"All things considered, we are happy 2009 is behind us and that we turned in a profit of approximately $3.5 million," commented Joseph L. Boling, chairman and CEO of Middleburg Financial Corporation. He continued, "The regulatory, political and economic climates made for a challenging year on all fronts but nevertheless the company continued to show improvements in its performance. We were especially gratified with the strong support from the capital markets in 2009 with our raising $24.3 million in new capital and our subsequent redemption of the TARP Capital Purchase Program (CPP) preferred stock and the return of those funds to the Government. The CPP dividends previously paid to the United States Treasury will now inure to the benefit of our common shareholders."
Net Interest Income and Net Interest Margin
Net interest income increased $4.46 million in 2009, up 13.4% from 2008, largely driven by growth in earning assets and reduced funding costs. Interest income and fees from loans and investments increased 1.47% during 2009. We reduced our costs for deposits as well as for borrowings in 2009. The average cost of interest bearing liabilities in 2009 decreased to 2.43%, down 71 bp relative to 2008. As a result, interest expense decreased $3.6 million in 2009 or 16% from the year ending December 31, 2008 to the year ending December 31. 2009.
The net interest margin for the twelve months ended December 31, 2009 was 4.17%, up 17 bp from 2008.
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.
Asset Quality and Provision for Loan Losses
Provisions for loan losses were $4.5 million for the year ended December 31, 2009, compared to $5.3 million for the same period in 2008, a decline of 15%. We aggressively recognized losses on non-performing loans and expenses related to other-real-estate owned (OREO) increased by $1.95 million or 217% during 2009. Given continued uncertainty in the economy, and the current nationwide credit crisis, the Company deemed it prudent to maintain its ratio of allowance for loan losses to total loans at 1.37%.
Non performing assets decreased from $18.8 million or 1.9% of total assets at September 30, 2009 to $16.0 million or 1.6% of total assets as of December 31, 2009. Given the current economic environment, it is anticipated there could be an increase in non performing loans, but we do not believe that the increase will be as dramatic as that experienced in 2009.
Non-interest income increased $4.0 million or 23.7% when comparing the year ended December 31, 2009 to the same period in 2008, largely driven by increases in gain on sale of mortgage loans originated by Southern Trust Mortgage, our majority owned subsidiary, and gains on sales of securities. Southern Trust Mortgageclosed $990 million in mortgage loans in 2009, up 48% from 2008. Gain on sale of mortgage loans increased $3.2 million or 37% from the year ending December 31, 2008 to the year ending December 31, 2009. Net gains on securities sold were $998,000 in 2009, versus a net loss of $913,000 in 2008, an increase of $1.9 million from the year prior.
The revenues and expenses of Southern Trust Mortgage for each of the three month periods ended March 31, June 30, September 30 and December 31, 2009 are reflected in the Company's financial statements on a consolidated basis, with the outstanding interest not held by the Company reported as "Net Income(Loss) Attributable to Non-controlling Interest."
Trust and investment advisory fees earned by Middleburg Trust Company ("MTC") and Middleburg Investment Advisors ("MIA") was relatively unchanged when comparing the quarter ended December 31, 2009 to the quarter ended September 30, 2009 and decreased 13.7% or $526,000 when comparing the year ended December 31, 2009 to December 31, 2008. Trust and investment advisory fees are based primarily upon the market value of the accounts under administration/management. Total consolidated assets under administration by MTC and MIA were at $1.085 billion at December 31, 2009, an increase of $191.3 million or 21.4% from the $893.7 million under administration at December 31, 2008. The Bank holds a large portion of its investment portfolio in custody with MTC. MTC's assets under administration were $771.5 million at December 31, 2009 and $485 million at December 31, 2008. MIA's assets under administration were $313.5 million at December 31, 2009 and $408.6 million at December 31, 2008.
Non-interest expense in 2009 increased $6.26 million, up 14.7% from 2008., driven primarily by commissions related to the increased production at Southern Trust Mortgage, increased FDIC insurance expense and increased legal and OREO expenses.
Salaries and employee benefit expenses increased $3.3 million during 2009, primarily due to higher commissions related to Southern Trust Mortgage. Other operating expenses increased by $4.2 million in 2009, due to increases in various other expense categories including FDIC special assessments, legal fees, and expenses associated with other real estate owned.
Total Consolidated Assets
Total assets at December 31, 2009 were $976 million, down $9 million or 0.9% relative to one year prior.
Total loans, net of allowance for loan losses, decreased by $27 million, or 4.1% when comparing December 31, 2008 to December 31, 2009. Slower loan demand was the primary reason for this decrease as loan runoff was comparable with previous years. Mortgages held for resale increased $5 million or 12.5% from December 31, 2008 to December 31, 2009.
In 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. As a result, cash and due from banks on December 31, 2009 increased $17 million from the year prior. The investment portfolio was at $179 million at December 31, 2009, an increase of $11 million compared to September 30, 2009 and a decline of $2 million from a year prior.
Deposits and Other Borrowings
Total deposits were at $805.6 million at December 31, 2009, up $60.8 million or 8.17% from the year prior, primarily due to an increase in savings and interest bearing demand deposits. Time deposits, including brokered deposits decreased $31 million or 9.2% when comparing December 31, 2008 to December 31, 2009. The Company has been paying off FHLB advances and brokered deposits as they mature. Brokered deposits were $64 million at December 31, 2009, down $43 million or 40% from the year prior. Long term borrowings were at $35 million at December 31, 2009, down $49 million or 58% from the year prior.
Shareholders' equity at December 31, 2009 was $103 million, an increase of $27 million or 35% from the year prior. The book value of the Company at December 31, 2009 was $14.52 per common share. New capital of $24.3 million was raised in 2009, and in December of 2009, the proceeds were used to redeem the TARP preferred stock issued to the Treasury in full. Subsequent to its redemption of the TARP preferred stock, the Company had the right to notify the Treasury within 15 days from the date of redemption whether it would make an offer to repurchase the warrant or allow the Treasury to liquidate the warrant in the open market. The Company determined that it was in its best interests not to make an offer to repurchase the warrant. As of December 31, 2009, the Tier 1 risk-based capital ratio was 13.88%, the total risk-based capital ratio was 15.07% and the leverage ratio was 10.42%
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 is 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.
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.