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Middleburg Financial Corporation Announces 2012 First Quarter Earnings

Middleburg Financial Corporation, parent company of Middleburg Bank, today reported its financial results for the first quarter of 2012.


MIDDLEBURG, Va., May 2, 2012  -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.6 million for the first quarter of 2012.
 
"Middleburg Financial Corporation continued to show improved operating results during the first quarter of 2012," commented Gary R. Shook, president and chief executive officer of the Company.  "Moreover, with a 29% increase in net income coupled with a 22% increase in total revenue over the first quarter of 2011, we are poised for continued improvement throughout 2012.  We are especially focused on loan generation and expense control in all areas of the operations.  Loan production at Middleburg Bank and Southern Trust Mortgage continue to show strength, while new business development initiatives are showing strong results at Middleburg Investment Group.  Although our NPA's continued to be elevated, we are beginning to see a leveling out of problem assets."
 
First Quarter 2012 Highlights:

Total Revenue
Total revenue was $15.7 million in the quarter ended March 31, 2012 compared to $17.8 million in the quarter ended December 31, 2011, representing a decrease of 11.8% and $12.9 million in the quarter ended March 31, 2011, representing an increase of 21.7%.    
 
Net interest income was $9.9 million during the three months ended March 31, 2012, which was 0.4% lower than the quarter ended December 31, 2011 and an increase of 9.8% compared to the quarter ended March 31, 2011. The yield on average earning assets was 4.56% for the quarter ended March 31, 2012 compared to 4.55% for the previous quarter and 4.91% for the quarter ended March 31, 2011, representing an increase of 1 basis point from the previous quarter and a decrease of 35 basis points from the quarter ended March 31, 2011.  The decrease in the yield on earning assets from the quarter ended March 31, 2011 reflected a 32 basis point decrease in the yield on the loan portfolio and a decrease of 24 basis points in the yield on the securities portfolio. 
 
The average cost of interest bearing liabilities was 1.06% for the quarter ended March 31, 2012, compared to 1.07% in the previous quarter, and 1.30% for the quarter ended March 31, 2011, representing a decrease of 1 basis point from the previous quarter and a decrease of 24 basis points from the quarter ended March 31, 2011.  Costs for wholesale borrowings decreased by 3 basis points during the quarter, while costs for retail deposits decreased by 2 basis points during the same period.  The decline in the cost of retail deposits during the quarter ended March 31, 2012, compared to the previous quarter, was primarily due to reductions in interest expenses related to time deposits. Lower rates also allowed us to refinance maturing brokered deposits and Federal Home Loan Bank advances during the quarter. 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 0.91% for the quarter ended March 31, 2012 compared to 0.92% for the quarter ended December 31, 2011, a decrease of 1 basis point from the previous quarter.
 
The net interest margin for the three months ended March 31, 2012 was 3.69%, compared to 3.67% for the previous quarter, and 3.80% for the quarter ended March 31, 2011, representing an increase of 2 basis points from the previous quarter and a decrease of 11 basis points compared to the quarter ended March 31, 2011.  
 
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 decreased by $535,000 or 8.4% when comparing the quarter ended March 31, 2012 to the previous quarter and increased by $1.9 million or 49.6% compared to the quarter ended March 31, 2011. The primary reason for the lower non-interest income in the first quarter of 2012 relative to the prior quarter was lower gain-on-sale revenues from the Company's mortgage operations.
 
Southern Trust Mortgage originated $210.8 million in mortgage loans during the quarter ended March 31, 2012 compared to $212.2 million originated during the previous quarter, and $136.5 million originated during the quarter ended March 31, 2011, virtually unchanged compared to the previous quarter and an increase of 54.4% when comparing calendar quarters.  Gains on mortgage loan sales decreased by 12.2% when comparing the quarter ended March 31, 2012 to the previous quarter.  Gains on mortgage loan sales increased by 95.4% when comparing the quarter ended March 31, 2012 to the quarter ended March 31, 2011.  Gains on mortgage loan sales included in the accompanying statement of income are presented net of originator commissions incurred to originate the loans.  
 
The revenues and expenses of Southern Trust Mortgage for the three month periods ended March 31, 2012 and March 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 income as "Net (income) / loss attributable to non-controlling interest."
 
Trust and investment advisory service fees earned by Middleburg Trust Company ("MTC") increased by 1.2% when comparing the quarter ended March 31, 2012 to the previous quarter, and increased by 6.2% compared to the quarter ended March 31, 2011.  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 $1.3 billion at March 31, 2012, an increase of 1.0% relative to December 31, 2011 and an increase of 1.0% relative to March 31, 2011.
 
Mr. Shook commented, "It is especially gratifying to note that the consolidation of all assets under administration for Middleburg Investment Group, shows that entity approaching $1.5 Billion in Assets, a 7% increase over the same period in 2011."
 
Net securities gains were $140,000 during the quarter March 31, 2012 compared to $197,000 during the previous quarter and $35,000 during the quarter ended March 31, 2011.
 
Non-Interest Expense
Non-interest expense in the first quarter of 2012 decreased by 1.0% compared to the previous quarter and increased by 19.2% compared to the quarter ended March 31, 2011.  
 
Salaries and employee benefit expenses decreased by $1.1 million or 13.1% when comparing the first quarter of 2012 to the previous quarter, primarily due to plan termination expenses incurred during the fourth quarter of 2011 in connection with the Company's defined benefit pension plan.  Salaries and employee benefits increased by $1.0 million or 16.5% versus the first quarter of 2011 due to increased compliance and operational salaries at the Company's mortgage subsidiary.  Expenses related to Other Real Estate Owned (OREO) decreased by $639,000 or 69.1% when comparing the first quarter of 2012 to the previous quarter. Advertising expenses decreased by $212,000 or 41.4% during the quarter. 
 
The Company's efficiency ratio was 77.2% for the first quarter of 2012, compared to an efficiency ratio of 81.3% for the first quarter of 2011.  The efficiency ratio is not a measurement under accounting principles generally accepted in the United States.  The Company calculates its efficiency ratio by dividing non interest expense (adjusted for amortization of intangibles, other real estate expenses, and non-recurring one-time charges) by the sum of tax equivalent net interest income and non interest income excluding gains and losses on the investment portfolio.  The tax rate utilized in calculating tax equivalent amounts is 34%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.  Prior to March 31, 2012, the Company did not exclude amortization of intangibles and other real estate expenses from total non-interest expense.  The efficiency ratios for the periods ended December 31, 2011 and prior and included in tables in this release have been restated for consistent presentation.
 
Asset Quality and Provision for Loan Losses
The provision for loan losses in the quarter ended March 31, 2012 was $792,000 compared to a provision of $319,000 in the previous quarter and a provision of $454,000 in the quarter ended March 31, 2011, representing an increase of 148.3% from the previous quarter and an increase of 74.4% from the quarter ended March 31, 2011.
 
The Allowance for Loan and Lease Losses (ALLL) at March 31, 2012 was $14.9 million representing 2.18% of total portfolio loans outstanding at that date versus $14.6 million and 2.18% of outstanding portfolio loans at December 31, 2011.
 
Loans that were delinquent for more than 90 days and still accruing were $167,000 as of March 31, 2012 compared to $1.2 million as of December 31, 2011, representing a decrease of 86.5% during the quarter. 
Non-accrual loans were $22.3 million at the end of the first quarter compared to $25.4 million as of December 31, 2011, representing a decrease of 12.2% during the first quarter of 2012. Troubled debt restructurings that were performing as agreed were $4.1 million at the end of the first quarter compared to $3.9 million as of December 31, 2011. Other Real Estate Owned (OREO) was $12.1 million as of March 31, 2012 compared to $8.5 million as of December 31, 2011, representing an increase of 41.7% during the first quarter. Total non-performing assets were $38.6 million or 3.2% of total assets at March 31, 2012, compared to $39.0 million or 3.3% of total assets as of December 31, 2011. 
 
Total Consolidated Assets
Total assets at March 31, 2012 were $1.2 billion, an increase of 0.9% from December 31, 2011.
 
Total portfolio loans increased by $11.0 million or 1.6% in the first quarter of 2012. The securities portfolio (excluding restricted stock) increased by $15.3 million or 5.0% in the first quarter relative to the previous quarter. Balances of mortgages held for sale decreased by $11.5 million or 12.4% in the first quarter of 2012 compared to the previous quarter.   Cash balances and deposits at other banks decreased by 12.2% in the first quarter of 2012 compared to the previous quarter.  
 
Deposits and Other Borrowings
Total deposits increased by $21.9 million or 2.4% in the first quarter.  Brokered deposits, including CDARS program funds, were $100.8 million at March 31, 2012, up 4.0% from December 31, 2011. FHLB advances were $82.9 million at March 31, 2012, unchanged during the quarter.   
 
Equity and Capital
Total shareholders' equity at March 31, 2012 was $107.9 million, compared to shareholders' equity of $105.9 million as of December 31, 2011. Retained earnings at March 31, 2012 were $42.4 million compared to $41.2 million at December 31, 2011. The book value of the Company's common stock at March 31, 2012 was $15.40 per share.
 
The Company's total risk-based capital ratio increased slightly to 14.8% as of March 31, 2012 from 14.7% at December 31, 2011.  The Tier 1 risk-based capital ratio also increased slightly from 13.5% at December 31, 2011 to 13.6% at March 31, 2012 and the Tier 1 Leverage Ratio increased to 8.9% at March 31, 2012 from 8.8% at December 31, 2011.  
 
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, 2011, and other filings with the Securities and Exchange Commission. 
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