The following discussion and analysis of the financial condition and results of operations of the Company at and for the three months ended March 31, 2009 should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report and in the 2008 Form 10-K. It should also be read in conjunction with the "Caution About Forward Looking Statements" section at the end of this discussion.

Overview

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

The Company operates under a business model that makes all of its financial and wealth management services available to its clients at all of its financial service centers. Financial service centers are larger than most traditional retail banking branches in order to allow commercial, mortgage, retail and wealth management personnel and services to be readily available to serve clients. By working together in the financial service center and the market, the team at each financial service center becomes more effective in expanding relationships with current clients and new clients. The Company's goal is to assist in the creation, preservation and ultimate transfer of the wealth of its clients.

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

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

Southern Trust Mortgage generates fees from the origination and sale of mortgages 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 for the three months ended March 31, 2009 increased to $984,000 from $153,000 for the three months ended March 31, 2008. Annualized returns on average assets and average equity for the

Total interest income increased $1.0 million or 7.3%, for the three months ended March 31, 2009, when compared to the same period in 2008. Funding costs have begun to decrease as a result of Middleburg Bank providing an alternative funding source for Southern Trust Mortgage and steady rate decreases since September 2008. Total interest expense was $5.3 million for the three months ended March 31, 2009, compared to $6.3 million for the three months ended March 31, 2008. Other income increased $185,000 to $5.0 million for the three months ended March 31, 2009, compared with the same period in 2008. Total other expense was $11.8 million for the three months ended March 31, 2009 compared to $10.5 million for the same period in 2008.

In February 2009, the Board of Directors of the FDIC announced the adoption of new rules to impose a special assessment on insured depository institutions of 20 basis points, to implement changes to the risk-based assessment system and to change assessment rates beginning in the second quarter of 2009. These changes may have a material impact on the Company's liquidity, capital resources and result of operations. The Company is not aware of any other current recommendations by any regulatory authorities that, if they were implemented, would have a material effect on the registrant's liquidity, capital resources or results of operations.

Critical Accounting Policies

General

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

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

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance 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.

The Company evaluates various loans individually for impairment as required by Statement of Financial Accounting Standard ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. 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 under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5. 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 loans losses. This estimate of losses is compared to the allowance for loan losses of the Company 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. The Company 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 $6.7 million in intangible assets and goodwill at March 31, 2009 and December 31, 2008. On April 1, 2002, the Company acquired Middleburg Investment Advisors, a registered investment advisor, for $6.0 million. Approximately $5.9 million of the purchase price was allocated to intangible assets and goodwill. In connection with this investment, a purchase price valuation (using SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as a guideline) 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 and is fully amortized. The remainder of the purchase price has been allocated to goodwill. Approximately $1.0 million of the $6.7 million in intangible assets and goodwill at March 31, 2009 was attributable to the Company's investment in Middleburg Trust Company. With the consolidation of Southern Trust Mortgage, the Company recognized $1.9 million in goodwill as part of its equity investment.

In addition, SFAS No. 142 requires that goodwill be tested annually using a two-step process. The first step is to identify a potential impairment. The second step measures the amount of the impairment loss, if any. Processes and procedures have been identified for the two-step process.

When the Company completes its ongoing review of the recoverability of intangible assets and goodwill, factors that are considered important to determining whether impairment might exist include loss of customers acquired or significant withdrawals of the assets currently under management and/or early retirement or termination of key members of management. Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company's financial condition and results of operations. The most recent review was performed in February 2009 and no impairment was indicated.

Financial Condition

Assets, Liabilities and Shareholders' Equity

Total assets for the Company increased to $998.3 million at March 31, 2009, compared to $985.2 million at December 31, 2008, representing an increase of $13.1 million or 1.3%. Loans held for sale increased $26.1 million during this same period. Total average assets increased 13.5% from $880.0 million for the three months ended March 31, 2008 to $999.2 million for the same period in 2009. Total liabilities were $897.6 million at March 31, 2009, compared to $907.6 million at December 31, 2008. Total deposits increased $28.5 million, while short-term borrowings and long-term debt decreased $35.6 million combined. Total average liabilities increased $108.3 million or 13.6% to $905.1 million at March 31, 2009, compared to the same period in 2008. Total shareholders' equity, which includes the non-controlling interest in Southern Trust Mortgage, increased $23.1 million to $100.7 million at March 31, 2009. The Company issued $22.0 million in preferred stock to the U.S. Treasury under the Capital Purchase Program in January 2009 and $2.2 million in common stock under a stock purchase agreement with an accredited investor in March 2009. Average shareholders' equity increased $12.7 million over the same periods.

Loans

Total loans, including loans held for sale at March 31, 2009 were $725.8 million, an increase of $14.1 million from the December 31, 2008 amount of $711.7 million. Loans held for sale increased to $66.4 million, or 9.2% of total loans at March 31, 2009, compared to $40.3 million, or 5.7% of total loans at December 31, 2008. The demand for refinancing and purchase money financing increased significantly during the three months ended March 31, 2009 as a result of historically low interest rates. Southern Trust Mortgage closed $270.8 million in loans for the three months ended March 31, 2009, compared to $145.7 million for the three months ended December 31, 2008. The Company experienced decreases in real estate construction loans, which were $95.6 million at March 31, 2009, compared to $105.7 million at December 31, 2008. Real estate mortgage loans of $505.1 million at March 31, 2009 increased slightly from the December 31, 2008 amount of $502.7 million. Commercial, financial and agricultural loans, which are primarily loans to businesses, decreased to $40.5 million at March 31, 2009, compared to $44.1 at December 31, 2008. Southern Trust Mortgage has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank. The line of credit and the participation amounts are

Securities

Securities decreased to $165.9 million at March 31, 2009 compared to $181.3 million at December 31, 2008. During the three months ended March 31, 2009, the Company increased its cash liquidity position by investing the proceeds of sales, maturities and principal payments of securities into federal funds sold, as a precaution against the economic uncertainties and the resulting volatility that occurred in the securities markets. Accordingly, the yields on these investments were lower than the Company could attain in other less liquid investments. The average balance of federal funds sold was $21.2 million at March 31, 2009, compared to $7.9 million at March 31, 2008. The Company sold $30.0 million in securities, received proceeds of $5.9 million from maturities and principal payments, and purchased securities of $23.2 million during the three months ended March 31, 2009. The Company will continue to maintain its securities portfolio as a source of liquidity and collateral. At March 31, 2009, the tax equivalent yield on the securities portfolio was 5.44%.

Premises and Equipment

Premises and equipment decreased $67,000 from $23.0 million at December 31, 2008 to $22.9 million at March 31, 2009. The decrease is the net of the change of accumulated depreciation and capitalized expenditures related to future financial service centers.

Goodwill and Other Identified Intangibles

Goodwill and other identified intangibles decreased $84,000 to $6.7 million at March 31, 2009 as the result of amortization of identified intangibles related to the acquisition of Middleburg Investment advisors.

Other Real Estate Owned

Other real estate owned increased $770,000 to $8.4 million at March 31, 2009. The increase is the net of real estate loans charged-off of $1.2 million, valuation adjustments of $162,000 and one sale of $300,000 during the three months ended March 31, 2009. The Company sold one other real estate owned asset during the three months ended March 31, 2009.

Other Assets

Other assets increased $1.6 million to $30.1 million at March 31, 2009, when compared to December 31, 2008. The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $13.5 million and deferred tax assets in the amount of $7.8 million at March 31, 2009. Deferred tax assets increased $951,000 as a result of changes in unrealized losses on securities available for sale.

Deposits

While deposits increased $28.4 million to $773.2 million at March 31, 2009 from $744.8 million at December 31, 2008, average deposits for the quarter ended March 31, 2009 increased 27.3% or $161.9 million compared to average deposits for the quarter ended March 31, 2008. The increase in deposits is

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 $46.7 million at March 31, 2009 and is reflected in both the "savings and interest bearing demand deposits" and the "securities sold under agreements to repurchase" amounts on the balance sheet. Excluding the Tredegar Institutional Select product, savings and interest bearing demand deposits grew by $29.0 million from December 31, 2008 to March 31, 2009.

Time deposits decreased $3.2 million from December 31, 2008 to $331.1 million at March 31, 2009. The decrease is the result of maturities of time deposits of public fund depositors. These deposits are larger than typical time deposits. The deposits enter and exit the Company's portfolio based on the clients' funding needs. Time deposits include brokered certificates of deposit, which increased $3.9 million to $111.4 million at March 31, 2009 from the December 31, 2008 amount of $107.5 million. The brokered certificates of deposit have maturities ranging from one month to four years. Securities sold under agreements to repurchase ("Repo Accounts") decreased $3.7 million from $22.7 million at December 31, 2008 to $19.0 million at March 31, 2009. 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.

Short-term Borrowings and Long-term Debt

The Company had no FHLB overnight advances at March 31, 2009 and December 31, 2008, respectively. Southern Trust Mortgage has a line of credit with a regional bank that is primarily used to fund its loans held for sale. At March 31, 2009, this line had an outstanding balance of $15.3 million compared to $40.9 million at December 31, 2008. The line of credit is based on the London Inter-Bank Offered Rate ("LIBOR"). Southern Trust Mortgage also has a $5.0 million line of credit and a $50.0 million participation agreement with Middleburg Bank. The line of credit and the outstanding balance under the participation agreement are eliminated in the consolidation process and are not reflected in the consolidated financial statements of the Company. Long-term debt decreased $10.0 million at March 31, 2009 from $84.0 million at December 31, 2008 as one of the Company's long-term advances matured.

Other Liabilities

Other liabilities increased $805,000 to $10.4 million at March 31, 2009, when compared to December 31, 2008. The other liabilities section of the balance sheet includes escrows payable in the amount of $1.1 million at March 31, 2009, compared to $642,000 at December 31, 2008.

Non-controlling Interest in Consolidated Subsidiary

Southern Trust Mortgage has preferred stock of $1.0 million issued and outstanding at March 31, 2009. The Company, through Middleburg Bank owns 60.9% of the issued and outstanding preferred stock in Southern Trust Mortgage. The remaining 39.1% of issued and outstanding preferred stock is owned by other partners. The preferred stock held by these other partners is reflected in other liabilities as "Shares Subject to Mandatory Redemption" in accordance with SFAS No. 160. The Company, through Middleburg Bank owns 57.1% of the issued and outstanding membership interest units in Southern Trust Mortgage. The remaining 42.9% of issued and outstanding membership interest units are owned by other partners. The ownership interest of these partners is represented in the financial

Capital

Total shareholders' equity was $100.7 million at March 31, 2009. This amount represents an increase of 29.8% from the December 31, 2008 amount of $77.6 million. The book value per common share was $21.29 at March 31, 2009 and $17.12 at December 31, 2008. The Company's shareholders' equity, excluding non-controlling interest was $98.1 million at March 31, 2009. This amount represents an increase of 29.6% from the December 31, 2008 amount of $75.7 million. The book value per common share was $20.75 at March 31, 2009 and $16.69 at December 31, 2008. The increases in shareholders' equity and book value are the result of $22 million in additional funds under the Capital Purchase Program and $2.2 million in common stock under a stock purchase agreement with an accredited investor.

Results of Operations

Net Interest Income

Net interest income is the Company's primary source of earnings and represents the difference between interest and fees earned on earning assets and the interest expense paid on deposits and other interest bearing liabilities. Net interest income totaled $9.7 million for the first three months of 2009 compared to $7.7 million for the same period in 2008, an increase of 25.3%. Interest income increased 7.3% and interest expense decreased 15.1% when comparing the three months ended March 31, 2009 to March 31, 2008. Average earning assets increased $98.3 million from $819.4 million for the three months ended March 31, 2008 to $917.7 million for the three months ended March 31, 2009.

            Average Balances, Income and Expenses, Yields and Rates

                                             Three Months Ended March 31,
                                         2009                                  2008
                         Average       Income/        Yield/      Average    Income/     Yield/
                         Balance       Expense       Rate (1)     Balance    Expense    Rate (1)
                                                (Dollars in thousands)
Assets
Securities:
Taxable                   $ 15,468       $ 1,279      4.49%       $ 98,025    $ 1,242    5.10%
Tax-exempt (2) (3)          62,031         1,103      7.21%         42,818        723    6.79%
Total securities         $ 177,499       $ 2,382      5.44%      $ 140,843    $ 1,965    5.61%
Loans:
Taxable                  $ 715,438      $ 12,950      7.34%      $ 666,776   $ 12,159    7.33%
Tax-exempt (2)                   3            --      0.00%             12         --    0.00%
Total loans              $ 715,441      $ 12,950      7.34%      $ 666,788   $ 12,159    7.33%
Federal funds sold          21,201            12      0.23%          7,854         65    3.33%
Interest-bearing
deposits in
other financial
institutions              3,542               22      2.52%        3,948           34    3.46%
Total earning assets     $ 917,683      $ 15,366      6.79%      $ 819,433   $ 14,223    6.98%
Less: allowances for
credit losses              (9,843)                                 (8,487)
Total nonearning
assets                      91,382                                  69,044
Total assets             $ 999,222                               $ 879,990

Liabilities
Interest-bearing
deposits:
. . .