interest bearing transactional accounts of $17.0 million and $19.6 million, respectively, accounts for the majority of the increase during the first nine months of 2002. While the Company has experienced significant growth in the balances within the low cost deposit categories, management believes that the growth is more related to an increase in the number of accounts and relationships with new clients rather than an existing client's decision to shift money from personal investments in stocks. Time deposits increased $7.5 million since December 31, 2001 to $99.3 million. As of September 30, 2002, the Company had approximately $10.0 million of municipal deposits that were expected to be withdrawn within the fourth quarter. 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 September 30, 2002. Shareholders' equity was $39.8 million at September 30, 2002. This amount represents an increase of 31.4% 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 and retained earnings. The company issued 59,874 shares of common stock for the acquisition. The book value per common share was $21.71 at September 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 $12.8 million for the first nine months of 2002 compared to $10.1 million for the same period in 2001. Average earning assets increased $70.3 million from $282.6 million at September 30, 2001 to $352.9 million at September 30, 2002. Accordingly, interest income increased 9.8% compared to the nine month period ended September 30, 2001. The 14 Company continues to experience a majority of its funding growth in its lower-cost deposit products. Average deposits increased $54.7 million from $234.0 million at September 30, 2001 to $289.0 million at September 30, 2002. Increases in lower cost deposit products combined with the lower interest rate environment resulted in a 18.9% decrease in interest expense for the nine months ended September 30, 2002 compared to the same period in 2001. The net interest margin was 5.09% for the nine months ended September 30, 2002 compared to 5.13% for the same period in 2001. The net interest margin for the third quarter of 2002 declined 23 basis points compared to the second quarter of 2002. The decline stems from significant prepayments in both the investment and loan portfolio which are being reinvested in lower yields. During the third quarter of 2002, net interest income increased $101,000 to $4.4 million compared to $4.3 million for the second quarter of 2002. The increase in net interest income is attributed to the growth in average earning assets offset slightly by a decrease in the net interest margin. Noninterest Income Noninterest income (excluding net gains (losses) on securities available for sale) increased 43.8% to $5.1 million for the first nine months of 2002 compared to $3.5 million for the same period in 2001. Noninterest income increased approximately $246,000 during the third quarter of 2002 compared to an increase of $158,000 during the third quarter of 2001. 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 sale increased 27.4% to $1.3 million at September 30, 2002 from $1.0 million at September 30, 2001. Service charges on deposit accounts for the first nine months of 2002 totaled $1.3 million compared to $1.1 million for the same period in 2001, an increase of 26.3%. Commissions and fees from trust and investment advisory activities were $903,000 for the nine-month period ended September 30, 2002 compared to $976,000 for the same period in 2001. GPIA, the Company's newest subsidiary, contributed $1.0 million in gross fees to the fees from trust and investment advisory activities total. Investment advisory fees and trust fees are based primarily upon the market value of the accounts under management or administration. Investment advisory fees are the result of a style of investing that is primarily focused on fixed income products. Trust fees are the result of a style of investing that is primarily focused on equity products. The stock market declines have been the only contributor to the decline in trust fees in 2002. Noninterest Expense Total noninterest expense includes employee-related costs, occupancy and equipment expense and other overhead. Total noninterest expense increased 28.2% to $10.9 million for the first nine months of 2002 compared to $8.5 million for the same period in 2001. During the third quarter of 2002, noninterest expense increased nearly $347,000. The increase during the same period in 2001 totaled approximately $101,000. The addition of Gilkison Patterson Investment Advisors accounts for 31.5% of the total increase in noninterest expense. Salary and benefit expense increased 29.5% from $4.6 million for the nine months ended September 30, 2001 to $5.9 million for the nine months ended September 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 $153,000 to $688,000 as a result in the increase in sales volume. Net occupancy expense of premises increased $373,000 from $872,000 for the nine months ended September 30, 2001 to $1.2 million for the nine months ended September 30, 2002. 15 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. A second Leesburg branch opened on July 29, 2002 and had $1.0 million in deposits at September 30, 2002. Approximately $1.6 million was spent on the land, building and fixtures of this branch. Allowance for Loan Losses The allowance for loan losses at September 30, 2002 was $2.2 million compared to $2.0 million at September 30, 2001. The provision for loan losses was unchanged at $225,000 for the nine months ended September 30, 2002, and September 30, 2001. The allowance for loan losses was 1.07% of total loans outstanding at September 30, 2002 and 1.04% of total loans outstanding at September 30, 2001. At September 30, 2002, net loan charge offs totaled $45,000, compared to a net recovery of $1,000 for the same period in 2001. Total loans past due 90 days or more at September 30, 2002 were approximately $21,000. Non-performing loans increased to .30% of total loans outstanding at September 30, 2002 compared to .05% at September 30, 2001. Management believes that the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at September 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. Capital Resources Shareholders' equity at September 30, 2002 and December 31, 2001 was $39.8 million and $30.3 million, respectively. Total common shares outstanding at September 30, 2002 were 1,852,682. At September 30, 2002 the Company's tier 1 and total risk-based capital ratios were 14.8% and 15.6%, respectively, compared to 16.4% and 17.3% at December 31, 2001. The Company's leverage ratio was 9.8% at September 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 16 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 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 and investment management subsidiaries for their clients are affected by equity and bond price risk and are not considered in the asset/liability management process. 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 100 and 200 basis point (bp) downward shift in interest rates and a 200 basis point upward shift. 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 nine months ended September 30, 2002 as well as the fiscal year of 2001 compared to the 10% Board-approved policy limit. For the Nine Months Ended September 30, 2002 Rate Change Estimated Net Interest Income Sensitivity ----------- ----------------------------------------- High Low Average ---- --- ------- + 200 bp (2.51%) (1.31%) (2.00%) - 200 bp 2.62% 2.62% 2.62% - 100 bp 1.24% 0.81% 1.43% 17 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% Since December 31, 2001, the company's balance sheet has grown by $60.1 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 nine 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 the first nine months of 2002's simulation, the Company could expect an average negative impact to net interest income of $340,000 over the next 12 months if rates rise 200 basis points. If rates were to decline 100 basis points, the Company could expect an average positive impact to net interest income of $245,000 over the next 12 months. Likewise, if rates were to decline 200 basis points, the Company could expect an average positive impact to net interest income of $440,000 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 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. Item 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of 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 Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company's Chief Executive Officer and Chief 18 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 its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date that the Company carried out its evaluation. In September 2002, the Company completed an upgrade conversion of its core operating software that had commenced in early 2002. The core operating software primarily provides customer accounting for deposit and loan relationships. In addition, the system will serve as a record-keeping tool for general ledger and accounts payable. The new system provides enhanced capabilities for the management of the Company's customer relationships. As with any system-related change, internal processes may need to change or adapt to retain efficiency. As part of its evaluation of its disclosure controls and procedures, management continues to evaluate, document and monitor any changes to internal controls as a result of the core operating software conversion. 19 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 None Item 5. Other Information None 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 -- None. 20 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: November 14, 2002 /s/ Joseph L. Boling ------------------------------------ Joseph L. Boling Chairman of the Board & CEO Date: November 14, 2002 /s/ Alice P. Frazier ------------------------------------ Alice P. Frazier Executive Vice President & CFO (Chief Accounting Officer) 21 CERTIFICATIONS I, Joseph L. Boling, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Middleburg Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Joseph L. Boling --------------------- Joseph L. Boling Chief Executive Officer CERTIFICATIONS I, Alice P. Frazier, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Middleburg Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Alice P. Frazier --------------------- Alice P. Frazier Chief Financial Officer EXHIBIT INDEX Exhibits 99.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 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 September 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) or 13(d) 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-----