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, 2010
OR
o | 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: 000-22283
StellarOne Corporation
![StellarOne logo](https://capedge.com/proxy/10-Q/0001036070-10-000004/stellaronelogo.jpg)
(Exact name of registrant as specified in its charter)
Virginia | 54-1829288 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
590 Peter Jefferson Parkway Charlottesville, Virginia | 22911 |
(Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number 434-964-2211, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
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 during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o.
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 o Accelerated filer x Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b – 2 of the Exchange Act). Yes o No x
As of May 4, 2010 there were 22,838,328 shares of common stock, $1.00 par value per share, issued and outstanding.
STELLARONE CORPORATION | ||
PART I - FINANCIAL INFORMATION | ||
Page No. | ||
ITEM 1 | Financial Statements: | |
3 | ||
4 | ||
5 | ||
6 | ||
7-19 | ||
ITEM 2 | 20-29 | |
ITEM 3 | 29 | |
ITEM 4 | 30 | |
PART II - OTHER INFORMATION | ||
ITEM 1 | 31 | |
ITEM 1A | 31 | |
ITEM 2 | 31 | |
ITEM 3 | 31 | |
ITEM 4 | 31 | |
ITEM 5 | 31 | |
ITEM 6 | 32 |
PART I – FINANCIAL INFORMATION | ||||||||
ITEM 1. Financial statements | ||||||||
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||
(In thousands) | ||||||||
MARCH 31, | DECEMBER 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 38,710 | $ | 52,120 | ||||
Federal funds sold | 59,643 | 44,244 | ||||||
Interest-bearing deposits in banks | 67,067 | 56,562 | ||||||
Cash and cash equivalents | 165,420 | 152,926 | ||||||
Investment securities (fair value: 2010, $380,269; 2009, $378,964) | 380,268 | 378,961 | ||||||
Mortgage loans held for sale | 29,355 | 44,165 | ||||||
Loans receivable, net of allowance for loan losses, 2010, $40,644; 2009, $40,172 | 2,121,351 | 2,146,335 | ||||||
Premises and equipment, net | 81,242 | 83,546 | ||||||
Accrued interest receivable | 9,857 | 9,459 | ||||||
Deferred income tax asset | 1,068 | 882 | ||||||
Core deposit intangibles, net | 7,900 | 8,408 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Bank owned life insurance | 30,519 | 30,196 | ||||||
Foreclosed assets | 2,267 | 4,505 | ||||||
Other assets | 59,718 | 60,066 | ||||||
Total assets | $ | 3,002,617 | $ | 3,033,101 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 298,682 | $ | 302,009 | ||||
Interest-bearing | 2,110,406 | 2,134,111 | ||||||
Total deposits | 2,409,088 | 2,436,120 | ||||||
Short-term borrowings | 952 | 783 | ||||||
Federal Home Loan Bank advances | 125,000 | 130,000 | ||||||
Subordinated debt | 32,991 | 32,991 | ||||||
Accrued interest payable | 3,221 | 3,626 | ||||||
Other liabilities | 8,873 | 8,796 | ||||||
Total liabilities | 2,580,125 | 2,612,316 | ||||||
Stockholders' Equity | ||||||||
Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding; | - | - | ||||||
Preferred stock; $1,000 per share liquidation preference; 30,000 shares issued and outstanding; | 28,486 | 28,398 | ||||||
Common stock; $1 par value; 35,000,000 shares authorized; 2010: 22,684,816 shares issued and outstanding; 2009: 22,661,125 shares issued and outstanding | 22,685 | 22,661 | ||||||
Additional paid-in capital | 269,241 | 268,965 | ||||||
Retained earnings | 97,431 | 96,947 | ||||||
Accumulated other comprehensive income, net | 4,649 | 3,814 | ||||||
Total stockholders' equity | 422,492 | 420,785 | ||||||
Total liabilities and stockholders' equity | $ | 3,002,617 | $ | 3,033,101 |
The accompanying notes are an integral part of these consolidated financial statements.
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||
(In thousands, except per share data) | ||||||||
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Interest and Dividend Income | ||||||||
Loans, including fees | $ | 29,086 | $ | 32,492 | ||||
Federal funds sold and deposits in other banks | 61 | 33 | ||||||
Investment securities: | ||||||||
Taxable | 2,258 | 2,572 | ||||||
Tax-exempt | 1,047 | 848 | ||||||
Dividends | 29 | 33 | ||||||
Total interest income | 32,481 | 35,978 | ||||||
Interest Expense | ||||||||
Deposits | 8,609 | 11,651 | ||||||
Federal funds repurchased and securities sold under agreements to repurchase | 6 | 3 | ||||||
Federal Home Loan Bank advances | 1,110 | 1,569 | ||||||
Subordinated debt | 257 | 357 | ||||||
Total interest expense | 9,982 | 13,580 | ||||||
Net interest income | 22,499 | 22,398 | ||||||
Provision for loan losses | 6,700 | 7,750 | ||||||
Net interest income after provision for loan losses | 15,799 | 14,648 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 3,920 | 3,711 | ||||||
Commissions and fees from fiduciary activities | 834 | 758 | ||||||
Brokerage fee income | 359 | 253 | ||||||
Mortgage banking-related fees | 1,963 | 1,424 | ||||||
Gain on sale of financial center | 748 | - | ||||||
Gains on sale of premises and equipment | 27 | 199 | ||||||
Gains on sale of securities available for sale | 302 | 2 | ||||||
Losses on sale of foreclosed assets | (364 | ) | (265 | ) | ||||
Income from bank owned life insurance | 324 | 304 | ||||||
Other operating income | 701 | 744 | ||||||
Total noninterest income | 8,814 | 7,130 | ||||||
Noninterest Expense | ||||||||
Compensation and employee benefits | 11,310 | 10,526 | ||||||
Net occupancy | 2,179 | 2,091 | ||||||
Supplies and equipment | 2,178 | 1,962 | ||||||
Amortization of intangible assets | 413 | 438 | ||||||
Marketing | 153 | 240 | ||||||
State franchise taxes | 554 | 596 | ||||||
FDIC insurance | 1,109 | 1,105 | ||||||
Data processing | 543 | 1,036 | ||||||
Professional fees | 675 | 504 | ||||||
Telecommunications | 425 | 467 | ||||||
Other operating expenses | 3,008 | 3,259 | ||||||
Total noninterest expense | 22,547 | 22,224 | ||||||
Income (loss) before income taxes | 2,066 | (446 | ) | |||||
Income tax expense (benefit) | 212 | (592 | ) | |||||
Net income | $ | 1,854 | $ | 146 | ||||
Dividends and accretion on preferred stock | (458 | ) | (444 | ) | ||||
Net income (loss) available to common shareholders | $ | 1,396 | $ | (298 | ) | |||
Basic net income (loss) per common share available to common shareholders | $ | 0.06 | $ | (0.01 | ) | |||
Diluted net income (loss) per common share available to common shareholders | $ | 0.06 | $ | (0.01 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | ||||||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Preferred | Common | Paid-In | Retained | Comprehensive | Comprehensive | |||||||||||||||||||||||
Stock | Stock | Capital | Earnings | Income | Income | Total | ||||||||||||||||||||||
Balance, January 1, 2009 | $ | 28,121 | $ | 22,605 | $ | 268,293 | $ | 113,661 | $ | 876 | $ | 433,556 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 146 | - | $ | 146 | 146 | ||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax, $612) | - | - | - | - | - | 1,135 | - | |||||||||||||||||||||
Reclassification adjustment (net of tax, $1) | - | - | - | - | - | 1 | - | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | 1,136 | 1,136 | 1,136 | |||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | $ | 1,282 | - | ||||||||||||||||||||
Cash dividends paid or accrued: | ||||||||||||||||||||||||||||
Common ($0.16 per share) | - | - | - | (3,625 | ) | - | (3,625 | ) | ||||||||||||||||||||
Preferred cumulative 5% | - | - | - | (370 | ) | - | (370 | ) | ||||||||||||||||||||
Accretion on preferred stock discount | 74 | - | - | (74 | ) | - | - | |||||||||||||||||||||
Preferred stock issuance costs | (56 | ) | - | - | - | - | (56 | ) | ||||||||||||||||||||
Stock-based compensation expense (1,074 shares) | - | 1 | 70 | - | - | 71 | ||||||||||||||||||||||
Exercise of stock options (24,499 shares) | - | 25 | 214 | - | - | 239 | ||||||||||||||||||||||
Balance, March 31, 2009 | $ | 28,139 | $ | 22,631 | $ | 268,577 | $ | 109,738 | $ | 2,012 | $ | 431,097 | ||||||||||||||||
Balance, January 1, 2010 | $ | 28,398 | $ | 22,661 | $ | 268,965 | $ | 96,947 | $ | 3,814 | $ | 420,785 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | - | - | - | 1,854 | - | $ | 1,854 | 1,854 | ||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax of $409) | - | - | - | - | - | 761 | - | |||||||||||||||||||||
Reclassification adjustment (net of tax of $106) | - | - | - | - | - | 196 | - | |||||||||||||||||||||
Change in post retirement liability (net of tax, $66) | - | - | - | - | - | (122 | ) | - | ||||||||||||||||||||
Other comprehensive income | - | - | - | - | 835 | 835 | 835 | |||||||||||||||||||||
Total comprehensive loss | - | - | - | - | - | $ | 2,689 | - | ||||||||||||||||||||
Cash dividends paid or accrued: | ||||||||||||||||||||||||||||
Common ($0.04 per share) | - | - | - | (912 | ) | - | (912 | ) | ||||||||||||||||||||
Preferred cumulative 5% | - | - | - | (370 | ) | - | (370 | ) | ||||||||||||||||||||
Accretion on preferred stock discount | 88 | - | - | (88 | ) | - | - | |||||||||||||||||||||
Stock-based compensation expense (7,385 shares) | - | 7 | 129 | - | - | 136 | ||||||||||||||||||||||
Exercise of stock options (16,306 shares) | - | 17 | 147 | - | - | 164 | ||||||||||||||||||||||
Balance, March 31, 2010 | $ | 28,486 | $ | 22,685 | $ | 269,241 | $ | 97,431 | $ | 4,649 | $ | 422,492 |
The accompanying notes are an integral part of these consolidated financial statements.
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||
(In thousands) | ||||||||
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 1,854 | $ | 146 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 1,637 | 1,598 | ||||||
Amortization of intangible assets | 413 | 438 | ||||||
Provision for loan losses | 6,700 | 7,750 | ||||||
Deferred tax benefit | (329 | ) | (1,451 | ) | ||||
Stock-based compensation expense | 152 | 72 | ||||||
Losses / impairments on foreclosed assets | 364 | 265 | ||||||
Gain on sale of financial center | (748 | ) | - | |||||
Gains on sale of premises and equipment | (27 | ) | (199 | ) | ||||
Gains on sale of securities available for sale | (302 | ) | (2 | ) | ||||
Mortgage banking-related fees | (1,963 | ) | (1,424 | ) | ||||
Proceeds from sale of mortgage loans | 121,047 | 105,602 | ||||||
Origination of mortgage loans for sale | (104,273 | ) | (126,506 | ) | ||||
Amortization of securities premiums and accretion of discounts, net | 341 | (680 | ) | |||||
Income on bank owned life insurance | (324 | ) | (304 | ) | ||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in accrued interest receivable | (398 | ) | 135 | |||||
(Increase) decrease in other assets | (120 | ) | 438 | |||||
Decrease in accrued interest payable | (379 | ) | (356 | ) | ||||
Decrease in other liabilities | (104 | ) | (1,450 | ) | ||||
Net cash provided (used) by operating activities | $ | 23,541 | $ | (15,928 | ) | |||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities and principal payments of securities available for sale | $ | 17,431 | $ | 22,481 | ||||
Proceeds from sales and calls of securities available for sale | 20,072 | 5,762 | ||||||
Purchase of securities available for sale | (37,323 | ) | (23,264 | ) | ||||
Net decrease (increase) in loans | 17,550 | (2,481 | ) | |||||
Proceeds from sale of premises and equipment | 19 | 641 | ||||||
Purchase of premises and equipment | (361 | ) | (796 | ) | ||||
Proceeds from sale of foreclosed assets | 2,885 | 754 | ||||||
Cash paid in sale of financial center, net | (13,349 | ) | - | |||||
Net cash provided by investing activities | $ | 6,924 | $ | 3,097 | ||||
Cash Flows from Financing Activities | ||||||||
Net increase in demand, money market and savings deposits | $ | 21,839 | $ | 51,402 | ||||
Net (decrease) increase in certificates of deposit | (33,856 | ) | 11,948 | |||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | 169 | (222 | ) | |||||
Principal payments on Federal Home Loan Bank advances | (5,000 | ) | (17,617 | ) | ||||
Proceeds from exercise of stock options | 164 | 238 | ||||||
Payment of preferred stock issuance costs | - | (56 | ) | |||||
Cash dividends paid | (1,287 | ) | (3,858 | ) | ||||
Net cash (used) provided by financing activities | $ | (17,971 | ) | $ | 41,835 | |||
Increase in cash and cash equivalents | $ | 12,494 | $ | 29,004 | ||||
Cash and Cash Equivalents | ||||||||
Beginning | 152,926 | 115,529 | ||||||
Ending | $ | 165,420 | $ | 144,533 | ||||
Supplemental Schedule of Noncash Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | 868 | $ | 598 |
The accompanying notes are an integral part of these consolidated financial statements.
STELLARONE CORPORATION AND SUBSIDIARIES
1. | Organization |
StellarOne Corporation (the “Company”) is a Virginia bank holding company headquartered in Charlottesville, Virginia. The Company’s sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia. Additional subsidiaries of the Company include VFG Limited Liability Trust and FNB (VA) Statutory Trust II both of which are associated with the Company’s subordinated debt issues and are not subject to consolidation. The consolidated statements include the accounts of the Company and its wholly-owned banking subsidiary. All significant intercompany accounts have been eliminated. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position as of March 31, 2010 a nd December 31, 2009, the results of operations for the three months ended March 31, 2010 and 2009 and cash flows for the three months ended March 31, 2010 and 2009. The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the three month period ended March 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.
2. Participation in U.S. Treasury Capital Purchase Program “CPP”
On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury for $30 million pursuant to the CPP. Additionally, the Company issued 302,623 common stock warrants to the U.S. Treasury as a condition to its participation in the CPP. The warrants are immediately exercisable, expire 10 years from the date of issuance and have an exercise price of $14.87 per share. Proceeds from this sale of preferred stock have been used to support general lending activities and provide liquidity for mortgage modification and builder loan programs. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. The Company may redeem the preferre d shares with the approval of the Federal Reserve at par value plus accrued and unpaid dividends.
A value of $1.9 million was assigned to the common stock warrants based on their relative fair value. Accordingly, $28.1 million has been assigned to the Series A preferred stock and will be accreted up to the redemption amount of $30 million over a five year period from the issuance date.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. | Investment Securities |
A summary of the amortized cost and estimated fair value of securities with gross unrealized gains and losses is presented below (In thousands).
March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
Gross | Gross | Estimated | Gross | Gross | Estimated | |||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | (Losses) | Value | Cost | Gains | (Losses) | Value | |||||||||||||||||||||||||
Securities Held to Maturity: | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
State and municipal | $ | 425 | $ | 1 | $ | - | $ | 426 | $ | 426 | $ | 2 | $ | - | $ | 428 | ||||||||||||||||
Agency mortgage backed securities | 1 | - | - | 1 | 21 | 1 | - | 22 | ||||||||||||||||||||||||
Total | $ | 426 | $ | 1 | $ | - | $ | 427 | $ | 447 | $ | 3 | $ | - | $ | 450 | ||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||||||||||
U. S. Treasuries | $ | 20,110 | $ | 40 | $ | - | $ | 20,150 | $ | 20,168 | $ | 35 | $ | - | $ | 20,203 | ||||||||||||||||
U. S. Government agencies | 76,472 | 903 | (120 | ) | 77,255 | 62,612 | 823 | (20 | ) | 63,415 | ||||||||||||||||||||||
State and municipals | 105,518 | 4,181 | (121 | ) | 109,578 | 109,431 | 3,921 | (168 | ) | 113,184 | ||||||||||||||||||||||
Corporate bonds | 6,552 | 433 | - | 6,985 | 6,560 | 374 | - | 6,934 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 16,595 | 114 | (201 | ) | 16,508 | 13,172 | 117 | (263 | ) | 13,026 | ||||||||||||||||||||||
Agency mortgage backed securities | 143,105 | 3,938 | (298 | ) | 146,745 | 156,588 | 3,862 | (863 | ) | 159,587 | ||||||||||||||||||||||
Certificates of deposit | 694 | - | - | 694 | 685 | - | - | 685 | ||||||||||||||||||||||||
Equity securities | 1,512 | 432 | (28 | ) | 1,916 | 1,484 | 7 | (22 | ) | 1,469 | ||||||||||||||||||||||
Other | 11 | - | - | 11 | 11 | - | - | 11 | ||||||||||||||||||||||||
Total | $ | 370,569 | $ | 10,041 | $ | (768 | ) | $ | 379,842 | $ | 370,711 | $ | 9,139 | $ | (1,336 | ) | $ | 378,514 |
The book value of securities pledged to secure deposits and for other purposes amounted to $153.8 million and $155.4 million at March 31, 2010 and December 31, 2009, respectively.
Sales of securities available for sale were as follows (In thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Proceeds from sales/calls | $ | 20,072 | $ | 5,762 | ||||
Gross realized gains | 310 | 2 | ||||||
Gross realized losses | (8 | ) | - |
As of March 31, 2010, securities with unrealized losses segregated by length of impairment were as follows (In thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Description of Securities | Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | ||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Available for Sale | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||
U. S. Government Agencies | $ | 26,493 | $ | 120 | $ | - | $ | - | $ | 26,493 | $ | 120 | ||||||||||||
Agency mortgage backed securities | 44,696 | 298 | - | - | 44,696 | 298 | ||||||||||||||||||
State and municipals | 4,895 | 54 | 2,644 | 68 | 7,539 | 122 | ||||||||||||||||||
Collateralized mortgage obligations | 5,193 | 30 | 2,487 | 170 | 7,680 | 200 | ||||||||||||||||||
Subtotal debt securities | 81,277 | 502 | 5,131 | 238 | 86,408 | 740 | ||||||||||||||||||
Equity securities | 99 | 28 | - | - | 99 | 28 | ||||||||||||||||||
Total temporarily impaired securities | $ | 81,376 | $ | 530 | $ | 5,131 | $ | 238 | $ | 86,507 | $ | 768 |
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
As of March 31, 2010, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality. Accordingly, as of March 31, 2010, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.
The amortized cost and estimated fair value of securities at March 31, 2010 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Equity securities are shown separately since they are not due at a single maturity date (In thousands).
Held to Maturity | Available for Sale | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Due in one year or less | $ | 425 | $ | 426 | $ | 41,489 | $ | 41,745 | ||||||||
Due after one year through five years | - | - | 101,771 | 104,402 | ||||||||||||
Due after five years through ten years | 1 | 1 | 71,869 | 74,309 | ||||||||||||
Due after ten years | - | - | 153,917 | 157,459 | ||||||||||||
Equity securities | - | - | 1,512 | 1,916 | ||||||||||||
Other | - | - | 11 | 11 | ||||||||||||
Total | $ | 426 | $ | 427 | $ | 370,569 | $ | 379,842 |
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. | Loans Receivable |
The Company’s loan portfolio is composed of the following (In thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Real estate loans: | ||||||||
Construction and land development | $ | 285,442 | $ | 296,489 | ||||
Secured by 1-4 family residential | 784,586 | 785,385 | ||||||
Commercial and multifamily | 838,902 | 845,561 | ||||||
Commercial, financial and agricultural loans | 209,514 | 211,903 | ||||||
Consumer loans | 35,439 | 39,173 | ||||||
All other loans | 7,201 | 7,027 | ||||||
Total loans | 2,161,084 | 2,185,538 | ||||||
Deferred loan costs | 911 | 969 | ||||||
Allowance for loan losses | (40,644 | ) | (40,172 | ) | ||||
Net loans | $ | 2,121,351 | $ | 2,146,335 |
5. | Allowance for Loan Losses |
Activity in the allowance for loan losses is as follows (In thousands):
March 31, | December 31, | March 31, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Balance, beginning | $ | 40,172 | $ | 30,464 | $ | 30,464 | ||||||
Provisions for loan losses | 6,700 | 37,800 | 7,750 | |||||||||
Loans charged off | (6,708 | ) | (30,947 | ) | (3,442 | ) | ||||||
Loan recoveries | 480 | 2,855 | 547 | |||||||||
Net loan charge-offs | (6,228 | ) | (28,092 | ) | (2,895 | ) | ||||||
Balance, ending | $ | 40,644 | $ | 40,172 | $ | 35,319 |
Information about impaired loans as of the periods indicated is as follows (In thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Impaired loans for which an allowance has been provided | $ | 54,444 | $ | 45,895 | ||||
Impaired loans for which an allowance has not been provided | 9,829 | 19,777 | ||||||
Total impaired loans | $ | 64,273 | $ | 65,672 | ||||
Allowance provided for impaired loans, included in the allowance for loan losses | $ | 7,955 | $ | 8,357 |
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings (Loss) Per Share
The following shows the weighted average number of shares used in computing earnings (loss) per share and the effect on weighted average number of shares of diluted potential common stock for the three month periods ended March 31, 2010 and 2009. Potential dilutive stock had no effect on income (loss) available to common stockholders for the three month period.
March 31, | ||||||||
(In thousands, except per share amounts) | 2010 | 2009 | ||||||
(unaudited) | (unaudited) | |||||||
Net income | $ | 1,854 | $ | 146 | ||||
Less: | ||||||||
Preferred stock dividends | (370 | ) | (370 | ) | ||||
Accretion of preferred stock discount | (88 | ) | (74 | ) | ||||
Net income (loss) available to common shareholders (numerator) | $ | 1,396 | $ | (298 | ) | |||
Earnings (loss) per common share | ||||||||
Weighted average common shares outstanding (denominator) | 22,674,490 | 22,619,426 | ||||||
Earnings (loss) per common share | $ | 0.06 | $ | (0.01 | ) | |||
Diluted earnings (loss) per common share | ||||||||
Weighted average common shares issued and outstanding | 22,674,490 | 22,619,426 | ||||||
Add: | ||||||||
Restricted stock | 43,942 | - | ||||||
Incentive stock options | 1,523 | - | ||||||
Stock options | 9,711 | - | ||||||
Diluted weighted average common shares outstanding (denominator) | 22,729,666 | 22,619,426 | ||||||
Diluted earnings (loss) per common share | $ | 0.06 | $ | (0.01 | ) |
Due to the loss available to common shareholders during the three month period in 2009 all unvested restricted stock and stock options would have been anti-dilutive and were not included in the three month calculation for 2009. In 2010, stock options representing 504,834 shares were not included in the three month calculation of earnings per share, as their effect would have been anti-dilutive.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Stock-Based Compensation
Stock-based compensation expense included within compensation and employee benefits expense totaled $152 thousand and $72 thousand during the three months ended March 31, 2010 and 2009, respectively.
A summary of the stock option plan at March 31, 2010 and 2009 and changes during the periods ended on those dates are as follows:
2010 | 2009 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number | Average | Number | Average | |||||||||||||
of | Exercise | of | Exercise | |||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding, January 1 | 575,046 | $ | 18.93 | 614,198 | $ | 18.58 | ||||||||||
Granted | - | - | 17,392 | 12.78 | ||||||||||||
Forfeited | (317 | ) | 23.33 | - | - | |||||||||||
Expired | - | - | - | - | ||||||||||||
Exercised | (16,306 | ) | 9.73 | (24,499 | ) | 9.73 | ||||||||||
Outstanding, March 31, | 558,423 | $ | 19.20 | 607,091 | $ | 18.69 | ||||||||||
Exercisable, March 31, | 462,391 | 473,798 |
The aggregate intrinsic value of the options outstanding as of March 31, 2010 was $343 thousand. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended March 31, 2010 and the exercise price, multiplied by the number of options outstanding). The aggregate intrinsic value of the options currently exercisable as of March 31, 2010 was $335 thousand. The weighted average remaining contractual life is 3.6 years for exercisable options at March 31, 2010.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes nonvested restricted shares outstanding as of March 31, 2010 and the related activity during the period:
Nonvested Shares | Number of Shares | Weighted-Average Grant-Date Fair Value | (In thousands) Total Intrinsic Value | |||||||||
Nonvested at January 1, 2010 | 70,936 | $ | 13.80 | $ | 707 | |||||||
Granted | 83,984 | 10.66 | ||||||||||
Vested & Exercised | (7,385 | ) | 14.08 | $ | (78 | ) | ||||||
Forfeited | (540 | ) | 14.37 | |||||||||
Nonvested at March 31, 2010 | 146,995 | $ | 11.99 | $ | 1,965 |
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2010 that will be recognized in future periods is as follows (in thousands):
Stock Options | Nonvested Restricted Stock | Total | ||||||||||
For the remaining nine months of 2010 | $ | 48 | $ | 318 | $ | 366 | ||||||
For year ended December 31, 2011 | 64 | 367 | 431 | |||||||||
For year ended December 31, 2012 | 64 | 324 | 388 | |||||||||
For year ended December 31, 2013 | 22 | 290 | 312 | |||||||||
For year ended December 31, 2014 | 1 | 93 | 94 | |||||||||
For year ended December 31, 2015 | - | 7 | 7 | |||||||||
Total | $ | 199 | $ | 1,399 | $ | 1,598 |
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs . The fair value hierarchy is as follows:
Under the guidance in ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. These levels are:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.
Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backe d securities in less liquid markets.
Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with authoritative accounting guidance under FASB ASC Topic 310, “Accounting by Creditors for Impairment of a Loan”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance repre sent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with guidance under FASB ASC Topic 310, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Foreclosed assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. As such, the Company records the foreclosed asset as nonrecurring Level 3.
Deferred compensation plans: Liabilities associated with deferred compensation plans are recorded at fair value on a recurring basis as Level 1 based on the fair value of the underlying securities. Fair value measurement is based upon the fair value of the securities as described above.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 are summarized below (In thousands).
Fair Value Measurements at | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(unaudited) | Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | ||||||||||||
Investment securities available-for-sale | $ | 379,842 | $ | 22,077 | $ | 357,765 | $ | - | ||||||||
Total assets at fair value | $ | 379,842 | $ | 22,077 | $ | 357,765 | $ | - | ||||||||
Other liabilities (1) | $ | 2,890 | $ | 2,890 | $ | - | $ | - | ||||||||
Total liabilities at fair value | $ | 2,890 | $ | 2,890 | $ | - | $ | - |
(1) Includes liabilities associated with deferred compensation plans
Fair Value Measurements at | ||||||||||||||||
December 31, 2009 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(unaudited) | Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | ||||||||||||
Investment securities available-for-sale | $ | 378,514 | $ | 21,682 | $ | 356,832 | $ | - | ||||||||
Total assets at fair value | $ | 378,514 | $ | 21,682 | $ | 356,832 | $ | - | ||||||||
Other liabilities (1) | $ | 2,882 | $ | 2,882 | $ | - | $ | - | ||||||||
Total liabilities at fair value | $ | 2,882 | $ | 2,882 | $ | - | $ | - |
(1) Includes liabilities associated with deferred compensation plans
The change in the balance sheet carrying values associated with company determined market priced assets measured at fair value on a recurring basis during the three months ended March 31, 2010 was not significant and there were no transfers between Levels 1, 2 or 3 during the three months ended March 31, 2010.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market whose fair value was recognized to be below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of March 31, 2010 are included in the table below (In thousands).
Fair Value Measurements at | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(unaudited) | Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | ||||||||||||
Loans - impaired loans | $ | 64,273 | $ | - | $ | 20,862 | $ | 43,411 | ||||||||
Loans held for sale - mortgage | 29,355 | - | 29,355 | - | ||||||||||||
Loans held for sale - other assets | 608 | - | - | 608 | ||||||||||||
Foreclosed assets | 2,267 | - | - | 2,267 | ||||||||||||
Total assets at fair value | $ | 96,503 | $ | - | $ | 50,217 | $ | 46,286 | ||||||||
Total liabilities at fair value | $ | - | $ | - | $ | - | $ | - |
Fair Value Measurements at | ||||||||||||||||
December 31, 2009 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
(unaudited) | Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | ||||||||||||
Loans - impaired loans | $ | 65,672 | $ | - | $ | 22,182 | $ | 43,490 | ||||||||
Loans held for sale - mortgage | 44,165 | - | 44,165 | - | ||||||||||||
Loans held for sale - other assets | 936 | - | - | 936 | ||||||||||||
Foreclosed assets | 4,505 | - | - | 4,505 | ||||||||||||
Total assets at fair value | $ | 115,278 | $ | - | $ | 66,347 | $ | 48,931 | ||||||||
Total liabilities at fair value | $ | - | $ | - | $ | - | $ | - |
The Company is required to disclose the estimated fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the 2009 Form 10-K.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and fair values of the Company’s remaining financial instruments are set forth in the following table. This information represents only a portion of the Company’s balance sheet and not the estimated value of the Company as a whole. Non-financial instruments such as the value of the Company’s branches and core deposits, leasing operations and the future revenues from the Company’s customers are not reflected in this disclosure. Therefore, use of this information to assess the value of the Company is limited.
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Estimated Fair | Carrying | Estimated Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 165,420 | $ | 165,420 | $ | 152,926 | $ | 152,926 | ||||||||
Investment securities | 380,268 | 380,269 | 378,961 | 378,964 | ||||||||||||
Mortgage loans held for sale | 29,355 | 29,355 | 44,165 | 44,165 | ||||||||||||
Loans, net | 2,121,351 | 1,915,540 | 2,146,335 | 1,917,338 | ||||||||||||
Accrued interest receivable | 9,857 | 9,857 | 9,459 | 9,459 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | 2,409,088 | $ | 2,417,298 | $ | 2,436,120 | $ | 2,446,354 | ||||||||
Federal funds purchased and securities sold under agreements to repurchase | 952 | 952 | 783 | 783 | ||||||||||||
Federal Home Loan Bank advances | 125,000 | 128,964 | 130,000 | 134,321 | ||||||||||||
Subordinated debt | 32,991 | 32,812 | 32,991 | 32,807 | ||||||||||||
Accrued interest payable | 3,221 | 3,221 | 3,626 | 3,626 |
9. | Restricted Investment in FHLB Stock |
Restricted stock, which represents a required investment in the common stock of a correspondent bank, is carried at cost and, as of March 31, 2010 and December 31, 2009, consisted of the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta.
Management evaluates the restricted stock for impairment in accordance with authoritative accounting guidance under ASC Topic 320, “Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.” Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost of an investment is influenced by criteria such as (1) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (2) commitments by the issuing ban k to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.
The FHLB of Atlanta announced that it would no longer provide dividend guidance prior to the end of each quarter. The FHLB of Atlanta also announced that it will no longer conduct repurchases of excess activity-based stock on a daily basis, but will make such determinations quarterly. The FHLB of Atlanta announced on March 25, 2010 that is has approved a dividend at the rate of 0.27% for the fourth quarter of 2009 and that it will not repurchase activity-based excess capital stock outstanding as of the end of the fourth quarter 2009.
Based on evaluation of criteria under ASC Topic 320, management believes that no impairment charge in respect of the restricted stock is necessary as of March 31, 2010.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. | New Authoritative Accounting Guidance |
In October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. This Update amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The amendments in this update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability an d consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued an Accounting Standards Update (“ASU”) entitled “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements” (“ASU 820”) which amends ASC 820-10. This ASU requires new disclosures: (i) of significant transfers in and out of Levels 1 and 2 with reasons for the transfers; and (ii) activity in Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a gross basis. In addition, the reporting entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about inputs and valuation techniques used to measure fair value of both recurring and nonrecurring fair value measurements. The ASU includes conforming amendments to the guidan ce on employers’ disclosures about postretirement benefit plan assets (ASC 715-20). These amendments change the terminology from major categories of assets to classes of assets and provide a cross reference to ASC 820-10 on how to determine appropriate class to present fair value disclosures. This ASU is effective for interim and annual periods beginning after December 15, 2009, except disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. This ASU requires additional disclosures only and will not have an impact on the Company’s consolidated financial statements.
STELLARONE CORPORATION
The following discussion provides management’s analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of StellarOne Corporation (“StellarOne,” or the “Company”) and its affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.
OVERVIEW
StellarOne Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, StellarOne is one of the largest independent commercial bank holding companies headquartered in the Commonwealth of Virginia. The Company’s sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia. Additional affiliates of the Company include VFG Limited Liability Trust and FNB (VA) Statutory Trust II both of which are associated with the Company’s subordinated debt issues and are not subject to consolidation. The organization has a network of fifty-six full-service financial centers, one loan production office, and a suite of ATMs serving the New River Valley, Roanoke Valley, Shenandoah Valley and Central and North Central Virginia.
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining inherent losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use.
Investment Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The initial classification of securities is determined at the date of purchase.
Based on management’s interpretations of related authoritative accounting guidance, management has determined that other-than-temporary impairment on equity securities exists and should be recorded if the fair value of an equity security represents (1) less than 70% of the book value of a security regardless of loss period or (2) if the loss period has been more than 18 months regardless of the fair value’s relationship to carrying value. If either of these conditions do not exist, but management becomes aware of possible impairment outside of this scope, management will conduct additional research to determine if market price recoveries can reasonably be expected to occur within an acceptable forecast period. For purposes of this analysis, a near term recovery period has been defined as 3-6 month s.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Purchase premiums and discounts are recognized in interest income using the effective interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated increase in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. There are a total of ten (10) securities that had unrealized losses for 12 months or more as of March 31, 2010 totaling $238 thousand. StellarOne has the ability and intent to hold these securities for the time thought to be necessary to recover its cost, and does not consider them to be other-than-temporarily impaired at March 31, 2010.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have been incurred, but not realized through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company’s banking subsidiary conducts an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. When a loan has been identified as impaired, a specific reserve may be established based on management’s calculation of the loss embedded in the individual loan. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. In addition to impairment testing, the banking subsidiary ha s a ten point grading system for each non-homogeneous loan in the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, overall portfolio quality including delinquency rates and commercial real estate loan concentrations. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are then used to compute an estimated range of losses which is then compared to the recorded allowance for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrow er’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that we would otherwise consider, the related loan is classified as a troubled debt restructuring “TDR”. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.
Goodwill
Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is September 30. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. As of March 31, 2010, there were no significant changes in market conditions, or forecasted future income since September 30, 2009, the date of the most recent goodwill impairment evaluation. The Company has noted improvement in earnings during the first quarter of 2009. Additionally, the trading value of the stock in relation to both its book value and tangible book value has improved since the annual assessment. Therefore no interim goodwill impairment test was performed, as there were no additional indicators of potential impairment present. If weak economic conditions continue or worsen for a prolonged period of time, the fair value of the Company may be adversely affected which may result in impairment of goodwill and other intangible assets in the future.
Additionally, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $413 thousand and $438 thousand for the three months ended March 31, 2010 and 2009, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. No such valuation is deemed necessary as of March 31, 2010.
Stock-Based Compensation
The Company has a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. The Company’s stock options typically have an exercise price equal to at least the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally five years. The Company recognizes the associated compensation cost relating to share-based payment transactions in the consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.
New awards to employees eligible for retirement prior to the award becoming fully vested are recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreclosed Assets
Real estate acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation are included in other operating expenses.
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income excluding gains or losses on securities, fixed assets and foreclosed assets. It also refers to the tangible common equity and Tier 1 common equity ratios which are used by management to assess the quality of capital and management believes that investors may find them useful in their analysis of the company. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies. Additionally we refer and define noninterest income on an operating basis below in our discussions of operations. These are non-GAAP financial measures that we believe provide investors with important information regarding our operational efficiency. Such information is not in accordance with GAAP and should not be construed as such. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The Company, in referring to its net income, is referring to income under GAAP.
Results of Operations
The Company’s first quarter 2010 earnings were $1.9 million and net income available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock, of $1.4 million, or $0.06 net income per diluted common share. Those results compare to a net loss of $298 thousand, or $0.01 loss per diluted common share during the same quarter in the prior year, and net income to common shareholders of $80 thousand or $0.00 per diluted common share recognized for the fourth quarter of 2009. Lower losses on foreclosed assets, gains on sale of certain assets and reduced operating expenses all contributed to the improvement in earnings for the quarter on both a sequential basis and year-over-year comparisons.
Net Interest Income
Net interest income, on a tax-equivalent basis, amounted to $23.1 million for the first quarter of 2010, which compares to $23.5 for fourth quarter of 2009, and $23.0 million for the same period in prior year. The net interest margin was 3.52% for the first quarter, compared to 3.45% for the fourth quarter of 2009 and 3.49% for the first quarter of 2009. The average yield on earning assets decreased 5 basis points to 5.04% as compared to 5.09% for the fourth quarter of 2009, which was offset by improvement in the cost of interest bearing liabilities, which contracted 17 basis points from 1.95% during the fourth quarter of 2009 to 1.78% during the first quarter of this year. The re-pricing sensitivity of interest bearing liabilities outpaced interest earning assets during the first quarter as approximately $161.2 million or 16.5% of the CD portfolio re-priced.
Compared to the same period in prior year, the average yield on earning assets decreased 52 basis points, which was offset by improvement in the cost of interest bearing liabilities, which contracted 67 basis points, resulting in a net interest margin improvement of 3 basis points. Average earning assets remained flat when compared to the same period in the prior year, while contracting on a sequential quarter basis, with average earnings assets of 2.67 billion at March 31, 2010 versus $2.71 billion for the quarter ended December 31, 2009. This sequential decrease was attributed to contraction in loans outstanding as management continues to reduce its exposure to construction lending, which is down $33.6 million or over 10% from the beginning of fourth quarter 2009.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended March 31, | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Dollars in thousands | Balance | Inc/Exp | Rates | Balance | Inc/Exp | Rates | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans receivable, net | $ | 2,204,297 | $ | 29,137 | 5.36 | % | $ | 2,284,456 | $ | 32,599 | 5.79 | % | ||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 259,875 | 2,287 | 3.52 | % | 229,147 | 2,605 | 4.61 | % | ||||||||||||||||
Tax exempt | 105,681 | 1,611 | 6.10 | % | 83,630 | 1,305 | 6.33 | % | ||||||||||||||||
Total investments | 365,556 | 3,898 | 4.27 | % | 312,777 | 3,910 | 5.07 | % | ||||||||||||||||
Interest bearing deposits | 44,060 | 28 | 0.25 | % | 49,792 | 23 | 0.19 | % | ||||||||||||||||
Federal funds sold | 52,948 | 33 | 0.25 | % | 17,307 | 9 | 0.21 | % | ||||||||||||||||
462,564 | 3,959 | 3.43 | % | 379,876 | 3,942 | 4.21 | % | |||||||||||||||||
Total earning assets | 2,666,861 | $ | 33,096 | 5.04 | % | 2,664,332 | $ | 36,541 | 5.56 | % | ||||||||||||||
Total nonearning assets | 332,122 | 326,659 | ||||||||||||||||||||||
Total assets | $ | 2,998,983 | $ | 2,990,991 | ||||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Interest checking | $ | 558,797 | $ | 1,332 | 0.97 | % | $ | 516,475 | $ | 1,397 | 1.10 | % | ||||||||||||
Money market | 392,243 | 1,294 | 1.34 | % | 235,150 | 830 | 1.43 | % | ||||||||||||||||
Savings | 200,064 | 450 | 0.91 | % | 188,399 | 410 | 0.88 | % | ||||||||||||||||
Time deposits: | ||||||||||||||||||||||||
Less than $100,000 | 643,709 | 3,577 | 2.25 | % | 762,657 | 6,060 | 3.22 | % | ||||||||||||||||
$100,000 and more | 312,297 | 1,956 | 2.54 | % | 324,093 | 2,954 | 3.70 | % | ||||||||||||||||
Total interest-bearing deposits | 2,107,110 | 8,609 | 1.66 | % | 2,026,774 | 11,651 | 2.33 | % | ||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 861 | 6 | 2.79 | % | 344 | 3 | 3.49 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings | 127,167 | 1,110 | 3.49 | % | 184,321 | 1,569 | 3.40 | % | ||||||||||||||||
Subordinated debt | 32,991 | 257 | 3.12 | % | 32,991 | 357 | 4.33 | % | ||||||||||||||||
161,019 | 1,373 | 3.41 | % | 217,656 | 1,929 | 3.54 | % | |||||||||||||||||
Total interest-bearing liabilities | 2,268,129 | 9,982 | 1.78 | % | 2,244,430 | 13,580 | 2.45 | % | ||||||||||||||||
Total noninterest-bearing liabilities | 308,594 | 313,799 | ||||||||||||||||||||||
Total liabilities | 2,576,723 | 2,558,229 | ||||||||||||||||||||||
Stockholders' equity | 422,260 | 432,762 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,998,983 | $ | 2,990,991 | ||||||||||||||||||||
Net interest income (tax equivalent) | $ | 23,114 | $ | 22,961 | ||||||||||||||||||||
Average interest rate spread | 3.26 | % | 3.11 | % | ||||||||||||||||||||
Interest expense as percentage of average earning assets | 1.52 | % | 2.07 | % | ||||||||||||||||||||
Net interest margin | 3.52 | % | 3.49 | % |
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
On an operating basis, which excludes gains and losses from sales and impairments of assets, total non-interest income amounted to $8.1 million for the first quarter of 2010, or flat on a sequential basis compared to the fourth quarter of 2009, and an increase of $938 thousand or 13.0% from $7.2 million for the same period in prior year. Mortgage banking revenue totaled $2.0 million for both the first quarter of 2010 and the fourth quarter of 2009 and is up $539 thousand or 37.9% when compared to the same quarter in 2009. Retail banking fee income amounted to $3.9 million for the first quarter of 2010, an increase of $209 thousand or 5.6% when compared to $3.7 million for the same period in the prior year, and a decrease of $294 thousand or 7.0% compared to $4.2 million for the fourth quarter of the prior year. The decrease on a sequential quarter basis was a result of less NSF charge activity for the period, which was offset in part by smaller increases in debit card fee income and account service and analysis fees. Wealth management revenues from trust and brokerage fees for the first quarter of 2010 were $1.2 million or up $134 thousand or 12.7% when compared to $1.1 million realized during the fourth quarter of 2009 and up $182 thousand or 18.0% when compared to $1.0 million realized during the same quarter in 2009. Additionally, noninterest income during the period was also positively impacted by a $748 thousand gain recognized on the sale of a financial services center located in Farmville, Virginia which consummated in January. Total deposits of $15.0 million and $551 thousand in real and personal property were transferred in the sale. No loans were transferred as part of this transaction.
Noninterest Expense
Non-interest expense for the first quarter amounted to $22.5 million, down $2.3 million or 9.4% when compared to the $24.9 million for the fourth quarter of 2009 and up $323 thousand or 1.5% when compared to the first quarter in 2009. This sequential decrease was driven by reduced professional fees of $579 thousand associated with decreased credit workouts and consulting activities in the first quarter of 2010, and an $865 thousand decrease in salaries and benefits which is a product of reduced mortgage commission levels, severance and incentives. Noninterest expense remained flat when comparing the first quarter of 2010 to the first quarter of 2009 as increased compensation and benefits were offset largely by a reduction in nonrecurring data processing expenses. Improvement was also noted in other expenses as DDA charge-offs and appraisal expenses decreased on a sequential basis. StellarOne’s efficiency ratio was 72.23% for the first quarter of 2010, compared to 73.70% for the first quarter of 2009 and 79.22% for the fourth quarter of 2009, reflecting the decrease in noninterest expense on a sequential basis and higher revenues and flat noninterest expense when compared to the same quarter in the prior year.
Income Taxes
Income tax expense for the first quarter of 2010 was $212 thousand resulting in an effective tax rate of 10.3% compared to an income tax benefit for the first quarter of 2009 of $592 thousand, or an effective rate of greater than 100%. The volatility in the effective tax rate on a comparative basis is a result of elevated provisioning levels that has reduced pretax earnings to a near a breakeven level, which is proportionately much smaller in relation to our permanent tax differences. As pretax results approach the breakeven point substantial shifts in the effective tax rate are generated due to comparing a lower level of earnings or losses to a relatively steady level of permanent differences. Given the uncertainty surrounding the current economic environment, which is causing provisioning to be elevated on a historical basis and is driving the Company’s effective tax rate; the effective rate for the first quarter of 2010 is within the estimated range of probable rates expected for the annualized period.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Quality
StellarOne’s ratio of non-performing assets as a percentage of total assets decreased to 2.07% as of March 31, 2010, compared to 2.18% as of December 31, 2009 and 2.34% as of March 31, 2009. Much of this sequential decrease is due to management's approach in conjunction with writing down and liquidating foreclosed assets and loans repurchased from the secondary market that are being held for sale. Annualized net charge-offs as a percentage of average loans receivable amounted to 1.13% for the first quarter of 2010, compared to 0.78% for the fourth quarter of 2009 and 0.51% for the first quarter of 2009. Net charge-offs for the first quarter totaled $6.2 million and were up $1.8 million compared to the $4.4 million in net charge-offs recognized during the fourth quarter of 2009 and up $3.3 million compa red to the $2.9 million in net charge-offs posted during the corresponding quarter in 2009.
The mix of nonperforming loans continues to be weighted to the residential development and construction loan segment of our portfolio. Of the total nonaccrual loans of $59.2 million at March 31, 2010, approximately $27.9 million are residential development and construction loans, of which approximately $16.2 million are located at Smith Mountain Lake, Virginia.
StellarOne recorded a provision for loan losses of $6.7 million for the first quarter of 2020, an increase of $3.2 million compared to the fourth quarter of 2009 and a decrease of $1.1 million for the same period in the prior year. The first quarter provision compares to net charge-offs of $6.2 million for the quarter, resulting in an allowance as a percentage of total loans of 1.88%, or up 4 basis points and 32 basis points when compared to December 31, 2009 and March 31, 2009, respectively. The allowance represents 68.7% of non-performing loans at March 31, 2010, compared to 67.7% and 53.0% of non-performing loans at December 31, 2009 and March 31, 2009, respectively.
At March 31, 2010 StellarOne had $24.8 million in loans under troubled debt restructuring terms. These restructurings occur when a loan customer has experienced or is anticipated to experience, financial difficulties in the short term. Consequently, a modification is granted to the borrower that would not otherwise be considered. These loans continue to accrue interest as long as the borrower complies with the modified loan terms and conditions and has demonstrated repayment performance under the modified agreement.
Accruing restructured loans were $23.0 million at March 31, 2010 compared to $20.7 million at December 31, 2009. These loans are primarily residential real estate related and are being restructured in order to assist our customers in retaining their homes and minimize our exposure to potential losses. These loans have been restructured by either reducing the related interest rate, extending the terms or both.
The following table provides information on asset quality statistics for the periods presented (In thousands):
March 31, | December 31, | March 31, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Non-accrual loans | $ | 57,343 | $ | 56,624 | $ | 66,432 | ||||||
Troubled debt restructurings | 1,810 | 2,678 | 195 | |||||||||
Foreclosed assets | 2,267 | 4,505 | 4,207 | |||||||||
Loans held for sale | 608 | 936 | 279 | |||||||||
Total non-performing assets | $ | 62,028 | $ | 64,743 | $ | 71,113 | ||||||
Nonperforming assets to total assets | 2.07 | % | 2.18 | % | 2.34 | % | ||||||
Nonperforming assets to loans and foreclosed property | 2.87 | % | 3.03 | % | 3.14 | % | ||||||
Allowance for loan losses as a percentage of loans receivable | 1.88 | % | 1.84 | % | 1.56 | % | ||||||
Allowance for loan losses as a percentage of nonperforming assets | 65.53 | % | 62.05 | % | 49.67 | % | ||||||
Annualized net charge-offs as a percentage of average loans receiveable | 1.13 | % | 1.24 | % | 0.51 | % |
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Capital Resources
The management of capital in a regulated financial services industry must properly balance return on equity to stockholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the resulting accounting treatment. The Company’s capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its “well-capitalized” position at the banking subsidiary.
The primary source of additional capital to the Company is earnings retention, which represents net income less dividends declared. The Company paid or accrued $912 thousand and $370 thousand in common and preferred dividends, respectively, during the quarter ended March 31, 2010. These dividends combined with net income of $1.9 million resulted in an increase to retained earnings of $487 thousand during the period. Dividends on a go-forward basis will be dependent upon the Company’s ability to generate earnings in future periods. On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury in exchange for $30 million pursuant to the U.S. Treasury CPP under TARP which further enhanced capital.
The Company and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by th e regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiary to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. As of March 31, 2010, the Company and the subsidiary bank met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized.” There are no conditions or events that management believes have changed the subsidiary bank’s well capitalized position.
The following table includes information with respect to the Company’s risk-based capital and equity levels as of March 31, 2010 (In thousands):
Corporation | Bank | |||||||
Tier 1 capital | $ | 330,218 | $ | 282,283 | ||||
Tier 2 capital | 30,504 | 30,177 | ||||||
Total risk-based capital | 360,722 | 312,460 | ||||||
Total risk-weighted assets | 2,415,414 | 2,398,479 | ||||||
Average adjusted total assets | 2,878,372 | 2,862,323 | ||||||
Capital ratios: | ||||||||
Tier 1 risk-based capital ratio | 13.67 | % | 11.77 | % | ||||
Total risk-based capital ratio | 14.93 | % | 13.03 | % | ||||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 11.47 | % | 9.86 | % | ||||
Equity to assets ratio | 14.08 | % | 13.69 | % | ||||
Tangible common equity to assets ratio | 9.40 | % | 9.99 | % |
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or other short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economy of markets served, concentrations of business and industry, competition, and the Company’s overall financial condition. The Bank’s primary sources of liquidity are cash and the securities in our available for sale portfolio. In addition, the Bank has substantial lines o f credit from its correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.
The liquidity of the Company also represents an important aspect of liquidity management. The Company’s cash outflows consist of overhead associated with corporate expenses, executive management, finance, marketing, human resources, loan and deposit operations, information technology, audit, compliance and loan review functions. It also includes outflows associated with dividends to common shareholders, dividends to preferred shareholders and interest on subordianted debt. The main sources of funding for the Company are the management fees and dividends it receives from its banking subsidiary, and availability of the debt and equity market as deemed necessary. The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.
In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs may arise.
Off Balance Sheet Items
There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009.
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009.
Effects of Inflation
The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates and thus the Company’s asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
StellarOne Corporation. (the “Company”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “likely,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of the Company to differ materially from a ny results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) continuation of the historically low short-term interest rate environment, (iii) the inability of the Company to continue to grow its loan portfolio, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the development of any new market, (vi) a merger or acquisition, (vii) any activity in the capital markets that would cause the Company to conclude that there was impairment of any asset including intangible assets, (viii) the impact of governmental restrictions on entities participating in the US Treasury Department Capital Purchase Program, (ix) the deterioration in carrying amounts of impaired assets and other real estate and (x) changes in state and Federal legislation, regulations or policies ap plicable to Banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy. A more detailed description of these and other risks is contained in the Company’s most recent annual report on Form 10-K. Many of such factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. StellarOne Corporation disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.
Access to Filings
The Company provides access to its SEC filings through the corporate Website at http://www.StellarOne.com. After accessing the Website, the filings are available upon selecting Investor Relations, then the SEC Filings & Other Documents icon. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.
There have been no significant changes to the quantitative and qualitative market risk disclosures in the Company’s Form 10-K for the year ended December 31, 2009.
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are required to include in our periodic reports information regarding our controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have established disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. Our principal executive officer and principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report and, based on their evaluation, concluded that our disclosure controls and procedures are operating effectively.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the organization to disclose material information otherwise required to be set forth in our period reports.
Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our assets 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. In the normal course we review and change our internal controls to reflect changes in our business including acquisition related improvements. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
STELLARONE CORPORATION
PART II - OTHER INFORMATION
ITEM 1. |
There are no material legal proceedings to which the Company or any of its subsidiary, directors, or officers is a party or by which they, or any of them, are threatened. Any legal proceeding presently pending or threatened against StellarOne Corporation and its subsidiaries are either not material in respect to the amount in controversy or fully covered by insurance.
ITEM 1a. RISK FACTORS.
There have been no material changes to our risk factors as previously disclosed in Part I, Item IA of our Annual Report on Form 10K for the fiscal year ended December 31, 2009.
The Company has a stock repurchase program authorized that is not currently active, with 210,000 shares remaining available for repurchase.
None.
None.
ITEM 5. |
Not applicable.
STELLARONE CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS:
(a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
Exhibit No. 2.1 | Agreement and Plan of Reorganization, dated as of July 26, 2007, between Virginia Financial Group, Inc. and FNB Corporation. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed July 30, 2007. |
Exhibit No. 3.1 | Articles of Incorporation StellarOne Corporation, as amended. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 10, 2010) |
Exhibit No. 3.2 | Bylaws of StellarOne Corporation, as amended and restated February 28, 2008. (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed on February 28, 2008) |
Exhibit No. 4.1 | Warrant to purchase up to 302,623 shares of Common Stock (incorporated by reference to Exhibit 4.1 to Form 8K filed on December 23, 2008) |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STELLARONE CORPORATION
/s/ O. R. Barham, Jr.
O.R. Barham, Jr.
President and Chief Executive Officer
May 10, 2010
/s/ Jeffrey W. Farrar
Jeffrey W. Farrar, CPA
Executive Vice President and Chief Financial Officer
May 10, 2010
33