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Middleburg Financial Corporation Announces 2011 Fourth Quarter Earnings

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


MIDDLEBURG, Va., Jan. 31, 2012 -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.1 million for the quarter ending December 31, 2011 and $5.0 million in net income for the year 2011.
 
"We are certainly gratified by the forward progress of Middleburg Financial Corporation in 2011 on a number of fronts. Our net income of $5.0 million for the year demonstrates the continued positive benefit derived from the actions taken in 2010. But just as important, our ability to grow our capital, open a full service financial services office in Richmond and continue to invest in our future by hiring top quality talent, positions this company very well as we look toward the future," commented Gary R. Shook, president and chief executive officer of Middleburg Financial Corporation. He continued, "while we would have liked to see a net profit from each of our subsidiaries, we did see both the Bank and Middleburg Investment Group, post positive net income. While Southern Trust Mortgage did not post positive net income, substantial investments made during 2011, especially in the contiguous markets of Northern Virginia, position both the Bank and STM to benefit from the synergies that exist between the two entities as we move out of the current economic environment."
 
Fourth Quarter 2011 Highlights:
 
Total Revenue
Total revenue was $17.8 million in the quarter ended December 31, 2011 compared to $17.2 million in the previous quarter and $16.9 million in the quarter ended December 31, 2010, representing an increase of 3.5% and 5.3%, respectively.
 
Net interest income was $10.0 million during the three months ended December 31, 2011, which was 3.1% higher than the previous quarter and an increase of 10.5% compared to the quarter ended December 31, 2010. The yield on average earning assets was 4.55% for the quarter ended December 31, 2011 compared to 4.66% for the previous quarter and 4.78% for the quarter ended December 31, 2010, representing a decrease of 11 basis points from the previous quarter and a decrease of 23 basis points from the quarter ended December 31, 2010. The decrease in the yield on earning assets from the previous quarter reflected a 20 basis point decrease in the yield on the loan portfolio and a decrease of 9 basis points in the yield on the securities portfolio. Average earning assets increased 3.4% compared to the previous quarter. Loan growth and an increase in investment securities drove the increase in earning assets during the fourth quarter of 2011.
 
The average cost of interest bearing liabilities was 1.07% for the quarter ended December 31, 2011, compared to 1.21% in the previous quarter, and 1.41% for the quarter ended December 31, 2010, representing a decrease of 14 basis points from the previous quarter and a decrease of 34 basis points from the quarter ended December 31, 2010. Costs for wholesale borrowings decreased by 10 basis points during the quarter, while costs for retail deposits decreased by 19 basis points during the same period. The decline in the cost of retail deposits during the quarter ended December 31, 2011, compared to the previous quarter, was driven by reductions in interest expenses across the board: cost of time deposits declined 22 basis points, savings account interest expense declined 25 basis points, money market interest expense declined 26 basis points and interest checking costs decreased 18 basis points. Cost of funds is calculated by dividing annualized total interest expense by the sum of average interest bearing liabilities and average demand deposits. Cost of funds was 0.92% for the quarter ended December 31, 2011 compared to 1.06% for the quarter ended September 30, 2011, a decrease of 14 basis points from the previous quarter.
 
The net interest margin for the three months ended December 31, 2011 was 3.67%, compared to 3.64% for the previous quarter, and 3.60% for the quarter ended December 31, 2010, representing an increase of 3 basis points from the previous quarter and an increase of 7 basis points compared to the quarter ended December 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 increased by $296,000 or 3.9% when comparing the quarter ended December 31, 2011 to the previous quarter and decreased by $92,000 or 1.2% compared to the quarter ended December 30, 2010. The primary reasons for the higher non-interest income in the fourth quarter of 2011 relative to the prior quarter were higher gain-on-sale revenues from the Company's mortgage operations, higher commissions on investment sales, and increased gains from sales of securities during the quarter.
 
Southern Trust Mortgage originated $212.2 million in mortgage loans during the quarter ended December 31, 2011 compared to $180.4 million originated during the previous quarter, an increase of 17.6%, and $227.1 million originated during the quarter ended December 31, 2010, a decrease of 6.6% when comparing calendar quarters. Gains on mortgage loan sales increased by 3.7% when comparing the quarter ended December 31, 2011 to the previous quarter. Gains on mortgage loan sales increased by 3.0% when comparing the quarter ended December 31, 2011 to the quarter ended December 31, 2010.
 
The revenues and expenses of Southern Trust Mortgage for the three month and twelve month periods ended December 31, 2010 and December 31, 2011 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") decreased by 2.3% when comparing the quarter ended December 31, 2011 to the previous quarter, and increased by 8.7% compared to the quarter ended December 31, 2010. 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 December 31, 2011, an increase of 1.9% relative to September 30, 2011 and unchanged relative to December 31, 2010.
 
Net securities gains were $197,000 during the quarter ended December 31, 2011 compared to net securities gains of $141,000 during the previous quarter and net securities gains of $109,000 during the quarter ended December 31, 2010.
 
Non-Interest Expense
Non-interest expense in the fourth quarter of 2011 increased by 15.9% compared to the previous quarter and by 15.1% compared to the quarter ended December 31, 2010.
 
Salaries and employee benefit expenses increased by $1.3 million or 14.7% when comparing the fourth quarter of 2011 to the previous quarter, primarily due to an increase in commission and recruiting expenses for mortgage loan officers. Expenses related to Other Real Estate Owned (OREO) increased by $236,000 or 34.3% when comparing the fourth quarter of 2011 to the previous quarter. Advertising expenses increased by $66,000 or 14.8% during the quarter as a result of expenses for bank-wide campaigns related to business loans and advertising at the mortgage company. Other operating expenses, which include expenses such as supplies, travel and entertainment expenses, increased by $383,000 or 27.1% when comparing the quarter ended December 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 90.4% for the fourth quarter of 2011, compared to an efficiency ratio of 80.9% in the quarter ending September 30, 2011 and 81.4% for the fourth quarter of 2010.
 
Asset Quality and Provision for Loan Losses
The provision for loan losses in the quarter ended December 31, 2011 was $319,000 compared to a provision of $1.0 million in the previous quarter and a provision of $655,000 in the quarter ended December 31, 2010, representing a decrease of 68.8% from the previous quarter and a decrease of 51.3% from the quarter ended December 31, 2010.
 
The Allowance for Loan and Lease Losses (ALLL) at December 31, 2011 was $14.6 million representing 2.18% of total portfolio loans outstanding versus 2.24% at September 30, 2011 and 2.27% of total portfolio loans at December 31, 2010.
 
Loans that were delinquent for more than 90 days and still accruing were $2.4 million as of December 31, 2011 compared to $1.6 million as of September 30, 2011, representing an increase of 50.0% during the quarter.
 
Non-accrual loans were $25.4 million at the end of the fourth quarter compared to $30.5 million as of September 30, 2011, representing a decrease of 16.7% during the fourth quarter of 2011. Troubled debt restructurings that were performing as agreed were $3.8 million at the end of the fourth quarter compared to $404,000 as of September 30, 2011. Other Real Estate Owned (OREO) was $8.5 million as of December 31, 2011 compared to $6.1 million as of September 30, 2011, representing an increase of 39.3% during the fourth quarter. Non-performing assets were $40.1 million or 3.3% of total assets at December 31, 2011, compared to $38.5 million or 3.3% of total assets as of September 30, 2011.
 
Total Consolidated Assets
Total assets at December 31, 2011 were $1.2 billion, an increase of $39.4 million or 3.4% compared to total assets at September 30, 2011.
 
Total portfolio loans declined by $4.4 million or 0.65% for the fourth quarter. The securities portfolio increased by $5.2 million or 1.7% in the fourth quarter relative to the previous quarter. Balances of mortgages held for sale increased by $25.6 million or 38.2% in the fourth quarter of 2011. Cash balances and deposits at other banks increased by 24.0% in the fourth quarter of 2011.
 
Deposits and Other Borrowings
Total deposits increased by $20.1 million or 2.2% in the fourth quarter. Brokered deposits, including CDARS program funds, were $96.9 million at December 31, 2011, up 5.4% from September 30, 2011. FHLB advances were $82.9 million at December 31, 2011, up $5.0 million from September 30, 2011, or an increase of 6.4%.
 
Equity and Capital
Total shareholders' equity at December 31, 2011 was $105.9 million, compared to shareholders' equity of $105.3 million as of September 30, 2011. Retained earnings at December 31, 2011 were $41.1 million compared to $40.4 million at September 30, 2011. The book value of the Company's common stock at December 31, 2011 was $15.13 per share.
 
The Company's total risk-based capital ratio increased to 14.7% at December 31, 2011 from 14.1% at December 31, 2010. The Tier 1 risk-based capital ratio increased from 12.8% to 13.5% from December 31, 2010 to December 31, 2011 and the Tier 1 Leverage Ratio decreased from 9.0% to 8.8% from December 31, 2010 to December 31, 2011.
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