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Middleburg Financial Corporation Announces 2011 Third Quarter Earnings

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


MIDDLEBURG, VA -- Oct. 28, 2011 -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.4 million for the quarter ending September 30, 2011 and $3.8 million in net income for the nine-month year to date period.
 
"We are pleased with the momentum in earnings experienced during the first nine months of 2011," commented Gary R. Shook, president and chief executive officer of Middleburg Financial Corporation. "Non Performing Assets as a percentage of Total Assets is stabilizing while Revenue continues to expand with growing Net Interest Income and improved fee income from our mortgage and wealth management subsidiaries. Growth in commercial loans is weak due to soft demand from qualified borrowers while residential loan growth is strong in the face of historically low mortgage rates. Continuation of economic uncertainty and a weak employment picture will do little to improve the sluggishness in loan demand from small businesses. However, we are significantly stepping up calling programs targeted at all existing and potential clients at the Bank and at our other subsidiaries, in an effort to broaden customer outreach."
 
Third Quarter 2011 Highlights:
 
Total Revenue
Total revenue was $17.2 million in the quarter ended September 30, 2011 compared to $15.4 million in the previous quarter and $14.9 million in the quarter ended September 30, 2010, representing an increase of 11.7% compared to the previous quarter and an increase of 16.2% compared to the quarter ended September 30, 2010.
 
Net interest income was $9.6 million during the three months ended September 30, 2011, which was 2.1% higher than the previous quarter and an increase of 21.5% compared to the quarter ended September 30, 2010. The yield on average earning assets was 4.66% for the quarter ended September 30, 2011 compared to 4.86% for the previous quarter and 4.74% for the quarter ended September 30, 2010, representing a decrease of 20 basis points from the previous quarter and a decrease of 8 basis points from the quarter ended September 30, 2010. Average earning assets increased 4.3% compared to the previous quarter. Loan growth and an increase in investment securities drove the increase in earning assets during the third quarter. The decrease in yields on earning assets from the previous quarter reflected a 13 basis point decrease in yields for the loan portfolio and a decrease of 25 basis points in the yield of the securities portfolio.
 
The average cost of interest bearing liabilities was 1.21% for the quarter ended September 30, 2011, compared to 1.26% in the previous quarter, and 1.73% for the quarter ended September 30, 2010, representing a decrease of 5 basis points from the previous quarter and a decrease of 52 basis points from the quarter ended September 30, 2010. Costs for wholesale borrowings increased by 1 basis point during the quarter, while costs for retail deposits decreased by 6 basis points during the same period. The decline in the cost of retail deposits during the quarter ended September 30, 2011, compared to the previous quarter, was driven by a 10 basis point decline in the cost of savings deposits. The cost of time deposits decreased by 9 basis points during the quarter ended September 30, 2011, compared to the previous quarter, as maturing CD's re-priced at lower rates. 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 1.05% for the quarter ended September 30, 2011 compared to 1.10% for the quarter ended June 30, 2011, a decrease of 5 basis points from the previous quarter.
 
The net interest margin for the three months ended September 30, 2011 was 3.64%, compared to 3.78% for the previous quarter, and 3.27% for the quarter ended September 30, 2010, representing a decrease of 14 basis points from the previous quarter and an increase of 37 basis points compared to the quarter ended September 30, 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 $1.6 million or 26.5% when comparing the quarter ended September 30, 2011 to the previous quarter and increased by $723,000 or 10.5% compared to the quarter ended September 30, 2010. The primary reason for the higher non-interest income in the third quarter of 2011 relative to the prior quarter was an increase in gain-on-sale revenues from the Company's mortgage operations.
 
Southern Trust Mortgage originated $180.4 million in mortgage loans during the quarter ended September 30, 2011 compared to $153.0 million originated during the previous quarter, an increase of 17.9%, and $217.6 million originated during the quarter ended September 30, 2010, a decrease of 17.1% when comparing calendar quarters. Gains on mortgage loan sales increased by 39.7% when comparing the quarter ended September 30, 2011 to the previous quarter. Gains on mortgage loan sales increased by 6.9% when comparing the quarter ended September 30, 2011 to the quarter ended September 30, 2010. The increase in gain-on-sale revenue in the third quarter of 2011 was driven by an increase in gain-on-sale margins during the third quarter.
 
The revenues and expenses of Southern Trust Mortgage for the three month period ended September 30, 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 income as "Net (income) / loss attributable to non-controlling interest."
 
Trust and investment advisory service fees earned by Middleburg Trust Company ("MTC") decreased by 2.0% when comparing the quarter ended September 30, 2011 to the previous quarter, and increased by 19.3% compared to the quarter ended September 30, 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 September 30, 2011, a decrease of 2.1% relative to June 30, 2011 and an increase of 20.0% relative to September 30, 2010.
 
Net securities gains were $141,000 during the quarter ended September 30, 2011 compared to net securities gains of $87,000 during the previous quarter and net securities gains of $288,000 during the quarter ended September 30, 2010.
 
Non-Interest Expense
Non-interest expense in the third quarter of 2011 increased by 8.7% compared to the previous quarter and decreased by 2.1% compared to the quarter ended September 30, 2010.
 
Salaries and employee benefit expenses increased by $895,000 or 11.4% when comparing the third 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 $83,000 or 13.7% when comparing the third quarter of 2011 to the previous quarter. Advertising expenses increased by $161,000 or 56.5% during the quarter as a result of expenses for bank-wide campaigns related to CD's and loans and advertising at the mortgage company. FDIC insurance premiums declined by $114,000 or 31.8% compared to the previous quarter. Other operating expenses, which include expenses such as supplies, travel and entertainment expenses, increased by $74,000 or 5.4% when comparing the quarter ended September 30, 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 80.89% for the third quarter of 2011, compared to an efficiency ratio of 82.79% in the quarter ending June 30, 2011.
 
Asset Quality and Provision for Loan Losses
The provision for loan losses in the quarter ended September 30, 2011 was $1,024,000 compared to a provision of $1,087,000 in the previous quarter and a provision of $9,130,000 in the quarter ended September 30, 2010, representing a decrease of 5.8% from the previous quarter and a decrease of 88.8% from the quarter ended September 30, 2010.
 
The Allowance for Loan and Lease Losses (ALLL) at September 30, 2011 was $15.1 million representing 2.24% of total portfolio loans outstanding versus 2.22% at June 30, 2011 and 2.42% of total portfolio loans at September 30, 2010.
 
Loans that were delinquent for more than 90 days and still accruing were $1.6 million as of September 30, 2011 compared to $3.2 million as of June 30, 2011, representing a decrease of 50% during the quarter.
Non-accrual loans were $30.5 million at the end of the third quarter compared to $32.3 million as of June 30, 2011, representing a decrease of 5.6% during the third quarter. Troubled debt restructurings were $404,000 at the end of the third quarter compared to $112,000 as of June 30, 2011. Other Real Estate Owned (OREO) was $6.1 million as of September 30, 2011 compared to $6.3 million as of June 30, 2011, representing a decrease of 3.2% during the third quarter. Non-performing assets were $38.5 million or 3.3% of total assets at September 30, 2011, compared to $41.9 million or 3.7% of total assets as of June 30, 2011.
 
Total Consolidated Assets
Total assets at September 30, 2011 were $1.2 billion, an increase of $8.9 million or 0.8% compared to total assets at June 30, 2011.
 
Total portfolio loans declined by $2.5 million or 0.37% for the third quarter. The securities portfolio increased by $9.9 million or 3.3% in the third quarter relative to the previous quarter. Balances of mortgages held for sale increased by $18.2 million or 37.4% in the third quarter of 2011. Cash balances and deposits at other banks decreased by 29.4% in the third quarter of 2011.
 
Deposits and Other Borrowings
Total deposits were unchanged in the third quarter. Brokered deposits, including CDARS program funds, were $91.9 million at September, 2011, down 1.0% from June 30, 2011. FHLB advances were $84.9 million at September 30, 2011, up $7.0 million from June 30, 2011, or an increase of 8.9%.
 
Equity and Capital
Total shareholders' equity at September 30, 2011 was $105.3 million, compared to shareholders' equity of $102.7 million as of June 30, 2011. Retained earnings at September 30, 2011 were $40.4 million compared to $39.3 million at June 30, 2011. The book value of the Company's common stock at September 30, 2011 was $15.04 per share.
 
The Company's total risk-based capital ratio was 14.1% at September 30, 2011 and December 31, 2010. The Tier 1 risk-based capital ratio increased from 12.8% to 12.9% from December 31, 2010 to September 30, 2011 and the Tier 1 Leverage Ratio remained at 9.0% as of both period ends.
 
Caution about 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 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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