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Middleburg Financial Corporation Announces 2011 Second Quarter Earnings

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


MIDDLEBURG, VA. – August 2, 2011 Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.2 million for the quarter ending June 30, 2011 representing an increase of 66% over the same quarter in 2010.
 
"The positive trends experienced by the Company in the first quarter of 2011 have continued into the second quarter.  We achieved growth in both loans and deposits, an improved net interest margin, and a decline in our ratio of non performing assets to total assets during the quarter." commented Gary R. Shook, president and chief executive officer.  He continued, "While our year over year quarterly earnings growth of 66% is certainly gratifying, we still face uncertainty on the problem loan front as well as with the regulatory direction of the banking industry in general. We will continue to focus our efforts on increasing profitability and expanding offerings in our existing corporate footprint.  Additionally, we are pleased to have received approval from the regulators for a full service banking office in Richmond, Virginia. The office will be shared with Middleburg Trust Company, a wholly owned subsidiary of the Company located in Richmond."
 
Second Quarter 2011 Highlights:
  • Net income of $1.2 million or $0.17 per diluted share, up 66% compared to second quarter of 2010;
  • Net interest margin of 3.78% compared to margin of 3.67% for second quarter of 2010;
  • Total revenue of $15.4 million, up 6.4% compared to second quarter of 2010;
  • Loan growth of 2.4% during the quarter;
  • Total assets of $1.1 billion, an increase of 5.6% from March 31, 2011;
  • Deposits increased $43.0 million or 5.0% during the quarter;
  • Provision for loan losses for quarter decreased by 15.8% compared to second quarter of 2010; and
  • Capital ratios continue to be strong: Tangible Common Equity Ratio of 8.47%, Total Risk-Based Capital Ratio of 14.2%, Tier I Risk-Based Capital Ratio of 12.9%, and a Tier 1 Leverage Ratio of 9.1% at June 30, 2011.
 
 
Total Revenue
Total revenue was $15.4 million in the quarter ended June 30, 2011 compared to $14.0 million in the previous quarter and $14.5 million in the quarter ended June 30, 2010, representing an increase of 10.0% compared to the previous linked quarter and an increase of 6.4% compared to the calendar quarter ended June 30, 2010.
 
Net interest income was $9.4 million during the three months ended June 30, 2011, which was 4.0% higher than the quarter ended March 31, 2011 and an increase of 11.4% compared to the quarter ended June 30, 2010. The average yield on earning assets was 4.86% for the quarter ended June 30, 2011 compared to 4.91% for the previous quarter and 5.22% for the quarter ended June 30, 2010, representing a decrease of 5 basis points from the previous quarter and a decrease of 36 basis points from the quarter ended June 30, 2010. Average earning assets increased 3.5% compared to the previous quarter. Loan growth and an increase in investment securities drove the increase in earning assets during the second quarter. The decrease in yields on earning assets from the previous quarter reflected a 12 basis point decrease in yields for the loan portfolio partially offset by an increase of 28 basis points in the yield of the securities portfolio.
 
The average cost of interest bearing liabilities was 1.26% for the quarter ended June 30, 2011, compared to 1.30% in the previous quarter, and 1.82% for the quarter ended June 30, 2010, representing a decrease of 4 basis points from the previous quarter and a decrease of 56 basis points from the quarter ended June 30, 2010. Costs for wholesale borrowings decreased by 11 basis points during the quarter, while costs for retail deposits decreased by 3 basis points during the same period. The decline in the cost of retail deposits was driven by a 2 basis point decline in the cost of interest checking deposits. The cost of time deposits decreased by 7 basis points during the 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 1.11% for the quarter ended June 30, 2011 compared to 1.14% for the quarter ended March 31, 2011, a decrease of 3 basis points from the previous quarter
 
The net interest margin for the three months ended June 30, 2011 was 3.78%, compared to 3.80% for the previous quarter, and 3.67% for the quarter ended June 30, 2010, representing a decrease of 2 basis points from the previous quarter and in increase of 11 basis points compared to the quarter ended June 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 $1.1 million or 22.4% when comparing the quarter ended June 30, 2011 to the previous quarter, and declined by $33,000 or 0.5% compared to the calendar quarter ended June 30, 2010. The primary reason for the higher non-interest income in the second 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 $153.0 million in mortgage loans during the quarter ended June 30, 2011 compared to $136.4 million originated during the previous quarter, an increase of 12.2%, and $194.0 million originated during the quarter ended June 30, 2010, a decrease of 21.1% when comparing calendar quarters. Gains on mortgage loan sales increased by 38.2% when comparing the quarter ended June 30, 2011 to the previous quarter. Gains on mortgage loan sales increased by 2.4% when comparing the quarter ended June 30, 2011 to the quarter ended June 30, 2010. The increase in gain-on-sale revenue in the second quarter of 2011 was driven by an increase in margins during the second quarter.
 
The revenues and expenses of Southern Trust Mortgage for the three month period ended June 30, 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 income as "Net (income) / loss attributable to non-controlling interest."
 
Trust and investment advisory service fees earned by Middleburg Trust Company ("MTC") increased by 13.4% when comparing the quarter ended June 30, 2011 to the previous quarter, and increased by 12.3% compared to the quarter ended June 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 $1.4 billion at June 30, 2011, an increase of 16.7% relative to March 31, 2011 and an increase of 27.2% relative to June 30, 2010.
Net securities gains were $87,000 during the quarter ended June 30, 2011 compared to net securities gains of $35,000 during the previous quarter and net securities losses of $37,000 during the quarter ended June 30, 2010.
 
Non-Interest Expense
Non-interest expense in the second quarter of 2011 increased by 5.9% compared to the previous quarter and increased by 5.6% compared to the quarter ended June 30, 2010.
Salaries and employee benefit expenses increased by $497,000 or 6.8% when comparing the second quarter of 2011 to the previous quarter, primarily due to an increase in commission expenses for mortgage loan officers. Expenses related to Other Real Estate Owned (OREO) increased by $262,000 or 76.2% when comparing the second quarter of 2011 to the previous quarter. Advertising expenses increased by $129,000 or 82.6% during the quarter as a result of expenses for bank-wide campaigns related to CD’s and loans and advertising at the mortgage company. Other expenses, which include expenses such as supplies, travel and entertainment expenses fell by $338,000 or 19.8% when comparing the quarter ended June 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 82.79% for the second quarter of 2011, compared to an efficiency ratio of 84.96% in the quarter ending March 31, 2011.
 
Asset Quality and Provision for Loan Losses
The provision for loan losses in the quarter ended June 30, 2011 was $1,087,000 compared to a $454,000 provision in the previous quarter and a provision of $1,291,000 in the quarter ended June 30, 2010, representing an increase of 139.4% from the previous quarter and a decrease of 15.8% from the quarter ended June 30, 2010.
 
The Allowance for Loan and Lease Losses (ALLL) at June 30, 2011 was $15.1 million representing 2.22% of total portfolio loans outstanding versus 2.20% at March 31, 2011 and 1.54% of total portfolio loans at June 30, 2010.
 
Loans that were delinquent for more than 90 days and still accruing were $3.2 million as of June 30, 2011 compared to $6.6 million as of March 31, 2011, representing a decrease of 50.8% during the quarter. The primary reason for the decrease in delinquent loans in the second quarter was because a large credit that was more than 90 days delinquent in the first quarter was moved to non-accrual status in the second quarter.
 
Non-accrual loans were $32.3 million at the end of the second quarter compared to $27.6 million as of March 31, 2011, representing an increase of 16.9% during the second quarter. The primary reason for the increase in non-accrual loans in the second quarter was because a large credit that was more than 90 days delinquent in the first quarter was moved to non-accrual status in the second quarter. Restructured loans were $112,000 at the end of the second quarter compared to $1.2 million as of March 31, 2011, representing a decrease of 91% during the quarter. The primary reason for the decrease in restructured loans in the second quarter was because certain loans that were classified as restructured as of March 31, 2011 were paid off in the second quarter. Other Real Estate Owned (OREO) was $6.2 million as of June 30, 2011 compared to $7.8 million as of March 31, 2011, representing a decrease of 20.5% during the second quarter. Non-performing assets were $41.9 million or 3.6% of total assets at June 30, 2011, compared to $43.3 million or 4.0% of total assets as of March 31, 2011.
 
Total Consolidated Assets
Total assets at June 30, 2011 were $1.1 billion, an increase of $60.4 million or 5.5% compared to total assets at March 31, 2011.
 
Growth in total portfolio loans was $15.8 million or 2.4% for the second quarter. The securities portfolio increased by $35.0 million or 13.5% in the second quarter relative to the previous quarter. Balances of mortgages held for sale increased by $14.3 million or 41.5% in the second quarter of 2011. Cash balances and deposits at other banks decreased by 4.4% in the second quarter of 2011.
 
Deposits and Other Borrowings
Total deposits increased by $43.0 million or 5.0% in the second quarter. Brokered deposits, including CDARS program funds, were $92.8 million at June 30, 2011, unchanged from March 31, 2011. FHLB advances were $77.9 million at June 30, 2011, up $5.0 million from March 31, 2011, or an increase of 6.8%.
 
Equity and Capital
Total shareholders’ equity at June 30, 2011 was $102.7 million, compared to shareholders’ equity of $98.4 million as of March 31, 2011. Retained earnings at June 30, 2011 were $39.3 million compared to $38.5 million at March 31, 2011. The book value of the Company’s common stock at June 30, 2011 was $14.68 per share.
 
The Company’s total risk-based capital ratio increased from 14.1% at December 31, 2010 to 14.2% at June 30, 2011, the Tier 1 risk-based capital ratio increased from 12.8% to 12.9% and the Tier 1 Leverage Ratio increased from 9.0% to 9.1% during the same period.
 
 
 
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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