10-Q/A

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q/A

(Amendment No. 1)

[X] Quarterly Report under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

[   ] 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 (State or Other Jurisdiction of Incorporation or Organization)	54-1696103 (I.R.S. Employer Identification No.)
111 West Washington Street Middleburg, Virginia (Address of Principal Executive Offices)	20117 (Zip Code)

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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 May 7, 2003

Explanatory Note

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as previously filed, the Registrant disclosed that its net interest margin for that quarter was 5.02%.  The calculation of that percentage inadvertently excluded the average balance of loans held for sale.  The average balance of loans held for sale for that quarter was $12.9 million.  As a result, the correct net interest margin for the first quarter of 2003 was 4.83%.  This amended report reflects solely this correction.

PART I.  FINANCIAL INFORMATION

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 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-K for the year ended December 31, 2002.

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 Standards (“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, 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 No. 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.  

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.  As of March 31, 2003, the Company had no derivative financial instruments outstanding.  

Intangibles and Goodwill

The Company had approximately $6.8 million in intangible assets and goodwill at March 31, 2003.  On April 1, 2002, the Company acquired Gilkison Patterson Investment Advisors, Inc. (“GPIA”), a registered investment advisor.  In connection with this investment, a purchase price valuation (using SFAS Nos. 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, SFAS No. 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.

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 three months ended March 31, 2003 increased 32.8% to $2.0 million or $1.07 per diluted share compared to $1.5 million or $.84 per diluted share for the first three months of 2002.  Annualized returns on average assets and equity for the three months ended March 31, 2003 were 1.7% and 17.8%, respectively, compared to 1.7% and 19.3% for the same period in 2002.

Total assets for the Company increased to $442.4 million at March 31, 2003 compared to $425.0 million at December 31, 2002, representing an increase of $17.5 million or 4.1%.  Total loans at March 31, 2003 were $220.3 million, an increase of $10.5 million from the December 31, 2002 balance of $209.8 million.  The amount of loans refinancing out of the Middleburg Bank (the “Bank”), a wholly owned subsidiary of the Company, has slowed during the first quarter of 2003.  The Company has also developed a strong image advertising campaign that focuses on its commercial lenders.  This campaign has built additional awareness within the market.  Furthermore, the Company hired another commercial lender in January 2003 who has significant experience within the Loudoun County market.  All of these factors have contributed to the strong loan growth during the first quarter of 2003.

The investment portfolio increased 1.7% to $166.5 million at March 31, 2003 compared to $163.7 million at December 31, 2002.  Deposits increased $8.5 million to $337.4 million at March 31, 2003 from $328.9 million at December 31, 2002. Growth in demand deposits of $7.2 million accounts for the majority of the increase during the first three months of 2003.  While the Company has experienced significant growth in the balances within the low cost deposit categories, management believes that a majority of the growth is 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 decreased $1.7 million since December 31, 2002 to $98.1 million.  Securities sold under agreements to repurchase with commercial checking accounts decreased $2.3 million from $8.9 million at December 31, 2002 to $6.6 million at March 31, 2003.  

Shareholders’ equity was $41.8 million at March 31, 2003.  This amount represents an increase of 1.0% from the December 31, 2002 balance of $41.4 million.  The book value per common share was $22.58 at March 31, 2003 and $22.35 at December 31, 2002.

Net Interest Income

Net interest income is one of the Company’s primary sources 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 $4.6 million for the first three months of 2003 compared to $4.2 million for the same period in 2002, an increase of 4.8%.  Average earning assets increased $48.4 million from $335.6 million at March 31, 2002 to $383.9 million at March 31, 2003.  The Company continues to experience a majority of its funding from growth in the low cost deposit categories. Average deposits increased $56.0 million from $275.6 million at March 31, 2002 to $331.6 million at March 31, 2003.  While deposit growth exceeded 20% on a year over year basis, interest expense decreased 10.1% largely due to a lower interest rate environment.  The mix of low cost deposits

versus time deposits remains balanced at approximately 70% in low cost deposits versus 30% in higher cost time deposits.  

The net interest margin was 4.83% for the three months ended March 31, 2003 compared to 5.24% for the same period in 2002.  The decline stems from significant prepayments in both the investment and loan portfolio over the past year which have been reinvested in lower yielding assets.  

Noninterest Income

Noninterest income (excluding net gains (losses) on securities available for sale) increased 100.7% to $2.4 million for the first three months of 2003 compared to $1.2 million for the same period in 2002.  Commissions and fees from trust and investment advisory activities were $846,000 for the three month period ended March 31, 2003 compared to $319,000 for the same period in 2002.  Investment advisory fees provided by GPIA, a wholly owned subsidiary acquired on April 1, 2002, accounted for 44.3% of the $1.2 million increase in non interest income.  GPIA’s fees increased 3.1% during the first quarter of 2002, due to both an increase in the market value of assets managed as well as new account growth.  GPIA’s assets under management at March 31, 2003 exceed $601 million.  Fiduciary fees, provided by Tredegar Trust Company, remained consistent year over year largely due to an increase in assets under administration to $461.8 million at March 31, 2003.  

Fees on loans held for sale is derived from the sale of loans to the secondary market.  The Company does not retain servicing on these loans.  Originations increased 67.0% to $37.6 million for the first quarter of 2003 compared to the first quarter of 2002.  Fees on loans held for sale increased 84.8% to $634,000 at March 31, 2003 from $343,000 at March 31, 2002.  Investment sales fees are generated by sales of equities, bonds and mutual funds.  The Company’s hiring of two additional sales representatives in the fourth quarter of 2002 accounted for most of the increase in related fees.

Finally, the Company continues to enjoy transactional (checking and money market) account growth that exceeds 30% over the prior year.  Service charges on deposit accounts for the first three months of 2003 totaled $593,000 compared to $351,000 for the same period in 2002, an increase of 68.9%. The Company had implemented a daily overdraft charge during the third quarter of 2002.  Fees from this charge account for 3.4% of the total service charges on deposit accounts for the three months ended March 31, 2003.  The Company also began accounting for the fee income on ATM and VISA check card transactions in gross rather than net of expenses; the result is an increase of $90,000 in service charge income.  The related expense is reflected in the non-interest expense section.  

Noninterest Expense

Total noninterest expense includes employee-related costs, occupancy and equipment expense and other overhead.  Total noninterest expense increased 38.1% to $4.3 million for the first three months of 2003 compared to $3.1 million for the same period in 2002.  The addition of GPIA accounts for 33.0% of the total increase in noninterest expense.  GPIA accounts for 41.6% of the increase in salaries and employee benefits expenses.  Commissions (included within the salaries and benefits expense) paid to employees for fee related business, such as mortgage originations and investment sales have increased by $186,000 to $384,000 as a result in the increase in sales volume.  The remaining increase in salaries and employment benefit expense is related to additional staffing to support the growth of the Company.  Net occupancy expense of premises increased $233,000 from $346,000 for the three months ended March 31, 2002 to $579,000 for the three months ended March 31, 2003. Increased expenditures on fixed assets (software, operations center and new branch) during 2002 have increased occupancy and equipment expenses year over year.  There were no non-recurring expenses in the first quarter of 2003.

Allowance for Loan Losses

The allowance for loan losses at March 31, 2003 was $2.4 million compared to $2.1 million at March 31, 2002.  The allowance for loan losses was 1.06% of total loans outstanding at March 31, 2003 and 1.04% of total loans outstanding at March 31, 2002.  The provision for loan losses was unchanged  at $75,000 for each of the three months ended March 31, 2003, and March 31, 2002.  At March 31, 2003, net loan charge offs totaled $25,000, compared to $6,000 for the same date in 2002.  Total loans past due 90 days or more at March 31, 2003 were approximately $148,000.  Non-performing loans increased to .11% of total loans outstanding at March 31, 2003 compared to .09% at March 31, 2002.  Management believes that the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at March 31, 2003.  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 March 31, 2003 and December 31, 2002 was $41.8 million and $41.4 million, respectively.  Total common shares outstanding at March 31, 2003 were 1,852,682.

At March 31, 2003 the Company’s tier 1 and total risk-based capital ratios were 14.9% and 15.7%, respectively, compared to 14.8% and 15.6% at December 31, 2002.  The Company’s leverage ratio was 9.5% at March 31, 2003 compared to 10.6% at December 31, 2002.  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.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.  Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale as well as loans and securities maturing within one year.  As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company also maintains additional sources of liquidity through a variety of borrowing arrangements.  The Bank maintains federal funds lines with large regional and money-center banking institutions.  These available lines total in excess of $5 million, of which none were outstanding at March 31, 2003.  Federal funds purchased during the first quarter of 2003 averaged $539,000 compared to an average of $235,000 during the same period in 2002.  At March 31, 2003 and March 31, 2002, the Bank had $6.6 million and $13.5 million, respectively, of outstanding borrowings pursuant to securities sold under agreement to repurchase transactions (Repo Accounts), with maturities of one day.  The Repo Accounts are long-term commercial checking accounts with average balances that typically exceed $100,000.

The Bank has a credit line in the amount of $56.5 million at the Federal Home Loan Bank of Atlanta.  This line may be utilized for short and/or long-term borrowing.  The Bank has utilized the credit line for overnight funding throughout the first quarter of 2003 with an average balance of $2.3 million.

At March 31, 2003, cash, interest-bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were  48.3% of total deposits and liabilities.

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.

PART II.  OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibits

31.1

Rule 13a-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

32.1

Statement of Chief Executive Officer and Chief Financial Officer
                        Pursuant to 18 U.S.C. Section 1350*

______________

*Previously filed (as Exhibit 99.1).

(b)

Reports on Form 8-K – None.

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 7, 2003

/s/ Alice P. Frazier       

Alice P. Frazier

Executive Vice President & CFO

Exhibit Index

Exhibit No.                                        Document

31.1

Rule 13a-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

32.1

Statement of Chief Executive Officer and Chief Financial Officer
                        Pursuant to 18 U.S.C. Section 1350*

______________

*Previously filed (as Exhibit 99.1).

EX-31

Exhibit 31.1

CERTIFICATION

I, Joseph L. Boling, Chief Executive Officer of Middleburg Financial Corporation, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Middleburg Financial Corporation; and

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.

Date:  August 7, 2003

/s/ Joseph L. Boling        

Joseph L. Boling

Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Alice P. Frazier, Chief Financial Officer of Middleburg Financial Corporation, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Middleburg Financial Corporation; and

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.

Date:  August 7, 2003

/s/ Alice P. Frazier      

Alice P. Frazier

Chief Financial Officer