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Middleburg Financial Corporation Announces 2Q 2009 Results

Middleburg Financial Corporation (Nasdaq: MBRG), parent company of Middleburg Bank reported its financial results for the second quarter of 2009.


MIDDLEBURG, Va., July 23, 2009 -- Middleburg Financial Corporation (the "Company"), (Nasdaq: MBRG), parent company of Middleburg Bank (the "Bank"), today reported its financial results for the second quarter of 2009.


Second Quarter 2009 Highlights


For the Quarter:


For the Year:


"We continue to see improved year over year and year to date performance in the Company," commented Joseph L. Boling, Chairman and Chief Executive Officer of Middleburg Financial Corporation. "While certainly the financials are not up to our traditional levels, we are pleased with the 2(nd) quarter, especially given the impact of the FDIC special assessment as well as the charge-offs related to problem assets. We do feel, however, that there are signs that the growth of problem assets will peak over the next several quarters, which we view as a positive development. Additionally, Southern Trust Mortgage provided the Company with a strong second quarter to compliment the first quarter as we continue using our Capital Purchase Program funds from the United States Treasury to fund these homeowner mortgages."


Net Interest Income and Net Interest Margin


Interest and fees on loans decreased $80,000 to $12.9 million during the three months ended June 30, 2009, compared to $13.0 million during the three months ended March 31, 2009. The Company received $22.0 million in Capital Purchase Program funds from the U.S. Treasury at the end of January and subsequently used the proceeds, along with additional cash raised through deposit growth, to fund lending activities at its mortgage banking subsidiary, Southern Trust Mortgage, LLC. For the quarter ended June 30, 2009, tax equivalent yield on loans was 7.09% or 25 basis points lower than for the quarter ended March 31, 2009.


Interest income from the investment portfolio, which includes securities available for sale, federal funds sold and other interest bearing deposits, decreased $51,000 from the three months ended March 31, 2009 to the three months ended June 30, 2009. The average balance of federal funds sold increased to $31.7 million from the March 31, 2009 quarter end average balance of $21.2 million. During the three months ended June 30, 2009, the Company increased its cash liquidity position by investing the proceeds of maturities and principal payments of securities into federal funds sold, as a precaution against the economic uncertainties and the resulting volatility that occurred in the securities markets. Accordingly, the yields on these investments were lower than the Company could attain in other less liquid investments. For the quarter ended June 30, 2009, the tax equivalent yield on the securities portfolio increased 27 basis points when compared to the quarter ended March 31, 2009, to 5.71%.


Total interest expense for the three months ended June 30, 2009 decreased $357,000 when compared to the three months ended March 31, 2009. Demand among local competitors for deposits remained high thereby keeping the costs of deposits elevated within certain categories. The Company benefited from the decrease in interest expense related to Tredegar Institutional Select, an interest bearing product that integrates the use of cash within client accounts at Middleburg Trust Company, which has a variable rate of interest. Interest expense on short-term borrowings decreased $86,000 as the result of decreases in interest rates. The average cost of interest bearing liabilities decreased 23 basis points to 2.50%, during the quarter ended June 30, 2009, when compared to the prior quarter. The average balance of interest bearing liabilities increased $7.8 million during the quarter ended June 30, 2009.


The net interest margin decreased from 4.45% for the quarter ended March 31, 2009 to 4.36% for the quarter ended June 30, 2009. The decrease in the net interest margin was mostly attributable to the decrease in interest and fees on loans.


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 footnote (3) following the "Key Statistics" table below.


Asset Quality and Provision for Loan Losses


Provisions for loan losses were $1.6 million for the three months ended June 30, 2009, compared to $1.0 million for the quarter ended March 31, 2009. Although the Company experienced a decrease in portfolio loans during 2009, it has recognized certain loans for charge-off and given the level of problem loans, continued uncertainty in the economy, and the current nationwide credit crisis, the Company deemed it prudent to increase its allowance for loan losses at Middleburg Bank to 1.34%. Southern Trust Mortgage recognized net charge-offs of $1.2 million related to several problem loans in its loan portfolio. The Company had specific allowances for loan losses related to these loans. As a result these charge-offs and the corresponding decrease in the loan portfolio, the Company decreased the allowance at Southern Trust Mortgage to 26.6% from 48.7% at March 31, 2009.


Non-performing assets, including loans past due more that 90 days, increased from $17.3 million or 1.7% of total assets at March 31, 2009 to $20.4 million or 1.96% of total assets at June 30, 2009. This change was mostly a result of the increase in non-accrual loans held by Middleburg Bank. During the second quarter of 2009, non-accrual loans at Middleburg Bank increased by $6.0 million to $12.8 million. Non-accrual loans at Southern Trust Mortgage decreased by $1.9 million during the quarter ended June 30, 2009. Total other real estate owned decreased by $900,000 to $7.5 million at June 30, 2009. There were no loans past due more than 90 days at June 30, 2009. Given the current economic environment, it is anticipated there could be an increase in non-performing loans.


Loans greater than 90 days past due were $31,000 at March 31, 2009 compared to none at June 30, 2009. The Company realized $1.9 million in net charge-offs for the quarter ended June 30, 2009 versus $1.4 million for the prior quarter. Additional past dues and credit losses are expected due to the current economic forecast.


The following table reflects asset quality and provision for loan loss details for the Bank and Southern Trust Mortgage:

 

                                   2009                        2008
                        ------------------------------------------------------
    (Dollars in         June 30, March 31, December 31, September 30, June 30,
     thousands)         -------- --------- ------------ ------------- --------
    Loans 90+ days
     past due
    Middleburg Bank          $--       $31         $540        $2,857   $1,444
    Southern Trust
     Mortgage                 --        --          577         1,461    1,294

    Non-accrual loans
    Middleburg Bank      $12,783    $6,738       $5,550        $2,966   $3,391
    Southern Trust
     Mortgage                202     2,150        1,340         3,725    3,476

    Other Real Estate
     Owned and Other
     Repossessed Assets
    Middleburg Bank       $4,215    $5,001       $4,586        $4,753   $3,277
    Southern Trust
     Mortgage              3,240     3,366        3,026         2,114    1,634

    Allowance for loan
     losses
    Middleburg Bank       $8,757    $7,922       $8,056        $7,884   $7,889
    Southern Trust
     Mortgage                673     1,785        1,989         1,997    1,863

 

Non-Interest Income


Including net gains on sales of investment securities, consolidated non-interest income increased by $1.1 million or 22.9% when comparing the quarter ended June 30, 2009 to the quarter ended March 31, 2009. Gains on mortgages held for resale increased $586,000 to $3.4 million for the quarter ended June 30, 2009, when compared to the prior quarter.


Trust and investment advisory fees earned by Middleburg Trust Company ("MTC") and Middleburg Investment Advisors ("MIA") decreased $5,000 when comparing the quarter ended June 30, 2009 to the quarter ended March 31, 2009. Trust and investment advisory fees are based primarily upon the market value of the accounts under administration/management. For the quarter ended June 30, 2009, MTC's consolidated fees increased 9.0% or $37,000 when compared to the quarter ended March 31, 2009. MIA's consolidated fees decreased by 10.7% or $42,000 when comparing the three months ended March 31, 2009 to the three months ended June 30, 2009. Total consolidated assets under administration by MTC and MIA were at $1.0 billion at June 30, 2009, an increase of $228.7 million or 28.2% from the $812.2 million under administration at March 31, 2009. The increase is the result of growth in new accounts at MTC. The Bank holds a large portion of its investment portfolio in custody with MTC and is included in assets under administration.


Service charges on deposits increased by $35,000 or 7.7% from the quarter ended March 31, 2009 to the quarter ended June 30, 2009. ATM and VISA check card fees increased $27,000 from the previous quarter. Commissions on investment sales increased $87,000 from the quarter ended March 31, 2009 to the quarter ended June 30, 2009.


Gains of the sale of loans were $3.4 million for the quarter ended June 30, 2009 and $2.8 million for the prior quarter. Southern Trust Mortgage closed $316.9 million in loans for the three months ended June 30, 2009 and $270.8 million in loans for the three months ended March 31, 2009.


Net gains on the sale of securities were $661,000 for the quarter ended June 30, 2009. The Company sold $29.2 million in securities available for sale during the three months ended June 30, 2009 in an effort to shorten the weighted average life of its investment portfolio and improve its liquidity.


Equity earnings in unconsolidated subsidiaries represent Southern Trust Mortgage's equity earnings from its unconsolidated mortgage affiliates. For the quarter ended June 30, 2009, the Company recognized $92,000 on these investments, compared to $111,000 for the previous quarter.


Income earned from the Bank's $11.3 million investment in Bank Owned Life Insurance (BOLI) was $130,000 and $127,000 for the quarters ended June 30, 2009 and March 31, 2009, respectively. The Company purchased $10.8 million in BOLI in 2004 and $485,000 in BOLI in 2007 to help subsidize increasing employee benefit costs and expenses related to the restructure of its supplemental retirement plans.


Other service charges, including fees from loans, mortgages held for sale and other service fees, increased $76,000 or 20.3% when comparing the three months ended June 30, 2009 to the three months ended March 31, 2009.


Non-Interest Expense


Non-interest expense increased $1.2 million or 10.0% from the quarter ended March 31, 2009 to the quarter ended June 30, 2009. The increase was primarily due to increases in salary and employee benefits, FDIC assessments for deposit insurance and other real estate owned expenses.


Salaries and employee benefit expenses increased $410,000 or 5.6% when comparing the quarter ended March 31, 2009 to the quarter ended June 30, 2009. The increase, when compared to the prior quarter, is impacted by increased commissions paid to mortgage originators for increased production.


Net occupancy expense increased $182,000 when comparing the quarter ended March 31, 2009 to the quarter ended June 30, 2009. As growth efforts continue to progress, the Company anticipates higher levels of occupancy expense to be incurred.


Other taxes of $145,000 were relatively unchanged for the quarter ended June 30, 2009, when compared to the previous quarter. Other taxes includes franchise taxes paid by Middleburg Bank and Middleburg Trust Company and is based on total capital of each company, respectively, net of certain adjustments.


Computer operations increased $59,000 from the quarter ended March 31, 2009 to the quarter ended June 30, 2009.


Advertising and marketing expense increased $67,000 when comparing the quarter ended March 31, 2009 to the quarter ended June 30, 2009. The Company increased the amount of advertising during the three months ended June 30, 2009, compared to the three months ended March 31, 2009.


Other operating expenses increased $469,000 or 18.1% when comparing the quarter ended March 31, 2009 to the quarter ended June 30, 2009. The increase is the result of expenses related to FDIC insurance, the FDIC Special Assessment and other real estate owned.


Total Consolidated Assets


The Company reached a milestone this quarter as consolidated total assets exceeded $1.0 billion at June 30, 2009. This is an increase of $46.3 million from $998.3 million at March 31, 2009. The largest increases were in cash and cash equivalents and federal funds sold and were funded primarily by deposit growth. Cash and cash equivalents increased $18.7 million as the Company focused on improving liquidity in an effort to provide a funding source for Southern Trust Mortgage's anticipated loan demand. Federal funds sold increased $30.1 million at June 30, 2009 compared to March 31, 2009.


The investment portfolio decreased $3.5 million to $162.4 million at June 30, 2009 compared to $165.9 million at March 31, 2009. The Company continued its effort to shorten the weighted average life of its investment portfolio and improve its liquidity through sales and purchases of securities. At June 30, 2009, the tax equivalent yield on the investment portfolio was 5.71%, compared to 5.44% at March 30, 2009.


Loans, net of allowance for loan losses, decreased by $7.7 million as a result of scheduled principal payments, when comparing March 31, 2009 to June 30, 2009. Considering the current interest rate and competitive market environment, the Company has been diligent about maintaining its credit quality and thereby cautious about the growth it has permitted in the loan portfolio.


Mortgages held for resale increased 12.1% or $7.9 million to $74.3 million when comparing the June 30, 2009 balance to that at March 31, 2009. Production during the second quarter of 2009 was $316.9 million and was higher than each of the quarterly results reported for 2009 or 2008. An agreement between Middleburg Bank and Southern Trust Mortgage provides for participation of mortgages held for resale as a funding source. Southern Trust Mortgage also has a long standing line of credit with a regional bank that is primarily used to fund its mortgages held for sale.


Premises and equipment, net of accumulated depreciation, decreased 0.9% to $22.7 million at June 30, 2009 from $22.9 million at March 31, 2009.


Deposits and Other Borrowings


Total deposits, which include brokered deposits, increased $36.9 million or 4.8% to $810.1 million at June 30, 2009 from $773.2 million at March 31, 2009. Brokered deposits were $107.5 million and $111.4 million at June 30, 2009 and March 31, 2009, respectively. Non-interest bearing demand deposits increased $11.3 million to $124.5 million at June 30, 2009. Interest checking increased $11.8 million, from $239.5 million at March 31, 2009. Money market and savings deposits increased to $96.3 million at June 30, 2009 from $89.6 million at March 31, 2009. Time deposits, excluding brokered certificates of deposit, increased $11.0 million to $230.6 million at June 30, 2009.


Short term borrowings, which include Southern Trust Mortgage's line of credit with a regional bank, were $21.3 million at June 30, 2009 and $15.3 million at March 31, 2009.


Equity


Total shareholders' equity, which includes non-controlling interest in accordance with SFAS No. 160, at June 30, 2009 and March 31, 2009, was $103.5 million and $100.7 million, respectively. Middleburg Financial Corporation's shareholders' equity at June 30, 2009 and March 31, 2009 was $100.5 million and $98.1 million, respectively. The book value available to common shareholders at June 30, 2009 was $15.80 per common share. Total common shares outstanding were 4,993,245 at June 30, 2009.

 

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, 2008, and other filings with the Securities and Exchange Commission.


Middleburg Financial Corporation is headquartered in Middleburg, Virginia and has two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc.Middleburg Bank serves Loudoun, Fairfax, and Fauquier Counties in Virginia with eight financial service centers. Middleburg Investment Group owns Middleburg Trust Company and Middleburg Investment Advisors, Inc.Middleburg Trust Company are headquartered in Richmond, Virginia with a branch office in Middleburg and Williamsburg. Middleburg Investment Advisors, Inc. is an SEC registered investment advisor located in Alexandria, Virginia.

 
 

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