Middleburg Financial Corporation Announces Fourth Quarter 2014 Results

MIDDLEBURG, Va., Jan. 30, 2015 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.63 million, or $0.23 per diluted share, for the fourth quarter of 2014.  Net income was $7.58 million, or $1.06 per diluted share, for the year ended December 31, 2014.

"As we look forward to 2015, we are gratified with the accomplishments of 2014 as compared to the previous year," commented Gary R. Shook, President and CEO of Middleburg Financial Corporation.  "In each area there were significant improvements, including a 23% increase in net income on a year-over-year basis.  We are focused on expense reduction and continuing the momentum of the robust loan growth that occurred in the fourth quarter of 2014."

Fourth Quarter 2014 Highlights:

• Net income of $1.63 million or $0.23 per diluted share for the fourth quarter of 2014, an increase of 45.15% compared to $1.12 million or $0.16 per diluted share for the fourth quarter of 2013.  Net income of $7.58 million or $1.06 per diluted share for 2014, an increase of 23.24% compared to $6.15 million or $0.87 per diluted share for 2013.
• Net interest margin for the fourth quarter of 2014 declined to 3.31% compared to 3.36% for the previous quarter and to 3.43% for the fourth quarter of 2013.  Net interest margin for 2014 and 2013 was 3.40%. 
• Cost of funds was 43 bp for the fourth quarter of 2014, a decrease of 2 bp from the previous quarter and a decrease of 12 bp from the fourth quarter of 2013.  Cost of funds was 48 bp for 2014, a decrease of 12 bp from 2013.
• Net interest income was $9.32 million for the fourth quarter of 2014, a decrease of 2.41% compared to the previous quarter and a decrease of 3.06% compared to the fourth quarter of 2013.  Net interest income was $38.08 million for 2014, an increase of 1.00% from 2013.
• Non-interest expense was $9.42 million for the fourth quarter of 2014, a decrease of 31.22% compared to the fourth quarter of 2013.  Non-interest expense was $41.08 million for 2014, a decrease of 23.98% from 2013.
• Efficiency ratio of 77.53% for the fourth quarter of 2014, compared to an efficiency ratio of 88.32% for the fourth quarter of 2013.  Efficiency ratio of 75.10% in 2014 compared to an efficiency ratio of 82.13% in 2013. 
• Total assets were $1.22 billion as of December 31, 2014, a decrease of 0.40% for the full year.
• Total deposits were $989.12 million as of December 31, 2014, an increase of 0.68% for the full year.
• Loans held-for-investment were $754.85 million as of December 31, 2014, an increase of 3.62% for the full year.
• Nonaccrual loans were $9.94 million on December 31, 2014, a decrease of 49.66% for the full year.
• The ratio of nonperforming assets to total assets was 1.59% at December 31, 2014 compared to 2.33% at December 31, 2013.
• Capital ratios continue to be strong: Tangible Common Equity Ratio of 9.70%, Total Risk-Based Capital Ratio of 16.95%, Tier 1 Risk-Based Capital Ratio of 15.70%, and a Tier 1 Leverage Ratio of 9.90% at December 31, 2014.

TOTAL REVENUE
Total revenue, which is comprised of net interest income (before provision for loan losses) and non-interest income, was $11.67 million for the fourth quarter of 2014, representing a decrease of 1.35% compared to the previous quarter and a decrease of 22.30% compared to the fourth quarter of 2013.  Total revenue for all of 2014 was $52.87 million compared to total revenue for 2013 of $62.24 million, a decline of 15.05% on a year-over-year basis.  The decline in revenue in the fourth quarter of 2014 compared to the previous quarter was driven by lower net interest income as the decrease in loan yields caused further net interest margin compression.  The declines in revenue in 2014 compared to the same periods in 2013 were primarily due to the sale of Southern Trust Mortgage in the second quarter of 2014, which resulted in no revenue from the gain on sale of residential mortgage loans in the third and fourth quarters of 2014.

Net Interest Income
The Company recorded net interest income of $9.32 million for the fourth quarter of 2014, representing a decrease of 2.41% compared to the previous quarter and a decrease of 3.06% compared to the quarter ended December 31, 2013.  The net interest margin declined to 3.31%, compared to 3.36% for the previous quarter and 3.43% for the quarter ended December 31, 2013.

The following factors contributed to net interest margin compression during the fourth quarter of 2014:

• Yields on earning assets declined by 7 bp compared to the previous quarter,  primarily due to a 12 bp decrease in loan yields and a 26 bp decrease in yields on investments.
• Loan yields fell even as loan balances increased during the quarter, reflecting competitive market pressures that resulted in lower yields for loans booked during the period. 
• Yields on investment securities were impacted by an increase in premium amortization stemming from faster prepayments on mortgage backed securities accompanied by a general decline in market yields which resulted in lower book yields for securities that were added to the portfolio during the period.
• Cost of funds declined by 2 bp to 43 bp as the Company grew non-interest bearing deposits and paid off some maturing brokered deposits.

The decline in yields on earning assets resulted in total interest income of $10.49 million for the quarter, lower by 2.81% compared to the previous quarter.   Total interest income for the quarter declined by 5.64% compared to the quarter ended December 31, 2013 as yields on average earning assets fell by 22 bp while the balance of average earning assets declined by 0.59% during the period.

The Company recorded net interest income of $38.08 million for 2014, representing an increase of 1.00% compared to 2013.  The net interest margin for all of 2014 was 3.40%, flat compared to the net interest margin for 2013.

Non-Interest Income
Non-interest income decreased by 56.52% in the fourth quarter of 2014 and by 39.74% for all of 2014 compared to the same periods in 2013.   The primary reason for the decline in non-interest income was the Company's sale of its majority interest in Southern Trust Mortgage during the second quarter of 2014, which resulted in no revenue from the gain on sale of residential mortgage loans in the third and fourth quarters of 2014.  The drop in mortgage revenue was partially offset by fees generated by Middleburg Investment Group ("MIG"), which is the Company's wealth management group.  Fees earned by MIG increased by 10.16% during the fourth quarter of 2014 and by 9.87% for all of 2014 compared to the same periods in 2013.  Fee income is based primarily on the market value of the accounts under administration which were $1.87 billion at December 31, 2014 compared to $1.55 billion at December 31, 2013.

NON-INTEREST EXPENSE
Non-interest expense declined by 31.22% during the fourth quarter of 2014 and by 23.98% for all of 2014, compared to the same periods in 2013.  Principal categories of non-interest expense that changed were the following:

• Salaries and employee benefit expenses declined by 30.48% in the fourth quarter of 2014 and by 26.21% for all of 2014 compared to the same periods in 2013.  The primary reasons for lower salary and employee benefit expenses were the sale of the Company's majority interest in Southern Trust Mortgage in the second quarter of 2014 and staff reductions at the bank.
• Advertising expenses decreased by 114.91% in the fourth quarter of 2014 and by 74.95% for all of 2014 compared to the same periods in 2013, as the Company streamlined its advertising campaigns and product marketing. 
• Occupancy and equipment expense decreased by 28.06% in the fourth quarter of 2014 and by 15.02% for all of 2014 compared to the same periods in 2013.  The primary reason for lower expenses in this category was the sale of Southern Trust Mortgage in the second quarter of 2014.  Expenses attributable to Southern Trust Mortgage were consolidated in the Company's financial statements through the date of the sale.
• Costs related to other real estate owned (OREO) increased by 41.03% in the fourth quarter of 2014 and decreased by 82.41% for all of 2014 compared to the same periods in 2013. Changes in the level of OREO related expenses are determined by the volume of OREO properties recorded during the periods, valuation allowance adjustments related to estimated selling costs of new properties recorded and adjustments based on fair value of existing properties, the condition and maintenance of properties held during the periods and gains and losses incurred on the sale of properties.
• Other expenses declined by 36.22% in the fourth quarter of 2014 and by 17.95% for all of 2014 compared to the same periods in 2013.   The primary reasons for declines in expenses in this category were the sale of the Company's majority interest in Southern Trust Mortgage in the second quarter of 2014.  Significant items in this category include expenses related to deposit processing, fees for advisory services, telephone and professional fees.

ASSET QUALITY
Nonaccrual loans declined during 2014 compared to the prior year and as a result the allowance for loans losses declined to $11.79 million or 1.56% of total loans at December 31, 2014 compared to $13.32 million or 1.83% of total loans at December 31, 2013.  The following factors contributed to the decline in the allowance for loan losses:

• Loans that were delinquent for more than 90 days and still accruing declined to $30,000 as of December 31, 2014 from $808,000 as of December 31, 2013. 
• Nonaccrual loans were $9.94 million as of December 31, 2014, compared to $19.75 million as of December 31, 2013, representing a decrease of 49.66%.
• Troubled debt restructurings that were performing as agreed totaled $4.30 million at December 31, 2014 compared to $4.67 million at December 31, 2013, representing a decrease of 8.11%.  
• Total nonperforming assets were $19.45 million or 1.59% of total assets at December 31, 2014 compared to $28.66 million or 2.33% to total assets at December 31, 2013.

CONSOLIDATED ASSETS
Total consolidated assets at December 31, 2014 were $1.22 billion, a decrease of 0.40% since December 31, 2013.  Changes in major asset categories were as follows:

• Cash balances and deposits at other banks decreased by $12.32 million compared to December 31, 2013, as the Company paid off maturing brokered deposits and Federal Home Loan Bank advances during the third and fourth quarters of 2014.
• The Company deployed excess liquidity into growing its securities portfolio which increased by $21.34 million compared to December 31, 2013.
• Loan balances grew in the fourth quarter of the year and loans held for investment increased by $26.37 million from December 31, 2013.  A reclassification of $8.64 million, previously in mortgage loans held for sale, into a single loan made to Southern Trust Mortgage was necessitated by the Company's sale of its majority interest in Southern Trust Mortgage during the second quarter of 2014.

CONSOLIDATED LIABILITIES
Total consolidated liabilities at December 31, 2014 were $1.10 billion, a decrease of 1.07% compared to December 31, 2013. Total deposits increased by $6.72 million from December 31, 2013 to $989.12 million as of December 31, 2014, while Federal Home Loan Bank borrowings fell by $25 million to $55 million.

SHAREHOLDERS' EQUITY AND CAPITAL
Shareholders' equity attributable to Middleburg Financial Corporation shareholders at December 31, 2014 was $122.03 million, compared to $112.58 million at December 31, 2013.  Retained earnings at December 31, 2014 were $55.85 million compared to $50.69 million at December 31, 2013.  The book value of the Company's common stock at December 31, 2014 was $17.11 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 December 31, 2014:

• Tier 1 Leverage ratio was 9.90%, 5.90% over the regulatory minimum of 4.0%.
• Tier 1 Risk-Based Capital Ratio was 15.70%, 11.70% over the regulatory minimum of 4.0%.
• Total Risk Based Capital Ratio was 16.95%, 8.95% 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.