10-Q

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 [X] Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

or

[   ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number:  0-24159

MIDDLEBURG FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)	54-1696103 (I.R.S. Employer Identification No.)
111 West Washington Street Middleburg, Virginia (Address of principal executive offices)	20117 (Zip Code)

(703) 777-6327

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  R   No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  £    No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £                                                                                              Accelerated filer R

Non-accelerated filer   £ (Do not check if a smaller reporting company)             Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  £    No  R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.   6,935,511 shares of Common Stock as of November 2, 2010

MIDDLEBURG FINANCIAL CORPORATION

INDEX

Part I.	Financial Information			Page No.
	Item 1.	Financial Statements
		Consolidated Balance Sheets		3
		Consolidated Statements of Operations		4
		Consolidated Statements of Changes in Shareholders’ Equity		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial
			Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
	Item 4.	Controls and Procedures		52
Part II.	Other Information
	Item 1.	Legal Proceedings		52
	Item 1A.	Risk Factors		52
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
	Item 3.	Defaults upon Senior Securities		53
	Item 4.	Removed and Reserved		53
	Item 5.	Other Information		53
	Item 6.	Exhibits		53
Signatures				54

2

PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share Data)

	(Unaudited)
	September 30,		December 31,
	2010		2009
Assets:
Cash and due from banks	$	23,371	$	18,365
Interest-bearing deposits in banks		45,612		24,845
Securities available for sale, at fair value		242,056		172,699
Loans held for sale		77,452		45,010
Restricted securities, at cost		6,430		6,225
Loans, net of allowance for loan losses of $15,870 in 2010
and $9,185 in 2009		639,365		635,094
Premises and equipment, net		22,996		23,506
Goodwill and identified intangibles		6,403		6,531
Other real estate owned, net of valuation allowance of
$1,110 in 2010 and $1,121 in 2009.		8,142		6,511
Prepaid federal deposit insurance		5,505		6,923
Accrued interest receivable and other assets		34,132		30,665
Total assets	$	1,111,464	$	976,374
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest bearing demand deposits	$	124,724	$	106,459
Savings and interest-bearing demand deposits		421,119		397,720
Time deposits		351,097		301,469
Total deposits	$	896,940	$	805,648
Securities sold under agreements to repurchase		25,416		17,199
Short-term borrowings		21,875		3,538
Long-term debt		52,912		35,000
Subordinated notes		5,155		5,155
Accrued interest and other liabilities		7,736		6,475
Commitments and contingent liabilities		-		-
Total liabilities	$	1,010,034	$	873,015
Shareholders' Equity:
Common stock, par value $2.50 share, authorized 20,000,000 shares
issued and outstanding at September 30, 2010 - 6,935,511 shares
issued and outstanding at December 31, 2009 - 6,909,293 shares	$	17,289	$	17,273
Capital surplus		42,930		42,807
Retained earnings		36,378		42,706
Accumulated other comprehensive income (loss), net		1,729		(2,474	)
Total Middleburg Financial Corporation shareholders' equity	$	98,326	$	100,312
Non-controlling interest in consolidated subsidiary		3,104		3,047
Total shareholders' equity	$	101,430	$	103,359
Total liabilities and shareholders' equity	$	1,111,464	$	976,374

 See Accompanying Notes to Consolidated Financial Statements.

3

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

	Unaudited						Unaudited
	For the Nine Months						For the Three Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Interest and Dividend Income
Interest and fees on loans	$	30,661		$	37,793		$	9,832		$	11,973
Interest on securities available for sale
Taxable		3,194			3,622			1,166			1,159
Exempt from federal income taxes		1,914			2,248			621			774
Dividends		75			64			32			28
Interest on federal funds sold and other		99			95			36			37
Total interest and dividend income	$	35,943		$	43,822		$	11,687		$	13,971
Interest Expense
Interest on deposits	$	9,410		$	11,981		$	3,160		$	3,866
Interest on securities sold under agreements to repurchase		144			32			63			7
Interest on short-term borrowings		245			518			134			51
Interest on long-term debt		1,298			2,341			372			691
Total interest expense	$	11,097		$	14,872		$	3,729		$	4,615
Net interest income	$	24,846		$	28,950		$	7,958		$	9,356
Provision for loan losses		11,350			3,584			9,130			964
Net interest income (loss) after provision
for loan losses	$	13,496		$	25,366		$	(1,172	)	$	8,392
Other Income
Trust and investment advisory fee income	$	2,497		$	2,402		$	807		$	813
Service charges on deposit accounts		1,396			1,419			487			474
Net gains (losses) on securities available for sale		757			1,345			288			275
Total other-than-temporary impairment loss on securities		(857	)		(2,128	)		(557	)		(533	)
Portion of gain (loss) recognized in other comprehensive income		117			(1,416	)		169			-
Net other-than-temporary impairment loss		(974	)		(712	)		(726	)		(533	)
Commissions on investment sales		453			405			142			148
Bank owned life insurance		391			380			136			123
Gain on loans held for sale		11,621			8,577			5,147			2,407
Fees on loans held for sale		1,311			722			477			195
Other service charges, commissions and fees		353			400			97			103
Other operating income		221			235			42			52
Total other income	$	18,026		$	15,173		$	6,897		$	4,057
Other Expense
Salaries and employee benefits	$	22,046		$	21,855		$	7,665		$	6,925
Net occupancy expense of premises		4,651			4,404			1,557			1,454
Other taxes		598			438			201			148
Advertising		685			549			257			184
Computer operations		1,008			946			340			285
Other real estate owned		1,171			2,163			666			703
Audits and examinations		373			448			96			120
Legal fees		401			442			96			144
FDIC insurance		1,521			1,567			368			510
Other operating expenses		6,142			3,944			3,141			1,432
Total other expense	$	38,596		$	36,756		$	14,387		$	11,905
Income (Loss) before income taxes	$	(7,074	)	$	3,783		$	(8,662	)	$	544
Income tax expense / (benefit)		(3,135	)		69			(3,297	)		(92	)
Net income (loss)	$	(3,939	)	$	3,714		$	(5,365	)	$	636
Less:  Net (income) loss attributable to non-controlling interest		(311	)		(1,307	)		(423	)		(26	)
Net income (loss) attributable to Middleburg Financial Corporation	$	(4,250	)	$	2,407		$	(5,788	)	$	610
Amortization of discount on preferred stock		-			26			-			10
Dividend on preferred stock		-			733			-			275
Net income (loss) available to common shareholders	$	(4,250	)	$	1,648		$	(5,788	)	$	325
Net income (loss) per common share, basic	$	(0.61	)	$	0.32		$	(0.83	)	$	0.05
Net income (loss) per common share, diluted	$	(0.61	)	$	0.32		$	(0.83	)	$	0.05
Dividends common per share	$	0.30		$	0.48		$	0.10		$	0.10
See Accompanying Notes to Consolidated Financial Statements

4

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

For the Nine months ended September 30, 2010 and 2009

(In Thousands, Except Share Data)

(Unaudited)

	Middleburg Financial Corporation Shareholders
											Accumulated
											Other									Total
	Preferred		Common		Capital			Retained			Comprehensive			Comprehensive			Noncontrolling			Comprehensive
	Stock		Stock		Surplus			Earnings			Income (Loss)			Income (Loss)			Interest			Income (Loss)			Total
Balances - December 31, 2008	$	-	$	11,336	$	23,967		$	43,555		$	(3,181	)				$	1,928					$	77,605
Comprehensive income
Net income									2,407					$	2,407			1,307		$	3,714			3,714
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of taxes of $1,201)												2,331			2,331						2,331			2,331
Reclassification adjustment (net of taxes $457)												(888	)		(888	)					(888	)		(888	)
Other comprehensive loss, related to securities
for which other-than-temporary impairment
has been recognized in earnings (net of taxes
of $481)												(935	)		(935	)					(935	)		(935	)
Reclassification adjustment (net of taxes of $242)												470			470						470			470
Total other comprehensive income												978			978			-		$	978			978
Total comprehensive income														$	3,385			1,307		$	4,692			4,692
Cash dividends declared:
Common Stock									(2,264	)														(2,264	)
Preferred Stock									(596	)														(596	)
Distributions to non-controlling interest																		(442	)					(442	)
Share-based compensation						86																		86
Issuance of preferred stock and related warrants		21,571				429																		22,000
Amortization of preferred stock discount		26							(26	)														-
Issuance of common stock (2,367,526 shares)				5,919		18,221																		24,140
Balances - September 30, 2009	$	21,597	$	17,255	$	42,703		$	43,076		$	(2,203	)				$	2,793					$	125,221
Balances - December 31, 2009	$	-	$	17,273	$	42,807		$	42,706		$	(2,474	)				$	3,047					$	103,359
Comprehensive income (loss)
Net loss									(4,250	)				$	(4,250	)		311		$	(3,939	)		(3,939	)
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of taxes of $2,051)												3,983			3,983						3,983			3,983
Reclassification adjustment (net of taxes $257)												(500	)		(500	)					(500	)		(500	)
Other comprehensive income, related to securities
for which other-than-temporary impairment
has been recognized in earnings (net of taxes
of $40)												77			77						77			77
Reclassification adjustment (net of taxes of $331)												643			643						643			643
Total other comprehensive income												4,203			4,203			-		$	4,203			4,203
Total comprehensive income (loss)														$	(47	)		311		$	264			264
Cash dividends declared									(2,078	)														(2,078	)
Exercise of stock options (2,750 shares)				7		22																		29
Restricted stock awards (3,650 shares)				9		(9	)																	-
Distributions to non-controlling interest																		(254	)					(254	)
Share-based compensation				-		110																		110
Balances - September 30, 2010	$	-	$	17,289	$	42,930		$	36,378		$	1,729					$	3,104					$	101,430

See Accompanying Notes to Consolidated Financial Statements.

5

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

	Unaudited
	For the Nine Months Ended
	September 30,			September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(3,939	)	$	3,714
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		11,350			3,584
Depreciation and amortization		1,323			1,404
Equity in distributions in excess of undistributed earnings of affiliate		145			71
Valuation adjustment on other real estate owned		760			1,556
Net loss on sale of other real estate owned		185			91
Premium amortization and discount (accretion) on securities, net		1,583			197
Net gain on securities available for sale		(757	)		(1,345	)
Other than temporary impairment loss		974			712
Originations of loans held for sale		(555,310	)		(755,883	)
Proceeds from sales of loans held for sale		534,489			767,935
Net gain on loans held for sale		(11,621	)		(8,577	)
Net (gain) loss on disposal of premises and equipment		(7	)		1
Earning on bank-owned life insurance		(391	)		(380	)
Share-based compensation		110			86
Decrease in prepaid FDIC insurance		1,418			-
Increase in other assets		(4,835	)		(760	)
Increase (decrease) in other liabilities		1,261			(27	)
Net cash provided by (used in) operating activities	$	(23,262	)	$	12,379
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity, principal paydowns and
calls of securities available for sale	$	39,656		$	20,258
Proceeds from sale of securities available for sale		56,502			79,908
Purchase of securities available for sale		(161,152	)		(84,984	)
Proceeds from sale of other real estate owned		1,049			1,375
Net decrease (increase) in loans		(19,247	)		11,536
Purchases of bank-owned life insurance		(682	)		-
Purchase of premises and equipment		(546	)		(965	)
Net cash provided by (used in) investing activities	$	(84,420	)	$	27,128
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing and interest-bearing demand deposits and savings accounts	$	41,664		$	75,632
Net increase (decrease) in certificates of deposits		49,628			(32,786	)
Increase (decrease) in securities sold under agreements to repurchase		8,217			(2,870	)
Net increase (decrease) in short-term borrowings		18,337			(33,832	)
Proceeds from long-term debt		17,912			-
Payments on long-term debt		-			(41,000	)
Distributions by subsidiary to non-controlling interest		(254	)		(442	)
Cash dividends paid on preferred stock		-			(596	)
Cash dividends paid on common  stock		(2,078	)		(2,273	)
Exercise of stock options		29			-
Issuance of common stock		-			24,140
Issuance of preferred stock		-			22,000
Net cash provided by financing activities	$	133,455		$	7,973
Increase in cash and cash equivalents	$	25,773		$	47,480
CASH AND CASH EQUIVALENTS
Beginning		43,210			35,380
Ending	$	68,983		$	82,860
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	11,144		$	15,505
Income taxes		-			854
SUPPLEMENTAL DISCLOSURES FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities available for sale		6,367			1,482
Transfer of loans to other real estate owned		3,625			3,962

See Accompanying Notes to Consolidated Financial Statements.

6

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDAIRIES

Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009

(Unaudited)

Note 1.                                General

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2010 and December 31, 2009, the results of operations for the three and nine months ended September 30, 2010 and 2009, and, changes in shareholders’ equity and cash flows for the nine months ended September 30, 2010 and 2009, in accordance with accounting principles generally accepted in the United States of America.  The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”) of Middleburg Financial Corporati on (the “Company”).  The results of operations for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year.

In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued.

On October 27, 2010, the Company and David L. Sokol entered into the First Amendment to Stock Purchase Agreement (the “First Amendment”), amending the Stock Purchase Agreement, dated March 27, 2009, between the Company and Mr. Sokol (the “Original Agreement”).  The Original Agreement provided, among other things, that Mr. Sokol could not beneficially own, individually or through an affiliated group or entity, more than 20% of the Company’s common stock without the prior consent of the Company’s board of directors. The First Amendment increased this beneficial ownership limitation from 20% to 30%. The First Amendment does not otherwise amend the Original Agreement. As of September 30, 2010, Mr. Sokol beneficially owned approximately 19.84% of the outstanding common stock of the Company. 0; A copy of the First Amendment is included as Exhibit 10.1 to the Company’s current Report on Form 8-K filed on October 28, 2010.

  Management has concluded there were no additional material subsequent events to be disclosed at this time.

Note 2.                                Stock–Based Compensation Plan

As of September 30, 2010, the Company sponsored one stock-based compensation plan (the 2006 Equity Compensation Plan), which provides for the granting of stock options, stock appreciation rights, stock awards, performance share awards, incentive awards and stock units.  The 2006 Equity Compensation Plan was approved by the Company’s shareholders at the Annual Meeting held on April 26, 2006 and has succeeded the Company’s 1997 Stock Incentive Plan.  Under the plan, the Company may grant stock-based compensation to its directors, officers, employees and other persons the Company determines have contributed to the profits or growth of the Company.  The Company may grant awards with respect to up to 255,000 shares of common stock under the 2006 Equity Compensation Plan.

The Company granted 24,440 shares of restricted stock on March 15, 2010.  The restricted stock award is divided equally between service-based shares and performance-based shares.  The service-based portion of the stock award has a vesting period of 25% of the shares granted one year after the date of

7

grant, another 25% two years after the date of grant, and the remaining 50% on the third year after the date of grant.  Service-based stock awards are entitled to voting and dividend rights on all shares granted as of the grant date. The performance-based stock awards vest at 100% on the third year after the date of grant if pre-established financial performance targets are met.  If the performance targets are not met as of the end of the fiscal year preceding the third anniversary date of the grant, the performance-based shares are forfeited.  All unearned restricted stock grants are forfeited if the employee leaves the Company prior to vesting.

Additionally, 2,803 shares of service-based restricted stock were issued to certain executive officers on May 1, 2010.  Of these shares, 1,430 vest on a graduated basis as discussed above.  The remaining 1,373 shares will vest at 100% on May 1, 2011.

  The Company recognized $110,000 for stock-based compensation expenses for the nine months ended September 30, 2010.

The following table summarizes stock options awarded under the 2006 Equity Compensation Plan and remaining unexercised options under the 1997 Stock Incentive Plan at the end of the reporting period.

	September 30, 2010
				Weighted
				Average		Aggregate
				Exercise		Intrinsic
	Shares			Price		Value
Outstanding at beginning of year		184,208		$	19.34
Granted		--			--
Exercised		(2,750	)		10.63
Forfeited		--			--
Outstanding at end of period		181,458		$	19.47	$            --

As of the end of the reporting period, 127,677 options were vested and exercisable representing 109,750 shares issued under the original 1997 plan and 17,927 vested options under the 2006 Plan.  At September 30, 2010 the weighted average exercise price of these stock options was greater than the aggregate market price.  The weighted average remaining contractual term for unexercised stock options at September 30, 2010 was 2.83 years.  As of September 30, 2010 there was $82,000 of total unrecognized compensation expense related to stock option awards under the 2006 Equity Compensation Plan.

8

The following table summarizes restricted stock awarded under the 2006 Equity Compensation Plan at the end of the reportable period.

	September 30, 2010
				Weighted
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair Value		Value
Outstanding at beginning of year		23,830		$	19.97
Granted		27,243			14.29
Vested		(3,650	)		26.30
Forfeited		(3,197	)		32.30
Non-vested at end of period		44,226		$	15.06	$     622,702

The weighted average remaining contractual term for non-vested restricted stock at September 30, 2010 was 1.79 years.  As of September 30, 2010, there was $617,180 of total unrecognized compensation expense related to the non-vested restricted stock awards under the 2006 Equity Compensation Plan.

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Note 3.                                Securities

Amortized costs and fair values of securities available for sale at September 30, 2010 are summarized as follows:

		Amortized		Unrealized		Unrealized			Fair
		cost		Gains		Losses			Value
		(In Thousands)
U.S. Treasury securities		$	1,001	$	1	$	-		$	1,002
U.S. government agency
securities			1,926		31		(2	)		1,955
Obligations of states and
political subdivision			64,751		1,805		(43	)		66,513
Mortgage-backed securities:
Agency			141,325		1,940		(159	)		143,106
Non-agency			19,404		175		(113	)		19,466
Corporate preferred stock			39		-		(5	)		34
Corporate Bonds			9,609		10		-			9,619
Trust preferred securities			1,382		-		(1,021	)		361
	Total	$	239,437	$	3,962	$	(1,343	)	$	242,056

Amortized costs and fair values of securities available for sale at December 31, 2009 are summarized as follows:

				Gross		Gross
		Amortized		Unrealized		Unrealized			Fair
		cost		Gains		Losses			Value
				(In Thousands)
U.S. Treasury securities		$	3,084	$	3	$	-		$	3,087
Obligations of states and
political subdivision			70,586		228		(1,770	)		69,044
Mortgage-backed securities:
Agency			89,933		949		(642	)		90,240
Non-agency			10,348		38		(447	)		9,939
Corporate preferred stock			39		-		(5	)		34
Trust preferred securities			2,457		4		(2,106	)		355
	Total	$	176,447	$	1,222	$	(4,970	)	$	172,699

The amortized cost and fair value of securities available for sale as of September 30, 2010, by contractual maturity are shown below.  Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties.  Therefore, these securities are not included in the maturity categories in the following maturity summary.

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	September 30, 2010
	Amortized		Fair
	Cost		Value
	(In Thousands)
Due in one year or less	$	1,426	$	1,430
Due after one year through five years		9,582		9,728
Due after five years through ten years		35,571		36,335
Due after ten years		30,708		31,596
Mortgage-backed securities		160,729		162,572
Corporate preferred stock		39		34
Other		1,382		361
Total	$	239,437	$	242,056

Proceeds from the sale of securities during the quarter ended September 30, 2010 were $19,157,000 and net gains of $288,000 were realized on those sales.  Additionally, $726,000 in losses were recognized for impaired securities during the quarter.  The tax benefit applicable to these net realized losses of $438,000 amounted to $149,000.

The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies and for other purposes as required by law amounted to $79,587,000 at September 30, 2010.

At September 30, 2010, investments in an unrealized loss position that were temporarily impaired are as follows:

	Less Than 12 Months					12 Months or More					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		(Losses)			Fair Value		(Losses)			Fair Value		(Losses)
	(In thousands)
U.S. government agency securities	$	122	$	(2	)	$	--	$	--		$	122	$	(2	)
Obligations of states
and political subdivisions		--		--			4,573		(43	)		4,573		(43	)
Mortgage-backed securities:
Agency		18,181		(159	)		--		--			18,181		(159	)
Non-agency		10,971		(113	)		--		--			10,971		(113	)
Corporate preferred stock		--		--			33		(5	)		33		(5	)
Other		--		--			361		(1,021	)		361		(1,021	)
Total temporarily
impaired securities	$	29,274	$	(274	)	$	4,967	$	(1,069	)	$	34,241	$	(1,343	)

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At December 31, 2009, investments in an unrealized loss position that were temporarily impaired are as follows:

	Less Than 12 Months					12 Months or More					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		(Losses)			Fair Value		(Losses)			Fair Value		(Losses)
	(In thousands)
Obligations of states
and political subdivisions	$	31,312	$	(639	)	$	20,143	$	(1,131	)	$	51,455	$	(1,770	)
Mortgage-backed securities:
Agency		44,590		(642	)		--		--			44,590		(642	)
Non-agency		6,601		(447	)		--		--			6,601		(447	)
Corporate preferred stock		--		--			34		(5	)		34		(5	)
Other		--		--			252		(2,106	)		252		(2,106	)
Total temporarily
impaired securities	$	82,503	$	(1,728	)	$	20,429	$	(3,242	)	$	102,932	$	(4,970	)

A total of 31 securities have been identified by the Company as temporarily impaired at September 30, 2010.  Of the 31 securities, 30 are investment grade and 1 is speculative grade.  Agency, non-agency mortgage-backed securities, and municipal securities make up the majority of temporarily impaired securities at September 30, 2010.  The speculative grade security is an asset backed security that is collateralized by trust preferred issuances of financial institutions.  Market prices change daily and are affected by conditions beyond the control of the Company.  Although the Company has the ability to hold these securities until the temporary loss is recovered, decisions by management may necessitate a sale before the loss is fully recovered.  No such sales are anticipated or required as of September 30, 2010.  Investment decisions reflect the strategic asset/liability objectives of the Company.  The investment portfolio is analyzed frequently by the Company and managed to provide an overall positive impact to the Company’s income statement and balance sheet.

Trust preferred securities

Trust preferred securities were evaluated within the scope of EITF 99-20 (ASC 320 Investments – Debt and Equity Securities) for potential impairment. The Company reviews current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected.  The Company considers the structure and term of the pool and the financial condition of the underlying issuers.  Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes.  Current estimates of cash flows are based on the most recent trustee reports, announ cements of deferrals or defaults, expected future default rates and other relevant market information.  The Company analyzed the cash flow characteristics of these securities.

All of the pooled trust preferred securities in the Company’s portfolio have floating rate coupons. In performing the present value analysis of expected cash flows, we incorporate expected deferral and default rates. The deferral/default assumptions for each pooled trust preferred security were developed by reviewing the underlying collateral or issuing banks. The present value of expected future cashflows is discounted at the effective purchase yield, which in the case of the floating rate securities is equal to the

12

credit spread at time of purchase plus the current 3-month LIBOR rate.    We then compare the present value to the current book value for purposes of determining if there is an other-than-temporary impairment (“OTTI”).  The discount rate used to determine OTTI for all periods is the effective purchase yield or the credit spread at time of purchase plus the 3-month LIBOR rate.

The Company reviewed the list of issuers underlying each trust preferred security as of September 30, 2010, and ranked each bank in order of expectations for future defaults and deferrals. We reviewed data on each bank such as earnings, capital ratios, credit metrics and loan loss reserves. We then assigned a default rate to each ranking, then the default rates were applied to each bank that was performing as of the reporting date.  Finally, we summed the defaults and divided by the total remaining performing collateral in each pool. For PreTSL IV, the default rate was 50 basis points, for PreTSL V, the default rate was 75 basis points, for PreTSL XXII, the default rate was 40 basis points and for MM Community Funding I, the default rate was 1.50%.

In connection with the preparation of the financial statements included in this Form 10-Q and using the evaluation procedures described above, the Company identified five other than temporarily impaired securities within its portfolio.  During the nine months ended September 30, 2010, the Company recognized credit related impairment losses of $974,000 compared to $712,000 for the nine months ended September 30, 2009 related to these securities.

The following table provides further information on the Company’s trust preferred securities that are considered other than temporarily impaired as of September 30, 2010 (in thousands):

										Cumulative		Amount
			Current							Other		of OTTI		(1)			(2)					Expected
			Moody's	Par		Book		Fair		Comprehensive		Related to		Excess			Inst.		Deferrals/			Default			Expected			Lag
Security	Class		Rating	Value		Value		Value		(Income) Loss		Credit Loss		Subord.			Perf.		Defaults			Rate			Recovery			Years
MM Community Funding   I		A	Ca		208		208		156	$	52		--		126.56	%		8		25.32	%		1.50	%		15	%		2
MM Community Funding   I		B	Ca	$	1,000	$	238	$	56	$	182	$	762		-68.79	%		8		25.32	%		1.50	%		15	%		2
MM Community Funding   I		B	Ca		1,000	$	238		56		182		762		-68.79	%		8		25.32	%		1.50	%		15	%		2
PreTSL XXII		D	C		1,979		--		--		--		284		-32.40	%		65		28.60	%		0.40	%		15	%		2
Pre TSL V	Mez		Ba3		691		454		69		385		238		-4.92	%		2		43.10	%		0.75	%		15	%		2
				$	4,878	$	1,138	$	337	$	801	$	2,046
(1) Excess subordination. See explanation in text below tables.
(2) Number of institutions in class performing.

The Company also has the following investment in a trust preferred security not considered other than temporarily impaired as of September 30, 2010 (in thousands):

									Cumulative
		Current							Other				(1)						Expected
	Tranche	Moody's	Par		Book		Fair		Comprehensive		Institutions		Excess			Deferrals/			Default			Expected			Lag
Security	Level	Rating	Value		Value		Value		Loss		Performing		Subord.			Defaults			Rate			Recovery			Years
PreTSL  IV	Mez	Ca	$	244	$	244	$	24	$	220		4		19.14	%		27.10	%		0.50	%		15	%		2
			$	244	$	244	$	24	$	220
(1) Excess subordination. See explanation in text below tables.

Both of the preceding tables present data on the excess subordination existing in each of the trust preferred issuances included in the Company’s investment portfolio.  Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are pari passu and senior to the class owned by the Company. Negative excess subordination indicates that there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to the classes owned by the Company.

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The credit deferral/default assumptions utilized in the Company’s OTTI analysis methodology and included in the above tables considers specific collateral underlying each trust preferred security.

The following table presents a roll-forward of the credit loss component amount of OTTI recognized in earnings:

OTTI Credit Losses Recognized in Earnings
Rollforward
Amount recognized through December 31, 2009	$	1,072
Additions related to initial impairments		237
Additions related to subsequent impairments		737
Net impairment losses recognized in earnings through September 30, 2010	$	2,046

At September 30, 2010, the Company concluded that no other adverse change in cash flows occurred during the quarter and did not consider any other securities other-than-temporarily impaired.  Based on this analysis and because the Company does not intend to sell these securities and it is  more likely than not the Company will not be required to sell these securities before recovery of amortized cost basis, which may be at maturity; and, for debt securities related to corporate securities, determined that there was no other adverse change in the cash flows as viewed by a market participant, the Company does not consider the investments in these assets to be other-than-temporarily impaired at September 30, 2010.  However, there is a risk that the Company’s continuing reviews could result in recogniti on of other-than-temporary impairment charges in the future.

Note 4.                                Loan Portfolio

The following table presents the composition of the consolidated loan portfolio by loan type as of September 30, 2010 and December 31, 2009:

	September 30, 2010					December 31, 2009
	Outstanding		Percent of			Outstanding		Percent of
	Balance		Total			Balance		Total
	(In Thousands)		Portfolio			(In Thousands)		Portfolio
Commercial, financial and agricultural	$	42,394		5.79	%	$	43,367		6.29	%
Real estate construction		70,851		9.67	%		72,934		10.58	%
Real estate mortgage 1 - 4 family residential		260,201		35.51	%		267,713		38.84	%
Other real estate loans		269,498		36.78	%		243,220		35.29	%
Consumer loans		12,154		1.66	%		16,907		2.45	%
Mortgages held for sale		77,452		10.57	%		45,010		6.53	%
All other loans		137		0.02	%		138		0.02	%
Total Loans	$	732,687		100.00	%	$	689,289		100.00	%
Less: Allowance for loan losses		15,870					9,185
Net Loans	$	716,817				$	680,104
Less loans held for sale		77,452					45,010
Net portfolio loans	$	639,365				$	635,094

The following table summarizes impaired loans:

	September 30,		December 31,
	2010		2009
	(In Thousands)
Impaired loans for which,
A specific allowance has been provided	$	20,010	$	12,282
A specific allowance has not been provided		11,462		10,441
Total impaired loans	$	31,472	$	22,723
Allowance provided for impaired loans,
included in the allowance for loan losses	$	7,277	$	1,731
Average balance of impaired loans	$	26,357	$	22,740
Interest income recognized	$	784	$	1,225

There were $388,000 and $908,000 in loans 90 days past due and still accruing interest on September 30, 2010 and December 31, 2009, respectively.

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Note 5.                                Allowance for Loan Losses

The following is a summary of transactions in the allowance for loan losses:

	September 30,			December 31,
	2010			2009
	(In Thousands)
Balance at January 1	$	9,185		$	10,020
Provision charged to operating expense		11,350			4,551
Recoveries added to the allowance		119			98
Loan losses charged to the allowance		(4,784	)		(5,484	)
Balance at the end of the period	$	15,870		$	9,185

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Note 6.                      Earnings (Loss) Per Share

The following table shows the weighted average number of common shares used in computing earnings per share and the effect on the weighted average number of shares of potential dilutive common stock.  Potential dilutive common stock has no effect on income available to common shareholders.

	Nine months ended
	September 30, 2010					September 30, 2009
			Per share					Per share
	Shares		Amount			Shares		Amount
Basic earnings  (loss) per share		6,931,239	$	(0.61	)		5,208,624	$	0.32
Effect of dilutive securities:
stock options and grants		0					1,993
Diluted earnings  (loss) per share		6,931,239	$	(0.61	)		5,210,617	$	0.32

	Three months ended
	September 30, 2010					September 30, 2009
			Per share					Per share
	Shares		Amount			Shares		Amount
Basic earnings (loss) per share		6,934,366	$	(0.83	)		6,256,800	$	0.05
Effect of dilutive securities:
stock options and grants		0					2,578
Diluted earnings (loss) per share		6,934,366	$	(0.83	)		6,259,378	$	0.05

The following table shows earnings available to common shareholders used in computing earnings per share.

	For the Nine Months
(In Thousands)	Ended September 30,
	2010			2009
Net income (loss)	$	(3,939	)	$	3,714
Net (income) attributable to non-controlling interest		(311	)		(1,307	)
Net income (loss) attributable to Middleburg Financial Corporation	$	(4,250	)	$	2,407
Less:  dividends to preferred shareholders		--			(733	)
Less:  amortization of discount on preferred stock		--			(26	)
Net income (loss) available to common shareholders	$	(4,250	)	$	1,648

At September 30, 2010 and 2009, stock options, restricted grants and warrants representing 225,684 and 284,110 shares, respectively, were not included in the calculation of earnings per share because they would have been anti-dilutive.

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Note 7.                                Segment Reporting

The Company operates in a decentralized fashion in three principal business activities: retail banking services; wealth management services; and mortgage banking services.  Revenue from retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts.

Revenue from the wealth management activities is comprised of fees based upon the market value of the accounts under administration as well as commission on investment transactions.  The wealth management services are conducted by the two subsidiaries of Middleburg Investment Group, Inc - Middleburg Trust Company and Middleburg Investment Advisors, Inc. and the investment services department of Middleburg Bank.

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process.  The Company recognizes gains on the sale of loans as part of Other Income.  The mortgage banking services are conducted by Southern Trust Mortgage, LLC.

Middleburg Bank and the Company have assets in custody with Middleburg Trust Company and accordingly pay Middleburg Trust Company a monthly fee.  Middleburg Bank also pays interest to Middleburg Trust Company, Middleburg Investment Advisors and Southern Trust Mortgage on deposit accounts that each company has at Middleburg Bank.  Southern Trust Mortgage has an outstanding line of credit and a participation agreement for which it pays interest to Middleburg Bank.  Middleburg Bank provides office space and data processing services to Southern Trust Mortgage for which it receives rental and fee income.  Middleburg Investment Advisors pays the Company a management fee each month for accounting and other services provided.  Transactions related to these relationships are eliminated to reach consolidated totals.

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The following table presents segment information for the nine months ended September 30, 2010 and 2009, respectively.

	For the Nine Months Ended															For the Nine Months Ended
	September 30, 2010															September 30, 2009
	Retail			Wealth			Mortgage			Intercompany						Retail		Wealth			Mortgage			Intercompany
	Banking			Management			Banking			Eliminations			Consolidated			Banking		Management			Banking			Eliminations			Consolidated
(In Thousands)
Revenues:
Interest income	$	35,075		$	7		$	1,809		$	(948	)	$	35,943		$	37,020	$	5		$	7,766		$	(969	)	$	43,822
Trust and investment advisory
fee income		-			2,546			-			(49	)		2,497			-		2,862						(55	)		2,807
Other income		2,065			445			13,026			(7	)		15,529			2,860		-			9,600			(94	)		12,366
Total operating income		37,140			2,998			14,835			(1,004	)		53,969			39,880		2,867			17,366			(1,118	)		58,995
Expenses:
Interest expense		10,854			-			1,204			(961	)		11,097			14,359		-			1,482			(969	)		14,872
Salaries and employee benefits		9,729			2,332			9,985			-			22,046			10,017		2,245			9,593						21,855
Provision for loan losses		11,122			-			228			-			11,350			3,673		-			(89	)					3,584
Other		13,063			766			2,764			(43	)		16,550			10,581		1,136			3,333			(149	)		14,901
Total operating expenses		44,768			3,098			14,181			(1,004	)		61,043			38,630		3,381			14,319			(1,118	)		55,212
Income / (Loss) before income taxes
and non-controlling interest		(7,628	)		(100	)		654			-			(7,074	)		1,250		(514	)		3,047			-			3,783
Income tax expense (benefit)		(3,171	)		36			-			-			(3,135	)		201		(132	)		-			-			69
Net income / (loss)		(4,457	)		(136	)		654			-			(3,939	)		1,049		(382	)		3,047			-			3,714
Non-controlling interest in
(income)/loss of consolidated subsidiary					-			(311	)		-			(311	)		-		(1,307	)		-			-			(1,307	)
Net income / (loss) attributable to
Middleburg Financial Corporation	$	(4,457	)	$	(136	)	$	343		$	-		$	(4,250	)	$	1,049	$	(1,689	)	$	3,047		$	-		$	2,407
Total assets	$	1,079,410		$	15,677		$	88,905		$	(72,528	)	$	1,111,464		$	1,007,416	$	6,315		$	48,813		$	(64,767	)	$	997,777
Capital expenditures	$	508		$	13		$	25		$	-		$	546		$	923	$	10		$	32		$	-		$	965
Goodwill and other intangibles	$	-		$	4,536		$	1,867		$	-		$	6,403		$	-	$	4,707		$	1,867		$	-		$	6,574

18

The following table presents segment information for the three months ended September 30, 2010 and 2009, respectively.

	For the Three Months Ended														For the Three Months Ended
	September 30, 2010														September 30, 2009
	Retail			Wealth		Mortgage			Intercompany						Retail			Wealth			Mortgage			Intercompany
	Banking			Management		Banking			Eliminations			Consolidated			Banking			Management			Banking			Eliminations			Consolidated
(In Thousands)
Revenues:
Interest income	$	11,706		$	3	$	343			(365	)	$	11,687		$	12,423		$	1		$	1,899		$	(352	)	$	13,971
Trust and investment advisory
fee income		-			855		-			(48	)		807			-			980			-			(19	)		961
Other income		385			156		5,573			(24	)		6,090			465			-			2,699			(68	)		3,096
Total operating income		12,091			1,014		5,916			(437	)		18,584			12,888			981			4,598			(439	)		18,028
Expenses:
Interest expense		3,595			-		514			(380	)		3,729			4,565			-			402			(352	)		4,615
Salaries and employee benefits		3,151			794		3,720			-			7,665			3,179			760			2,986			-			6,925
Provision for loan losses		9,120			-		10			-			9,130			1,156			-			(192	)		-			964
Other		5,904			82		793			(57	)		6,722			3,359			368			1,340			(87	)		4,980
Total operating expenses		21,770			876		5,037			(437	)		27,246			12,259			1,128			4,536			(439	)		17,484
Income / (Loss) before income taxes
and non-controlling interest		(9,679	)		138		879			-			(8,662	)		629			(147	)		62			-			544
Income tax expense (benefit)		(3,357	)		60		-			-			(3,297	)		(62	)		(30	)		-			-			(92	)
Net income / (loss)		(6,322	)		78		879			-			(5,365	)		691			(117	)		62			-			636
Non-controlling interest in
(income)/loss of consolidated subsidiary		-			-		(423	)		-			(423	)		-			-			(26	)		-			(26	)
Net income / (loss) attributable to
Middleburg Financial Corporation	$	(6,322	)	$	78	$	456		$	-		$	(5,788	)	$	691		$	(117	)	$	36		$	-		$	610
Total assets	$	1,079,410		$	15,677	$	88,905		$	(72,528	)	$	1,111,464		$	1,007,416		$	6,315		$	48,813		$	(64,767	)	$	997,777
Capital expenditures	$	78		$	1	$	4		$	-		$	83		$	463		$	-		$	18		$	-		$	481
Goodwill and other intangibles	$	-		$	4,536	$	1,867		$	-		$	6,403		$	-		$	4,707		$	1,867		$	-		$	6,574

Note 8.                                Defined Benefit Pension Plan

The table below reflects the components of the Net Periodic Benefit Cost related to the Company’s defined benefit pension plan.

	Nine months ended September 30,
	2010			2009
	(In Thousands)
Service cost	$	--		$	654
Interest cost		240			317
Expected return on plan assets		(291	)		(246	)
Amortization of prior service cost		--			(1	)
Amortization of net loss		--			96
Net periodic benefit cost (income)	$	(51	)	$	820

	Three months ended September 30,
	2010			2009
	(In Thousands)
Service cost	$	--		$	218
Interest cost		80			105
Expected return on plan assets		(97	)		(82	)
Amortization of net loss		--			32
Net periodic benefit cost (income)	$	(17	)	$	273

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    The Company contributed $6,000 to its pension plan in January 2010.  The defined benefit pension plan was suspended as of September 30, 2009 and the Company does not expect to make significant additional contributions to the plan.  Additionally, a $50,000 restructuring charge was taken during the quarter ended September 30, 2010 related to expenditures to be made in connection with the termination of the Company’s defined benefit pension plan.

Note 9.                                Capital Purchase Program and Stock Offerings

During 2009, the Company participated in the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 and issued 22,000 shares of preferred stock to the Treasury as well as a warrant (“the Warrant”) to purchase 208,202 shares of the Company’s common stock at an initial exercise price of $15.85 per share.  As a result of the completion of the Company’s public stock offering in August 2009, the number of shares of common stock underlying the Warrant was reduced by one-half to 104,101.  On December 23, 2009, the Company redeemed all of the shares of preferred stock issued to the Treasury.  Pursuant to the purchase agreement with the Treasury, the Company may repurchase the Warrant now that it has fully redeemed its Preferred Stock.  The price for the purchase of the Warrant is subject to negotiation and there can be no assurance that the Warrant will be repurchased.  At this time, the Company has not repurchased the Warrant and the Warrant remains outstanding to the Treasury.  The Company expects that the warrant will be sold by the U.S. Treasury at public auction.

Note 10.Fair Value Measurements

The Company adopted SFAS No. 157, Fair Value Measurements (ASC 820), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

Level I:                        Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:                      Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:                      Assets and liabilities that have little to no pricing observability as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

20

Securities available for sale

Fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010.

			Fair Value Measurements at September 30, 2010 Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balances as of		Markets for		Observable		Unobservable
	September 30,		Identical Assets		Inputs		Inputs
Description	2010		(Level I)		(Level II)		(Level III)
			(in thousands)
Assets:
U.S. Treasury securities	$	1,002	$	-	$	1,002	$	-
U.S. government agency
securities		1,955				1,955
Obligations of states and
political subdivision		66,513				63,181		3,332
Mortgage-backed securities:
Agency		143,106				142,864		242
Non-agency		19,466				19,466
Corporate preferred stock		34				34
Corporate bonds		9,619				9,619
Trust preferred securities		361				361

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009.

			Fair Value Measurements at December 31, 2009 Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balances as of		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
Description	2009		(Level I)		(Level II)		(Level III)
			(in thousands)
Assets:
U.S. Treasury securities	$	3,087	$	-	$	3,087	$	-
U.S. government agency
securities		-
Obligations of states and
political subdivision		69,044				65,937		3,107
Mortgage-backed securities:
Agency		90,240				90,231		9
Non-agency		9,939				9,939
Corporate preferred stock		34				34
Corporate bonds		104				104
Trust preferred securities		251				251

The table below presents reconciliation and statements of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the nine months ended September 30, 2010:

	Available for Sale Securities
	(In Thousands)
Balance, December 31, 2009	$	3,116
Total realized and unrealized gains (losses):
Included in earnings		--
Included in other comprehensive income		225
Purchases, sales, issuances and settlements, net		233
Transfers in and (out) of Level III		--
Balance September 30, 2010	$	3,574

Certain financial assets and certain financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances.  Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or impairment of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

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Loans held for sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market.  Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level II).  As such, the Company records any fair value adjustments on a nonrecurring basis.  No nonrecurring fair value adjustments were recorded on loans held for sale during the nine months ended September 30, 2010.  Gains and losses on the sale of loans are recorded within income from mortgage banking on the consolidated statements of income.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.  The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral.  Fair value is measured based on the value of the collateral securing the loans.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, license d appraiser outside of the Company using observable market data (Level II).  However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level III. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level III).

When collateral-dependent loans are performing in accordance with the original terms of their contract, the Company continues to use the appraisal that was done at origination as the basis for the collateral value.  When collateral-dependent loans are considered non-performing, they are assessed to determine the next appropriate course of action:  either foreclosure or modification with forbearance agreement.  The loans would then be re-appraised prior to foreclosure or before a forbearance agreement is executed.  Thereafter, collateral for loans under a forbearance agreement may be re-appraised as the circumstances warrant.  This process does not vary by loan type.

For the purpose of the evaluation of the adequacy of our allowance for loan losses, new appraisals are discounted 10% for selling costs when determining the amount of the specific reserve.  Thereafter, for collateral dependent impaired loans, we consider each loan on a case-by-case basis to determine whether or not the recorded values are appropriate given current market conditions.  When warranted, new appraisals are obtained.

For real estate-secured loans, if the Company doesn’t have a useable appraisal a new one is ordered to determine fair value.  If the loan is secured by assets other than real estate and an appraisal is neither available nor feasible, the loan is treated as unsecured.

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Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period ended September 30, 2010.

			Fair Value Measurements at September 30, 2010 Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balance as of		Markets for		Observable		Unobservable
	September 30,		Identical Assets		Inputs		Inputs
Description	2010		(Level 1)		(Level II)		(Level III)
			(in thousands)
Assets:
Impaired loans	$	12,733	$	--	$	1,481	$	11,252
Mortgages held for sale	$	77,452	$	--	$	77,452	$	--

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period ended December 31, 2009.

			Fair Value Measurements at December 31, 2009 Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Balance as of		Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
Description	2009		(Level 1)		(Level II)		(Level III)
			(in thousands)
Assets:
Impaired loans	$	10,551	$	--	$	10,551	$	--
Mortgages held for sale	$	45,010	$	--	$	45,010	$	--

Other Real Estate Owned

The value of other real estate owned (“OREO”) is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser independent of the Company using observable market data (Level II).  For other real estate owned properties, the Company’s policy is to obtain “as-is” appraisals on an annual basis as opposed to “as-completed” appraisals.  This approach provides current values without regard to completion of any construction or renovation that may be in process on OREO properties.  Accordingly, the Company considers the valuations to be Level II valuations even though some properties may be in process of renovation or

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construction.  As of September 30, 2010, the Company had 2 OREO properties considered to be in construction with a carrying value of approximately $1.9 million.

For the purpose OREO valuations, appraisals are discounted 10% for selling and holding costs and it is the policy of the Company to obtain annual appraisals for properties held in OREO.

Any fair value adjustments are recorded in the period incurred as loss on other real estate owned on the consolidated statements of income.

The following table summarizes the Company’s non-financial assets that were measured at fair value on a nonrecurring basis during the period ended September 30, 2010.

		Fair Value Measurements at September 30, 2010 Using
		Quoted Prices	Significant
		in Active	Other	Significant
	Balance as of	Markets for	Observable	Unobservable
	September 30,	Identical Assets	Inputs	Inputs
Description	2010	(Level I)	(Level II)	(Level III)
		(in thousands)
Assets:
Other real estate owned	$            8,142	$                      --	$              8,142	$                   --

The following table summarizes the Company’s non-financial assets that were measured at fair value on a nonrecurring basis during the period ended December 31, 2009.

		Fair Value Measurements at December 31, 2009 Using
		Quoted Prices	Significant
		in Active	Other	Significant
	Balance as of	Markets for	Observable	Unobservable
	December 31,	Identical Assets	Inputs	Inputs
Description	2009	(Level I)	(Level II)	(Level III)
		(in thousands)
Assets:
Other real estate owned	$            6,511	$                      --	$              6,511	$                   --

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  Generally accepted accounting principles exclude certain financial instrum ents and all non-financial instruments from

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disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:

September 30, 2010		December 31, 2009
Carrying	Fair	Carrying	Fair
Amount	Value	Amount	Value

	(In Thousands)
Financial assets:
Cash and cash equivalents	$	68,983	$	68,983	$	43,210	$	43,210
Securities		242,056		242,056		172,699		172,699
Loans - portfolio		639,365		640,263		635,094		648,454
Loans - held for sale		77,452		77,452		45,010		45,010
Accrued interest receivable		3,479		3,479		3,842		3,842
Financial liabilities:
Deposits	$	896,940	$	893,900	$	805,648	$	812,080
Securities sold under agreements
to repurchase		25,416		25,416		17,199		17,199
Short-term debt		21,875		21,875		3,538		3,538
Long-term debt		52,912		54,245		35,000		35,078
Trust preferred capital notes		5,155		5,285		5,155		5,167
Accrued interest payable		1,448		1,448		1,495		1,495

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.  Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. & #160;Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.

Note 11.                      Recent Accounting Pronouncements

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (ASU) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  ASU 2009-16 was effective for transfers on or after January 1 , 2010.  The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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In June 2009, the FASB issued new guidance relating to variable interest entities.  The new guidance, which was issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 was effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  The adoption of the new guidance did not have a material impact on the Company’s cons olidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.”  ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events.  An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated.  ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements.  The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending on or after December 15, 2010.  Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance rollforward and modification disclosures will be required for periods beginning on

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or after December 15, 2010.  The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.

On September 15, 2010, the SEC issued Release No. 33-9142, “Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.”  This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

On September 17, 2010, the SEC issued Release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.”  This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosures,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.

Item 2.                       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition at September 30, 2010 and results of operations of the Company for the three months and the nine months ended September 30, 2010 and 2009 should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report and in the 2009 Form 10-K.  It should also be read in conjunction with the “Caution About Forward Looking Statements” section at the end of this discussion.

Overview

The Company is headquartered in Middleburg, Virginia and conducts its primary operations through two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc and a majority owned subsidiary, Southern Trust Mortgage, LLC.  Middleburg Bank is a community bank serving the Virginia counties of Loudoun, Fairfax and Fauquier with seven financial service centers and two limited service facilities. Middleburg Investment Group is a non-bank holding company that was formed in the fourth quarter of 2005.  It has one wholly-owned subsidiary, Middleburg Trust Company which in turn wholly owns Middleburg Investment Advisors, Inc.  Middleburg Trust Company is a trust company headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank’ ;s facilities.  Middleburg Investment Advisors is a registered investment advisor headquartered in Alexandria, Virginia serving clients in 24 states.  Southern Trust Mortgage is a regional mortgage company headquartered in Virginia Beach, Virginia and maintains offices in Virginia, Maryland, Georgia, North Carolina and South Carolina.

The Company operates under a business model that makes all of its financial and wealth management services available to its clients at all of its financial service centers.  Financial service centers are larger than most traditional retail banking branches in order to allow commercial, mortgage, retail and wealth management personnel and services to be readily available to serve clients.  By working

28

together in the financial service center and the market, the team at each financial service center becomes more effective in expanding relationships with current clients and new clients.  The Company’s goal is to assist in the creation, preservation and ultimate transfer of the wealth of its clients.

The Company generates a significant amount of its income from the net interest income earned by Middleburg Bank.  Net interest income is the difference between interest income and interest expense.  Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon.  Middleburg Bank’s cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon.  The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.  Middleburg Bank also generates income from fees on deposits and loans.

Middleburg Investment Group’s subsidiaries, Middleburg Trust Company and Middleburg Investment Advisors, generate fee income by providing investment management and trust services to its clients.  Investment management and trust fees are generally based upon the value of assets under administration and, therefore, can be significantly affected by fluctuation in the values of securities caused by changes in the capital markets.

Southern Trust Mortgage generates fees from the origination and sale of mortgage loans. Southern Trust Mortgage also maintains a real estate construction portfolio and receives interest and fee income from these loans, which, net of interest expense, is included in net interest income.

Net income available to common shareholders for the nine months ended September 30, 2010 decreased to a loss of $4.3 million from net income of $1.6 million for the nine months ended September 30, 2009.  Annualized return on total average assets for the nine months ended September 30, 2010 was   -0.5%, compared to 0.3% for the same period in 2009.  Annualized return on total average equity of Middleburg Financial Corporation, which excludes the non-controlling interest in Southern Trust Mortgage, for the nine months ended September 30, 2010 was -5.5%, compared to 3.1% for  the same  period in 2009.  The 2009 results included preferred stock outstanding at September 30, 2009.  The Company recognized losses in its loan portfolio resulting in net charge-offs again st the reserves for loan losses of $4.7 million during the nine months ended September 30, 2010.  As a result of the evaluation of the adequacy of the reserve for loan losses, the Company increased its reserve for loan losses by $6.7 million, during the nine months ended September 30, 2010.  The provision for loan losses was $11.4 million for the nine months ended September 30, 2010.

Total interest income decreased $7.9 million or 18.0%, for the nine months ended September 30, 2010, when compared to the same period in 2009.  Interest and fees on loans decreased 19.0% for the nine months ended September 30, 2010 to $30.7 million, compared to $37.8 million for the same period in 2009.  Total interest expense was $11.1 million for the nine months ended September 30, 2010, compared to $14.9 million for the nine months ended September 30, 2009, a decrease of 25.4%. Interest expense on deposits for the nine months ended September 30, 2010 decreased $2.6 million when compared to the same period in 2009 while interest bearing deposits increased $73.0 million or 10.4% during the nine months ended September 30, 2010, compared to December 31, 2009.  Total other income increased $2.9 million to $ 18.0 million for the nine months ended September 30, 2010, when compared to the same period in 2009.  Total other expense was $38.6 million for the nine months ended September 30, 2010 compared to $36.7 million for the same period in 2009.

Net income available to common shareholders for the three months ended September 30, 2010 decreased to a loss of $5.8 million from income of $325,000 for the same period in 2009.  Net charge-offs against the reserves for loan losses were $3.3 million during the three months ended September 30, 2010

29

and the provision for loan losses was $9.1 million.  Total interest income decreased by $2.3 million or 16.3%, for the three months ended September 30, 2010, when compared to the same period in 2009.  Interest and fees on loans decreased 17.9% for the three months ended September 30, 2010 to $9.8 million, compared to $11.9 million for the same period in 2009.  Total interest expense decreased $886,000 or 19.2%, for the three months ended September 30, 2010, when compared to the same period in 2009.  Other income increased by $2.8 million or 70% for the three months ended September 30, 2010, when compared to the same period in 2009.  Total other expense increased by $2.5 million or 20.8% for the three months ended September 30, 2010 compared to the same period in 2009.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act contains significant modifications to the current bank regulatory structure and requires various federal agencies to adopt a broad range of new implementing rules and regulations.  While not determinable at this time, the impact of the Dodd-Frank Act and the rules and regulations that will be promulgated thereunder could significantly affect our operations, increase our operating costs and divert management resources.  Other than the potential impact of this legislation, the Company is not aware of any current recommendations by any regulatory authorities that, if implemented, would have a material effect on the registrant’s liquidity, capital resourc es or results of operations.

Critical Accounting Policies

General

The financial condition and results of operations presented in the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and this section are, to a large degree, dependent upon the accounting policies of the Company.  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is discussion of those accounting policies that management believes are the most important (“Critical Accounting Policies”) to the portrayal and understanding of the Company’s financial condition and results of operations.  The Critical Accounting Policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio.  The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance:  the systematic methodology used to determine the appropriate level of the allowance to provide assurance the methodology is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

Middleburg Bank evaluates various loans individually for impairment as required by applicable accounting guidance.  Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management.  The evaluations are based upon discounted expected cash flows or collateral valuations.  If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the

30

amount of impairment.  If a loan evaluated individually is not determined to be impaired, then the loan is added back to its pool of loans with similar risk characteristics which is then assigned a loss rate factor as discussed below.

For loans without individual measures of impairment, Middleburg Bank makes estimates of losses for groups of loans as required by applicable accounting standards.  Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type.  A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan.  The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including:  borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standa rds and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loans losses.  This estimate of losses is compared to the allowance for loan losses of Middleburg Bank as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made.  If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates.  If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.  Middleburg Bank recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high.  If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

Intangibles and Goodwill

The Company had approximately $6.4 million in intangible assets and goodwill at September 30, 2010, a decrease of $128,000 or 2% since December 31, 2009.  On April 1, 2002, the Company acquired Middleburg Investment Advisors, a registered investment advisor, for $6.0 million.  Approximately $5.9 million of the purchase price was allocated to intangible assets and goodwill.  In connection with this investment, a purchase price valuation was completed to determine the appropriate allocation to identified intangibles.  The valuation concluded that approximately 42% of the purchase price was related to the acquisition of customer relationships with an amortizable life of 15 years.  Another 19% of the purchase price was allocated to a non - -compete agreement with an amortizable life of seven years.  The remainder of the purchase price has been allocated to goodwill.  Approximately $1.0 million of the $6.4 million in intangible assets and goodwill at September 30, 2010 was attributable to the Company’s investment in Middleburg Trust Company.  With the consolidation of Southern Trust Mortgage, the Company recognized $1.9 million in goodwill as part of its equity investment.

The purchase price allocation process requires management estimates and judgment as to expectations for the life span of various customer relationships as well as the value that key members of management add to the success of the Company.  For example, customer attrition rates were determined based upon assumptions that the past five years may predict the future.  If the actual attrition rates, among other assumptions, differed from the estimates and judgments used in the purchase price allocation, the amounts recorded in the Consolidated Financial Statements could result in a possible impairment of the intangible assets and goodwill or require acceleration in the amortization expense.

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In addition, accounting standards require that goodwill be tested annually using a two-step process.  The first step is to identify a potential impairment.  The second step measures the amount of the impairment loss, if any.  Processes and procedures have been identified for the two-step process.

When the Company completes its ongoing review of the recoverability of intangible assets and goodwill,   factors that are considered important to determining whether impairment might exist include loss of customers acquired or significant withdrawals of the assets currently under management and/or early retirement or termination of key members of management.  Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company’s financial condition and results of operations.  The most recent review was performed as of September 30, 2010 and no impairment was indicated.

Tax-Equivalent Interest Income

Tax-equivalent interest income is gross interest income adjusted for the non-taxable interest income earned on loans, municipal securities and corporate securities, which are dividend-received deduction eligible.  The effective tax rate of 34% is used in calculating tax equivalent income related to loans, municipal securities and corporate securities.

Other-Than-Temporary Impairment (OTTI)

Approximately $974,000 in losses related to other-than-temporary impairment on trust-preferred securities was recognized for the nine months ended September 30, 2010 and approximately $726,000 was recognized during the third quarter.  At September 30, 2010, the Company had $1.4 million in trust-preferred securities in its portfolio.

In accordance with applicable accounting guidance, we determine the other-than-temporary impairment for the trust preferred securities in the securities portfolio based on an evaluation of the underlying collateral.  We developed cash flow projections based upon assumptions of default/deferral rates, recovery rates and prepayment rates for the collateral.  The present value of the projected cash flows was calculated by discounting the projected cash flows using the effective yield at purchase in accordance with applicable accounting guidance.  Finally, the present values of the projected cash flows were compared to the carrying values of the securities.  If the present values were less than the carrying value, we determined that the security h ad an other-than-temporary impairment equal to the difference between the present value and the carrying value of the bond.

The Company may need to recognize additional other-than-temporary impairments related to trust preferred securities during the remainder of 2010.  We evaluate default assumptions and cash flow projections in relation to the credit performance of the collateral that underlies the trust preferred securities.  Should additional deferrals/defaults occur on the collateral, projected cash flows from the collateral could be reduced which could result in additional other-than-temporary impairments in 2010.

Financial Condition

Assets, Liabilities and Shareholders’ Equity

Total assets for the Company increased to $1.1 billion at September 30, 2010, compared to $976.3 million at December 31, 2009, representing an increase of $135.1 million or 13.8%.  Total average assets increased 7.4% from $1.01 billion for the three months ended September 30, 2009 to $1.09 billion for the same period in 2010.  Total liabilities were $1.0 billion at September 30, 2010, compared to

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$873.0 million at December 31, 2009.  Total average liabilities increased $84.8 million or 9.4% to $981.5 million for the three months ended September 30, 2010, compared to the same period in 2009.  Average shareholders’ equity decreased 8.3% or $9.5 million over the same periods.

Loans

Total loans, including loans held for sale at September 30, 2010 increased $43.4 million to $732.7 million from the December 31, 2009 amount of $689.3 million.  Loans held for sale increased to $77.4 million at September 30, 2010, compared to $45.0 million at December 31, 2009, an increase of 72.1% during the period.  Southern Trust Mortgage originated $555.4 million in loans for the nine months ended September 30, 2010, compared to $785.8 million for the nine months ended September 30, 2009.  The Company experienced a decrease in real estate construction loans, which were $70.9 million at September 30, 2010, compared to $72.9 million at December 31, 2009.  Real estate mortgage loans of $529.7 million at September 30, 2010 increased from the December 31, 2009 amount of $510.9 million.   ;Commercial, financial and agricultural loans, which are primarily loans to businesses, decreased to $42.4 million at September 30, 2010, compared to $43.4 at December 31, 2009.  Southern Trust Mortgage has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank.  The line of credit and the participation amounts are eliminated in the consolidation process and are not reflected in the Company’s consolidated financial statements.  Net charge-offs were $4.7 million for the nine months ended September 30, 2010.  The provision for loan losses for the nine months ended September 30, 2010 was $11.4 million compared to $3.6 million for the same period in 2009.  The allowance for loan losses at September 30, 2010 was $15.9 million or 2.42% of total loans outstanding, excluding loans held for sale, compared to $9.2 million or 1.43% at December 31, 2009.

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The following table presents information on the Company’s nonperforming assets as of the dates indicated:

Nonperforming Assets
Middleburg Financial Corporation
	September 30,			December 31,
	2010			2009			2008			2007			2006
	(In thousands)
Nonperforming assets:
Nonaccrual loans	$	29,923		$	8,608		$	6,890		$	6,635		$	-
Restructured loans		404			2,096			-			-			-
Accruing loans greater than
90 days past due		388			908			1,117			30			19
Total nonperforming loans	$	30,715		$	11,612		$	8,007		$	6,665		$	19
Foreclosed property		8,142			6,511			7,597			-			-
Total Nonperforming assets	$	38,857		$	18,123		$	15,604		$	6,665		$	19
Allowance for loan losses	$	15,870		$	9,185		$	10,020		$	7,093		$	5,582
Nonperforming loans to
period end portfolio loans		4.69	%		1.80	%		1.19	%		1.03	%		0.00	%
Allowance for loan losses
to nonperforming loans		52	%		79	%		125	%		106	%		29,379	%
Nonperforming assets to
period end assets		3.50	%		1.86	%		1.58	%		0.79	%		0.00	%

The Company utilizes the ratios included in the above table to evaluate the relative level of nonperforming assets included in the Company’s balance sheet.  Changes in the ratios assist management in evaluating the overall adequacy of the allowance for loan losses and any reserve against other real estate owned.

Our accounting policy for foreclosed property does not include any allowance for loan loss amounts subsequent to the reclassification event which writes the loan down to fair value when moved into foreclosed property.

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The following table depicts the transactions, in summary form, that occurred to the allowance for loan losses in each period presented:

Allowance for Loan Losses
	Nine Months		Year
	Ended		Ended
	September 30,		December 31,
	2010		2009
Balance, beginning of year	$	9,185	$	10,020
Loans charged off:
Commercial, financial and agricultural		173		343
Real estate construction		1,197		836
Real estate mortgage		3,105		3,580
Consumer loans		309		725
Total loans charged off		4,784		5,484
Recoveries of loans previously charged off:
Commercial, financial and agricultural		67		21
Real estate construction		-		-
Real estate mortgage		5		9
Consumer loans		47		68
Total recoveries		119		98
Net charge-offs		4,665		5,386
Provision charged to expense		11,350		4,551
Balance, end of period	$	15,870	$	9,185

The following table shows the balance of the allowance for loan losses allocated to each major loan type and the percent of loans in each category to total loans as of September 30, 2010 and December 31, 2009:

Allocation of Allowance for Loan Losses
			Percent of loans					Percent of loans
	September 30,		in each category			December 31,		in each category
	2010		to total loans			2009		to total loans
Commercial, financial and agricultural	$	914		6.47	%	$	819		6.73	%
Real estate construction		4,467		10.81	%		2,087		11.35	%
Real estate mortgage		9,725		80.84	%		6,038		79.28	%
Consumer loans		764		1.88	%		241		2.64	%
Totals	$	15,870		100.00	%	$	9,185		100.00	%

Non-performing Loans

Non-performing loans increased by $17.7 million in the third quarter to $30.7 million, largely as the result of four credit relationships totaling $16.8 million being moved to non-accrual status during the quarter.  A loan loss reserve of approximately $3.2 million has been established to provide for potential losses on these credits.

The following table provides additional information on the largest four relationships classified as non-accrual during the quarter ended September 30, 2010:

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	Non-Accrual Loans - Large Credit Relationships
	September 30, 2010
											Year
		Year				ALLL		Date			Range
	Type of	Range		Non-accrual		Allocated		Placed on			of Last
	Loan	Originated		Loan Balance		to Loans		Non-accrual		Collateral	Appraisal
1	CRE/LOC		2006-2007	$	10,427	$	2,137		3Q2010	Business Assets / Real Estate		2006-2007
2	MTG		2005-2007		3,529		130		3Q2010	Real Estate		2010
3	MTG		2005		1,829		635		3Q2010	Real Estate		2010
4	CRE		2007-2008		1,028		323		3Q2010	Real Estate		2007
		Totals		$	16,812	$	3,226

The largest relationship moved to non-accrual during the quarter is a $10.4 million relationship.  The borrower is making substantial principal curtailments in accordance with a forbearance agreement entered into during the quarter.  This relationship has never been more than 45 days past due, and an orderly liquidation of collateral is under way with the full cooperation of the borrower.

The second relationship totaled $3.5 million and is secured by a large estate property.  Subsequent to the end of the third quarter, the loans in this relationship were brought current by the borrower.  The third relationship is a $1.8 million loan collateralized by owner-occupied commercial real estate.  This borrower is now making regular payments under a forbearance agreement entered into during the third quarter.  The fourth relationship totals $1.0 million and consists of an $817,000 residential mortgage and two commercial loans.  The borrower continues to make all payments as agreed under a forbearance agreement.

Restructured Loans

The total balance of restructured loans at September 30, 2010 was $3.1 million of which $2.7 million were included in the Company’s non-accrual loan totals at that date and $404,000 represented loans performing as agreed to the restructured terms.  This compares with $2.1 million in restructured loans at December 31, 2009, an increase of $1.0 million or 47.3%.  All loans classified as restructured are considered to be non-performing assets as of September 30, 2010.

As of September 30, 2010, the Company had 14 restructured loans that it considered to be impaired with an aggregate balance of $2.7 million and $647,000 in restructured loans were charged off during the third quarter.  The Company requires six timely consecutive monthly payments before a restructured loan that has been placed on non-accrual can be returned to accrual status.  Formal, standardized loan restructuring programs are not utilized by the Company.  Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provision.  The Company has not employed workout strategies resulting in one loan being restructured into multiple new loans.

Approximately $484,000 is included in the Company’s allowance for loan losses at September 30, 2010 related to restructured loans.

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Securities

Securities, excluding Federal Reserve and Federal Home Loan Bank stock, increased to $242.0 million at September 30, 2010 compared to $172.7 million at December 31, 2009, an increase of 40.2% during the period. The average balance of federal funds sold was zero for the nine months ended September 30, 2010, compared to $27.5 million for the nine months ended September 30, 2009 while the average balance in interest-bearing bank balances increased to $49.1 million for the nine months ended September 30, 2010 versus $26.1 million for the same period in 2009.  The Company sold $56.5 million in securities, received proceeds of $39.7 million from maturities and principal payments, and purchased securities of $161.2 million during the nine months ended September 30, 2010.  Approximately $974,000 in losses related to other- than-temporary impairments on trust-preferred securities was recognized for the nine months ended September 30, 2010.  At September 30, 2010, the Company had $1.4 million in trust-preferred securities in its portfolio of which $1.1 million are considered other-than-temporarily impaired.

The Company will continue to maintain its securities portfolio as a source of liquidity and collateral.  At September 30, 2010, the year-to-date tax equivalent yield on the securities portfolio was 4.02%.

Premises and Equipment

Premises and equipment decreased $510,000 from $23.5 million at December 31, 2009 to $23.0 million at September 30, 2010.  The decrease is the net of the change in accumulated depreciation and additions to premises and equipment during the period.

Goodwill and Other Identified Intangibles

Goodwill and other identified intangibles decreased $128,000 to $6.4 million at September 30, 2010 as the result of amortization of identified intangibles related to the acquisition of Middleburg Investment Advisors.

Other Real Estate Owned

Other real estate owned increased $1.6 million to $8.1 million at September 30, 2010 from $6.5 million at December 31, 2009.  The increase is the net of real estate loans charged-off and subsequently added to other real estate owned, valuation adjustments and sales of other real estate owned properties during the period.  During the nine months ended September 30, 2010, the Company received proceeds of $1.0 million from the sale of other real estate owned properties and incurred a net loss of $185,000 on the sales.

Other Assets

Other assets increased $3.5 million to $34.1 million at September 30, 2010, when compared to December 31, 2009.  The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $15.4 million and deferred tax assets in the amount of $5.1 million at September 30, 2010.

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Deposits

Deposits increased $91.3 million to $896.9 million at September 30, 2010 from $805.6 million at December 31, 2009.  Average deposits for the nine months ended September 30, 2010 increased 19.1% or $148.3 million compared to average deposits for the nine months ended September 30, 2009.  Average interest bearing demand deposits were $282.2 million for the nine months ended September 30, 2010 compared to $245.3 million for the nine months ended September 30, 2009.  Average interest bearing deposits were $727.2 million for the nine months ended September 30, 2010 compared to $670.1 million for the nine months ended September 30, 2009.

  The Company has an interest bearing product, known as Tredegar Institutional Select, that integrates the use of the cash within client accounts at Middleburg Trust Company for overnight funding at the Bank.  The overall balance of this product was $33.2 million at September 30, 2010 and is reflected in both the savings and interest bearing demand deposits and the “securities sold under agreements to repurchase” amounts on the balance sheet.  Excluding the Tredegar Institutional Select product, savings and interest bearing demand deposits increased by $41.7 million from December 31, 2009 to September 30, 2010.

Time deposits increased $49.6 million from December 31, 2009 to $351.1 million at September 30, 2010.  Time deposits include brokered certificates of deposit, which decreased $2.1 million to $61.9 million at September 30, 2010 from the December 31, 2009 amount of $64.0 million.  The brokered certificates of deposit have maturities ranging from four months to five years.  Securities sold under agreements to repurchase (“Repo Accounts”) increased $8.2 million from $17.2 million at December 31, 2009 to $25.4 million at September 30, 2010.  The Repo Accounts include certain long-term commercial checking accounts with average balances that typically exceed $100,000 and the Tredegar Institutional Select account which includes accounts maintained by Middleburg Trust Company’s business clients.  All repurchase agreement transactions entered into by the Company are accounted for as collateralized financings and not as sales.

Short-term Borrowings and Long-term Debt

The Company had no FHLB overnight advances at September 30, 2010 and December 31, 2009, respectively.  Southern Trust Mortgage has a line of credit with a regional bank that is primarily used to fund its loans held for sale.  At September 30, 2010, this line had an outstanding balance of $21.9 million compared to $3.5 million at December 31, 2009.  The line of credit is based on the London Inter-Bank Offered Rate (“LIBOR”).  Southern Trust Mortgage also has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank.  The line of credit and the outstanding balance under the participation agreement are eliminated in the consolidation process and are not reflected in the consolidated financial statements of the Company.  Long-term debt increased $17.9 million at September 30, 2010 from $35.0 million at December 31, 2009.  The increase in long-term debt was used to fund loan originations and securities purchases.

Other Liabilities

Other liabilities increased $1.3 million to $7.7 million at September 30, 2010, when compared to December 31, 2009 primarily due to accrued restructuring charges of $530,000 at September 30, 2010 as discussed in the “Other Expense” section of this report.  Additionally the other liabilities section of the balance sheet includes escrows payable in the amount of $258,000 at September 30, 2010, compared to $141,000 at December 31, 2009.  The remainder of the increase from December 31, 2009 to September

38

30, 2010 is attributable to changes in accrued interest payable balances and miscellaneous liability balances.

Non-controlling Interest in Consolidated Subsidiary

The Company, through Middleburg Bank owns 57.1% of the issued and outstanding membership interest units in Southern Trust Mortgage.  The remaining 42.9% of issued and outstanding membership interest units are owned by other partners.  The ownership interest of these partners is represented in the financial statements as “Non-controlling Interest in Consolidated Subsidiary.”  The non-controlling interest is reflected in total shareholders’ equity.  Southern Trust Mortgage also has preferred stock of $1.0 million issued and outstanding at September 30, 2010.  The Company, through Middleburg Bank owns 60.9% of the issued and outstanding preferred stock in Southern Trust Mortgage.  The remaining 39.1% of issued and outstanding preferred stock is owned by other p artners.  The preferred stock held by these other partners is reflected in other liabilities.

Capital

Total shareholders’ equity, including non-controlling interest, was $101.4 million at September 30, 2010.  This amount represents a decrease of 1.9% from the December 31, 2009 amount of $103.4 million. Middleburg Financial Corporation’s shareholders’ equity, which excludes the non-controlling interest, was $98.3 million at September 30, 2010, compared to $100.3 million at December 31, 2009.  The book value of common shareholders was $14.22 per share at September 30, 2010 and $14.52 at December 31, 2009.  The following table shows the Company’s risk-based capital ratios as of September 30, 2010 and December 31, 2009:

	September 30,			December 31,
	2010			2009
Total risk-based capital ratio		13.5	%		15.1	%
Tier 1 risk-based capital ratio		12.3	%		13.9	%
Tier 1 leverage ratio		9.1	%		10.4	%

Results of Operations

Net Interest Income

Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on earning assets and the interest expense paid on deposits and other interest bearing liabilities.  Net interest income totaled $24.8 million for the first nine months of 2010 compared to $28.9 million for the same period in 2009, a decrease of 14.2%.  Total interest income decreased 18.0% and total interest expense decreased 25.4% when comparing the nine months ended September 30, 2010 to the nine months ended September 30, 2009.  The decrease in total interest income from 2009 to 2010 is primarily the result of lower market yields on loans and investments and higher average balances in lower yielding interest bearing deposits in other banks.  Total interest expe nse was $11.1 million for the nine months ended September 30, 2010 compared to $14.9 million for the same

39

period in 2009.  Average earning assets were $955.9 million for the nine months ended September 30, 2010, compared to $940.1 million for the nine months ended September 30, 2009.

Net interest income for the three months ended September 30, 2010 was $8.0 million, compared to $9.4 million for the same period in 2009.  Total interest income for the three months ended September 30, 2010 was $11.7 million compared to $14.0 million for the three months ended September 30, 2009 representing a decrease of 16.3%.  Total interest expense was $3.7 million for the three months ended September 30, 2010 compared to $4.6 million for the same period in 2009 representing a decrease of 19.3%.  Average earning assets increased $67.8 million to $1.0 billion for the three months ended September 30, 2010 from $937.1 million for the three months ended September 30, 2009.  Average interest bearing liabilities increased $78.5 million to $857.3 million for the three months ended September 30, 201 0 when compared to the same period in 2009.

The following tables reflect an analysis of the Company’s net interest income using the daily average balances of the Company’s assets and liabilities for the periods indicated.  Non-accrual loans are included in the loan balances.

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	Middleburg Financial Corporation
	Average Balances, Income and Expenses, Yields and Rates
	Nine Months Ended September 30,
	2010								2009
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (2)			Balance			Expense		Rate (2)
	(Dollars in thousands)
Assets :
Securities:
Taxable	$	145,188		$	3,269		3.01	%	$	105,853		$	3,686		4.66	%
Tax-exempt (1)		60,078			2,900		6.45	%		64,441			3,406		7.07	%
Total securities	$	205,266		$	6,169		4.02	%	$	170,294		$	7,092		5.57	%
Loans
Taxable	$	701,446		$	30,661		5.84	%	$	716,151		$	37,793		7.06	%
Tax-exempt  (1)		-			-		0.00	%		1			-		0.00	%
Total loans	$	701,446		$	30,661		5.84	%	$	716,152		$	37,793		7.06	%
Federal funds sold		-			-		0.00	%		27,551			42		0.20	%
Interest bearing deposits in
other financial institutions		49,194			95		0.27	%		26,151			53		0.27	%
Total earning assets	$	955,906		$	36,925		5.17	%	$	940,148		$	44,980		6.40	%
Less: allowances for credit losses		(9,742	)							(9,153	)
Total nonearning assets		92,521								82,868
Total assets	$	1,038,685							$	1,013,863
Liabilities:
Interest-bearing deposits:
Checking	$	282,245		$	1,748		0.83	%	$	245,326		$	2,425		1.32	%
Regular savings		75,671			544		0.96	%		55,212			555		1.34	%
Money market savings		52,625			323		0.82	%		40,354			336		1.11	%
Time deposits:
$100,000 and over		163,380			3,508		2.87	%		133,269			3,238		3.25	%
Under $100,000		153,284			3,287		2.87	%		195,944			5,427		3.70	%
Total interest-bearing deposits	$	727,205		$	9,410		1.73	%	$	670,105		$	11,981		2.39	%
Short-term borrowings		9,065			245		3.61	%		21,667			518		3.20	%
Securities sold under agreements
to repurchase		24,402			144		0.79	%		21,413			32		0.20	%
Long-term debt		53,236			1,298		3.26	%		77,096			2,341		4.06	%
Total interest-bearing liabilities	$	813,908		$	11,097		1.82	%	$	790,281		$	14,872		2.52	%
Non-interest bearing liabilities
Demand Deposits		112,721								108,196
Other liabilities		6,657								10,603
Total liabilities	$	933,286							$	909,080
Non-controlling interest		2,781								2,692
Shareholders' equity		102,618								102,091
Total liabilities and shareholders'
equity	$	1,038,685							$	1,013,863
Net interest income				$	25,832							$	30,108
Interest rate spread							3.35	%							3.88	%
Interest expense as a percent of
average earning assets							1.55	%							2.11	%
Net interest margin							3.61	%							4.28	%
(1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%.
(2) All yields and rates have been annualized on a 365 day year.

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	Middleburg Financial Corporation
	Average Balances, Income and Expenses, Yields and Rates
	Three Months Ended September 30,
	2010								2009
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (2)			Balance			Expense		Rate (2)
	(Dollars in thousands)
Assets :
Securities:
Taxable	$	172,955		$	1,198		2.75	%	$	102,120		$	1,187		4.61	%
Tax-exempt (1)		60,101			941		6.21	%		66,146			1,172		7.03	%
Total securities	$	233,056		$	2,139		3.64	%	$	168,266		$	2,359		5.56	%
Loans
Taxable	$	716,173		$	9,832		5.45	%	$	695,738		$	11,974		6.83	%
Total loans	$	716,173		$	9,832		5.45	%	$	695,738		$	11,974		6.83	%
Federal funds sold		-			-					29,640			15		0.20	%
Interest bearing deposits in
other financial institutions		55,721			36		0.25	%		43,478			22		0.20	%
Total earning assets	$	1,004,950		$	12,007		4.74	%	$	937,122		$	14,370		6.08	%
Less: allowances for credit losses		(10,156	)							(9,111	)
Total nonearning assets		93,947								85,368
Total assets	$	1,088,741							$	1,013,379
Liabilities:
Interest-bearing deposits:
Checking	$	280,585		$	569		0.80	%	$	263,674		$	834		1.25	%
Regular savings		79,348			173		0.86	%		58,624			195		1.32	%
Money market savings		55,190			101		0.73	%		45,887			121		1.05	%
Time deposits:
$100,000 and over		169,903			1,217		2.84	%		137,241			1,073		3.10	%
Under $100,000		171,379			1,100		2.55	%		182,109			1,643		3.58	%
Total interest-bearing deposits	$	756,405		$	3,160		1.66	%	$	687,535		$	3,866		2.23	%
Short-term borrowings		16,341			134		3.25	%		2,787			51		7.54	%
Securities sold under agreements
to repurchase		26,534			63		0.94	%		20,609			7		0.13	%
Long-term debt		58,067			372		2.54	%		67,938			691		4.03	%
Total interest-bearing liabilities	$	857,347		$	3,729		1.73	%	$	778,869		$	4,615		2.35	%
Non-interest bearing liabilities
Demand deposits		117,110								107,092
Other liabilities		7,080								10,782
Total liabilities	$	981,537							$	896,743
Non-controlling interest		2,947								2,909
Shareholders' equity		104,257								113,727
Total liabilities and shareholders'
equity	$	1,088,741							$	1,013,379
Net interest income				$	8,278							$	9,755
Interest rate spread							3.01	%							3.73	%
Interest expense as a percent of
average earning assets							1.47	%							1.95	%
Net interest margin							3.27	%							4.13	%
(1) Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%.
(2) All yields and rates have been annualized on a 365 day year.

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Interest and fee income from loans decreased $7.1 million to $30.7 million for the nine months ended September 30, 2010 compared to $37.8 million for the same period in 2009.  The tax equivalent weighted average yield of loans decreased 122 basis points from 7.06% for the nine months ended September 30, 2009 to 5.84% for the nine months ended September 30, 2010.

For the three months ended September 30, 2010, interest income from loans was $9.8 million compared to $12.0 million for the three months ended September 30, 2009.  The tax equivalent weighted average yield of loans decreased 138 basis points from 6.83% for the three months ended September 30, 2009 to 5.45% for the three months ended September 30, 2010.

Interest income from the securities portfolio and short-term investments decreased by $751,000 to $5.1 million for the nine month period ended September 30, 2010 from $5.9 million for the nine month period ended September 30, 2009.  For the nine months ended September 30, 2010, the tax equivalent yield on securities was 4.02% compared to 5.57% for the same period in 2009

For the three month period ended September 30, 2010, interest income from the securities portfolio decreased by $142,000 to $1.8 million compared to the same period in 2009.  The tax equivalent yield on securities for the three months ended September 30, 2010 decreased 192 basis points to 3.64% compared to 5.56% for the three months ended September 30, 2009.

Interest expense on deposits decreased $2.6 million to $9.4 million for the nine months ended September 30, 2010, compared to $12.0 million for the same period in 2009.  The mix of demand and savings deposits versus time deposits changed slightly to 60.9% in demand and savings deposits, and 39.1% in time deposits at September 30, 2010.  At December 31, 2009, the mix was 62.6% in savings and demand deposits, versus 37.4% in time deposits.   For the nine months ended September 30, 2010, average deposits increased $61.6 million to $839.9 million, compared to the same period in 2009.

Interest expense on deposits for the three months ended September 30, 2010, decreased $706,000 compared to the same period in 2009.  For the three months ended September 30, 2010, average deposits increased $79.0 million to $873.5 million, compared to the same period in 2009.

Interest expense for securities sold under agreements to repurchase, which includes Tredegar Institutional Select, increased $112,000 for the nine months ended September 30, 2010 compared to the same period ended September 30, 2009.  Tredegar Institutional Select earns interest at a rate equal to approximately 90% of the Federal Home Loan Bank of Atlanta’s overnight rate.  Interest expense related to Federal funds purchased and short-term borrowings decreased $273,000 from $518,000 for the nine months ended September 30, 2009 to $245,000 for the nine months ended September 30, 2010. Interest expense related to long-term debt decreased $1.0 million from $2.3 million for the nine months ended June 30, 2009 to $1.3 million for the nine months ended September 30, 2010.

Interest expense for securities sold under agreements to repurchase increased to $63,000 for the three months ended September 30, 2010 from $7,000 for the three months ended September 30, 2009.  Interest expense related to Federal funds purchased and short-term borrowings increased $83,000 from $51,000 for the three months ended September 30, 2009 to $134,000 for the three months ended September 30, 2010. Interest expense related to long-term debt decreased $319,000 from $691,000 for the three months ended September 30, 2009 to $372,000 for the three months ended September 30, 2010.

The net interest margin, on a tax equivalent basis, was 3.61% for the nine months ended September 30, 2010 compared to 4.28% for the same period in 2009.  For the three months ended September 30, 2010, the net interest margin, on a tax equivalent basis, was 3.27% compared to 4.13% for the same three-month period in 2009.  The average yield on earning assets was 4.74% for the quarter

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ended September 30, 2010 while the average cost of interest bearing liabilities was 1.73%, representing decreases of 48 basis points and 9 basis points, respectively, from the previous quarter.  The net interest margin for the three months ended September 30, 2010 was 3.27%, compared to 3.67% for the previous quarter, a decline of 40 basis points during the period. While the cost-of-funds did decrease during the third quarter, the decrease was not sufficient to offset the decline in yields of earning assets. The decline in yields on earning assets in the third quarter reflected increased runoff of loans as well as an increase in prepayments of mortgage securities in the securities portfolio, in conjunction with the low interest rate environment in the third quarter. The Company’s net interest margin is not a measur ement under accounting principles generally accepted in the United States, but it is a common measure used by the financial service industry to determine how profitably earning assets are funded.  The net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets.  Because a portion of interest income earned by the Company is non taxable, the tax equivalent net interest income is considered in the calculation of this ratio.  Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense.  The tax rate utilized in calculating the tax benefit is 34.0% for all periods presented.  The reconciliation of tax equivalent net interest income, which is not a measurement under accounting principles generally accepted in the United States, to net interest income is reflected in the table below.

Reconciliation of Net Interest Income to

Tax Equivalent Net Interest Income

	For the Nine months ended
	September 30,
	2010		2009
GAAP measures:	(in thousands)
Interest Income – Loans	$	30,661	$	37,793
Interest Income - Investments & Other		5,282		6,029
Interest Expense – Deposits		9,410		11,981
Interest Expense - Other Borrowings		1,687		2,891
Total Net Interest Income	$	24,846	$	28,950
NON-GAAP measures:
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities		986		1,158
Total Tax Benefit Realized on Non-Taxable Interest Income	$	986	$	1,158
Total Tax Equivalent Net Interest Income	$	25,832	$	30,108

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	For the Three months ended
	September 30,
	2010		2009
GAAP measures:	(in thousands)
Interest Income – Loans	$	9,832	$	11,974
Interest Income - Investments & Other		1,855		1,998
Interest Expense – Deposits		3,160		3,866
Interest Expense - Other Borrowings		569		749
Total Net Interest Income	$	7,958	$	9,357
NON-GAAP measures:
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities		320		398
Total Tax Benefit Realized on Non-Taxable Interest Income	$	320	$	398
Total Tax Equivalent Net Interest Income	$	8,278	$	9,755

The decrease in tax equivalent net interest margin was attributed to the decrease in average loan balances and a lower yield on both loans and investments from September 30, 2009 to September 30, 2010.  The Company’s total average earning assets increased by $15.8 million when comparing the nine months ended September 30, 2010 to the nine months ended September 30, 2009, while the yield on average earnings assets decreased by 123 basis points when comparing the same periods.  Average balances in interest checking, regular savings and money market accounts increased by $69.6 million when comparing the nine months ended September 30, 2010 to the same period in 2009.  The weighted average cost of these accounts for the nine months ended September 30, 2010 and 2009 was .85% and 1.30%, respectively.  ; The average balance of certificates of deposits decreased $12.5 million when comparing the nine months ended September 30, 2009 to the nine months ended September 30, 2010.  The weighted average cost of the Company’s certificates of deposits decreased by 61 basis points to 2.87% for the nine months ended September 30, 2010 versus the same period in 2009.

When comparing the three months ended September 30, 2010 to the same period  in 2009, the Company’s total average earning assets increased $67.8 million, while the yield on average earnings assets decreased by 134 basis points when comparing the same periods.  Average balances in interest checking, regular savings and money market accounts increased by $46.9 million when comparing the three months ended September 30, 2010 to the same period in 2009.  The weighted average cost of these accounts for the three months ended September 30, 2010 and 2009 was .81% and 1.24%, respectively.  The average balance of certificates of deposits decreased by $21.9 million when comparing the three months ended September 30, 2010 to the three months ended September 30, 2009.  The weighted average c ost of the Company’s certificates of deposits decreased by 68 basis points to 2.72% for the three months ended September 30, 2010 versus the three months ended September 30, 2009.

Other Income

Other income includes, among other items, fees generated by the retail banking and investment services departments of the Bank as well as by Middleburg Trust Company and Middleburg Investment Advisors.  Other income also includes income from the Company’s 57.1% ownership interest in Southern Trust Mortgage, LLC.  Other income increased 18.8% to $18.0 million for nine months ended September 30, 2010 compared to the same period in 2009.  Other income increased 70.0% to $6.9 million for three months ended September 30, 2010 compared to the same period in 2009.

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Commissions and fees from trust and investment advisory activities earned by Middleburg Trust Company (“MTC”) and Middleburg Investment Advisors (“MIA”) increased 4.0% to $2.5 million for the nine month period ended September 30, 2010 compared to $2.4 million for the same period in 2009.   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 were at $1.2 billion at September 30, 2010, an increase of 9.1% relative to September 30, 2009.  MTC’s assets under administration were $905.6 million at September 30, 2010 and $771.5 million at December 31, 2009.  MIA’s assets under administration were $325.2 million at September 30, 2010 and $313.5 million at December 31, 2009.

Commissions and fees from trust and investment advisory activities decreased 0.7% to $807,000 for the three month period ended September 30, 2010 compared to $813,000 for the same period in 2009.

Service charges on deposits decreased 1.6% to $1.4 million for the nine months ended September 30, 2010, compared to the same period ended September 30, 2009.  For the three months ended September 30, 2010, service charges on deposits decreased 2.7% to $487,000 compared to the same period in 2009.

The Company sold $56.5 million in securities and purchased $161.2 million in securities during the nine months ended September 30, 2010.  The Company realized a net gain of $757,000 on the sale of securities in the nine months ended September 30, 2010.  The Company has identified five other-than-temporarily impaired securities in its portfolio and has elected to recognize decreases in the fair market value of the security through earnings.  During the nine months ended September 30, 2010, the Company realized a loss of $974,000 related to the other-than-temporarily impaired securities.  For the nine months ended September 30, 2009, a loss of $712,000 was realized as a result of the impaired securities.

Commissions on investment sales increased 11.9% to $453,000 for the nine months ended September 30, 2010, compared to $405,000 for the nine months ended September 30, 2009.  For the three months ended September 30, 2010, commissions on investment sales decreased 4.1% to $142,000 compared to the three months ended September 30, 2009.

The revenues and expenses of Southern Trust Mortgage for the nine and three months ended September 30, 2010 are reflected in the Company’s financial statements on a consolidated basis, with the proportionate share not owned by the Company reported as “Non-controlling Interest in Consolidated  Subsidiary.”  Gains and fees on loans held for sale of $12.9 million, which were generated by Southern Trust Mortgage during the nine months ended September 30, 2010, are being reported as part of consolidated other income, compared to $9.3 million for the same period in 2009.  The increase in gains and fees on loans held for sale is due primarily to more favorable pricing received on loan sales during the nine months ended September 30, 2010 compared to the same period in 2009.  Southern Trust Mortgage closed $555.4 million in loans during the nine months ended September 30, 2010, compared to $785.8 for the same period in 2009.

Income earned from the Bank’s $15.4 million investment in Bank Owned Life Insurance (BOLI) contributed $391,000 and $136,000 to total other income for the nine and three months ended September 30, 2010.  The Company purchased $6.0 million of BOLI in the third quarter of 2004, $4.8 million in the fourth quarter of 2004, $485,000 in the second quarter of 2007, $453,000 in the fourth quarter of 2009, and $682,000 in the second quarter of 2010 to help subsidize increasing employee benefit costs and expenses related to the restructure of its supplemental retirement plans.

Other service charges, commissions and fees decreased 11.8% to $353,000 for the nine months ended September 30, 2010, compared to $400,000 for the same period in 2009.

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Other operating income decreased $14,000 to $221,000 for the nine months ended September 30, 2010, compared to the same period in 2009.  For the three months ended September 30, 2010, other operating income decreased 19.2% to $42,000 compared to the three months ended September 30, 2009.

Other Expense

Total other expense includes employee-related costs, occupancy and equipment expense and other overhead.  Total other expense increased by $1.8 million from $36.8 million for the nine months ended September 30, 2009 to $38.6 million for the nine months ended September 30, 2010.  When taken as a percentage of total average assets, other expense increased to 3.7% of total average assets for the nine months ended September 30, 2010 versus 3.6% for the same period in 2009.  Total other expense increased $2.4 million from $12.0 million for the three months ended September 30, 2009 to $14.4 million for the three months ended September 30, 2010.

The increase during the third quarter was primarily the result of the following charges taken during the third quarter:

●   $1.4 million to reflect an adjustment to the carrying value of two branch sites that had been previously held for future expansion and are now being readied for sale.  The Company will actively market these properties to potential buyers in the fourth quarter.

●   $481,000 in adjustments to Other Real Estate Owned.

●   $530,000 restructuring charge related to workforce downsizing.  The restructuring is expected to reduce payroll expenses by approximately 10%.

●   $50,000 associated with the termination of the Company’s defined benefit pension plan.  The Company froze the plan during 2008 and suspended contributions during that year.

Salaries and employee benefits expense increased $191,000 when comparing the nine months ended September 30, 2010 to the same period in 2009. Salaries and employee benefit expenses increased by $740,000 in the third quarter of 2010 relative to the quarter ended September 30, 2009.  This increase is primarily due to higher commission expense associated with the mortgage company. The Company anticipates that salaries and employee benefits expenses will decrease in future quarters as the benefits of the restructuring program are realized.

Net occupancy expense increased by $247,000 or 5.6% for the nine months ended September 30, 2010 compared to the same period in 2009.  For the three months ended September 30, 2010, net occupancy expense increased $103,000 or 7.1 % to $1.6 million from September 30, 2009.  The year to date increase is the result of the Company’s growth as well as maintenance and improvements of the Company’s facilities.   As growth efforts continue to progress, the Company anticipates higher levels of occupancy expense to be incurred.

Other tax expense increased 36.5% to $598,000 for the nine months ended September 30, 2010 from $438,000 for the nine months ended September 30, 2009.  Other tax expense includes the state franchise tax paid by Middleburg Bank and Middleburg Trust Company in lieu of an income tax.  The tax is based on each subsidiary’s equity capital at January 1st, net of adjustments.  Total capital of Middleburg Bank increased 29.1% from January 1, 2009 to January 1, 2010, while total capital for Middleburg Trust Company increased 189.1% during the same period.

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Advertising expense increased $136,000 to $685,000 for the nine months ended September 30, 2010 compared to $549,000 for the same period in 2009.  For the three months ended September 30, 2010, advertising expense was $257,000, compared to $184,000 for the three months ended September 30, 2009.

Other real estate owned expense decreased by $992,000 to $1.2 million for the nine months ended September 30, 2010 compared to the same period in 2009.  For the three months ended September 30, 2010, other real estate owned expense decreased $37,000 to $666,000 compared to the same period in 2009.  The decrease was primarily due to a decrease in legal expenses related to foreclosure, valuation adjustments and fewer losses on the sales of these assets.

FDIC insurance expense decreased by $46,000 to $1.5 million for the nine months ended September 30, 2010 compared to the same period ended September 30, 2009.  For the three months ended September 30, 2010, FDIC insurance expense decreased $42,000 to $368,000.

Other expenses increased 55.7% or $2.2 million to $6.1 million for the nine months ended September 30, 2010 compared to the same period in 2009.  The increase was primarily due to the carrying value adjustment of two previous branch sites and the restructuring charges incurred during the quarter as discussed in the first paragraph of this section.

Allowance for Loan Losses

The allowance for loan losses at September 30, 2010 was $15.9 million, or 2.4% of total portfolio loans, compared to $9.2 million, or 1.4% of total portfolio loans at September 30, 2009.  The provision for loan losses was $11.4 million for the nine months ended September 30, 2010, compared to $3.6 million for the nine months ended September 30, 2009. For the three months ended September 30, 2010, the provision for loan losses was $9.1 million, compared to $1.0 million for the same period in 2009.    For the nine months ended September 30, 2010, net loan charge-offs totaled $4.7 million, compared to net loan charge-offs of $4.4 million for the same period in 2009.  There were $388,000 in loans past due 90 days or more and still accruing at September 30, 2010, compared to $1.2 million at September 30, 2009.  Non-performing loans were $30.7 million at September 30, 2010, compared to $10.2 million at September 30, 2009.  Management believes that the allowance for loan losses was adequate to cover credit losses inherent in the loan portfolio at September 30, 2010.  Loans classified as loss, doubtful, substandard or special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved.  Approximately $484,000 has been included in the allowance for loan losses related to restructured loans.

Non-performing assets increased from $18.1 million or 1.9% of total assets at December 31, 2009 to $38.9 million or 3.5% of total assets as of September 30, 2010.  The increase was primarily due to the reclassification of four loans to non-accrual status during the quarter.

Capital Resources

Total shareholders’ equity at September 30, 2010 and December 31, 2009 was $101.4 million and $103.3 million, respectively.  Total common shares outstanding at September 30, 2010 were 6,915,687.

At September 30, 2010, the Company’s tier 1 and total risk-based capital ratios were 12.3% and 13.5%, respectively, compared to 13.9% and 15.1% at December 31, 2009.  The Company’s leverage ratio was 9.12% at September 30, 2010 compared to 10.4% at December 31, 2009.  The Company’s capital structure places it above the well capitalized regulatory guidelines, which affords the Company the

48

opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.  Liquid assets include cash, interest bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale and loans and securities maturing within one year.  As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company also maintains additional sources of liquidity through a variety of borrowing arrangements.  The Company maintains federal funds lines with large regional and money-center banking institutions.  These available lines totaled $19.0 million, none of which were outstanding at September 30, 2010.  At September 30, 2010 and December 31, 2009, the Company had $25.4 million and $17.2 million, respectively, of outstanding borrowings pursuant to repurchase agreements.

The Company has a credit line in at the Federal Home Loan Bank of Atlanta with an available borrowing capacity of $143.5 million.  This line may be utilized for short and/or long-term borrowing.  The Company utilized the credit line for both overnight and long-term funding throughout the first nine months of 2010.  Southern Trust Mortgage has a $25.0 million revolving line of credit with a regional bank, which is primarily used to fund its loans held for sale.  Middleburg Bank guarantees up to $10 million of borrowings on this line. At September 30, 2010, this line had an outstanding balance of $21.9 million and is included in total short-term borrowings.  Short-term and long-term advances averaged $9.1 million and $53.2 million, respecti vely, for the nine months ended September 30, 2010.

At September 30, 2010, cash, interest bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were 43.3% of total deposits.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments to extend credit (excluding standby letters of credit) increased $2.6 million to $87.2 million at September 30, 2010 compared to $84.6 million at December 31, 2009.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent expected future cash flows.  Standby letters of credit were $2.0 million at September 30, 2010 representing no change from December 31, 2009.

Contractual obligations increased $16.2 million to $86.3 million at September 30, 2010 compared to $70.1 million at December 31, 2009 excluding certificates of deposit and short-term borrowings.  This change resulted primarily from additional long term debt of $17.9 million assumed during the nine months ended September 30, 2010.  Additional information on commitments to extend credit, standby letters of credit and contractual obligations is included in the Company’s 2009 Form 10-K.

49

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 are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

●   changes in general economic and business conditions in the Company’s market area;

●   changes in banking and other laws and regulations applicable to the Company;

●   maintaining asset qualities;

●   risks inherent in making loans such as repayment risks and fluctuating collateral values;

●   changing trends in customer profiles and behavior;

●   maintaining cost controls and asset qualities as the Company opens or acquires new branches;

●   changes in interest rates and interest rate policies;

●   competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

●   the ability to continue to attract low cost core deposits to fund asset growth;

●   the ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;

●   reliance on the Company’s management team, including its ability to attract and retain key personnel;

●   demand, development and acceptance of new products and services;

●   problems with technology utilized by the Company;

●   maintaining capital levels adequate to support the Company’s growth; and

●   other factors described in Item 1A, “Risk Factors,” included in our quarterly reports on Form 10-Q and the 2009 Form 10-K.

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.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices.  The Company’s primary market risk exposure is interest rate risk, though it should be noted that the assets under administration by Middleburg Trust Company are affected by equity price risk.  The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually.  The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (“ALCO”) of the Ba nk.  In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management

50

related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates.  As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings.  ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes.  While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk.  The model prepared for September 30, 2010 did not include the assets and liabilities of Southern Trust Mortgage.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet.  The simulation model is prepared and updated four times during each year.  This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward shift and a 200 basis point downward shift in interest rates.  A parallel shift in rates over a 12-month period is assumed.  The following reflects the Company’s net interest income sensitivity analysis as of September 30, 2010 and December 31, 2009.

	Estimated Net Interest Income Sensitivity
Rate Change	As of September 30, 2010	As of December 31, 2009
+ 200 bp	(7.2%)	(11.5%)
- 200 bp	(12.8%)	(10.0%)

At September 30, 2010, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points over a 12 month period, net interest income could decrease by 7.2% on average.  For the same time period the interest rate risk model indicated that in a declining rate environment of 200 basis points over a 12 month period net interest income could decrease by 12.8% on average.  While these numbers are subjective based upon the parameters used within the model, management believes the balance sheet is properly structured and is working to minimize risks to rising rates in the future.

Since December 31, 2009, the Company’s balance sheet has grown by $135.1 million.  Increased deposits have provided the funding for the growth in the loan portfolio and liquid assets.  The Company’s interest rate profile is symmetrical for the next 12 months.  Based upon a September 30, 2010 simulation, the Company could expect an average negative impact to net interest income of $1.2 million over the next 12 months if rates rise 200 basis points.  If rates were to decline 200 basis points, the Company could expect an average negative impact to net interest income of $2.2 million over the next 12 months. The Company’s specific goal is to lower (where possible) the cost of its borrowed funds.

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results.  These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cashflows.  While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the

51

predictive nature of these assumptions, including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables.  Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

Item 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including Middleburg Bank, Southern Trust Mortgage, Middleburg Investment Group, Middleburg Investment Advisors and Middleburg Trust C ompany) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

Item 1A.  Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities. The risk factors that are applicable to us are outlined in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in our risk factors from those disclosed in these reports.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Removed and Reserved

Item 5.  Other Information

None

Item 6.  Exhibits

3.1	Bylaws of Middleburg Financial Corporation (restated in electronic format as of October 28, 2010) (incorporated by reference to Exhibit 3.1 of Form 8-K filed October 28, 2010).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MIDDLEBURG FINANCIAL CORPORATION
	(Registrant)
Date:  November 9, 2010	/s/ Gary R. Shook
	Gary R. Shook
	President & Chief Executive Officer
Date:  November 9, 2010	/s/ Raj Mehra
	Raj Mehra
	Executive Vice President
	& Chief Financial Officer

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EXHIBIT INDEX

Exhibits

3.1	Bylaws of Middleburg Financial Corporation (restated in electronic format as of October 28, 2010) (incorporated by reference to Exhibit 3.1 of Form 8-K filed October 28, 2010).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gary R. Shook, certify that:

1. I have reviewed the Quarterly Report on Form 10-Q of Middleburg Financial Corporation for the period ended September 30, 2010;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2010

/s/ Gary R. Shook

Gary R. Shook

President & Chief Executive Officer

EX-31.1

Exhibit 31.2

CERTIFICATION

I, Raj Mehra, certify that:

1. I have reviewed the Quarterly Report on Form 10-Q of Middleburg Financial Corporation for the period ended September 30, 2010;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the

audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2010

/s/ Raj Mehra

Raj Mehra

Executive Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER AND

CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. § 1350

In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2010 (the “Form 10-Q”) of Middleburg Financial Corporation (the “Company”), we, Gary R. Shook, Chief Executive Officer of the Company, and Raj Mehra, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

(a) the Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(b) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Form 10-Q.

By:	/s/ Gary R. Shook	Date:	November 9, 2010
	Gary R. Shook
	Chief Executive Officer
By:	/s/ Raj Mehra	Date:	November 9, 2010
	Raj Mehra
	Chief Financial Officer