Middleburg Financial Corporation Announces Fourth Quarter 2016 Results

MIDDLEBURG, Va., Jan. 30, 2017 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $1.09 million, or $0.15 per diluted share, for the quarter ended December 31, 2016 and $8.06 million, or $1.13 per diluted share, for the full year 2016.

"On October 24, 2016,  the Company announced a Definitive Agreement of a strategic merger of equals with Access National Corporation (NASDAQ: ANCX). We believe that this combination will result in Virginia's premier bank, with enhanced scale, improved efficiency and a well-diversified business model. The two companies have highly complementary businesses and geographic footprints with a greater market reach which creates significant opportunities for growth.  Our strategic focus mirrors the attributes of the high net worth northern and central Virginia market and bodes well for us as we move forward," said Gary R. Shook, President and CEO of Middleburg Financial Corporation. "While the fourth quarter had some bumpiness from significant merger related expenses, we did see quality loan growth accompanied by a lower cost of funds and an expanded net interest margin.  Loan growth came from all of our markets with a diversity of loan types. For the second year in a row Middleburg Investment Group ("MIG") produced record earnings of $1.2 million.  With approximately $2 billion in assets under administration, MIG has the scale that will continue to drive increased profitability."

Fourth quarter and full year 2016 highlights :

• The pending strategic merger with Access National Corporation is on track to close during the second quarter of 2017.
• Net income was $1.09 million, or $0.15 per diluted share, compared to $2.26 million, or $0.32 per diluted share, for the previous quarter and $781,000, or $0.11 per diluted share, for the same period in 2015.
• Total revenue was $13.53 million for the fourth quarter of 2016, higher by 14.09% compared to the previous quarter and an increase of 14.41% relative to the same period in 2015.
• The net interest margin expanded by 6 basis points to 3.17%, compared to 3.11% for the previous quarter and was unchanged relative to the same period in 2015.
• Cost of funds declined by 2 basis points to 36 basis points during the fourth quarter compared to 38 basis points for the previous quarter. The cost of funds for the full year 2016 was 38 basis points unchanged relative to the full year 2015.
• Reported earnings reflect merger related expenses of $1.05 million for the fourth quarter of 2016 and $1.29 million for the full year 2016.
• Loans held-for-investment increased by $14.21 million or 6.68% on an annualized basis during the fourth quarter of 2016.
• Deposits grew by 1.18% in 2016 to $1.05 billion at December 31, 2016, while non-interest bearing demand deposits grew by 5.37% during 2016.
• A loan loss provision of $1.80 million was recognized in the current quarter which resulted in a ratio of loan loss reserves to total loans of 1.33% and the ratio of reserves to nonaccrual loans was 179.90% at December 31, 2016.

TOTAL REVENUE

Total revenue, which is composed of net interest income and non-interest income (before any provision for loan losses), was $13.53 million for the fourth quarter of 2016, higher by 14.09% compared to the previous quarter and by 14.41% compared to the same period in 2015.

Net Interest Income

The Company recorded net interest income of $9.62 million for the fourth quarter of 2016, relatively unchanged compared to the previous quarter and higher by 1.53% compared to the same period in 2015.  The net interest margin in the fourth quarter of 2016 was 3.17%, higher by 6 basis points ("bp") compared to the previous quarter and unchanged compared to the same period in 2015.

The following factors contributed to the change in net interest margin during the fourth quarter of 2016 compared to the previous quarter:

• Yields on earning assets increased by 4 bp compared to the previous quarter.
• Yields on investment securities increased by 24 bp compared to the previous quarter. A significant portion of the investment portfolio is in residential mortgage backed securities ("MBS") and SBA securities. These securities experienced slower prepayments which had the effect of reducing premium amortization and increasing yields. Yields on floating rate securities, many of which have coupons that are indexed to either LIBOR or the Prime rate, increased following the decision by the Federal Reserve to raise the target Federal Funds rate by 25 bp in December of 2016.
• Yields on loans decreased by 7 bp compared to the previous quarter, as we experienced some payoffs and also added loans at lower yields. The compression in loan yields was partially offset by higher yields on floating rate loans following the decision by the Federal Reserve to raise the target Federal Funds rate by 25 bp in December of 2016.
• Cost of funds was 0.36%, compared to 0.38% for the previous quarter as we paid off some borrowings and higher cost time deposits.

The following table analyzes changes in net interest income comparing the fourth quarter of 2016 to the previous quarter and to the quarter ended December 31, 2015.  Changes in tax-exempt income are presented on a tax-equivalent basis.

Comparing the fourth quarter of 2016 to the previous quarter, the table shows that the increase in interest income for securities was primarily due to higher yields stemming from reduced premium amortization on amortizing securities.   We continue to manage the investment portfolio with a focus on liquidity while retaining a balance between fixed and floating rate investments.  The decrease in interest income from loans in the fourth quarter relative to the previous quarter came from payoff activity accompanied by lower yields on new loan originations.  Interest income from securities in the fourth quarter of 2016 was lower compared to the same quarter in 2015 as we sold some higher yielding securities in the fourth quarter of 2016 and used proceeds to fund loans and also pay off borrowings and maturing time deposits.   Interest income from loans in the fourth quarter of 2016  was higher relative to the same period in 2015 primarily as a result of growth in loan balances in 2016. Competition for good credits continues to pressure loan rates.

Non-Interest Income

Non-interest income for the fourth quarter of 2016 increased by 74.51% compared to the previous quarter and was higher by 66.14% compared to the quarter ended December 31, 2015.

• Total revenue generated by our wealth management group, Middleburg Investment Group ("MIG") increased by 1.46% to $1.19 million compared to the previous quarter and increased by 2.51% compared to the same quarter in 2015. Fee income is primarily based upon the market value of assets under administration which were $1.93 billion at December 31, 2016.
• Net gains from securities sold were $1.04 million for the fourth quarter and $1.55 million for the full year 2016. Securities were sold in order to fund loan originations and also to pay off borrowings and high cost maturing time deposits.
• Other operating income was $894,000 for the quarter ended December 31, 2016, an increase of 557.35% compared to the previous quarter and an increase of 102.26% compared to the quarter ended December 31, 2015. In the fourth quarter of 2016, there was a substantial recovery of approximately $191,000 in expenses related to an overdrawn deposit account that had previously been charged off and also insurance proceeds of approximately $560,000 were received related to previously incurred storm damage to two of our financial service centers.

NON-INTEREST EXPENSE

Non-interest expense for the fourth quarter of 2016 increased by 9.22% compared to the previous quarter and by 23.13% compared to the same period in 2015.  Principal categories of non-interest expense that changed were the following: 

• Salaries and employee benefit expense decreased to $4.61 million for the current quarter compared to $4.73 million for the prior quarter and increased by 22.12% when compared to the same period in 2015. The increase in salary and benefit expenses in the fourth quarter of 2016 relative to the same period in 2015 was due to higher incentive accruals in the fourth quarter of 2016.
• Costs related to other real estate owned (OREO) decreased by $159,000 when compared to the prior quarter and increased by $25,000 when compared to the same period in 2015. OREO expenses were higher in the third quarter of 2016 due to valuation adjustments of $167,000 for several properties.
• Expenses from computer operations were $659,000 for the current quarter, $605,000 for the prior quarter and $801,000 for the quarter ended December 31, 2015.
• Legal and advisory fees increased to $1.34 million for the current quarter compared to $494,000 for the prior quarter and $328,000 for the quarter ended December 31, 2015. These increases were primarily due to legal and advisory fees that were incurred in the pending merger with Access National Corporation.
• Other operating expenses increased by 21.90% compared to the prior quarter and increased by 20.81% when compared to the same period in 2015. The primary reason for the increase was a $200,000 impairment of repossessed assets during the current quarter.

ASSET QUALITY

Total nonperforming assets increased to $25.45 million as of December 31, 2016 compared to $23.77 million at September 30, 2016 and $25.51 million at December 31, 2015.

• Nonaccrual loans decreased to $6.34 million compared to $6.70 million as of September 30, 2016 and $8.78 million compared to December 31, 2015.
• Restructured loans that were accruing were $12.41 million compared to $12.39 million as of September 30, 2016 and $12.06 million as of December 31, 2015.
• Other real estate owned was $5.07 million compared to $3.39 million as of September 30, 2016 and $3.35 million as of December 31, 2015.
• Loans past due 90+ days and still accruing were $781,000 as of December 31, 2016 compared to $248,000 as of September 30, 2016 and $278,000 as of December 31, 2015.
• Repossessed assets were $843,000 as of December 31, 2016 compared to $1.04 million as of September 30, 2016 and December 31, 2015.

The Company's allowance for loan and lease losses ("ALLL") was $11.40 million or 1.33% of total loans at December 31, 2016 compared to $11.05 million or 1.37% of total loans at December 31, 2015.  The Company recorded a provision for loan losses of $1.80 million in the fourth quarter of 2016 compared to a recovery of provision of $297,000 in the previous quarter and a provision for loan losses of $2.70 million for the same period in 2015.   

CONSOLIDATED ASSETS

Total consolidated assets at December 31, 2016 were $1.27 billion, lower by 1.72% since December 31, 2015.  Changes in major asset categories were as follows:

• Cash balances and deposits with other banks decreased by $10.68 million compared to December 31, 2015.
• The securities portfolio decreased by $66.53 million compared to December 31, 2015, as we sold some securities to fund loans and pay off borrowings and maturing time deposits.
• Loans held-for-investment increased to $860.10 million as of December 31, 2016.

CONSOLIDATED LIABILITIES

Total consolidated liabilities at December 31, 2016 were $1.15 billion, a decrease of 2.16% compared to December 31, 2015.  Deposits grew by $12.26 million for the full year 2016 to $1.05 billion as of December 31, 2016.  Federal Home Loan Bank ("FHLB") borrowings decreased by $45.50 million from December 31, 2015 to $39.50 million at December 31, 2016.

SHAREHOLDERS' EQUITY AND CAPITAL

Shareholders' equity at December 31, 2016 was $126.68 million, compared to $123.55 million at December 31, 2015.  Retained earnings at December 31, 2016 were $64.76 million compared to $60.39 million at December 31, 2015.  During the quarter, the Company did not make any purchases under its share repurchase authorization and expects to refrain from any repurchases in deference to the pending merger.  The tangible book value of the Company's common stock at December 31, 2016 was $17.10 per share versus $16.93 per share at December 31, 2015.

The Company's capital ratios remain well above regulatory minimum capital ratios as of December 31, 2016:

• Tier 1 Leverage ratio was 9.73%, 5.73% over the regulatory minimum of 4.00% to be well capitalized.
• Common Equity Tier 1 Ratio was 15.61%, 8.61% over the regulatory minimum of 7.00% to be well capitalized.
• Tier 1 Risk-Based Capital Ratio was 16.25%, 7.75% over the regulatory minimum of 8.50% to be well capitalized.
• Total Risk Based Capital Ratio was 17.50%, 7.00% over the regulatory minimum of 10.50% to be well capitalized.

Caution about Forward Looking Statements

Certain information contained in this release 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. Risk and uncertainties related to the pending merger with Access National include, among others, ability to obtain regulatory approvals and meet other closing conditions to the transaction; delays in closing the transaction; changes in asset quality and credit risk; changes in interest rates and capital markets; the introduction, timing and success of business initiatives; competitive conditions; and the inability to recognize cost savings or revenues or to implement integration plans associated with the transaction. Annualized, pro forma, projected, and estimated numbers are used for illustrative purposes only, may not reflect actual results and may not be relied upon.  For details on other 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, 2015, 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.

Additional Information About the Proposed Transaction and Where to Find It

Investors are urged to review carefully and consider all public filings by Access National and Middleburg with the Securities and Exchange Commission (the "SEC"), including but not limited to their Annual Reports on Form 10-K, their proxy statements, their Quarterly Reports on Form 10-Q, and their Current Reports on Form 8-K. The documents filed with the SEC may be obtained free of charge at the SEC's website at www.sec.gov. The documents filed by Access National with the SEC may also be obtained free of charge at Access National's website at www.accessnationalbank.com or by requesting them in writing to Access National Corporation, 1800 Robert Fulton Drive, Suite 300, Reston, VA 20191, Attention: Investor Relations. The documents filed by Middleburg with the SEC may also be obtained free of charge at Middleburg's website at www.middleburgbank.com or by requested them in writing to Middleburg Financial Corporation, 111 West Washington Street, Middleburg, Virginia 20117, Attention: Investor Relations.

In connection with the proposed transaction, Access National has filed a registration statement on Form S-4 with the SEC which includes a joint proxy statement of Access National and Middleburg and a prospectus of Access National.  Once the registration statement is declared effective, a definitive joint proxy statement/prospectus will be sent to the shareholders of each company seeking the required shareholder approvals. Before making any voting or investment decision, investors and security holders of Access National and Middleburg are urged to read carefully the entire registration statement and joint proxy statement/prospectus when they become available, including any amendments thereto, because they will contain important information about the proposed transaction. Free copies of these documents may be obtained as described above.

Access National, Middleburg and certain of their directors and executive officers may be deemed participants in the solicitation of proxies from Access National and Middleburg shareholders in connection with the proposed transaction. Information about the directors and officers of Access National and their ownership of Access National common stock is set forth in the definitive proxy statement for Access National's 2016 annual meeting of shareholders, as previously filed with the SEC on April 18, 2016. Information about the directors and officers of Middleburg and their ownership of Middleburg common stock is set forth in the definitive proxy statement for Middleburg's 2016 annual meeting of shareholders, as previously filed with the SEC on April 12, 2016. Investors may obtain additional information regarding the interests of such participants by reading the registration statement and the joint proxy statement/prospectus when they become available. Free copies of these documents may be obtained as described above.