UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 logo](https://capedge.com/proxy/10-Q/0001036070-11-000040/stellaronecorplogo.jpg)
StellarOne Corporation
(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 November 2, 2011 there were 23,004,849 shares of common stock, $1.00 par value per share, issued and outstanding.
STELLARONE CORPORATION | ||
PART I - FINANCIAL INFORMATION | ||
ITEM 1 | Financial Statements (Unaudited): | |
1 | ||
2 | ||
4 | ||
5 | ||
6 | ||
ITEM 2 | 21 | |
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 (Unaudited)
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||
(In Thousands) | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 38,525 | $ | 35,144 | ||||
Federal funds sold | 3,318 | 55,643 | ||||||
Interest-bearing deposits in banks | 115,744 | 49,099 | ||||||
Cash and cash equivalents | 157,587 | 139,886 | ||||||
Investment securities available for sale, at fair value | 480,787 | 381,231 | ||||||
Mortgage loans held for sale | 34,032 | 51,722 | ||||||
Loans receivable, net of allowance for loan losses, 2011, $35,268; 2010, $37,649 | 1,992,270 | 2,061,835 | ||||||
Premises and equipment, net | 75,307 | 79,033 | ||||||
Accrued interest receivable | 9,135 | 9,317 | ||||||
Deferred income tax asset | - | 1,909 | ||||||
Core deposit intangibles, net | 5,424 | 6,662 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Bank owned life insurance | 32,085 | 31,116 | ||||||
Foreclosed assets | 9,009 | 10,894 | ||||||
Other assets | 48,553 | 53,185 | ||||||
Total assets | $ | 2,957,841 | $ | 2,940,442 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 314,880 | $ | 322,924 | ||||
Interest-bearing | 2,103,108 | 2,063,178 | ||||||
Total deposits | 2,417,988 | 2,386,102 | ||||||
Short-term borrowings | 1,042 | 987 | ||||||
Federal Home Loan Bank advances | 60,000 | 85,000 | ||||||
Subordinated debt | 32,991 | 32,991 | ||||||
Accrued interest payable | 2,087 | 2,278 | ||||||
Deferred income tax liability | 1,604 | - | ||||||
Other liabilities | 9,264 | 6,647 | ||||||
Total liabilities | 2,524,976 | 2,514,005 | ||||||
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; 2011: 22,500 shares issued and outstanding; 2010: 30,000 shares issued and outstanding. | 21,798 | 28,763 | ||||||
Common stock; $1 par value; 35,000,000 shares authorized; 2011: 22,815,936 shares issued and outstanding; 2010: 22,748,062 shares issued and outstanding. | 22,816 | 22,748 | ||||||
Additional paid-in capital | 270,846 | 270,047 | ||||||
Retained earnings | 108,065 | 101,188 | ||||||
Accumulated other comprehensive income | 9,340 | 3,691 | ||||||
Total stockholders' equity | 432,865 | 426,437 | ||||||
Total liabilities and stockholders' equity | $ | 2,957,841 | $ | 2,940,442 |
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 | ||||||||
SEPTEMBER 30, | ||||||||
2011 | 2010 | |||||||
Interest and Dividend Income | ||||||||
Loans, including fees | $ | 27,018 | $ | 28,226 | ||||
Federal funds sold and deposits in other banks | 78 | 62 | ||||||
Investment securities: | ||||||||
Taxable | 1,829 | 2,134 | ||||||
Tax-exempt | 1,469 | 1,149 | ||||||
Dividends | - | 11 | ||||||
Total interest and dividend income | 30,394 | 31,582 | ||||||
Interest Expense | ||||||||
Deposits | 5,357 | 6,744 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 8 | 8 | ||||||
Federal Home Loan Bank advances | 523 | 1,010 | ||||||
Subordinated debt | 263 | 286 | ||||||
Total interest expense | 6,151 | 8,048 | ||||||
Net interest income | 24,243 | 23,534 | ||||||
Provision for loan losses | 3,300 | 3,500 | ||||||
Net interest income after provision for loan losses | 20,943 | 20,034 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 4,019 | 4,125 | ||||||
Commissions and fees from fiduciary activities | 821 | 818 | ||||||
Brokerage fee income | 374 | 318 | ||||||
Mortgage banking-related fees | 1,967 | 2,602 | ||||||
Gains (losses) on mortgage indemnifications and repurchases | 31 | (809 | ) | |||||
Losses on sale of premises and equipment | (9 | ) | - | |||||
Impairments on securities available for sale | - | (53 | ) | |||||
Gains on sale of securities available for sale | 41 | 336 | ||||||
Losses / impairments on foreclosed assets | (223 | ) | (18 | ) | ||||
Income from bank owned life insurance | 327 | 322 | ||||||
Other operating income | 516 | 606 | ||||||
Total noninterest income | 7,864 | 8,247 | ||||||
Non-interest Expense | ||||||||
Compensation and employee benefits | 12,527 | 11,687 | ||||||
Net occupancy | 2,108 | 1,996 | ||||||
Supplies and equipment | 2,212 | 1,963 | ||||||
Amortization of intangible assets | 413 | 413 | ||||||
Marketing | 153 | 313 | ||||||
State franchise taxes | 596 | 554 | ||||||
FDIC insurance | 590 | 1,617 | ||||||
Data processing | 729 | 634 | ||||||
Professional fees | 641 | 656 | ||||||
Telecommunications | 406 | 410 | ||||||
Other operating expenses | 2,971 | 3,422 | ||||||
Total noninterest expense | 23,346 | 23,665 | ||||||
Income before income taxes | 5,461 | 4,616 | ||||||
Income tax expense | 1,242 | 1,088 | ||||||
Net income | $ | 4,219 | $ | 3,528 | ||||
Dividends and accretion on preferred stock | (296 | ) | (470 | ) | ||||
Net income available to common shareholders | $ | 3,923 | $ | 3,058 | ||||
Basic net income per common share available to common shareholders | $ | 0.17 | $ | 0.13 | ||||
Diluted net income per common share available to common shareholders | $ | 0.17 | $ | 0.13 |
The accompanying notes are an integral part of these consolidated financial statements.
STELLARONE CORPORATION AND SUBSIDIARIES | ||||||||
CONSOLIDATED INCOME STATEMENT | ||||||||
(In thousands, except per share data) | ||||||||
NINE MONTHS ENDED | ||||||||
SEPTEMBER 30, | ||||||||
2011 | 2010 | |||||||
Interest and Dividend Income | ||||||||
Loans, including fees | $ | 81,365 | $ | 86,162 | ||||
Federal funds sold and deposits in other banks | 211 | 193 | ||||||
Investment securities: | ||||||||
Taxable | 5,373 | 6,560 | ||||||
Tax-exempt | 4,119 | 3,226 | ||||||
Dividends | - | 71 | ||||||
Total interest and dividend income | 91,068 | 96,212 | ||||||
Interest Expense | ||||||||
Deposits | 16,424 | 22,953 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 24 | 22 | ||||||
Federal Home Loan Bank advances | 1,681 | 3,179 | ||||||
Subordinated debt | 790 | 808 | ||||||
Total interest expense | 18,919 | 26,962 | ||||||
Net interest income | 72,149 | 69,250 | ||||||
Provision for loan losses | 10,950 | 17,550 | ||||||
Net interest income after provision for loan losses | 61,199 | 51,700 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 11,415 | 12,338 | ||||||
Commissions and fees from fiduciary activities | 2,572 | 2,496 | ||||||
Brokerage fee income | 1,315 | 1,103 | ||||||
Mortgage banking-related fees | 5,563 | 6,620 | ||||||
Gain on sale of financial center | - | 748 | ||||||
Losses on mortgage indemnifications and repurchases | (232 | ) | (1,411 | ) | ||||
(Losses) Gains on sale of premises and equipment | (6 | ) | 27 | |||||
Impairments on securities available for sale | - | (53 | ) | |||||
Gains on securities available for sale | 62 | 656 | ||||||
Losses / impairments on foreclosed assets | (717 | ) | (459 | ) | ||||
Income from bank owned life insurance | 969 | 972 | ||||||
Other operating income | 2,115 | 2,405 | ||||||
Total noninterest income | 23,056 | 25,442 | ||||||
Non-interest Expense | ||||||||
Compensation and employee benefits | 37,186 | 34,095 | ||||||
Net occupancy | 6,165 | 6,218 | ||||||
Supplies and equipment | 6,752 | 6,295 | ||||||
Amortization of intangible assets | 1,238 | 1,238 | ||||||
Marketing | 737 | 786 | ||||||
State franchise taxes | 1,788 | 1,662 | ||||||
FDIC insurance | 2,108 | 4,048 | ||||||
Data processing | 2,029 | 1,741 | ||||||
Professional fees | 1,873 | 2,071 | ||||||
Telecommunications | 1,221 | 1,256 | ||||||
Other operating expenses | 9,006 | 9,593 | ||||||
Total noninterest expense | 70,103 | 69,003 | ||||||
Income before income taxes | 14,152 | 8,139 | ||||||
Income tax expense | 3,036 | 1,203 | ||||||
Net income | $ | 11,116 | $ | 6,936 | ||||
Dividends and accretion on preferred stock | (1,482 | ) | (1,393 | ) | ||||
Net income available to common shareholders | $ | 9,634 | $ | 5,543 | ||||
Basic net income per common share available to common shareholders | $ | 0.42 | $ | 0.24 | ||||
Diluted net income per common share available to common shareholders | $ | 0.42 | $ | 0.24 |
(in Thousands) | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Other | ||||||||||||||||||||||
Additional | Compre- | Compre- | ||||||||||||||||||||
Preferred | Common | Paid-In | Retained | hensive | hensive | |||||||||||||||||
Stock | Stock | Capital | Earnings | Income | Income | Total | ||||||||||||||||
Balance, January 1, 2010 | $ | 28,398 | $ | 22,661 | $ | 268,965 | $ | 96,947 | $ | 3,814 | $ | 420,785 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net income | - | - | - | 6,936 | - | $ | 6,936 | 6,936 | ||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax of $2,374) | - | - | - | - | - | 4,409 | - | |||||||||||||||
Reclassification adjustment (net of tax of $211) | - | - | - | - | - | 392 | - | |||||||||||||||
Change in post retirement liability (net of tax, $66) | - | - | - | - | - | (122 | ) | - | ||||||||||||||
Change in cash flow hedge (net of tax of $40) | - | - | - | - | - | (74 | ) | - | ||||||||||||||
Other comprehensive income | - | - | - | - | 4,605 | 4,605 | 4,605 | |||||||||||||||
Total comprehensive income | - | - | - | - | - | $ | 11,541 | - | ||||||||||||||
Cash dividends paid or accrued: | ||||||||||||||||||||||
Common ($0.12 per share) | - | - | - | (2,742 | ) | - | (2,742 | ) | ||||||||||||||
Preferred cumulative 5% | - | - | - | (1,122 | ) | - | (1,122 | ) | ||||||||||||||
Accretion of preferred stock discount | 271 | - | - | (271 | ) | - | - | |||||||||||||||
Stock-based compensation expense (26,615 shares) | - | 27 | 455 | - | - | 482 | ||||||||||||||||
Exercise of stock options (60,322 shares) | - | 60 | 450 | - | - | 510 | ||||||||||||||||
Balance, September 30, 2010 | $ | 28,669 | $ | 22,748 | $ | 269,870 | $ | 99,748 | $ | 8,419 | $ | 429,454 | ||||||||||
Balance, January 1, 2011 | $ | 28,763 | $ | 22,748 | $ | 270,047 | $ | 101,188 | $ | 3,691 | $ | 426,437 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net income | - | - | - | 11,116 | - | $ | 11,116 | 11,116 | ||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax of $3,209) | - | - | - | - | - | 5,960 | - | |||||||||||||||
Reclassification adjustment (net of tax of $22) | - | - | - | - | - | (40 | ) | - | ||||||||||||||
Change in post retirement liability (net of tax of $42) | - | - | - | - | - | 78 | - | |||||||||||||||
Change in cash flow hedge (net of tax of $188) | - | - | - | - | - | (349 | ) | - | ||||||||||||||
Other comprehensive income | - | - | - | - | 5,649 | 5,649 | 5,649 | |||||||||||||||
Total comprehensive income | - | - | - | - | - | $ | 16,765 | - | ||||||||||||||
Cash dividends paid or accrued: | ||||||||||||||||||||||
Common ($0.12 per share) | - | - | - | (2,757 | ) | - | (2,757 | ) | ||||||||||||||
Preferred cumulative 5% | - | - | - | (947 | ) | - | (947 | ) | ||||||||||||||
Accretion of preferred stock discount | 250 | - | - | (250 | ) | - | - | |||||||||||||||
Partial repurchase of preferred stock issued to the U.S. Treasury and associated accelerated accretion | (7,215 | ) | - | - | (285 | ) | - | (7,500 | ) | |||||||||||||
Stock-based compensation expense (35,954 shares) | - | 36 | 521 | - | - | 557 | ||||||||||||||||
Exercise of stock options (31,920 shares) | - | 32 | 278 | - | - | 310 | ||||||||||||||||
Balance, September 30, 2011 | $ | 21,798 | $ | 22,816 | $ | 270,846 | $ | 108,065 | $ | 9,340 | $ | 432,865 |
The accompanying notes are an integral part of these consolidated financial statements.
StellarOne Corporation and Subsidiaries | ||||||||
(In Thousands) | ||||||||
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 11,116 | $ | 6,936 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 4,926 | 4,691 | ||||||
Amortization of intangible assets | 1,238 | 1,238 | ||||||
Provision for loan losses | 10,950 | 17,550 | ||||||
Deferred tax benefit | 472 | (536 | ) | |||||
Stock-based compensation expense | 557 | 482 | ||||||
Losses / impairments on foreclosed assets | 717 | 459 | ||||||
Losses on mortgage indemnifications and repurchases | 232 | 1,411 | ||||||
Losses (gains) on sale of premises and equipment | 6 | (27 | ) | |||||
Gain on sale of financial center | - | (748 | ) | |||||
Gains on sale of securities available for sale | (62 | ) | (656 | ) | ||||
Impairments of equity securities available for sale | - | 53 | ||||||
Mortgage banking-related fees | (5,563 | ) | (6,620 | ) | ||||
Proceeds from sale of mortgage loans | 299,509 | 371,407 | ||||||
Origination of mortgage loans for sale | (276,256 | ) | (367,247 | ) | ||||
Amortization of securities premiums and accretion of discounts, net | 1,044 | 1,063 | ||||||
Income on bank owned life insurance | (969 | ) | (972 | ) | ||||
Changes in assets and liabilities: | ||||||||
Decrease in accrued interest receivable | 182 | 32 | ||||||
Decrease (increase) in other assets | 5,869 | (6,634 | ) | |||||
Decrease in accrued interest payable | (191 | ) | (840 | ) | ||||
Increase in other liabilities | 2,065 | 9,199 | ||||||
Net cash provided by operating activities | $ | 55,842 | $ | 30,241 | ||||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities and principal payments of securities available for sale | $ | 68,998 | $ | 64,695 | ||||
Proceeds from sales and calls of securities available for sale | 37,612 | 30,979 | ||||||
Purchase of securities available for sale | (198,041 | ) | (113,117 | ) | ||||
Net decrease in loans | 53,011 | 73,608 | ||||||
Proceeds from sale of premises and equipment | 12 | 26 | ||||||
Purchase of premises and equipment | (2,347 | ) | (2,236 | ) | ||||
Proceeds from sale of foreclosed assets | 6,567 | 5,285 | ||||||
Cash paid in sale of financial center, net | - | (13,349 | ) | |||||
Net cash (used) provided by investing activities | $ | (34,188 | ) | $ | 45,891 | |||
Cash Flows from Financing Activities | ||||||||
Net increase in demand, money market and savings deposits | $ | 39,613 | $ | 30,612 | ||||
Net decrease in certificates of deposit | (7,727 | ) | (102,813 | ) | ||||
Net increase in federal funds purchased and securities sold under agreements to repurchase | 55 | 373 | ||||||
Principal payments on Federal Home Loan Bank advances | (25,000 | ) | (45,000 | ) | ||||
Proceeds from exercise of stock options | 310 | 510 | ||||||
Partial repurchase of preferred stock issued to the U.S. Treasury | (7,500 | ) | - | |||||
Cash dividends paid | (3,704 | ) | (3,864 | ) | ||||
Net cash used by financing activities | $ | (3,953 | ) | $ | (120,182 | ) | ||
Increase (decrease) in cash and cash equivalents | $ | 17,701 | $ | (44,050 | ) | |||
Cash and Cash Equivalents | ||||||||
Beginning | 139,886 | 152,926 | ||||||
Ending | $ | 157,587 | $ | 108,876 | ||||
Supplemental Schedule of Noncash Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | 5,604 | $ | 11,774 |
The accompanying notes are an integral part of these consolidated financial statements.
5
1. | Organization |
StellarOne Corporation (“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 September 30, 2011 and December 31, 2010, the results of operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010. 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, 2010. The results of operations for the nine month period ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year.
2. | Participation in U.S. Treasury Capital Purchase Program |
On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury for $30 million pursuant to the U.S. Treasury Capital Purchase Program (“CPP”). Additionally, the Company issued 302,622 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 the preferred stock have been used for general corporate purposes, including supporting the continued, anticipated growth of the Company. 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 preferred shares with the approval of the Federal Reserve at liquidation value, as defined by the agreement executed pursuant to the CPP, plus accrued and unpaid dividends.
On April 13, 2011, the Company redeemed 25%, or 7,500 shares, of its preferred stock. The preferred stock was repurchased for $7.5 million and had a current carrying value of $7.2 million, net of $285 thousand unaccreted discount, on the Company’s consolidated balance sheet. As a result of the repurchase, the Company accelerated the accretion of the $285 thousand discount and recorded a total reduction in shareholders’ equity of $7.5 million.
Initially, a value of $1.9 million was assigned to the common stock warrants based on their relative fair value, and $28.1 million was assigned to the Series A preferred stock. The discount was being accreted up to the original redemption amount of $30 million over a five year term. Subsequent to the partial redemption on April 13, 2011, the remaining $785 thousand of the discount will be accreted up to the new redemption amount of $22.5 million over the remaining 2.5 year term.
6
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. | Investment Securities |
A summary of the amortized cost and fair value of securities with gross unrealized gains and losses is presented below (in thousands).
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||||||||||
U. S. Government agencies | $ | 129,147 | $ | 1,540 | $ | (87 | ) | $ | 130,600 | $ | 101,864 | $ | 1,389 | $ | - | $ | 103,253 | |||||||||||||||
State and municipals | 160,053 | 9,016 | (17 | ) | 169,052 | 134,465 | 3,248 | (890 | ) | 136,823 | ||||||||||||||||||||||
Corporate bonds | 5,504 | 233 | - | 5,737 | 6,527 | 377 | - | 6,904 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 7,750 | 242 | - | 7,992 | 9,294 | 203 | - | 9,497 | ||||||||||||||||||||||||
Agency mortgage backed securities | 152,356 | 6,052 | - | 158,408 | 119,595 | 3,587 | (43 | ) | 123,139 | |||||||||||||||||||||||
Other | 8,998 | - | - | 8,998 | 1,615 | - | - | 1,615 | ||||||||||||||||||||||||
Total | $ | 463,808 | $ | 17,083 | $ | (104 | ) | $ | 480,787 | $ | 373,360 | $ | 8,804 | $ | (933 | ) | $ | 381,231 |
The book value of securities pledged to secure deposits and for other purposes amounted to $141.3 million and $156.3 million at September 30, 2011 and December 31, 2010, respectively.
Information pertaining to sales and calls of securities available for sale is as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Proceeds from sales/calls | $ | 12,662 | $ | 7,539 | $ | 37,612 | $ | 30,979 | ||||||||
Gross realized gains | 41 | 336 | 62 | 664 | ||||||||||||
Gross realized losses | - | - | - | (8 | ) | |||||||||||
Impairment losses | - | (53 | ) | - | (53 | ) |
As of September 30, 2011, securities with unrealized losses segregated by length of impairment were as follows (in thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||
U. S. Government Agencies | $ | 30,211 | $ | 87 | $ | - | $ | - | $ | 30,211 | $ | 87 | ||||||||||||
State and municipals | 2,119 | 17 | - | - | 2,119 | 17 | ||||||||||||||||||
Total temporarily impaired securities | $ | 32,330 | $ | 104 | $ | - | $ | - | $ | 32,330 | $ | 104 |
Declines in the fair value of 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 September 30, 2011, management 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 September 30, 2011, 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 fair value of securities at September 30, 2011 are presented below by contractual maturity (in thousands).
Available for Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year or less | $ | 34,568 | $ | 34,823 | ||||
Due after one year through five years | 141,377 | 144,429 | ||||||
Due after five years through ten years | 91,615 | 95,891 | ||||||
Due after ten years | 196,249 | 205,644 | ||||||
Total | $ | 463,809 | $ | 480,787 |
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
4. | Derivative Financial Instruments |
The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps, caps and floors. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two counterparties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. During 2010, the Company entered into an interest rate swap contract on its subordinated debt that qualifies as a cash flow hedge. The Company’s cash flow hedge effectively modifies the Company’s exposure to interest rate risk by converting floating rate debt to a fixed rate debt with a maturity in 2013.
The notional amount of the cash flow hedge is $32.0 million. At September 30, 2011, the cash flow hedge had a fair value of $439 thousand and is recorded in other liabilities. The cash flow hedge was fully effective at September 30, 2011 and therefore the change in fair value on the cash flow hedge was recognized as a component of other comprehensive income, net of deferred income taxes.
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. | Loans and Allowance for Loan Losses |
The Company, through its banking subsidiary, grants mortgage, commercial and consumer loans to customers, all of which are considered financing receivables. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. These amounts are generally being amortized over the contractual life of the loan.
The Company’s loan portfolio is composed of the following (in thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Construction and land development: | ||||||||
Residential | $ | 53,328 | $ | 57,135 | ||||
Commercial | 158,682 | 180,502 | ||||||
Total construction and land development | 212,010 | 237,637 | ||||||
Commercial real estate: | ||||||||
Commercial real estate - owner occupied | 325,489 | 356,769 | ||||||
Commercial real estate - non-owner occupied | 412,233 | 401,178 | ||||||
Farmland | 16,841 | 17,561 | ||||||
Multifamily, nonresidential and junior liens | 98,323 | 103,641 | ||||||
Total commercial real estate | 852,886 | 879,149 | ||||||
Consumer real estate: | ||||||||
Home equity lines | 264,655 | 264,945 | ||||||
Secured by 1-4 family residential, secured by first deeds of trust | 451,039 | 457,300 | ||||||
Secured by 1-4 family residential, secured by second deeds of trust | 43,731 | 46,108 | ||||||
Total consumer real estate | 759,425 | 768,353 | ||||||
Commercial and industrial loans (except those secured by real estate) | 177,678 | 183,693 | ||||||
Consumer and other: | ||||||||
Consumer installment loans | 21,945 | 26,795 | ||||||
Deposit overdrafts | 1,481 | 1,395 | ||||||
All other loans | 1,656 | 1,874 | ||||||
Total consumer and other | 25,082 | 30,064 | ||||||
Total loans | 2,027,081 | 2,098,896 | ||||||
Deferred loan costs | 457 | 588 | ||||||
Allowance for loan losses | (35,268 | ) | (37,649 | ) | ||||
Net loans | $ | 1,992,270 | $ | 2,061,835 |
As of September 30, 2011 and December 31, 2010, the book value of loans pledged as collateral for advances outstanding with the Federal Home Loan Bank of Atlanta totaled $643.0 million and $630.5 million, respectively.
The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Deposit overdrafts and other loans are typically charged off no later than 120 days past due. Consumer installment loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful or charged-off if a loss is considered imminent.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future collection of principal and interest are reasonably assured.
The following table presents the recorded investment in nonaccrual and loans past due more than 90 days still accruing by portfolio segment (in thousands):
Nonaccrual | Loans Past Due Over 90 Days Still Accruing | |||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Construction and land development | $ | 9,602 | $ | 15,443 | $ | 444 | $ | 937 | ||||||||
Commercial real estate | 15,192 | 8,060 | - | 531 | ||||||||||||
Consumer real estate | 15,203 | 15,154 | 70 | - | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 3,132 | 4,277 | 50 | 423 | ||||||||||||
Consumer and other | 54 | 26 | 2 | 19 | ||||||||||||
Total | $ | 43,183 | $ | 42,960 | $ | 566 | $ | 1,910 |
If interest had been recognized on non-accrual loans, such income would have approximated $654 thousand and $280 thousand for the three months ended September 30, 2011 and 2010, respectively and $1.4 million and $2.5 million for the nine months ended September 30, 2011 and 2010, respectively.
8
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aging of the recorded investment in past due loans as of September 30, 2011 and 2010 by portfolio segment (in thousands):
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Non-accrual | Total Past Due | Current | Total Loans | ||||||||||||||||||||||
September 30, 2011 | ||||||||||||||||||||||||||||
Construction and land development | $ | 2,708 | $ | 6,067 | $ | 444 | $ | 9,602 | $ | 18,821 | $ | 193,189 | $ | 212,010 | ||||||||||||||
Commercial real estate | 7,440 | 9,326 | - | 15,192 | 31,958 | 820,928 | 852,886 | |||||||||||||||||||||
Consumer real estate | 7,073 | 7,616 | 70 | 15,203 | 29,962 | 729,463 | 759,425 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 1,085 | 1,413 | 50 | 3,132 | 5,680 | 171,998 | 177,678 | |||||||||||||||||||||
Consumer and other | 276 | 334 | 2 | 54 | 666 | 24,416 | 25,082 | |||||||||||||||||||||
Total loans | $ | 18,582 | $ | 24,756 | $ | 566 | $ | 43,183 | $ | 87,087 | $ | 1,939,994 | $ | 2,027,081 | ||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||
Construction and land development | $ | 7,467 | $ | 1,064 | $ | 937 | $ | 15,443 | $ | 24,911 | $ | 212,726 | $ | 237,637 | ||||||||||||||
Commercial real estate | 7,586 | 4,685 | 531 | 8,060 | 20,862 | 858,287 | 879,149 | |||||||||||||||||||||
Consumer real estate | 22,586 | 6,805 | - | 15,154 | 44,545 | 723,808 | 768,353 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 791 | 1,139 | 423 | 4,277 | 6,630 | 177,063 | 183,693 | |||||||||||||||||||||
Consumer and other | 513 | 147 | 19 | 26 | 705 | 29,359 | 30,064 | |||||||||||||||||||||
Total loans | $ | 38,943 | $ | 13,840 | $ | 1,910 | $ | 42,960 | $ | 97,653 | $ | 2,001,243 | $ | 2,098,896 |
The allowance for loan losses (“ALLL”) is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan balances are charged off against the allowance when management believes a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance.
The Company 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 the identification of potential 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 the Company’s calculation of the loss embedded in the individual loan. In addition to specific reserves on impaired loans, the Company has a nine point grading system for each non-homogeneous loan in the portfolio to reflect the risk characteristic of the loan. The loans identified and measured for impairment are segregated from risk-rated loans within 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 ALLL is an accounting estimate and as such there is uncertainty associated with the estimate due to the level of subjectivity and judgment inherent in performing the calculation. Management’s evaluation of the ALLL also includes considerations of existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, bank regulatory examination results and findings of the Company's outsourced loan review consultants. The total of specific reserves required for impaired classified loans and the calculated reserves comprise the allowance for loan losses. The look-back period for calculating historical losses is 3 years. Management feels this is the appropriate period given where the Company is in the current credit cycle and to accurately reflect the risk in the loan portfolio. The most current 12 month period continues to be heavily weighted as management considers it to be the most relevant considering current economic conditions.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
Activity in the allowance for loan losses is as follows (in thousands):
Three Months Ended September 30, 2011 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Loans | |||||||||||||||||||
Balance, July 1, 2011 | $ | 9,876 | $ | 8,433 | $ | 10,957 | $ | 6,244 | $ | 226 | $ | 35,736 | ||||||||||||
Provisions for loan losses | 52 | 1,457 | 1,412 | 545 | (166 | ) | 3,300 | |||||||||||||||||
Loans charged off | (1,075 | ) | (768 | ) | (1,495 | ) | (673 | ) | (74 | ) | (4,085 | ) | ||||||||||||
Recoveries | 33 | 11 | 72 | 87 | 114 | 317 | ||||||||||||||||||
Net charge-offs | (1,042 | ) | (757 | ) | (1,423 | ) | (586 | ) | 40 | (3,768 | ) | |||||||||||||
Balance, September 30, 2011 | $ | 8,886 | $ | 9,133 | $ | 10,946 | $ | 6,203 | $ | 100 | $ | 35,268 | ||||||||||||
Three Months Ended September 30, 2010 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Loans | |||||||||||||||||||
Balance, July 1, 2010 | $ | 18,097 | $ | 4,882 | $ | 7,900 | $ | 9,179 | $ | 1,467 | $ | 41,525 | ||||||||||||
Provisions for loan losses | (3,399 | ) | 3,963 | 4,050 | 254 | (1,368 | ) | 3,500 | ||||||||||||||||
Loans charged off | (1,783 | ) | (1,430 | ) | (988 | ) | (1,217 | ) | (105 | ) | (5,523 | ) | ||||||||||||
Recoveries | 94 | 7 | 51 | 189 | 130 | 471 | ||||||||||||||||||
Net charge-offs | (1,689 | ) | (1,423 | ) | (937 | ) | (1,028 | ) | 25 | (5,052 | ) | |||||||||||||
Balance, September 30, 2010 | $ | 13,009 | $ | 7,422 | $ | 11,013 | $ | 8,405 | $ | 124 | $ | 39,973 | ||||||||||||
Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Loans | |||||||||||||||||||
Balance, January 1, 2011 | $ | 11,037 | $ | 8,211 | $ | 10,864 | $ | 7,388 | $ | 149 | $ | 37,649 | ||||||||||||
Provisions for loan losses | 2,254 | 3,249 | 3,637 | 1,950 | (140 | ) | 10,950 | |||||||||||||||||
Loans charged off | (4,933 | ) | (2,408 | ) | (3,730 | ) | (3,503 | ) | (309 | ) | (14,883 | ) | ||||||||||||
Recoveries | 528 | 81 | 175 | 368 | 400 | 1,552 | ||||||||||||||||||
Net charge-offs | (4,405 | ) | (2,327 | ) | (3,555 | ) | (3,135 | ) | 91 | (13,331 | ) | |||||||||||||
Balance, September 30, 2011 | $ | 8,886 | $ | 9,133 | $ | 10,946 | $ | 6,203 | $ | 100 | $ | 35,268 | ||||||||||||
Nine Months Ended September 30, 2010 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Loans | |||||||||||||||||||
Balance, January 1, 2010 | $ | 17,867 | $ | 4,210 | $ | 9,244 | $ | 7,655 | $ | 1,196 | $ | 40,172 | ||||||||||||
Provisions for loan losses | 2,301 | 6,141 | 7,509 | 2,787 | (1,187 | ) | 17,551 | |||||||||||||||||
Loans charged off | (7,371 | ) | (2,945 | ) | (6,028 | ) | (2,478 | ) | (564 | ) | (19,386 | ) | ||||||||||||
Recoveries | 212 | 16 | 288 | 441 | 679 | 1,636 | ||||||||||||||||||
Net charge-offs | (7,159 | ) | (2,929 | ) | (5,740 | ) | (2,037 | ) | 115 | (17,750 | ) | |||||||||||||
Balance, September 30, 2010 | $ | 13,009 | $ | 7,422 | $ | 11,013 | $ | 8,405 | $ | 124 | $ | 39,973 |
9
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method for the periods ended September 30, 2011 and December 31, 2010 were as follows (in thousands):
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial Loans (Except those Secured by Real Estate) | Consumer and Other | Total Loans | |||||||||||||||||||
September 30, 2011 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,843 | $ | 2,056 | $ | 846 | $ | 166 | $ | - | $ | 4,911 | ||||||||||||
Collectively evaluated for impairment | 7,043 | 7,077 | 10,100 | 6,037 | 100 | 30,357 | ||||||||||||||||||
Total ending allowance | $ | 8,886 | $ | 9,133 | $ | 10,946 | $ | 6,203 | $ | 100 | $ | 35,268 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 16,252 | $ | 16,486 | $ | 6,209 | $ | 2,574 | $ | - | $ | 41,521 | ||||||||||||
Collectively evaluated for impairment | 195,758 | 836,400 | 753,216 | 175,104 | 25,082 | 1,985,560 | ||||||||||||||||||
Total loans | $ | 212,010 | $ | 852,886 | $ | 759,425 | $ | 177,678 | $ | 25,082 | $ | 2,027,081 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,607 | $ | 886 | $ | 364 | $ | 2,667 | $ | - | $ | 5,524 | ||||||||||||
Collectively evaluated for impairment | 9,430 | 7,325 | 10,500 | 4,721 | 149 | 32,125 | ||||||||||||||||||
Total ending allowance | $ | 11,037 | $ | 8,211 | $ | 10,864 | $ | 7,388 | $ | 149 | $ | 37,649 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 13,538 | $ | 10,209 | $ | 4,403 | $ | 5,703 | $ | - | $ | 33,853 | ||||||||||||
Collectively evaluated for impairment | 224,099 | 868,940 | 763,950 | 177,990 | 30,064 | 2,065,043 | ||||||||||||||||||
Total loans | $ | 237,637 | $ | 879,149 | $ | 768,353 | $ | 183,693 | $ | 30,064 | $ | 2,098,896 |
Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment.
Impaired loans totaled $60.5 million and $62.4 million at September 30, 2011 and December 31, 2010, respectively. Included in these balances were $40.7 million and $43.2 million, respectively, of loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonperforming. If, at the time of restructure, the loan is not considered non-accrual, it will be classified as performing. TDRs originally classified as nonperforming are able to be reclassified as performing if, subsequent to restructure, they experience six months of payment performance according to the restructured terms. Further, TDRs may be subsequently removed from impaired status in years subsequent to the restructuring if it meets the following criteria:
· | At the time of restructure, the loan was made at a market rate of interest |
· | The loan has shown at least 6 months of payment performance in accordance with the restructured terms. |
Quarterly, the Company reviews those loans designated as TDRs for compliance with the previously stated criteria. In the third quarter, the Company removed $12.9 million in consumer 1-4 family residential mortgage loans from impaired status, due to the loans meeting performance and other criteria.
As a result of adopting the amendments in Accounting Standards Update (“ASU”) 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for potential identification as TDRs. Certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology were reclassified as TDRs. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance for those receivables newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now classified as TDRs and impaired was $4.2 million, and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $313 thousand.
10
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information on performing and nonperforming restructures for the periods presented (in thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Performing restructurings: | ||||||||
Construction and land development | $ | 9,426 | $ | 5,163 | ||||
Commercial real estate | 5,444 | 6,680 | ||||||
Consumer real estate (mortgage modification program) | 17,423 | 24,674 | ||||||
Commercial and industrial loans (except those secured by real estate) | - | 3,181 | ||||||
Consumer and other | - | - | ||||||
Total performing restructurings | $ | 32,293 | $ | 39,698 | ||||
Nonperforming restructurings: | ||||||||
Construction and land development | $ | - | $ | 300 | ||||
Commercial real estate | 1,299 | - | ||||||
Consumer real estate (mortgage modification program) | 4,573 | 3,208 | ||||||
Commercial and industrial loans (except those secured by real estate) | 2,573 | - | ||||||
Consumer and other | - | - | ||||||
Total nonperforming restructurings | $ | 8,445 | $ | 3,508 | ||||
Total restructurings | $ | 40,738 | $ | 43,206 |
11
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about TDRs identified during the current period (in thousands, except number of contracts).
Modifications for the three months ended, | ||||||||||||
September 30, 2011 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
Troubled Debt Restructurings | ||||||||||||
Construction and land development | 6 | $ | 6,020 | $ | 6,020 | |||||||
Consumer real estate | 10 | 2,628 | 2,643 | |||||||||
Total Troubled Debt Restructurings | 16 | $ | 8,648 | $ | 8,663 |
Troubled Debt Restructurings that Subsequently Defaulted | ||||||||
Number of contracts | Recorded Investment | |||||||
Troubled Debt Restructurings | ||||||||
Consumer real estate | 5 | $ | 821 | |||||
Total Troubled Debt Restructurings | 5 | $ | 821 |
September 30, 2010 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
Troubled Debt Restructurings | ||||||||||||
Consumer real estate | 25 | $ | 3,077 | $ | 2,861 | |||||||
Total Troubled Debt Restructurings | 25 | $ | 3,077 | $ | 2,861 |
Troubled Debt Restructurings that Subsequently Defaulted | ||||||||
Number of contracts | Recorded Investment | |||||||
Troubled Debt Restructurings | ||||||||
Consumer real estate | 4 | $ | 607 | |||||
Total Troubled Debt Restructurings | 4 | $ | 607 |
Modifications for the nine months ended, | ||||||||||||
September 30, 2011 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
Troubled Debt Restructurings | ||||||||||||
Construction and land development | 10 | $ | 6,728 | $ | 6,736 | |||||||
Commercial real estate | 3 | 1,770 | 1,770 | |||||||||
Consumer real estate | 44 | 7,259 | 7,353 | |||||||||
Commercial and industrial loans (except those secured by real estate) | 1 | - | - | |||||||||
Total Troubled Debt Restructurings | 58 | $ | 15,757 | $ | 15,859 |
Troubled Debt Restructurings that Subsequently Defaulted | ||||||||
Number of contracts | Recorded Investment | |||||||
Troubled Debt Restructurings | ||||||||
Consumer real estate | 5 | $ | 821 | |||||
Total Troubled Debt Restructurings | 5 | $ | 821 |
September 30, 2010 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
Troubled Debt Restructurings | ||||||||||||
Construction and land development | 6 | $ | 3,021 | $ | 3,019 | |||||||
Commercial real estate | 10 | 6,797 | 6,797 | |||||||||
Consumer real estate | 76 | 8,736 | 8,468 | |||||||||
Commercial and industrial loans (except those secured by real estate) | 2 | 3,400 | 3,400 | |||||||||
Total Troubled Debt Restructurings | 94 | $ | 21,954 | $ | 21,684 |
Troubled Debt Restructurings that Subsequently Defaulted | ||||||||
Number of contracts | Recorded Investment | |||||||
Troubled Debt Restructurings | ||||||||
Consumer real estate | 4 | $ | 607 | |||||
Total Troubled Debt Restructurings | 4 | $ | 607 |
The Company monitors the performance of modified loans on an ongoing basis. Loans retain their accrual status at the time of their modification. As a result, if a loan is on non-accrual at the time it is modified, it stays as non-accrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A modified loan will be reclassified to non-accrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement for a minimum of six months prior to being reclassified to accrual status. TDRs are considered impaired. However, TDRs that specified a market rate of interest at the date of restructure and have performed in accordance with the revised terms for a minimum of six months may be removed from the impaired loan disclosures in years subsequent to the modification.
The allowance for loan losses associated with TDRs for every loan class is determined using a discounted cash flow analysis in which the original rate prior to modification is used to discount the modified cash flow stream to its net present value. This value is then compared to the recorded amount to determine the appropriate level of reserve to be included in the allowance for loan losses. In instances where this analysis is deemed ineffective due to rate increases made during modification, a collateral dependent approach is used as a practical alternative. The discounted cash flow analysis is used to calculate the reserve balance for TDRs both evaluated individually and those included within homogenous pools.
12
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interest is not typically accrued on impaired loans, but is accrued for performing TDRs. The following table shows interest income recognized on impaired loans (in thousands):
Three Months Ended September 30, 2011 | ||||||||
Interest income recognized | Cash-basis interest income | |||||||
2011 | ||||||||
Construction and land development | $ | 41 | $ | 36 | ||||
Commercial real estate | 71 | 49 | ||||||
Consumer real estate | 25 | 21 | ||||||
Commercial and industrial loans (except those secured by real estate) | 10 | 9 | ||||||
Total | $ | 147 | $ | 115 | ||||
2010 | ||||||||
Construction and land development | $ | 16 | $ | 10 | ||||
Commercial real estate | 75 | 85 | ||||||
Consumer real estate | 4 | 5 | ||||||
Commercial and industrial loans (except those secured by real estate) | 75 | 68 | ||||||
Total | $ | 170 | $ | 168 | ||||
Nine Months Ended September 30, 2011 | ||||||||
Interest income recognized | Cash-basis interest income | |||||||
2011 | ||||||||
Construction and land development | $ | 135 | $ | 140 | ||||
Commercial real estate | 231 | 221 | ||||||
Consumer real estate | 78 | 73 | ||||||
Commercial and industrial loans (except those secured by real estate) | 47 | 54 | ||||||
Total | $ | 491 | $ | 488 | ||||
2010 | ||||||||
Construction and land development | $ | 16 | $ | 10 | ||||
Commercial real estate | 124 | 137 | ||||||
Consumer real estate | 6 | 8 | ||||||
Commercial and industrial loans (except those secured by real estate) | 123 | 124 | ||||||
Total | $ | 269 | $ | 279 |
Cash basis interest income illustrates income that would have been recognized solely based on cash payments received. Interest income recognized differs from the cash basis due to the movement of loans between performing and nonperforming status during the periods presented. Other than these TDRs, no interest income has been recognized on impaired loans subsequent to their classification as impaired.
In order to measure the amount of impairment, the Company evaluates loans either individually or in collective pools. Collective pools consist of smaller balance, homogenous loans that are not subject to a restructuring agreement. Of the $60.5 million of impaired loans at September 30, 2011, $19.0 million, consisting solely of TDRs, was collectively evaluated for impairment and $41.5 million was individually evaluated for impairment. The detail of loans individually evaluated for impairment, which includes $21.7 million of TDRs, is presented below (in thousands):
Recorded investment | Unpaid contractual principal balance | Allocated allowance | Average recorded investment | |||||||||||||
September 30, 2011 | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||
Construction and land development | $ | 3,430 | $ | 3,430 | $ | - | $ | 3,628 | ||||||||
Commercial real estate | 2,012 | 2,305 | - | 3,898 | ||||||||||||
Consumer real estate | 948 | 990 | - | 2,080 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 1 | 1 | - | 646 | ||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||
Construction and land development | 12,822 | 12,850 | 1,843 | 10,077 | ||||||||||||
Commercial real estate | 14,474 | 14,484 | 2,056 | 7,642 | ||||||||||||
Consumer real estate | 5,261 | 6,320 | 846 | 2,140 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 2,573 | 2,573 | 166 | 3,297 | ||||||||||||
Total | $ | 41,521 | $ | 42,953 | $ | 4,911 | $ | 33,408 |
Recorded investment | Unpaid contractual principal balance | Allocated allowance | Average recorded investment | |||||||||||||
December 31, 2010 | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||
Construction and land development | $ | 3,414 | $ | 3,420 | $ | - | $ | 7,091 | ||||||||
Commercial real estate | 7,160 | 7,185 | - | 6,341 | ||||||||||||
Consumer real estate | 3,200 | 3,855 | - | 1,459 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | - | - | - | 880 | ||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||
Construction and land development | 10,124 | 11,574 | 1,607 | 13,126 | ||||||||||||
Commercial real estate | 3,049 | 4,041 | 886 | 3,095 | ||||||||||||
Consumer real estate | 1,203 | 1,216 | 364 | 2,814 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 5,703 | 7,008 | 2,667 | 7,158 | ||||||||||||
Total | $ | 33,853 | $ | 38,299 | $ | 5,524 | $ | 41,964 |
13
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators
The Company categorizes all business and commercial purpose loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by setting the risk grade at the inception of a loan through the approval process. The definitions used were last updated in early 2010. The risk grades are formally affirmed quarterly by loan officers. In addition, a certain percentage of loan dollars is reviewed each year through the Company’s loan review process. The risk rating process is inherently subjective and based upon management’s evaluation of the specific facts and circumstances for individual borrowers. As such, the assigned risk ratings are subject to change based upon changes in borrower status and changes in the external environment affecting the borrower. The Company uses the following definitions for risk ratings:
· | Risk Grade 1 – Prime Risk. Loss potential is rated as none or extremely low. Loans fully secured by deposit accounts at the Company’s subsidiary bank will also be rated as Risk Grade 1. |
· | Risk Grade 2 – Excellent Risk. Loss potential is demonstrably low. Loans have liquid financial statements or are secured by marketable securities or other liquid collateral. |
· | Risk Grade 3 – Good Risk. Loss potential is low. Asset quality and liquidity are considered good. Overall leverage and liquidity measures are better than the industry in which the borrower operates and they are stable. |
· | Risk Grade 4 – Average Risk. Loss potential is low, but evidence of risk exists. Margins and cash flow generally equal or exceed industry norm and policy guidelines, but some inconsistency may be evident. Asset quality is average with liquidity comparable to industry norms. Leverage may be slightly higher than the industry, but is stable. |
· | Risk Grade 5 – Marginal Risk. Loss potential is variable, but there is potential for deterioration. Asset quality is marginally acceptable. Leverage may fluctuate and is above normal for the industry. Cash flow is marginally adequate. |
· | Risk Grade 6 – Special Mention. Loss potential moderate if corrective action not taken. Evidence of declining revenues or margins, inadequate cash flow, and possibly high leverage or tightening liquidity. |
· | Risk Grade 7 – Substandard. Distinct possibility of loss to the bank. Repayment ability of borrower is weak and the loan may have exhibited excessive overdue status, extension, or renewals. |
· | Risk Grade 8 – Doubtful. Loss potential is extremely high. Ability of the borrower to service the debt is weak, constant overdue status, loan has been placed on non-accrual status and no definitive repayment schedule exists. |
· | Risk Grade 9 – Loss. Loans are considered fully uncollectible and charged off. |
The Company utilizes its nine point grading system in order to evaluate the level of inherent risk in the loan portfolio as part of its allowance for loan losses methodology. Loans graded 5 or worse are assigned an additional reserve factor stated in basis points in order to account for the added inherent risk. Additional basis points are applied as a reserve factor to the loan balances as the corresponding loan grades indicate additional risk and increase from grade 5 to grade 8.
Loans not rated are either commercial loans less than $25 thousand, consumer purpose loans or are included in groups of homogenous loans. As of September 30, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):
Risk Grade | ||||||||||||||||||||||||||||||||||||
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | ||||||||||||||||||||||||||||
September 30, 2011 | ||||||||||||||||||||||||||||||||||||
Construction and land development | $ | - | $ | - | $ | 1,534 | $ | 67,136 | $ | 38,698 | $ | 9,320 | $ | 44,787 | $ | 3,213 | $ | 190 | ||||||||||||||||||
Commercial real estate | - | 5 | 86,904 | 408,041 | 230,641 | 39,096 | 83,974 | 3,113 | 1,112 | |||||||||||||||||||||||||||
Consumer real estate | - | 7 | 9,185 | 98,887 | 70,184 | 9,929 | 31,665 | 1,494 | - | |||||||||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 1,005 | 4,307 | 35,642 | 89,214 | 32,453 | 3,950 | 11,022 | 85 | - | |||||||||||||||||||||||||||
Consumer and other | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total | $ | 1,005 | $ | 4,319 | $ | 133,265 | $ | 663,278 | $ | 371,976 | $ | 62,295 | $ | 171,448 | $ | 7,905 | $ | 1,302 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||||||
Construction and land development | $ | - | $ | 275 | $ | 2,481 | $ | 79,817 | $ | 31,468 | $ | 12,588 | $ | 59,301 | $ | 4,464 | $ | - | ||||||||||||||||||
Commercial real estate | - | 1,957 | 102,520 | 458,261 | 178,279 | 55,178 | 82,232 | 624 | 98 | |||||||||||||||||||||||||||
Consumer real estate | - | 991 | 12,533 | 121,066 | 53,867 | 11,627 | 28,238 | 1,301 | - | |||||||||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 1,190 | 2,774 | 30,319 | 107,286 | 22,900 | 8,342 | 9,662 | 3,094 | - | |||||||||||||||||||||||||||
Consumer and other | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total | $ | 1,190 | $ | 5,997 | $ | 147,853 | $ | 766,430 | $ | 286,514 | $ | 87,735 | $ | 179,433 | $ | 9,483 | $ | 98 |
Consumer real estate | Consumer and other | |||||||||||||||
September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||
Performing | $ | 576,604 | $ | 577,230 | $ | 25,028 | $ | 28,164 | ||||||||
Nonperforming | 8,602 | 8,743 | 54 | 26 | ||||||||||||
Total | $ | 585,206 | $ | 585,973 | $ | 25,082 | $ | 28,190 |
14
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. | Earnings Per Share |
The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock for the three month periods ended September 30, 2011 and 2010. Potential dilutive stock had no effect on income available to common shareholders for the three month periods (in thousands, except share and per share amounts).
September 30, | ||||||||
2011 | 2010 | |||||||
Earnings per common share | ||||||||
Net income | $ | 4,219 | $ | 3,528 | ||||
Preferred stock dividends and accretion | (296 | ) | (470 | ) | ||||
Net income available to common shareholders | 3,923 | 3,058 | ||||||
Weighted average common shares issued and outstanding | 22,807,413 | 22,745,527 | ||||||
Earnings per common share | $ | 0.17 | $ | 0.13 | ||||
Diluted earnings per common share | ||||||||
Weighted average common shares issued and outstanding | 22,807,413 | 22,745,527 | ||||||
Restricted stock | 61,858 | 43,299 | ||||||
Incentive stock options | 227 | 845 | ||||||
Stock options | - | 5,461 | ||||||
Total diluted weighted average common shares issued and outstanding | 22,869,498 | 22,795,132 | ||||||
Diluted earnings per common share | $ | 0.17 | $ | 0.13 |
September 30, | ||||||||
2011 | 2010 | |||||||
Earnings per common share | ||||||||
Net income | $ | 11,116 | $ | 6,936 | ||||
Preferred stock dividends and accretion | (1,482 | ) | (1,393 | ) | ||||
Net income available to common shareholders | 9,634 | 5,543 | ||||||
Weighted average common shares issued and outstanding | 22,787,279 | 22,712,383 | ||||||
Earnings per common share | $ | 0.42 | $ | 0.24 | ||||
Diluted earnings per common share | ||||||||
Weighted average common shares issued and outstanding | 22,787,279 | 22,712,383 | ||||||
Restricted stock | 66,281 | 44,113 | ||||||
Incentive stock options | 946 | 1,895 | ||||||
Stock options | 1,900 | 9,471 | ||||||
Total diluted weighted average common shares issued and outstanding | 22,856,406 | 22,767,862 | ||||||
Diluted earnings per common share | $ | 0.42 | $ | 0.24 |
In 2011 and 2010, stock options and restricted stock representing 465,171 and 483,379 shares, respectively, were not included in the three month calculation of earnings per share, as their effect would have been anti-dilutive. For the nine month calculation of earnings per share 467,591 and 498,140 shares in 2011 and 2010, respectively, were excluded.
7. | Goodwill |
During the second quarter of 2011, the Company changed the date of its annual impairment testing for goodwill from September 30th to October 1st. The change in the date of the annual goodwill impairment test represents a change in the method of applying an accounting principle. Management believes this change in accounting principle is preferable, as the later date provides the Company additional time for the completion of its annual impairment testing in conjunction with its budget process while also performing the testing in the final quarter of the year. For fiscal year 2011, management is in the process of testing goodwill for impairment on both September 30, 2011 and October 1, 2011 as part of the process of changing the annual impairment testing date to October 1st.
Based on preliminary results of step one of the impairment test, the carrying amount of goodwill exceeded its estimated fair value. While step two has not been completed, the Company has conducted valuation testing on the more significant components of the balance sheet and estimate that the completion of step two will not result in an impairment charge to goodwill. Therefore, no impairment has been recorded as of the annual assessment date. The process used to test for impairment is inherently complex and the Company’s estimate cannot be determined with certainty until the step two of the impairment test is complete. 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.
8. | Stock-Based Compensation |
Stock-based compensation expense included within compensation and employee benefits expense totaled $206 thousand and $557 thousand during the three and nine months ended September 30, 2011, respectively, and $205 thousand and $482 thousand during the three and the nine months ended September 30, 2010, respectively.
A summary of the stock option plan at September 30, 2011 and 2010 and changes during the periods ended on those dates are as follows:
2011 | 2010 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number | Average | Number | Average | |||||||||||||
of | Exercise | of | Exercise | |||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at January 1, | 498,174 | $ | 19.98 | 575,046 | $ | 18.93 | ||||||||||
Forfeited | (10,805 | ) | 18.64 | (3,216 | ) | 13.27 | ||||||||||
Expired | (162,853 | ) | 19.21 | (7,834 | ) | 22.40 | ||||||||||
Exercised | (31,920 | ) | 9.71 | (60,322 | ) | 9.78 | ||||||||||
Outstanding at September 30, | 292,596 | $ | 21.59 | 503,674 | $ | 20.01 | ||||||||||
Exercisable at September 30, 2011 | 248,478 | 433,706 |
There was no aggregate intrinsic value associated with options outstanding and exercisable as of September 30, 2011. 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 September 30, 2011 and the exercise price, multiplied by the number of options outstanding). The weighted average remaining contractual life is 2.6 years for exercisable options at September 30, 2011.
The following table summarizes nonvested restricted shares outstanding as of September 30, 2011 and the related activity during the period:
Number of Shares | Weighted Average Grant-Date Fair Value | Total Intrinsic Value | ||||||||||
(in thousands) | ||||||||||||
Nonvested at January 1, 2011 | 152,090 | $ | 12.21 | $ | 2,211 | |||||||
Granted | 77,041 | 13.48 | ||||||||||
Vested and exercised | (35,955 | ) | 14.17 | $ | 466 | |||||||
Forfeited | (11,912 | ) | 12.44 | |||||||||
Nonvested at September 30, 2011 | 181,264 | $ | 12.35 | $ | 1,804 |
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of September 30, 2011 that will be recognized in future periods is as follows (in thousands):
Stock Options | Nonvested Restricted Stock | Total | ||||||||||
For the remaining three months of 2011 | $ | 13 | $ | 190 | $ | 203 | ||||||
For year ending December 31, 2012 | 52 | 641 | 693 | |||||||||
For year ending December 31, 2013 | 19 | 518 | 537 | |||||||||
For year ending December 31, 2014 | 1 | 248 | 249 | |||||||||
For year ending December 31, 2015 | - | 62 | 62 | |||||||||
For year ending December 31, 2016 | - | 7 | 7 | |||||||||
Total | $ | 85 | $ | 1,666 | $ | 1,751 |
9. | 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 the 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.
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. There were no transfers between levels in 2011 or 2010.
Assets and Liabilities Measured on a Recurring Basis:
Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available (Level 1). 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 relying on the securities’ relationship to other benchmark quoted securities (Level 2). Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities generally 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-backed securities in less liquid markets.
Deferred compensation plans: Assets and 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.
Cash flow hedges: Cash flow hedges held by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments held or issued for risk management purposes as Level 2.
15
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 are summarized below (in thousands).
Fair Value Measurements at | ||||||||||||||||
September 30, 2011 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U. S. Government agencies | $ | 130,600 | $ | - | $ | 130,600 | $ | - | ||||||||
State and municipals | 169,052 | - | 169,052 | - | ||||||||||||
Corporate bonds | 5,737 | - | 5,737 | - | ||||||||||||
Collateralized mortgage obligations | 7,992 | - | 7,992 | - | ||||||||||||
Mortgage backed securities | 158,408 | - | 158,408 | - | ||||||||||||
Other investment securities | 8,998 | 8,998 | - | - | ||||||||||||
Other assets 1 | 2,522 | 2,522 | - | - | ||||||||||||
Total assets at fair value | $ | 483,309 | $ | 11,520 | $ | 471,789 | $ | - | ||||||||
Other liabilities 1 | $ | 2,522 | $ | 2,522 | $ | - | $ | - | ||||||||
Cash flow hedge | 439 | - | 439 | - | ||||||||||||
Total liabilities at fair value | $ | 2,961 | $ | 2,522 | $ | 439 | $ | - |
1 Includes assets and liabilities associated with deferred compensation plans.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are summarized below (in thousands).
Fair Value Measurements at | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U. S. Government agencies | $ | 103,253 | $ | - | $ | 103,253 | $ | - | ||||||||
State and municipals | 136,823 | - | 136,823 | - | ||||||||||||
Corporate bonds | 6,904 | - | 6,904 | - | ||||||||||||
Collateralized mortgage obligations | 9,497 | - | 9,497 | - | ||||||||||||
Mortgage backed securities | 123,139 | - | 123,139 | - | ||||||||||||
Other investment securities | 1,615 | 1,615 | - | - | ||||||||||||
Cash flow hedge | 98 | - | 98 | - | ||||||||||||
Other assets 1 | 2,720 | 2,720 | - | - | ||||||||||||
Total assets at fair value | $ | 384,049 | $ | 4,335 | $ | 379,714 | $ | - | ||||||||
Other liabilities 1 | 2,720 | 2,720 | - | - | ||||||||||||
Total liabilities at fair value | $ | 2,720 | $ | 2,720 | $ | - | $ | - |
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 nine months ended September 30, 2011 was not significant and there were no transfers between Levels 1, 2 or 3 during the nine months ended September 30, 2011.
Assets and Liabilities Measured on a Nonrecurring Basis:
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 the 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 three methods: the fair value of the collateral (less estimated selling costs), the loan’s observable market value or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011, 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 has deteriorated below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices, which would be a Level 1 value. 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, which would be a Level 2 value. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.
Foreclosed assets: Foreclosed assets are initially recorded at fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or 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.
16
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets measured at fair value on a nonrecurring basis as of September 30, 2011 and December 31, 2010 are included in the table below (in thousands).
Fair Value Measurements at | ||||||||||||||||
September 30, 2011 | ||||||||||||||||
Using | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Loans - impaired loans | $ | 60,535 | $ | - | $ | 25,439 | $ | 35,096 | ||||||||
Loans held for sale - mortgage | 34,032 | - | 34,032 | - | ||||||||||||
Loans held for sale - other assets | 287 | - | - | 287 | ||||||||||||
Foreclosed assets | 9,009 | - | - | 9,009 | ||||||||||||
Total assets at fair value | $ | 103,863 | $ | - | $ | 59,471 | $ | 44,392 | ||||||||
Fair Value Measurements at | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Using | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Loans - impaired loans | $ | 62,397 | $ | - | $ | 15,121 | $ | 47,276 | ||||||||
Loans held for sale - mortgage | 51,722 | - | 51,722 | - | ||||||||||||
Loans held for sale - other assets | 514 | - | - | 514 | ||||||||||||
Foreclosed assets | 10,894 | - | - | 10,894 | ||||||||||||
Total assets at fair value | $ | 125,527 | $ | - | $ | 66,843 | $ | 58,684 |
The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The carrying amount approximates fair value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:
Loans: For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.
Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Short-Term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Federal Home Loan Bank Advances: The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Subordinated Debt: The Company’s subordinated debt are variable rate instruments that re-price on a quarterly basis; therefore, carrying value is adjusted for the three month re-pricing lag in order to approximate fair value.
Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2011 and 2010, the fair value of loan commitments and stand-by letters of credit was immaterial.
The estimated fair values of the Company's financial instruments at September 30, 2011 and December 31, 2010, are as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 157,587 | $ | 157,587 | $ | 139,886 | $ | 139,886 | ||||||||
Investment securities | 480,787 | 480,787 | 381,231 | 381,231 | ||||||||||||
Mortgage loans held for sale | 34,032 | 34,032 | 51,722 | 51,722 | ||||||||||||
Loans, net | 1,992,270 | 1,833,269 | 2,061,835 | 1,794,267 | ||||||||||||
Accrued interest receivable | 9,135 | 9,135 | 9,317 | 9,317 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | 2,417,988 | $ | 2,433,411 | $ | 2,386,102 | $ | 2,394,156 | ||||||||
Federal funds purchased and securities sold under agreements to repurchase | 1,042 | 1,042 | 987 | 987 | ||||||||||||
Federal Home Loan Bank advances | 60,000 | 64,457 | 85,000 | 86,363 | ||||||||||||
Subordinated debt | 32,991 | 32,931 | 32,991 | 32,945 | ||||||||||||
Accrued interest payable | 2,087 | 2,087 | 2,278 | 2,278 |
17
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. | 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 September 30, 2011 and December 31, 2010, consisted of the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is included in Other assets.
Management evaluates the restricted stock for impairment in accordance with authoritative accounting guidance under ASC Topic 320, “Investments – Debt and Equity Securities.” 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 bank 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 neither provides dividend guidance prior to the end of each quarter, nor conducts repurchases of excess activity-based stock on a daily basis, instead making such determinations quarterly. The FHLB of Atlanta announced on August 3, 2011, that it approved a dividend at the rate of 0.76% for the second quarter of 2011. The FHLB repurchased $866 thousand of capital stock in the third quarter, leaving a remaining balance of $2.5 million in excess FHLB capital stock as of September 30, 2011.
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 September 30, 2011.
11. | Segment Information |
The Company operates in three business segments, organized around the different products and services offered:
· | Commercial Banking |
· | Mortgage Banking |
· | Wealth Management |
Commercial Banking includes commercial, business and retail banking. This segment provides customers with products such as commercial loans, small business loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. Mortgage Banking engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best-efforts basis. Wealth Management provides investment and financial advisory services to businesses and individuals, including financial planning, retirement planning, estate planning, trust and custody services, investment management, escrows, and retirement plans.
18
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three and nine months ended September 30, 2011 and 2010 is as follows:
At and for the Three Months Ended September 30, 2011 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 24,323 | $ | 183 | $ | - | $ | (263 | ) | $ | - | $ | 24,243 | |||||||||||
Provision for loan losses | 3,300 | - | - | - | - | 3,300 | ||||||||||||||||||
Noninterest income | 5,800 | 2,035 | 1,195 | 27 | (1,193 | ) | 7,864 | |||||||||||||||||
Noninterest expense | 21,251 | 1,909 | 1,040 | 339 | (1,193 | ) | 23,346 | |||||||||||||||||
Provision for income taxes | 1,309 | 93 | 47 | (207 | ) | - | 1,242 | |||||||||||||||||
Net income (loss) | $ | 4,263 | $ | 216 | $ | 108 | $ | (368 | ) | $ | - | $ | 4,219 | |||||||||||
Total Assets | $ | 2,915,016 | $ | 35,167 | $ | 451 | $ | 469,579 | $ | (462,372 | ) | $ | 2,957,841 | |||||||||||
Average Assets | $ | 2,922,790 | $ | 22,524 | $ | 274 | $ | 466,416 | $ | (458,691 | ) | $ | 2,953,313 | |||||||||||
At and for the Three Months Ended September 30, 2010 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 23,437 | $ | 383 | $ | - | $ | (286 | ) | $ | - | $ | 23,534 | |||||||||||
Provision for loan losses | 3,500 | - | - | - | - | 3,500 | ||||||||||||||||||
Noninterest income | 6,129 | 1,857 | 1,136 | 213 | (1,088 | ) | 8,247 | |||||||||||||||||
Noninterest expense | 21,197 | 2,032 | 997 | 527 | (1,088 | ) | 23,665 | |||||||||||||||||
Provision for income taxes | 1,208 | 62 | 42 | (224 | ) | - | 1,088 | |||||||||||||||||
Net income (loss) | $ | 3,661 | $ | 146 | $ | 97 | $ | (376 | ) | $ | - | $ | 3,528 | |||||||||||
Total Assets | $ | 2,855,275 | $ | 47,977 | $ | 654 | $ | 466,998 | $ | (451,334 | ) | $ | 2,919,570 | |||||||||||
Average Assets | $ | 2,918,727 | $ | 41,029 | $ | 330 | $ | 465,035 | $ | (447,516 | ) | $ | 2,977,605 | |||||||||||
For the Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 72,356 | $ | 583 | $ | - | $ | (790 | ) | $ | - | $ | 72,149 | |||||||||||
Provision for loan losses | 10,950 | - | - | - | - | 10,950 | ||||||||||||||||||
Noninterest income | 17,192 | 5,474 | 3,887 | 79 | (3,576 | ) | 23,056 | |||||||||||||||||
Noninterest expense | 64,194 | 5,451 | 3,295 | 739 | (3,576 | ) | 70,103 | |||||||||||||||||
Provision for income taxes | 3,202 | 182 | 178 | (526 | ) | - | 3,036 | |||||||||||||||||
Net income (loss) | $ | 11,202 | $ | 424 | $ | 414 | $ | (924 | ) | $ | - | $ | 11,116 | |||||||||||
Average Assets | $ | 2,897,919 | $ | 20,653 | $ | 282 | $ | 464,177 | $ | (455,573 | ) | $ | 2,927,458 | |||||||||||
For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 69,010 | $ | 1,049 | $ | - | $ | (809 | ) | $ | - | $ | 69,250 | |||||||||||
Provision for loan losses | 17,550 | - | - | - | - | 17,550 | ||||||||||||||||||
Noninterest income | 19,145 | 5,269 | 3,599 | 638 | (3,209 | ) | 25,442 | |||||||||||||||||
Noninterest expense | 63,245 | 5,469 | 1,948 | 1,550 | (3,209 | ) | 69,003 | |||||||||||||||||
Provision for income taxes | 1,457 | 255 | 155 | (664 | ) | - | 1,203 | |||||||||||||||||
Net income (loss) | $ | 5,903 | $ | 594 | $ | 1,496 | $ | (1,057 | ) | $ | - | $ | 6,936 | |||||||||||
Average Assets | $ | 2,933,782 | $ | 35,528 | $ | 340 | $ | 461,711 | $ | (444,260 | ) | $ | 2,987,101 |
12. | Subsequent Events |
During the fourth quarter of 2011, the Company extended its interest rate swap contract for an additional three years (see Note 4 for discussion of the contract). The Company anticipates that the contract will continue to qualify as a cash flow hedge, effectively modifying exposure to interest rate risk. The new rate will take effect in September 2013 following the maturity of the current swap and will mature in September 2016. The notional amount remains unchanged at $32.0 million.
The Company has entered into an asset sale agreement with First Bank of Tennessee to sell its wholesale mortgage banking business located in Greer, South Carolina. This business is a subset of the Company’s Mortgage Banking segment which also includes the retail mortgage banking business. The agreement calls for the purchase of net assets, goodwill and going concern value. For the nine months ended September 30, 2011, the wholesale division had gross revenues of $2.3 million and direct operating expenses of $1.9 million. The transaction is expected to close by year end.
19
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13. | New Authoritative Accounting Guidance |
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update outlines the parameters of what constitutes a troubled debt restructuring, as well as clarifies the guidance on those parameters. The clarifying guidance is meant to eliminate current diversity in practice of identifying restructurings of receivables. This guidance becomes effective for the Company in the first interim period beginning after June 15, 2011. The Company applied the provisions retrospectively in its 2011 third quarter results back to activity beginning January 1, 2011. For those receivables that are newly considered impaired based on the newly adopted guidance, the amendments were applied prospectively. In addition, the Company disclosed those items deferred by ASU 2011-01, discussed above, in Note 5. The Company did not experience a material effect on its consolidated financial position or consolidated results of operations based on the new measurement parameters.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This Update will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs through changes to wording used to describe and disclose information about fair value measurements, clarification about the application of existing requirements, and changes to particular principles for measuring fair value or for disclosing information about those measurements. This guidance becomes effective for the Company during the first interim period beginning after December 15, 2011. The Company does not expect a material effect on its consolidated financial position or consolidated results of operations based on the clarification about application or changes to principles from the new standard.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. This Update requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Presentation of comprehensive income in the statement of changes in stockholders’ equity will no longer be acceptable. The update does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, the option for an entity to present components of other comprehensive income net or before related tax effects, or how earnings per share is calculated or presented. This guidance becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company currently presents other comprehensive income in its Consolidated Statements of Changes in Stockholders’ Equity and Other Comprehensive Income and plans to adopt the new disclosure requirements in its first quarter 2012 10-Q.
In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment. This Update allows companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The “more likely than not” threshold is defined as having a likelihood of more than 50 percent. A company is not required to calculate the fair value of a reporting unit unless it determines that it is more likely than not that its fair value is less than its carrying amount. The objective of the update is to simplify the goodwill impairment testing process in terms of both cost and complexity. The guidance becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company is in the process of testing goodwill under the two-step method at both September 30th and October 1st, as discussed in Footnote 7. The Company will adopt the qualitative test for the fiscal year ending December 31, 2012 and does not anticipate any effect on its consolidated financial position or consolidated results of operations as a result of adoption.
20
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.
Results of Operations
The Company’s third quarter 2011 earnings were $4.2 million and net income available to common shareholders was $3.9 million, or $0.17 net income per diluted common share, after deducting the dividends and discount accretion on preferred stock from net income. This represents a 28.3% increase over net income available to common shareholders of $3.1 million, or $0.13 net income per diluted common share during the same quarter in the prior year, and an 18.7% increase over net income available to common shareholders of $3.3 million or $0.14 net income per diluted common share recognized for the second quarter of 2011.
The Company’s net income for the nine month period ended September 30, 2011 was $11.1 million and net income available to common shareholders was $9.6 million, or $0.42 net income per diluted common share. Those results compare to net income available to common shareholders of $5.5 million, or $0.24 net income per diluted common share during the same period in the prior year. Improved net interest income driven by reduced funding costs contributed to the growth in recurring earnings.
Operating Segment Results
Revenue from the mortgage banking segment totaled $2.2 million for the third quarter of 2011, or up $498 thousand or 29.0% compared to $1.7 million for the second quarter of 2011 and down $22 thousand or less than 1% when compared to the same quarter in 2010. The sequential increase was associated with comparatively lower mortgage rates resulting in increased refinance activity. However, the level of refinancing is more muted when comparing to levels in 2010, which results in the decrease compared to the same period in the prior year. Revenue from the mortgage banking segment totaled $6.1 million for the first nine months of 2011, or down $261 thousand or 4.1% compared to $6.3 million for the first nine months of 2010. The revenue decrease compared to the same period in the prior year was associated with comparatively higher mortgage rates resulting in reduced refinance activity.
Retail banking fee income from the commercial banking segment remained stable at $4.0 million for the third quarter of 2011, an increase of $179 thousand or 4.7% compared to $3.8 million for the second quarter of 2011. This sequential quarter increase was primarily attributable to an increase of $160 thousand in non-sufficient fund revenue.
Retail banking fee income from the commercial banking segment amounted to $11.4 million for the first nine months of 2011, a decrease of $923 thousand or 7.5% compared to $12.3 million for the first nine months of 2010. This decrease was attributable to a net decrease of $1.4 million in consumer and commercial NSF income, offset by a $526 thousand increase in interchange income.
Wealth management revenues from trust and brokerage fees for the third quarter of 2011 were $1.2 million or down $158 thousand or 11.7% on a sequential quarter basis and up $59 thousand or 5.2% when compared to the $1.1 million realized during the third quarter of 2010. Lower fee realizations attributed to decreased market value of assets contributed to the revenue decrease. Fiduciary assets decreased $37.1 million sequentially to $413.6 million, compared to $450.6 million at June 30, 2011. Wealth management revenues from trust and brokerage fees for the first nine months of 2011 were $3.9 million or up $288 thousand or 8.0% when compared to $3.6 million realized during the first nine months of 2010.
21
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Income
Net interest income on a tax-equivalent basis amounted to $25.1 million for the third quarter of 2011, which compares favorably to $24.8 million for the second quarter of 2011, and $24.2 million for the same period in the prior year. The net interest margin was 3.77% for the third quarter of 2011, compared to 3.83% for the second quarter of 2011 and 3.63% for the third quarter of 2010. The average yield on earning assets for the current quarter decreased 11 basis points to 4.69% as compared to 4.80% for the second quarter of 2011, which was offset by a 6 basis point improvement in the cost of interest bearing liabilities, moving from 1.17% during the second quarter of 2011 to 1.11% during the third quarter of 2011. The re-pricing sensitivity of interest earning assets outpaced interest bearing liabilities during the third quarter as investment yields and loan yields contracted 32 basis points and 3 basis points, respectively, on a sequential basis. Investment yields have contracted due to the continued runoff of higher yielding securities and lower yields realized on the recent investment of excess liquidity in the current low rate environment. Loan yields have contracted slightly due to re-pricing within the current portfolio and lower yields realized on new production. The 6 basis point improvement to the cost of funds was driven by pricing strategies implemented which reduced the cost of money market and certificate of deposit accounts. Moderate margin pressure will continue, although pricing for core deposits was significantly reduced late in the quarter, which should minimize contraction. Pricing for quality loan opportunities continues to be fierce, and the current flattening in the yield curve will provide some additional pressure on the margin.
Net interest income on a tax-equivalent basis amounted to $74.5 million for the first nine months of 2011, which compares to $71.1 million for the same period in 2010. The net interest margin was 3.81% for the first nine months of 2011, compared to 3.58% for the same period in 2010. The average yield on earning assets for the first nine months of 2011 decreased 15 basis points to 4.78% as compared to 4.93% for the first nine months of 2010, which was more than offset by improvement in the cost of interest bearing liabilities, which contracted 44 basis points from 1.60% during the first nine months of 2010 to 1.16% during the first nine months of 2011. The re-pricing of interest bearing liabilities outpaced interest earning assets during the first nine months as a significant decrease in the cost of all deposit categories, an 8 basis point decrease in the cost of FHLB advances and a 7 point decrease in the cost of subordinated debt resulted in a net 44 point decrease overall. Loan yields contracted 9 basis points due to re-pricing within the current portfolio and lower yields realized on new production due to the protracted low rate environment.
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES (UNAUDITED) | ||||||||||||||||||||||||
THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Dollars in thousands | Balance | Inc/Exp | Rates | Balance | Inc/Exp | Rates | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans receivable, net (1) | $ | 2,064,789 | $ | 27,044 | 5.20 | % | $ | 2,144,270 | $ | 28,274 | 5.23 | % | ||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 292,359 | 1,829 | 2.45 | % | 279,963 | 2,144 | 3.00 | % | ||||||||||||||||
Tax exempt (1) | 153,964 | 2,260 | 5.74 | % | 117,933 | 1,768 | 5.87 | % | ||||||||||||||||
Total investments | 446,323 | 4,089 | 3.58 | % | 397,896 | 3,912 | 3.85 | % | ||||||||||||||||
Interest bearing deposits | 122,835 | 75 | 0.24 | % | 61,574 | 37 | 0.24 | % | ||||||||||||||||
Federal funds sold | 4,816 | 2 | 0.19 | % | 39,114 | 25 | 0.25 | % | ||||||||||||||||
573,974 | 4,166 | 2.84 | % | 498,584 | 3,974 | 3.12 | % | |||||||||||||||||
Total earning assets | 2,638,763 | $ | 31,210 | 4.69 | % | 2,642,854 | $ | 32,248 | 4.84 | % | ||||||||||||||
Total nonearning assets | 314,550 | 334,751 | ||||||||||||||||||||||
Total assets | $ | 2,953,313 | $ | 2,977,605 | ||||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Interest checking | $ | 573,871 | $ | 538 | 0.37 | % | $ | 558,996 | $ | 583 | 0.41 | % | ||||||||||||
Money market | 445,187 | 970 | 0.86 | % | 398,846 | 1,117 | 1.11 | % | ||||||||||||||||
Savings | 280,640 | 423 | 0.60 | % | 235,379 | 443 | 0.75 | % | ||||||||||||||||
Time deposits: | ||||||||||||||||||||||||
Less than $100,000 | 537,180 | 2,185 | 1.61 | % | 594,434 | 2,933 | 1.96 | % | ||||||||||||||||
$100,000 and more | 267,116 | 1,241 | 1.84 | % | 283,747 | 1,668 | 2.33 | % | ||||||||||||||||
Total interest-bearing deposits | 2,103,994 | 5,357 | 1.01 | % | 2,071,402 | 6,744 | 1.29 | % | ||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 1,075 | 8 | 2.91 | % | 1,087 | 8 | 2.88 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings | 60,000 | 523 | 3.41 | % | 118,587 | 1,010 | 3.33 | % | ||||||||||||||||
Subordinated debt | 32,991 | 263 | 3.12 | % | 32,991 | 286 | 3.39 | % | ||||||||||||||||
94,066 | 794 | 3.30 | % | 152,665 | 1,304 | 3.34 | % | |||||||||||||||||
Total interest-bearing liabilities | 2,198,060 | 6,151 | 1.11 | % | 2,224,067 | 8,048 | 1.43 | % | ||||||||||||||||
Total noninterest-bearing liabilities | 325,577 | 325,307 | ||||||||||||||||||||||
Total liabilities | 2,523,637 | 2,549,374 | ||||||||||||||||||||||
Stockholders' equity | 429,676 | 428,231 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,953,313 | $ | 2,977,605 | ||||||||||||||||||||
Net interest income (tax equivalent) | $ | 25,059 | $ | 24,200 | ||||||||||||||||||||
Average interest rate spread | 3.58 | % | 3.41 | % | ||||||||||||||||||||
Interest expense as percentage of average earning assets | 0.92 | % | 1.21 | % | ||||||||||||||||||||
Net interest margin | 3.77 | % | 3.63 | % |
(1) | Income and yields are reported on a taxable equivalent basis using a 35% tax rate. |
22
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES (UNAUDITED) | ||||||||||||||||||||||||
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Dollars in thousands | Balance | Inc/Exp | Rates | Balance | Inc/Exp | Rates | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans receivable, net (1) | $ | 2,084,621 | $ | 81,457 | 5.22 | % | $ | 2,172,148 | $ | 86,311 | 5.31 | % | ||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 260,266 | 5,373 | 2.72 | % | 269,614 | 6,631 | 3.24 | % | ||||||||||||||||
Tax exempt (1) | 142,909 | 6,337 | 5.85 | % | 109,296 | 4,963 | 5.99 | % | ||||||||||||||||
Total investments | 403,175 | 11,710 | 3.83 | % | 378,910 | 11,594 | 4.03 | % | ||||||||||||||||
Interest bearing deposits | 100,320 | 164 | 0.22 | % | 55,560 | 95 | 0.23 | % | ||||||||||||||||
Federal funds sold | 25,089 | 47 | 0.25 | % | 51,298 | 98 | 0.25 | % | ||||||||||||||||
528,584 | 11,921 | 2.97 | % | 485,768 | 11,787 | 3.20 | % | |||||||||||||||||
Total earning assets | 2,613,205 | $ | 93,378 | 4.78 | % | 2,657,916 | $ | 98,098 | 4.93 | % | ||||||||||||||
Total nonearning assets | 314,253 | 329,185 | ||||||||||||||||||||||
Total assets | $ | 2,927,458 | $ | 2,987,101 | ||||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Interest checking | $ | 567,188 | $ | 1,601 | 0.38 | % | $ | 563,238 | $ | 2,817 | 0.67 | % | ||||||||||||
Money market | 430,565 | 3,064 | 0.95 | % | 393,675 | 3,532 | 1.20 | % | ||||||||||||||||
Savings | 275,404 | 1,306 | 0.63 | % | 219,969 | 1,374 | 0.84 | % | ||||||||||||||||
Time deposits: | ||||||||||||||||||||||||
Less than $100,000 | 539,790 | 6,710 | 1.66 | % | 617,562 | 9,884 | 2.14 | % | ||||||||||||||||
$100,000 and more | 265,587 | 3,743 | 1.88 | % | 295,455 | 5,346 | 2.42 | % | ||||||||||||||||
Total interest-bearing deposits | 2,078,534 | 16,424 | 1.06 | % | 2,089,899 | 22,953 | 1.47 | % | ||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 1,091 | 24 | 2.95 | % | 967 | 22 | 2.95 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings | 66,593 | 1,681 | 3.33 | % | 122,857 | 3,179 | 3.41 | % | ||||||||||||||||
Subordinated debt | 32,991 | 790 | 3.16 | % | 32,991 | 808 | 3.23 | % | ||||||||||||||||
100,675 | 2,495 | 3.27 | % | 156,815 | 4,009 | 3.37 | % | |||||||||||||||||
Total interest-bearing liabilities | 2,179,209 | 18,919 | 1.16 | % | 2,246,714 | 26,962 | 1.60 | % | ||||||||||||||||
Total noninterest-bearing liabilities | 320,679 | 315,705 | ||||||||||||||||||||||
Total liabilities | 2,499,888 | 2,562,419 | ||||||||||||||||||||||
Stockholders' equity | 427,570 | 424,682 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,927,458 | $ | 2,987,101 | ||||||||||||||||||||
Net interest income (tax equivalent) | $ | 74,459 | $ | 71,136 | ||||||||||||||||||||
Average interest rate spread | 3.62 | % | 3.33 | % | ||||||||||||||||||||
Interest expense as percentage of average earning assets | 0.97 | % | 1.36 | % | ||||||||||||||||||||
Net interest margin | 3.81 | % | 3.58 | % |
(1) | Income and yields are reported on a taxable equivalent basis using a 35% tax rate. |
23
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 securities and other assets, total non-interest income amounted to $7.8 million for the third quarter of 2011, up $325 thousand or 4.3% on a sequential basis compared to $7.5 million for the second quarter of 2011, and down $132 thousand or 1.6% compared to the same period in prior year. The sequential quarter increase on a consolidated basis is largely attributable to an increase of $436 thousand in mortgage banking related fees, an increase of $179 thousand in retail banking fees and a $143 thousand decrease in losses on the sale of foreclosed assets. The increases in these operating line items were offset by a decrease of approximately $308 thousand in other operating revenues which was primarily driven by lower income levels from pass through entities. The $132 thousand decrease in operating noninterest income compared to the same quarter in the prior year stemmed from a contraction in mortgage revenues of $635 thousand and higher losses on foreclosed assets of $205 thousand. These decreases were offset by an $840 thousand decrease in losses from mortgage indemnifications.
Total non-interest income amounted to $23.1 million for the first nine months of 2011, or down $2.4 million or 9.4% compared to the same period in the prior year. A gain on the sale of a financial center of $748 thousand in 2010, along with decreases in both retail banking fees of $923 thousand and mortgage banking-related fees of $1.1 million were offset by a $1.2 million decrease in losses on mortgage indemnifications and repurchases, reflecting anticipated reduction in exposure due to the mortgage indemnification settlement made in the fourth quarter of 2010. The decrease in retail banking fees resulted from implementing the modifications to Regulation E that became effective during the third quarter of 2010 and is consistent with the expectation of a $1.5 million to $1.8 million contraction on an annual basis.
Noninterest Expense
StellarOne’s efficiency ratio was 69.3% for the third quarter of 2011, compared to 70.0% for the second quarter of 2011 and 72.3% for the same quarter in 2010. The sequential quarter decrease in the efficiency ratio reflects a slight increase in total revenue and stable overhead base. Noninterest expense for the third quarter amounted to $23.3 million, relatively flat compared to $23.2 million for the second quarter of 2011 and down $319 thousand or 1.3% when compared to the third quarter in 2010.
The sequential quarter increase in noninterest expense was driven by increases of $223 thousand in compensation and benefits expense, $124 thousand in occupancy costs and $66 thousand in data processing expense, which were offset by decreases of $121 thousand in supplies and equipment expense, $105 thousand in marketing expense and $51 thousand in FDIC insurance expense. FDIC insurance expense is expected to be consistent with third quarter amounts on an ongoing basis. The increase in compensation and benefits expense is largely related to increased commissions and incentives associated with the higher mortgage volume and will continue to be dependent on future volume. Additionally, severance costs associated with the closure of two financial centers during the quarter contributed to this increase, but will result in favorable efficiencies going forward.
The decrease relative to the same quarter in 2010 can be attributed to a $1.0 million decrease in FDIC insurance expense and a $451 thousand decrease in other operating expenses, which largely consisted of DDA charge-offs reductions and decreases in foreclosed asset related expenses. These reductions were partially offset by $840 thousand increase in compensation and benefits and $249 thousand increase in supplies and equipment. The compensation and benefits increase is related to efforts to build human capital in key management positions over the past fifteen months, and the reestablishment of incentive plans for revenue producing units. There are a number of company-wide initiatives that management believes will result in human capital cost reduction and reallocation. This effort was evidenced by the reduction of 19 full-time equivalent positions noted on a sequential quarter basis.
24
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
StellarOne’s efficiency ratio was 70.1% for the first nine months in 2011, compared to 70.3% for the same period in 2010. The stability in the efficiency ratio reflects an increase in revenues offset by an increase in noninterest expense. Non-interest expense for the first nine months of 2011 amounted to $70.1 million, or up $1.1 million or 1.6% when compared to $69.0 million for the same period in the prior year. The increase was driven by an increase of $3.1 million in compensation and employee benefits, offset by a decrease of $1.9 million in FDIC insurance expense due to revised regulatory guidance in determining the expense. The decrease in FDIC insurance expense is expected to continue going forward. As noted above, the compensation and benefit increase is related to efforts to build human capital in key management positions over the past fifteen months, and the reestablishment of incentive plans for revenue producing units. These costs are being closely managed and future cost savings are anticipated. Revenue increases have been primarily margin driven as the re-pricing of interest bearing liabilities significantly outpaced interest earning assets during the first nine months of 2011.
Income Taxes
Income tax expense for the third quarter of 2011 was $1.2 million, resulting in an effective tax rate of 22.7%, compared to an income tax expense of $1.1 million for the third quarter of 2010, or an effective rate of 23.6%. For the nine month period ended September 30, 2011, income tax expense was $3.0 million, or an effective rate of 21.5% compared to $1.2 million, or an effective rate of 14.8% for the same period in 2010. The volatility in the effective tax rate on a nine month comparative basis is a result of elevated provisioning levels in the prior year that reduced pretax earnings to a level proportionately much smaller in relation to permanent tax differences. As pretax results fluctuate, 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. Although there is uncertainty surrounding the current economic environment, which is causing provisioning to be elevated on a historical basis and is driving the decrease in the tax rate noted when comparing the third quarter of 2011 to the same quarter in the prior year, the effective rate is primarily driven by higher levels of tax exempt securities within the investment portfolio. The Company’s effective tax rate for the first nine months of 2011 is within the estimated range of probable rates expected for the annualized period.
Asset Quality
Net charge-offs decreased sequentially during the third quarter. Annualized net charge-offs as a percentage of average loans receivable amounted to 0.73% for the third quarter of 2011, down from 0.95% for the second quarter of 2011 results and down from 0.94% for the third quarter of 2010. Net charge-offs for the third quarter of 2011 totaled $3.8 million or down $1.2 million compared to the $4.9 million realized during the second quarter of 2011 and down $1.3 million when compared to $5.1 million during the third quarter of 2010.
StellarOne’s non-performing assets totaled $52.5 million at September 30, 2011, up $5.2 million or 11.0% from $47.3 million at June 30, 2011 and down $9.7 million or 15.5% compared to $62.1 million at September 30, 2010. The ratio of non-performing assets as a percentage of total assets increased to 1.77% as of September 30, 2011, compared to 1.61% as of June 30, 2011 and 2.13% at September 30, 2010.
Non-performing loans increased $5.4 million or 14.1% on a sequential quarter basis to $43.5 million at September 30, 2011, when compared to $38.1 million at June 30, 2011 and were down $8.1 million or 15.8% compared to $51.6 million at September 30, 2010. Contributing to the sequential increase was a $5.5 million credit associated with one multifamily non-residential commercial real estate credit that went non-accrual during the quarter. Management believes the credit is adequately collateralized with solid prospects for short term lease up and resolution.
Foreclosed assets totaled $9.0 million at September 30, 2011, down $140 thousand or 1.5% compared to $9.1 million at June 30, 2011 and down $1.5 million or 14.5% compared to $10.5 million as of September 30, 2010. Past due and matured loans between 30 and 89 days totaled $43.3 million at September 30, 2011, up $4.9 million or 12.7% compared to $38.5 million at June 30, 2011.
Included in the loan portfolio at September 30, 2011, are loans classified as troubled debt restructurings (“TDRs”) totaling $40.7 million, a sequential reduction of 15.2% or $7.3 million as compared to $48.0 million at June 30, 2011. Of the total restructurings, $32.3 million are on accrual status, which represent performing relationships for which a modification to the contractual interest rate or repayment structure has been granted to address a financial hardship. Total TDRs make up 2.0% of the total loan portfolio at September 30, 2011, while $30.4 million or 74.7% of TDRs represent residential consumer real estate loans under a mortgage modification program designed to help homeowners remain in their homes. The sequential reduction in TDRs was largely attributable to $12.9 million being upgraded from impaired status during the quarter due to meeting performance and other criteria. The TDRs removed from impaired status were identified during the Company’s quarterly review of TDRs to determine compliance with specified criteria, including a market rate of interest at time of restructure and at least 6 months of payment performance in accordance with the restructured terms. It is anticipated that such upgrades will continue over the next few quarters, but at a significantly reduced amount from the third quarter.
StellarOne recorded a provision for loan losses of $3.3 million for the third quarter of 2011, an increase of $150 thousand compared to the $3.2 million recognized for the second quarter of 2011 and a decrease of $200 thousand compared to the third quarter of 2010. The third quarter 2011 provision compares to net charge-offs of $3.8 million, resulting in an allowance for loan losses of $35.3 million at September 30, 2011, a decrease of $468 thousand when compared to $35.7 million at June 30, 2011. The allowance as a percentage of total loans was 1.74% at both September 30, 2011 and June 30, 2011. The allowance as a percentage of non-performing loans declined to 81.1% at September 30, 2011, or down 12.7% when compared to 93.8% at June 30, 2011.
The Company’s nonaccrual loans are composed of the following (in thousands):
September 30, 2011 | ||||||||||||
Loans Outstanding | Nonaccrual Loans | Nonaccrual Loans to Loans Outstanding | ||||||||||
Construction and land development | $ | 212,010 | $ | 9,602 | 4.53 | % | ||||||
Commercial real estate | 852,886 | 15,192 | 1.78 | % | ||||||||
Consumer real estate | 759,425 | 15,203 | 2.00 | % | ||||||||
Commercial and industrial loans (except those secured by real estate) | 177,678 | 3,132 | 1.76 | % | ||||||||
Consumer and other | 25,082 | 54 | 0.22 | % | ||||||||
Total loans | $ | 2,027,081 | $ | 43,183 | 2.13 | % |
25
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides information on asset quality statistics for the periods presented (in thousands):
September 30, 2011 | December 31, 2010 | September 30, 2010 | ||||||||||
Non-accrual loans | $ | 35,025 | $ | 39,966 | $ | 49,192 | ||||||
Troubled debt restructurings - non-accrual status | 8,445 | 3,508 | 2,411 | |||||||||
Foreclosed assets | 9,009 | 10,894 | 10,535 | |||||||||
Total non-performing assets | $ | 52,479 | $ | 54,368 | $ | 62,138 | ||||||
Nonperforming assets to total assets | 1.77 | % | 1.85 | % | 2.13 | % | ||||||
Nonperforming assets to loans and foreclosed property | 2.58 | % | 2.58 | % | 2.97 | % | ||||||
Allowance for loan losses as a percentage of loans receivable | 1.74 | % | 1.79 | % | 1.92 | % | ||||||
Allowance for loan losses as a percentage of nonperforming loans | 81.13 | % | 87.60 | % | 77.46 | % | ||||||
Annualized net charge-offs as a percentage of average loans receivable | 0.73 | % | 1.43 | % | 0.94 | % |
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 $2.8 million and $947 thousand in common and preferred dividends, respectively, during the nine month period ended September 30, 2011. These dividends combined with net income of $11.1 million and the accretion of the preferred stock discount resulted in an increase to retained earnings of $6.9 million during the period. Future dividends will be dependent upon the Company’s ability to generate earnings in future periods.
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 bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action under the Federal Deposit Insurance Act of 1991 (“FDICIA”), 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 the 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. The most recent notification from the Federal Reserve Bank of Richmond categorized the Company and the subsidiary bank as “well capitalized” under FIDICIA. There are no conditions or events that management believes have changed the Company’s or subsidiary bank’s well capitalized position including the redemption of 25%, or 7,500 shares, of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Preferred Stock”) which occurred on April 13, 2011.
26
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table includes information with respect to the Company’s risk-based capital and equity levels as of September 30, 2011 (in thousands):
Corporation | Bank | |||||||
Tier 1 capital | $ | 340,328 | $ | 322,570 | ||||
Tier 2 capital | 26,285 | 26,212 | ||||||
Total risk-based capital | 366,613 | 348,782 | ||||||
Total risk-weighted assets | 2,093,659 | 2,087,690 | ||||||
Average adjusted total assets | 2,837,182 | 2,829,445 | ||||||
Capital ratios: | ||||||||
Tier 1 risk-based capital ratio | 16.26 | % | 15.45 | % | ||||
Total risk-based capital ratio | 17.51 | % | 16.71 | % | ||||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 12.00 | % | 11.40 | % | ||||
Equity to assets ratio | 14.63 | % | 15.24 | % | ||||
Tangible common equity to assets ratio | 10.29 | % | 11.68 | % |
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or at 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, economic conditions in the market served, concentrations of business and industry, competition, and the Company’s overall financial condition. The Company’s bank subsidiary has available a $210 million line of credit with the Federal Home Loan Bank of Atlanta, uncollateralized, unused lines of credit totaling $70 million with nonaffiliated banks and access to the Federal Reserve discount window to support liquidity as conditions dictate.
The liquidity of the parent Company also represents an important aspect of liquidity management. The parent 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 credit administration functions. It also includes outflows associated with dividends to common shareholders, dividends to preferred shareholders and interest on subordinated debt. The main sources of funding for the parent Company are the management fees and dividends it receives from its banking subsidiary and availability on the equity market as deemed necessary.
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, 2010.
27
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2010.
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.
Forward Looking Statements
In addition to historical information, this report on Form 10-Q contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. When we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof. StellarOne wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect StellarOne’s actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from StellarOne’s acquisitions and dispositions, (ii) competitive pressure in the banking industry or in StellarOne’s markets may increase significantly, (iii) changes in the interest rate environment may reduce margins, (iv) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (v) changes may occur in banking legislation and regulation, (vi) changes may occur in general business conditions, (vii) changes may occur in the securities markets, and (viii) the impact of governmental restrictions on entities participating in the US Treasury Department Capital Purchase Program. Please refer to StellarOne’s filings with the Securities and Exchange Commission for additional information, which may be accessed at www.StellarOne.com.
Access to Filings
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are posted on the Company’s website at http://www.stellarone.com under the “Investor Relations” tab as soon as reasonably practical after filing electronically with the SEC.
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 does 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 months.
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. Please see Note 3 of Notes to Unaudited Consolidated Financial Statements for additional information related to investment securities.
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 (i.e. it is probable that the Company will be unable to collect amounts due according to the original contractual terms), 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 has a grading system which is applied to 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 for impaired loans 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 borrower’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.
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 than would otherwise be considered, the related loan is classified as a troubled debt restructuring (“TDR”). The Company strives 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.
The Company monitors the performance of modified loans on an ongoing basis. Loans retain their accrual status at the time of their modification. As a result, if a loan is on non-accrual at the time it is modified, it stays as non-accrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A modified loan will be reclassified to non-accrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement for a minimum of six months prior to being reclassified to accrual status. TDRs are considered impaired. However, TDRs that specified a market rate of interest at the date of restructure and have performed in accordance with the revised terms for a minimum of six months may be removed from the impaired loan disclosures in years subsequent to the modification.
The allowance for loan losses associated with TDRs for every loan class is determined using a discounted cash flow analysis in which the original rate prior to modification is used to discount the modified cash flow stream to its net present value. This value is then compared to the recorded amount to determine the appropriate level of reserve to be included in the allowance for loan losses. In instances where this analysis is deemed ineffective due to rate increases made during modification, a collateral dependent approach is used as a practical alternative. The discounted cash flow analysis is used to calculate the reserve balance for TDRs both evaluated individually and those included within homogenous pools.
Accrued Losses Associated With Mortgage Indemnifications and Repurchases
When the Company is notified by an investor that there is an inherent loss and an underwriting exception associated with a mortgage loan previously sold by the Company to the investor, the Company goes through a process to determine if it is probable that the loss will need to be absorbed by the Company and if the loss is able to be estimated. The Company accrues the related loss if management determines that it is probable that the loss will be recognized by the Company and it is able to be estimated. Members of the Company’s management meet monthly to discuss outstanding notices received from investors and document the associated probability of loss being recognized and any estimation of the associated loss to determine the amount that should be accrued.
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. In 2010, the Company’s annual impairment date was September 30. During the twelve months following completion of the Company’s most recent annual impairment test, there have been no significant negative changes in market conditions or forecasted future income; and actual earnings have improved. As such, management determined there were no additional indicators of potential impairment and no interim goodwill impairment test was performed. During the third quarter of 2011, the Company changed the date of its annual impairment testing for goodwill from September 30th to October 1st. This annual assessment will be completed during the fourth quarter.
Based on preliminary results of step one of the impairment test, the carrying amount of goodwill exceeded its estimated fair value. While step two has not been completed, the Company has conducted valuation testing on the more significant components of the balance sheet and estimate that the completion of step two will not result in an impairment charge to goodwill. Therefore, no impairment has been recorded as of the annual assessment date. The process used to test for impairment is inherently complex and the Company’s estimate cannot be determined with certainty until the step two of the impairment test is complete. 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.
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 September 30, 2011, as management has not taken any tax positions that it deems to be considered uncertain.
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.
Foreclosed Assets
Real estate acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less costs to sell, 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.
28
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing noninterest expense less amortization of intangibles and goodwill impairments as a percent of the sum of net interest income on a tax equivalent basis and noninterest income excluding gains on securities and losses on foreclosed assets. The efficiency ratio is not a recognized reporting measure under USGAAP. Management believes this measure provides investors with important information regarding the Company’s operational efficiency. 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 USGAAP. The Company, in referring to its net income, is referring to income under USGAAP. Comparison of the efficiency ratio with those of other companies may not be possible, because other companies may calculate the efficiency ratio differently.
The following table presents a reconciliation to provide a more detailed analysis of this non-USGAAP performance measure:
For the three months ended | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Noninterest expense | $ | 23,346 | $ | 23,665 | ||||
Less: | ||||||||
Amortization of intangible assets | 413 | 413 | ||||||
Adjusted noninterest expense | 22,933 | 23,252 | ||||||
Net interest income (tax equivalent) | 25,061 | 24,201 | ||||||
Noninterest income | 7,864 | 8,247 | ||||||
Less: | ||||||||
Gains on sale of securities available for sale | 41 | 336 | ||||||
Losses / impairments on foreclosed assets | (223 | ) | (18 | ) | ||||
Impairments on securities available for sale | - | (53 | ) | |||||
Net revenues | 33,107 | 32,183 | ||||||
Efficiency ratio | 69.3 | % | 72.3 | % |
For the nine months ended | ||||||||
September 30, 2011 | September 30, 2010 | |||||||
Noninterest expense | $ | 70,103 | $ | 69,003 | ||||
Less: | ||||||||
Amortization of intangible assets | 1,238 | 1,238 | ||||||
Adjusted noninterest expense | 68,865 | 67,765 | ||||||
Net interest income (tax equivalent) | 74,459 | 71,137 | ||||||
Noninterest income | 23,056 | 25,442 | ||||||
Less: | ||||||||
Gains on sale of securities available for sale | 62 | 657 | ||||||
Losses / impairments on foreclosed assets | (717 | ) | (459 | ) | ||||
Impairments on securities available for sale | - | (53 | ) | |||||
Net revenues | 98,170 | 96,434 | ||||||
Efficiency ratio | 70.1 | % | 70.3 | % |
The report also refers to the tangible common equity to assets ratio, which is computed by dividing total stockholders’ equity less core deposit intangibles, goodwill and preferred stock by total assets less core deposit intangibles and goodwill. The tangible common equity to assets ratio is not a recognized reporting measure under USGAAP. Management believes it provides investors with important information about the strength of the balance sheet by removing the intangible items from the equity to assets ratio. The table below presents a reconciliation of this non-USGAAP measure as of September 30, 2011.
Corporation | Bank | |||||||
Total stockholders' equity | $ | 432,865 | $ | 449,794 | ||||
Less: | ||||||||
Core deposit intangibles, net | 5,424 | 5,424 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Preferred stock | 21,798 | - | ||||||
Tangible common equity | 291,991 | 330,718 | ||||||
Total assets | 2,957,841 | 2,950,634 | ||||||
Core deposit intangibles, net | 5,424 | 5,424 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Tangible assets | 2,838,765 | 2,831,558 | ||||||
Tangible common equity to assets ratio | 10.29 | % | 11.68 | % |
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, 2010.
29
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is required to include in its periodic reports information regarding 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 in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company has established disclosure controls and procedures to ensure that material information related to the Company is made known to the principal executive officer and principal financial officer on a regular basis, in particular during the periods in which quarterly and annual reports are being prepared. The 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 the 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 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 the period reports.
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of 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 of business, the Company reviews and changes internal controls to reflect changes in business including acquisition related improvements. There have been no changes in internal control over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
LEGAL PROCEEDINGS. |
There are no material legal proceedings to which the Company or any of its subsidiaries, 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 is either not material in respect to the amount in controversy or fully covered by insurance.
RISK FACTORS. |
There have been no material changes to the risk factors as previously disclosed in Part I, Item IA of the Company’s Annual Report on Form 10K for the fiscal year ended December 31, 2010.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
The Company has a stock repurchase program authorized that is not currently active, with 210,000 shares remaining available for repurchase.
DEFAULTS UPON SENIOR SECURITIES. |
None.
(REMOVED AND RESERVED). |
OTHER INFORMATION. |
Not applicable.
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 May 28, 2010) |
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) |
Preferability letter provided by Grant Thornton LLP, the Company's registered public accounting firm to change the measurement date in connection with the Company's annual goodwill impairment test. |
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. |
Exhibit No. 101 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2011 is formatted in XBRL interactive data files: (i) Consolidated Statement of Income for the three and nine months ended September 30, 2011, and 2010; (ii) Consolidated Balance Sheet at September 30, 2011 and December 31, 2010; (iii) Consolidated Statement of Changes in Equity and Comprehensive Income for the nine months ended September 30, 2011 and 2010; (iv) Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010; and (v) Notes to Financial Statements. |
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
November 8, 2011
/s/ Jeffrey W. Farrar
Jeffrey W. Farrar, CPA
Executive Vice President and Chief Financial Officer
November 8, 2011
33