Middleburg Financial Corporation Announces Second Quarter 2013 Results

MIDDLEBURG, Va., Aug. 2, 2013 /PRNewswire/ -- Middleburg Financial Corporation (the "Company") (Nasdaq: MBRG), today announced net income of $2.1 million or $0.29 per diluted share for the second quarter of 2013.

"The second quarter showed the results of our priorities which are loan growth, problem assets reduction and expense control, commented Gary R. Shook, president and Chief Executive Officer of Middleburg Financial Corporation.  "All of those factors contributed to our best quarterly net income since 2006.  With that said, we understand that we still have more to do as we endeavor to achieve best in class performance.  We are pleased with the strength of our loan pipeline and the growth in our wealth management operations.  Mortgage lending rebounded from the first quarter, amid strong purchase loan originations." Mr. Shook continued, "We are pleased to see economic momentum beginning to return to our primary Loudoun and Northern Virginia markets coupled with loan and deposit growth in the Richmond marketplace.  Problem assets are still somewhat elevated; however, we are making progress in reducing levels of problem loans and OREO."

Second Quarter 2013 Highlights:

• Net income of $2.1 million or $0.29 per diluted share, compared to $1.8 million or $0.25 per diluted share for the second quarter of 2012, an increase of 18.3% when comparing calendar quarters;
• Net interest margin of 3.40%, compared to 3.45% for the previous quarter and 3.57% for the second quarter of 2012;
• Total revenue of $16.4  million, an increase of 6.9% compared to the first quarter of 2013;
• Total assets of $1.2 billion, unchanged compared to March 31, 2013;
• Deposits decreased by $4.2 million or 0.4% since March 31, 2013;
• Loans held-for-investment decreased by $7.6 million or 1.0% since March 31, 2013, primarily due to elevated levels of payoffs;
• The ratio of Non Performing Assets to Total Assets was 2.80% as of June 30, 2013 compared to 2.77% at March 31, 2013 and 3.10% at June 30, 2012;
• Capital ratios continue to be strong: Tangible Common Equity Ratio of 8.8%, Total Risk-Based Capital Ratio of 15.4%, Tier 1 Risk-Based Capital Ratio of 14.2%, and a Tier 1 Leverage Ratio of 9.3% at June 30, 2013.

Total Revenue

Total revenue which is comprised of Net Interest Income (before a provision for loan losses) and Non Interest Income was $16.4 million in the quarter ended June 30, 2013, representing an increase of 6.9% compared to the previous quarter and a decrease of $408,000 or 2.4% from the quarter ended June 30, 2012.

Net interest income was $9.3 million during the three months ended June 30, 2013, which was 1.0% lower than the quarter ended March 31, 2013 and a decrease of 3.3% compared to the quarter ended June 30, 2012. The yield on average earning assets was 3.97% for the quarter ended June 30, 2013 compared to 4.08% for the previous quarter and 4.40% for the quarter ended June 30, 2012, representing a decrease of 11 basis points from the previous quarter and a decrease of 43 basis points from the quarter ended June 30, 2012. Loan yields decreased by 16 basis points while the yield for the securities portfolio decreased by 12 basis points from the previous quarter.  The primary reasons for the decline in loan yields were elevated levels of loan payoffs and lower yields on new loans.

The average annualized cost of interest bearing liabilities was 0.72% for the quarter ended June 30, 2013, compared to 0.78% in the previous quarter, and 1.00% for the quarter ended June 30, 2012, representing a decrease of 6 basis points from the previous quarter and a decrease of 28 basis points from the quarter ended June 30, 2012.  Annualized costs for interest bearing retail deposits decreased by 5 basis points from the previous quarter to 0.64% from 0.69% and decreased by 29 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 1.33%, a decrease of 14 basis points compared to the previous quarter and higher by 1 basis point compared to the quarter ended June 30, 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 0.61% for the quarter ended June 30, 2013 compared to 0.66% for the quarter ended March 31, 2013, a decrease of 5 basis points.  Cost of funds decreased 25 basis points compared to the quarter ended June 30, 2012.

The net interest margin for the three months ended June 30, 2013 was 3.40%, compared to 3.45% for the previous quarter, and 3.57% for the quarter ended June 30, 2012, representing a decrease of 5 basis points from the previous quarter and a decrease of 17 basis points compared to the quarter ended June 30, 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 increased by $1.1 million or 19.4% when comparing the quarter ended June 30, 2013 to the previous quarter and decreased by 1.3% compared to the quarter ended June 30, 2012. Gains on mortgage loan sales increased by 15.2% when comparing the quarter ended June 30, 2013 to the previous quarter and decreased by 11.7% when compared to the quarter ended June 30, 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 $209.8 million in mortgage loans during the quarter ended June 30, 2013 compared to $191.1 million closed during the previous quarter, and $233.5 million closed during the quarter ended June 30, 2012, an increase of 9.8% compared to the previous quarter and a decrease of 10.2% 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 $1.2 million for the quarter ended June 30, 2013 compared to $1.0 million in the previous quarter and $1.1 million in the quarter ended June 30, 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 June 30, 2013 and June 30, 2012.

Net gains on securities available for sale were $326,000 during the quarter ended June 30, 2013 compared to gains of $47,000 during the previous quarter and gains of $148,000 during the quarter ended June 30, 2012.

Other operating income was $392,000 during the quarter ended June 30, 2013 compared to $263,000 during the previous quarter and $119,000 during the quarter ended June 30, 2012. The primary reason for the increase in other operating income during the second quarter was related to an adjustment to fair market value of certain mortgage loans. Other operating income includes credit card fees, data processing fees and other miscellaneous income during the reporting period.   

The following table presents dollar and percentage changes in components of non-interest income for the periods ended June 30, 2013 and June 30, 2012:

Non-Interest Expense

Total non-interest expense in the second quarter of 2013 was 5.9% lower compared to the previous quarter and decreased by $203,000 or 1.5% compared to the quarter ended June 30, 2012.  

Salaries and employee benefit expenses decreased by $107,000 or 1.4% when comparing the second quarter of 2013 to the previous quarter. Salaries and employee benefits increased by $186,000 or 2.5% versus the second quarter of 2012. 

Expenses related to Other Real Estate Owned ("OREO") decreased by $678,000 when comparing the second quarter of 2013 to the previous quarter and decreased by $732,000 versus the quarter ended June 30, 2012. The decrease in this expense relative to the previous quarter was primarily related to losses incurred on the sale of two large OREO properties during the first quarter of 2013 and fewer losses in the second quarter.

Advertising expense was higher by 62.3% compared to the previous quarter and decreased by $12,000 or 2.7% from the quarter ended June 30, 2012. The primary reason for higher advertising expenses during the quarter was new product and service promotions and expenses related to the bank's entrance into the Richmond market. Advertising expenses are cyclical and affected by spending on promotions.

Other operating expenses decreased by $181,000 or 7.8% from the previous quarter and increased by $268,000 or 14.3% compared to the quarter ended June 30, 2012. 

The following table presents dollar and percentage changes in components of non-interest expense for the periods ended June 30, 2013 and June 30, 2012:

The Company's efficiency ratio was 78.4% for the second quarter of 2013, compared to an efficiency ratio of 72.7% for the second 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

The Company recorded a provision for loan losses of $184,000 in the second quarter compared to a negative provision of $188,000 for the previous quarter and a provision of $730,000 for the quarter ended June 30, 2012 The Allowance for Loan and Lease Losses (ALLL) was $13.6 million representing 1.93% of loans held for investment at June 30, 2013 compared to $13.5 million representing 1.89% of loans held for investment at March 31, 2013.   

Loans that were delinquent for more than 90 days and still accruing were $829,000 as of June 30, 2013 compared to $812,000 as of March 31, 2013, and $1.4 million as of June 30, 2012, representing an increase of 2.1% compared to the previous quarter and a 40.8% decrease compared to the quarter ended June 30, 2012.

Non-accrual loans were $20.4 million at the end of the second quarter of 2013 compared to $20.0 million as of March 31, 2013 and $18.8 million at June 30, 2012, representing an increase of 1.8% during the second quarter of 2013 and an increase of 8.4% since June 30, 2012. Troubled debt restructurings that were performing as agreed were $5.4 million at the end of the second quarter of 2013, compared to $4.9 million for the quarter ended March 31, 2013, representing an increase of 10.2% during the quarter. Other Real Estate Owned (OREO) was $7.6 million as of June 30, 2013 compared to $7.9 million as of March 31, 2013, representing a decrease of 4.2% during the second quarter of 2013. Total non-performing assets were $34.1 million or 2.80% of total assets at June 30, 2013, compared to $33.6 million or 2.77% of total assets as of March 31, 2013 and $37.8 million or 3.10% of total assets as of June 30, 2012.

The net loan charge-offs during the second quarter of 2013 were $76,000 compared to net charge-offs of $615,000 for the previous quarter and $622,000 in net loan charge-offs for the quarter ended June 30, 2012.

Total Consolidated Assets

Total assets at June 30, 2013 were $1.2 billion, lower by $19.6 million or 1.6% from December 31, 2012 and unchanged from June 30, 2012.

Total loans held for investment decreased by $7.6 million or 1.1% in the second quarter of 2013 compared to the previous quarter.  The primary reason for the weakness was elevated levels of payoffs of existing loans. Loans held for investment increased by $21.1 million or 3.1% from June 30, 2012.  The securities portfolio (excluding restricted stock) decreased by $11.5 million or 3.5% in the second quarter of 2013 relative to the previous quarter. Balances of mortgages held for sale increased by $16.6 million or 34.1% at June 30, 2013 compared to the previous quarter end balance.  Cash balances and deposits at other banks increased by 15.9% at the end of the second quarter of 2013 compared to the previous quarter.

Deposits and Other Borrowings

Total deposits decreased by $4.2 million or 0.4% from the previous quarter.  Brokered deposits, including CDARS program funds, were $74.4 million at June 30, 2013, up 3.4% from the previous quarter. FHLB advances were $85.0 million at June 30, 2013, unchanged compared to the previous quarter.   

Equity and Capital

Shareholders' equity attributable to Middleburg Financial Corporation shareholders at June 30, 2013 was $112.9 million, compared to $114.8 million as of March 31, 2013 and $109.9 million at June 30, 2012.  Retained earnings at June 30, 2013 were $48.9 million compared to $47.2 million at March 31, 2013 and $43.8 million at June 30, 2012. The book value of the Company's common stock at June 30, 2013 was $15.93 per share versus $16.28 per share at March 31, 2013. The decline in shareholders equity during the second quarter was primarily due to a decrease in accumulated other comprehensive income (AOCI) of $3.7 million resulting from unrealized losses in available for sale securities.

The Company's total risk-based capital ratio decreased to 15.4% as of June 30, 2013 from 15.6% at March 31, 2013 and remained unchanged from December 31, 2012.  The Tier 1 risk-based capital ratio decreased from 14.4% at March 31, 2013 to 14.2% at June 30, 2013 and increased from 14.1% at December 31, 2012.  The Tier 1 Leverage Ratio increased to 9.3% at June 30, 2013 from 9.1% at March 31, 2013 and December 31, 2012.   

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, 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.