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Middleburg Financial Corporation Announces 2011 First Quarter Earnings

Middleburg Financial Corporation, parent company of Middleburg Bank, today reported its financial results for the first quarter of 2011.


MIDDLEBURG, Va., April 27, 2011 -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.2 million for the quarter ending March 31, 2011 representing an increase of 50.7% over the same quarter in 2010.

"First Quarter net income of $1.2 million created a nice foundation for continued earnings growth for Middleburg as we move forward into 2011," commented Gary R. Shook, President and Chief Executive Officer of Middleburg Financial Corporation. "While we were disappointed with the slight increase in non-performing assets, we are pleased with the strong growth in net interest income during the quarter, which helped to offset lower fee income from mortgage operations. Our majority owned mortgage subsidiary, Southern Trust Mortgage capitalized upon recent disruptions in the market place by bringing aboard new loan officers and leadership, most notably in our Northern Virginia and Richmond markets." Mr. Shook went on to say, "Additionally, we are extremely pleased with the marked improvement in our commercial loan and investment management business pipelines These renewed signs of life bode well for the Company over the coming quarters. While we do expect our non-performing assets to remain elevated through 2011, our strong focus on loan work-outs, sales of foreclosed properties, and expense controls along with new revenue growth creates the opportunity for increased profitability as the economy continues to improve."

First Quarter 2011 Highlights

Total Revenue

Total revenue was $14.0 million in the quarter ended March 31, 2011 compared to $17.0 million in the previous quarter and $13.5 million in the quarter ended March 31, 2010, representing a decrease of 17.1% compared to the previous linked quarter and an increase of 3.7% compared to the calendar quarter ended March 31, 2010.

Net interest income was $9.0 million during the three months ended March 31, 2011, which was unchanged compared to the quarter ended December 31, 2010 and an increase of 6.8% compared to the quarter ended March 31, 2010. The average yield on earning assets was 4.91% for the quarter ended March 31, 2011 compared to 4.78% for the previous quarter and 5.58% for the quarter ended March 31, 2010, representing an increase of 13 basis points from the previous quarter and a decrease of 67 basis points from the quarter ended March 31, 2010. Average earning assets declined 3.1% compared to the previous quarter. The primary reason for the decline in earning assets during the first quarter was a reduction in balances of mortgage loans held-for-sale. The increase in yields on earning assets from the previous quarter reflected a decrease of 21 basis points in the yield of the securities portfolio and a 26 basis point increase in yields for the loan portfolio.

The average cost of interest bearing liabilities was 1.30% for the quarter ended March 31, 2011, compared to 1.41% in the previous quarter, and 1.93% for the quarter ended March 31, 2010, representing a decrease of 11 basis points from the previous quarter and a decrease of 63 basis points from the quarter ended March 31, 2010. Costs for wholesale borrowings increased by 2 basis points during the quarter, while costs for retail deposits decreased by 9 basis points during the same period. The decline in the cost of retail deposits was driven by a 6 basis point decline in the cost of interest checking deposits and a 4 basis point decline in the cost of time deposits. Cost of funds is calculated by dividing total interest expense by the sum of average interest bearing liabilities and average demand deposits. Cost of funds was 1.14% for the quarter ended March 31, 2011 compared to 1.21% for the quarter ended December 31, 2010, a decrease of 7 basis points from the previous quarter

The net interest margin for the three months ended March 31, 2011 was 3.80%, compared to 3.60% for the previous quarter, and 3.94% for the quarter ended March 31, 2010, representing an increase of 20 basis points from the previous quarter and a decrease of 14 basis points compared to the quarter ended March 31, 2010.

The Company's net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial services industry to determine how profitably earning assets are funded. The Company's net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Tax equivalent net interest income is calculated by grossing up interest income for the amounts that are non-taxable (i.e., municipal income) then subtracting interest expense. The tax rate utilized is 34%. Details on the calculation of the net interest margin are included in the "Key Statistics" table.

Non-interest income declined by $3.0 million or 37.7% when comparing the quarter ended March 31, 2011 to the previous quarter, and declined by $103,000 or 2.0% compared to the calendar quarter ended March 31, 2010. The primary reason for the lower non-interest income in the first quarter of 2011 was a decline in gain-on-sale revenues from the Company's mortgage operations.

Southern Trust Mortgage originated $136.4 million in mortgage loans during the quarter ended March 31, 2011 compared to $227.7 million originated during the previous quarter, a decrease of 40%, and $149 million originated during the quarter ended March 31, 2010, a decrease of 10% when comparing calendar quarters. Gains on mortgage loan sales decreased by 48.6% when comparing the quarter ended March 31, 2011 to the previous quarter. Gains on mortgage loan sales increased by 8.2% when comparing the quarter ended March 31, 2011 to the quarter ended March 31, 2010. The decline in mortgage originations and the decrease in gain-on-sale revenue in the first quarter of 2011 was driven by an increase in mortgage rates during the first quarter.

The revenues and expenses of Southern Trust Mortgage for the three month period ended March 31, 2011 is reflected in the Company's financial statements on a consolidated basis following generally accepted accounting principles in the United States. The outstanding equity interest not held by the Company is reported on the Company's balance sheet as "Non-controlling interest in consolidated subsidiary" and the earnings or loss attributable to the non-controlling interest is reported on the Company's statement of operations as "Net (income) / loss attributable to non-controlling interest."

Trust and investment advisory service fees earned by Middleburg Trust Company ("MTC") increased by 3.5% when comparing the quarter ended March 31, 2011 to the previous quarter, and increased by 6.4% compared to the quarter ended March 31, 2010. On January 3, 2011, Middleburg Investment Advisers was merged into Middleburg Trust Company and ceased operating as an independent company.

Trust and investment advisory fees are based primarily upon the market value of the accounts under administration. Total consolidated assets under administration by MTC were at $1.2 billion at March 31, 2011, a decrease of 7.6% relative to December 31, 2010 and an increase of 5.9% relative to March 31, 2010.

Net securities gains were $34,000 during the quarter ended March 31. 2011 compared to net securities losses of $20,000 during the quarter ended December 31, 2010. The net securities gains during the quarter ended March 31, 2011 included $1,000 of other than temporary impairment losses related to one trust preferred security identified as impaired under generally accepted accounting principles.

Non-Interest Expense

Non-interest expense in the first quarter of 2011 decreased by 13.5% compared to the previous quarter and increased by 2.5% compared to the quarter ended March 31, 2010.

Salaries and employee benefit expenses decreased by $432,000 or 5.6% when comparing the first quarter of 2011 to the quarter ended December 31, 2010, primarily due to a decline in commission expenses. Expenses related to Other Real Estate Owned (OREO) decreased by $498,000 or 59.1% when comparing the first quarter of 2011 to the previous quarter. Other expenses, which include expenses such as supplies, travel and entertainment expenses fell by $841,000 when comparing the quarter ended March 31, 2011 to the previous quarter.

The Company's efficiency ratio which is represented by the ratio of non-interest expense to the sum of tax equivalent net interest income and non-interest income, excluding securities gains and losses, was 84.96% for the first quarter of 2011, compared to an efficiency ratio of 81.42% in the quarter ending December 31, 2010.

Asset Quality and Provision for Loan Losses

The provision for loan losses in the quarter ended March 31, 2011 was $454,000 compared to a $655,000 provision in the quarter ended December 31, 2010 and a provision of $929,000 in the quarter ended March 31, 2010, representing a decrease of 30.7% from the previous quarter and a decrease of 51.1% from the quarter ended March 31, 2010.

The Allowance for Loan and Lease Losses (ALLL) at March 31, 2011 was $14.6 million representing 2.20% of total portfolio loans outstanding versus 2.27% at December 31, 2010 and 1.50% of total portfolio loans at March 31, 2010.

Loans that were delinquent for more than 90 days and still accruing were $6.6 million as of March 31, 2011 compared to $909,000 as of December 31, 2010. The increase in delinquent loans in the first quarter was primarily due to two credit relationships:

  1. Credit Relationship for $4.5 million - The loan has matured and negotiations are underway with the borrower to resolve the delinquency status. Management believes that the reserve provided for on this loan at March 31, 2011 is adequate.
  2. Credit Relationship for $1.6 million - The loan is secured with commercial real estate which is undergoing a tenant transition and is expected to be brought current in the near future. Management believes that the loan is adequately collateralized and that no additional reserve is needed as of March 31, 2011.

Non-accrual loans were $27.6 million at the end of the first quarter compared to $29.4 million as of December 31, 2010, representing a decrease of 6.1% during the first quarter. Restructured loans were $1.3 million at the end of the first quarter, unchanged from the balance of restructured loans as of December 31, 2010. Other Real Estate Owned (OREO) was $7.8 million as of March 31, 2011 compared to $8.4 million as of December 31, 2010, representing a decrease of 7.1% during the first quarter. Non-performing assets were $43.3 million or 4.0% of total assets at March 31, 2011, compared to $39.9 million or 3.5% of total assets as of December 31, 2010.

Total Consolidated Assets

Total assets at March 31, 2011 were $1.1 billion, a decrease of $20.3 million or 1.8% compared to total assets at December 31, 2010.

Growth in total portfolio loans was $3.2 million or 0.5% for the first quarter. The securities portfolio increased by $6.4 million or 2.5% in the first quarter relative to the previous quarter. Balances of mortgages held for sale declined by $5.0 million or 42.0% in the first quarter of 2011. Cash balances and deposits at other banks decreased by 5.3% in the first quarter of 2011.

Deposits and Other Borrowings

Total deposits decreased by 2.8% in the first quarter. Brokered deposits, including CDARS program funds, were $93.1 million at March 31, 2011, down $29.2 million or 23.8% from December 31, 2010. Brokered deposit balances declined in the first quarter as the Company used proceeds from sales of mortgage loans to pay off maturing deposits. FHLB advances were $72.9 million at March 31, 2011, up $10 million from December 31, 2010, or an increase of 15.9%.

Equity and Capital

Total shareholders' equity at March 31, 2011 was $98.4 million, compared to shareholders' equity of $97.0 million as of December 31, 2010. Retained earnings at March 31, 2011 were $38.5 million compared to $37.6 million at December 31, 2010. The book value of the Company's common stock at March 31, 2011 was $14.18 per share. The Company's total risk-based capital ratio increased from 14.1% at December 31, 2010 to 14.5% at March 31, 2011, the Tier 1 risk-based capital ratio increased from 12.8% to 13.3% and the Tier 1 Leverage Ratio increased from 9.0% to 9.4% during the same period. The increases in the risk-based capital ratios resulted from increased capital levels from December 31, 2010 to March 31, 2011 due to quarterly earnings and a slight decrease in average assets from the quarter ended December 31, 2010 to the quarter ended March 31, 2011.

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 relate to the Company's future operations and are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. 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. For details on factors that could affect expectations, see the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, and other filings with the Securities and Exchange Commission.

About Middleburg Financial Corporation

Middleburg Financial Corporation is headquartered in Middleburg, Virginia and has two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc. Middleburg Bank serves communities in Virginia with financial centers in Ashburn, Gainesville, Leesburg, Marshall, Middleburg, Purcellville, Reston, Warrenton and Williamsburg. Middleburg Investment Group owns Middleburg Trust Company, which is headquartered in Richmond, Virginia with offices in Middleburg, Alexandria and Williamsburg. Middleburg Financial Corporation is also the majority owner of Southern Trust Mortgage, which is based in Virginia Beach and provides mortgages through 17 offices in 11 states.

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