MIDDLEBURG, Va., Jan. 25 /PRNewswire-FirstCall/ -- Middleburg Financial Corporation reported asset growth of 9.0% since December 31, 2006, leading to total consolidated assets of $841.4 million at December 31, 2007. The net loan portfolio had an increase of 13.1% over the last 12 months, reaching $638.7 million at December 31, 2007. Net income was $3.1 million, or $0.67 per diluted share, for the year ended December 31, 2007, which represents a 61.8% decrease from $8.0 million, or $1.90 per diluted share, for the year ended December 31, 2006. Return on average assets for the years ended December 31, 2007 and 2006 was 0.38% and 1.05%, respectively. Return on average equity for the years ended December 31, 2007 and 2006 was 3.83% and 12.25%, respectively.
As previously disclosed, the Company engaged an independent firm to assist with valuing Middleburg Bank's investment in Southern Trust Mortgage, LCC (STM) in order to determine whether or not its investment in STM had been impaired. Based upon the Company's impairment testing and the independent valuation of the investment in STM, the Company's Board of Directors concluded on December 19, 2007 that an impairment charge with respect to the carrying value of STM was required under generally accepted accounting principles. Accordingly, during the fourth quarter of 2007, the Company recorded a non- cash impairment charge of $5.0 million related to its investment in STM.
"While the independent study noted an impairment of our mortgage investment amid the recent economic environment, it also noted several strengths of STM. These strengths were discovered when comparing the financial performance and operating efficiency of STM, to peer group statistics. It is such strengths, coupled with our evaluation of the short term risk, that has given us confidence in STM for the long term," commented Joseph L. Boling, Chairman and Chief Executive Officer.
The components of net income per diluted share are summarized below: For the Three Months Ended December 31, 2007 2006 Diluted Diluted Earnings Earnings Net Per Net Per Income Share Income Share Core Banking $888,682 $0.19 $1,658,319 $0.36 Equity Investment Impairment Charge (3,307,958) (0.72) - - Mortgage (511,895) (0.11) (71,738) (0.02) Wealth Management 96,313 0.02 (54,449) (0.01) $(2,834,858) $(0.62) $1,532,132 $0.33 For the Year Ended December 31, 2007 2006 Diluted Diluted Earnings Earnings Net Per Net Per Income Share Income Share Core Banking $6,178,464 $1.35 $7,324,873 $1.73 Equity Investment Impairment Charge (3,307,958) (0.72) - - Mortgage (199,770) (0.04) 449,039 0.11 Wealth Management 393,745 0.08 243,902 0.06 $3,064,481 $0.67 $8,017,814 $1.90
Core banking operations were impacted not only by a declining net interest margin resulting from the Company's increased interest costs, but also by increased reserves for loan losses. Although asset quality remains very strong, during the fourth quarter of 2007, the Company increased its allowance for loan losses from 0.98% to 1.10% of total loans outstanding.
Earnings from mortgage banking have been negatively affected by decreased production levels, as well as by narrowed margins resulting from shifts in the mix of retail and wholesale loan volume. Additionally, along with the higher expense associated with adjusting STM's allowance for loan losses, other operating expenses increased with the hiring of several loan producers and support staff with the objective of increasing future loan production levels.
Net earnings of wealth management operations consists of the net income of the Middleburg Investment Group (MIG), the non-bank subsidiary of the Company that generates revenues from trust and investment advisory activities through its subsidiaries [Middleburg Trust Company (MTC), a trust subsidiary, and Middleburg Investment Advisors, Inc. (MIA), a registered investment advisor focused on fixed income investments], and of the Middleburg Bank Investment Sales, which is a division of Middleburg Bank. For these operations, much of the 61.4% increase in net earnings for the year ended December 31, 2007, when compared to the same period in 2006, was related to the increase in gross fees generated by MTC.
Net Interest Income and Net Interest Margin
The net interest margin declined from 3.94% for the quarter ended December 31, 2006 to 3.62% for the same period in 2007. The net interest margin declined from 3.97% in 2006 to 3.77% in 2007. The decline in the net interest margin was attributable to the steady rise in interest costs resulting from the Company's change in funding mix. The Company relied upon higher cost deposits and borrowed money to fund the 2007 earning asset growth.
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 bond income) then subtracting interest expense. The tax rate utilized is 34%. Details on the calculation of the net interest margin are included in footnote (1) following the "Key Statistics" table below.
Net interest income increased 0.1% for the quarter ended December 31, 2007, compared to the same period in 2006. Interest income for the quarter ended December 31, 2007 increased 8.6% or $1.0 million, compared to the quarter ended December 31, 2006. Interest expense increased 20.4% for the quarter ended December 31, 2007 compared to the same time period in 2006.
Net interest income increased 1.0% from $26.9 million for the year ended December 31, 2006 to $27.2 million for the year ended December 31, 2007. Interest income increased 9.3% while interest expense increased 21.4% when comparing the year ended December 31, 2007 to 2006. The increase in interest expense resulted mostly from the Company's change in funding mix, which is reflected in the increase in the average amount of time deposits in 2007, compared to 2006.
Interest income from the investment portfolio decreased $197,000 for the three months ended December 31, 2007, compared to the same period in 2006. Interest income from the investment portfolio decreased $570,000 from the year ended December 31, 2006 to the same period in 2007, while the tax equivalent yield on the investment portfolio increased 36 basis points over that same time period. The average balance of the investment portfolio decreased $17.7 million or 12.1% from December 31, 2006 to December 31, 2007.
Interest income from loans increased $1.2 million or 12.1% when comparing the quarter ended December 31, 2007 to the same period in 2006. Interest income from loans increased $4.8 million or 12.6% when comparing the year ended December 31, 2007 to 2006. While the yield on the loan portfolio increased by five basis points from December 31, 2006 to December 31, 2007, the majority of the increase in interest income from loans was attributable to the increased volume of the loan portfolio. Average net loans increased $64.3 million from the year ended December 31, 2006 to the year ended December 31, 2007.
Non Interest Income
Non interest income decreased $432,000 or 27.7% when comparing the quarter ended December 31, 2007 to the same period in 2006. This decrease resulted mostly from the reduced earnings from STM. Non interest income decreased $414,000 or 5.1% when comparing the year ended December 31, 2007 to the same period in 2006. The annual decrease was also driven by the reduced earnings from STM.
Trust and investment advisory fees earned by MTC and MIA decreased 0.5% or $6,000 when comparing the quarter ended December 31, 2007 to the same period in 2006 and increased 5.9% or $241,000 when comparing the year ended December 31, 2007 to 2006. Trust and investment advisory fees are based primarily upon the market value of the accounts under administration/management. Total consolidated assets under administration by MTC and MIA decreased 7.6% from $1.1 billion at December 31, 2006 to $1.0 billion at December 31, 2007. Although MTC's Richmond location experienced a decline in assets under administration since December 31, 2006, MTC continues to increase assets under administration within the Company's Northern Virginia footprint in Loudoun and Fauquier Counties where the Company's business model has been fully executed and MTC's trust officer works in several of the Company's financial service centers. MTC's assets under administration in Northern Virginia at December 31, 2007 grew by $6.2 million or 3.2% from $196.9 million under administration at December 31, 2006 to $203.1 million at December 31, 2007. MIA's assets under administration decreased from $587.5 million at December 31, 2006 to $548.6 million at December 31, 2007. The decline in assets under administration at both MTC and MIA resulting mostly from distributions, not account closings.
Service charges on deposits increased 6.6% from the quarter ended December 31, 2006 to the same period in 2007. Service charges on deposits increased $155,000 or 8.3% to $2.0 million for the year ended December 31, 2007, compared to $1.9 million for 2006. In particular, overdraft service charges and ATM and Visa check card fees increased $137,000 for the year ended December 31, 2007 compared to 2006.
Net losses on securities available for sale decreased 57.4% when comparing the quarter ended December 31, 2007 to the same period in 2006. The Company wrote down the fair value of an asset backed security held in its available for sale portfolio by $130,000 during the fourth quarter of 2007. The security is not rated and had a par value of $2.0 million at December 31, 2007.
Investment sales fees increased 47.9% or $44,000 from the quarter ended December 31, 2006 to the same period in 2007. Investment sales fees decreased 3.4% to $535,000 for the year ended December 31, 2007, compared to $554,000 for 2006.
Equity in earnings from affiliate, which reflects the 41.8% ownership interest in STM, decreased $667,000 from the quarter ended December 31, 2006 to the same period in 2007. STM closed $156.2 million in loans for the quarter ended December 31, 2007 with 50.3 % of its production attributable to purchase money financings. For the quarter ended December 31, 2006, STM closed $243.0 million in loans with 53.6% of its production attributable to purchase money financings. Equity in earnings from affiliate decreased 144.5% or $983,000 from $680,000 for the year ended December 31, 2006 to a loss of $303,000 for 2007. STM closed $822.7 million in loans for the year ended December 31, 2007 with 56.4% of its production attributable to purchase money financings. For the year ended December 31, 2006, STM closed $938.8 million in loans with 58.8% of its production attributable to purchase money financings.
Mortgage banking operations were negatively impacted by decreased production levels and narrowed margins resulting from shifts in the mix of retail and wholesale loan volume. Additionally, earnings were negatively impacted by increased operational expenses with the hiring of several loan producers and support staff with the objective of increasing future loan production levels. STM experienced an increase in problem and repurchased loans during the third quarter of 2007. Accordingly, STM's earnings were also negatively impacted by the need to establish an adequate allowance for estimated loan losses during the fourth quarter of 2007 in connection with these loans. The majority of the problem loans are due to credit risk in their construction portfolio and early payment defaults of loans sold to investors, both of which are issues facing mortgage bankers in the current economic climate. STM had taken a proactive approach in addressing the problem loans. In early 2007, STM implemented credit overlays or increased underwriting thresholds and re-negotiated early payment default periods. These steps have helped mitigate the risks inherent in its portfolio. STM continues to analyze the problem loans and its construction portfolio as well as refine its methodology to estimate the expected loss and required reserve.
Income earned from the Bank's $11.3 million investment in Bank Owned Life Insurance (BOLI) was $111,000 and $112,000 for the quarters ended December 31, 2007 and 2006, respectively. Income earned from BOLI was $450,000 for the year ended December 31, 2007 and $436,000 for 2006. The Company purchased $10.8 million in BOLI in 2004 and $485,000 BOLI in 2007 to help subsidize increasing employee benefit costs and expenses related to the restructure of its supplemental retirement plans.
Other service charges, including fees from loans and other service fees, decreased $24,000 or 15.5% when comparing the three months ended December 31, 2006 to the same period in 2007. Other service charges decreased $13,000 or 2.1% from the year ended December 31, 2006 to 2007.
Non Interest Expense
Non interest expense increased $5.3 million or 85.6% from the quarter ended December 31, 2006 to the same period in 2007. Non interest expense increased $6.2 million for the year ended December 31, 2007 when compared to 2006. The majority of the increase for both periods results from the $5.0 million impairment charge the Company incurred related to its investment in STM. The impairment of STM's value primarily resulted from earnings declines associated with a slowdown in its loan production volume and increases to its loan loss reserves.
Salary and employee benefit expense decreased 9.4% or $329,000 for the quarter ended December 31, 2007, compared to the same period in 2006. Salary and employee benefit expense decreased 1.0% or $133,000 from the year ended December 31, 2006 to 2007. The decreases for each period were driven by the Company's ability to decrease its minimum healthcare insurance premium surplus to the amount calculated by the plan administrator's actuary. During the fourth quarter of 2007, the Company reduced its minimum premium surplus by $203,000.
Net occupancy and equipment expense increased $131,000 or 17.5% when comparing the quarter ended December 31, 2006 to the quarter ended December 31, 2007. This increase is driven mostly by the additional rent expense associated with the Company's relocation of its Ashburn financial service center. The Company began leasing the site for the new financial service center in October 2007 and opened the new facility in January 2008. Net occupancy and equipment expense increased $275,000 or 9.1% when comparing the year ended December 31, 2006 to 2007. This increase results not only from the rent for the Ashburn financial service center, but also the additional depreciation and construction related expense associated with the renovation of the Middleburg financial service center, which also serves as the Company's headquarters. The Company expects net occupancy and equipment expense to continue to increase as three new financial service centers open in the Virginia counties of Loudoun and Fauquier.
Other taxes, which is comprised primarily of bank franchise tax, increased 28.6% or $36,000 from the quarter ended December 31, 2006 to the same period in 2007. Other taxes increased 27.4% to $137,000 for the year ended December 31, 2007 compared to 2006. The Virginia bank franchise tax assessment is equal to one percent of a bank's net capital, as defined by the Commonwealth of Virginia. With the issuance of 676,552 shares of its common stock in an underwritten public offering in July 2006, the Company increased its capital level by $19.7 million and subsequently transferred $19.0 million to the banking subsidiary, resulting in the increase in bank franchise tax in 2007.
Computer operations expense increased $9,000 or 3.6% from the quarter ended December 31, 2006 to the quarter ended December 31, 2007. Computer operations expense increased $93,000 or 9.5% from the year ended December 31, 2006 to 2007. These increases are related to increased maintenance costs of in-house core operating and support systems resulting mostly from the Company's growth.
Other operating expenses increased $454,000 when comparing the quarter ended December 31, 2007 to the same period in 2006. Other operating expenses increased $860,000 from $5.0 million for the year ended December 31, 2006 to $5.9 million for 2007. The Company experienced increases in various other expense categories including audit fees, legal fees, educational expenses, recruiting expenses and travel expenses. Additionally, approximately $247,000 in due diligence costs were expensed to other expense during the fourth quarter of 2007 as potential financial service center locations became no longer viable or desirable.
Total Consolidated Assets
Total assets increased 9.0% to $841.4 million at December 31, 2007 from $772.3 million at December 31, 2006. Total loans, net of allowance for loan losses, increased 13.1% or $73.9 million to $638.7 million at December 31, 2007 from $564.8 million at December 31, 2006. Considering the current interest rate and competitive market environment, the Company has been diligent about maintaining its credit quality and thereby cautious about the growth it has added to the loan portfolio. Additional staff, a solid local economy, the relationship with STM, and the success of the financial service center business model, which focuses on high quality financial solutions to clients and increasing client introductions across business lines, are all believed to have contributed to the strong loan growth experienced.
At December 31, 2007, there were $6.6 million in nonperforming loans. At December 31, 2006, there were no nonperforming loans. Nearly half of the total nonperforming loans at December 31, 2007 are related to one borrower and the Company estimates the loss related to this borrower's non performing loans to be approximately $160,000. Total loans past due 90 days or more were $30,000 at December 31, 2007 and $19,000 at December 31, 2006. The loans past due 90 days or more at December 31, 2007 were comprised of five consumer loans. All of the $30,000 in total loans past due 90 days or more at December 31, 2007, have been charged off.
The loan loss provision was $1.8 million for the year ended December 31, 2007. The allowance for loan losses was $7.1 million or 1.10% of total loans outstanding at December 31, 2007. Net charge offs were $275,000 for the year ended December 31, 2007, compared to net charge offs of $61,000 for 2006. Based upon internal analysis by the Company's credit administration department, which factors, among other things, the credit quality of the portfolio, the allowance for loan losses was deemed adequate at 1.10% of total loans outstanding.
The investment portfolio decreased $6.3 million or 4.7% to $129.1 million at December 31, 2007 compared to $135.4 million at December 31, 2006. During 2006 and 2007, management elected to utilize cash received from principal pay downs, maturities and calls in its investment portfolio to fund loan growth rather than re-invest in the investment portfolio. This strategy decreased the size of the investment portfolio. At December 31, 2007, the tax equivalent yield on the investment portfolio was 5.82%.
Deposits and Other Borrowings
Total deposits, which includes brokered deposits, increased 3.2% to $588.8 million at December 31, 2007 from $570.6 million at December 31, 2006. Total retail deposits, which excludes brokered deposits, increased 0.7% from $545.5 million at December 31, 2006 to $549.3 million at December 31, 2007. At December 31, 2007, $39.4 million of the brokered certificates remained outstanding. The Company had $25.1 million in brokered certificates of deposits at December 31, 2006.
During the third quarter of 2007, the Company offered a high yielding, short term certificate of deposit in order to obtain deposits and to broaden its client base. In order to open the high yield certificate of deposit, a client was required to bring new money to the Bank and open a demand deposit account. The demand deposit account must maintain a minimum balance throughout the term of the certificate of deposit to continue to earn the premium rate. The certificate of deposit promotion resulted in $36.0 million in new deposits during the promotional period.
Securities sold under agreements to repurchase with commercial checking account clients increased by $13.3 million or 34.6% from December 31, 2006 to $51.8 million at December 31, 2007. Federal Home Loan Bank advances and overnight borrowings increased $36.5 million or 49.3% to $110.5 million at December 31, 2007 from $74.0 million at December 31, 2006. FHLB advances have provided the majority of funding for the Company's 2007 loan growth.
Equity
Stockholders' equity increased 0.1% from $77.9 million at December 31, 2006 to $80.0 million at December 31, 2007. The book value of the Company at December 31, 2007 was $17.21 per common share. Total common shares outstanding were 4,526,317 at December 31, 2007.
On December 19, 2007, the board of directors declared a $0.19 per common share cash dividend for shareholders of record as of January 2, 2008 and paid on January 18, 2008.
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, 2006, and other filings with the Securities and Exchange Commission.
Middleburg Financial Corporation is headquartered in Middleburg, Virginia and has two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc. Middleburg Bank serves Loudoun, Fairfax, and Fauquier Counties in Virginia with seven financial service centers. Middleburg Investment Group owns Middleburg Trust Company and Middleburg Investment Advisors, Inc. Middleburg Trust Company is headquartered in Richmond, Virginia with a branch office in Middleburg. Middleburg Investment Advisors, Inc. is a SEC registered investment advisor located in Alexandria, Virginia.
MIDDLEBURG FINANCIAL CORPORATION SUMMARY INCOME STATEMENT (Unaudited, dollars in thousands) For the Year Ended December 31, % 2007 2006 Change INTEREST INCOME Interest and fees on loans $42,960 $38,161 12.6% Interest on investment securities 6,668 7,237 -7.9% Interest on short term investments - - 0.0% TOTAL INTEREST INCOME $49,628 $45,398 9.3% INTEREST EXPENSE Interest on deposits $14,797 $11,694 26.5% Interest on borrowings 7,644 6,794 12.5% TOTAL INTEREST EXPENSE $22,441 $18,488 21.4% NET INTEREST INCOME $27,186 $26,910 1.0% PROVISION FOR LOAN LOSSES 1,786 499 257.6% NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $25,401 $26,411 -3.8% NON INTEREST INCOME Trust and investment advisory fee income $4,355 $4,114 5.9% Service charges on deposits 2,024 1,869 8.3% Net losses on securities available for sale (130) (305) -57.3% Commissions on investment sales 535 554 -3.4% Equity in earnings from affiliate (303) 680 -144.5% Bank owned life insurance 450 436 3.3% Other service charges, commissions and fees 595 608 -2.1% Other operating income 175 159 10.4% TOTAL NON INTEREST INCOME $7,702 $8,116 -5.1% NON INTEREST EXPENSE Salaries and employee benefits $13,557 $13,690 -1.0% Net occupancy expense of premises 3,300 3,025 9.1% Other taxes 637 500 27.4% Computer operations 1,075 982 9.5% Impairment loss on equity investment in affiliate 5,012 - - Other operating expenses 5,873 5,014 17.1% TOTAL NON INTEREST EXPENSE $29,454 $23,210 26.9% INCOME BEFORE TAXES $3,648 $11,317 -67.8% Income tax expense 584 3,299 -82.3% NET INCOME $3,064 $8,018 -61.8% MIDDLEBURG FINANCIAL CORPORATION SUMMARY INCOME STATEMENT ( Unaudited, dollars in thousands) For the Three Months Ended 4Q07 3Q07 2Q07 1Q07 4Q06 INTEREST INCOME Interest and fees on loans $11,148 $11,237 $10,592 $9,983 $9,944 Interest on investment securities 1,609 1,628 1,661 1,770 1,806 Interest on short term investments - - - - - TOTAL INTEREST INCOME $12,757 $12,866 $12,252 $11,753 $11,751 INTEREST EXPENSE Interest on deposits $3,964 $3,810 $3,505 $3,518 $3,374 Interest on borrowings 1,986 2,261 1,971 1,426 1,580 TOTAL INTEREST EXPENSE $5,951 $6,071 $5,476 $4,944 $4,953 NET INTEREST INCOME $6,806 $6,795 $6,777 $6,809 $6,797 PROVISION FOR LOAN LOSSES 948 279 407 152 82 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $5,858 $6,516 $6,370 $6,657 $6,716 NON INTEREST INCOME Trust and investment advisory fee income $1,048 $1,072 $1,130 $1,105 $1,054 Service charges on deposits 520 521 516 466 488 Net (losses) gains on securities available for sale (130) - - - (305) Commissions on investment sales 137 128 144 127 93 Equity in earnings from affiliate (776) 168 253 52 (109) Bank owned life insurance 111 119 111 109 112 Other service charges, commissions and fees 131 121 173 170 155 Other operating income 85 36 26 28 72 TOTAL NON INTEREST INCOME $1,127 $2,166 $2,352 $2,057 $1,560 NON INTEREST EXPENSE Salaries and employee benefits $3,166 $3,486 $3,565 $3,340 $3,495 Net occupancy expense of premises 881 800 800 818 750 Other taxes 161 161 159 156 125 Computer operations 266 263 289 258 257 Impairment loss on equity investment in affiliate 5,012 - - - - Other operating expenses 2,033 1,367 1,326 1,148 1,579 TOTAL NON INTEREST EXPENSE $11,519 $6,077 $6,139 $5,719 $6,206 INCOME BEFORE TAXES $(4,534) $2,605 $2,583 $2,994 $2,069 Income tax expense (1,699) 716 718 849 537 NET INCOME $(2,835) $1,888 $1,866 $2,146 $1,532 MIDDLEBURG FINANCIAL CORPORATION BALANCE SHEET (dollars in thousands) Unaudited Unaudited Unaudited Unaudited Audited 12/31/2007 9/30/2007 6/30/2007 3/31/2007 12/31/2006 Assets: Cash and due from banks $19,413 $16,538 $16,028 $15,668 $18,391 Interest-bearing balances in banks 803 520 48 394 164 Securities at fair value 129,142 123,642 128,460 134,048 135,435 Loans, net of allowance for loan losses 638,692 636,545 618,237 579,604 564,750 Bank premises and equipment, net 20,639 19,646 19,156 18,884 18,429 Other assets 32,725 43,050 40,347 39,171 35,136 Total assets $841,413 $839,940 $822,276 $787,767 $772,305 Liabilities and Shareholders' Equity: Liabilities: Deposits: Non-interest bearing demand deposits $119,556 $119,331 $121,799 $117,684 $128,300 Savings and interest-bearing demand deposits 238,992 229,628 235,993 259,855 250,747 Time deposits 230,221 226,510 203,113 179,293 191,551 Total deposits $588,769 $575,469 $560,905 $556,833 $570,598 Federal funds purchased - - - - - Securities sold under agreements to repurchase 51,781 41,216 39,261 39,922 38,474 Federal Home Loan Bank advances 22,500 50,500 97,400 64,000 34,000 Long-term debt 88,000 80,000 35,000 35,000 40,000 Trust preferred capital notes 5,155 5,155 5,155 5,155 5,155 Other liabilities 7,328 7,134 5,921 7,527 6,179 Commitment and contingent liabilities - - - - - Total liabilities $763,534 $759,475 $743,642 $708,437 $694,406 Shareholders' Equity: Common stock, par value $2.50 per share $11,316 $11,266 $11,264 $11,264 $11,264 Capital surplus 23,817 23,567 23,531 23,519 23,503 Retained earnings 43,773 47,470 46,438 45,429 44,139 Accumulated other comprehensive income (loss), net (1,026) (1,838) (2,600) (882) (1,008) Total shareholders' equity $77,878 $80,464 $78,633 $79,329 $77,898 Total liabilities and shareholders' equity $841,413 $839,940 $822,276 $787,767 $772,305 MIDDLEBURG FINANCIAL CORPORATION KEY STATISTICS For the Three Months Ended 4Q07 3Q07 2Q07 1Q07 4Q06 Net Income (dollars in thousands) $(2,835) $1,888 $1,866 $2,146 $1,532 Earnings per share, basic $(0.63) $0.42 $0.41 $0.48 $0.34 Earnings per share, diluted $(0.62) $0.41 $0.41 $0.47 $0.33 Return on average total assets -1.34% 0.90% 0.93% 1.09% 0.92% Return on average total equity -13.80% 9.38% 9.35% 10.70% 9.21% Dividend payout ratio -30.21% 45.34% 45.89% 39.90% 55.87% Fee revenue as a percent of total revenue 8.12% 14.41% 16.11% 14.89% 11.72% Net interest margin(1) 3.62% 3.67% 3.80% 4.02% 3.94% Yield on average earning assets 6.67% 6.83% 6.77% 6.83% 6.72% Yield on average interest- bearing liabilities 3.74% 3.85% 3.65% 3.50% 3.49% Net interest spread 2.93% 2.98% 3.11% 3.33% 3.23% Tax equivalent adjustment to net interest income (dollars in thousands) $244 $260 $247 $251 $216 Non-interest income to average assets 0.55% 1.07% 1.19% 1.07% 0.80% Non-interest expense to average assets 5.63% 3.00% 3.12% 2.99% 3.20% Efficiency ratio(2) 137.69% 65.47% 65.08% 62.35% 69.46% (1) The 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%. For the quarters ended December 31, 2007 and 2006, net interest income on a tax equivalent basis was $7.1 million and $7.0 million, respectively. See the table below for a reconciliation of net interest income to tax equivalent net interest income. The Company's net interest margin is a common measure used by the financial service industry to determine how profitably earning assets are funded. Because the Company earns a fair amount of non taxable interest income due to the mix of securities in its investment security portfolio, net interest income for the ratio is calculated on a tax equivalent basis as described above. (2) The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing non interest expense 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 is 34%. For the quarters ended December 31, 2007 and 2006, tax equivalent net interest income was $7.1 million and $7.0 million, respectively. See the table below for a reconciliation of net interest income to tax equivalent net interest income. Total non interest income, excluding gains and losses on the investment portfolio, for the quarters ended December 31, 2007 and 2006, was $1.3 million and $1.9 million, respectively. The Company calculates this ratio in order to evaluate its overhead structure or how effectively it is operating. An increase in the ratio from period to period indicates the Company is losing a larger percentage of its income to expenses. The Company believes that the efficiency ratio is a reasonable measure of profitability. MIDDLEBURG FINANCIAL CORPORATION SELECTED FINANCIAL DATA BY QUARTER 4Q07 3Q07 2Q07 1Q07 BALANCE SHEET RATIOS Loans to deposits 109.66% 111.66% 111.28% 111.53% Average interest- earning assets to average-interest bearing liabilities 122.99% 123.16% 123.85% 124.49% PER SHARE DATA Dividends $0.19 $0.19 $0.19 $0.19 Book value 17.21 17.86 17.45 17.61 Tangible book value 16.12 16.68 16.26 16.39 SHARE PRICE DATA Closing price $21.32 $32.50 $32.50 $32.80 Diluted earnings multiple(1) 1.25 1.85 1.90 1.90 Book value multiple(2) 1.24 1.82 1.86 1.86 COMMON STOCK DATA Outstanding shares at end of period 4,506,364 4,505,794 4,505,605 4,505,605 Weighted average shares outstanding 4,507,628 4,506,166 4,505,605 4,505,605 Weighted average shares outstanding, diluted 4,549,296 4,584,560 4,588,469 4,590,450 CAPITAL RATIOS Total equity to total assets 9.26% 9.58% 9.56% 10.07% Total risk based capital ratio 12.62% 12.95% 13.16% 13.63% Tier 1 risk based capital ratio 11.58% 12.03% 12.23% 12.71% Leverage ratio 9.46% 9.97% 10.12% 10.35% CREDIT QUALITY Net charge-offs to average loans 0.03% 0.02% 0.01% 0.00% Total non-performing loans to total loans 1.03% 0.21% 0.21% 0.00% Total non-performing assets to total assets Non-accrual loans to: total loans 1.03% 0.21% 0.21% 0.00% total assets 0.79% 0.16% 0.16% 0.00% Allowance for loan losses to: total loans 1.10% 0.98% 0.98% 0.98% non-performing loans 106.42% 439.39% 464.01% 0.00% non-accrual loans 106.90% 459.94% 464.01% 0.00% NON-PERFORMING ASSETS: (dollars in thousands) Loans delinquent over 90 days $30 $64 $23 $22 Non-accrual loans 6,635 1,368 1,317 - NET LOAN CHARGE-OFFS (RECOVERIES): (dollars in thousands) Loans charged off $155 $120 $37 $26 (Recoveries) (8) (23) (12) (20) Net charge-offs (recoveries) 147 97 25 6 PROVISION FOR LOAN LOSSES (dollars in thousands) $948 $279 $407 $152 ALLOWANCE FOR LOAN LOSS SUMMARY (dollars in thousands) Balance at the beginning of period $6,292 $6,110 $5,728 $5,582 Provision 948 279 407 152 Net charge-offs (recoveries) 147 97 25 6 Balance at the end of period 7,093 6,292 6,110 5,728 MIDDLEBURG FINANCIAL CORPORATION SELECTED FINANCIAL DATA BY QUARTER 4Q06 BALANCE SHEET RATIOS Loans to deposits 105.25% Average interest-earning assets to average-interest bearing liabilities 123.82% PER SHARE DATA Dividends $0.19 Book value 17.29 Tangible book value 16.06 SHARE PRICE DATA Closing price $36.99 Diluted earnings multiple(1) 2.00 Book value multiple(2) 2.14 COMMON STOCK DATA Outstanding shares at end of period 4,505,605 Weighted average shares outstanding 4,505,605 Weighted average shares outstanding, diluted 4,596,195 CAPITAL RATIOS Total equity to total assets 10.09% Total risk based capital ratio 13.70% Tier 1 risk based capital ratio 12.79% Leverage ratio 10.26% CREDIT QUALITY Net charge-offs to average loans 0.00% Total non-performing loans to total loans 0.00% Total non-performing assets to total assets Non-accrual loans to: total loans 0.00% total assets 0.00% Allowance for loan losses to: total loans 0.98% non-performing loans 0.00% non-accrual loans 0.00% NON-PERFORMING ASSETS: (dollars in thousands) Loans delinquent over 90 days $19 Non-accrual loans - NET LOAN CHARGE-OFFS (RECOVERIES): (dollars in thousands) Loans charged off $16 (Recoveries) (4) Net charge-offs (recoveries) 13 PROVISION FOR LOAN LOSSES (dollars in thousands) $82 ALLOWANCE FOR LOAN LOSS SUMMARY (dollars in thousands) Balance at the beginning of period $5,513 Provision 82 Net charge-offs (recoveries) 13 Balance at the end of period 5,582 (1) The diluted earnings multiple (or price earnings ratio) is calculated by dividing the period's closing market price per share by total equity per weighted average shares outstanding, diluted for the period The diluted earnings multiple is a measure of how much an investor may be willing to pay for $1.00 of the Company's earnings. (2) The book value multiple (or price to book ratio) is calculated by dividing the period's closing market price per share by the period's book value per share. The book value multiple is a measure used to compare the Company's market value per share to its book value per share. Average Balances, Income and Expenses, Yields and Rates Three Months Ended December 31, 2007 2006 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate(3) Balance Expense Rate(3) (Dollars in thousands) Assets : Securities: Taxable $82,386 $1,092 5.26% $106,554 $1,367 5.09% Tax-exempt (1)(2) 41,373 722 6.92% 35,231 631 7.11% Total securities $123,759 $1,814 5.82% $141,785 $1,998 5.59% Loans Taxable $646,123 $11,148 6.85% $562,600 $9,944 7.01% Tax-exempt (1) 14 - 0.00% 23 - 0.00% Total loans $646,137 $11,148 6.85% $562,623 $9,944 7.01% Federal funds sold 2,748 34 4.91% 1,475 20 5.38% Interest on money market investments - - - - - - Interest bearing deposits in other financial institutions 463 6 5.14% 309 3 3.85% Total earning assets $773,107 $13,002 6.67% $706,192 $11,965 6.72% Less: allowances for credit losses (6,393) (5,495) Total nonearning assets 72,477 68,267 Total assets $839,191 $768,964 Liabilities: Interest-bearing deposits: Checking $132,680 $798 2.39% $139,757 $875 2.48% Regular savings 53,079 277 2.07% 49,341 220 1.77% Money market savings 49,975 144 1.14% 61,201 169 1.10% Time deposits: $100,000 and over 124,416 1,499 4.78% 118,905 1,474 4.92% Under $100,000 101,859 1,245 4.85% 63,703 635 3.95% Total interest- bearing deposits $462,009 $3,963 3.40% $432,907 $3,373 3.09% Federal Home Loan Bank advances 31,519 409 5.15% 27,898 378 5.38% Securities sold under agreements to repurchase 50,047 495 3.92% 37,068 410 4.39% Long-term debt 86,894 1,076 4.91% 63,862 783 4.86% Federal funds purchased 475 7 5.85% 560 9 6.38% Total interest- bearing liabilities $630,944 $5,950 3.74% $562,295 $4,953 3.49% Non-interest bearing liabilities Demand deposits 119,905 125,007 Other liabilities 6,828 4,765 Total liabilities $757,677 $692,067 Shareholders' equity 81,514 76,897 Total liabilities and shareholders' equity $839,191 $768,964 Net interest income $7,052 $7,012 Interest rate spread 2.93% 3.23% Interest expense as a percent of average earning assets 3.05% 2.78% Net interest margin 3.62% 3.94% (1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%. (2) Income and yields include dividends on preferred bonds which are 70% excludable for tax purposes. (3) All yields and rates have been annualized on a 365 day year. Average Balances, Income and Expenses, Yields and Rates Twelve Months Ended December 31, Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate(3) Balance Expense Rate(3) (Dollars in thousands) Assets : Securities: Taxable $86,776 $4,524 5.21% $113,978 $5,641 4.95% Tax-exempt (1) (2) 41,524 2,947 7.10% 31,992 2,330 7.28% Total securities $128,300 $7,471 5.82% $145,970 $7,971 5.46% Loans Taxable $615,198 $42,958 6.98% $550,805 $38,156 6.93% Tax-exempt (1) 27 3 11.11% 77 7 9.09% Total loans $615,225 $42,961 6.98% $550,882 $38,163 6.93% Federal funds sold 3,195 159 4.98% 953 48 5.04% Interest on money market investments - - - - - - Interest bearing deposits in other financial institutions 730 39 5.34% 235 11 4.68% Total earning assets $747,450 $50,630 6.77% $698,040 $46,193 6.62% Less: allowances for credit losses (6,005) (5,377) Total nonearning assets 70,433 68,387 Total assets $811,878 $761,050 Liabilities: Interest-bearing deposits: Checking $140,045 $3,427 2.45% $141,160 $3,289 2.33% Regular savings 52,167 1,021 1.96% 54,242 934 1.72% Money market savings 54,558 618 1.13% 67,305 665 0.99% Time deposits: $100,000 and over 118,964 5,958 5.01% 97,140 4,442 4.57% Under $100,000 86,083 3,773 4.38% 62,609 2,365 3.78% Total interest- bearing deposits $451,817 $14,797 3.27% $422,456 $11,695 2.77% Federal Home Loan Bank advances 51,659 2,825 5.47% 34,795 1,830 5.26% Securities sold under agreements to repurchase 43,769 1,868 4.27% 36,838 1,529 4.15% Long-term debt 60,018 2,926 4.88% 68,814 3,390 4.93% Federal funds purchased 447 25 5.59% 860 44 5.12% Total interest- bearing liabilities $607,710 $22,441 3.69% $563,763 $18,488 3.28% Non-interest bearing liabilities Demand deposits 117,942 127,944 Other liabilities 6,128 3,917 Total liabilities $731,780 $695,624 Shareholders' equity 80,098 65,426 Total liabilities and shareholders' equity $811,878 $761,050 Net interest income $28,189 $27,705 Interest rate spread 3.08% 3.34% Interest expense as a percent of average earning assets 3.00% 2.65% Net interest margin 3.77% 3.97% (1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34% (2) Income and yields include dividends on preferred bonds which are 70% excludable for tax purposes. (3) All yields and rates have been annualized on a 365 day year. MIDDLEBURG FINANCIAL CORPORATION RECONCILIATION OF NET INTEREST INCOME TO TAX EQUIVALENT NET INTEREST INCOME FOR THE FISCAL YEAR-TO-DATE PERIOD ENDED 12/31/07 9/30/07 6/30/07 3/31/07 12/31/06 (dollars in thousands) GAAP measures: Interest Income - Loans $42,960 $31,812 $20,575 $9,983 $38,161 Interest Income - Investments & Other 6,668 5,058 3,430 1,770 7,237 Interest Expense - Deposits 14,797 10,833 7,023 3,518 11,694 Interest Expense - Other Borrowings 7,644 5,658 3,397 1,426 6,794 Total Net Interest Income $27,186 $20,380 $13,585 $6,809 $26,910 Plus: NON-GAAP measures: Tax Benefit Realized on Non- Taxable Interest Income - Loans $1 $1 $1 $1 $2 Tax Benefit Realized on Non- Taxable Interest Income - Municipal Securities 1,002 757 497 250 792 Tax Benefit Realized on Non- Taxable Interest Income - Corporate Securities - - - - - Total Tax Benefit Realized on Non- Taxable Interest Income $1,003 $758 $498 $251 $794 Total Tax Equivalent Net Interest Income $28,189 $21,138 $14,083 $7,059 $27,704 FOR THE THREE MONTH PERIOD ENDED (dollars in thousands) 12/31/07 9/30/07 6/30/07 3/31/07 12/31/06 GAAP measures: Interest Income - Loans $11,148 $11,237 $10,592 $9,983 $9,944 Interest Income - Investments & Other 1,609 1,628 1,661 1,770 1,806 Less: Interest Expense - Deposits 3,964 3,810 3,505 3,518 3,374 Less: Interest Expense - Other Borrowings 1,986 2,261 1,971 1,426 1,580 Total Net Interest Income $6,807 $6,795 $6,777 $6,809 $6,797 Plus: NON-GAAP measures: Tax Benefit Realized on Non- Taxable Interest Income - Loans $- $- $- $1 $1 Tax Benefit Realized on Non- Taxable Interest Income - Municipal Securities 244 260 247 250 215 Tax Benefit Realized on Non- Taxable Interest Income - Corporate Securities - - - - - Total Tax Benefit Realized on Non- Taxable Interest Income $244 $260 $247 $251 $216 Total Tax Equivalent Net Interest Income $7,051 $7,055 $7,024 $7,059 $7,013
