UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-22283
![StellarOne Corporation Logo](https://capedge.com/proxy/10-Q/0001036070-13-000018/logo.jpg)
(Exact name of registrant as specified in its charter)
Virginia | 54-1829288 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
590 Peter Jefferson Parkway Charlottesville, Virginia | 22911 |
(Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number 434-964-2211, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b – 2 of the Exchange Act). Yes o No x
As of May 3, 2013 there were 22,713,422 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 | ||
Consolidated Statements of Comprehensive Income | 3 | |
4 | ||
5 | ||
6 | ||
ITEM 2 | 20 | |
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 |
STELLARONE CORPORATION AND SUBSIDIARY | ||||||||
(In thousands) | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 42,296 | $ | 55,546 | ||||
Federal funds sold | 52 | 1,552 | ||||||
Interest-bearing deposits in banks | 24,161 | 32,851 | ||||||
Cash and cash equivalents | 66,509 | 89,949 | ||||||
Investment securities, at fair value | 510,323 | 553,476 | ||||||
Mortgage loans held for sale | 30,036 | 37,778 | ||||||
Loans receivable, net of allowance for loan losses, 2013, $29,050; 2012, $29,824 | 2,112,441 | 2,049,769 | ||||||
Premises and equipment, net | 73,778 | 72,060 | ||||||
Accrued interest receivable | 8,865 | 8,265 | ||||||
Core deposit intangibles, net | 3,882 | 3,462 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Bank owned life insurance | 44,613 | 44,182 | ||||||
Foreclosed assets | 6,389 | 5,760 | ||||||
Other assets | 43,401 | 44,851 | ||||||
Total assets | $ | 3,013,889 | $ | 3,023,204 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 372,864 | $ | 362,713 | ||||
Interest-bearing | 2,103,141 | 2,121,611 | ||||||
Total deposits | 2,476,005 | 2,484,324 | ||||||
Federal Home Loan Bank advances | 55,000 | 55,000 | ||||||
Subordinated debt | 32,991 | 32,991 | ||||||
Accrued interest payable | 1,548 | 1,682 | ||||||
Deferred income tax liability | 2,662 | 3,810 | ||||||
Other liabilities | 16,930 | 13,755 | ||||||
Total liabilities | 2,585,136 | 2,591,562 | ||||||
Stockholders' Equity | ||||||||
Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding. | - | - | ||||||
��Common stock; $1 par value; 35,000,000 shares authorized; 2013: 22,569,918 shares issued and outstanding; 2012: 22,889,091 shares issued and outstanding. | 22,570 | 22,889 | ||||||
Additional paid-in capital | 266,596 | 271,747 | ||||||
Retained earnings | 131,161 | 127,099 | ||||||
Accumulated other comprehensive income | 8,426 | 9,907 | ||||||
Total stockholders' equity | 428,753 | 431,642 | ||||||
Total liabilities and stockholders' equity | $ | 3,013,889 | $ | 3,023,204 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME | ||||||||
(In thousands, except per share data) | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Interest Income | ||||||||
Loans, including fees | $ | 25,416 | $ | 26,014 | ||||
Federal funds sold and deposits in other banks | 18 | 34 | ||||||
Investment securities: | ||||||||
Taxable | 1,444 | 1,610 | ||||||
Tax-exempt | 1,185 | 1,300 | ||||||
Total interest income | 28,063 | 28,958 | ||||||
Interest Expense | ||||||||
Deposits | 3,117 | 4,277 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 7 | 6 | ||||||
Federal Home Loan Bank advances | 404 | 438 | ||||||
Subordinated debt | 336 | 341 | ||||||
Total interest expense | 3,864 | 5,062 | ||||||
Net interest income | 24,199 | 23,896 | ||||||
Provision for loan losses | 700 | 850 | ||||||
Net interest income after provision for loan losses | 23,499 | 23,046 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 3,051 | 3,327 | ||||||
Fiduciary and brokerage fee income | 1,228 | 1,228 | ||||||
Mortgage banking-related fees | 1,835 | 1,777 | ||||||
Losses on mortgage indemnifications and repurchases | - | (354 | ) | |||||
Losses on sale of premises and equipment | (10 | ) | (16 | ) | ||||
Gains on sale of securities available for sale | 6 | 73 | ||||||
Losses on sale / impairments of foreclosed assets | (130 | ) | (452 | ) | ||||
Income from bank owned life insurance | 432 | 440 | ||||||
Insurance income | 299 | 288 | ||||||
Other operating income | 728 | 657 | ||||||
Total noninterest income | 7,439 | 6,968 | ||||||
Noninterest Expense | ||||||||
Compensation and employee benefits | 12,423 | 12,102 | ||||||
Net occupancy | 2,250 | 2,063 | ||||||
Equipment | 2,089 | 2,218 | ||||||
Amortization of intangible assets | 311 | 413 | ||||||
Marketing | 245 | 249 | ||||||
State franchise taxes | 587 | 568 | ||||||
FDIC insurance | 506 | 639 | ||||||
Data processing | 414 | 341 | ||||||
Professional fees | 754 | 681 | ||||||
Telecommunications | 373 | 425 | ||||||
Other operating expenses | 2,818 | 2,701 | ||||||
Total noninterest expense | 22,770 | 22,400 | ||||||
Income before income taxes | 8,168 | 7,614 | ||||||
Income tax expense | 2,257 | 2,114 | ||||||
Net income | $ | 5,911 | $ | 5,500 | ||||
Basic net income per common share available to common shareholders | $ | 0.26 | $ | 0.24 | ||||
Diluted net income per common share available to common shareholders | $ | 0.26 | $ | 0.24 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||||
(In thousands) | ||||||||||||||||
Three months ended March 31, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Net income | $ | 5,911 | $ | 5,500 | ||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||
Net change in investment securities | $ | (1,415 | ) | $ | (354 | ) | ||||||||||
Change in post retirement liability | (115 | ) | 2 | |||||||||||||
Change in cash flow hedge | 49 | (27 | ) | |||||||||||||
Other comprehensive loss | (1,481 | ) | (379 | ) | ||||||||||||
Total comprehensive income | $ | 4,430 | $ | 5,121 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | |||||||||||||||||
Stock | Capital | Earnings | Income | Total | ||||||||||||||||
Balance, January 1, 2012 | $ | 22,819 | $ | 271,080 | $ | 110,940 | $ | 9,334 | $ | 414,173 | ||||||||||
Net income | - | - | 5,500 | - | 5,500 | |||||||||||||||
Other comprehensive loss | - | - | - | (379 | ) | (379 | ) | |||||||||||||
Common dividends paid ($0.06 per share) | - | - | (1,384 | ) | - | (1,384 | ) | |||||||||||||
Stock-based compensation benefit (36,708 shares) | 37 | (62 | ) | - | - | (25 | ) | |||||||||||||
Exercise of stock options (3,192 shares) | 3 | 32 | - | - | 35 | |||||||||||||||
Balance, March 31, 2012 | $ | 22,859 | $ | 271,050 | $ | 115,056 | $ | 8,955 | $ | 417,920 | ||||||||||
Balance, January 1, 2013 | $ | 22,889 | $ | 271,747 | $ | 127,099 | $ | 9,907 | $ | 431,642 | ||||||||||
Net income | - | - | 5,911 | - | 5,911 | |||||||||||||||
Other comprehensive loss | - | - | - | (1,481 | ) | (1,481 | ) | |||||||||||||
Common dividends paid ($0.08 per share) | - | - | (1,849 | ) | - | (1,849 | ) | |||||||||||||
Purchase of common stock under share repurchase program (372,466 shares) | (372 | ) | (5,402 | ) | (5,774 | ) | ||||||||||||||
Stock-based compensation expense (52,183 shares) | 52 | 238 | - | - | 290 | |||||||||||||||
Exercise of stock options (1,110 shares) | 1 | 13 | - | - | 14 | |||||||||||||||
Balance, March 31, 2013 | $ | 22,570 | $ | 266,596 | $ | 131,161 | $ | 8,426 | $ | 428,753 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(In thousands) | ||||||||
Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 5,911 | $ | 5,500 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,534 | 1,629 | ||||||
Amortization of intangible assets | 311 | 413 | ||||||
Provision for loan losses | 700 | 850 | ||||||
Deferred tax expense | 350 | 597 | ||||||
Stock-based compensation expense (benefit) | 290 | (25 | ) | |||||
Losses on sale / impairments of foreclosed assets | 130 | 452 | ||||||
Losses on mortgage indemnifications and repurchases | - | 354 | ||||||
Losses on sale of premises and equipment | 10 | 16 | ||||||
Gains on sale of securities available for sale | (6 | ) | (73 | ) | ||||
Mortgage banking-related fees | (1,835 | ) | (2,184 | ) | ||||
Proceeds from sale of mortgage loans | 79,042 | 97,007 | ||||||
Origination of mortgage loans for sale | (69,466 | ) | (69,854 | ) | ||||
Amortization of securities premiums and accretion of discounts, net | 537 | 495 | ||||||
Income on bank owned life insurance | (432 | ) | (440 | ) | ||||
Changes in assets and liabilities: | ||||||||
Increase in accrued interest receivable | (600 | ) | (53 | ) | ||||
Decrease in other assets | 1,562 | 927 | ||||||
Decrease in accrued interest payable | (134 | ) | (209 | ) | ||||
Increase in other liabilities | 2,323 | 2,241 | ||||||
Net cash provided by operating activities | $ | 20,227 | $ | 37,643 | ||||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities, calls and principal payments of securities available for sale | $ | 40,446 | $ | 25,528 | ||||
Purchase of securities available for sale | - | (72,552 | ) | |||||
Net increase in loans | (52,797 | ) | (6,364 | ) | ||||
Proceeds from sale of premises and equipment | - | 9 | ||||||
Purchase of premises and equipment | (1,577 | ) | (1,672 | ) | ||||
Proceeds from sale of foreclosed assets | 699 | 2,643 | ||||||
Net proceeds from branch acquisition | 6,373 | - | ||||||
Net cash used by investing activities | $ | (6,856 | ) | $ | (52,408 | ) | ||
Cash Flows from Financing Activities | ||||||||
Net (decrease) increase in demand, money market and savings deposits | $ | (10,685 | ) | $ | 31,003 | |||
Net decrease in certificates of deposit | (18,517 | ) | (24,686 | ) | ||||
Principal payments on Federal Home Loan Bank advances | - | (5,000 | ) | |||||
Purchase of common stock under share repurchase program | (5,774 | ) | - | |||||
Exercise of stock options | 14 | 35 | ||||||
Cash dividends paid | (1,849 | ) | (1,384 | ) | ||||
Net cash used by financing activities | $ | (36,811 | ) | $ | (32 | ) | ||
Decrease in cash and cash equivalents | $ | (23,440 | ) | $ | (14,796 | ) | ||
Cash and Cash Equivalents | ||||||||
Beginning | 89,949 | 99,970 | ||||||
Ending | $ | 66,509 | $ | 85,174 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash paid for interest | $ | 3,998 | $ | 5,271 | ||||
Supplemental Schedule of Noncash Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | 1,408 | $ | 1,219 |
The accompanying notes are an integral part of these consolidated financial statements.
5
1. | Organization |
StellarOne Corporation (“we”) is a Virginia bank holding company headquartered in Charlottesville, Virginia. Our sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia. Additional subsidiaries include VFG Limited Liability Trust and FNB (VA) Statutory Trust II, both of which are associated with our subordinated debt issues and are not subject to consolidation. The consolidated statements include our accounts and those of our wholly-owned banking subsidiary. All significant intercompany accounts have been eliminated. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position as of March 31, 2013 and December 31, 2012, the results of operations for the three months ended March 31, 2013 and 2012 and cash flows for the three months ended March 31, 2013 and 2012. The statements should be read in conjunction with the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year.
2. | Investment Securities |
Amortized cost and estimated fair value of securities available for sale, with gross unrealized gains and losses as of March 31, 2013 and December 31, 2012 are as follows (In thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | |||||||||||||||||||||||||
U.S. Treasuries | $ | - | $ | - | $ | - | $ | - | $ | 20,000 | $ | - | $ | - | $ | 20,000 | ||||||||||||||||
U.S. Government agencies | 241,013 | 1,667 | (38 | ) | 242,642 | 247,665 | 1,848 | (17 | ) | 249,496 | ||||||||||||||||||||||
State and municipals | 132,225 | 10,538 | - | 142,763 | 136,695 | 11,971 | - | 148,666 | ||||||||||||||||||||||||
Corporate bonds | 1,825 | 23 | - | 1,848 | 1,825 | 27 | - | 1,852 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 4,609 | 192 | - | 4,801 | 5,119 | 214 | - | 5,333 | ||||||||||||||||||||||||
Mortgage backed securities | 99,015 | 4,559 | (54 | ) | 103,520 | 108,360 | 5,020 | - | 113,380 | |||||||||||||||||||||||
Other investments | 14,749 | - | - | 14,749 | 14,749 | - | - | 14,749 | ||||||||||||||||||||||||
Total | $ | 493,436 | $ | 16,979 | $ | (92 | ) | $ | 510,323 | $ | 534,413 | $ | 19,080 | $ | (17 | ) | $ | 553,476 |
Other investments consist of Certificates of Deposit and investments in Small Business Administration loan funds.
The carrying value of securities pledged to secure deposits and for other purposes amounted to $175.9 million and $194.9 million at March 31, 2013 and December 31, 2012, respectively.
Information pertaining to sales and calls of securities available for sale is as follows (In thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Proceeds from sales/calls | $ | 6,875 | $ | 2,705 | ||||
Gross realized gains | 6 | 73 |
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) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. As of March 31, 2013 and December 31, 2012, there were no available for sale securities with unrealized losses greater than twelve months.
As of March 31, 2013, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not likely that we will have to sell any such securities before a recovery of cost given the current liquidity position. 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 re-pricing 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.
The amortized cost and fair value of securities available for sale at March 31, 2013 are presented below by contractual maturity (In thousands):
Amortized Cost | Fair Value | |||||||
Due in one year or less | $ | 16,307 | $ | 16,511 | ||||
Due after one year through five years | 238,103 | 240,611 | ||||||
Due after five years through ten years | 113,310 | 118,693 | ||||||
Due after ten years | 124,716 | 133,508 | ||||||
Equity securities | 1,000 | 1,000 | ||||||
Total | $ | 493,436 | $ | 510,323 |
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
6
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. | Derivative Financial Instruments |
We use derivatives to manage exposure to interest rate risk through the use of interest rate swaps, caps and floors to mitigate exposure to interest rate risk and service the needs of our customers.
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, we entered into a forward start interest rate swap contract on our subordinated debt that qualifies as a cash flow hedge, effective September 2011. The swap was extended for an additional three years, with the new rate to take effect in September 2013 following the maturity of the current swap. Our cash flow hedge effectively modifies our exposure to interest rate risk by converting floating rate subordinated debt to a fixed rate with a maturity in 2016.
On September 30, 2011, we began paying a weighted average fixed rate of 1.245% plus margin, and receive a variable interest rate of three-month LIBOR on a total notional amount of $32.0 million, with quarterly settlements. Beginning in September of 2011, this swap effectively fixed the interest rate on the subordinated debt at 4.11% for the two year swap term (through September 2013). The cash flow hedge was fully effective at March 31, 2013 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. The swap extension will effectively fix the interest rate on the subordinated debt at 4.81%, starting in September 2013 (through September 2016). At March 31, 2013, the cash flow hedge had a fair value of $1.4 million and is recorded in Other Liabilities. We anticipate that it will continue to be fully effective and changes in fair value will continue to be recognized as a component of other comprehensive income, net of deferred income taxes. At March 31, 2013, we pledged $1.4 million of cash collateral for this interest rate swap.
We entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which we enter into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay the counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customers to effectively convert a variable rate loan to a fixed rate. Because we act as an intermediary for our customers, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations. The aggregate notional amount of these swap agreements with counterparties was $82.1 million as of March 31, 2013 and cash collateral of $3.0 million was pledged.
4. | Loans and Allowance for Loan Losses |
Through our banking subsidiary, we grant 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 our debtors to honor their contracts is dependent upon the real estate and general economic conditions in our market area.
Loans that we have 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.
7
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Our loan portfolio is composed of the following (In thousands):
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Construction and land development: | ||||||||
Residential | $ | 44,166 | $ | 45,308 | ||||
Commercial | 164,801 | 149,072 | ||||||
Total construction and land development | 208,967 | 194,380 | ||||||
Commercial real estate: | ||||||||
Commercial real estate - owner occupied | 351,433 | 343,944 | ||||||
Commercial real estate - non-owner occupied | 480,615 | 458,646 | ||||||
Farmland | 10,894 | 12,099 | ||||||
Multifamily, nonresidential and junior liens | 113,381 | 106,334 | ||||||
Total commercial real estate | 956,323 | 921,023 | ||||||
Consumer real estate: | ||||||||
Home equity lines | 241,625 | 246,806 | ||||||
Secured by 1-4 family residential, secured by first deeds of trust | 455,397 | 447,400 | ||||||
Secured by 1-4 family residential, secured by second deeds of trust | 34,659 | 34,690 | ||||||
Total consumer real estate | 731,681 | 728,896 | ||||||
Commercial and industrial loans (except those secured by real estate) | 205,877 | 203,840 | ||||||
Consumer and other: | ||||||||
Consumer installment loans | 37,056 | 26,697 | ||||||
Deposit overdrafts | 644 | 3,677 | ||||||
All other loans | 1,383 | 1,555 | ||||||
Total consumer and other | 39,083 | 31,929 | ||||||
Total loans | 2,141,931 | 2,080,068 | ||||||
Deferred loan costs | (440 | ) | (475 | ) | ||||
Allowance for loan losses | (29,050 | ) | (29,824 | ) | ||||
Net loans | $ | 2,112,441 | $ | 2,049,769 |
As of March 31, 2013 and December 31, 2012, the book value of loans pledged as collateral for advances outstanding with the Federal Home Loan Bank of Atlanta totaled $349.6 million and $360.9 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 | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Construction and land development | $ | 8,148 | $ | 9,400 | $ | 523 | $ | - | ||||||||
Commercial real estate | 7,911 | 10,224 | - | - | ||||||||||||
Consumer real estate | 14,208 | 15,642 | - | 179 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 1,195 | 584 | - | - | ||||||||||||
Consumer and other | 16 | 32 | 2 | 3 | ||||||||||||
Total | $ | 31,478 | $ | 35,882 | $ | 525 | $ | 182 |
If interest under the accrual method had been recognized on nonaccrual loans, such income would have approximated $297 thousand and $351 thousand for the three months ended March 31, 2013 and 2012, respectively.
The following table presents the aging of the recorded investment in past due loans 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 | ||||||||||||||||||||||
March 31, 2013 | ||||||||||||||||||||||||||||
Construction and land development | $ | 1,418 | $ | 1,581 | $ | 523 | $ | 8,148 | $ | 11,670 | $ | 197,297 | $ | 208,967 | ||||||||||||||
Commercial real estate | 3,253 | 2,719 | - | 7,911 | 13,883 | 942,440 | 956,323 | |||||||||||||||||||||
Consumer real estate | 9,897 | 3,448 | - | 14,208 | 27,553 | 704,128 | 731,681 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 168 | 106 | - | 1,195 | 1,469 | 204,408 | 205,877 | |||||||||||||||||||||
Consumer and other | 130 | 19 | 2 | 16 | 167 | 38,916 | 39,083 | |||||||||||||||||||||
Total loans | $ | 14,866 | $ | 7,873 | $ | 525 | $ | 31,478 | $ | 54,742 | $ | 2,087,189 | $ | 2,141,931 | ||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||
Construction and land development | $ | 2,283 | $ | 2,430 | $ | - | $ | 9,400 | $ | 14,113 | $ | 180,267 | $ | 194,380 | ||||||||||||||
Commercial real estate | 6,529 | 5,980 | - | 10,224 | 22,733 | 898,290 | 921,023 | |||||||||||||||||||||
Consumer real estate | 7,899 | 6,879 | 179 | 15,642 | 30,599 | 698,297 | 728,896 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | 615 | 338 | - | 584 | 1,537 | 202,303 | 203,840 | |||||||||||||||||||||
Consumer and other | 231 | 101 | 3 | 32 | 367 | 31,562 | 31,929 | |||||||||||||||||||||
Total loans | $ | 17,557 | $ | 15,728 | $ | 182 | $ | 35,882 | $ | 69,349 | $ | 2,010,719 | $ | 2,080,068 |
We conduct an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses (“ALLL”) and in the determination of the necessary provision for loan losses. The 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 analysis of the loan portfolio generally begins with the identification of potential problem loans to be reviewed on an individual basis for impairment. When a commercial or commercial real estate loan of $500,000 or more has been identified as impaired, our policy requires a new appraisal (to include a liquidation value) unless our in-house Chief Appraiser reviews the existing appraisal (generally less than twelve months old) and determines that it may be used with appropriate market and/or liquidation adjustments as determined by him on a case by case basis. If a new appraisal is not required, the existing appraisal is used in order to estimate the fair value of the collateral, as validated by our in-house appraisal group. Our in-house Chief Appraiser’s review of such appraisals is documented and retained as part of the quarterly ALLL process. New appraisals are generally available within a one-quarter lag and are also reviewed by the Chief Appraiser to ensure appropriateness and reasonableness of the methods and assumptions used by the external third-party appraiser. Typically, charge-offs are recognized when the loss is probable and estimable, which is typically in the same quarter as the foreclosure or disposition of the underlying collateral. Prior to being charged-off, a specific reserve may be established based on our calculation of the loss embedded in the individual loan. Due to the processes described above, we do not experience significant timing differences between the identification of losses on impaired loans and recordation.
In addition to specific reserves on impaired loans, we have a nine point grading system, which we apply to business purpose loans in the portfolio to reflect the risk characteristic of the loan. The loans identified and measured for impairment are segregated from other loans within the portfolio. The remaining loans are then grouped by loan type and, in the case of business 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 allowance factor incorporating the unemployment rate in Virginia was updated to assign a reserve at a lower rate of unemployment than previously used and softened the impact between different tranches.
In the first quarter of 2013, the look-back period for calculating historical losses was changed from four years to five years. Management believes this period appropriately reflects the current credit cycle and accurately reflects the risk in the loan portfolio. The five year look-back period includes the higher credit losses beginning in 2008 attributable to the economic downturn. The most current 12 month period continues to be weighted more heavily as management considers it to be the most relevant indicator of current economic conditions. These refinements to the ALLL calculation were not significant to the provision expense or the overall consolidated financial statements.
The loan portfolio analysis also consists of appraisal updates on non-impaired loans. Existing appraisals may be validated or new appraisals ordered as loans are renewed or refinanced, depending on the individual circumstances surrounding each loan. Our in-house Chief Appraiser reviews new appraisals on non-impaired loans and documents the review.
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 our key lending areas, 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, and bank regulatory examination results. The total of specific reserves required for impaired classified loans and the calculated reserves comprise the allowance for loan losses.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
9
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan losses by portfolio segment is as follows (In thousands):
Three Months Ended March 31, 2013 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Allowance | |||||||||||||||||||
Balance, January 1, 2013 | $ | 8,230 | $ | 9,045 | $ | 10,811 | $ | 1,642 | $ | 96 | $ | 29,824 | ||||||||||||
Provision for loan losses | 584 | (396 | ) | (119 | ) | 603 | 28 | 700 | ||||||||||||||||
Loans charged off | (394 | ) | (267 | ) | (1,225 | ) | (170 | ) | (77 | ) | (2,133 | ) | ||||||||||||
Recoveries | 38 | 209 | 99 | 250 | 63 | 659 | ||||||||||||||||||
Net charge-offs | (356 | ) | (58 | ) | (1,126 | ) | 80 | (14 | ) | (1,474 | ) | |||||||||||||
Balance, March 31, 2013 | $ | 8,458 | $ | 8,591 | $ | 9,566 | $ | 2,325 | $ | 110 | $ | 29,050 | ||||||||||||
Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
Construction and Land Development | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial (Except those Secured by Real Estate) | Consumer and Other | Total Allowance | |||||||||||||||||||
Balance, January 1, 2012 | $ | 9,856 | $ | 8,565 | $ | 10,019 | $ | 4,059 | $ | 89 | $ | 32,588 | ||||||||||||
Provisions for loan losses | (53 | ) | 395 | 1,295 | (713 | ) | (74 | ) | 850 | |||||||||||||||
Loans charged off | (401 | ) | (798 | ) | (886 | ) | (250 | ) | (48 | ) | (2,383 | ) | ||||||||||||
Recoveries | 14 | 68 | 98 | 268 | 112 | 560 | ||||||||||||||||||
Net (charge-offs) recoveries | (387 | ) | (730 | ) | (788 | ) | 18 | 64 | (1,823 | ) | ||||||||||||||
Balance, March 31, 2012 | $ | 9,416 | $ | 8,230 | $ | 10,526 | $ | 3,364 | $ | 79 | $ | 31,615 |
The table below presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method. TDRs that have been subsequently removed from impaired status in years subsequent to the restructuring are not presented in the table (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 | |||||||||||||||||||
March 31, 2013 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4,014 | $ | 2,491 | $ | 636 | $ | 437 | $ | - | $ | 7,578 | ||||||||||||
Collectively evaluated for impairment | 4,444 | 6,100 | 8,930 | 1,888 | 110 | 21,472 | ||||||||||||||||||
Total ending allowance | $ | 8,458 | $ | 8,591 | $ | 9,566 | $ | 2,325 | $ | 110 | $ | 29,050 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 11,222 | $ | 20,396 | $ | 5,740 | $ | 615 | $ | - | $ | 37,973 | ||||||||||||
Collectively evaluated for impairment | 197,745 | 935,927 | 725,941 | 205,262 | 39,083 | 2,103,958 | ||||||||||||||||||
Total loans | $ | 208,967 | $ | 956,323 | $ | 731,681 | $ | 205,877 | $ | 39,083 | $ | 2,141,931 | ||||||||||||
December 31, 2012 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4,423 | $ | 2,767 | $ | 640 | $ | - | $ | - | $ | 7,830 | ||||||||||||
Collectively evaluated for impairment | 3,807 | 6,278 | 10,171 | 1,642 | 96 | 21,994 | ||||||||||||||||||
Total ending allowance | $ | 8,230 | $ | 9,045 | $ | 10,811 | $ | 1,642 | $ | 96 | $ | 29,824 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 12,686 | $ | 23,006 | $ | 5,919 | $ | - | $ | - | $ | 41,611 | ||||||||||||
Collectively evaluated for impairment | 181,694 | 898,017 | 722,977 | 203,840 | 31,929 | 2,038,457 | ||||||||||||||||||
Total loans | $ | 194,380 | $ | 921,023 | $ | 728,896 | $ | 203,840 | $ | 31,929 | $ | 2,080,068 |
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Additionally, management’s policy is generally to evaluate only those loans greater than $500 thousand for impairment as these are considered to be individually significant in relation to the size of the loan portfolio. 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 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. Accordingly, we do not separately identify individual consumer and residential loans for impairment.
Impaired loans totaled $44.5 million and $49.3 million at March 31, 2013 and December 31, 2012, respectively. Included in these balances were $23.0 million and $25.6 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 TDRs, we further evaluate the loans as performing or nonperforming. If, at the time of restructure, the loan is accruing, it will be classified as performing and will continue to be classified as performing as long as the borrower continues making payments in accordance with the restructured terms. A modified loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. TDRs originally considered nonaccrual will be classified as nonperforming, but are able to be reclassified as performing if subsequent to restructure, they experience consecutive six months of payment performance according to the restructured terms. Further, a TDR 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.
· The loan has been reported as a TDR in at least one annual filing on Form 10-K.
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.
Annually during the second quarter, we review those loans designated as TDRs for compliance with the previously stated criteria as part of our ongoing monitoring of the performance of modified loans.
10
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information on performing and nonperforming TDRs for the periods presented (In thousands):
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Performing restructurings: | ||||||||
Construction and land development | $ | 4,940 | $ | 5,962 | ||||
Commercial real estate | 6,746 | 7,004 | ||||||
Consumer real estate | 9,396 | 10,278 | ||||||
Total performing restructurings | $ | 21,082 | $ | 23,244 | ||||
Nonperforming restructurings: | ||||||||
Construction and land development | $ | 381 | $ | 380 | ||||
Commercial real estate | 60 | 116 | ||||||
Consumer real estate | 1,519 | 1,885 | ||||||
Total nonperforming restructurings | $ | 1,960 | $ | 2,381 | ||||
Total restructurings | $ | 23,042 | $ | 25,625 |
The following table provides information about TDRs identified during the specified periods and those loans identified as TDRs within the prior 12 month timeframe that subsequently defaulted. Defaults are those TDRs that went greater than 90 days past due, and aligns with our internal definition of default for those loans not identified as TDRs (In thousands, except number of contracts):
Modifications for the three months ended, | ||||||||||||
March 31, 2012 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
Troubled Debt Restructurings | ||||||||||||
Construction and land development | 1 | $ | 2,201 | $ | 2,201 | |||||||
Consumer real estate | 2 | 986 | 1,275 | |||||||||
Total Troubled Debt Restructurings | 3 | $ | 3,187 | $ | 3,476 |
Troubled Debt Restructurings that Subsequently Defaulted | ||||||||
Number of contracts | Recorded Investment | |||||||
Troubled Debt Restructurings | ||||||||
Commercial real estate | 1 | $ | 1,043 | |||||
Consumer real estate | 14 | 2,360 | ||||||
Commercial and industrial loans (except those secured by real estate) | 1 | - | ||||||
Total Troubled Debt Restructurings | 16 | $ | 3,403 |
There were no TDRs identified during the first quarter of 2013, nor any TDRs identified within the past 12 months that subsequently defaulted.
11
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 TDRs (In thousands):
Three Months Ended March 31 | ||||||||
Interest income recognized | Cash-basis interest income | |||||||
2013 | ||||||||
Construction and land development | $ | 76 | $ | 89 | ||||
Commercial real estate | 224 | 236 | ||||||
Consumer real estate | 54 | 53 | ||||||
Total | $ | 354 | $ | 378 | ||||
2012 | ||||||||
Construction and land development | $ | 114 | $ | 147 | ||||
Commercial real estate | 62 | 64 | ||||||
Consumer real estate | 45 | 43 | ||||||
Total | $ | 221 | $ | 254 |
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, we evaluate 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 $44.5 million of impaired loans at March 31, 2013, $6.5 million, consisting solely of TDRs, was collectively evaluated for impairment and $38.0 million was individually evaluated for impairment. The detail of loans individually evaluated for impairment, which includes $16.5 million of TDRs, is presented below (In thousands):
Recorded investment | Unpaid contractual principal balance | Allocated allowance | Average recorded investment | |||||||||||||
March 31, 2013 | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||
Construction and land development | $ | 2,762 | $ | 3,116 | $ | - | $ | 3,001 | ||||||||
Commercial real estate | 1,466 | 1,466 | - | 4,335 | ||||||||||||
Consumer real estate | 1,871 | 3,426 | - | 1,896 | ||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||
Construction and land development | 8,460 | 13,083 | 4,014 | 8,954 | ||||||||||||
Commercial real estate | 18,930 | 19,559 | 2,491 | 17,366 | ||||||||||||
Consumer real estate | 3,869 | 3,886 | 636 | 3,934 | ||||||||||||
Commercial and industrial loans (except those secured by real estate) | 615 | 615 | 437 | 307 | ||||||||||||
Total | $ | 37,973 | $ | 45,151 | $ | 7,578 | $ | 39,793 |
As of December 31, 2012, we had $49.3 million of impaired loans, with $7.7 million, consisting solely of TDRs, collectively evaluated for impairment. The other $41.6 million individually evaluated for impairment, which includes $17.9 million of TDRs, is presented below (In thousands):
Recorded investment | Unpaid contractual principal balance | Allocated allowance | Average recorded investment | |||||||||||||
December 31, 2012 | ||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||
Construction and land development | $ | 3,239 | $ | 3,593 | $ | - | $ | 3,591 | ||||||||
Commercial real estate | 7,204 | 7,320 | - | 7,920 | ||||||||||||
Consumer real estate | 1,921 | 3,479 | - | 3,228 | ||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||
Construction and land development | 9,447 | 14,045 | 4,423 | 10,390 | ||||||||||||
Commercial real estate | 15,802 | 16,383 | 2,767 | 12,697 | ||||||||||||
Consumer real estate | 3,998 | 4,015 | 640 | 3,540 | ||||||||||||
Total | $ | 41,611 | $ | 48,835 | $ | 7,830 | $ | 41,366 |
Credit Quality Indicators
We categorize 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. Loans are risk graded at inception through the credit approval process. The definitions used were last updated in early 2010 and are reviewed for applicability annually. The risk grades are reviewed and formally affirmed quarterly by loan officers. In addition, a certain percentage of credit exposure is reviewed each year through our 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. We use 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 our 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 nonaccrual status and no definitive repayment schedule exists.
· Risk Grade 9 – Loss. Loans are considered fully uncollectible and charged off.
We utilize our nine point grading system in order to evaluate the level of inherent risk in the loan portfolio as part of our 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.
12
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Loans not graded are either consumer purpose loans, construction loans to individuals for single-family owner-occupied construction, or are included in groups of homogenous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In thousands):
Risk Grade | ||||||||||||||||||||||||||||
Not Graded | 1 - 3 | 4 | 5 | 6 | 7 | 8 | ||||||||||||||||||||||
March 31, 2013 | ||||||||||||||||||||||||||||
Construction and land development | $ | 41,861 | $ | 1,587 | $ | 74,193 | $ | 61,635 | $ | 3,415 | $ | 22,543 | $ | 3,733 | ||||||||||||||
Commercial real estate | - | 92,102 | 539,407 | 237,655 | 22,900 | 64,259 | - | |||||||||||||||||||||
Consumer real estate | - | 6,299 | 98,809 | 70,258 | 12,013 | 21,525 | 976 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | - | 74,008 | 83,101 | 39,081 | 4,073 | 5,522 | 92 | |||||||||||||||||||||
Total | $ | 41,861 | $ | 173,996 | $ | 795,510 | $ | 408,629 | $ | 42,401 | $ | 113,849 | $ | 4,801 | ||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||
Construction and land development | $ | 40,980 | $ | 964 | $ | 65,041 | $ | 56,114 | $ | 2,907 | $ | 24,945 | $ | 3,429 | ||||||||||||||
Commercial real estate | - | 86,518 | 523,127 | 207,470 | 30,738 | 72,484 | 686 | |||||||||||||||||||||
Consumer real estate | - | 6,935 | 98,432 | 69,061 | 12,575 | 23,203 | 976 | |||||||||||||||||||||
Commercial and industrial loans (except those secured by real estate) | - | 66,612 | 76,748 | 49,236 | 4,717 | 6,470 | 57 | |||||||||||||||||||||
Total | $ | 40,980 | $ | 161,029 | $ | 763,348 | $ | 381,881 | $ | 50,937 | $ | 127,102 | $ | 5,148 |
We consider the performance of the loan portfolio and its impact on the allowance for loan losses. For smaller-balance homogenous residential and consumer loans, we also evaluate credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity (In thousands):
Consumer real estate | Consumer and other | |||||||||||||||
March 31, 2013 | December 31, 2012 | March 31, 2013 | December 31, 2012 | |||||||||||||
Performing | $ | 507,593 | $ | 502,072 | $ | 39,067 | $ | 31,897 | ||||||||
Nonperforming | 14,208 | 15,642 | 16 | 32 | ||||||||||||
Total | $ | 521,801 | $ | 517,714 | $ | 39,083 | $ | 31,929 |
Repurchased Loans
In certain loan sales, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain time period. We evaluate all mortgage loans at the time of repurchase for evidence of deteriorated credit quality. All loans are recorded at estimated realizable value at the time of purchase. At March 31, 2013, $252 thousand of losses associated with mortgage repurchases and indemnifications was accrued. Additionally, losses of $354 thousand were recognized during the three months ended March 31, 2012. No losses were recognized during the first quarter of 2013.
Concentrations of Credit
Most of our lending activity occurs within Richmond, Central and Southwest Virginia. The majority of our loan portfolio consists of consumer and commercial real estate loans. As of March 31, 2013 and December 31, 2012, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
13
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. | 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 March 31, 2013 and 2012. Potential dilutive stock had no effect on income per common share for the three month periods (In thousands, except share and per share amounts).
March 31, | ||||||||
2013 | 2012 | |||||||
Earnings per common share | ||||||||
Net income | $ | 5,911 | $ | 5,500 | ||||
Weighted average common shares issued and outstanding | 22,995,404 | 23,064,048 | ||||||
Earnings per common share | $ | 0.26 | $ | 0.24 | ||||
Diluted earnings per common share | ||||||||
Weighted average common shares issued and outstanding | 22,995,404 | 23,064,048 | ||||||
Stock options | 25,947 | 116 | ||||||
Total diluted weighted average common shares issued and outstanding | 23,021,351 | 23,064,164 | ||||||
Diluted earnings per common share | $ | 0.26 | $ | 0.24 |
In 2013 and 2012, stock options representing 172,859 and 257,336 shares, respectively, were not included in the three month calculation of earnings per share, as their effect would have been anti-dilutive. Of the outstanding warrants to purchase 302,622 shares of common stock associated with the U.S. Treasury Capital Purchase Program, 278,637 shares were considered anti-dilutive and thus have not been considered in the fully-diluted share calculations.
6. | Stock-Based Compensation |
Stock-based compensation expense included within compensation and employee benefits expense totaled $290 thousand and $218 thousand during the three months ended March 31, 2013 and 2012.
A summary of the stock option plan at March 31, 2013 and 2012 and changes during the periods ended on those dates are as follows:
2013 | 2012 | |||||||||||||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding at January 1, | 184,431 | $ | 20.30 | 291,196 | $ | 21.58 | ||||||||||
Forfeited | - | - | (6,228 | ) | 19.29 | |||||||||||
Expired | (1,134 | ) | 18.68 | (29,538 | ) | 22.57 | ||||||||||
Exercised | (1,110 | ) | 12.78 | - | - | |||||||||||
Outstanding at March 31, | 182,187 | $ | 20.36 | 255,430 | $ | 21.53 | ||||||||||
Exercisable at March 31, | 168,553 | 224,206 |
The aggregate intrinsic value of options outstanding as of March 31, 2013 was $53 thousand and the intrinsic value of options exercisable was $44 thousand and the intrinsic value of options exercised during the first quarter of 2013 was $3 thousand. There were no options exercised during the first quarter of 2012. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the quarter ended March 31, 2013 and the exercise price, multiplied by the number of options outstanding). The fair value of shares vested during the first quarter of 2013 was $17 thousand. The weighted average remaining contractual life is 1.6 years with a weighted average exercise price of $20.55 for exercisable options at March 31, 2013.
The following table summarizes nonvested restricted shares outstanding as of March 31, 2013 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, 2013 | 210,011 | $ | 12.49 | $ | 2,970 | |||||||
Granted | 61,654 | 14.37 | ||||||||||
Vested and exercised | (52,152 | ) | 12.70 | $ | 760 | |||||||
Forfeited | (50 | ) | 12.78 | |||||||||
Nonvested at March 31, 2013 | 219,463 | $ | 12.96 | $ | 3,544 |
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2013 that will be recognized through 2018 is $2.3 million.
14
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. | 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 (an exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, we utilize 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.
We group 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. We evaluate our 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, we expect changes in classifications between levels will be rare. There were no transfers between levels in 2013 or 2012.
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. 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 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Deferred compensation plans: Liabilities associated with deferred compensation plans are recorded at fair value on a recurring basis as Level 1 based on the fair value of the underlying securities. The underlying securities are all Level 1 as described above.
Cash flow hedge: We record the fair value of our cash flow hedge on a recurring basis as Level 2, as the valuation is based on estimates using standard pricing models. These models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves.
15
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 are summarized below (In thousands).
Fair Value Measurements at | ||||||||||||||||
March 31, 2013 | ||||||||||||||||
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 | $ | 242,642 | $ | - | $ | 242,642 | $ | - | ||||||||
State and municipals | 142,763 | - | 142,763 | - | ||||||||||||
Corporate bonds | 1,848 | - | 1,848 | - | ||||||||||||
Collateralized mortgage obligations | 4,801 | - | 4,801 | - | ||||||||||||
Mortgage backed securities | 103,520 | - | 103,520 | - | ||||||||||||
Other investments | 14,749 | 13,749 | 1,000 | - | ||||||||||||
Other assets 1 | 2,908 | 2,908 | - | - | ||||||||||||
Total assets at fair value | $ | 513,231 | $ | 16,657 | $ | 496,574 | $ | - | ||||||||
Cash flow hedge | $ | 1,390 | $ | - | $ | 1,390 | $ | - | ||||||||
Other liabilities 1 | 2,954 | 2,954 | - | - | ||||||||||||
Total liabilities at fair value | $ | 4,344 | $ | 2,954 | $ | 1,390 | $ | - |
1 Includes assets and liabilities associated with deferred compensation plans.
Fair Value Measurements at | ||||||||||||||||
December 31, 2012 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Investment securities available-for-sale | ||||||||||||||||
U. S. Treasuries | $ | 20,000 | �� | $ | 20,000 | $ | - | $ | - | |||||||
U. S. Government agencies | 249,496 | - | 249,496 | $ | - | |||||||||||
State and municipals | 148,666 | - | 148,666 | - | ||||||||||||
Corporate bonds | 1,852 | - | 1,852 | - | ||||||||||||
Collateralized mortgage obligations | 5,333 | - | 5,333 | - | ||||||||||||
Mortgage backed securities | 113,380 | - | 113,380 | - | ||||||||||||
Other investments | 14,749 | 13,749 | 1,000 | - | ||||||||||||
Other assets 1 | 2,987 | 2,987 | - | - | ||||||||||||
Total assets at fair value | $ | 556,463 | $ | 36,736 | $ | 519,727 | $ | - | ||||||||
Cash flow hedge | $ | 1,465 | $ | - | $ | 1,465 | $ | - | ||||||||
Other liabilities 1 | 3,034 | 3,034 | - | - | ||||||||||||
Total liabilities at fair value | $ | 4,499 | $ | 3,034 | $ | 1,465 | $ | - |
Assets and Liabilities Measured on a Nonrecurring Basis:
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with USGAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.
Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. Those loans with a quoted price are recorded as Level 2. 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. These loans are recorded as Level 3.
Loans: We do 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.
The fair value of impaired loans is estimated using one of several methods. For real estate secured loans, generally external appraisals by a board approved appraiser are used to determine the fair value of the underlying collateral for collateral dependent impaired loans. These appraisals are sometimes adjusted based on management’s and Chief Appraiser’s knowledge of other factors not embedded within the appraisal, including selling costs, maintenance costs, and other estimable costs that would be incurred if collateral is required to be liquidated. Our in-house Chief Appraiser’s review of such appraisals is documented as part of the quarterly ALLL process. Other estimates of value, such as auctioneer’s estimates of value, purchase offers and/or contracts, and settlement offers and/or agreements, may be used when they are thought to represent a more accurate estimate of fair value. For loans that are not secured by real estate, fair value of the collateral may be determined by discounted book value based on available data such as current financial statements or an external appraisal or an auctioneer’s or liquidator’s estimate of value. Those impaired loans not requiring an allowance represent loans that have been charged down to their net realizable value. At March 31, 2013 and December 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. As such, we record the impaired loan as nonrecurring Level 3.
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 appraised values of the collateral adjusted for estimated disposition costs or management’s estimation of the value of the collateral. As such, we record 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 March 31, 2013 and December 31, 2012 are included in the table below (In thousands).
Fair Value Measurements at | ||||||||||||||||
March 31, 2013 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Impaired loans | $ | 21,432 | $ | - | $ | - | $ | 21,432 | ||||||||
Foreclosed assets | 6,389 | - | - | 6,389 | ||||||||||||
Total assets at fair value | $ | 27,821 | $ | - | $ | - | $ | 27,821 | ||||||||
Fair Value Measurements at | ||||||||||||||||
December 31, 2012 | ||||||||||||||||
Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Total | (Quoted Prices) | (Significant Other Observable Inputs) | (Significant Unobservable Inputs) | |||||||||||||
Impaired loans | $ | 23,667 | $ | - | $ | - | $ | 23,667 | ||||||||
Loans held for sale - mortgage | 37,778 | - | 37,778 | - | ||||||||||||
Foreclosed assets | 5,760 | - | - | 5,760 | ||||||||||||
Total assets at fair value | $ | 67,205 | $ | - | $ | 37,778 | $ | 29,427 |
There are significant unobservable inputs used for our Level 3 measurements of impaired loans and foreclosed assets. For both types of assets, the measurement is dependent on our planned strategy. For foreclosed assets, quarterly valuations are typically obtained for the properties in the portfolio. For those properties less than $500 thousand associated with realtor sales, this is typically a realtor’s assessment. Properties greater than $500 thousand that will be sold through the retail, wholesale and auction markets are typically reported at liquidation value supported by a current appraisal or an auctioneer’s estimate, as appropriate. Over the past few years, the average markdown on foreclosed assets subsequent to their reclassification from the loan portfolio has been approximately 12% - 15%. For impaired loans with a planned strategy of rehabilitation, a market value is used for the fair value measurement. Adjustments are made if an updated market value is not obtained and we feel that the market has changed significantly since the value was prepared. If our strategy is to liquidate a property, the liquidation value is used. For those properties going to auction, the value may be adjusted downward based on auctioneer feedback, which is typically more reliable than appraisal value based on market knowledge.
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 estimated fair value approximates carrying value for cash and cash equivalents, and accrued interest. 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. These loans are considered Level 3, as the valuation is determined using discounted cash flow methodology.
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. Deposits are considered Level 3, as the valuation is determined using discounted cash flow methodology.
Federal Home Loan Bank Advances: The fair values of our Federal Home Loan Bank advances are provided by the Federal Home Loan Bank of Atlanta and represent mathematical approximations of market values derived from their proprietary models as of the close of business on the last business day of the quarter and therefore, we consider these advances Level 3.
Subordinated Debt: The values of our 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. Subordinated debt is Level 3, as the valuation is determined using discounted cash flow methodology.
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 March 31, 2013 and December 31, 2012, the fair value of loan commitments and stand-by letters of credit was immaterial.
17
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of our financial instruments are as follows (In thousands):
March 31, 2013 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | ||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 66,509 | $ | 66,509 | $ | 66,509 | $ | - | $ | - | ||||||||||
Investment securities | 510,323 | 510,323 | 13,749 | 496,574 | - | |||||||||||||||
Mortgage loans held for sale | 30,036 | 30,036 | - | 30,036 | - | |||||||||||||||
Loans receivable, net | 2,112,441 | 1,940,078 | - | - | 1,940,078 | |||||||||||||||
Accrued interest receivable | 8,865 | 8,865 | 17 | 3,003 | 5,845 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | $ | 2,476,005 | $ | 2,487,796 | $ | - | $ | - | $ | 2,487,796 | ||||||||||
Federal Home Loan Bank advances | 55,000 | 59,503 | - | - | 59,503 | |||||||||||||||
Subordinated debt | 32,991 | 32,938 | - | - | 32,938 | |||||||||||||||
Accrued interest payable | 1,548 | 1,548 | - | - | 1,548 | |||||||||||||||
December 31, 2012 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | ||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 89,949 | $ | 89,949 | $ | 89,949 | $ | - | $ | - | ||||||||||
Investment securities | 553,476 | 553,476 | 33,749 | 519,727 | - | |||||||||||||||
Mortgage loans held for sale | 37,778 | 37,778 | - | 37,778 | - | |||||||||||||||
Loans receivable, net | 2,049,769 | 1,884,523 | - | - | 1,884,523 | |||||||||||||||
Accrued interest receivable | 8,265 | 8,265 | 14 | 2,646 | 5,605 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | $ | 2,484,324 | $ | 2,497,277 | $ | - | $ | - | $ | 2,497,277 | ||||||||||
Federal Home Loan Bank advances | 55,000 | 59,864 | - | - | 59,864 | |||||||||||||||
Subordinated debt | 32,991 | 32,937 | - | - | 32,937 | |||||||||||||||
Accrued interest payable | 1,682 | 1,682 | - | - | 1,682 |
8. | Segment Information |
We operate 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 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.
Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three months ended March 31, 2013 and 2012 is as follows:
At and for the Three Months Ended March 31, 2013 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 24,218 | $ | 316 | $ | - | $ | (335 | ) | $ | - | $ | 24,199 | |||||||||||
Provision for loan losses | 700 | - | - | - | - | 700 | ||||||||||||||||||
Noninterest income | 5,585 | 1,817 | 1,228 | 26 | (1,217 | ) | 7,439 | |||||||||||||||||
Noninterest expense | 21,660 | 1,445 | 1,035 | (153 | ) | (1,217 | ) | 22,770 | ||||||||||||||||
Provision for income taxes | 2,053 | 206 | 58 | (60 | ) | - | 2,257 | |||||||||||||||||
Net income (loss) | $ | 5,390 | $ | 482 | $ | 135 | $ | (96 | ) | $ | - | $ | 5,911 | |||||||||||
Total Assets | $ | 2,960,541 | $ | 44,874 | $ | 629 | $ | 467,166 | $ | (459,321 | ) | $ | 3,013,889 | |||||||||||
Average Assets | $ | 2,945,276 | $ | 39,816 | $ | 615 | $ | 468,857 | $ | (461,775 | ) | $ | 2,992,789 | |||||||||||
At and for the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
Commercial | Mortgage | Wealth | Intersegment | |||||||||||||||||||||
Banking | Banking | Management | Other | Elimination | Consolidated | |||||||||||||||||||
Net interest income | $ | 23,992 | $ | 245 | $ | - | $ | (341 | ) | $ | - | $ | 23,896 | |||||||||||
Provision for loan losses | 850 | - | - | - | - | 850 | ||||||||||||||||||
Noninterest income | 5,496 | 1,398 | 1,278 | 27 | (1,231 | ) | 6,968 | |||||||||||||||||
Noninterest expense | 21,090 | 1,327 | 1,026 | 188 | (1,231 | ) | 22,400 | |||||||||||||||||
Provision for income taxes | 2,123 | 95 | 77 | (181 | ) | - | 2,114 | |||||||||||||||||
Net income (loss) | $ | 5,425 | $ | 221 | $ | 175 | $ | (321 | ) | $ | - | $ | 5,500 | |||||||||||
Total Assets | $ | 2,900,980 | $ | 17,383 | $ | 506 | $ | 455,548 | $ | (448,503 | ) | $ | 2,925,914 | |||||||||||
Average Assets | $ | 2,865,457 | $ | 24,988 | $ | 461 | $ | 454,809 | $ | (448,091 | ) | $ | 2,897,624 |
18
STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. | Accumulated Other Comprehensive Income |
The components of other comprehensive loss and the related tax effects were (In thousands):
Three months ended March 31, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Before tax | Tax effect | Net of tax | Before tax | Tax effect | Net of tax | |||||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||
Unrealized holding gains arising during the period | $ | (2,170 | ) | $ | 759 | $ | (1,411 | ) | $ | (472 | ) | $ | 165 | $ | (307 | ) | ||||||||
Reclassification adjustment | (6 | ) | 2 | (4 | ) | (73 | ) | 26 | (47 | ) | ||||||||||||||
Change in post retirement liability | (177 | ) | 62 | (115 | ) | 3 | (1 | ) | 2 | |||||||||||||||
Change in cash flow hedge | 75 | (26 | ) | 49 | (42 | ) | 15 | (27 | ) | |||||||||||||||
Other comprehensive income | $ | (2,278 | ) | $ | 797 | $ | (1,481 | ) | $ | (584 | ) | $ | 205 | $ | (379 | ) |
There were no significant reclassifications out of accumulated other comprehensive income during the periods presented.
Cumulative other comprehensive income balances were (In thousands):
Investment securities available for sale | Postretirement liability | Cash flow hedge | Cumulative other comprehensive income | |||||||||||||
Balance, January 1, 2012 | $ | 11,582 | $ | (1,725 | ) | $ | (523 | ) | $ | 9,334 | ||||||
Net change | (354 | ) | 2 | (27 | ) | (379 | ) | |||||||||
Balance, March 31, 2012 | $ | 11,228 | $ | (1,723 | ) | $ | (550 | ) | $ | 8,955 | ||||||
Balance, January 1, 2013 | $ | 12,391 | $ | (1,532 | ) | $ | (952 | ) | $ | 9,907 | ||||||
Net change | (1,415 | ) | (115 | ) | 49 | (1,481 | ) | |||||||||
Balance, March 31, 2013 | $ | 10,976 | $ | (1,647 | ) | $ | (903 | ) | $ | 8,426 |
10. | Share Repurchase Plan |
Our Board approved a share repurchase program in December of 2012, authorizing 1,500,000 shares for repurchase. There is no stated expiration for the share repurchase program. Since the inception of this share repurchase program, we have repurchased 372 thousand shares of our common stock for a total cash investment of $5.8 million.
The table below presents information with respect to our common stock purchases made during the three months ended March 31, (In thousands, except per share data):
2013 | |
Total number of shares purchased | 372 |
Average price paid per share | $15.47 |
Total investment | $5,774 |
11. | Reclassifications |
During the first quarter of 2013 we modified the reporting of commissions paid on both the origination of mortgage loans held for sale and the generation of fiduciary fee income. Mortgage banking-related fees and Fiduciary and brokerage fee income are now being reported net of associated commission expense in Noninterest income. Previously both of these commission expense items were reported in the Compensation and employee benefits line item on the consolidated income statement.
In addition, debit card interchange costs and net demand deposit charge-offs have been reclassified from the Data processing and Other operating expenses line items to Retail banking fees, respectively. Also, insurance related expenses have been reclassified from Other operating expenses to Insurance income.
Management considers the net presentation to more accurately reflect income derived from our retail banking activities and the net contribution of the mortgage banking and wealth management segments to the consolidated financial results. As shown below, the results of these reclassifications are not considered material and have no effect on previously reported amounts related to consolidated net income or earnings per share (In thousands):
For the Three Months Ended March 31, 2013 | For the Three Months Ended March 31, 2012 | |||||||||||||||||||||||
Prior | Current | Prior | Current | |||||||||||||||||||||
Presentation | Reclassification | Presentation | Presentation | Reclassification | Presentation | |||||||||||||||||||
Net interest income after provision for loan losses | $ | 23,499 | $ | - | $ | 23,499 | $ | 23,046 | $ | - | $ | 23,046 | ||||||||||||
Noninterest income | ||||||||||||||||||||||||
Retail banking fees | 3,578 | (527 | ) | 3,051 | 3,795 | (468 | ) | 3,327 | ||||||||||||||||
Fiduciary and brokerage fee income | 1,332 | (104 | ) | 1,228 | 1,343 | (115 | ) | 1,228 | ||||||||||||||||
Mortgage banking-related fees | 2,366 | (531 | ) | 1,835 | 2,184 | (407 | ) | 1,777 | ||||||||||||||||
Insurance income | 340 | (41 | ) | 299 | 353 | (65 | ) | 288 | ||||||||||||||||
Other noninterest income line items | 1,026 | - | 1,026 | 450 | (102 | ) | 348 | |||||||||||||||||
Total noninterest income | $ | 8,642 | $ | (1,203 | ) | $ | 7,439 | $ | 8,125 | $ | (1,157 | ) | $ | 6,968 | ||||||||||
Noninterest expense | ||||||||||||||||||||||||
Compensation and employee benefits | $ | 13,058 | $ | (635 | ) | $ | 12,423 | 12,624 | (522 | ) | 12,102 | |||||||||||||
Data processing | 765 | (351 | ) | 414 | 671 | (330 | ) | 341 | ||||||||||||||||
Other operating expenses | 3,035 | (217 | ) | 2,818 | 3,006 | (305 | ) | 2,701 | ||||||||||||||||
Other noninterest expense line items | 7,115 | - | 7,115 | 7,256 | - | 7,256 | ||||||||||||||||||
Total noninterest expense | 23,973 | (1,203 | ) | 22,770 | 23,557 | (1,157 | ) | 22,400 | ||||||||||||||||
Income tax expense | 2,257 | - | 2,257 | 2,114 | - | 2,114 | ||||||||||||||||||
Net income | $ | 5,911 | $ | - | $ | 5,911 | $ | 5,500 | $ | - | $ | 5,500 |
12. | New Authoritative Accounting Guidance |
In February 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The Update was issued to improve the transparency of reporting these reclassifications; the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements and all information required by this ASU was already required to be disclosed elsewhere in the financial statements. The ASU requires presentation, either on the face of the statement where net income is presented or in the notes, of the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under USGAAP to be reclassified to net income in its entirety in the same reporting period. Additionally, a company must cross-reference to other disclosures currently required under USGAAP for other reclassification items that are not required under USGAAP to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account instead of directly to income or expense. This Update becomes effective for reporting periods beginning after December 15, 2012. We followed the new guidance effective first quarter of 2013 by adding the required disclosure. This had no effect on our consolidated financial position or consolidated results of operations as a result of adoption.
19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides management’s analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of StellarOne Corporation and our affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.
Results of Operations
Our first quarter 2013 earnings were $5.9 million, or $0.26 net income per diluted share. This represents a 7.5% increase over net income of $5.5 million or $0.24 per diluted share recognized during the same quarter in the prior year. Continuing improvements in asset quality and stabilized net interest income revenues contributed to the growth in earnings.
Earnings Highlights
Change | Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
Dollars in thousands, except per share data | 2013 | 2012 | 2012 | Q4 12 | Q1 12 | |||||||||||||||
Interest income - taxable equivalent | $ | 28,761 | $ | 29,050 | $ | 29,684 | $ | (289 | ) | $ | (923 | ) | ||||||||
Interest expense | 3,864 | 4,118 | 5,062 | (254 | ) | (1,198 | ) | |||||||||||||
Net interest income - taxable equivalent | 24,897 | 24,932 | 24,622 | (35 | ) | 275 | ||||||||||||||
Less: taxable equivalent adjustment | 698 | 729 | 726 | (31 | ) | (28 | ) | |||||||||||||
Net interest income | 24,199 | 24,203 | 23,896 | (4 | ) | 303 | ||||||||||||||
Provision for loan losses | 700 | 1,400 | 850 | (700 | ) | (150 | ) | |||||||||||||
Net interest income after provision for loan losses | 23,499 | 22,803 | 23,046 | 696 | 453 | |||||||||||||||
Noninterest income | 7,439 | 8,068 | 6,968 | (629 | ) | 471 | ||||||||||||||
Noninterest expense | 22,770 | 22,405 | 22,400 | 365 | 370 | |||||||||||||||
Income tax expense | 2,257 | 2,245 | 2,114 | 12 | 143 | |||||||||||||||
Net income available to common shareholders | $ | 5,911 | $ | 6,221 | $ | 5,500 | $ | (310 | ) | $ | 411 | |||||||||
Earnings per share available to common shareholders | ||||||||||||||||||||
Basic | $ | 0.26 | $ | 0.27 | $ | 0.24 | $ | (0.01 | ) | $ | 0.02 | |||||||||
Diluted | $ | 0.26 | $ | 0.27 | $ | 0.24 | $ | (0.01 | ) | $ | 0.02 |
20
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Margin
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Balance | Inc/Exp | Rates | Balance | Inc/Exp | Rates | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans receivable, net (1) | $ | 2,141,838 | $ | 25,476 | 4.82 | % | $ | 2,054,830 | $ | 26,040 | 5.10 | % | ||||||||||||
Investment securities | ||||||||||||||||||||||||
Taxable | 379,131 | 1,444 | 1.52 | % | 322,372 | 1,610 | 1.98 | % | ||||||||||||||||
Tax exempt (1) | 126,907 | 1,823 | 5.75 | % | 138,864 | 2,000 | 5.70 | % | ||||||||||||||||
Total investments | 506,038 | 3,267 | 2.58 | % | 461,236 | 3,610 | 3.10 | % | ||||||||||||||||
Federal funds sold and deposits in banks | 23,637 | 18 | 0.30 | % | 59,323 | 34 | 0.23 | % | ||||||||||||||||
529,675 | 3,285 | 2.48 | % | 520,559 | 3,644 | 2.77 | % | |||||||||||||||||
Total earning assets | 2,671,513 | $ | 28,761 | 4.37 | % | 2,575,389 | $ | 29,684 | 4.64 | % | ||||||||||||||
Total nonearning assets | 321,276 | 322,235 | ||||||||||||||||||||||
Total assets | $ | 2,992,789 | $ | 2,897,624 | ||||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||||||||
Interest checking | $ | 627,046 | $ | 200 | 0.13 | % | $ | 585,017 | $ | 396 | 0.27 | % | ||||||||||||
Money market | 463,969 | 484 | 0.42 | % | 412,739 | 544 | 0.53 | % | ||||||||||||||||
Savings | 313,875 | 105 | 0.14 | % | 296,373 | 332 | 0.45 | % | ||||||||||||||||
Time deposits: | ||||||||||||||||||||||||
Less than $100,000 | 459,826 | 1,438 | 1.27 | % | 507,797 | 1,896 | 1.50 | % | ||||||||||||||||
$100,000 and more | 230,892 | 890 | 1.56 | % | 259,364 | 1,109 | 1.72 | % | ||||||||||||||||
Total interest-bearing deposits | 2,095,608 | 3,117 | 0.60 | % | 2,061,290 | 4,277 | 0.83 | % | ||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 1,388 | 7 | 2.02 | % | 835 | 6 | 2.95 | % | ||||||||||||||||
Federal Home Loan Bank advances and other borrowings | 55,000 | 404 | 2.94 | % | 57,363 | 438 | 3.02 | % | ||||||||||||||||
Subordinated debt | 32,991 | 336 | 4.07 | % | 32,991 | 341 | 4.09 | % | ||||||||||||||||
89,379 | 747 | 3.34 | % | 91,189 | 785 | 3.41 | % | |||||||||||||||||
Total interest-bearing liabilities | 2,184,987 | 3,864 | 0.72 | % | 2,152,479 | 5,062 | 0.94 | % | ||||||||||||||||
Total noninterest-bearing liabilities | 376,296 | 328,147 | ||||||||||||||||||||||
Total liabilities | 2,561,283 | 2,480,626 | ||||||||||||||||||||||
Stockholders' equity | 431,506 | 416,998 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 2,992,789 | $ | 2,897,624 | ||||||||||||||||||||
Net interest income (tax equivalent) | $ | 24,897 | $ | 24,622 | ||||||||||||||||||||
Average interest rate spread | 3.65 | % | 3.70 | % | ||||||||||||||||||||
Interest expense as percentage of average earning assets | 0.59 | % | 0.79 | % | ||||||||||||||||||||
Net interest margin | 3.78 | % | 3.85 | % |
(1) Income and yields are reported on a taxable equivalent basis using a 35% tax rate.
21
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 2013 compared to Fourth Quarter 2012
The expansion in net interest margin on a sequential basis was driven by a 3 basis point reduction in the cost of interest bearing liabilities and stable asset yields. The yield on assets was slightly elevated due to higher loan fee amortization associated with loan payoffs during the current quarter. Loan yields contracted 5 basis points due to re-pricing within the current portfolio and reduced yields on stronger new loan production. Investment yields contracted 3 basis points sequentially due to maturities and pay-downs of higher yielding investments. The cost of interest bearing liabilities improved 3 basis points sequentially, moving from 0.75% during the fourth quarter of 2012 to 0.72% during the first quarter of 2013. Significant improvements in the cost of interest-bearing liabilities were realized during 2012; however, we anticipate the improvement in 2013 to be more muted and consistent with the sequential shift. Higher earning assets offset the contraction in loan yields and the effect of the shorter period as net interest income on a tax-equivalent basis remained stable at $24.9 million on a sequential basis.
First Quarter 2013 compared to First Quarter 2012
The net interest margin compressed 7 basis points when compared to the first quarter of 2012. Loan and investment yields contracted 28 basis points and 52 basis points, respectively, on a year over year basis. Similar to the sequential quarter contractions, these were also due to the current low rate environment. These contractions were somewhat offset by the 22 basis point improvement in the cost of interest bearing liabilities noted year over year. Higher earning assets offset the margin compression as net interest income on a tax-equivalent basis increased $275 thousand to $24.9 million for the first quarter of 2013, compared to $24.6 million for the first quarter last year.
Noninterest Income
% Change | % Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
2013 | 2012 | 2012 | Q4 12 | Q1 12 | ||||||||||||||||
Retail banking fees | $ | 3,051 | $ | 3,370 | $ | 3,327 | -9.5 | % | -8.3 | % | ||||||||||
Fiduciary and brokerage fee income | 1,228 | 1,129 | 1,228 | 8.8 | % | 0.0 | % | |||||||||||||
Mortgage banking-related fees | 1,835 | 2,096 | 1,777 | -12.5 | % | 3.3 | % | |||||||||||||
Losses on mortgage indemnifications and repurchases | - | (9 | ) | (354 | ) | -100.0 | % | -100.0 | % | |||||||||||
Losses on sale of premises and equipment | (10 | ) | 58 | (16 | ) | >100 | % | -37.5 | % | |||||||||||
Gains on sale of securities available for sale | 6 | 440 | 73 | -98.6 | % | -91.8 | % | |||||||||||||
Losses on sale / impairments of foreclosed assets | (130 | ) | (440 | ) | (452 | ) | -70.5 | % | -71.2 | % | ||||||||||
Income from bank owned life insurance | 432 | 446 | 440 | -3.1 | % | -1.8 | % | |||||||||||||
Insurance income | 299 | 125 | 288 | >100 | % | 3.8 | % | |||||||||||||
Other operating income | 728 | 853 | 657 | -14.7 | % | 10.8 | % | |||||||||||||
Total noninterest income | $ | 7,439 | $ | 8,068 | $ | 6,968 | -7.8 | % | 6.8 | % |
First Quarter 2013 compared to Fourth Quarter 2012
On an operating basis, which excludes gains and losses from sales and impairments of securities and other assets, total non-interest income amounted to $7.4 million for the first quarter of 2013, down $127 thousand or 1.7% on a sequential basis compared to $7.6 million for the fourth quarter of 2012. The sequential quarter decrease in operating noninterest income was attributable to decreases in retail banking fees and mortgage banking fees of $319 thousand and $261 thousand, respectively. These contractions were partially offset by a $310 thousand reduction in losses on foreclosed assets, a $174 thousand seasonal increase in insurance income and a $99 thousand increase in fiduciary and brokerage fee income.
The decrease in retail banking fees was driven by a $316 thousand decrease in overdraft revenues, which is considered normal seasonal contraction when comparing the first quarter to the fourth quarter. The contraction in mortgage banking related fees was primarily margin related due to product mix as loans sold in the first quarter of 2013 totaled $79.0 million or down $1.8 million or only 2.2% from the $80.8 million sold during the fourth quarter of 2012.
The wealth management segment saw growth in both fees from brokerage fee income, which was up $83 thousand or 33.6% and from fiduciary activities, which were up $15 thousand or 1.7%. Fiduciary assets increased sequentially by $127.7 million or 28.0% amounting to $583.0 million at March 31, 2013, compared to $455.3 million at December 31, 2012. This business segment produced over $105 million in new assets under management during the first quarter of 2013.
Losses and write-downs on foreclosed assets decreased as the portfolio increased $629 thousand or 10.9% during the quarter, as approximately $1.4 million of properties were added and $699 thousand were sold. Other operating income decreased $125 thousand during the quarter due to a contraction in commercial lending loan swap fee income.
First Quarter 2013 compared to First Quarter 2012
On an operating basis total non-interest income was up $532 thousand or 7.7% compared to $6.9 million for the first quarter of 2012. The increase in operating noninterest income was attributable to a $354 thousand decrease in losses on mortgage indemnifications, a $322 thousand decrease in losses on foreclosed assets, a $73 thousand increase in other income and a $58 thousand increase in mortgage banking related fees. These were partially offset by a $276 thousand contraction in retail banking fees.
The decrease in losses on sale/impairments of foreclosed assets is reflective of the downward trending balance in foreclosed assets. This balance decreased $447 thousand or 6.5% when compared to the first quarter of 2012.
Mortgage banking-related fees increased primarily due to margin and not volume as loans sold in the first quarter of 2013 totaled $79.0 million or down $18.0 million or 18.5% from the $97.0 million sold during the first quarter of 2012. The increase in other operating income was a result of higher commercial lending loan swap fee revenues when compared to the first quarter of 2012.
The decrease in retail banking fees of $276 thousand was driven by a $185 thousand decrease in overdraft revenues and a $92 thousand decrease in interchange fees. The decrease in overdraft revenues is due to decreased volume, while the decrease in interchange income is primarily due to decreased margin related to recently enacted legislation.
22
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
% Change | % Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
2013 | 2012 | 2012 | Q4 12 | Q1 12 | ||||||||||||||||
Compensentation and employee benefits | $ | 12,423 | $ | 11,994 | $ | 12,102 | 3.6 | % | 2.7 | % | ||||||||||
Net occupancy | 2,250 | 2,212 | 2,063 | 1.7 | % | 9.1 | % | |||||||||||||
Equipment | 2,089 | 1,965 | 2,218 | 6.3 | % | -5.8 | % | |||||||||||||
Amortization-intangible assets | 311 | 311 | 413 | 0.0 | % | -24.7 | % | |||||||||||||
Marketing | 245 | 373 | 249 | -34.3 | % | -1.6 | % | |||||||||||||
State franchise taxes | 587 | 564 | 568 | 4.1 | % | 3.4 | % | |||||||||||||
FDIC insurance | 506 | 562 | 639 | -10.0 | % | -20.8 | % | |||||||||||||
Data processing | 414 | 410 | 341 | 1.0 | % | 21.4 | % | |||||||||||||
Professional fees | 754 | 735 | 681 | 2.6 | % | 10.7 | % | |||||||||||||
Telecommunications | 373 | 405 | 425 | -7.9 | % | -12.2 | % | |||||||||||||
Other operating expense | 2,818 | 2,874 | 2,701 | -2.0 | % | 4.3 | % | |||||||||||||
Total noninterest expenses | $ | 22,770 | $ | 22,405 | $ | 22,400 | -7.8 | % | 1.7 | % |
First Quarter 2013 compared to Fourth Quarter 2012
Noninterest expenses were up sequentially by $365 thousand or 1.6%. This increase was driven by a $429 thousand increase in compensation and benefits expense associated with seasonal increases in incentive costs and related benefits. Equipment expense increased $124 thousand on higher maintenance costs. These increases were somewhat offset by decreased marketing, FDIC insurance and telecommunications expenses of $128 thousand, $56 thousand and $32 thousand, respectively.
Professional fees remained elevated due to $316 thousand of nonrecurring costs associated with strategic initiatives involving succession planning, efficiency initiatives and evaluation of certain strategic opportunities.
First Quarter 2013 compared to First Quarter 2012
Noninterest expenses were up year over year by $370 thousand or 1.7%. The majority of the noninterest expense increase when comparing the first quarter of 2013 to the same quarter in the prior year relates to a $321 thousand increase in compensation and benefits. The primary driver of the increase relates to increased incentive costs incurred during the current quarter.
Net occupancy, professional fees, and data processing increased when comparing the first quarter of 2013 to the same quarter in the prior year by $187 thousand, $73 thousand and $73 thousand, respectively. Net occupancy increases were driven by our additional financial centers; professional fees including the aforementioned nonrecurring costs in the current year; and the increase in data processing reflects additional transaction volume and technology investments. These increases were somewhat offset by decreased amortization of intangible assets and FDIC insurance expenses of $102 thousand and $133 thousand, respectively.
The efficiency ratio was 69.19% for the first quarter of 2013, compared to 66.95% for the fourth quarter of 2012 and 68.78% for the first quarter of 2012. The sequential quarter increase in the efficiency ratio reflects lower noninterest income revenues coupled with higher compensation costs associated with incentives and nonrecurring professional costs. The incentive cost also drove the year over year increase, which was partially offset by slightly higher noninterest income revenues.
Asset Quality
Change | Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
Dollars in thousands | 2013 | 2012 | 2012 | Q4 12 | Q1 12 | |||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||
Beginning of period | $ | 29,824 | $ | 29,860 | $ | 32,588 | $ | (36 | ) | $ | (2,764 | ) | ||||||||
Provision for loan losses | 700 | 1,400 | 850 | (700 | ) | (150 | ) | |||||||||||||
Charge-offs | (2,133 | ) | (2,562 | ) | (2,383 | ) | 429 | 250 | ||||||||||||
Recoveries | 659 | 1,126 | 560 | (467 | ) | 99 | ||||||||||||||
Net charge-offs | (1,474 | ) | (1,436 | ) | (1,823 | ) | (38 | ) | 349 | |||||||||||
End of period | $ | 29,050 | $ | 29,824 | $ | 31,615 | $ | (774 | ) | $ | (2,565 | ) | ||||||||
Accruing Troubled Debt Restructurings | $ | 21,082 | $ | 23,244 | $ | 28,646 | $ | (2,162 | ) | $ | (7,564 | ) | ||||||||
Loans greater than 90 days past due still accruing | $ | 525 | $ | 182 | $ | 563 | $ | 343 | $ | (38 | ) | |||||||||
Non accrual loans | $ | 29,518 | $ | 33,795 | $ | 31,558 | $ | (4,277 | ) | $ | (2,040 | ) | ||||||||
Non accrual TDR's | $ | 1,960 | 2,381 | $ | 6,134 | (421 | ) | (4,174 | ) | |||||||||||
Total non-performing loans | 31,478 | 36,176 | 37,692 | (4,698 | ) | (6,214 | ) | |||||||||||||
Foreclosed assets | 6,389 | 5,760 | 6,836 | 629 | (447 | ) | ||||||||||||||
Total non-performing assets | $ | 37,867 | $ | 41,936 | $ | 44,528 | $ | (4,069 | ) | $ | (6,661 | ) | ||||||||
Nonperforming assets as a % of total assets | 1.26 | % | 1.39 | % | 1.52 | % | -0.13 | % | -0.26 | % | ||||||||||
Nonperforming assets as a % of loans plus foreclosed assets | 1.76 | % | 2.01 | % | 2.18 | % | -0.25 | % | -0.42 | % | ||||||||||
Allowance for loan losses as a % of total loans | 1.36 | % | 1.43 | % | 1.55 | % | -0.07 | % | -0.19 | % | ||||||||||
Annualized net charge-offs as a % of average loans outstanding | 0.28 | % | 0.28 | % | 0.35 | % | 0.00 | % | -0.07 | % |
March 31, 2013 | ||||||||||||
Loans Outstanding | Nonaccrual Loans | Nonaccrual Loans to Loans Outstanding | ||||||||||
Construction and land development | $ | 208,967 | $ | 8,148 | 3.90 | % | ||||||
Commercial real estate | 956,323 | 7,911 | 0.83 | % | ||||||||
Consumer real estate | 731,681 | 14,208 | 1.94 | % | ||||||||
Commercial and industrial loans (except those secured by real estate) | 205,877 | 1,195 | 0.58 | % | ||||||||
Consumer and other | 39,083 | 16 | 0.04 | % | ||||||||
Total loans | $ | 2,141,931 | $ | 31,478 | 1.47 | % |
First Quarter 2013 compared to Fourth Quarter 2012
Nonperforming asset levels decreased 9.7% on a sequential basis and 15.0% when compared to the same quarter in the prior year. We continue to see improvement in the market conditions throughout our footprint and believe our efforts to manage problem credits is driving the reductions noted in nonaccrual loans and nonperforming troubled debt restructurings (“TDRs”). The decreased provisioning in the first quarter of 2013 directly correlated to the continued improvement in underlying credit quality metrics used in measuring the risk inherent in the loan portfolio.
Our allowance to nonperforming loans coverage ratio is at its highest level since the second quarter of 2011. This metric was 92.3% at March 31, 2013, increasing from 82.4% at December 31, 2012 and 83.9% at March 31, 2012. The first quarter net charge offs of $1.5 million outpaced loan loss provisioning of $700 thousand, resulting in an allowance for loan losses of $29.1 million at March 31, 2013, or lower when compared to $29.8 million at December 31, 2012 and $31.6 million at March 31, 2012. The allowance as a percentage of total loans was 1.36% at March 31, 2013, compared to 1.43% at December 31, 2012 and 1.55% at March 31, 2012.
Foreclosed assets on a sequential basis ticked up slightly from an eight quarter low at December 31, 2012. This was due the net effect of $1.4 million in nonperforming loans migrating to foreclosed assets and $699 thousand of properties being sold during the quarter. We continue to manage properties out of the portfolio at a moderate pace while maintaining reasonable price points relative to market.
Included in the loan portfolio at March 31, 2013 were loans classified as TDRs totaling $23.0 million, which is down $2.6 million or 10.1% from $25.6 million at December 31, 2012. At March 31, 2013, $21.1 million or 91.5% of total TDRs were performing under the modified terms.
Balance Sheet Trends
% Change | % Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
Dollars in thousands | 2013 | 2012 | 2012 | Q4 12 | Q1 12 | |||||||||||||||
SUMMARY AVERAGE BALANCE SHEETS | ||||||||||||||||||||
Total loans | $ | 2,141,838 | $ | 2,084,741 | $ | 2,054,830 | 2.7 | % | 4.2 | % | ||||||||||
Total investment securities | 506,038 | 521,999 | 461,236 | -3.1 | % | 9.7 | % | |||||||||||||
Total earning assets | 2,671,513 | 2,644,993 | 2,575,389 | 1.0 | % | 3.7 | % | |||||||||||||
Total assets | 2,992,789 | 2,973,428 | 2,897,624 | 0.7 | % | 3.3 | % | |||||||||||||
Total deposits | 2,452,592 | 2,433,728 | 2,373,887 | 0.8 | % | 3.3 | % | |||||||||||||
Shareholders' equity | 431,506 | 431,505 | 416,998 | 0.0 | % | 3.5 | % | |||||||||||||
SUMMARY ENDING BALANCE SHEETS | ||||||||||||||||||||
Total loans | $ | 2,141,931 | $ | 2,080,068 | $ | 2,034,440 | 3.0 | % | 5.3 | % | ||||||||||
Total investment securities | 510,323 | 553,476 | 524,020 | -7.8 | % | -2.6 | % | |||||||||||||
Total earning assets | 2,706,063 | 2,705,249 | 2,621,833 | 0.0 | % | 3.2 | % | |||||||||||||
Total assets | 3,013,889 | 3,023,204 | 2,925,914 | -0.3 | % | 3.0 | % | |||||||||||||
Total deposits | 2,476,005 | 2,484,324 | 2,401,917 | -0.3 | % | 3.1 | % | |||||||||||||
Shareholders' equity | 428,753 | 431,642 | 417,920 | -0.7 | % | 2.6 | % |
First Quarter 2013 compared to Fourth Quarter 2012
Period end loans grew $61.9 million or 3.0% on a sequential basis and are up $107.5 million or 5.3% compared to the same quarter in the prior year. Loan growth during the first quarter of 2013 was primarily commercial real estate driven, but growth was noted in just about every loan category. This category also accounts for most of the growth noted since the first quarter of 2012. Additionally, loans totaling $11.9 million were purchased during the first quarter in conjunction with the purchase of our Robious Road financial center. While loan growth in the first quarter of 2013 was improved, pricing competition continues to be high for quality loans and elevated curtailments continue across our footprint. Investment securities continue to trend down as maturing cash flows from the investment portfolio are being utilized to fund loan growth. While total assets contracted slightly, we improved the mix of earning assets and its ratio to nonearning assets.
23
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segments
% Change | % Change | |||||||||||||||||||
Q1 | Q4 | Q1 | Q1 13 vs. | Q1 13 vs. | ||||||||||||||||
Dollars in thousands | 2013 | 2012 | 2012 | Q4 12 | Q1 12 | |||||||||||||||
Net Income | ||||||||||||||||||||
Commercial Banking | $ | 5,390 | $ | 5,696 | $ | 5,425 | -5.4 | % | -0.7 | % | ||||||||||
Mortgage Banking | 482 | 722 | 221 | -33.2 | % | 118.1 | % | |||||||||||||
Wealth Management | 135 | 83 | 175 | 62.7 | % | -22.9 | % | |||||||||||||
Other | (96 | ) | (280 | ) | (321 | ) | -65.7 | % | -70.1 | % | ||||||||||
Consolidated | 5,911 | 6,221 | 5,500 | -5.0 | % | 7.5 | % |
First Quarter 2013 compared to Fourth Quarter 2012
The first quarter of 2013 saw decreased contributions from both the Commercial Banking and Mortgage Banking segments on a sequential quarter basis. These were driven by increased incentives paid out in our commercial lending group and reduced margins on mortgage production, respectively. Wealth management net income increased based on strong growth in assets under management and higher brokerage fee income realized through increased volume.
First Quarter 2013 compared to First Quarter 2012
The year over year increase in consolidated net income was attributable to the strong contribution from the Mortgage Banking segment, which was volume related. The Commercial Banking segment saw little contraction in net income due to strong loan growth which offset the contractions in both net interest margin and noninterest income. Wealth management net income decreased largely due to some nonrecurring revenues associated with a vendor conversion that were recognized during the first quarter of 2012.
Income Taxes
The provision for income taxes was $2.3 million for the first quarter of 2013 compared to $2.2 million for the fourth quarter of 2012. This resulted in an effective tax rate of 27.6% for the first quarter of 2013 compared to 26.8% for the year ended December 31, 2012. The increase in the effective tax rate was due to higher earnings relative to permanent differences. The effective rate of 27.6% applied to the first quarter is anticipated to be our annual effective rate for 2013.
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. Our capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining our “well-capitalized” position at the banking subsidiary.
Our primary source of additional capital is earnings retention, which represents net income less dividends declared. We paid $1.8 million in common dividends during the three month period ended March 31, 2013. These dividends combined with net income of $5.9 million resulted in an increase to retained earnings of $4.1 million during the period. Future dividends will be dependent upon our ability to generate earnings in future periods.
We, along with our 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 us 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”), we and our banking subsidiary must meet specific capital guidelines that involve quantitative measures of our 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 our banking subsidiary and us 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 our subsidiary bank and us as “well capitalized” under FIDICIA. There are no conditions or events that we believe have changed our subsidiary bank’s or our well capitalized position.
The following table includes information with respect to our risk-based capital and equity levels as of March 31, 2013 (in thousands):
Consolidated | Bank | |||||||
Tier 1 capital | $ | 338,939 | $ | 323,792 | ||||
Tier 2 capital | 27,850 | 27,778 | ||||||
Total risk-based capital | 366,789 | 351,570 | ||||||
Total risk-weighted assets | 2,226,533 | 2,220,695 | ||||||
Average adjusted total assets | 2,878,517 | 2,871,059 | ||||||
Capital ratios: | ||||||||
Tier 1 risk-based capital ratio | 15.22 | % | 14.58 | % | ||||
Total risk-based capital ratio | 16.47 | % | 15.83 | % | ||||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 11.77 | % | 11.28 | % | ||||
Equity to assets ratio | 14.23 | % | 14.94 | % | ||||
Tangible common equity to assets ratio | 10.72 | % | 11.46 | % |
24
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed 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 our overall financial condition. Our bank subsidiary has available a $177.5 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 our 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. As of March 31, 2013 there was $8.6 million in unrestricted funds that could be transferred from the bank subsidiary to us without prior regulatory approval.
In the judgment of management, we maintain 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 our annual report on Form 10-K for the fiscal year ended December 31, 2012.
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2012.
Effects of Inflation
The effect of changing prices on financial institutions is typically different from other industries as our assets and liabilities are monetary in nature. Interest rates and thus our asset liability management are 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 “believe,” “expect,” “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. We wish to caution the reader that factors, such as those listed below, in some cases have affected and could affect our actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from our acquisitions and dispositions, (ii) competitive pressure in the banking industry or in our 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, and (vii) changes may occur in the securities markets. Please refer to our filings with the Securities and Exchange Commission for additional information, which may be accessed at www.StellarOne.com.
Access to Filings
We file 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. Our 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.
25
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
General
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“USGAAP”). 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 carrying 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 us to retain our 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 2 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.
Our 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 we 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 we 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, we grant a concession for other than an insignificant period of time to the borrower than we would otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.
26
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Accrued Losses Associated With Mortgage Indemnifications and Repurchases
In certain loan sales, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain time period. The maximum exposure to loss represents the outstanding principal balance of the loans sold that are subject to recourse provisions, but the likelihood of the repurchase of the entire balance is remote and amounts paid can be recovered in whole or in part from the sale of collateral.
We enter into other types of indemnification agreements in the ordinary course of business under which we agree to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with us. These relationships or transactions include those arising from service as a director or officer of the company, acquisition agreements and various other business transactions or arrangements. Because the extent of our obligations under these agreements depends entirely upon the occurrence of future events, our potential future liability under these agreements has been estimated based on our recent historic run rate.
Goodwill
Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. Our annual impairment measurement date is October 1. This annual assessment will be completed during the fourth quarter. Since our 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.
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. These intangible assets will be evaluated for impairment if a triggering event occurs; no such event was identified during the quarter.
Deferred Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. No such valuation is deemed necessary as of March 31, 2013, as management has not taken any tax positions that it deems to be considered uncertain.
Stock-Based Compensation
We have a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. Our 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. We recognize 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.
27
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 our 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. We, in referring to our net income, are 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 | ||||||||||||
March 31, 2013 | December 31, 2012 | March 31, 2012 | ||||||||||
Noninterest expense | $ | 22,770 | $ | 22,405 | $ | 22,400 | ||||||
Less: | ||||||||||||
Amortization of intangible assets | 311 | 311 | 413 | |||||||||
Adjusted noninterest expense | $ | 22,459 | $ | 22,094 | $ | 21,987 | ||||||
Net interest income (tax equivalent) | $ | 24,897 | $ | 24,932 | $ | 24,622 | ||||||
Noninterest income | 7,439 | 8,068 | 6,968 | |||||||||
Less: | ||||||||||||
Gains on sale of securities available for sale | 6 | 440 | 73 | |||||||||
Losses / impairments on foreclosed assets | (130 | ) | (440 | ) | (452 | ) | ||||||
Net revenues | $ | 32,460 | $ | 33,000 | $ | 31,969 | ||||||
Efficiency ratio | 69.19 | % | 66.95 | % | 68.78 | % |
28
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Consolidated | Bank | |||||||
Total stockholders' equity | $ | 428,753 | $ | 449,148 | ||||
Less: | ||||||||
Core deposit intangibles, net | 3,882 | 3,882 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Net other intangibles | 740 | 740 | ||||||
Tangible common equity | 310,479 | 330,874 | ||||||
Total assets | 3,013,889 | 3,006,044 | ||||||
Core deposit intangibles, net | 3,882 | 3,882 | ||||||
Goodwill | 113,652 | 113,652 | ||||||
Net other intangibles | 740 | 740 | ||||||
Tangible assets | $ | 2,895,615 | $ | 2,887,770 | ||||
Tangible common equity to assets ratio | 10.72 | % | 11.46 | % |
The report also refers to operating noninterest income, which is computed by subtracting gains on securities available for sale and gains (losses) on sale of premises and equipment from noninterest income. Operating noninterest income is not a recognized reporting measure under USGAAP. Management believes it provides investors with important information about core business earnings by removing the income from nonoperational items. The table below presents a reconciliation of this non-USGAAP measure.
For the three months ended | ||||||||
March 31, 2013 | March 31, 2012 | |||||||
Noninterest income | $ | 7,439 | $ | 6,968 | ||||
Less: | ||||||||
Gains on securities available for sale | 6 | 73 | ||||||
Losses on sale of premises and equipment | (10 | ) | (16 | ) | ||||
Operating earnings | $ | 7,443 | $ | 6,911 |
There have been no significant changes to the quantitative and qualitative market risk disclosures in our Form 10-K for the year ended December 31, 2012.
29
STELLARONE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are required to include in our periodic reports, information regarding 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.
We have established disclosure controls and procedures to ensure that material information related to us 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, we review and change 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 March 31, 2013 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 we or any of our 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 our 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 our Annual Report on Form 10K for the fiscal year ended December 31, 2012.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
We announced a share repurchase program on December 19, 2012, authorizing 1,500,000 shares for repurchase. There is no stated expiration for the share repurchase program. Since the inception of this share repurchase program, we have repurchased 372 thousand shares of our common stock for a total cash investment of $5.8 million.
The table below presents information with respect to our common stock purchases made during the three months ended March 31, 2013.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares that May Yet Be Purchased Under the Plan | ||||||||||||
January 2013 | 28,839 | $ | 14.92 | 28,839 | 1,471,161 | |||||||||||
February 2013 | 200,232 | 15.17 | 229,071 | 1,270,929 | ||||||||||||
March 2013 | 143,395 | 16.01 | 372,466 | 1,127,534 | ||||||||||||
372,466 | $ | 15.47 | 372,466 | 1,127,534 |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. |
Not applicable.
ITEM 6. |
(a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
Exhibit No. 3.1 | Articles of Incorporation of 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. (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 Current Report on Form 8-K filed on December 23, 2008) |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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 March 31, 2013 is formatted in XBRL interactive data files: (i) Consolidated Statements of Income for the three months ended March 31, 2013 and 2012; (ii) Consolidated Balance Sheets at March 31, 2013 and December 31, 2012; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012; and (vi) 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
May 9, 2013
/s/ Jeffrey W. Farrar
Jeffrey W. Farrar, CPA
Executive Vice President and Chief Financial Officer
May 9, 2013
33