Middleburg Financial Corporation Announces First Quarter 2014 Results

MIDDLEBURG, Va., April 30, 2014 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.98 million for the quarter ended March 31, 2014, or $0.28 per diluted share.

"Middleburg Financial Corporation had a strong first quarter with positive momentum in earnings, which were driven by expansion in the net interest margin as we grew loans, strong fee income from wealth management which offset a decline in mortgage revenue and good expense control across the bank and its subsidiaries" commented Gary R. Shook, president and CEO of the Company. "Asset quality continues to improve steadily and in the first quarter we saw a decline in non-accrual loans and an improvement in delinquencies. Additionally, on March 26, we announced that Middleburg Bank, our wholly owned banking subsidiary had agreed to sell its majority ownership in Southern Trust Mortgage. The sale is expected to close in the first half of 2014, following the receipt of regulatory approval."

First Quarter 2014 Highlights:

• Net income of $1.98 million or $0.28 per diluted share for the quarter ended March 31, 2014, an increase of 48.98% compared to net income of $1.33 million or $0.19 per diluted share for the first quarter of 2013;
• Net interest margin expanded to 3.54%, compared to 3.43% for the fourth quarter of 2013 and 3.45% for the quarter ended March 31, 2013;
• Total revenue increased 1.49% to $15.59 million compared to the quarter ended March 31, 2013;
• Non-interest expenses declined by 12.87% to $12.14 million compared to the quarter ended March 31, 2013;
• The efficiency ratio declined to 75.19% compared to 88.32% in the previous quarter and 80.96% for the quarter ended March 31, 2013;
• Total assets were $1.21 billion as of quarter end, a decrease of 1.58% since December 31, 2013;
• Total deposits were $961.25 million as of quarter end, a decrease of 2.15% since December 31, 2013;
• Loans held-for-investment increased by $2.98 million to $731.46 million as of quarter end, an increase of 0.41% since December 31, 2013;
• Credit quality improved with nonaccrual loans declining by 24.69% since December 31, 2013;
• Nonperforming assets to total assets was 2.04% at March 31, 2014 compared to 2.33% at December 31, 2013;
• Capital ratios continue to be strong: Tangible Common Equity Ratio of 9.19%, Total Risk-Based Capital Ratio of 15.93%, Tier 1 Risk-Based Capital Ratio of 14.67%, and a Tier 1 Leverage Ratio of 9.61% at March 31, 2014.
• In light of the declining profitability of its majority-owned mortgage subsidiary resulting from reduced loan volumes and increased compliance costs from the implementation of rules related to the Dodd-Frank Wall Street Reform Act, on March 26, 2014, the Company announced an agreement to sell its membership interests in Southern Trust Mortgage to a consortium of banks and the President of Southern Trust Mortgage. The sale is expected to close in the second quarter of 2014, and is subject to regulatory approval.

Total Revenue
Total revenue, which is comprised of net interest income (before the provision for loan losses) and non-interest income, was $15.59 million for the quarter ended March 31, 2014, representing an increase of 1.49% compared to the quarter ended March 31, 2013.

The increase in revenue in the first quarter was driven by an expanding net interest margin.  The net interest margin for the quarter ended March 31, 2014 was 3.54% compared to 3.43% for the quarter ended December 31, 2013 and 3.45% for the quarter ended March 31, 2013.  Margin expansion during the quarter was principally due to the following:

• Loan growth accompanied by sales of lower yielding securities.
• Yields on earning assets increased by 10 basis points compared to the previous quarter primarily due to an increase in loan yields and higher yields on securities as premium amortization slowed and we sold some lower yielding investments.
• Cost of funds declined by 3 basis points compared to the previous quarter as we paid off maturing wholesale borrowings, reduced interest costs for NOW, money market and savings accounts and added non-interest bearing demand deposits.

Non-Interest Income
Non-interest income was lower by 0.79% compared to the quarter ended March 31, 2013 as our mortgage revenue declined in response to lower origination volumes, stemming from higher mortgage rates and severe weather during the first quarter which slowed borrower activity and impacted loan closings.  The drop in mortgage revenue was partially offset by higher fees from our wealth management subsidiary.  A more detailed discussion of non-interest income follows:

• Gains on mortgage loan sales decreased by 24.43% compared to the quarter ended March 31, 2013. We originated $109.36 million in mortgage loans during the quarter ended March 31, 2014 compared to $138.49 million during the previous quarter, and $191.10 million during the quarter ended March 31, 2013, a decrease of 21.03% compared to the previous quarter and a decrease of 42.77% compared to the quarter ended March 31, 2013.
• Total revenue generated by our wealth management group, Middleburg Investment Group ("MIG") was $1.19 million for the quarter ended March 31, 2014, an increase of 12.71% from the quarter ended March 31, 2013. Fee income is based primarily upon the market value of the accounts under administration which were $1.56 billion at March 31, 2014 compared to $1.55 billion at March 31, 2013.
• Other operating income was $941,000 for the quarter ended March 31, 2014, compared to $263,000 for the quarter ended March 31, 2013. Most of the other operating income during the first quarter of 2014 was related to the recovery of expenses related to one loan workout charged-off in a prior period.

Non-Interest Expense
Non-interest expense declined as actions to cut costs during 2013 took effect during the first quarter of 2014.  Non-interest expense fell by 12.87% compared to the quarter ended March 31, 2013.  Principal categories of non-interest expense that improved as a result of management's cost cutting initiatives were the following:

• Since March 31, 2013, management has reduced staffing levels at the bank and the mortgage company by 55 full-time equivalent employees. These changes were across the board and several senior management positions were eliminated as part of the reduction in force. Salaries and employee benefit expenses decreased by 9.82% compared to the quarter ended March 31, 2013. The ratio of salaries and benefits expense to total revenue was 45.11% compared to 50.76% for the quarter ended March 31, 2013.
• We streamlined campaign and product promotions, which reduced advertising expenses significantly. Advertising expenses for the quarter declined by 39.18% compared to the quarter ended March 31, 2013.
• Costs related to other real estate owned (OREO) declined during the quarter as our OREO balances fell and ongoing expenses to maintain the properties fell. Expenses related to OREO decreased by 79.63% compared to the quarter ended March 31, 2013. For the first quarter of 2014, there was one property transferred to OREO for $1.04 million compared to five properties transferred in the first quarter of 2013 for $1.85 million.
• Other operating expenses have declined 14.62% compared to the quarter ended March 31, 2013 primarily due to lower mortgage banking related expenses.

As operating expenses declined and revenue increased, the Company's efficiency ratio improved to 75.19% for the quarter ended March 31, 2014 compared to 88.32% for the previous quarter and 80.96% for the quarter ended March 31, 2013.

Asset Quality and Provision for Loan Losses
Nonperforming asset balances fell as nonaccrual loans and delinquencies declined.  Net loan charge-offs during the first quarter of $980,000 exceeded the provision for loan losses of $888,000, which resulted in a slightly lower allowance for loan losses (ALLL) at the end of the quarter.  The ALLL was $13.23 million representing 1.81% of total loans at March 31, 2014 compared to $13.32 million or 1.83% of total loans at the end of the previous quarter and $13.51 million or 1.89% of total loans at March 31, 2013.

• Total nonperforming assets were $24.71 million or 2.04% of total assets at March 31, 2014 compared to $28.66 million or 2.33% to total assets at December 31, 2013 and $33.59 million or 2.77% of total assets at March 31, 2013.
• Loans that were delinquent for more than 90 days and still accruing declined to $503,000 as of March 31, 2014 from $808,000 as of December 31, 2013 and $812,000 as of March 31, 2013.
• Nonaccrual loans declined to $14.88 million as of March 31, 2014 from $19.75 million as of December 31, 2013 and $20.02 million as of March 31, 2013, representing a decrease of 24.69% and 25.69%, respectively.
• Troubled debt restructurings that were performing as agreed were $4.84 million at March 31, 2014 compared to $4.67 million at December 31, 2013 and $4.85 million at March 31, 2013, representing an increase of 3.51% and a decrease of .33%, respectively.

Consolidated Assets
Total consolidated assets were relatively unchanged when compared to December 31, 2013.  Total consolidated assets at March 31, 2014 were $1.21 billion, a decrease of 1.58% compared to December 31, 2013.  Changes in major asset categories were as follows:

• Cash balances and deposits at other banks decreased by $14.28 million compared to December 31, 2013.
• Securities available for sale decreased by $2.90 million compared to December 31, 2013.
• Loans held for investment increased by $2.98 million during the first quarter compared December 31, 2013.
• Balances of mortgages held for sale decreased by $1.40 million compared to December 31, 2013.
• Other real estate owned (OREO) increased $1.07 million during the first quarter.

Consolidated Liabilities
Total consolidated liabilities at March 31, 2014 were $1.09 billion, a decrease of 2.01% compared to December 31, 2013.  The most significant change in liabilities was the change in total deposits.  Total deposits decreased by $21.15 million from December 31, 2013 to $961.25 million as of quarter end March 31, 2014, primarily due to seasonal activity and maturing wholesale deposits that we elected not to renew.

Shareholders' Equity and Capital
Shareholders' equity attributable to Middleburg Financial Corporation shareholders at March 31, 2014 was $115.84 million, compared to $112.58 million at December 31, 2013.  Retained earnings at March 31, 2014 were $52.17 million compared to $50.69 million at December 31, 2013. The book value of the Company's common stock at March 31, 2014 was $16.37 per share versus $15.90 per share at December 31, 2013.

The Company's capital ratios remain well above regulatory minimum capital ratios as of March 31, 2014:

• Tier 1 Leverage ratio was 9.61%, 5.61% over the regulatory minimum of 4.0%
• Tier 1 Risk-Based Capital Ratio was 14.67%, 10.67% over the regulatory minimum of 4.0%
• Total Risk Based Capital Ratio was 15.93%, 7.93% over the regulatory minimum of 8.0%.

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, 2013, 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.

SOURCE Middleburg Financial Corporation