Middleburg Financial Corporation Announces Third Quarter 2012 Results

MIDDLEBURG, Va., Oct. 31, 2012 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.7 million or $0.24 per share for the third quarter of 2012.

"We are pleased with the contributions received from our subsidiary businesses, Southern Trust Mortgage and Middleburg Investment Group. Both entities as well as Middleburg Bank saw improvements in most performance metrics in the Third Quarter," commented Gary R. Shook, president and CEO of Middleburg Financial Corporation. He continued, "Additionally, we continue to find buyers for our other real estate owned properties which bodes well for future earnings. While we will continue to see bumps up and down in our non-performing assets, a consistent trend of improvement has certainly emerged over the past several quarters."

Third Quarter 2012 Highlights:

• Net income of $1.7 million or $0.24 per diluted share, compared to $1.4 million or $0.20 per diluted share for the third quarter of 2011;
• Net interest margin of 3.28%, compared to 3.57% for the previous quarter and 3.64% for the third quarter of 2011;
• Gain-on-sale fee income from mortgages increased 60.2% compared to the third quarter of 2011;
• Total revenue of $17.5  million, an increase of 14.3%  over the third quarter of 2011;
• Total assets of $1.2 billion, an increase of 3.6% over December 31, 2011;
• Deposits increased by $54.6 million or 5.9% since December 31, 2011;
• Loans held-for-investment increased by $21.0 million or 3.1% since December 31, 2011;
• Provision for loan losses decreased by 38.0% compared to third quarter of 2011; and
• Capital ratios continue to be strong: Tangible Common Equity Ratio of 8.7%, Total Risk-Based Capital Ratio of 15.2%, Tier 1 Risk-Based Capital Ratio of 14.0%, and a Tier 1 Leverage Ratio of 8.9% at September 30, 2012.

Total Revenue

Total revenue was $17.5 million in the quarter ended September 30, 2012 representing an increase of $706,000 or 4.2% over the previous quarter and an increase of $2.2 million or 14.3% over the quarter ended September 30, 2011. Although, the lower yield environment during the quarter led to a decline in net interest income, the lower net interest income was more than offset by an increase in non-interest income, primarily stemming from our mortgage banking operations. This balance between spread and fee income enables the Company to grow revenues in challenging low yield environments.

The net interest margin for the three months ended September 30, 2012 was 3.28%, compared to 3.57% for the previous quarter, and 3.64% for the quarter ended September 30, 2011, representing a decrease of 29 basis points from the previous quarter and a decrease of 36 basis points compared to the quarter ended September 30, 2011. The drop in net interest margin for the quarter ended September 30, 2012 compared to the previous quarter was principally due to a reduction in net interest income coupled with an increase in average earning assets during the quarter.

Net interest income was $9.2 million during the three months ended September 30, 2012, which was 4.8% lower than the quarter ended June 30, 2012 and a decrease of 2.9% compared to the quarter ended September 30, 2011. The yield on average earning assets was 4.03% for the quarter ended September 30, 2012 compared to 4.40% for the previous quarter and 4.66% for the quarter ended September 30, 2011, representing a decrease of 37 basis points from the previous quarter and a decrease of 63 basis points from the quarter ended September 30, 2011. Loan yields decreased by 35 basis points while the yield for the securities portfolio decreased by 24 basis points from the previous quarter. Yields on earning assets were also pressured due to higher average balances of cash deposits at the Federal Reserve.

The decline in loan yields was primarily related to the following factors:

• A one time reversal of accrued interest income during the quarter for certain loans that were placed on non accrual. We estimate the reduction in annualized total yield on loans for the quarter due to this one time reversal to be 9.5 basis points.
• Balances of lower yielding held-for-sale mortgage loans increased more than did balances of commercial loans which tend to have higher yields. This lowered the overall weighted average loan yield for the quarter.
• Accelerated premium amortizations for purchased loans due to faster prepayments during the quarter.

The decline in yield for securities was related to the following factors:

• Lower yields on very short duration investments that were purchased during the quarter
• Accelerated amortizations of premiums on mortgage and asset backed securities during the quarter due to faster prepayments.
• We also sold some securities during the quarter in a continuing effort to rebalance the investment portfolio. We recognized gains on the sale of the securities but since the proceeds were not immediately reinvested back into the portfolio, the net effect was a decline in yield for the securities portfolio.

We also took actions during the third quarter to reduce our cost of funds. Rates paid on interest bearing deposits were reduced.  Furthermore, we paid off brokered time deposits that either matured or were callable during the third quarter. While those actions reduced interest expense, most of the maturities and calls of brokered time deposits occurred in the last month of the quarter. Since the rate reductions were not in effect for the entire quarter, the reduction in interest expense was somewhat muted.

Specifically, the average annualized cost of interest bearing liabilities was 0.93% for the quarter ended September 30, 2012, compared to 1.00% in the previous quarter, and 1.21% for the quarter ended September 30, 2011, representing a decrease of 7 basis points from the previous quarter and a decrease of 28 basis points from the quarter ended September 30, 2011.  Annualized costs for interest bearing retail deposits decreased by 9 basis points from the previous quarter to 0.84% from 0.93% and decreased by 34 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 primarily due to a decrease of 8 and 36 basis points respectively in the annualized cost of interest bearing non maturity deposits.  The annualized cost of interest bearing time deposits was essentially flat from the previous quarter but decreased 20 basis points from the quarter ended September 30, 2011 to 1.70% from 1.90%. Annualized costs for wholesale borrowings (excluding brokered deposits) increased by 8 basis points to 1.52% from 1.44% from both the previous quarter and from the quarter ended September 30, 2011. The average rate on wholesale borrowings (excluding brokered deposits) increased during the quarter, even as the balances of wholesale borrowings (excluding brokered deposits) declined, as we paid off maturing short term FHLB advances. Since the rate on the short term advances was lower than the rates on the remaining longer term advances, the removal of the short term advance resulted in a higher average rate for the remaining portfolio of advances.

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 0.79% for the quarter ended September 30, 2012 compared to 0.86% for the quarter ended June 30, 2012, a decrease of 7 basis points.  Cost of funds decreased 27 basis points compared to the quarter ended September 30, 2011.

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.

Non-interest income increased by $1.2 million or 16.0% when comparing the quarter ended September 30, 2012 to the previous quarter and increased by $2.5 million or 42.3% compared to the quarter ended September 30, 2011. The primary reason for the higher non-interest income for both the third quarter of 2012 and the same quarter last year was higher gain-on-sale revenues from the Company's mortgage operations.  Gains on mortgage loan sales increased by 21.4% when comparing the quarter ended September 30, 2012 to the previous quarter and by 60.2% when compared to the quarter ended September 30, 2011.  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 originated $251.2 million in mortgage loans during the quarter ended September 30, 2012 compared to $233.4 million originated during the previous quarter, and $212.2 million originated during the quarter ended September 30, 2011, an increase of 7.6% compared to the previous quarter and an increase of 18.4% when comparing the same calendar quarters. 

The revenues and expenses of Southern Trust Mortgage for the three month periods ended September 30, 2012 and September 30, 2011 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") increased to $1.2 million for the quarter ended September 30, 2012 and to $3.3 million on a year-to-date basis.  Net income generated from this group increased more than ten-fold when comparing the quarter ended September 30, 2012 to the quarter ended September 30, 2011. The increase in earnings was attributed to expense control and an increase in revenue during the period.  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 at $1.5 billion at September 30, 2012, an increase of 15.3% relative to September 30, 2011. 

Net securities gains were $164,000 during the quarter ended September 30, 2012 compared to $148,000 during the previous quarter and $141,000 during the quarter ended September 30, 2011.

Non-Interest Expense

Total non-interest expense in the third quarter of 2012 increased by $525,000 or 3.9% versus the previous quarter and increased by $1.6 million or 13.1% compared to the quarter ended September 30, 2011.  

Salaries and employee benefit expenses decreased by $230,000 or 3.1% when comparing the third quarter of 2012 to the previous quarter. Salaries and employee benefits increased by $376,000 or 5.4% versus the third quarter of 2011. 

Expenses related to Other Real Estate Owned ("OREO") increased by $632,000 or 72.3% when comparing the third quarter of 2012 to the previous quarter and by $817,000 or 118.6% versus the quarter ended September 30, 2011.  The increase in OREO expenses during the quarter resulted primarily from valuation adjustments on two OREO properties.

Advertising expenses increased by $205,000 or 45.9% during the quarter and by $206,000 or 46.2% from the quarter ended September 30, 2011. The increase between the third quarter of 2012 and the previous quarter was timing related. Advertising expenses are a byproduct of campaigns and promotions which do not always occur uniformly throughout the year. The increase in advertising expenses between the third quarter of 2012 and the same quarter last year was primarily due to expenses related to promotions and campaigns in 2012.

The Company's efficiency ratio was 69.3% for the third quarter of 2012, compared to an efficiency ratio of 73.9% for the third quarter of 2011.  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.  Prior to March 31, 2012, the Company did not exclude amortization of intangibles and other real estate expenses from total non-interest expense.  The efficiency ratios for the periods ended December 31, 2011 and prior and included in tables in this release have been restated for consistent presentation.

Asset Quality and Provision for Loan Losses

The provision for loan losses in the quarter ended September 30, 2012 was $635,000 compared to a provision of $730,000 in the previous quarter and a provision of $1.0 million in the quarter ended September 30, 2011, representing a decrease of 13.0% from the previous quarter and a decrease of 38.0% from the quarter ended September 30, 2011.

The Allowance for Loan and Lease Losses (ALLL) was $13.9 million representing 2.01% of total portfolio loans outstanding at September 30, 2012 and 2.18% at December 31, 2011. The decrease in the ALLL balance as a percentage of portfolio loans occurred primarily as a result of an increase in the balance of loans held for investment and the net result of loans charged off during the period versus the provision for loan losses during the period.  Loans held for investment increased approximately $21.0 million from December 31, 2011 to September 30, 2012.

Loans that were delinquent for more than 90 days and still accruing were $860,000 as of September 30, 2012 compared to $1.4 million as of June 30, 2012, representing a decrease of 37.3%.  The decrease in delinquent loans during the quarter resulted primarily from the transfer of a single large loan to Other Real Estate Owned ("OREO")

Non-accrual loans were $22.7 million at the end of the third quarter compared to $18.8 million as of June 30, 2012, representing an increase of 20.7% during the third quarter of 2012. Troubled debt restructurings that were performing as agreed were $4.3 million at the end of the third quarter, essentially unchanged from the quarter ended June 30, 2012. Other Real Estate Owned (OREO) was $11.9 million as of September 30, 2012 compared to $13.3 million as of June 30, 2012, representing a decrease of 10.5% during the third quarter. Total non-performing assets were $39.8 million or 3.2% of total assets at September 30, 2012, compared to $37.8 million or 3.1% of total assets as of June 30, 2012.  

Total Consolidated Assets

Total assets at September 30, 2012 were $1.2 billion, an increase of 1.4% from June 30, 2012 and 3.6% from December 31, 2011.

Total loans held for investment increased by $6.4 million or 0.94% in the third quarter of 2012 from the end of the second quarter.  Loans held for investment increased by $21.0 million or 3.1% from December 31, 2011.  The securities portfolio (excluding restricted stock) decreased by $6.2 million or 2.0% in the third quarter relative to the previous quarter and remained essentially flat from the December 31, 2011 balance of $308.2 million. Balances of mortgages held for sale increased by $24.5 million or 36.1% at September 30, 2012 compared to the previous quarter end balance but remained essentially flat from the December 31, 2011 balance of $92.5 million.   Cash balances and deposits at other banks decreased by 9.3% at the end of the third quarter of 2012 compared to the previous quarter end and increased $20.3 million or 39.5% from the balances at December 31, 2011.   

Deposits and Other Borrowings

Total deposits increased by $9.2 million or 0.9% from June 30, 2012 to September 30, 2012 and by $54.6 million or 5.9% from December 31, 2011.  Brokered deposits, including CDARS program funds, were $69.1 million at September 30, 2012, down 25.3% from June 30, 2012. FHLB advances were $72.9 million at September 30, 2012, compared to $77.9 million in advances at June 30, 2012.   

Equity and Capital

Shareholders' equity attributable to Middleburg Financial Corporation shareholders at September 30, 2012 was $112.5 million, compared to $109.9 million as of June 30, 2012 and $105.9 million at December 31, 2011.  Retained earnings at September 30, 2012 were $45.2 million compared to $43.8 million at June 30, 2012 and $41.2 million at December 31, 2011. The book value of the Company's common stock at September 30, 2012 was $15.96 per share versus $15.57 per share at June 30, 2012.

The Company's total risk-based capital ratio continued to increase to 15.2% as of September 30, 2012 from 14.9% at June 30, 2012 and 14.7% at December 31, 2011.  The Tier 1 risk-based capital ratio also increased from 13.5% at December 31, 2011 to 14.0% at September 30, 2012 and the Tier 1 Leverage Ratio increased to 8.9% from 8.8% at December 31, 2011.   

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

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, 2011, 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 17 offices in 11 states.

SOURCE Middleburg Financial Corporation