Middleburg Financial Hurt by Mortgage Stake

Middleburg Financial Corp. here saw its fourth-quarter earnings drop by nearly two-thirds in a year-over-year comparison, due mostly to an impairment charge related to the company's investment in Southern Trust Mortgage LCC. Middleburg recorded a non-cash impairment charge of $5 million related to its investment in STM.

The lender reported net income of $3.1 million, or $0.67 per diluted share, for the year ended Dec. 31, which represents a 61.8% decrease from $8 million, or $1.90 per diluted share, for the year ended Dec. 31, 2006.

Assets have grown 9% since Dec. 31, 2006, leading to total consolidated assets of $841.4 million at Dec. 31, 2007. The net loan portfolio increased 13.1%, reaching $638.7 million at Dec. 31, 2007.

Earnings from mortgage banking have been negatively affected by decreased production levels and 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 expenses increased with the hiring of several loan producers and support staff with the objective of increasing future loan production levels.

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. The affiliate saw an increase in problem and repurchased loans during the third quarter of 2007. The majority of the problem loans are due to credit risk in their construction portfolio and early payment defaults of loans sold to investors.

"While the independent study noted an impairment of our mortgage investment amid the recent economic environment, it also noted several strengths of STM," said Joseph L. Boling, chairman and CEO, Middleburg Financial Corp.

He noted that STM is strong when comparing its financial performance and operating efficiency to peer group statistics.

According to Middleburg's fourth-quarter earnings release, STM has implemented credit overlays or increased underwriting thresholds, and renegotiated early payment default periods to help mitigate the risks inherent in its portfolio. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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