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Middleburg Financial Corporation Announces 2010 Fourth Quarter Earnings

Middleburg Financial Corporation, parent company of Middleburg Bank, today reported its financial results for the fourth quarter of 2010.


Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.6 million for the quarter ending December 31, 2010 and a net loss of $2.7 million for the full year 2010.

"We are certainly gratified at posting our best quarterly net income for our shareholders since the third quarter of 2007.  In fact, our work in the third quarter of 2010 continues to yield positive returns," commented Gary R. Shook, President and CEO of Middleburg Financial Corporation.  "Our already strong capital ratios have strengthened, management's focus on greater corporate efficiency continues to show bottom line benefits, and sales of foreclosed properties at fair valuations are gaining momentum- trends we expect to see continuing as we enter the first quarter of 2011.  Additionally, the Corporation's 2011 focus on client centric revenue generation in all lines of business should allow for greater market penetration as we begin to move out of the current prolonged negative economic cycle."

Fourth Quarter and Full Year 2010 Highlights:

Net Interest Income and Net Interest Margin

Net interest income was $9.0 million during the three months ended December 31, 2010; an increase of 13.2% compared to the quarter ended September 30, 2010 and an increase of 3.3% compared to the quarter ended December 31, 2009. Average earning assets increased by 2.3% during the quarter ended December 31, 2010. The average yield on earning assets was 4.78% for the quarter ended December 31, 2010 compared to 4.74% for the previous quarter and 6.46% for the quarter ended December 31, 2009, representing an increase of 4 basis points from the previous quarter and a decrease of 168 basis points from the quarter ended December 31, 2009.   The increase in yields on earning assets in the fourth quarter reflected an increase of 15 basis points in the yield of the securities portfolio and a 3 basis point decrease in yields for the loan portfolio.  The yield on average earning assets was 5.20% in 2010 compared to 6.06% in 2009, a decrease of 86 basis points.  The primary reasons for the decline in yields on earning assets during 2010 was loan repricing and prepayments which caused yields on loans to decrease by 111 basis points and yields on securities to decrease by 151 basis points.  

The average cost of interest bearing liabilities was 1.41% for the quarter ended December 31, 2010, compared to 1.73% in the previous quarter, and 2.16% for the quarter ended December 31, 2009, representing a decrease of 32 basis points from the previous quarter and a decrease of 75 basis points from the quarter ended December 31, 2009.  Costs for wholesale borrowings declined by 95 basis points during the quarter, while costs for retail deposits decreased by 30 basis points during the same period.  The decline in the cost of retail deposits was broad-based with a 5 basis point decline in the cost of interest checking deposits, a 1 basis point decline in the cost of savings deposits, and a 58 basis point decline in the cost of time deposits.  The average cost of interest bearing liabilities was 1.71% in 2010 compared to 2.43% in 2009, representing a decrease of 72 basis points.  The primary reasons for the decrease in the cost of interest bearing liabilities during the twelve month period were a 68 basis point decrease in the cost of interest bearing deposits and a 129 basis point decrease in the cost of long term wholesale borrowings.  Cost of funds was 1.21% for the quarter ended December 31, 2010 compared to 1.52% for the quarter ended September 30, 2010, a decrease of 31 basis points from the previous quarter.  Cost of funds was 1.50% for 2010 compared to 2.13% in 2009, representing a decrease of 63 basis points.

The net interest margin for the three months ended December 31, 2010 was 3.60%, compared to 3.27% for the previous quarter, and 3.83% for the quarter ended December 31, 2009, representing an increase of 33 basis points from the previous quarter and a decrease of 23 basis points compared to the quarter ended December 31, 2009.  The net interest margin was 3.61% in 2010 compared to 4.16% in 2009, representing a decrease of 56 basis points.

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.

Asset Quality and Provision for Loan Losses

The provision for loan losses in the quarter ended December 31, 2010 was $655,000 compared to a $967,000 provision in the quarter ended December 31, 2009, representing a decrease of 32.3%.

The Allowance for Loan and Lease Losses (ALLL) at December 31, 2010 was $15.0 million representing 2.27% of total portfolio loans outstanding versus 2.42% at September 30, 2010 and 1.43% of total portfolio loans at December 31, 2009.

Loans that were delinquent for more than 90 days and still accruing were $909,000 as of December 31, 2010 compared to $388,000 as of September 30, 2010, representing an increase 134.3% during the fourth quarter. Non accrual loans were $29.4 million at the end of the fourth quarter compared to $29.9 million at the end of the third quarter, representing a decrease of 1.7% during the fourth quarter.  The balance of restructured loans was $404,000 at the end of the fourth quarter, unchanged from the previous quarter. Other Real Estate Owned (OREO) was $8.4 million as of December 31, 2010 compared to $8.1 million as of September 30, 2010, representing an increase of 3.7% during the fourth quarter.

Non-performing assets were $39.1 million or 3.5% of total assets at December 31, 2010 compared to $38.9 million or 3.5% of total assets as of September 30, 2010. Non-performing assets increased from $18.1 million or 1.9% of total assets at December 31, 2009 to $39.1 million or 3.5% of total assets as of December 31, 2010.  The increase was primarily due to the reclassification of two loan relationships to non-accrual status during the year.  

Non-Interest Income

Non-interest income increased by $1.1 million or 15.6% when comparing the quarter ended December 31, 2010 to the previous quarter, and increased by $5 million or 24.0% compared to the quarter ended December 31, 2009, primarily due to strong growth in revenues from the Company's mortgage operations.  The strong non-interest income, primarily driven by the Company's mortgage operations, has contributed to an increase in total revenues, defined as the sum of net interest income and non-interest income, in each linked quarter of 2010.

Total revenue was $16.9 million in the quarter ended December 31, 2010 compared to $14.9 million in the previous quarter and $14.5 million in the quarter ended December 31, 2009, representing an increase of 14.3% compared to the previous linked quarter and an increase of 17.5% compared to the calendar quarter ended December 31, 2009. This increase reflects the benefits of the Company's diversified business model whereby strong non-interest income is able to supplement net interest income in periods of declining net interest margins.

Southern Trust Mortgage, the Company's majority owned subsidiary, originated $227.7 million in mortgage loans during the quarter ended December 31, 2010 compared to $217.7 million originated during the previous quarter, an increase of 4.6%, and $204.3 million originated during the quarter ended December 31, 2009, an increase of 11.4% when comparing calendar quarters.  Mortgage loans originated for the twelve months ended December 31, 2010 was $782.6 million compared to $990.0 million for the twelve months ended December 31, 2009. Gains on mortgage loan sales increased by 7.6% when comparing the quarter ended December 31, 2010 to the previous quarter.  Gains on mortgage loan sales increased by 68.6% when comparing the quarter ended December 31, 2010 to the quarter ended December 31, 2009. Additionally, fees related to mortgage loan sales increased by 19.5% when comparing the quarter ended December 31, 2010 to the previous quarter, and increased by 77.0% compared to the quarter ended December 31, 2009.  

The revenues and expenses of Southern Trust Mortgage for the three and twelve month periods ended December 31, 2010 are 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") and Middleburg Investment Advisors ("MIA") increased by 3.8% when comparing the quarter ended December 31, 2010 to the previous quarter, and increased by 2.7% compared to the quarter ended December 31, 2009.  On January 3, 2011, MIA became a wholly owned subsidiary of MTC.      

Trust and investment advisory fees are based primarily upon the market value of the accounts under administration.  Total consolidated assets under administration by MTC and MIA were at $1.3 billion at December 31, 2010, an increase of 14.9% relative to December 31, 2009.  MTC's assets under administration were $932.4 million at December 31, 2010 versus $771.5 million at December 31, 2009 representing an increase of 20.9%.  MIA's assets under administration were $314.7 million at December 31, 2010 versus $313.5 million at December 31, 2009 representing an increase of 0.4%.

Net securities losses were $20,000 during the quarter ended December 31, 2010 compared to net securities losses of $438,000 during the quarter ended September 30, 2010.  The net securities losses during the quarter ended December 31, 2010 included $129,000 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 fourth quarter of 2010 decreased by 1.7% compared to the previous quarter.  

Salaries and employee benefit expenses increased by $284,000 when comparing the fourth quarter of 2010 to the quarter ended September 30, 2010, primarily due to expenses related to the defined contribution plan. Expenses related to Other Real Estate Owned (OREO) increased by $176,000 when comparing the fourth quarter of 2010 to the previous quarter. Other expenses, which include expenses such as FDIC insurance premiums, supplies, travel and entertainment expenses fell by $941,000 when comparing the quarter ended December 31, 2010 to the previous quarter. Other expenses in the third quarter of 2010 were higher because of $1.4 million in write-downs in the carrying value of two branch properties.

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 81.42% for the fourth quarter of 2010, compared to an efficiency ratio of 83.48% in the quarter ending December 31, 2009. The efficiency ratio for the full year 2010 was 85.55% and reflects write-downs and restructuring charges in the third quarter of 2010.

Total Consolidated Assets

Total assets at December 31, 2010 were $1.1 billion, an increase of $128.8 million or 13.2% over December 31, 2009.

Growth in total portfolio loans was 0.6% for the fourth quarter. Total portfolio loans increased by $15.0 million or 2.3% in 2010 in a challenging lending environment characterized by weak borrower demand for new loans coupled with increased refinancing of existing credit relationships. The securities portfolio grew by $9.9 million in the fourth quarter, representing an increase of 4.0% compared to the previous quarter. The securities portfolio increased by $79.4 million or 44.3% for the entire year. Balances of mortgages held for resale declined by $18.1 million or 23.4% in the fourth quarter of 2010. Mortgages held for resale increased by $14.3 million or 31.8% for the entire year. Cash balances and deposits at other banks decreased by 6.2% in the fourth quarter of 2010.  

Deposits and Other Borrowings

Total deposits decreased by 0.7% in the fourth quarter.  Deposits increased by $84.7 million or 10.5% for the year.  Brokered deposits, including CDARS program funds, were $122.3 million at December 31, 2010, up $46.1 million or 60.1% from December 31, 2009. FHLB advances were $62.9 million at December 31, 2010, up $27.9 million from December 31, 2009, or an increase of 79.7%.    

Equity

Total shareholders' equity at December 31, 2010 was $100.1 million, compared to shareholders' equity of $103.4 million as of December 31, 2009. Retained earnings at December 31, 2010 were $37.8 million compared to $42.7 million at December 31, 2009. The book value of the Company's common stock at December 31, 2010 was $14.02 per share.  The Company's total risk-based capital ratio increased from 13.54% at September 30, 2010 to 14.10% at December 31, 2010 and the Tier 1 risk-based capital ratio increased from 12.29% to 12.84% during the same period.  The increases in the risk-based capital ratios were due primarily to a net increase in zero percent risk-weighted assets during the fourth quarter of 2010.

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, 2009, 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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