Middleburg Financial Corporation (Nasdaq: MBRG) announced that it expects to record a non-cash impairment charge for the quarter ending December 31, 2007.
At September 30, 2007, the carrying value of Middleburg Bank's 41.8% ownership interest in Southern Trust Mortgage, LLC was approximately $9.7 million. As previously disclosed, the Company engaged an independent firm to assist with valuing Middleburg Bank's investment in Southern Trust Mortgage in order to determine whether or not there has been impairment.
Based upon the Company's impairment testing and the independent valuation of the interest in Southern Trust Mortgage, the Board of Directors of the Company concluded on December 19, 2007 that an impairment charge with respect to the carrying value of Middleburg Bank's interest in Southern Trust Mortgage is required under generally accepted accounting principles. The impairment of value primarily results from earnings declines associated with the slowdown in loan production volume and the increases to loan loss reserves. As a result, for the quarter ending December 31, 2007, the Company expects to record a non- cash impairment charge of approximately $5.0 million for the impairment of the carrying value assigned to Southern Trust Mortgage. The Company will provide additional disclosure in its Annual Report on Form 10-K for the year ended December 31, 2007.
The Company also announced that it expects to guarantee up to $15 million of Southern Trust Mortgage's bank debt. Southern Trust Mortgage's warehouse lender has informed Southern Trust Mortgage that it will not continue to permit Southern Trust Mortgage to carry ineligible loans on its line of credit. The Company expects that its guarantee of those loans will enable Southern Trust Mortgage to continue to carry those loans on its line of credit in order that the loans or the real estate securing the loans can be disposed of in an orderly manner. The exact terms of the guaranty have not been negotiated, nor has the compensation the Company would receive from Southern Trust Mortgage for providing the guaranty.
"While we are positive in our long term view of Southern Trust Mortgage, its management, production channels and long term prospects for providing the Company an attractive revenue stream, from a financial reporting standpoint taking this write down at this juncture was the conservative and prudent action to take," commented Joseph L. Boling, Chairman and CEO of the Company. "Middleburg management's review of Southern Trust Mortgage, the mortgage industry and the analysis of the independent outside consultant of the markets in which Southern Trust Mortgage operates, all lead management to conclude that Southern Trust Mortgage's business should recover as and when mortgage market conditions improve.
Management cannot predict the timing of any improvement, but believes that the current conditions are likely to negatively affect Southern Trust Mortgage's revenue at least through 2008. Southern Trust Mortgage is benefited by its adherence to higher than market credit criteria and its status as a certified government lender. We will continue to work with the Southern Trust team providing assistance where we deem appropriate as the mortgage industry moves through this down cycle." -- Middleburg Financial Corporation
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