Middleburg Financial Corporation Announces First Quarter 2013 Results

MIDDLEBURG, Va., May 1, 2013 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.3 million or $0.19 per diluted share for the first quarter of 2013.

"The real story for Middleburg in the first quarter relates to the significant drop in non-accrual loans and total non-performing assets," commented Gary R. Shook, president and CEO of Middleburg Financial Corporation.  "Non-accrual loans dropped 10% and total non-performing assets as a percentage of total assets fell to 2.77%.  Both of these metrics are continued evidence of the positive trend that began to take hold in early 2012." Mr. Shook continued, "Another positive for the quarter was the stabilization of the net interest margin.  While the current monetary policy of quantitative easing can contribute to margin compression, our management team is very focused on maintaining our margins with particular emphasis on cost of funds and loan yields."

First Quarter 2013 Highlights:

  • Net income of $1.3 million or $0.19 per diluted share, compared to $1.6 million or $0.23 per diluted share for the first quarter of 2012, a decrease of 19.0% when comparing calendar quarters;
  • Net interest margin of 3.45%, compared to 3.42% for the previous quarter and 3.69% for the first quarter of 2012;
  • Total revenue of $15.3  million, a decrease of 2.5% compared to the first quarter of 2012;
  • Total assets of $1.2 billion, a decrease of 1.9% compared to December 31, 2012;
  • Deposits decreased by $15.8 million or 1.6% since December 31, 2012;
  • Loans held-for-investment increased by $5.1 million or 0.7% since December 31, 2012;
  • Credit quality improved with Non Accrual Loans declining 7.6% since December 31, 2012;
  • The ratio of Non Performing Assets to Total Assets was 2.77% as of March 31, 2013 compared to 3.05% at December 31, 2012 and 3.21% at March 31, 2012;
  • Capital ratios continue to be strong: Tangible Common Equity Ratio of 9.0%, Total Risk-Based Capital Ratio of 15.6%, Tier 1 Risk-Based Capital Ratio of 14.4%, and a Tier 1 Leverage Ratio of 9.1% at March 31, 2013.

Total Revenue

Total revenue which is comprised of Net Interest Income (before a provision for loan losses) and Non Interest Income was $15.3 million in the quarter ended March 31, 2013, representing a decrease of 12.4% compared to the previous quarter and a decrease of $392,000 or 2.5% from the quarter ended March 31, 2012.

The net interest margin for the three months ended March 31, 2013 was 3.45%, compared to 3.42% for the previous quarter, and 3.69% for the quarter ended March 31, 2012, representing an increase of 3 basis points from the previous quarter and a decrease of 24 basis points compared to the quarter ended March 31, 2012.

Net interest income was $9.4 million during the three months ended March 31, 2013, which was 1.2% lower than the quarter ended December 31, 2012 and a decrease of 3.4% compared to the quarter ended March 31, 2012. The yield on average earning assets was 4.08% for the quarter ended March 31, 2013 unchanged from the previous quarter and 4.56% for the quarter ended March 31, 2012, representing no change from the previous quarter and a decrease of 48 basis points from the quarter ended March 31, 2012. Loan yields decreased by 4 basis points while the yield for the securities portfolio increased by 14 basis points from the previous quarter.  

The average annualized cost of interest bearing liabilities was 0.78% for the quarter ended March 31, 2013, compared to 0.82% in the previous quarter, and 1.06% for the quarter ended March 31, 2012, representing a decrease of 4 basis points from the previous quarter and a decrease of 28 basis points from the quarter ended March 31, 2012.  Annualized costs for interest bearing retail deposits decreased by 3 basis points from the previous quarter to 0.69% from 0.72% and decreased by 28 basis points from the same quarter last year.  The decline in the annualized cost of interest bearing retail deposits from both the previous quarter and the same quarter last year was due to reduced interest expenses broadly across deposit categories, including interest checking, savings and time deposits. An annualized cost for wholesale borrowings (excluding brokered deposits) was 1.47%, unchanged compared to the previous quarter and higher by 11 basis points compared to the quarter ended March 31, 2012.  

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 0.66% for the quarter ended March 31, 2013 compared to 0.69% for the quarter ended December 31, 2012, a decrease of 3 basis points.  Cost of funds decreased 25 basis points compared to the quarter ended March 31, 2012.

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 34.0%. Details on the calculation of the net interest margin are included in the "Key Statistics" table.

Non-interest income decreased by $2 million or 25.7% when comparing the quarter ended March 31, 2013 to the previous quarter and decreased by 0.9% compared to the quarter ended March 31, 2012. Gains on mortgage loan sales decreased by 34.3% when comparing the quarter ended March 31, 2013 to the previous quarter and increased by 1.1% when compared to the quarter ended March 31, 2012.  Gains on mortgage loan sales included in the accompanying statements of income are presented net of originator commissions incurred to originate the loans.  

Southern Trust Mortgage closed $191.1 million in mortgage loans during the quarter ended March 31, 2013 compared to $249.2 million closed during the previous quarter, and $210.8 million closed during the quarter ended March 31, 2012, a decrease of 23.3% compared to the previous quarter and a decrease of 9.3% when comparing the same calendar quarters. 

The revenues and expenses of Southern Trust Mortgage 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 sheets as "Non-controlling interest in consolidated subsidiary" and the earnings or loss attributable to the non-controlling interest is reported on the Company's statements of income as "Net (income) / loss attributable to non-controlling interest."

Total revenue generated by our wealth management group, Middleburg Investment Group ("MIG") was $1.0 million for the quarter ended March 31, 2013 unchanged from the previous quarter and $1.1 million in the quarter ended March 31, 2012. Middleburg Investment Group is comprised of Middleburg Trust Company, a wholly owned subsidiary of the Company and Middleburg Investment Services, which is a division of Middleburg Bank.  Fee income is based primarily upon the market value of the accounts under administration. Total consolidated assets under administration by MIG were $1.5 billion at March 31, 2013, an increase of 6% relative to March 31, 2012.

Net securities gains were $47,000 during the quarter ended March 31, 2013 compared to losses of $7,000 during the previous quarter and gains of $140,000 during the quarter ended March 31, 2012.

The following table presents dollar and percentage changes in components of non-interest income for the periods ended March 31, 2013 and March 31, 2012:

MIDDLEBURG FINANCIAL CORPORATION 

Non-Interest Income

(in thousands)






























For the three months ended


Dollar


Percent






3/31/2013


3/31/2012


Change


Change













Service charges on deposit accounts


$         534


$        530


$         4


0.8%

Trust services income



960


921


39


4.2%

Net gains on loans held for sale


3,893


3,852


41


1.1%

Net gains on securities available for sale


47


140


(93)


-66.4%

Net commissions on investment sales


94


147


(53)


-36.1%

Other service charges, commissions and fees


130


150


(20)


-13.3%

Bank-owned life insurance


120


122


(2)


-1.6%

Other operating income



150


122


28


23.1%


    Total non-interest income


$      5,928


$     5,984


$      (56)


-0.9%













Non-Interest Expense

Total non-interest expense in the first quarter of 2013 was 1% higher compared to the previous quarter and increased by $614,000 or 4.6% compared to the quarter ended March 31, 2012.  

Salaries and employee benefit expenses decreased by $479,000 or 5.8% when comparing the first quarter of 2013 to the previous quarter. Salaries and employee benefits increased by $442,000 or 6.0% versus the first quarter of 2012.  The increase in salaries and employee benefit expenses was primarily due to staffing expenses for the financial service center in Richmond which opened in the fourth quarter of 2012.

Expenses related to Other Real Estate Owned ("OREO") increased by $765,000 when comparing the first quarter of 2013 to the previous quarter and increased by $534,000 versus the quarter ended March 31, 2012. The increase in this expense was primarily related to losses incurred on the sale of two large OREO properties during the first quarter.  The liquidation of these properties reduced non-performing assets by approximately $2.0 million and contributed to the decline in the Company's non-performing assets ratio from 3.05% at December 31, 2012 to 2.77% at March 31, 2013.

Advertising expense was lower by 57.8% compared to the previous quarter and decreased by $32,000 or 10.7% from the quarter ended March 31, 2012.  Advertising expenses in the fourth quarter of 2012 were impacted by costs for promotions related to the Richmond financial service center.

Other operating expenses decreased by $429,000 or 15.6% from the quarter ended March 31, 2012 primarily due to lower mortgage banking related expenses.

The following table presents dollar and percentage changes in components of non-interest expense for the periods ended March 31, 2013 and March 31, 2012:

MIDDLEBURG FINANCIAL CORPORATION 

Non-Interest Expense

(in thousands)


















For the three months ended


Dollar


Percent






3/31/2013


3/31/2012


Change


Change













Salaries and employees' benefits


$      7,799


$     7,357


$      442


6.0%

Net occupancy and equipment expense


1,805


1,778


27


1.5%

Advertising




268


300


(32)


-10.7%

Computer operations



461


385


76


19.7%

Other real estate owned



820


286


534


186.7%

Other taxes




192


203


(11)


-5.4%

Federal deposit insurance expense


265


258


7


2.7%

Other operating expenses


2,318


2,747


(429)


-15.6%


    Total non-interest expense


$    13,928


$   13,314


$      614


4.6%

























 

The Company's efficiency ratio was 80.9% for the first quarter of 2013, compared to an efficiency ratio of 77.2% for the first quarter of 2012.  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. 

Asset Quality and Provision for Loan Losses

Non Performing Asset balances have decreased by 11.0% since December 31, 2012 while net charge-offs have declined in three consecutive quarters beginning in the quarter ended September 30, 2012. Substantially all of the net charge-offs during the first quarter were fully reserved at December 31, 2012.  As a result of the drop in non-performing assets and charge-offs, the Company recorded a negative loan loss provision of $188,000 for the quarter ended March 31, 2013 versus $792,000 for the quarter ended March 31, 2012.  The negative provision allowed the reserve ratio to decrease to 1.89% of portfolio loans at March 31, 2013 from 2.02% at December 31, 2012.  After this quarter's reserve decrease, the coverage ratio for non-performing assets (allowance for loan losses balance divided by non-performing assets) increased to 40.2% of nonperforming assets from 37.9% at December 31, 2012. 

The Allowance for Loan and Lease Losses (ALLL) was $13.5 million representing 1.89% of loans held for investment at March 31, 2013 compared to $14.3 million representing 2.02% of loans held for investment at December 31, 2012.  The decrease in the ALLL balance as a percentage of loans held for investment occurred primarily due to an increase in the balance of loans held for investment and lower loss reserves resulting from improved credit quality over three consecutive quarters beginning in the quarter ended September 30, 2012. 

Loans that were delinquent for more than 90 days and still accruing were $812,000 as of March 31, 2013 compared to $1.0 million as of December 31, 2012, and $167,000 as of March 31, 2012, representing a decrease of 22.2% compared to the previous quarter and a 386.2% increase compared to the quarter ended March 31, 2012.

Non-accrual loans were $20.0 million at the end of the first quarter of 2013 compared to $21.7 million as of December 31, 2012 and $22.2 million at March 31, 2012, representing a decrease of 7.6% during the first quarter of 2013 and a decrease of 10.0% since March 31, 2012. Troubled debt restructurings that were performing as agreed were $4.9 million at the end of the first quarter of 2013, compared to $5.1 million for the quarter ended December 31, 2012, representing a decrease of 5.4% during the quarter. Other Real Estate Owned (OREO) was $7.9 million as of March 31, 2013 compared to $9.9 million as of December 31, 2012, representing a decrease of 20.4% during the first quarter of 2013. Total non-performing assets were $33.6 million or 2.77% of total assets at March 31, 2013, compared to $37.8 million or 3.05% of total assets as of December 31, 2012 and $38.6 million or 3.21% of total assets as of March 31, 2012.

The net loan charge-offs during the first quarter of 2013 were $615,000 compared to net charge-offs of $911,000 for the previous quarter and $554,000 in net loan charge-offs for the quarter ended March 31, 2012.

Total Consolidated Assets

Total assets at March 31, 2013 were $1.2 billion, lower by $23.0 million or 1.9% from December 31, 2012 and an increase of 0.9% from March 31, 2012.

Total loans held for investment increased by $5.1 million or 0.7% in the first quarter of 2013 from the end of the fourth quarter of 2012.  Loans held for investment increased by $32.2 million or 4.7% from March 31, 2012.  The securities portfolio (excluding restricted stock) increased by $12.2 million or 3.8% in the first quarter of 2013 relative to the previous quarter and increased by $8.1 million or 2.5% from March 31, 2012. Balances of mortgages held for sale decreased by $33.4 million or 40.7% at March 31, 2013 compared to the previous quarter end balance.  Cash balances and deposits at other banks decreased by 7.3% at the end of the first quarter of 2013 compared to the previous quarter end and increased by $5.4 million or 12.0% from the balances at March 31, 2012.   

Deposits and Other Borrowings

Total deposits decreased by $15.8 million or 1.6% from December 31, 2012 to March 31, 2013 and increased by $14.3 million or 1.5% from March 31, 2012.  Brokered deposits, including CDARS program funds, were $64.2 million at March 31, 2013, down 1.4% from December 31, 2012. FHLB advances were $85.0 million at March 31, 2013, an increase of $7.1 million compared to December 31, 2012.   

Equity and Capital

Shareholders' equity attributable to Middleburg Financial Corporation shareholders at March 31, 2013 was $114.8 million, compared to $113.9 million as of December 31, 2012 and $107.9 million at March 31, 2012.  Retained earnings at March 31, 2013 were $47.2 million compared to $46.2 million at December 31, 2012 and $42.4 million at March 31, 2012. The book value of the Company's common stock at March 31, 2013 was $16.28 per share versus $16.15 per share at December 31, 2012.

The Company's total risk-based capital ratio increased to 15.6% as of March 31, 2013 from 15.4% at December 31, 2012.  The Tier 1 risk-based capital ratio also increased from 14.1% at December 31, 2012 to 14.4% at March 31, 2013.  The Tier 1 Leverage Ratio remained unchanged from December 31, 2012 to March 31, 2013 at 9.1%.   

As depicted in the following table, the Company's risk-based capital ratios remain well above regulatory minimum capital ratios:










MIDDLEBURG FINANCIAL CORPORATION



Risk-Based Capital Ratios



March 31, 2013












(1)




MFC




Regulatory




Excess




Minimum


MFC


over




Requirement


Ratios


Minimum











Tier 1 Leverage Ratio

4.0%


9.1%


5.1%











Tier 1 Risk-Based Capital Ratio

4.0%


14.4%


10.4%











Total Risk-Based Capital Ratio

8.0%


15.6%


7.6%











(1) Under the regulatory framework for prompt corrective action.










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, 2012, 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,  Richmond, 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 offices in Virginia, Maryland, Georgia, North Carolina, and South Carolina.

MIDDLEBURG FINANCIAL CORPORATION 

Consolidated Balance Sheets

(In thousands, except for share and per share data)




















(Unaudited)


(Audited)









March 31,


December 31,









2013


2012

ASSETS










Cash and due from banks

$

6,697

$

7,139


Interest-bearing deposits with other institutions


43,753


47,276


     Total cash and cash equivalents


50,450


54,415


Securities available for sale


331,650


319,457


Loans held for sale


48,721


82,114


Restricted securities, at cost


7,005


6,990


Loans receivable, net of allowance for loan losses of $13,508 at






  March 31, 2013 and $14,311 at December 31, 2012


701,078


695,166


Premises and equipment, net


20,418


20,587


Goodwill and identified intangibles


5,975


6,017


Other real estate owned, net of valuation allowance of $348 at 






  March 31, 2013, and $1,707 at December 31, 2012


7,904


9,929


Prepaid federal deposit insurance


2,768


3,015


Accrued interest receivable and other assets


37,787


39,091













    TOTAL ASSETS




$

1,213,756

$

1,236,781












LIABILITIES










Deposits:






      Non-interest-bearing demand deposits

$

163,611

$

167,137


      Savings and interest-bearing demand deposits


515,082


522,740


      Time deposits


287,383


292,023



   Total deposits


966,076


981,900


Securities sold under agreements to repurchase


31,880


33,975


Short-term borrowings


519


11,873


FHLB borrowings


85,000


77,912


Subordinated notes


5,155


5,155


Accrued interest payable and other liabilities


7,426


8,844


Commitments and contingent liabilities


-


-



    TOTAL LIABILITIES




1,096,056


1,119,659












SHAREHOLDERS' EQUITY








Common stock ($2.50 par value; 20,000,000 shares authorized, 






7,051,587 and 7,052,554 issued and outstanding at 






March 31, 2013, and December 31, 2012, respectively)


17,365


17,357


Capital surplus


43,946


43,869


Retained earnings


47,209


46,235


Accumulated other comprehensive income


6,260


6,467


    Total Middleburg Financial Corporation shareholders' equity


114,780


113,928


Non-controlling interest in consolidated subsidiary


2,920


3,194













 

    TOTAL SHAREHOLDERS' EQUITY


117,700


117,122
























    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

1,213,756

$

1,236,781