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 March 31, 2012

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  R 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.   7,005,315 shares of Common Stock as of May 5, 2012.

MIDDLEBURG FINANCIAL CORPORATION

INDEX

Part I.    Financial Information			Page No.
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Changes in Shareholders’ Equity	6
		Consolidated Statements of Cash Flows	7
		Notes to Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations	31
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
	Item 4.	Controls and Procedures	48
Part II.     Other Information
	Item 1.	Legal Proceedings	48
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults upon Senior Securities	48
	Item 4.	Mine Safety Disclosures	48
	Item 5.	Other Information	49
	Item 6.	Exhibits	49
Signatures			50

2

PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

MIDDLEBURG FINANCIAL CORPORATION
Consolidated Balance Sheets
(In thousands, except for share and per share data)
	(Unaudited)
	March 31, 2012		December 31, 2011
ASSETS
Cash and due from banks	$	6,514	$	6,163
Interest-bearing deposits with other institutions	38,523		45,107
Total cash and cash equivalents	45,037		51,270
Securities available for sale	323,584		308,242
Loans held for sale	81,027		92,514
Restricted securities, at cost	7,665		7,117
Loans receivable, net of allowance for loan losses of $14,861 at March 31, 2012 and $14,623 at December 31, 2011	667,508		656,770
Premises and equipment, net	21,099		21,306
Goodwill and identified intangibles	6,146		6,189
Other real estate owned, net of valuation allowance of $1,492 at March 31, 2012 and $1,522 at December 31, 2011	12,095		8,535
Prepaid federal deposit insurance	3,753		3,993
Accrued interest receivable and other assets	35,297		36,924
TOTAL ASSETS	$	1,203,211	$	1,192,860
LIABILITIES
Deposits:
Non-interest-bearing demand deposits	$	150,385	$	143,398
Savings and interest-bearing demand deposits	475,138		460,576
Time deposits	326,249		325,895
Total deposits	951,772		929,869
Securities sold under agreements to repurchase	32,154		31,686
Short-term borrowings	14,166		28,331
FHLB Borrowings	82,912		82,912
Subordinated notes	5,155		5,155
Accrued interest payable and other liabilities	7,457		6,894
Commitments and contingent liabilities	—		—
TOTAL LIABILITIES	1,093,616		1,084,847
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value; 20,000,000 shares authorized, 7,005,315 and 6,996,932 issued and outstanding at March 31, 2012 and December 31, 2011, respectively)	17,359		17,331
Capital surplus	43,551		43,498
Retained earnings	42,389		41,157
Accumulated other comprehensive income	4,582		3,926
Total Middleburg Financial Corporation shareholders' equity	107,881		105,912
Non-controlling interest in consolidated subsidiary	1,714		2,101
TOTAL SHAREHOLDERS' EQUITY	109,595		108,013
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,203,211	$	1,192,860

See accompanying notes to the consolidated financial statements.

3

MIDDLEBURG FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except for per share data)
	Unaudited
	For the Three Months
	Ended March 31,
	2012			2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	9,931		$	9,735
Interest and dividends on securities available for sale
Taxable	1,735			1,399
Tax-exempt	607			561
Dividends	44			36
Interest on deposits in banks and federal funds sold	24			27
Total interest and dividend income	12,341			11,758
INTEREST EXPENSE
Interest on deposits	1,893			2,308
Interest on securities sold under agreements to repurchase	83			56
Interest on short-term borrowings	148			63
Interest on FHLB borrowings and other debt	297			296
Total interest expense	2,421			2,723
NET INTEREST INCOME	9,920			9,035
Provision for loan losses	792			454
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES	9,128			8,581
NONINTEREST INCOME
Service charges on deposit accounts	530			489
Trust services income	921			867
Gains on loans held for sale	3,769			1,929
Gains on securities available for sale, net	140			35
Total other-than-temporary impairment losses	(10		)	(17		)
Portion of loss recognized in other comprehensive income	10			16
Net impairment losses	—			(1		)
Commissions on investment sales	147			95
Fees on mortgages held for sale	42			154
Other service charges, commissions and fees	150			115
Bank-owned life insurance	122			123
Other operating income	14			94
Total noninterest income	5,835			3,900
NONINTEREST EXPENSE
Salaries and employees' benefits	7,357			6,313
Net occupancy and equipment expense	1,778			1,676
Advertising	300			156
Computer operations	385			365
Other real estate owned	286			344
Other taxes	203			197
Federal deposit insurance expense	258			407
Other operating expenses	2,747			1,709
Total noninterest expense	13,314			11,167
Income before income taxes	1,649			1,314
Income tax expense	416			317
NET INCOME	1,233			997
Net loss attributable to noncontrolling interest	349			230
Net income attributable to Middleburg Financial Corporation	$	1,582		$	1,227
Earnings per share:
Basic	$	0.23		$	0.18
Diluted	$	0.23		$	0.18
Dividends per common share	$	0.05		$	0.05

See accompanying notes to the consolidated financial statements.

4

MIDDLEBURG FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands)
	Unaudited
	For the Three Months
	Ended March 31,
	2012			2011
Net income	$	1,233		$	997
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period (net of tax of $358 for 2012 and $265 for 2011)	695			514
Reclassification adjustment for gains included in net income  (net of tax of $48 for 2012 and $12 for 2011)	(92		)	(23		)
Unrealized losses on securities for which other-than-temporary impairment has been recognized in earnings (net of tax of $0 for 2011)	—			1
Unrealized gain on interest rate swap  (net of tax of $27 for 2012 and $20 for 2011)	53			40
Total other comprehensive income	656			532
Total comprehensive income	1,889			1,529
Comprehensive loss attributable to non-controlling interest	349			230
Comprehensive income attributable to Middleburg Financial Corporation	$	2,238		$	1,759

See accompanying notes to the consolidated financial statements.

5

Middleburg Financial Corporation
Consolidated Statement of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2012 and 2011
(In Thousands, Except Share Data)
(Unaudited)
	Middleburg Financial Corporation Shareholders
	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest			Total
Balances - December 31, 2010	$	17,314	$	43,058		$	37,593		$	(1,012	)	$	3,040		$	99,993
Net income (loss)						1,227						(230		)	997
Other comprehensive income, net of tax									532						532
Cash dividends declared						(347		)							(347		)
Distributions to non-controlling interest												(15		)	(15		)
Share-based compensation			47												47
Balances - March 31, 2011	$	17,314	$	43,105		$	38,473		$	(480	)	$	2,795		$	101,207
Balances - December 31, 2011	$	17,331	$	43,498		$	41,157		$	3,926		$	2,101		$	108,013
Net income (loss)						1,582						(349		)	1,233
Other comprehensive income, net of tax									656						656
Cash dividends declared						(350		)							(350		)
Vesting of restricted stock awards (11,011 shares)	28		(28		)										—
Distributions to non-controlling interest												(38		)	(38		)
Share-based compensation			81												81
Balances - March 31, 2012	$	17,359	$	43,551		$	42,389		$	4,582		$	1,714		$	109,595

 See accompanying notes to the consolidated financial statements.

6

MIDDLEBURG FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
	Unaudited
	For the three months ended
	March 31, 2012			March 31, 2011
Cash Flows From Operating Activities
Net income	$	1,233		$	997
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	478			470
Equity in (undistributed earnings) of affiliate	(3		)	(22		)
Provision for loan losses	792			454
Net (gain) on securities available for sale	(140		)	(35		)
Other than temporary impairment loss	—			1
Net loss on disposal of assets	7			39
Premium amortization on securities, net	918			766
Origination of loans held for sale	(211,159		)	(136,432		)
Proceeds from sales of loans held for sale	226,415			163,315
Net (gains) on mortgages held for sale	(3,769		)	(1,929		)
Share-based compensation	81			47
Net loss on sale of other real estate owned	14			66
Valuation adjustment on other real estate owned	54			200
Decrease in prepaid FDIC insurance	240			363
Changes in assets and liabilities:
Decrease in other assets	1,257			306
Increase in other liabilities	563			34
Net cash provided by operating activities	$	16,981		$	28,640
Cash Flows from Investing Activities
Proceeds from maturity, principal paydowns and calls of securities available for sale	$	20,607		$	18,799
Proceeds from sale of securities available for sale	3,147			9,412
Purchase of securities available for sale	(38,960		)	(34,565		)
Purchase of restricted stock	(548		)	(450		)
Purchases of bank premises and equipment	(204		)	(253		)
Net (increase) in loans	(15,287		)	(3,122		)
Proceeds from sale of other real estate owned	213			—
Net cash used in investing activities	$	(31,032	)	$	(10,179	)

See Accompanying Notes to Consolidated Financial Statements.

7

MIDDLEBURG FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
(In Thousands)
	For the three months ended
	March 31, 2012			March 31, 2011
Cash Flows from Financing Activities
Net increase in non-interest-bearing and interest-bearing demand deposits and savings accounts	$	21,549		$	3,747
Net (decrease) increase in certificates of deposit	354			(28,598		)
Increase in securities sold under agreements
to repurchase	468			2,401
Proceeds from short-term borrowings	33,971			19,302
Payments on short-term borrowings	(48,136		)	(28,378		)
Proceeds from FHLB borrowings	32,912			20,000
Payments on FHLB borrowings	(32,912		)	(10,000		)
Distributions to non-controlling interest	(38		)	(15		)
Payment of dividends on common stock	(350		)	(347		)
Net cash provided by (used in) financing activities	$	7,818		$	(21,888	)
Decrease in cash and and cash equivalents	(6,233		)	(3,427		)
Cash and Cash Equivalents
Beginning	51,270			64,724
Ending	$	45,037		$	61,297
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	2,503		$	2,667
Income taxes	$	100		$	—
Supplemental Disclosure of Non-cash Transactions
Unrealized gain on securities available for sale	$	914		$	745
Change in market value of interest rate swap	$	80		$	60
Transfer of loans to other real estate owned	$	3,906		$	407
Loans originated from sale of other real estate owned	$	149		$	533

See accompanying notes to the consolidated financial statements.

8

MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDAIRIES

Notes to Consolidated Financial Statements

For the Three Months Ended March 31, 2012

(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 March 31, 2012 and December 31, 2011, the results of operations and comprehensive income for the three months ended March 31, 2012 and 2011, and, changes in shareholders’ equity and cash flows for the three months ended March 31, 2012 and 2011, 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, 2011 (the “2011 Form 10-K”) of Middleburg Financial Corporation (the “Company”).  The results of operations for the three month period ended March 31, 2012 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.  Management has concluded there were no additional material subsequent events to be disclosed.

Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.  Commissions paid on the origination of mortgages held for sale and commissions paid on investments sales have been netted against the related revenue amounts for these sources of revenue for both 2012 and 2011.  Management considers the net presentation to more accurately reflect the net contribution to consolidated net income of the mortgage and wealth management segments.

Note 2.  Stock–Based Compensation Plan

As of March 31, 2012, 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 of up to 255,000 shares of common stock under the 2006 Equity Compensation Plan.

The Company recognized $81,000 for stock-based compensation expenses for the three months ended March 31, 2012.

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

	March 31, 2012
	Shares		Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at beginning of year	160,171		$	20.40
Granted	—		—
Exercised	—		—
Forfeited	(58,000	)	(23.95		)
Outstanding at end of period	102,171		$	18.39		$	—

As of the end of the reporting period, 99,671 options were vested and exercisable representing 42,000 shares issued under the original 1997 plan and 57,671 vested options under the 2006 Plan.  As of March 31, 2012 no outstanding options were not vested from the original 1997 plan and 2,500 outstanding options were not vested under the 2006 plan.  At March 31, 2012 the weighted average exercise price of these stock options was greater than the average market price during the period.  The weighted average remaining contractual term for options outstanding and exercisable at March 31, 2012 was 4.3 years.  As of

9

March 31, 2012 there was $4,000 of total unrecognized compensation expense related to stock option awards under the 2006 Equity Compensation Plan.

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

	March 31, 2012
	Shares		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Outstanding at beginning of year	86,220		$	14.79
Granted	—		—
Vested	(11,011	)	14.43
Forfeited	(2,808	)	14.59
Non-vested at end of period	72,401		$	14.85	$	1,137,420

The weighted average remaining contractual term for non-vested restricted stock at March 31, 2012 was 3.9 years.  As of March 31, 2012, there was approximately $866,000 of total unrecognized compensation expense related to non-vested restricted stock awards under the 2006 Equity Compensation Plan.

Note 3.  Securities

Amortized costs and fair values of securities available for sale at March 31, 2012 are summarized as follows:

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,103	$	281	$	(25	)	$	9,359
Obligations of states and
political subdivisions	67,667		2,486		(36		)	70,117
Mortgage-backed securities:
Agency	184,733		5,655		(245		)	190,143
Non-agency	43,747		191		(482		)	43,456
Corporate preferred stock	68		—		(22		)	46
Corporate securities	10,613		9		(399		)	10,223
Trust-preferred securities	475		—		(235		)	240
Total	$	316,406	$	8,622	$	(1,444	)	$	323,584

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Amortized costs and fair values of securities available for sale at December 31, 2011 are summarized as follows:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,068	$	293	$	(18	)	$	9,343
Obligations of states and
political subdivisions	65,090		2,503		(51		)	67,542
Mortgage-backed securities:
Agency	181,797		5,482		(209		)	187,070
Non-agency	34,847		157		(1,002		)	34,002
Corporate preferred stock	68		—		(28		)	40
Corporate securities	10,612		5		(641		)	9,976
Trust-preferred securities	497		—		(228		)	269
Total	$	301,979	$	8,440	$	(2,177	)	$	308,242

The amortized cost and fair value of securities available for sale as of March 31, 2012, 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.

	March 31, 2012
	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	4,724	$	4,760
Due after one year through
five years	15,713		15,902
Due after five years through
ten years	36,678		37,846
Due after ten years	30,267		31,191
Mortgage-backed securities	228,481		233,599
Corporate preferred stock	68		46
Trust preferred securities	475		240
Total	$	316,406	$	323,584

Proceeds from the sale of securities during the three months ended March 31, 2012 were $3.1 million and net gains of $140,000 were realized on those sales.  The tax expense applicable to the net realized gains amounted to $47,600.  Additionally, no loss on securities with other than temporary impairment was recognized during the three months ended March 31, 2012.

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 $116.0 million at March 31, 2012.

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At March 31, 2012, investments in an unrealized loss position that were temporarily impaired are as follows:

	March 31, 2012
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	1,943	$	(25	)	$	25	$	—		$	1,968	$	(25	)
Obligations of states and
political subdivisions	7,078		(36		)	—		—			7,078		(36		)
Mortgage backed securities:
Agency	12,185		(245		)	—		—			12,185		(245		)
Non-agency	16,679		(210		)	8,825		(272		)	25,504		(482		)
Corporate preferred stock	—		—			17		(22		)	17		(22		)
Corporate securities	7,661		(340		)	2,412		(59		)	10,073		(399		)
Trust-preferred securities	—		—			240		(235		)	240		(235		)
Total	$	45,546	$	(856	)	$	11,519	$	(588	)	$	57,065	$	(1,444	)

At December 31, 2011, investments in an unrealized loss position that were temporarily impaired are as follows:

	December 31, 2011
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	2,045	$	(18	)	$	26	$	—		$	2,071	$	(18	)
Obligations of states and
political subdivisions	43		—			2,243		(51		)	2,286		(51		)
Mortgage backed securities:
Agency	22,768		(209		)	—		—			22,768		(209		)
Non-agency	15,345		(465		)	5,989		(537		)	21,334		(1,002		)
Corporate preferred stock	—		—			11		(28		)	11		(28		)
Corporate securities	7,775		(227		)	2,057		(414		)	9,832		(641		)
Trust-preferred securities	—		—			269		(228		)	269		(228		)
Total	$	47,976	$	(2,634	)	$	10,595	$	(1,258	)	$	58,571	$	(2,177	)

A total of 57 securities have been identified by the Company as temporarily impaired at March 31, 2012.  Of the 57 securities, 54 are investment grade and 3 are speculative grade.  Agency, non-agency mortgage-backed securities, and corporate debt securities make up the majority of temporarily impaired securities at March 31, 2012.  The speculative grade securities are asset backed securities that are 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 March 31, 2012.  Investment decisions reflect the strategic asset/liability objectives of the Company.  

Trust preferred securities

Trust preferred securities were evaluated within the scope of 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

12

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, announcements 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 cash flows is discounted at the effective purchase yield, which in the case of the floating rate securities is equal to the 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 March 31, 2012, 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 Trust Preferred IV, the expected default rate was 50 basis points, for Trust Preferred V, the expected default rate was 0 basis points, for Trust Preferred XXII, the expected default rate was 75 basis points, and for MM Community Funding Class A, the expected default rate was 150 basis points.

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 three securities with other-than-temporary impairment within its portfolio.  During the three months ended March 31, 2012, no credit related impairment losses were recognized on these securities  compared to $1,000 recognized for the three months ended March 31, 2011.

The following table provides further information on the Company’s trust preferred securities that are considered other-than-temporarily impaired as of March 31, 2012 (in thousands):

Security	Class	Current Moody's Rating	Par Value		Book Value		Fair Value		Cumulative Other Compre-hensive Loss		Amount of OTTI Related to Credit Loss		(1) Excess Subord.		(2) Inst. Perf.	Deferrals/ Defaults		Expected Default Rate		Expected Recovery		Lag Years
MM Community Funding LTD	A	B1	$	183	$	162	$	120	$	42	$	24	157.91	%	7	25.32	%	1.50	%	15	%	2
Trust Preferred XXII	D	C	1,979		—		—		—		1,979		(33.74	)%	59	30.40	%	0.75	%	15	%	2
Trust Preferred V	Mez	Caa3	304		69		6		63		367		(728.48	)%	—	100.00	%	—	%	15	%	2
			$	2,466	$	231	$	126	$	105	$	2,370

(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 March 31, 2012 (in thousands):

Security	Tranche Level	Current Moody's Rating	Par Value	Book Value	Fair Value	Cumulative Other Comprehensive Loss	Institutions Performing	(1) Excess Subord.	Deferrals/ Defaults	Expected Default Rate	Expected Recovery	Lag Years
Trust Preferred IV	Mez	Ca	$244	$244	$114	$130	4	19.44%	27.10%	0.50%	15%	2
			$244	$244	$114	$130

(1)  Excess subordination.  See explanation in text below tables.

13

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.

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, 2011	$	2,370
Additions related to intial impairments	—
Additions related to subsequent impairments	—
Net impairment losses recognized in earnings through March 31, 2012	$	2,370

At March 31, 2012, 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 March 31, 2012.  However, there is a risk that the Company’s continuing reviews could result in recognition of other-than-temporary impairment charges in the future.

Note 4.  Loan Portfolio

The Company segregates its loan portfolio into three primary loan segments:  Real Estate Loans, Commercial Loans, and Consumer Loans.  Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans.  Other real estate loans include commercial real estate loans.  The consolidated loan portfolio was composed of the following on the dates indicated:

	March 31, 2012				December 31, 2011
	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
	(In Thousands)				(In Thousands)
Real estate loans:
Construction	$	47,089	6.9	%	$	42,208	6.3	%
Secured by farmland	9,616		1.4	%	10,047		1.5	%
Secured by 1-4 family residential	249,134		36.5	%	236,760		35.3	%
Other real estate loans	272,919		40.0	%	275,428		41.0	%
Commercial loans	91,371		13.4	%	94,427		14.1	%
Consumer loans	12,240		1.8	%	12,523		1.8	%
	682,369		100.0	%	671,393		100.0	%
Less allowance for loan losses	14,861				14,623
Net loans	$	667,508			$	656,770

Loans presented in the table above exclude loans held for sale.  The Company had $81.0 million and $92.5 million in mortgages held for sale at March 31, 2012 and December 31, 2011, respectively.

14

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011.

	March 31, 2012
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	862	$	95	$	2,241	$	3,198	$	43,891	$	47,089
Secured by farmland	—		—		—		—		9,616		9,616
Secured by 1-4 family residential	2,076		1,116		7,763		10,955		238,179		249,134
Other real estate loans	1,701		209		7,099		9,009		263,910		272,919
Commercial loans	—		24		2,083		2,107		89,264		91,371
Consumer loans	13		71		—		84		12,156		12,240
Total	$	4,652	$	1,515	$	19,186	$	25,353	$	657,016	$	682,369

	December 31, 2011
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	696	$	—	$	3,285	$	3,981	$	38,227	$	42,208
Secured by farmland	415		—		—		415		9,632		10,047
Secured by 1-4 family residential	2,036		1,721		7,639		11,396		225,364		236,760
Other real estate loans	6,079		1,736		1,466		9,281		266,147		275,428
Commercial loans	1,751		121		315		2,187		92,240		94,427
Consumer loans	23		—		—		23		12,500		12,523
Total	$	11,000	$	3,578	$	12,705	$	27,283	$	644,110	$	671,393

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of March 31, 2012 and December 31, 2011:

	March 31, 2012				December 31, 2011
	Nonaccrual		Past due 90 days or more and still accruing		Nonaccrual		Past due 90 days or more and still accruing
	(In Thousands)
Real estate loans:
Construction	$	2,241	$	—	$	3,804	$	86
Secured by 1-4 family residential	9,026		167		11,839		1,097
Other real estate loans	8,895		—		7,567		—
Commercial loans	2,083		—		2,136		50
Total	$	22,245	$	167	$	25,346	$	1,233

15

If interest on non-accrual loans had been accrued, such income would have approximated $350,000 for the three months ended March 31, 2012 and $1.5 million for the year ended December 31, 2011.

The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio.  Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, “Doubtful” and “Loss”.

Special Mention:  Loans classified as special mention have potential weaknesses that deserve management’s close attention.  If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.

Substandard:  Loans classified as substandard have a well-defined weakness that jeopardizes the liquidation of the debt.  Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.

Doubtful:  Loans classified as doubtful have a very high possibility of loss.  However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status can be determined.

Loss: Loans are classified as loss when they are deemed uncollectable and are charged off immediately.

The following tables present a summary of loan classifications by class of loan as of March 31, 2012 and December 31, 2011:

	March 31, 2012
					(In Thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	29,315	$	8,804	$	222,355	$	233,031	$	85,129	$	11,965	$	590,599
Special Mention	3,448		199		11,002		21,657		3,789		70		40,165
Substandard	14,101		613		14,224		17,965		2,301		193		49,397
Doubtful	225		—		1,553		266		152		12		2,208
Loss	—		—		—		—		—		—		—
Ending Balance	$	47,089	$	9,616	$	249,134	$	272,919	$	91,371	$	12,240	$	682,369

	December 31, 2011
					(In thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	22,250	$	9,235	$	207,332	$	239,156	$	87,731	$	12,448	$	578,152
Special Mention	5,764		199		10,773		23,434		4,127		61		44,358
Substandard	13,163		613		17,062		12,592		2,374		14		45,818
Doubtful	1,031		—		1,593		246		195		—		3,065
Loss	—		—		—		—		—		—		—
Ending Balance	$	42,208	$	10,047	$	236,760	$	275,428	$	94,427	$	12,523	$	671,393

16

The following table presents loans identified as impaired by class of loan as of and for the three months ended March 31, 2012:

	March 31, 2012
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,851	$	2,421	$	—	$	2,271	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	2,818		3,496		—		2,498		13
Other real estate loans	4,691		5,060		—		4,695		89
Commercial loans	1,759		1,759		—		1,755		—
Consumer loans	—		—		—		—		—
Total with no related allowance	11,119		12,736		—		11,219		102
With an allowance recorded:
Real estate loans:
Construction	390		529		89		392		—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	7,271		8,159		2,676		7,395		17
Other real estate loans	6,927		6,953		1,280		6,939		52
Commercial loans	582		604		414		585		14
Consumer loans	12		12		12		12		2
Total with a related allowance	15,182		16,257		4,471		15,323		85
Total	$	26,301	$	28,993	$	4,471	$	26,542	$	187

17

The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2011:

	December 31, 2011
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	2,992	$	3,652	$	—	$	3,948	$	—
Secured by farmland	—		—		—		—
Secured by 1-4 family residential	3,978		4,656		—		4,424		7
Other real estate loans	4,732		4,775		—		5,729		95
Commercial loans	1,751		1,751		—		1,735		—
Consumer loans	—		—		—		—		—
Total with no related allowance	13,453		14,834		—		15,836		102
With an allowance recorded:
Real estate loans:
Construction	812		842		328		812		—
Secured by farmland	—		—		—		—
Secured by 1-4 family residential	8,697		10,417		3,076		9,047		17
Other real estate loans	5,581		5,581		1,192		5,076		64
Commercial loans	656		678		502		662		14
Consumer loans	—		—		—		—		—
Total with a related allowance	15,746		17,518		5,098		15,597		95
Total	$	29,199	$	32,352	$	5,098	$	31,433	$	197

The “Recorded Investment” amounts in the tables above represent the outstanding principal balance on each loan represented in the tables plus any accrued interest receivable on such loans.  The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the tables plus any amounts that have been charged off on each loan.

Troubled Debt Restructurings

Included in certain loan categories in the impaired loans table above are troubled debt restructurings (“TDRs”) that were classified as impaired.  The total balance of TDRs at March 31, 2012 was $10.0 million of which $6.0 million were included in the Company’s non-accrual loan totals at that date and $4.0 million represented loans performing as agreed according to the restructured terms. This compares with $11.2 million in total restructured loans at December 31, 2011, a decrease of $1.2 million or 10.7%.  The amount of the valuation allowance related to total TDRs was $803,000 and $1.7 million as of March 31, 2012 and December 31, 2011 respectively.

The $6.0 million in nonaccrual TDRs as of March 31, 2012 is comprised of $4.9 million in real estate construction loans, $863,000 in 1-4 family real estate loans, and $226,000 in consumer loans.  The $4.0 million in TDRs which were performing as agreed under restructured terms as of March 31, 2012 is represented comprised of $258,000 in commercial loans, $1.1 million in 1-4 family real estate loans, and $2.7 million in other real estate loans.  The Company considers all loans classified as TDRs to be impaired.

18

The following table presents by class of loan, information related to loans modified in a TDR during the three months ended March 31, 2012:

	Loans modified as TDR's
	For the Three Months Ended
	March 31, 2012
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Real estate loans:
Construction	—	$	—	$	—
Secured by farmland	—	—		—
Secured by 1-4 family residential	1	658		658
Other real estate loans	—	—		—
Total real estate loans	1	658		658
Commercial loans	—	—		—
Consumer loans	—	—		—
Total	1	$	658	$	658

During the three months ended March 31, 2012, the Company modified one loan that was considered to be a TDR.  The interest rate was lowered for this loan.

During the three months ended March 31, 2012, the Company identified as a TDR one loan for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying this loan as a TDR, the Company evaluated it for impairment.  On the basis of a current evaluation of loss for this loan, no allowance for loan losses was established for it as of March 31, 2012.

As of March 31, 2012, no loans restructured as TDRs during the three month period are included in the Company’s non-accrual loans total.  The identified TDR loan is included in the Company's non-performing assets that are performing as agreed under the restructured terms.

No loans modified as TDRs from April 1, 2011 through March 31, 2012 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the three months ended March 31, 2012.

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses.  When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent.  Loans identified as TDR’s frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan.  As a result of any modification as a TDR, the specific reserve associated with the loan may be increased.  Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. 

Note 5.  Allowance for Loan Losses

The following tables present a rollforward of the changes in the allowance for loan losses balance by class of loan,  the balances in the allowance for loan losses and the recorded investment in loans by class of loan and, for the ending loan balances, based on impairment evaluation method as of March 31, 2012 and December 31, 2011.

19

	March 31, 2012
							(In Thousands)
	Real Estate Construction			Real Estate Secured by Farmland			Real Estate Secured by 1-4 Family Residential			Other Real Estate Loans		Commercial			Consumer			Total
Allowance for loan losses:
Balances at December 31, 2011	$	897		$	110		$	7,465		$	4,385	$	1,621		$	145		$	14,623
Chargeoffs	(186		)	—			(353		)	—		(155		)	(6		)	(700		)
Recoveries	—			—			114			20		2			10			146
Provision	1,958			(8		)	(1,510		)	369		(19		)	2			792
Balances at March 31, 2012	$	2,669		$	102		$	5,716		$	4,774	$	1,449		$	151		$	14,861
Ending allowance balance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	89		$	—		$	2,676		$	1,280	$	414		$	12		$	4,471
Collectively evaluated for impairment	2,580			102			3,040			3,494		1,035			139			10,390
Total ending allowance balances	$	2,669		$	102		$	5,716		$	4,774	$	1,449		$	151		$	14,861
Ending loan recorded investment balances:
Individually evaluated for impairment	$	2,241		$	—		$	10,089		$	11,618	$	2,341		$	12		$	26,301
Collectively evaluated for impairment	44,848			9,616			239,045			261,301		89,030			12,228			656,068
Total ending loan balances	$	47,089		$	9,616		$	249,134		$	272,919	$	91,371		$	12,240		$	682,369

	December 31, 2011
						(In Thousands)
	Real Estate Construction			Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential			Other Real Estate Loans			Commercial			Consumer			Total
Allowance for loan losses:
Balances at December 31, 2010	$	4,684		$	107	$	3,965		$	4,771		$	1,055		$	385		$	14,967
Chargeoffs	(467		)	—		(2,062		)	(438		)	(180		)	(318		)	(3,465		)
Recoveries	29			—		41			98			41			28			237
Provision	(3,349		)	3		5,521			(46		)	705			50			2,884
Balances at December 31, 2011	$	897		$	110	$	7,465		$	4,385		$	1,621		$	145		$	14,623
Ending allowance balance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	328		$	—	$	3,076		$	1,192		$	502		$	—		$	5,098
Collectively evaluated for impairment	569			110		4,389			3,193			1,119			145			9,525
Total ending allowance balances	$	897		$	110	$	7,465		$	4,385		$	1,621		$	145		$	14,623
Ending loan recorded investment balances:
Individually evaluated for impairment	$	3,804		$	—	$	12,675		$	10,313		$	2,407		$	—		$	29,199
Collectively evaluated for impairment	38,404			10,047		224,085			265,115			92,020			12,523			642,194
Total ending loan balances	$	42,208		$	10,047	$	236,760		$	275,428		$	94,427		$	12,523		$	671,393

20

Note 6.  Earnings 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.

	Three months ended
	March 31, 2012			March 31, 2011
	Shares	Per share Amount		Shares	Per share Amount
Basic earnings per share	6,994,858	$	0.23	6,940,154	$	0.18
Effect of dilutive securities:
stock options and grants	5,311			3,035
Diluted earnings per share	7,000,169	$	0.23	6,943,189	$	0.18

At March 31, 2012 and 2011, stock options, restricted grants and warrants representing approximately 157,000 and 211,000 shares, respectively, were not included in the calculation of earnings per share because they would have been anti-dilutive.

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 commissions on investment transactions.  The wealth management services are conducted by Middleburg Trust Company 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 and Southern Trust Mortgage on deposit accounts that each company has at Middleburg Bank.  Southern Trust Mortgage has an outstanding line of credit of $5.0 million and a participation agreement of $75.0 million for which it pays interest to Middleburg Bank on any outstanding balance.  Middleburg Bank provides office space and data processing services to Southern Trust Mortgage for which it receives rental and fee income.  Transactions related to these relationships are eliminated to reach consolidated totals.

21

The following table presents segment information for the three months ended March 31, 2012 and 2011, respectively.

	For the Three Months Ended												For the Three Months Ended
	March 31, 2012												March 31, 2011
	Retail Banking		Wealth Management		Mortgage Banking			Inter-company Elimina-tions			Consolidated		Retail Banking		Wealth Management			Mortgage Banking			Inter-company Elimina-tions			Consolidated
(In Thousands)
Revenues:
Interest income	$	11,854	$	2	$	887		$	(402	)	$	12,341	$	11,313	$	3		$	691		$	(249	)	$	11,758
Trust and investment fee income	—		956		—			(35		)	921		—		895			—			(28		)	867
Other income	1,093		—		4,018			(197		)	4,914		936		—			3,101			(1		)	4,036
Total operating income	12,947		958		4,905			(634		)	18,176		12,249		898			3,792			(278		)	16,661
Expenses:
Interest expense	2,272		—		551			(402		)	2,421		2,661		—			311			(249		)	2,723
Salaries and employee benefits	3,796		528		3,033			—			7,357		3,661		609			3,046			—			7,316
Provision for loan losses	792		—		—			—			792		454		—			—			—			454
Other	3,624		318		2,247			(232		)	5,957		3,613		297			973			(29		)	4,854
Total operating expenses	10,484		846		5,831			(634		)	16,527		10,389		906			4,330			(278		)	15,347
Income (loss) before income taxes and non-controlling interest	2,463		112		(926		)	—			1,649		1,860		(8		)	(538		)	—			1,314
Income tax expense (benefit)	313		103		—			—			416		322		(5		)	—			—			317
Net Income (loss)	2,150		9		(926		)	—			1,233		1,538		(3		)	(538		)	—			997
Non-controlling interest in loss of consolidated subsidiary	—		—		349			—			349							230			—			230
Net income (loss) attributable to Middleburg Financial Corporation	$	2,150	$	9	$	(577	)	$	—		$	1,582	$	1,538	$	(3	)	$	(308	)	$	—		$	1,227
Total assets	$	1,179,087	$	12,241	$	90,128		$	(78,245	)	$	1,203,211	$	1,071,689	$	11,981		$	44,718		$	(44,099	)	$	1,084,289
Capital expenditures	$	204	$	—	$	—		$	—		$	204	$	250	$	3		$	—		$	—		$	253
Goodwill and other intangibles	$	—	$	4,279	$	1,867		$	—		$	6,146	$	—	$	4,449		$	1,867		$	—		$	6,316

Note 8.  Defined Benefit Pension Plan

Prior to December 31, 2011, the Company sponsored a noncontributory, defined benefit pension plan covering substantially all full-time employees of Middleburg Bank and Middleburg Trust Company.  The defined benefit pension plan was terminated in in February of 2011, and all plan assets were distributed to participants as of December 31, 2011.  When the plan was active, the Company funded pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.  Benefit accruals and eligibility were frozen as of September 30, 2009.

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

	Three months ended March 31,
	2012		2011
	(In Thousands)
Interest cost	$	—	$	46
Expected return on plan assets	—		(15		)
Amortization of unrecognized  net actuarial  loss	—		305
Net periodic benefit cost (income)	$	—	$	336

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Note 9.  Capital Purchase Program

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.   During 2011, the Warrant was sold by the U.S. Treasury at public auction and has not been exercised as of March 31, 2012.

Note 10.  Fair Value Measurements

The Company adopted ASC 820, Fair Value Measurements 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.

Measured on recurring basis

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:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level I). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level II).

Derivatives

Derivatives are recorded at fair value on a recurring basis.  Third party vendors compile prices from various sources and may determine the fair value of identical or similar instruments by using pricing models that consider observable market data (Level II).

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The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

	March 31, 2012
	(In thousands)
	Total		Level I		Level II		Level III
Assets:
U.S. government agencies	$	9,359	$	—	$	9,359	$	—
Obligations of states and political subdivisions	70,117		—		70,117		—
Mortgage-backed securities:
Agency	190,143		—		190,143		—
Non-agency	43,456		—		43,456		—
Corporate preferred stock	46		—		46		—
Corporate securities	10,223		—		10,223		—
Trust preferred securities	240		—		240		—
Liabilities:
Derivative financial instruments	$	234	$	—	$	234	—

	December 31, 2011
	(In thousands)
	Total		Level I		Level II		Level III
Assets:
U.S. government agencies	$	9,343	$	—	$	9,343	$	—
Obligations of states and political subdivisions	67,542		—		67,542		—
Mortgage-backed securities:
Agency	187,070		—		187,070		—
Non-agency	34,002		—		34,002		—
Corporate preferred stock	40		—		40		—
Corporate securities	9,976		—		9,976		—
Trust preferred securities	269		—		269		—
Liabilities:
Derivative financial instruments	314		—		314		—

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the three months ended March 31, 2012. 

Measured on nonrecurring basis

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:

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

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nonrecurring fair value adjustments were recorded on loans held for sale during the three months ended March 31, 2012.  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 the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the underlying collateral.  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, licensed appraiser 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. As of March 31, 2012, thirteen impaired loans with a net balance of $1.9 million were categorized as having a Level III valuation due to the date of the last appraisal.  The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level III).  Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Impaired loans for which no further loss is expected are not considered to be measured at fair value on a nonrecurring basis.  Any fair value adjustments as a result of the evaluation process are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

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.

The Company’s procedure to monitor the value of collateral for collateral dependent impaired loans between the receipt of an original appraisal and an updated appraisal is to review tax assessment records when they change annually.  At the time of any change in tax assessment, an appropriate adjustment is made to the existing appraised value.  Information considered in a determination not to order an updated appraisal includes the availability and reliability of tax assessment records, the results of any independent real estate evaluation, and significant changes in capitalization rates for income properties since the original appraisal.  Other facts and circumstances on a case by case basis may be considered relative to a decision to order or not to order an updated appraisal.  If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal is obtained.

Circumstances that may warrant a re-appraisal for non-performing (impaired) loans might include foreclosure proceedings or a material adverse change in the borrower’s condition or that of the collateral underlying the loan.  Examples include bankruptcy filing by the debtor or guarantors, loss of a major tenant in an income property, or a significant increase in capitalization rates for income properties.  In some cases, management may decide that an updated appraisal for a non-performing loan is not necessary.  In such cases, an estimate of the fair value of the collateral for the loans would be made by management by reference to current tax assessment records, the latest appraised value, and knowledge of collateral value fluctuations in a loan’s market area.  If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal would be obtained.

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 or independent real estate evaluations are obtained.  If an appraisal is less than 12 months old, the only adjustment made to appraised values is the 10% discount for selling costs.  If an appraisal is older than 12 months, management will use judgment based on knowledge of current market values and specific facts surrounding any particular property to determine if an additional valuation adjustment may be necessary.

For real estate-secured impaired loans, if the Company does not have an adequate appraisal a new one is ordered to determine fair value.  An appraisal that would be considered adequate for real estate-secured loans is one that is less than 12 months or one that is more than 12 months old but alternative methods with which to monitor the collateral value exist, such as reference to frequently updated tax assessments.  Appraisals that would be considered inadequate for real estate-secured loans include

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appraisals older than 12 months and with a property located in a jurisdiction that does not reassess property values on a regular basis, or with a property to which substantial changes have been made since the last assessment. 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.

It is the Company’s policy to account for partially charged-off loans consistently both before and after updated appraisals are obtained.  Partially charged-off loans are placed in non-accrual status and remain in that status until the borrower has made a minimum of six consecutive monthly payments on a timely basis and there is evidence that the borrower has the ability to repay the balance of the loan plus accrued interest in full.   Partially charged-off loans are not automatically returned to accrual status when updated appraisals are obtained.

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 as of March 31, 2012 and December 31, 2011:

	March 31, 2012
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Loans held for sale	$	81,027	$	—	$	81,027	$	—
Impaired loans	10,711		—		8,828		1,883

	December 31, 2011
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Loans held for sale	$	92,514	$	—	$	92,514	$	—
Impaired loans	10,648		—		6,767		3,881

The following table presents a roll-forward of the transfers in and out of the Level III valuation method for financial assets that are measured at fair value on a nonrecurring basis as of  March 31, 2012:

	Impaired Loans
Balance at December 31, 2011	$	3,881
Transfers in	—
Transfers out (1)	(1,848		)
Other (2)	(150		)
Balance at March 31, 2012	$	1,883

(1)  Impaired loans are considered to have a Level III valuation methodology if the appraisal on the loan is older than two years.  Transfers out of level three status represent loans for which current appraisals have been obtained or loans which have been transferred to other real estate owned and the collateral re-appraised at the time of the transfer.

(2)  Other changes in the Level III balances during the period represent principal changes on level three impaired loans and minor valuation adjustments.

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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 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 construction. 

For the purpose of 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 “Other real estate owned expenses” 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.

	March 31, 2012
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Other real estate owned	$	12,095	$	—	$	12,095	$	—

	December 31, 2011
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Other real estate owned	$	8,535	$	—	$	8,535	$	—

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.  U.S. generally accepted accounting principles excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

For those cash equivalents, the carrying amount is a reasonable estimate of fair value.

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Loans, Net and Loans Held for Sale

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair values.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  For all other deposits, the fair value is determined using the discounted cash flow method.  The discount rate used is equal to the rate currently offered on similar products.

Securities Sold Under Agreements to Repurchase and Short-Term Debt

The carrying amounts approximate fair values.

FHLB Borrowings, Long-Term and Subordinated Debt

For variable rate long-term debt, fair values are based on carrying values.  For fixed rate debt, fair values are estimated based on observable market prices and discounted cash flow analysis using interest rates for borrowings of similar remaining maturities and characteristics.  The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.  At March 31, 2012 and December 31, 2011, the fair values of loan commitments and standby letters of credit were deemed immaterial; therefore, they have not been included in the table below.

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Fair Value of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company's financial instruments as of March 31, 2012 are as follows:

					March 31, 2012
					Fair value measurements using:
	Carrying Amount		Total Fair Value		Level I		Level II		Level III
	(In thousands)
Financial assets:
Cash and cash equivalents	$	45,037	$	45,037	$	45,037	$	—	—
Securities	323,584		323,584		—		323,584		—
Loans held for sale	81,027		81,027		—		81,027		—
Net portfolio loans	667,508		691,593		—		689,710		1,883
Accrued interest receivable	4,094		4,094		—		4,094		—
Interest rate swap	—		—		—		—		—
Financial liabilities:
Deposits	$	951,772	$	955,971	$	—	$	955,971	—
Securities sold under agreements
to repurchase	32,154		32,154		—		32,154		—
Short-term debt	14,166		14,166		—		14,166		—
FHLB borrowings	82,912		83,967		—		83,967		—
Trust preferred capital notes	5,155		5,221		—		5,221		—
Accrued interest payable	762		762		—		762		—
Interest rate swap	234		234		—		234		—

The estimated fair values, and related carrying amounts, of the Company's financial instruments as of December 31, 2011 are as follows:

		December 31, 2011
		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents		$	51,270	$	51,270
Securities		308,242		308,242
Loans		749,284		770,759
Accrued interest receivable		4,221		4,221
Financial liabilities:
Deposits		$	929,869	$	934,322
Securities sold under agreements
to repurchase		31,686		31,686
Short-term debt		28,331		28,331
FHLB borrowings		82,912		83,899
Trust preferred capital notes		5,155		5,216
Accrued interest payable		844		844
Interest rate swap		314		314

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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.  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 April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”  The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion.  The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements.  The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS).  The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application.  Early application is not permitted.  The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share.  The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011.  Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures.  The Company has included the required disclosures in its consolidated financial statements.

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In September 2011, the FASB issued ASU 2011-08, “Intangible - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.”  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued.  The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.”  This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

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

The following discussion and analysis of the financial condition at March 31, 2012 and results of operations of the Company for the three months ended March 31, 2012 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 2011 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, Fauquier and

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western Prince William as well as the town of Williamsburg, Virginia and the city of Richmond, Virginia.  The Bank operates eleven financial service centers and one limited service facility. 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 is headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank’s facilities.  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 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 subsidiary, Middleburg Trust Company, generates fee income by providing trust and investment management 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 attributable to the Company for the three months ended March 31, 2012 increased to $1.6 million from net income of $1.2 million during the first quarter of 2011.  Earnings per fully diluted share for the three months ended March 31, 2012 was $0.23 per share versus  $0.18 per diluted share for the quarter ended March 31, 2011.

Annualized return on total average assets for the three months ended March 31, 2012 was 0.54%, compared to 0.46% for the same period in 2011.  Annualized return on total average equity of Middleburg Financial Corporation, which excludes the non-controlling interest in Southern Trust Mortgage, for the three months ended March 31, 2012, was 5.95%, compared to 5.11% for the first three months of 2011.

As a result of the evaluation of the adequacy of the reserve for loan losses, the Company increased its reserve for loan losses by $792,000 during the three months ended March 31, 2012 compared to a provision of $454,000 during the three months ended March 31, 2011.  

Net interest income for the three months ended March 31, 2012 was $9.9 million compared to $9.0 million for the three months ended March 31, 2011.  Total non-interest income increased $1.9 million to $5.8 million for the three months ended March 31, 2012 from $3.9 million for the three months ended March 31, 2011.  Total non-interest expenses increased approximately $2.1 million to $13.3 million for the three months ended March 31, 2012 from $11.2 million for the same period in 2011.

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 rules and regulations throughout 2011 and beyond.  While not fully 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 resources or results of operations.

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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

Middleburg Bank monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio.  Middleburg Bank 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 they are 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 standards.  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 amount of impairment.  If a loan evaluated individually is not impaired, then the loan is assessed for impairment with a group of loans that have similar characteristics.

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 standards 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 loan 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 $6.2 million in intangible assets and goodwill at March 31, 2012, a decrease of $43,000 or 0.7% since December 31, 2011 which was attributable to regular amortization of intangible assets.

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On April 1, 2002, the Company acquired Middleburg Investment Advisors 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.  On January 3, 2011, Middleburg Investment Advisors was merged into Middleburg Trust Company and its goodwill balance is reflected in the total goodwill balance reported for Middleburg Investment Group of $3.4 million.  The remaining balance of unamortized identified intangible assets related to the acquisition of Middleburg Investment Advisors is approximately $857,000.  Approximately $1.0 million of the $6.2 million in total intangible assets and goodwill at March 31, 2012 was attributable directly to the Company’s investment in Middleburg Trust Company exclusive of the goodwill related to the former Middleburg Investment Advisors.  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.

In addition, current accounting standards permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two step goodwill impairment test.  If a two step process is necessary, the first step is to identify whether or not any  impairment exists.  The second step measures the amount of the impairment loss, if any.  The most recent evaluation of the Company's goodwill balance was conducted as of December 31, 2011.

As of March 31, 2012, the Company recognized two consolidated subsidiaries as reporting units for the purpose of goodwill evaluation and reporting:  Southern Trust Mortgage (“STM”) and Middleburg Investment Group (“MIG”).   MIG is the parent company of Middleburg Trust Company and the former Middleburg Investment Advisors.  The following table shows the allocation of goodwill between the two reporting units and the percentage by which the fair value of each reporting unit as of December 31, 2011 (the most recent fair value evaluation date) exceeded the carrying value as of that date.  Management does not believe the estimated fair values have changed significantly from December 31, 2011 to March 31,  2012.

	Allocation of Goodwill to Reporting Units
			(Dollars in Thousands)
	Carrying Value of Goodwill		(1) Carrying Value of Reporting Unit			(1) Estimated Fair Value of Reporting Unit		(1) Percentage by which Estimated Fair Value of Reporting Unit Exceeds
Reporting Unit	December 31, 2011		December 31, 2011			December 31, 2011		Carrying Value
STM	$	1,867	$	6,039		$	6,828	13.07	%
MIG	3,422		5,891		(2)	6,691		13.58	%
Total	$	5,289	$	11,930		$	13,519	13.32	%

(1)   Reported amounts reflect only Middleburg Financial Corporation shareholders' ownership interests. Estimated fair values are as of December 31, 2011. Management does not believe the estimated fair values have changed significantly from December 31, 2011 to March 31, 2012.

(2)   Includes $900,000 of amortizing intangible assets at December 31, 2011.

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Management estimates fair value utilizing multiple methodologies which include discounted cash flows, comparable companies, third-party sale and assets under management analysis. Determining the fair value of the Company’s reporting units requires management to make judgments and assumptions related to various items, including estimates of future operating results, allocations of indirect expenses, and discount rates.  Management believes its estimates and assumptions are reasonable; however, the fair value of each reporting unit could be different in the future if actual results or market conditions differ from the estimates and assumptions used.

The Company’s forecasted cash flows for its reporting units assume a stable economic environment and consistent long-term growth in loan originations and assets under management over the projected periods.  Additionally, expenses are assumed to be consistently correlated with projected asset and revenue growth over the time periods projected.  Although we believe the key assumptions underlying the financial forecasts to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond the control of the Company.  Accordingly, there can be no assurance that the forecasted results will be realized and variations from the forecast may be material.  If weak economic conditions continue or worsen for a prolonged period of time, or if the reporting unit loses key personnel, the fair value of the reporting unit may be adversely affected which may result in impairment of goodwill or other intangible assets in the future.  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.

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)

There were no losses related to other-than-temporary impairment on trust-preferred securities  for the three months ended March 31, 2012.  At March 31, 2012, the Company had $475,000 in trust-preferred securities in its portfolio with a fair value of $240,000.

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 had 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 other-than-temporary impairments related to trust preferred securities during the remainder of 2012.  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 other-than-temporary impairments in 2012.

Financial Condition

Assets, Liabilities and Shareholders’ Equity

Total assets for the Company were $1.2 billion at March 31, 2012, an increase of $10.3 million or 0.9% compared to total assets at December 31, 2011.  Total average assets increased 9.9% from $1.07 billion for the three months ended March 31, 2011 to $1.18 billion for the same period in 2012.  Total liabilities were $1.09 billion at March 31, 2012, compared to $1.08 billion at December 31, 2011.  Total average liabilities increased $98.5 million or 10.1% to $1.07 billion for the three months ended March 31, 2012, compared to $975.5 million for the same period in 2011.  Average shareholders’ equity increased 9.8% or $9.5 million over the same periods.

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Loans

Total loans, including loans held for sale at March 31, 2012 were at $763.4 million, lower by $511,000 from the December 31, 2011 amount of $763.9 million.  Loans held for sale decreased to $81.0 million at March 31, 2012, compared to $92.5 million at December 31, 2011, a decrease of 12.4% during the period.  The primary reason for the decrease in loans held for sale was a decrease in mortgage originations during the first quarter of 2012 compared to the fourth quarter of 2011. Southern Trust Mortgage originated $211.2 million in loans for the three months ended March 31, 2012, compared to $136.5 million for the three months ended March 31, 2011.  The Company experienced an increase in real estate construction loans, which were $47.1 million at March 31, 2012, compared to $42.2 million at December 31, 2011.  Real estate mortgage loans of $522.1 million at March 31, 2012 increased from the December 31, 2011 amount of $512.2 million.  Commercial loans, which are primarily loans to businesses, decreased to $91.4 million at March 31, 2012, compared to $94.4 million at December 31, 2011.  Net charge-offs were $554,000 for the three months ended March 31, 2012 versus $846,000 for the same period in 2011.  The provision for loan losses for the three months ended March 31, 2012 was $792,000 compared to $454,000 for the same period in 2011. The allowance for loan losses at March 31, 2012 was $14.9 million or 2.18% of total loans outstanding, excluding loans held for sale, compared to $14.6 million and 2.18% at December 31, 2011.

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

	Nonperforming Assets Middleburg Financial Corporation
	March, 31			December 31,
	2012			2011			2010			2009			2008
	(In thousands)
Nonperforming assets:
Nonaccrual loans	$	22,245		$	25,346		$	29,386		$	8,606		$	6,890
Restructured loans (1)	4,056			3,853			1,254			2,096			—
Accruing loans greater than 90 days past due	167			1,233			909			908			1,117
Total nonperforming loans	$	26,468		$	30,432		$	31,549		$	11,610		$	8,007
Foreclosed property	12,095			8,535			8,394			6,511			7,597
Total nonperforming assets	$	38,563		$	38,967		$	39,943		$	18,121		$	15,604
Allowance for loan losses	$	14,861		$	14,623		$	14,967		$	9,185		$	10,020
Nonperforming loans to period end portfolio loans	3.88		%	4.53		%	4.79		%	1.80		%	1.19		%
Allowance for loan losses to nonperforming loans	56.14		%	48.05		%	47.44		%	79.11		%	125.14		%
Nonperforming assets to period end assets	3.21		%	3.27		%	3.62		%	1.86		%	1.58		%

(1) Amount reflects restructured loans that are performing as agreed to the restructured terms and are not included in nonaccrual loans.

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
	Three  Months Ended			Year Ended
	March 31, 2012			December 31, 2011
Balance, beginning of year	$	14,623		$	14,967
Provision for loan losses	792			2,884
Charge-offs:
Real estate loans:
Construction	186			467
Secured by 1-4 family residential	353			2,062
Other real estate loans	—			438
Commercial loans	155			180
Consumer loans	6			318
Total charge-offs	$	700		$	3,465
Recoveries:
Real estate loans:
Construction	$	—		$	29
Secured by 1-4 family residential	114			41
Other real estate loans	20			98
Commercial loans	2			41
Consumer loans	10			28
Total recoveries	$	146		$	237
Net charge-offs	554			3,228
Balance, end of period	$	14,861		$	14,623
Ratio of allowance for loan losses to portfolio loans outstanding at end of period	2.18		%	2.18		%
Ratio of net charge offs to average portfolio loans outstanding during the period	0.33		%	0.44		%

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 March 31, 2012 and December 31, 2011:

Allocation of Allowance for Loan Losses
	March 31, 2012		Percent of loans in each category to total loans		December 31, 2011		Percent of loans in each category to total loans
Commercial, financial and agricultural	$	1,551	14.80	%	$	1,731	5.40	%
Real estate construction	2,669		6.90	%	897		16.80	%
Real estate mortgage	10,490		76.51	%	11,850		74.54	%
Consumer loans	151		1.79	%	145		3.26	%
Totals	$	14,861	100.00	%	$	14,623	100.00	%

Non-performing Loans

Non-performing loans were $26.5 million at March 31, 2012 compared to $30.4 million at December 31, 2011.

Non-accrual loans were $22.2 million at the end of the first quarter of 2012 compared to $25.3 million as of December 31, 2011, representing a decrease of 12.2% during the first three months of 2012.   

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Restructured Loans

Included in the “Nonperforming Assets” table above are troubled debt restructurings (“TDRs”), all of which were classified as impaired.  The total balance of TDRs at March 31, 2012 was $10.0 million of which $6.0 million were included in the Company’s non-accrual loan totals at that date and $4.0 million represented loans performing as agreed to the restructured terms. This compares with $11.2 million in total restructured loans at December 31, 2011, an decrease of $1.2 million or 10.7%.  The amount of the valuation allowance related to total TDRs was $803,000 and $1.7 million as of March 31, 2012 and December 31, 2011 respectively.

The $6.0 million in nonaccrual TDRs as of March 31, 2012 is comprised of $4.9 million in real estate construction loans, $863,000 in 1-4 family real estate loans, and $226,000 in consumer loans.  The $4.0 million in TDRs which were performing as agreed under restructured terms as of March 31, 2012 is represented comprised of $258,000 in commercial loans, $1.1 million in 1-4 family real estate loans, and $2.7 million in other real estate loans.  The Company considers all loans classified as TDRs to be impaired.

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.  No restructured loans were charged off during the three month period ended March 31, 2012.  The Company does not utilize formal modification programs or packages when loans are considered for restructuring.  Any loan restructuring is based on the borrower’s circumstances and may include modifications to more than one of the terms and conditions of the loan.

The Company has not performed any commercial real estate or other type of loan workout whereby the existing loan would have been structured into multiple new loans.

Other Real Estate Owned

Other real estate owned, net of valuation allowance, increased by $3.6 million to $12.1 million at March 31, 2012 from $8.5 million at December 31, 2011.  The change in balance is the net of foreclosed real estate loans  added to other real estate owned, valuation adjustments and sales of other real estate owned properties during the period.  During the three months ended March 31, 2012, the Company received proceeds of $213,000 from the sale of other real estate owned properties and incurred a net loss of $14,000 on the sales. Valuation adjustments to properties held in OREO were approximately $54,000 during the three months ended March 31, 2012.

Securities

Securities, excluding Federal Reserve and Federal Home Loan Bank stock, increased to $323.6 million at March 31, 2012 compared to $308.2 million at December 31, 2011, an increase of 5.0% during the period. The balance in interest-bearing bank balances decreased to $38.5 million as of March 31, 2012 versus $45.1 million at December 31, 2011.  The Company sold $3.1 million in securities, received proceeds of $20.6 million from maturities and principal payments, and purchased securities of $39.0 million for the three months ended March 31, 2012.  No losses related to other-than-temporary impairments on trust-preferred securities were recognized for the three months ended March 31, 2012.  At March 31, 2012, the Company had $475,000 in trust-preferred securities in its portfolio of which $231,099 are considered other-than-temporarily impaired.

The Company will continue to maintain its securities portfolio as a source of liquidity and collateral.  At March 31, 2012 the year-to-date tax equivalent yield on the securities portfolio was 3.34%.

Premises and Equipment

Net Premises and equipment decreased by $207,000 from $21.3 million at December 31, 2011 to $21.1 million at March 31, 2012.  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 by $43,000 in the first quarter of 2012 to $6.1 million at March 31, 2012 as the result of amortization of identified intangibles related to the acquisition of Middleburg Investment Advisors.

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Other Assets

Other assets decreased $1.6 million to $35.3 million at March 31, 2012, when compared to December 31, 2011.  The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $16.2 million and net deferred tax assets in the amount of $6.2 million at March 31, 2012.

Deposits

Deposits increased by $21.9 million to $951.8 million at March 31, 2012 from $929.9 million at December 31, 2011.  Average deposits for the three months ended March 31, 2012 increased 8.5% or $73.5 million compared to average deposits for the three months ended March 31, 2011.  Average interest bearing deposits were $788.1 million for the three months ended March 31, 2012 compared to $736.7 million for the three months ended March 31, 2011.

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 March 31, 2012 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.

Time deposits increased by $354,000 from December 31, 2011 to $326.2 million at March 31, 2012.  Time deposits include brokered certificates of deposit and CDARS deposits, which increased y $4 million or 4.0% to $100.8 million at March 31, 2012 from the December 31, 2011 amount of $96.8 million.  The brokered certificates of deposit have maturities ranging from one month to ten years.  Securities sold under agreements to repurchase (“Repo Accounts”) increased by $468,000 from

$31.7 million at December 31, 2011 to $32.2 million at March 31, 2012.  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 FHLB Borrowings

The Company had no overnight or short term advances from the Federal Home Loan Bank of Atlanta (“FHLB”) outstanding at March 31, 2012 or December 31, 2011.  Southern Trust Mortgage has a line of credit with a regional bank that is primarily used to fund its loans held for sale.  At March 31, 2012, this line had an outstanding balance of $15.7 million compared to $28.3 million at December 31, 2011.  The interest rate on the line of credit is based on the 30-day London Inter-Bank Offered Rate (“LIBOR”).  Southern Trust Mortgage also has a $5.0 million line of credit and a $75.0 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 FHLB advances were by $82.9 million at March 31, 2012, unchanged from December 31, 2011.  

Other Liabilities

Other liabilities increased by $600,000 to $7.5 million at March 31, 2012, when compared to December 31, 2011.

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Non-controlling Interest in Consolidated Subsidiary

The Company, through Middleburg Bank owns 62.3% of the issued and outstanding membership interest units in Southern Trust Mortgage.  The remaining 37.7% 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 $865,000 issued and outstanding at March 31, 2012. The Company, through Middleburg Bank owns 70.4% of the issued and outstanding preferred stock in Southern Trust Mortgage.  The remaining 29.6% of issued and outstanding preferred stock is owned by other partners.  The preferred stock held by these other partners is reflected in other liabilities.

Capital

Total shareholders’ equity, including the non-controlling interest in Southern Trust Mortgage, was $109.6 million at March 31, 2012.  This amount represents an increase of 1.5% from the December 31, 2011 amount of $108.0 million. Middleburg Financial Corporation’s shareholders’ equity, which excludes the non-controlling interest, was $107.9 million at March 31, 2012 compared to $105.9 million at December 31, 2011.  The book value of common shareholders was $15.40 per share at March 31, 2012 and $15.13 at December 31, 2011.  The following table shows the Company’s risk-based capital ratios as of March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
Total risk-based capital ratio	14.8	%	14.7	%
Tier 1 risk-based capital ratio	13.6	%	13.5	%
Tier 1 leverage ratio	8.9	%	8.8	%

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 for the three months ended March 31, 2012 was $9.9 million, compared to $9.0 million for the same period in 2011.  Total interest income for the three months ended March 31, 2012 was $12.3 million compared to $11.7 million for the three months ended March 31, 2011 representing an increase of 5.1%.  Total interest expense was $2.4 million for the three months ended March 31, 2012 compared to $2.7 million for the same period in 2011 representing a decrease of 11.1%.  Average earning assets increased by $120.8 million to $1.1 billion for the three months ended March 31, 2012 from $1.0 billion for the three months ended March 31, 2011.  Average interest bearing liabilities increased by $75.9 million or 8.9% to $922.4 million for the three months ended March 31, 2012 when compared to the same period in 2011.

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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.

	MIDDLEBURG FINANCIAL CORPORATION Average Balances, Income and Expenses, Yields and Rates
	Three Months Ended March 31,
	2012							2011
	Average Balance			Income/ Expense		Yield/ Rate (2)		Average Balance			Income/ Expense		Yield/ Rate (2)
	(Dollars in thousands)
Assets :
Securities:
Taxable	$	263,408		$	1,779	2.72	%	$	204,725		$	1,435	2.84	%
Tax-exempt (1)	61,802			920		5.99	%	53,974			850		6.39	%
Total securities	$	325,210		$	2,699	3.34	%	$	258,699		$	2,285	3.58	%
Total loans (3)	$	744,776		$	9,931	5.36	%	$	694,628		$	9,735	5.68	%
Interest bearing deposits in other financial institutions	46,111			24		0.21	%	41,980			27		0.26	%
Total earning assets	$	1,116,097		$	12,654	4.56	%	$	995,307		$	12,047	4.91	%
Less: allowances for credit losses	(14,871		)					(14,747		)
Total nonearning assets	81,699							95,185
Total assets	$	1,182,925						$	1,075,745
Liabilities:
Interest-bearing deposits:
Checking	$	303,641		$	383	0.51	%	$	287,005		$	486	0.69	%
Regular savings	105,010			115		0.44	%	89,650			187		0.85	%
Money market savings	56,624			58		0.41	%	60,872			101		0.67	%
Time deposits:
$100,000 and over	142,688			572		1.61	%	130,641			605		1.88	%
Under $100,000	180,176			765		1.71	%	168,537			929		2.24	%
Total interest-bearing deposits	$	788,139		$	1,893	0.97	%	$	736,705		$	2,308	1.27	%
Short-term borrowings	12,379			148		4.81	%	5,739			63		4.45	%
Securities sold under agreements to repurchase	34,125			83		0.98	%	29,308			56		0.77	%
FHLB advances and other borrowings	87,792			297		1.36	%	74,734			296		1.61	%
Total interest-bearing liabilities	$	922,435		$	2,421	1.06	%	$	846,486		$	2,723	1.30	%
Non-interest bearing liabilities
Demand Deposits	144,188							122,118
Other liabilities	7,322							6,873
Total liabilities	$	1,073,945						$	975,477
Non-controlling interest	2,023							2,830
Shareholders' equity	106,957							97,438
Total liabilities and shareholders' equity	$	1,182,925						$	1,075,745
Net interest income				$	10,233						$	9,324
Interest rate spread						3.50	%						3.61	%
Cost of Funds						0.91	%						1.14	%
Interest expense as a percent of average earning assets						0.87	%						1.11	%
Net interest margin						3.69	%						3.80	%

(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 366 day year.

(3)   Total average loans include loans on non-accrual status.

41

For the three months ended March 31, 2012, interest and fees from loans was $9.9 million compared to $9.7 million for the three months ended March 31. 2011. The tax equivalent weighted average yield of loans decreased 32 basis points from 5.68% for the three months ended March 31, 2011 to 5.36% for the three months ended March 31, 2012.

For the three month period ended March 31, 2012, interest income from the securities portfolio and invested liquid funds increased by $387,000 to $2.4 million compared to the same period in 2011.  The tax equivalent yield on securities for the three months ended March 31, 2012 decreased 24 basis points to 3.34% compared to 3.58% for the three months ended March 31, 2011.

Interest expense on deposits was $1.9 million for the three months ended March 31, 2012.  The mix of demand and savings deposits versus time deposits changed slightly to 65.7% in demand and savings deposits, and 34.3% in time deposits at March 31, 2012.  At December 31, 2011, the mix was 64.9% in savings and demand deposits, versus 35.1% in time deposits.  

Interest expense for securities sold under agreements to repurchase increased to $83,000 for the three months ended March 31, 2012 from $56,000 for the three months ended March 31, 2011.  Interest expense related to short-term borrowings increased $85,000 from $63,000 for the three months ended March 31, 2011 to $148,000 for the three months ended March 31, 2012. Interest expense related to FHLB advances and other debt increased $1,000 from $296,000 for the three months ended March 31, 2011 to $297,000 for the three months ended March 31, 2012.

Average balances in interest checking, regular savings and money market accounts increased by $27.1 million when comparing the three months ended March 31, 2012 to the same period in 2011.  The weighted average cost of these accounts for the three months ended March 31, 2012 and 2011 was .48% and 0.72%, respectively.  The average balance of certificates of deposits increased by $23.7 million when comparing the three months ended March 31, 2012 to the three months ended March 31, 2011. The weighted average cost of the Company’s certificates of deposits decreased by 41 basis points to 1.67% for the three months ended March 31, 2012 versus the three months ended March 31, 2011.

The net interest margin, on a tax equivalent basis, was 3.69% for the three months ended March 31, 2012 compared to 3.80% for the three-month period ended March 31, 2011.  The average yield on earning assets was 4.56% for the quarter ended March 31, 2012 compared to  4.91% for the quarter ended March 31, 2011, representing a decrease of 35 basis points from the quarter ended March 31, 2011. The decrease in yields on earning assets from the quarter ended March 31, 2011 reflected a decrease of 24 basis points in the yield of the securities portfolio and a 32 basis point decrease in yields for the loan portfolio.

The Company’s net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial 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.

42

Reconciliation of Net Interest Income to

Tax Equivalent Net Interest Income

	For the three months ended March 31,
	2012		2011
GAAP measures:	(in thousands)
Interest Income – Loans	$	9,931	$	9,735
Interest Income - Investments & Other	2,410		2,023
Interest Expense – Deposits	1,893		2,308
Interest Expense - Other Borrowings	528		415
Total Net Interest Income	$	9,920	$	9,035
NON-GAAP measures:
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities	313		289
Total Tax Benefit Realized on Non-Taxable Interest Income	$	313	$	289
Total Tax Equivalent Net Interest Income	$	10,233	$	9,324

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.  Other income also includes income from the Company’s 62.3% ownership interest in Southern Trust Mortgage, LLC.  Other income increased 49.6% to $5.8 million for the three months ended March 31, 2012 compared to the same period in 2011.

Trust and investment service fees earned by Middleburg Trust Company (“MTC”) increased by 6.2% compared to the quarter ended March 31, 2011.  Trust and investment service fees are based primarily upon the market value of the accounts under administration.  Total consolidated assets under administration by MTC were at $1.3 billion at March 31, 2012, an increase of 1.0% relative to December 31, 2011 and an increase of 11.0% relative to March 31, 2011.

Service charges on deposits increased 8.4% to $530,000 for the three months ended March 31, 2012, compared to the three months ended March 31, 2011.  

The Company sold $3.1 million in securities and purchased $39.0 million in securities during the three months ended March 31, 2012.  The Company realized a net gain of $140,000 on the sale of securities in the three months ended March 31, 2012.  The Company has identified three other-than-temporarily impaired securities in its portfolio and has recognized decreases in the fair market value of the security through earnings. During the three months ended March 31, 2012, the Company realized no losses related to the other-than-temporarily impaired securities.

Commissions on investment sales increased 54.7% to $147,000 for the three months ended March 31, 2012, compared to $95,000 for the three months ended March 31, 2011.

The revenues and expenses of Southern Trust Mortgage for the three months ended March 31, 2012 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.”  Southern Trust Mortgage originated $211.2 million in mortgage loans during the quarter ended March 31, 2012 compared to $136.5 million originated during the quarter ended March 31, 2011. Gains on mortgage loan sales increased by 95.4% when comparing the quarter ended March 31, 2012 to the quarter ended March 31, 2011.  

Income earned from the Bank’s $16.2 million investment in Bank Owned Life Insurance (BOLI) contributed $122,000 to total other income for the three months ended March 31, 2012.  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.

43

Other service charges, commissions and fees increased by 30.4% to $150,000 for the three months ended March 31, 2012, compared to $115,000 for the same period in 2011.

Other Expense

Total other expense includes employee-related costs, occupancy and equipment expense and other overhead.  Total other expense increased by $2.1 million from $11.2 million for the three months ended March 31, 2011 to $13.3 million for the three months ended March 31, 2012.  When taken as a percentage of total average assets on an annualized basis, other expense was 4.5% of total average assets for the three months ended March 31, 2012 versus 4.1% for the same period in 2011.  

Salaries and employee benefit expenses increased by $1.0 million or 16.5% when comparing the first three months of 2012 to the same period ended March 31, 2011.

Net occupancy expense increased by $102,000 or 6.1% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The 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 by 3.0% to $203,000 for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The other tax expenses is franchise taxes 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 of each year, net of adjustments.

Advertising expense increased by $144,000 to $300,000 for the three months ended March 31, 2012 compared to $156,000 for the three months ended March 31, 2011. 

Other real estate owned expense decreased by $58,000 to $286,000 for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase in expenses was primarily due to increases in legal expenses related to foreclosure, valuation adjustments and losses on the sales of these assets.

FDIC insurance expense decreased by $149,000 to $258,000 for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The decrease in FDIC insurance expense for the three month periods occurred because of a change in expense calculation methods implemented by the FDIC during 2011.

Other expenses increased 60.7% or $1.0 million to $2.7 million for the three months ended March 31, 2012 compared to the same period in 2011. This increase is primarily a result of a $1.125 million one-time charge associated with a settlement agreement entered into with one of Southern Trust Mortgage's mortgage correspondents related to the loan purchase agreement between the two parties. This one-time settlement agreement provided for the release of known and unknown claims by the mortgage correspondent in exchange for aggregate cash payments of $1.125 million.

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Allowance for Loan Losses

The allowance for loan losses at March 31, 2012 was $14.9 million, or 2.18% of total portfolio loans, compared to $14.6 million, or 2.18% of total portfolio loans at December 31, 2011.  The provision for loan losses was $792,000 for the three months ended March 31, 2012, compared to $454,000 for the three months ended March 31, 2011.  For the three months ended March 31, 2012, net loan charge-offs totaled $554,000 compared to net loan charge-offs of $846,000 for the same period in 2011.  There were $167,000 in loans past due 90 days or more and still accruing at March 31, 2012, compared to $1.2 million at December 31, 2011.  Non-performing loans were $26.5 million at March 31, 2012, compared to $30.4 million at December 31, 2011.  Management believes that the allowance for loan losses was adequate to cover credit losses inherent in the loan portfolio at March 31, 2012.  Loans classified as loss, doubtful, substandard and special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved.  Approximately $803,000 has been included in the allowance for loan losses related to restructured loans.

Non-performing assets decreased from $39.0 million or 3.3% of total assets at December 31, 2011 to $38.6 million or 3.2% of total assets as of March 31, 2012.   Non-accrual loans decreased from $25.4 million at December 31, 2011 to $22.3 million at March 31, 2012.

Capital Resources

Total shareholders’ equity at March 31, 2012 and December 31, 2011 was $109.6 million and $108.0 million, respectively.  Total common shares outstanding at March 31, 2012 were 7,005,315.

At March 31, 2012, the Company’s tier 1 and total risk-based capital ratios were 13.6% and 14.8%, respectively, compared to 13.5% and 14.7% at December 31, 2011.  The Company’s leverage ratio was 8.9% at March 31, 2012 compared to 8.8% at December 31, 2011.  The Company’s capital structure places it above the well capitalized regulatory guidelines, which enables it to take advantage of business opportunities and indicates 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 $24.0 million, none of which were outstanding at March 31, 2012.  At March 31, 2012 and December 31, 2011, the Company had $32.1 million and $31.7 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 $76.4 million as of March 31, 2012.  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 three months of 2012.  Southern Trust Mortgage has a revolving line of credit with a regional bank having a credit limit of $24.0 million.  This line is primarily used to fund its loans held for sale.    Middleburg Bank guarantees up to $10 million of borrowings on this line.  At March 31 2012, the line had an outstanding balance of $14.2 million and is included in total short-term borrowings on the Company’s balance sheet.    

At March 31, 2012, cash, interest bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were 48.0% of total deposits.

45

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments to extend credit (excluding standby letters of credit) decreased $4.0 million to $88.0 million at March 31, 2012 compared to $92.0 million at December 31, 2011.  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 March 31, 2012 representing a decrease of $175,000 from December 31, 2011.

Contractual obligations, representing FHLB advance obligations, operating leases, and capital notes, decreased $1.3 million to $119.5 million at March 31, 2012 compared to $120.8 million at December 31, 2011.   These results do not include changes in certificates of deposit and short-term borrowings.   Additional information on commitments to extend credit, standby letters of credit and contractual obligations is included in the Company’s 2011 Form 10-K.

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 2011 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.

46

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 Bank.  In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management 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.  The results of the simulation are dependent upon assumptions and parameters within the model used which change from time to time based on historical interest rate relationships, current market conditions, and anticipated future market conditions.  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 March 31, 2012 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 excluding the assets of Southern Trust Mortgage.  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 March 31, 2012 and December 31, 2011.

	Estimated Net Interest Income Sensitivity
Rate Change	As of March 31, 2012	As of December 31, 2011
+ 200 bp	(2.0)%	—%
- 200 bp	(10.0)%	(10.0)%

At March 31, 2012, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points, net interest income could decrease by 2.0% on average over the next 12 months.  For the same time period the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could decrease by 10.0% on average over the next 12 months.  While these numbers are subjective based upon the assumptions and parameters used within the model, management believes the balance sheet is properly structured to minimize interest rate risk in the future.

Based upon a March 31, 2012 simulation, the Company could expect an average negative impact to net interest income of $702,000 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 $3.9 million over the next 12 months.

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, and reinvestment or replacement of asset and liability cash flows.  Management routinely monitors these

assumptions however the Company cannot make any assurances about the predictive nature of the 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.

47

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 and Middleburg Trust Company) 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, 2011. There have been no material changes in our risk factors from those disclosed in this report.

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

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None

48

Item 5.  Other Information

None

Item 6.  Exhibits

3.1 Bylaws of the Company (restated in electronic format as of May 3, 2012).

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

101 The following materials from the Middleburg Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in Extensible Business reporting Language (XBRL):  (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

49

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:	May 10, 2012	/s/ Gary R. Shook
		Gary R. Shook
		President & Chief Executive Officer
Date:	May 10, 2012	/s/ Raj Mehra
		Raj Mehra
		Executive Vice President
		& Chief Financial Officer

50

EXHIBIT INDEX

Exhibits

3.1	Bylaws of the Company (restated in electronic format as of May 3, 2012).
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
101	The following materials from the Middleburg Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in Extensible Business reporting Language (XBRL):  (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

51

EX-26.1

Exhibit 3.1

BYLAWS

OF

MIDDLEBURG FINANCIAL CORPORATION

(restated in electronic format as of May 2, 2012)

ARTICLE I

Shareholder Matters

Section 1.1.                                Annual Meetings.

A.           The annual meeting of the shareholders of the Corporation shall be held at such a place as may be decided by, the Board of Directors on a date during the month of March, April or May of each and every year, the exact date, place and hour to be fixed by the Board of Directors.

B.           At the annual meeting of the shareholders of the Corporation, Directors shall be elected and reports of the affairs of the Corporation shall be received and considered.  Any other business may be transacted which is within the powers of the shareholders, except that, if any shareholder shall bring new business before the annual meeting, the shareholder must give advance notice as set forth in Section 1.6 of these Bylaws.

C.           The Board of Directors may designate any place, either within or without the Commonwealth of Virginia, as the place of meeting for any annual meeting or for any special meeting.  If no place is designated by the Board, the place of meeting shall be the principal office of the Corporation.

Section 1.2.                                Special Meetings.  A special meeting of the shareholders may be called for any purpose or purposes whatsoever at any time, but only by the President, the Chairman of the Board of Directors, or the Board of Directors.

Section 1.3.                                Notice of Meetings.  Notice of the time and place of every annual meeting or special meeting shall be mailed to each Shareholder of record entitled to vote at the meeting at his address as it appears on the records of the Corporation not less than ten (10) nor more than sixty (60) days before the date of such meeting (except as a different time may be specified by law).

Section 1.4.                                Quorum.  A majority of the votes entitled to be cast on a matter by a voting group constitutes a quorum of such voting group for action on such matter.  If there is not a quorum at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the shareholders present or represented by proxy without notice, other than by announcement at the meeting, until there is a quorum.

Page 1 of 7

Section 1.5.                                Voting.  Except as the Articles of Incorporation otherwise provide, at any meeting of the shareholders, each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholders' meeting.

Section 1.6.                                Notice of Shareholder Business.  At an annual meeting of the shareholders of the Corporation, only such business shall be conducted as shall have been properly brought before the meeting.  To be brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder.  For business to be properly brought before an annual meeting by a shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation.  To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that in the event that less than seventy (70) days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by a shareholder, to be timely, must be so received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made.  A shareholder's notice to the Secretary of the Corporation shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books of the shareholder proposing such business and of any other person or entity who is the record or beneficial owner of any shares of the Corporation and who, to the knowledge of the shareholder proposing such business, supports such proposal, (c) the class and number of shares of the Corporation which are beneficially owned and owned of record by the shareholder proposing such business on the date of his notice to the Corporation and the number of shares so owned by any person or entity who, to the knowledge of the shareholder proposing such business, supports such proposal and (d) any material interest (financial or other) of such shareholder in such proposal.  Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 1.6.  The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

Section 1.7.                                Order of Business.  All meetings of shareholders shall be conducted in accordance with such rules as are prescribed by the Chairman of the meeting and he shall determine the order of business at all meetings of the shareholders.

Section 1.8.                                Inspectors.  The Board of Directors, in advance of any meeting of shareholders, may, but shall not be required to, appoint one or more inspectors to act at such meeting or any adjournment thereof.  If any of the inspectors so appointed shall fail to appear or

Page 2 of 7

act, the Chairman of the meeting may appoint one or more inspectors.  The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all shareholders.  On request of the Chairman of the meeting, the inspectors shall make a report of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them.  No director or candidate for the office of director shall act as an inspector of an election of directors.  Inspectors need not be shareholders.

ARTICLE II

Directors

Section 2.1.                                General Powers.  The business and affairs of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law or by the Articles of Incorporation, or by these Bylaws, all of the powers of the Corporation shall be exercised by or under the authority of said Board of Directors.

Section 2.2.                                Number and Qualification.  The Board of Directors shall consist of twelve Directors.

Section 2.3.                                Election of Directors.  The Directors shall be elected at the annual meeting of shareholders, and shall hold their offices until their successors are elected in accordance with the Articles of Incorporation.  Nominations for the election of Directors shall be given in the manner provided in Section 2.6.

Section 2.4.                                Chairman of the Board.  The Chairman of the Board shall be elected by the Board of Directors, and shall hold office until his successor is elected and qualifies.  He shall preside at all meetings of the Directors and all meetings of the shareholders.  He shall appoint all standing committees and temporary committees.  He shall be a member ex officio of all standing committees and shall have all other powers and duties as may be prescribed by the Board of Directors or by the Bylaws.

Section 2.5.                                Honorary and Advisory Directors.  The Board may appoint to the position of Honorary Director or the position of Advisory Director such person or persons as it deems appropriate.  Honorary Directors shall be entitled to receive notice of, and to attend all meetings of the Board, but they shall not be Directors and shall not be entitled to vote, nor shall they be counted in determining a quorum of the Board. Advisory Directors shall be entitled only to notice of meetings of Advisory or other Boards of the Corporation to which they shall be appointed.  Honorary and Advisory Directors shall receive such compensation as may be authorized by the Board of attendance at meetings of Advisory or other Boards to which such Advisory or Honorary Directors are appointed.

Section 2.6.                                Nominations.  Only persons who are nominated in accordance with the procedures set forth in this Section 2.6 shall be eligible for election as Directors.  Nominations of

Page 3 of 7

persons for election to the Board of Directors of the Corporation may be made by or at the direction of the Board of Directors, or by any shareholder of the Corporation entitled to vote for the election of Directors who complies with the notice procedures set forth in this Section 2.6.  Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation.  To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporations not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled annual meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; provided, however, in the event that less than seventy (70) days' notice or prior pubic disclosure of the date of the meeting is given or made, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made.  Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election as a Director, (1) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and address of such shareholder and of any other person or entity who is the record or beneficial owner of shares of the Corporation and who, to the knowledge of the shareholder giving notice, supports such nominee(s) and (ii) the class and number of shares of the Corporation which are beneficially owned and owned of record by such shareholder and by any other person or entity who is the record or beneficial owner of shares of the Corporation and who, to the knowledge of the shareholder giving the notice, supports such nominee(s).  At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation the information required to be set forth in a shareholder's notice of nomination which pertains to the nominee.  No person shall be eligible for election as a Director of the Corporation unless in accordance with the procedures set forth in this Section 2.6.  The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 2.7.                                Meetings of Directors.  Meetings of the Board of Directors shall be held at places within or without the Commonwealth of Virginia and at times fixed by resolution of the Board of Directors, or upon call of the Chairman of the Board of Directors or the President.  The Secretary, or officer performing his duties, shall give at least twenty-four (24) hours' notice by telegraph, letter, telephone or in person, of all meetings of the Directors; provided, that notice need not be given of regular meetings held at times and places fixed by resolution of the Board.  Regular meetings of the Board of Directors shall be held at least once in every calendar month.  Meetings may be held at any time without notice if all of the Directors are present, or if those not present waive notice either before or after the meeting.  Neither the business to be transacted nor the purpose of any annual or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

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Section 2.8.                                Quorum.  A majority of the members of the Board of Directors shall constitute a quorum.

Section 2.9.                                Compensation.  The Board of Directors shall fix the compensation of the Directors.

Section 2.10.                              Committees.  The Board of Directors may create committees and appoint members of committees in accordance with Virginia law.  There shall be an Executive Committee and such committee may exercise the authority of the Board of Directors to the fullest extent permitted by law.

ARTICLE III

Officers

Section 3.1.                                Election.  The Officers of the Corporation shall consist of the President, one or more Executive Vice Presidents, one or more senior Vice Presidents, one or more additional Vice Presidents, a Secretary, a Treasurer, one or more Assistant Secretaries, and such other officers as may be elected as provided in Section 3.3 of this Article.  All Officers shall be elected by the Board of Directors, and shall hold office until their successors are elected and qualify.  Vacancies may be filled at any meeting of the Board of Directors.  Subject to any applicable provision of Virginia law, more than one office may be combined in the same person as the Board of Directors may determine.

Section 3.2.                                Removal of Officers.  Any Officer of the Corporation may be summarily removed with or without cause, at any time, by a resolution passed by affirmative vote of a majority of all of the Directors; provided that any such removal shall not affect an Officer's right to any compensation to which he is entitled under any employment contract between him and the Corporation.

Section 3.3.                                Other Officers.  Other Officers may from time to time be appointed by the Board of Directors, and such Officers shall hold office for such term as may be designated by the said Board of Directors.

Section 3.4.                                President.  The President shall be the Chief Executive Officer of the Corporation.  In the absence or disability of the Chairman of the Board, the President shall preside at all meetings of the Directors and at meetings of the shareholders and in the absence or disability of the Chairman of the Board the duties and responsibilities of his office shall devolve upon the President.  The President shall have such other powers and duties as may be prescribed by the Chairman of the Board of Directors, the Board of Directors or by the Bylaws.

Section 3.5.                                Vice Presidents.  Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall perform such duties as may be prescribed for them from time to time by the Chairman of the Board of Directors, the Board of Directors or the Bylaws.

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Section 3.6.                                Secretary.  The Secretary shall have the duties and responsibilities prescribed by law for the secretary of a Virginia corporation.

Section 3.7.                                Surety Bonds.  All Officers and employees who shall have charge or possession of money, securities or property of the Corporation must, before entering upon their duties, be covered by a bond with a surety company approved by the Board of Directors and state and federal authorities.  The costs of such bond shall be borne by the Corporation.

ARTICLE IV

Capital Stock

Section 4.1.                                Issues of Certificate of Stock.  Certificates of capital stock shall be in such form as may be prescribed by law and by the Board of Directors.  All certificates shall be signed by the President and by the Secretary or an Assistant Secretary, or by any other two Officers authorized by resolution of the Board of Directors.

Section 4.2.                                Transfer of Stock.  The stock of the corporation shall be transferable or assignable on the books of the Corporation by the holders in person or by attorney on surrender of the certificate or certificates for such shares duly endorsed, and, if sought to be transferred by attorney, accompanied by a written power of attorney to have such stock transferred on the books of the Corporation.

Section 4.3.                                Restrictions on Transfer of Stock.  Any restrictions that may be imposed by law, by the Articles of Incorporation or Bylaws of the Corporation, or by an agreement among shareholders of the Corporation, or by an agreement among shareholders of the Corporation, shall be noted conspicuously on the front or back of all certificates representing shares of stock of the Corporation.

Section 4.4.                                Lost, Destroyed or Mutilated Certificates. The holder of stock of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Corporation may in its discretion cause one or more new certificates for the same aggregate number of shares to be issued to such Stockholder upon the surrender of the mutilated certificate, or upon satisfactory proof of such loss or destruction accompanied by the deposit of a bond in such form and amount and with such surety as the Corporation may require.

Section 4.5.                                Holder of Record.  The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law.

Section 4.6.                                Record Date.  The Board of Directors shall fix in advance the record date in order to make a determination of shareholders for any purpose, including the determination of shareholders entitled to notice of or to vote at any shareholders' meeting or entitled to payment of any dividend or distribution to shareholders.  Such record date shall not be more than seventy

Page 6 of 7

(70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken.

Section 4.7.  Control Share Acquisitions.  Article 14.1 of the Virginia Stock Corporation Act shall not apply to the Corporation.

ARTICLE V

Miscellaneous Provisions

Section 5.1.                                Seal.  The seal of the Corporation shall be circular in shape with the name of the Corporation around the circumference thereof, and the word "SEAL" in the center thereof.

Section 5.2.                                Examination of the Books and Records.  The books and records of account of the Corporation, the minutes of the proceedings of the shareholders, the Board and Committees appointed by the Board of Directors and the records of the shareholders showing the names and addresses of all shareholders and the number of shares held by each, shall be subject to inspection during the normal business hours by any person who is a duly qualified Director of the Corporation at the time he makes such inspection.  Shareholders shall have such rights to inspect records of the Corporation as are prescribed by applicable law.

Section 5.3.                                Checks, Notes and Drafts.  Checks, notes, drafts, and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize.

Section 5.4.                                Amendments to By-Laws.  These Bylaws may be altered, amended or repealed in accordance with the Articles of Incorporation.

Section 5.5.                                Voting of Stock Held.  Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board of Directors, the President or any Executive Vice President may from time to time appoint an attorney or attorneys as agent or agents of the Corporation to cast in the name of the Corporation the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and such Officers may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers, or other instruments as may be necessary or proper in the premises; or any of such Officers may himself attend any meeting of the holders of stock or other securities of any such other corporation and there vote or exercise any or all other powers of the Corporation as the holder of such stock or other securities of such other corporation.

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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 March 31, 2012;

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:  May 10, 2012

/s/ Gary R. Shook

Gary R. Shook

President & Chief Executive Officer

EX-31.2

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 March 31, 2012;

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:  May 10, 2012

/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 March 31, 2012 (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:	May 10, 2012
	Gary R. Shook
	Chief Executive Officer
By:	/s/ Raj Mehra	Date:	May 10, 2012
	Raj Mehra
	Chief Financial Officer

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash Flows From Operating Activities
Net income	$ 1,233	$ 997
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	478	470
Equity in (undistributed earnings) of affiliate	(3)	(22)
Provision for loan losses	792	454
Net (gain) on securities available for sale	(140)	(35)
Other than temporary impairment loss	0	1
Net loss on disposal of assets	7	39
Premium amortization on securities, net	918	766
Origination of loans held for sale	(211,159)	(136,432)
Proceeds from sales of loans held for sale	226,415	163,315
Net (gains) on mortgages held for sale	(3,769)	(1,929)
Share-based compensation	81	47
Net loss on sale of other real estate owned	14	66
Valuation adjustment on other real estate owned	54	200
Decrease in prepaid FDIC insurance	240	363
Changes in assets and liabilities:
Decrease in other assets	1,257	306
Increase in other liabilities	563	34
Net cash provided by operating activities	16,981	28,640
Cash Flows from Investing Activities
Proceeds from maturity, principal paydowns and calls of securities available for sale	20,607	18,799
Proceeds from sale of securities available for sale	3,147	9,412
Purchase of securities available for sale	(38,960)	(34,565)
Purchase of restricted stock	(548)	(450)
Purchases of bank premises and equipment	(204)	(253)
Net (increase) in loans	(15,287)	(3,122)
Proceeds from sale of other real estate owned	213	0
Net cash provided by (used in) investing activities	(31,032)	(10,179)
Cash Flows from Financing Activities
Net increase in non-interest-bearing and interest-bearing demand deposits and savings accounts	21,549	3,747
Net (decrease) increase in certificates of deposit	354	(28,598)
Increase in securities sold under agreements to repurchase	468	2,401
Proceeds from short-term borrowings	33,971	19,302
Payments on short-term borrowings	(48,136)	(28,378)
Proceeds from FHLB borrowings	32,912	20,000
Payments on FHLB borrowings	(32,912)	(10,000)
Distributions to non-controlling interest	(38)	(15)
Payment of dividends on common stock	(350)	(347)
Net cash provided by (used in) financing activities	7,818	(21,888)
Decrease in cash and and cash equivalents	(6,233)	(3,427)
Cash and Cash Equivalents
Beginning	51,270	64,724
Ending	45,037	61,297
Cash payments for:
Interest	2,503	2,667
Income taxes	100	0
Supplemental Disclosure of Non-cash Transactions
Unrealized gain on securities available for sale	914	745
Change in market value of interest rate swap	80	60
Transfer of loans to other real estate owned	3,906	407
Loans originated from sale of other real estate owned	$ 149	$ 533

XML

Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parenthetical)	3 Months Ended
	Mar. 31, 2012
Consolidated Statements of Changes in Shareholders' Equity [Abstract]
Vesting of restricted stock awards	11,011

XML

Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 6,514	$ 6,163
Interest-bearing deposits with other institutions	38,523	45,107
Total cash and cash equivalents	45,037	51,270
Securities available for sale	323,584	308,242
Loans held for sale	81,027	92,514
Restricted securities, at cost	7,665	7,117
Loans receivable, net of allowance for loan losses of $14,861 at March 31, 2012 and $14,623 at December 31, 2011	667,508	656,770
Premises and equipment, net	21,099	21,306
Goodwill and identified intangibles	6,146	6,189
Other real estate owned, net of valuation allowance of $1,492 at March 31, 2012 and $1,522 at December 31, 2011	12,095	8,535
Prepaid federal deposit insurance	3,753	3,993
Accrued interest receivable and other assets	35,297	36,924
TOTAL ASSETS	1,203,211	1,192,860
Deposits:
Non-interest-bearing demand deposits	150,385	143,398
Savings and interest-bearing demand deposits	475,138	460,576
Time deposits	326,249	325,895
Total deposits	951,772	929,869
Securities sold under agreements to repurchase	32,154	31,686
Short-term borrowings	14,166	28,331
FHLB Borrowings	82,912	82,912
Subordinated notes	5,155	5,155
Accrued interest payable and other liabilities	7,457	6,894
Commitments and contingent liabilities
TOTAL LIABILITIES	1,093,616	1,084,847
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value; 20,000,000 shares authorized, 7,005,315 and 6,996,932 issued and outstanding at March 31, 2012 and December 31, 2011, respectively)	17,359	17,331
Capital surplus	43,551	43,498
Retained earnings	42,389	41,157
Accumulated other comprehensive income	4,582	3,926
Total Middleburg Financial Corporation shareholders' equity	107,881	105,912
Non-controlling interest in consolidated subsidiary	1,714	2,101
TOTAL SHAREHOLDERS' EQUITY	109,595	108,013
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 1,203,211	$ 1,192,860

XML

Consolidated Statements of Comprehensive Income (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements of Comprehensive Income (Loss) Unaudited [Abstract]
Unrealized holding gains arising during the period, tax	$ 358	$ 265
Reclassification adjustment for gains included in net income, tax	48	12
Unrealized losses on securities for which other-than-temporary impairment has been recognized in earnings, tax	0	0
Unrealized gain on interest rate swap, tax	$ 27	$ 20

XML

Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (USD $) In Thousands, unless otherwise specified	Common Stock [Member]	Capital Surplus [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2010	$ 17,314	$ 43,058	$ 37,593	$ (1,012)	$ 3,040	$ 99,993
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)			1,227		(230)	997
Other comprehensive income, net of tax				532		532
Cash dividends declared			(347)			(347)
Distributions to non-controlling interest					(15)	(15)
Share-based compensation		47,000				47
Balance at Mar. 31, 2011	17,314	43,105	38,473	(480)	2,795	101,207
Balance at Dec. 31, 2011	17,331	43,498	41,157	3,926	2,101	108,013
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)			1,582		(349)	1,233
Other comprehensive income, net of tax				656		656
Cash dividends declared			(350)			(350)
Vesting of restricted stock awards (11,011 shares)	28	(28)				0
Distributions to non-controlling interest					(38)	(38)
Share-based compensation		81				81
Balance at Mar. 31, 2012	$ 17,359	$ 43,551	$ 42,389	$ 4,582	$ 1,714	$ 109,595

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Loans, allowance for loan losses	$ 14,861	$ 14,623
Other real estate owned, valuation allowance	$ 1,492	$ 1,522
SHAREHOLDERS' EQUITY
Common stock, par value (in dollars per share)	$ 2.50	$ 2.50
Common stock, shares authorized (in shares)	20,000,000	20,000,000
Common stock, shares issued (in shares)	7,005,315	6,996,932
Common stock, shares outstanding (in shares)	7,005,315	6,996,932

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Defined Benefit Pension Plan

3 Months Ended

Mar. 31, 2012

Defined Benefit Pension Plan [Abstract]

Defined Benefit Pension Plan

Note 8.  Defined Benefit Pension Plan

Prior to December 31, 2011, the Company sponsored a noncontributory, defined benefit pension plan covering substantially all full-time employees of Middleburg Bank and Middleburg Trust Company.  The defined benefit pension plan was terminated in in February of 2011, and all plan assets were distributed to participants as of December 31, 2011.  When the plan was active, the Company funded pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.  Benefit accruals and eligibility were frozen as of September 30, 2009.

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

	Three months ended March 31,
	2012		2011
	(In Thousands)
Interest cost	$	-	$	46
Expected return on plan assets	-		(15		)
Amortization of unrecognized  net actuarial  loss	-		305
Net periodic benefit cost (income)	$	-	$	336

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 05, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	MIDDLEBURG FINANCIAL CORP
Entity Central Index Key	0000914138
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		7,005,315
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012

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Capital Purchase Program

3 Months Ended

Mar. 31, 2012

Capital Purchase Program [Abstract]

Capital Purchase Program

Note 9.  Capital Purchase Program

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.   During 2011, the Warrant was sold by the U.S. Treasury at public auction and has not been exercised as of March 31, 2012.

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Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 9,931	$ 9,735
Interest and dividends on securities available for sale
Taxable	1,735	1,399
Tax-exempt	607	561
Dividends	44	36
Interest on deposits in banks and federal funds sold	24	27
Total interest and dividend income	12,341	11,758
INTEREST EXPENSE
Interest on deposits	1,893	2,308
Interest on securities sold under agreements to repurchase	83	56
Interest on short-term borrowings	148	63
Interest on FHLB borrowings and other debt	297	296
Total interest expense	2,421	2,723
NET INTEREST INCOME	9,920	9,035
Provision for loan losses	792	454
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	9,128	8,581
NONINTEREST INCOME
Service charges on deposit accounts	530	489
Trust services income	921	867
Gains on loans held for sale	3,769	1,929
Gains on securities available for sale, net	140	35
Total other-than-temporary impairment losses	(10)	(17)
Portion of loss recognized in other comprehensive income	10	16
Net impairment losses	0	(1)
Commissions on investment sales	147	95
Fees on mortgages held for sale	42	154
Other service charges, commissions and fees	150	115
Bank-owned life insurance	122	123
Other operating income	14	94
Total noninterest income	5,835	3,900
NONINTEREST EXPENSE
Salaries and employees' benefits	7,357	6,313
Net occupancy and equipment expense	1,778	1,676
Advertising	300	156
Computer operations	385	365
Other real estate owned	286	344
Other taxes	203	197
Federal deposit insurance expense	258	407
Other operating expenses	2,747	1,709
Total noninterest expense	13,314	11,167
Income before income taxes	1,649	1,314
Income tax expense	416	317
NET INCOME	1,233	997
Net loss attributable to noncontrolling interest	349	230
Net income attributable to Middleburg Financial Corporation	$ 1,582	$ 1,227
Earnings per share:
Basic (in dollars per share)	$ 0.23	$ 0.18
Diluted (in dollars per share)	$ 0.23	$ 0.18
Dividends per common share (in dollars per share)	$ 0.05	$ 0.05

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Securities

3 Months Ended

Mar. 31, 2012

Securities [Abstract]

Securities

Note 3.  Securities

Amortized costs and fair values of securities available for sale at March 31, 2012 are summarized as follows:

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,103	$	281	$	(25	)	$	9,359
Obligations of states and
political subdivisions	67,667		2,486		(36		)	70,117
Mortgage-backed securities:
Agency	184,733		5,655		(245		)	190,143
Non-agency	43,747		191		(482		)	43,456
Corporate preferred stock	68		-		(22		)	46
Corporate securities	10,613		9		(399		)	10,223
Trust-preferred securities	475		-		(235		)	240
Total	$	316,406	$	8,622	$	(1,444	)	$	323,584

Amortized costs and fair values of securities available for sale at December 31, 2011 are summarized as follows:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,068	$	293	$	(18	)	$	9,343
Obligations of states and
political subdivisions	65,090		2,503		(51		)	67,542
Mortgage-backed securities:
Agency	181,797		5,482		(209		)	187,070
Non-agency	34,847		157		(1,002		)	34,002
Corporate preferred stock	68		-		(28		)	40
Corporate securities	10,612		5		(641		)	9,976
Trust-preferred securities	497		-		(228		)	269
Total	$	301,979	$	8,440	$	(2,177	)	$	308,242

The amortized cost and fair value of securities available for sale as of March 31, 2012, 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.

	March 31, 2012
	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	4,724	$	4,760
Due after one year through
five years	15,713		15,902
Due after five years through
ten years	36,678		37,846
Due after ten years	30,267		31,191
Mortgage-backed securities	228,481		233,599
Corporate preferred stock	68		46
Trust preferred securities	475		240
Total	$	316,406	$	323,584

Proceeds from the sale of securities during the three months ended March 31, 2012 were $3.1 million and net gains of $140,000 were realized on those sales.  The tax expense applicable to the net realized gains amounted to $47,600.  Additionally, no loss on securities with other than temporary impairment was recognized during the three months ended March 31, 2012.

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 $116.0 million at March 31, 2012.

At March 31, 2012, investments in an unrealized loss position that were temporarily impaired are as follows:

	March 31, 2012
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	1,943	$	(25	)	$	25	$	-		$	1,968	$	(25	)
Obligations of states and
political subdivisions	7,078		(36		)	-		-			7,078		(36		)
Mortgage backed securities:
Agency	12,185		(245		)	-		-			12,185		(245		)
Non-agency	16,679		(210		)	8,825		(272		)	25,504		(482		)
Corporate preferred stock	-		-			17		(22		)	17		(22		)
Corporate securities	7,661		(340		)	2,412		(59		)	10,073		(399		)
Trust-preferred securities	-		-			240		(235		)	240		(235		)
Total	$	45,546	$	(856	)	$	11,519	$	(588	)	$	57,065	$	(1,444	)

At December 31, 2011, investments in an unrealized loss position that were temporarily impaired are as follows:

	December 31, 2011
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	2,045	$	(18	)	$	26	$	-		$	2,071	$	(18	)
Obligations of states and
political subdivisions	43		-			2,243		(51		)	2,286		(51		)
Mortgage backed securities:
Agency	22,768		(209		)	-		-			22,768		(209		)
Non-agency	15,345		(465		)	5,989		(537		)	21,334		(1,002		)
Corporate preferred stock	-		-			11		(28		)	11		(28		)
Corporate securities	7,775		(227		)	2,057		(414		)	9,832		(641		)
Trust-preferred securities	-		-			269		(228		)	269		(228		)
Total	$	47,976	$	(2,634	)	$	10,595	$	(1,258	)	$	58,571	$	(2,177	)

A total of 57 securities have been identified by the Company as temporarily impaired at March 31, 2012.  Of the 57 securities, 54 are investment grade and 3 are speculative grade.  Agency, non-agency mortgage-backed securities, and corporate debt securities make up the majority of temporarily impaired securities at March 31, 2012.  The speculative grade securities are asset backed securities that are 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 March 31, 2012.  Investment decisions reflect the strategic asset/liability objectives of the Company.  

Trust preferred securities

Trust preferred securities were evaluated within the scope of 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, announcements 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 cash flows is discounted at the effective purchase yield, which in the case of the floating rate securities is equal to the 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 March 31, 2012, 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 Trust Preferred IV, the expected default rate was 50 basis points, for Trust Preferred V, the expected default rate was 0 basis points, for Trust Preferred XXII, the expected default rate was 75 basis points, and for MM Community Funding Class A, the expected default rate was 150 basis points.

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 three securities with other-than-temporary impairment within its portfolio.  During the three months ended March 31, 2012, no credit related impairment losses were recognized on these securities  compared to $1,000 recognized for the three months ended March 31, 2011.

The following table provides further information on the Company's trust preferred securities that are considered other-than-temporarily impaired as of March 31, 2012 (in thousands):

Security	Class	Current Moody's Rating	Par Value		Book Value		Fair Value		Cumulative Other Compre-hensive Loss		Amount of OTTI Related to Credit Loss		(1) Excess Subord.		(2) Inst. Perf.	Deferrals/ Defaults		Expected Default Rate		Expected Recovery		Lag Years
MM Community Funding LTD	A	B1	$	183	$	162	$	120	$	42	$	24	157.91	%	7	25.32	%	1.50	%	15	%	2
Trust Preferred XXII	D	C	1,979		-		-		-		1,979		(33.74	)%	59	30.40	%	0.75	%	15	%	2
Trust Preferred V	Mez	Caa3	304		69		6		63		367		(728.48	)%	-	100.00	%	-	%	15	%	2
			$	2,466	$	231	$	126	$	105	$	2,370

(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 March 31, 2012 (in thousands):

Security	Tranche Level	Current Moody's Rating	Par Value	Book Value	Fair Value	Cumulative Other Comprehensive Loss	Institutions Performing	(1) Excess Subord.	Deferrals/ Defaults	Expected Default Rate	Expected Recovery	Lag Years
Trust Preferred IV	Mez	Ca	$244	$244	$114	$130	4	19.44%	27.10%	0.50%	15%	2
			$244	$244	$114	$130

(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.

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, 2011	$	2,370
Additions related to intial impairments	-
Additions related to subsequent impairments	-
Net impairment losses recognized in earnings through March 31, 2012	$	2,370

At March 31, 2012, 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 March 31, 2012.  However, there is a risk that the Company's continuing reviews could result in recognition of other-than-temporary impairment charges in the future.

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Stock-Based Compensation Plan

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation Plan [Abstract]

Stock-Based Compensation Plan

Note 2.  Stock-Based Compensation Plan

As of March 31, 2012, 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 of up to 255,000 shares of common stock under the 2006 Equity Compensation Plan.

The Company recognized $81,000 for stock-based compensation expenses for the three months ended March 31, 2012.

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

	March 31, 2012
	Shares		Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at beginning of year	160,171		$	20.40
Granted	-		-
Exercised	-		-
Forfeited	(58,000	)	(23.95		)
Outstanding at end of period	102,171		$	18.39		$	-

As of the end of the reporting period, 99,671 options were vested and exercisable representing 42,000 shares issued under the original 1997 plan and 57,671 vested options under the 2006 Plan.  As of March 31, 2012 no outstanding options were not vested from the original 1997 plan and 2,500 outstanding options were not vested under the 2006 plan.  At March 31, 2012 the weighted average exercise price of these stock options was greater than the average market price during the period.  The weighted average remaining contractual term for options outstanding and exercisable at March 31, 2012 was 4.3 years.  As of

March 31, 2012 there was $4,000 of total unrecognized compensation expense related to stock option awards under the 2006 Equity Compensation Plan.

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

	March 31, 2012
	Shares		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Outstanding at beginning of year	86,220		$	14.79
Granted	-		-
Vested	(11,011	)	14.43
Forfeited	(2,808	)	14.59
Non-vested at end of period	72,401		$	14.85	$	1,137,420

The weighted average remaining contractual term for non-vested restricted stock at March 31, 2012 was 3.9 years.  As of March 31, 2012, there was approximately $866,000 of total unrecognized compensation expense related to non-vested restricted stock awards under the 2006 Equity Compensation Plan.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 10.  Fair Value Measurements

The Company adopted ASC 820, Fair Value Measurements 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.

Measured on recurring basis

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:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level I). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level II).

Derivatives

Derivatives are recorded at fair value on a recurring basis.  Third party vendors compile prices from various sources and may determine the fair value of identical or similar instruments by using pricing models that consider observable market data (Level II).

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

	March 31, 2012
	(In thousands)
	Total		Level I		Level II		Level III
Assets:
U.S. government agencies	$	9,359	$	-	$	9,359	$	-
Obligations of states and political subdivisions	70,117		-		70,117		-
Mortgage-backed securities:
Agency	190,143		-		190,143		-
Non-agency	43,456		-		43,456		-
Corporate preferred stock	46		-		46		-
Corporate securities	10,223		-		10,223		-
Trust preferred securities	240		-		240		-
Liabilities:
Derivative financial instruments	$	234	$	-	$	234	-

	December 31, 2011
	(In thousands)
	Total		Level I		Level II		Level III
Assets:
U.S. government agencies	$	9,343	$	-	$	9,343	$	-
Obligations of states and political subdivisions	67,542		-		67,542		-
Mortgage-backed securities:
Agency	187,070		-		187,070		-
Non-agency	34,002		-		34,002		-
Corporate preferred stock	40		-		40		-
Corporate securities	9,976		-		9,976		-
Trust preferred securities	269		-		269		-
Liabilities:
Derivative financial instruments	314		-		314		-

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the three months ended March 31, 2012. 

Measured on nonrecurring basis

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:

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 three months ended March 31, 2012.  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 the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the underlying collateral.  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, licensed appraiser 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. As of March 31, 2012, thirteen impaired loans with a net balance of $1.9 million were categorized as having a Level III valuation due to the date of the last appraisal.  The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business' financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level III).  Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Impaired loans for which no further loss is expected are not considered to be measured at fair value on a nonrecurring basis.  Any fair value adjustments as a result of the evaluation process are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

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.

The Company's procedure to monitor the value of collateral for collateral dependent impaired loans between the receipt of an original appraisal and an updated appraisal is to review tax assessment records when they change annually.  At the time of any change in tax assessment, an appropriate adjustment is made to the existing appraised value.  Information considered in a determination not to order an updated appraisal includes the availability and reliability of tax assessment records, the results of any independent real estate evaluation, and significant changes in capitalization rates for income properties since the original appraisal.  Other facts and circumstances on a case by case basis may be considered relative to a decision to order or not to order an updated appraisal.  If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal is obtained.

Circumstances that may warrant a re-appraisal for non-performing (impaired) loans might include foreclosure proceedings or a material adverse change in the borrower's condition or that of the collateral underlying the loan.  Examples include bankruptcy filing by the debtor or guarantors, loss of a major tenant in an income property, or a significant increase in capitalization rates for income properties.  In some cases, management may decide that an updated appraisal for a non-performing loan is not necessary.  In such cases, an estimate of the fair value of the collateral for the loans would be made by management by reference to current tax assessment records, the latest appraised value, and knowledge of collateral value fluctuations in a loan's market area.  If, in the judgment of management, a reliable collateral value estimate can not be obtained by an alternative method, an updated appraisal would be obtained.

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 or independent real estate evaluations are obtained.  If an appraisal is less than 12 months old, the only adjustment made to appraised values is the 10% discount for selling costs.  If an appraisal is older than 12 months, management will use judgment based on knowledge of current market values and specific facts surrounding any particular property to determine if an additional valuation adjustment may be necessary.

For real estate-secured impaired loans, if the Company does not have an adequate appraisal a new one is ordered to determine fair value.  An appraisal that would be considered adequate for real estate-secured loans is one that is less than 12 months or one that is more than 12 months old but alternative methods with which to monitor the collateral value exist, such as reference to frequently updated tax assessments.  Appraisals that would be considered inadequate for real estate-secured loans include appraisals older than 12 months and with a property located in a jurisdiction that does not reassess property values on a regular basis, or with a property to which substantial changes have been made since the last assessment. 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.

It is the Company's policy to account for partially charged-off loans consistently both before and after updated appraisals are obtained.  Partially charged-off loans are placed in non-accrual status and remain in that status until the borrower has made a minimum of six consecutive monthly payments on a timely basis and there is evidence that the borrower has the ability to repay the balance of the loan plus accrued interest in full.   Partially charged-off loans are not automatically returned to accrual status when updated appraisals are obtained.

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 as of March 31, 2012 and December 31, 2011:

	March 31, 2012
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Loans held for sale	$	81,027	$	-	$	81,027	$	-
Impaired loans	10,711		-		8,828		1,883

	December 31, 2011
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Loans held for sale	$	92,514	$	-	$	92,514	$	-
Impaired loans	10,648		-		6,767		3,881

The following table presents a roll-forward of the transfers in and out of the Level III valuation method for financial assets that are measured at fair value on a nonrecurring basis as of  March 31, 2012:

	Impaired Loans
Balance at December 31, 2011	$	3,881
Transfers in	-
Transfers out (1)	(1,848		)
Other (2)	(150		)
Balance at March 31, 2012	$	1,883

(1)  Impaired loans are considered to have a Level III valuation methodology if the appraisal on the loan is older than two years.  Transfers out of level three status represent loans for which current appraisals have been obtained or loans which have been transferred to other real estate owned and the collateral re-appraised at the time of the transfer.

(2)  Other changes in the Level III balances during the period represent principal changes on level three impaired loans and minor valuation adjustments.

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 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 construction. 

For the purpose of 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 "Other real estate owned expenses" 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.

	March 31, 2012
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Other real estate owned	$	12,095	$	-	$	12,095	$	-

	December 31, 2011
	(In thousands)
Description	Total		Level I		Level II		Level III
Assets:
Other real estate owned	$	8,535	$	-	$	8,535	$	-

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.  U.S. generally accepted accounting principles excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

For those cash equivalents, the carrying amount is a reasonable estimate of fair value.

Loans, Net and Loans Held for Sale

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair values.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  For all other deposits, the fair value is determined using the discounted cash flow method.  The discount rate used is equal to the rate currently offered on similar products.

Securities Sold Under Agreements to Repurchase and Short-Term Debt

The carrying amounts approximate fair values.

FHLB Borrowings, Long-Term and Subordinated Debt

For variable rate long-term debt, fair values are based on carrying values.  For fixed rate debt, fair values are estimated based on observable market prices and discounted cash flow analysis using interest rates for borrowings of similar remaining maturities and characteristics.  The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.  At March 31, 2012 and December 31, 2011, the fair values of loan commitments and standby letters of credit were deemed immaterial; therefore, they have not been included in the table below.

Fair Value of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company's financial instruments as of March 31, 2012 are as follows:

					March 31, 2012
					Fair value measurements using:
	Carrying Amount		Total Fair Value		Level I		Level II		Level III
	(In thousands)
Financial assets:
Cash and cash equivalents	$	45,037	$	45,037	$	45,037	$	-	-
Securities	323,584		323,584		-		323,584		-
Loans held for sale	81,027		81,027		-		81,027		-
Net portfolio loans	667,508		691,593		-		689,710		1,883
Accrued interest receivable	4,094		4,094		-		4,094		-
Interest rate swap	-		-		-		-		-
Financial liabilities:
Deposits	$	951,772	$	955,971	$	-	$	955,971	-
Securities sold under agreements
to repurchase	32,154		32,154		-		32,154		-
Short-term debt	14,166		14,166		-		14,166		-
FHLB borrowings	82,912		83,967		-		83,967		-
Trust preferred capital notes	5,155		5,221		-		5,221		-
Accrued interest payable	762		762		-		762		-
Interest rate swap	234		234		-		234		-

The estimated fair values, and related carrying amounts, of the Company's financial instruments as of December 31, 2011 are as follows:

		December 31, 2011
		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents		$	51,270	$	51,270
Securities		308,242		308,242
Loans		749,284		770,759
Accrued interest receivable		4,221		4,221
Financial liabilities:
Deposits		$	929,869	$	934,322
Securities sold under agreements
to repurchase		31,686		31,686
Short-term debt		28,331		28,331
FHLB borrowings		82,912		83,899
Trust preferred capital notes		5,155		5,216
Accrued interest payable		844		844
Interest rate swap		314		314

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.  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.

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Earnings Per Share

3 Months Ended

Mar. 31, 2012

Earnings Per Share [Abstract]

Earnings Per Share

Note 6.  Earnings 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.

	Three months ended
	March 31, 2012			March 31, 2011
	Shares	Per share Amount		Shares	Per share Amount
Basic earnings per share	6,994,858	$	0.23	6,940,154	$	0.18
Effect of dilutive securities:
stock options and grants	5,311			3,035
Diluted earnings per share	7,000,169	$	0.23	6,943,189	$	0.18

At March 31, 2012 and 2011, stock options, restricted grants and warrants representing approximately 157,000 and 211,000 shares, respectively, were not included in the calculation of earnings per share because they would have been anti-dilutive.

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Loan Portfolio

3 Months Ended

Mar. 31, 2012

Loan Portfolio [Abstract]

Loan Portfolio

Note 4.  Loan Portfolio

The Company segregates its loan portfolio into three primary loan segments:  Real Estate Loans, Commercial Loans, and Consumer Loans.  Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans.  Other real estate loans include commercial real estate loans.  The consolidated loan portfolio was composed of the following on the dates indicated:

	March 31, 2012				December 31, 2011
	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
	(In Thousands)				(In Thousands)
Real estate loans:
Construction	$	47,089	6.9	%	$	42,208	6.3	%
Secured by farmland	9,616		1.4	%	10,047		1.5	%
Secured by 1-4 family residential	249,134		36.5	%	236,760		35.3	%
Other real estate loans	272,919		40.0	%	275,428		41.0	%
Commercial loans	91,371		13.4	%	94,427		14.1	%
Consumer loans	12,240		1.8	%	12,523		1.8	%
	682,369		100.0	%	671,393		100.0	%
Less allowance for loan losses	14,861				14,623
Net loans	$	667,508			$	656,770

Loans presented in the table above exclude loans held for sale.  The Company had $81.0 million and $92.5 million in mortgages held for sale at March 31, 2012 and December 31, 2011, respectively.

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011.

	March 31, 2012
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	862	$	95	$	2,241	$	3,198	$	43,891	$	47,089
Secured by farmland	-		-		-		-		9,616		9,616
Secured by 1-4 family residential	2,076		1,116		7,763		10,955		238,179		249,134
Other real estate loans	1,701		209		7,099		9,009		263,910		272,919
Commercial loans	-		24		2,083		2,107		89,264		91,371
Consumer loans	13		71		-		84		12,156		12,240
Total	$	4,652	$	1,515	$	19,186	$	25,353	$	657,016	$	682,369

	December 31, 2011
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	696	$	-	$	3,285	$	3,981	$	38,227	$	42,208
Secured by farmland	415		-		-		415		9,632		10,047
Secured by 1-4 family residential	2,036		1,721		7,639		11,396		225,364		236,760
Other real estate loans	6,079		1,736		1,466		9,281		266,147		275,428
Commercial loans	1,751		121		315		2,187		92,240		94,427
Consumer loans	23		-		-		23		12,500		12,523
Total	$	11,000	$	3,578	$	12,705	$	27,283	$	644,110	$	671,393

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of March 31, 2012 and December 31, 2011:

	March 31, 2012				December 31, 2011
	Nonaccrual		Past due 90 days or more and still accruing		Nonaccrual		Past due 90 days or more and still accruing
	(In Thousands)
Real estate loans:
Construction	$	2,241	$	-	$	3,804	$	86
Secured by 1-4 family residential	9,026		167		11,839		1,097
Other real estate loans	8,895		-		7,567		-
Commercial loans	2,083		-		2,136		50
Total	$	22,245	$	167	$	25,346	$	1,233

If interest on non-accrual loans had been accrued, such income would have approximated $350,000 for the three months ended March 31, 2012 and $1.5 million for the year ended December 31, 2011.

The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio.  Under the Company's classification system, problem and potential problem loans are classified as "Special Mention", "Substandard", "Doubtful" and "Loss".

Special Mention:  Loans classified as special mention have potential weaknesses that deserve management's close attention.  If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.

Substandard:  Loans classified as substandard have a well-defined weakness that jeopardizes the liquidation of the debt.  Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.

Doubtful:  Loans classified as doubtful have a very high possibility of loss.  However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status can be determined.

Loss: Loans are classified as loss when they are deemed uncollectable and are charged off immediately.

The following tables present a summary of loan classifications by class of loan as of March 31, 2012 and December 31, 2011:

	March 31, 2012
					(In Thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	29,315	$	8,804	$	222,355	$	233,031	$	85,129	$	11,965	$	590,599
Special Mention	3,448		199		11,002		21,657		3,789		70		40,165
Substandard	14,101		613		14,224		17,965		2,301		193		49,397
Doubtful	225		-		1,553		266		152		12		2,208
Loss	-		-		-		-		-		-		-
Ending Balance	$	47,089	$	9,616	$	249,134	$	272,919	$	91,371	$	12,240	$	682,369

	December 31, 2011
					(In thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	22,250	$	9,235	$	207,332	$	239,156	$	87,731	$	12,448	$	578,152
Special Mention	5,764		199		10,773		23,434		4,127		61		44,358
Substandard	13,163		613		17,062		12,592		2,374		14		45,818
Doubtful	1,031		-		1,593		246		195		-		3,065
Loss	-		-		-		-		-		-		-
Ending Balance	$	42,208	$	10,047	$	236,760	$	275,428	$	94,427	$	12,523	$	671,393

The following table presents loans identified as impaired by class of loan as of and for the three months ended March 31, 2012:

	March 31, 2012
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,851	$	2,421	$	-	$	2,271	$	-
Secured by farmland	-		-		-		-		-
Secured by 1-4 family residential	2,818		3,496		-		2,498		13
Other real estate loans	4,691		5,060		-		4,695		89
Commercial loans	1,759		1,759		-		1,755		-
Consumer loans	-		-		-		-		-
Total with no related allowance	11,119		12,736		-		11,219		102
With an allowance recorded:
Real estate loans:
Construction	390		529		89		392		-
Secured by farmland	-		-		-		-		-
Secured by 1-4 family residential	7,271		8,159		2,676		7,395		17
Other real estate loans	6,927		6,953		1,280		6,939		52
Commercial loans	582		604		414		585		14
Consumer loans	12		12		12		12		2
Total with a related allowance	15,182		16,257		4,471		15,323		85
Total	$	26,301	$	28,993	$	4,471	$	26,542	$	187

The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2011:

	December 31, 2011
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	2,992	$	3,652	$	-	$	3,948	$	-
Secured by farmland	-		-		-		-
Secured by 1-4 family residential	3,978		4,656		-		4,424		7
Other real estate loans	4,732		4,775		-		5,729		95
Commercial loans	1,751		1,751		-		1,735		-
Consumer loans	-		-		-		-		-
Total with no related allowance	13,453		14,834		-		15,836		102
With an allowance recorded:
Real estate loans:
Construction	812		842		328		812		-
Secured by farmland	-		-		-		-
Secured by 1-4 family residential	8,697		10,417		3,076		9,047		17
Other real estate loans	5,581		5,581		1,192		5,076		64
Commercial loans	656		678		502		662		14
Consumer loans	-		-		-		-		-
Total with a related allowance	15,746		17,518		5,098		15,597		95
Total	$	29,199	$	32,352	$	5,098	$	31,433	$	197

The "Recorded Investment" amounts in the tables above represent the outstanding principal balance on each loan represented in the tables plus any accrued interest receivable on such loans.  The "Unpaid Principal Balance" represents the outstanding principal balance on each loan represented in the tables plus any amounts that have been charged off on each loan.

Troubled Debt Restructurings

Included in certain loan categories in the impaired loans table above are troubled debt restructurings ("TDRs") that were classified as impaired.  The total balance of TDRs at March 31, 2012 was $10.0 million of which $6.0 million were included in the Company's non-accrual loan totals at that date and $4.0 million represented loans performing as agreed according to the restructured terms. This compares with $11.2 million in total restructured loans at December 31, 2011, a decrease of $1.2 million or 10.7%.  The amount of the valuation allowance related to total TDRs was $803,000 and $1.7 million as of March 31, 2012 and December 31, 2011 respectively.

The $6.0 million in nonaccrual TDRs as of March 31, 2012 is comprised of $4.9 million in real estate construction loans, $863,000 in 1-4 family real estate loans, and $226,000 in consumer loans.  The $4.0 million in TDRs which were performing as agreed under restructured terms as of March 31, 2012 is represented comprised of $258,000 in commercial loans, $1.1 million in 1-4 family real estate loans, and $2.7 million in other real estate loans.  The Company considers all loans classified as TDRs to be impaired.

The following table presents by class of loan, information related to loans modified in a TDR during the three months ended March 31, 2012:

	Loans modified as TDR's
	For the Three Months Ended
	March 31, 2012
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Real estate loans:
Construction	-	$	-	$	-
Secured by farmland	-	-		-
Secured by 1-4 family residential	1	658		658
Other real estate loans	-	-		-
Total real estate loans	1	658		658
Commercial loans	-	-		-
Consumer loans	-	-		-
Total	1	$	658	$	658

During the three months ended March 31, 2012, the Company modified one loan that was considered to be a TDR.  The interest rate was lowered for this loan.

During the three months ended March 31, 2012, the Company identified as a TDR one loan for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying this loan as a TDR, the Company evaluated it for impairment.  On the basis of a current evaluation of loss for this loan, no allowance for loan losses was established for it as of March 31, 2012.

As of March 31, 2012, no loans restructured as TDRs during the three month period are included in the Company's non-accrual loans total.  The identified TDR loan is included in the Company's non-performing assets that are performing as agreed under the restructured terms.

No loans modified as TDRs from April 1, 2011 through March 31, 2012 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the three months ended March 31, 2012.

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company's allowance for loan losses.  When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent.  Loans identified as TDR's frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan.  As a result of any modification as a TDR, the specific reserve associated with the loan may be increased.  Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan. 

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Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Allowance for Loan Losses [Abstract]

Allowance for Loan Losses

Note 5.  Allowance for Loan Losses

The following tables present a rollforward of the changes in the allowance for loan losses balance by class of loan,  the balances in the allowance for loan losses and the recorded investment in loans by class of loan and, for the ending loan balances, based on impairment evaluation method as of March 31, 2012 and December 31, 2011.

	March 31, 2012
							(In Thousands)
	Real Estate Construction			Real Estate Secured by Farmland			Real Estate Secured by 1-4 Family Residential			Other Real Estate Loans		Commercial			Consumer			Total
Allowance for loan losses:
Balances at December 31, 2011	$	897		$	110		$	7,465		$	4,385	$	1,621		$	145		$	14,623
Chargeoffs	(186		)	-			(353		)	-		(155		)	(6		)	(700		)
Recoveries	-			-			114			20		2			10			146
Provision	1,958			(8		)	(1,510		)	369		(19		)	2			792
Balances at March 31, 2012	$	2,669		$	102		$	5,716		$	4,774	$	1,449		$	151		$	14,861
Ending allowance balance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	89		$	-		$	2,676		$	1,280	$	414		$	12		$	4,471
Collectively evaluated for impairment	2,580			102			3,040			3,494		1,035			139			10,390
Total ending allowance balances	$	2,669		$	102		$	5,716		$	4,774	$	1,449		$	151		$	14,861
Ending loan recorded investment balances:
Individually evaluated for impairment	$	2,241		$	-		$	10,089		$	11,618	$	2,341		$	12		$	26,301
Collectively evaluated for impairment	44,848			9,616			239,045			261,301		89,030			12,228			656,068
Total ending loan balances	$	47,089		$	9,616		$	249,134		$	272,919	$	91,371		$	12,240		$	682,369

	December 31, 2011
						(In Thousands)
	Real Estate Construction			Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential			Other Real Estate Loans			Commercial			Consumer			Total
Allowance for loan losses:
Balances at December 31, 2010	$	4,684		$	107	$	3,965		$	4,771		$	1,055		$	385		$	14,967
Chargeoffs	(467		)	-		(2,062		)	(438		)	(180		)	(318		)	(3,465		)
Recoveries	29			-		41			98			41			28			237
Provision	(3,349		)	3		5,521			(46		)	705			50			2,884
Balances at December 31, 2011	$	897		$	110	$	7,465		$	4,385		$	1,621		$	145		$	14,623
Ending allowance balance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	328		$	-	$	3,076		$	1,192		$	502		$	-		$	5,098
Collectively evaluated for impairment	569			110		4,389			3,193			1,119			145			9,525
Total ending allowance balances	$	897		$	110	$	7,465		$	4,385		$	1,621		$	145		$	14,623
Ending loan recorded investment balances:
Individually evaluated for impairment	$	3,804		$	-	$	12,675		$	10,313		$	2,407		$	-		$	29,199
Collectively evaluated for impairment	38,404			10,047		224,085			265,115			92,020			12,523			642,194
Total ending loan balances	$	42,208		$	10,047	$	236,760		$	275,428		$	94,427		$	12,523		$	671,393

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Segment Reporting

3 Months Ended

Mar. 31, 2012

Segment Reporting [Abstract]

Segment Reporting

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 commissions on investment transactions.  The wealth management services are conducted by Middleburg Trust Company 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 and Southern Trust Mortgage on deposit accounts that each company has at Middleburg Bank.  Southern Trust Mortgage has an outstanding line of credit of $5.0 million and a participation agreement of $75.0 million for which it pays interest to Middleburg Bank on any outstanding balance.  Middleburg Bank provides office space and data processing services to Southern Trust Mortgage for which it receives rental and fee income.  Transactions related to these relationships are eliminated to reach consolidated totals.

The following table presents segment information for the three months ended March 31, 2012 and 2011, respectively.

	For the Three Months Ended												For the Three Months Ended
	March 31, 2012												March 31, 2011
	Retail Banking		Wealth Management		Mortgage Banking			Inter-company Elimina-tions			Consolidated		Retail Banking		Wealth Management			Mortgage Banking			Inter-company Elimina-tions			Consolidated
(In Thousands)
Revenues:
Interest income	$	11,854	$	2	$	887		$	(402	)	$	12,341	$	11,313	$	3		$	691		$	(249	)	$	11,758
Trust and investment fee income		-		956		-			(35	)		921		-		895			-			(28	)		867
Other income		1,093		-		4,018			(197	)		4,914		936		-			3,101			(1	)		4,036
Total operating income		12,947		958		4,905			(634	)		18,176		12,249		898			3,792			(278	)		16,661
Expenses:
Interest expense		2,272		-		551			(402	)		2,421		2,661		-			311			(249	)		2,723
Salaries and employee benefits		3,796		528		3,033			-			7,357		3,661		609			3,046			-			7,316
Provision for loan losses		792		-		-			-			792		454		-			-			-			454
Other		3,624		318		2,247			(232	)		5,957		3,613		297			973			(29	)		4,854
Total operating expenses		10,484		846		5,831			(634	)		16,527		10,389		906			4,330			(278	)		15,347
Income (loss) before income taxes and non-controlling interest		2,463		112		(926	)		-			1,649		1,860		(8	)		(538	)		-			1,314
Income tax expense (benefit)		313		103		-			-			416		322		(5	)		-			-			317
Net Income (loss)		2,150		9		(926	)		-			1,233		1,538		(3	)		(538	)		-			997
Non-controlling interest in loss of consolidated subsidiary		-		-		349			-			349							230			-			230
Net income (loss) attributable to Middleburg Financial Corporation	$	2,150	$	9	$	(577	)	$	-		$	1,582	$	1,538	$	(3	)	$	(308	)	$	-		$	1,227
Total assets	$	1,179,087	$	12,241	$	90,128		$	(78,245	)	$	1,203,211	$	1,071,689	$	11,981		$	44,718		$	(44,099	)	$	1,084,289
Capital expenditures	$	204	$	-	$	-		$	-		$	204	$	250	$	3		$	-		$	-		$	253
Goodwill and other intangibles	$	-	$	4,279	$	1,867		$	-		$	6,146	$	-	$	4,449		$	1,867		$	-		$	6,316

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Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements of Comprehensive Income (Loss) Unaudited [Abstract]
Net income	$ 1,233	$ 997
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period (net of tax of $358 for 2012 and $265 for 2011)	695	514
Reclassification adjustment for gains included in net income (net of tax of $48 for 2012 and $12 for 2011)	(92)	(23)
Unrealized losses on securities for which other-than-temporary impairment has been recognized in earnings (net of tax of $0 for 2011)	0	1
Unrealized gain on interest rate swap (net of tax of $27 for 2012 and $20 for 2011)	53	40
Total other comprehensive income	656	532
Total comprehensive income	1,889	1,529
Comprehensive loss attributable to non-controlling interest	349	230
Comprehensive income attributable to Middleburg Financial Corporation	$ 2,238	$ 1,759

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General

3 Months Ended

Mar. 31, 2012

General [Abstract]

General

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 March 31, 2012 and December 31, 2011, the results of operations and comprehensive income for the three months ended March 31, 2012 and 2011, and, changes in shareholders' equity and cash flows for the three months ended March 31, 2012 and 2011, 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, 2011 (the "2011 Form 10-K") of Middleburg Financial Corporation (the "Company").  The results of operations for the three month period ended March 31, 2012 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.  Management has concluded there were no additional material subsequent events to be disclosed.

Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation.  Commissions paid on the origination of mortgages held for sale and commissions paid on investments sales have been netted against the related revenue amounts for these sources of revenue for both 2012 and 2011.  Management considers the net presentation to more accurately reflect the net contribution to consolidated net income of the mortgage and wealth management segments.

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 11.  Recent Accounting Pronouncements

In April 2011, the FASB issued ASU 2011-03, "Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements."  The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion.  The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs."  This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements.  The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS).  The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application.  Early application is not permitted.  The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income."  The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share.  The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011.  Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures.  The Company has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, "Intangible - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment."  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued.  The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities."  This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05."  The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.