XNAS:STEL Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended  March 31, 2012
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from   to

Commission File Number:   000-22283
 
StellarOne logo
(Exact name of registrant as specified in its charter)
  Virginia
  54-1829288
(State or other jurisdiction of
 (I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
590 Peter Jefferson Parkway Charlottesville, Virginia
22911
(Address of principal executive offices)
(Zip Code)
(Registrant's telephone number 434-964-2211, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x      No   o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  Yes   o    No   o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   o     Accelerated filer   x     Non-accelerated filer   o   Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b – 2 of the Exchange Act). Yes   o     No   x

As of May 4, 2012 there were 23,080,007 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 Other Comprehensive Income 3
  4
  5
  6
     
ITEM 2
26
     
ITEM 3
37
     
ITEM 4
38
     
PART II - OTHER INFORMATION
ITEM 1
39
     
ITEM 1A
39
     
ITEM 2
39
     
ITEM 3
39
     
ITEM 4
39
     
ITEM 5
39
     
ITEM 6
40



 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Assets
           
  Cash and due from banks
  $ 39,170     $ 40,931  
  Federal funds sold
    42       21,117  
  Interest-bearing deposits in banks
    45,961       37,922  
    Cash and cash equivalents
    85,173       99,970  
  Investment securities available for sale, at fair value
    524,020       477,964  
  Mortgage loans held for sale
    17,058       42,027  
  Loans receivable, net of allowance for loan losses, 2012, $31,615; 2011, $32,588
    2,003,137       1,998,842  
  Premises and equipment, net
    72,602       74,602  
  Accrued interest receivable
    8,961       8,908  
  Core deposit intangibles, net
    4,599       5,011  
  Goodwill
    113,652       113,652  
  Bank owned life insurance
    42,853       42,413  
  Foreclosed assets
    6,836       8,575  
  Other assets
    47,023       45,964  
    Total assets
  $ 2,925,914     $ 2,917,928  
                 
Liabilities
               
  Deposits:
               
  Noninterest-bearing
  $ 338,237     $ 310,756  
  Interest-bearing
    2,063,680       2,084,844  
    Total deposits
    2,401,917       2,395,600  
  Federal Home Loan Bank advances
    55,000       60,000  
  Subordinated debt
    32,991       32,991  
  Accrued interest payable
    1,913       2,122  
  Deferred income tax liability
    3,037       2,654  
  Other liabilities
    13,136       10,388  
Total liabilities
    2,507,994       2,503,755  
                 
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; 2012:  22,858,900 shares issued and outstanding; 2011: 22,819,000 shares issued and outstanding.
    22,859       22,819  
  Additional paid-in capital
    271,050       271,080  
  Retained earnings
    115,056       110,940  
  Accumulated other comprehensive income
    8,955       9,334  
    Total stockholders' equity
    417,920       414,173  
    Total liabilities and stockholders' equity
  $ 2,925,914     $ 2,917,928  

The accompanying notes are an integral part of these consolidated financial statements.




 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands, except per share data)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Interest Income
           
  Loans, including fees
  $ 26,014     $ 27,264  
  Federal funds sold and deposits in other banks
    34       68  
  Investment securities:
               
    Taxable
    1,610       1,721  
    Tax-exempt
    1,300       1,253  
      Total interest income
    28,958       30,306  
                 
Interest Expense
               
  Deposits
    4,277       5,533  
  Federal funds purchased and securities sold under agreements to repurchase
    6       8  
  Federal Home Loan Bank advances
    438       640  
  Subordinated debt
    341       262  
      Total interest expense
    5,062       6,443  
  Net interest income
    23,896       23,863  
  Provision for loan losses
    850       4,500  
      Net interest income after provision for loan losses
    23,046       19,363  
                 
Noninterest Income
               
  Retail banking fees
    3,795       3,556  
  Commissions and fees from fiduciary activities
    929       904  
  Brokerage fee income
    414       435  
  Mortgage banking-related fees
    2,184       2,065  
  Losses on mortgage indemnifications and repurchases
    (354 )     (265 )
  Losses on sale of premises and equipment
    (16 )     -  
  Gains on sale of securities available for sale
    73       10  
  Losses on sale / impairments on foreclosed assets
    (348 )     (128 )
  Income from bank owned life insurance
    440       319  
  Other operating income
    1,008       774  
      Total noninterest income
    8,125       7,670  
Non-interest Expense
               
  Compensation and employee benefits
    12,624       12,355  
  Net occupancy
    2,063       2,073  
  Equipment
    2,218       2,020  
  Amortization of intangible assets
    412       413  
  Marketing
    249       327  
  State franchise taxes
    568       598  
  FDIC insurance
    639       877  
  Data processing
    671       636  
  Professional fees
    681       633  
  Telecommunications
    425       376  
  Other operating expenses
    3,007       3,228  
      Total noninterest expense
    23,557       23,536  
                 
      Income before income taxes
    7,614       3,497  
  Income tax expense
    2,114       626  
      Net income
  $ 5,500     $ 2,871  
  Dividends and accretion on preferred stock
    -       (465 )
      Net income available to common shareholders
  $ 5,500     $ 2,406  
                 
Basic net income per common share available to common shareholders
  $ 0.24     $ 0.11  
Diluted net income per common share available to common shareholders
  $ 0.24     $ 0.11  

The accompanying notes are an integral part of these consolidated financial statements.
 



 

 
 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
   
Three months ended March 31,
 
   
2012
   
2011
 
Net income
        $ 5,500           $ 2,871  
   Other comprehensive income, net of tax:
                           
     Unrealized holding gains arising during the period (net of tax 2012: $165, 2011: $288)
    (307 )             535          
     Reclassification adjustment (net of tax 2012: $26, 2011: $4)
    (47 )             (6 )        
     Change in post retirement liability (net of tax 2012: $1, 2011: $42)
    2               (78 )        
     Change in cash flow hedge (net of tax 2012: $15, 2011: $11)
    (27 )             20          
   Other comprehensive (loss)  income
            (379 )             471  
Total comprehensive income
          $ 5,121             $ 3,342  

The accompanying notes are an integral part of these consolidated financial statements.
 


 

 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
                           
Accumulated
       
                           
Other
       
               
Additional
         
Compre-
       
   
Preferred
   
Common
   
Paid-In
   
Retained
   
hensive
       
   
Stock
   
Stock
   
Capital
   
Earnings
   
Income
   
Total
 
Balance, January 1, 2011
  $ 28,763     $ 22,748     $ 270,047     $ 101,188     $ 3,691     $ 426,437  
  Net income
    -       -       -       2,871       -       2,871  
  Other comprehensive income
    -       -       -       -       471       471  
  Cash dividends paid or accrued:
                                            -  
     Common ($0.04 per share)
    -       -       -       (917 )     -       (917 )
     Preferred cumulative 5%
    -       -       -       (370 )     -       (370 )
  Accretion on preferred stock discount
    95       -       -       (95 )     -       -  
  Stock-based compensation expense (5,831 shares)
    -       6       159       -       -       165  
  Exercise of stock options (21,840 shares)
    -       22       190       -       -       212  
Balance, March 31, 2011
  $ 28,858     $ 22,776     $ 270,396     $ 102,677     $ 4,162     $ 428,869  
                                                 
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) expense (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  

The accompanying notes are an integral part of these consolidated financial statements.


 
 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 5,500     $ 2,871  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    1,629       1,680  
Amortization of intangible assets
    412       413  
Provision for loan losses
    850       4,500  
Deferred tax expense (benefit)
    597       (843 )
Stock-based compensation (benefit) expense
    (25 )     165  
Losses on sale / impairments on foreclosed assets
    348       128  
Losses on mortgage indemnifications and repurchases
    354       265  
Losses on sale of premises and equipment
    16       -  
Gains on sale of securities available for sale
    (73 )     (10 )
Mortgage banking-related fees
    (2,184 )     (2,065 )
Proceeds from sale of mortgage loans
    97,007       121,217  
Origination of mortgage loans for sale
    (69,854 )     (79,477 )
Amortization of securities premiums and accretion of discounts, net
    495       272  
Income on bank owned life insurance
    (440 )     (319 )
Changes in assets and liabilities:
               
(Increase) decrease in accrued interest receivable
    (53 )     170  
Decrease in other assets
    927       3,192  
Decrease in accrued interest payable
    (209 )     (2,278 )
Increase in other liabilities
    2,346       4,073  
 Net cash provided by operating activities
  $ 37,643     $ 53,954  
                 
Cash Flows from Investing Activities
               
Proceeds from maturities, calls and principal payments of securities available for sale
  $ 25,528     $ 33,256  
Proceeds from sales of securities available for sale
    -       1,085  
Purchase of securities available for sale
    (72,552 )     (32,634 )
Net (increase) decrease in loans
    (6,364 )     28,313  
Proceeds from sale of premises and equipment
    9       -  
Purchase of premises and equipment
    (1,672 )     (561 )
Proceeds from sale of foreclosed assets
    2,643       2,736  
Net cash (used) provided by investing activities
  $ (52,408 )   $ 32,195  
                 
Cash Flows from Financing Activities
               
Net increase (decrease) in demand, money market and savings deposits
  $ 31,003     $ (13,047 )
Net decrease in certificates of deposit
    (24,686 )     (8,491 )
Principal payments on Federal Home Loan Bank advances
    (5,000 )     (25,000 )
Proceeds from exercise of stock options
    35       212  
Cash dividends paid
    (1,384 )     (1,287 )
 Net cash used by financing activities
  $ (32 )   $ (47,613 )
                 
  (Decrease) increase in cash and cash equivalents
  $ (14,797 )   $ 38,536  
                 
Cash and Cash Equivalents
               
Beginning
    99,970       139,886  
Ending
  $ 85,173     $ 178,422  
Supplemental Schedule of Noncash Activities
               
Foreclosed assets acquired in settlement of loans
  $ 1,219     $ 1,213  

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, 2012 and December 31, 2011, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011.  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, 2011.  The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

2.  
Investment Securities

A summary of the amortized cost and fair value of securities available for sale with gross unrealized gains and losses is presented below (In thousands).
 
   
March 31, 2012
   
December 31, 2011
 
         
Gross
   
Gross
               
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
U. S. Government agencies
  $ 213,007     $ 1,270     $ (190 )   $ 214,087     $ 151,155     $ 1,370     $ (58 )   $ 152,467  
State and municipals
    145,554       10,139       (13 )     155,680       148,933       10,582       -       159,515  
Corporate bonds
    4,808       130       (6 )     4,932       4,478       140       -       4,618  
Collateralized mortgage obligations
    6,775       204       -       6,979       7,251       221       -       7,472  
Agency mortgage backed securities
    127,604       5,739       -       133,343       139,330       5,563       -       144,893  
Other
    8,999       -       -       8,999       8,999       -       -       8,999  
Total
  $ 506,747     $ 17,482     $ (209 )   $ 524,020     $ 460,146     $ 17,876     $ (58 )   $ 477,964  

The book value of securities pledged to secure deposits and for other purposes amounted to $131.1 million and $146.4 million at March 31, 2012 and December 31, 2011, respectively.

Information pertaining to sales and calls of securities available for sale is as follows (In thousands):
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Proceeds from sales/calls
  $ 2,705     $ 10,483  
Gross realized gains
    73       10  

 

 
6

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


As of March 31, 2012, securities with unrealized losses segregated by length of impairment were as follows (In thousands):
 
   
Less than 12 months
   
12 months or more
   
Total
 
         
Unrealized
         
Unrealized
         
Unrealized
 
   
Fair Value
   
Losses
   
Fair Value
   
Losses
   
Fair Value
   
Losses
 
Securities Available for Sale
                                   
U. S. Government agencies
  $ 66,515     $ (190 )   $ -     $ -     $ 66,515     $ (190 )
State and municipals
    2,222       (13 )     -       -       2,222       (13 )
Corporate bonds
    1,318       (6 )     -       -       1,318       (6 )
Total temporarily impaired securities
  $ 70,055     $ (209 )   $ -     $ -     $ 70,055     $ (209 )

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, 2012, 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, 2012 are presented below by contractual maturity (In thousands).
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 47,930     $ 48,246  
Due after one year through five years
    208,574       211,009  
Due after five years through ten years
    80,891       85,258  
Due after ten years
    169,351       179,507  
Total
  $ 506,746     $ 524,020  

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

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, 2012 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, 2012, the cash flow hedge had a fair value of $845 thousand 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.

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 $21.5 million as of March 31, 2012.
 
 
7

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


4.
Loans and Alowance 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.
Our loan portfolio is composed of the following (In thousands):
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Construction and land development:
           
   Residential
  $ 48,478     $ 49,995  
   Commercial
    158,753       164,672  
      Total construction and land development
    207,231       214,667  
Commercial real estate:
               
  Commercial real estate - owner occupied
    317,374       317,976  
  Commercial real estate - non-owner occupied
    421,288       417,658  
  Farmland
    15,851       15,756  
  Multifamily, nonresidential and junior liens
    97,601       93,470  
      Total commercial real estate
    852,114       844,860  
Consumer real estate:
               
  Home equity lines
    261,851       263,035  
  Secured by 1-4 family residential, secured by first deeds of trust
    451,454       450,667  
  Secured by 1-4 family residential, secured by second deeds of trust
    40,789       42,534  
      Total consumer real estate
    754,094       756,236  
Commercial and industrial loans (except those secured by real estate)
    199,453       189,887  
Consumer and other:
               
  Consumer installment loans
    18,754       20,216  
  Deposit overdrafts
    1,213       3,526  
  All other loans
    1,581       1,739  
      Total consumer and other
    21,548       25,481  
Total loans
    2,034,440       2,031,131  
Deferred loan costs
    312       299  
Allowance for loan losses
    (31,615 )     (32,588 )
Net loans
  $ 2,003,137     $ 1,998,842  
 
 
8

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
As of March 31, 2012 and December 31, 2011, the book value of loans pledged as collateral for advances outstanding with the Federal Home Loan Bank of Atlanta totaled $622.9 million and $642.6 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,
 
   
2012
   
2011
   
2012
   
2011
 
Construction and land development
  $ 8,414     $ 8,324     $ -     $ -  
Commercial real estate
    14,378       15,055       -       1,416  
Consumer real estate
    14,272       14,629       352       -  
Commercial and industrial loans (except those secured by real estate)
    598       1,141       205       96  
Consumer and other
    30       25       6       4  
Total
  $ 37,692     $ 39,174     $ 563     $ 1,516  
 
If interest under the accrual method had been recognized on nonaccrual loans, such income would have approximated $351 thousand and $713 thousand for the three months ended March 31, 2012 and 2011, respectively. 
 
The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 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, 2012
                                         
Construction and land development
  $ 6,123     $ 413     $ -     $ 8,414     $ 14,950     $ 192,281     $ 207,231  
Commercial real estate
    3,869       3,138       -       14,378       21,385       830,729       852,114  
Consumer real estate
    12,879       4,681       352       14,272       32,184       721,910       754,094  
Commercial and industrial loans (except those secured by real estate)
    496       783       205       598       2,082       197,371       199,453  
Consumer and other
    207       89       6       30       332       21,216       21,548  
Total loans
  $ 23,574     $ 9,104     $ 563     $ 37,692     $ 70,933     $ 1,963,507     $ 2,034,440  
                                                         
December 31, 2011
                                                       
Construction and land development
  $ 7,268     $ 397     $ -     $ 8,324     $ 15,989     $ 198,678     $ 214,667  
Commercial real estate
    5,125       2,856       1,416       15,055       24,452       820,408       844,860  
Consumer real estate
    14,818       2,661       -       14,629       32,108       724,128       756,236  
Commercial and industrial loans (except those secured by real estate)
    714       264       96       1,141       2,215       187,672       189,887  
Consumer and other
    297       59       4       25       385       25,096       25,481  
Total loans
  $ 28,222     $ 6,237     $ 1,516     $ 39,174     $ 75,149     $ 1,955,982     $ 2,031,131  
 
 
9

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
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.

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 and in the determination of the necessary provision for loan losses.  The review process generally begins with the identification of potential problem loans to be reviewed on an individual basis for impairment.  When a loan has been identified as impaired, a specific reserve may be established based on our calculation of the loss embedded in the individual loan.  In addition to specific reserves on impaired loans, we have a nine point grading system for each non-homogeneous loan in the portfolio to reflect the risk characteristic of the loan.  The loans identified and measured for impairment are segregated from risk-rated loans within the portfolio.  Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating.  Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, overall portfolio quality including delinquency rates and commercial real estate loan concentrations. The ALLL is an accounting estimate and as such there is uncertainty associated with the estimate due to the level of subjectivity and judgment inherent in performing the calculation.  Management’s evaluation of the ALLL also includes considerations of existing general economic and business conditions affecting 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, bank regulatory examination results and findings of our outsourced loan review consultants. The total of specific reserves required for impaired classified loans and the calculated reserves comprise the allowance for loan losses.

The look-back period for calculating historical losses is four years.  This period was increased to four years in the first quarter of 2012, from three years, as management believes this period more appropriately reflects the current credit cycle and accurately reflects the risk in the loan portfolio.  A period of four years includes the higher credit losses beginning in 2008 attributable to the economic downturn.  The look-back period was shortened due to the sudden, extreme decline in credit quality.  As the economy recovers, we are returning our look-back period to more historical levels.  The most current 12 month period continues to be heavily weighted as management considers it to be the most relevant indicator of current economic conditions.  An additional soft factor to capture the additional risk associated with the level of nonaccrual consumer real estate loans was also added to the methodology during the current quarter.  These refinements to the ALLL calculation were not significant to the provision expense or the overall consolidated financial statements.

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.  
 
Activity in the allowance for loan losses is as follows (In thousands):
 
   
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 Loans
 
Balance, January 1, 2012
  $ 9,856     $ 8,565     $ 10,019     $ 4,059     $ 89     $ 32,588  
Provision 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  
                                                 
   
Three Months Ended March 31, 2011
 
   
Construction and Land Development
   
Commercial Real Estate
   
Consumer Real Estate
   
Commercial and Industrial (Except those Secured by Real Estate)
   
Consumer and Other
   
Total Loans
 
Balance, January 1, 2011
  $ 11,037     $ 8,211     $ 10,864     $ 7,388     $ 149     $ 37,649  
Provisions for loan losses
    1,318       1,019       1,319       829       15       4,500  
Loans charged off
    (962 )     (1,353 )     (936 )     (1,622 )     (106 )     (4,979 )
Recoveries
    15       2       58       126       148       349  
Net (charge-offs) recoveries
    (947 )     (1,351 )     (878 )     (1,496 )     42       (4,630 )
Balance, March 31, 2011
  $ 11,408     $ 7,879     $ 11,305     $ 6,721     $ 206     $ 37,519  
 


 
10

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method for the periods ended March 31, 2012 and December 31, 2011 were as follows (In thousands):
 
   
Construction and Land Development
   
Commercial Real Estate
   
Consumer Real Estate
   
Commercial and Industrial Loans (Except those Secured by Real Estate)
   
Consumer and Other
   
Total Loans
 
March 31, 2012
                                   
Allowance for loan losses:
                                   
Individually evaluated for impairment
  $ 3,673     $ 1,201     $ 645     $ -     $ -     $ 5,519  
Collectively evaluated for impairment
    5,743       7,029       9,881       3,364       79       26,096  
Total ending allowance
  $ 9,416     $ 8,230     $ 10,526     $ 3,364     $ 79     $ 31,615  
                                                 
Loans:
                                               
Individually evaluated for impairment
  $ 14,032     $ 15,579     $ 7,043     $ -     $ -     $ 36,654  
Collectively evaluated for impairment
    193,199       836,535       747,051       199,453       21,548       1,997,786  
Total loans
  $ 207,231     $ 852,114     $ 754,094     $ 199,453     $ 21,548     $ 2,034,440  
                                                 
December 31, 2011
                                               
Allowance for loan losses:
                                               
Individually evaluated for impairment
  $ 4,071     $ 1,088     $ 562     $ -     $ -     $ 5,721  
Collectively evaluated for impairment
    5,785       7,477       9,457       4,059       89       26,867  
Total ending allowance
  $ 9,856     $ 8,565     $ 10,019     $ 4,059     $ 89     $ 32,588  
                                                 
Loans:
                                               
Individually evaluated for impairment
  $ 15,218     $ 13,730     $ 5,325     $ -     $ -     $ 34,273  
Collectively evaluated for impairment
    199,449       831,130       750,911       189,887       25,481       1,996,858  
Total loans
  $ 214,667     $ 844,860     $ 756,236     $ 189,887     $ 25,481     $ 2,031,131  
   

 
11

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
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 $51.4 million and $52.8 million at March 31, 2012 and December 31, 2011, respectively.  Included in these balances were $34.8 million and $38.7 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 not considered non-accrual, 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 non-accrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely.  TDRs originally considered non-accrual 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.

Quarterly, 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.
 
The following table provides information on performing and nonperforming restructures for the periods presented (In thousands):
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Performing restructurings:
           
Construction and land development
  $ 8,238     $ 9,946  
Commercial real estate
    4,987       5,029  
Consumer real estate (mortgage modification program)
    15,421       15,556  
Total performing restructurings
  $ 28,646     $ 30,531  
                 
Nonperforming restructurings:
               
Commercial real estate
  $ 2,796     $ 2,832  
Consumer real estate (mortgage modification program)
    3,338       5,357  
Total nonperforming restructurings
  $ 6,134     $ 8,189  
                 
Total restructurings
  $ 34,780     $ 38,720  
 
 
 
12

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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  
 
   
Modifications for the three months ended,
 
   
March 31, 2011
 
                   
   
Number of contracts
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
 
Troubled Debt Restructurings
                 
Construction and land development
    1     $ 152     $ 156  
Commercial real estate
    2       445       445  
Consumer real estate
    19       3,529       3,599  
Total Troubled Debt Restructurings
    22     $ 4,126     $ 4,200  

 
Troubled Debt Restructurings that Subsequently Defaulted
       
   
Number of contracts
   
Recorded Investment
 
Troubled Debt Restructurings
           
Construction and land development
    2     $ 300  
Consumer real estate
    17       1,573  
Total Troubled Debt Restructurings
    19     $ 1,873  

 

 
13

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Modifications of terms for loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal payments, regardless of the period of the modification. The loans included in all loan classes as TDRs at March 31, 2012 and December 31, 2011 had either an interest rate modification or a deferral of principal payments, which we consider to be a concession. All loans designated as TDRs were modified due to financial difficulties experienced by the borrower.

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.

Interest is not typically accrued on impaired loans, but is accrued for performing TDRs.  The following table shows interest income recognized on impaired loans (In thousands):
   
Three Months Ended March 31
 
   
Interest income recognized
   
Cash-basis interest income
 
2012
           
Construction and land development
  $ 114     $ 147  
Commercial real estate
    62       64  
Consumer real estate
    45       43  
Total
  $ 221     $ 254  
                 
2011
               
Construction and land development
  $ 35     $ 45  
Commercial real estate
    79       87  
Consumer real estate
    49       48  
Commercial and industrial loans (except those secured by real estate)
    53       38  
Total
  $ 216     $ 218  
   
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.


 
14

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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 $51.4 million of impaired loans at March 31, 2012, $14.7 million, consisting solely of TDRs, was collectively evaluated for impairment and $36.7 million was individually evaluated for impairment.  The detail of loans individually evaluated for impairment, which includes $20.1 million of TDRs, is presented below (In thousands):
 
   
Recorded investment
   
Unpaid contractual principal balance
   
Allocated allowance
   
Average recorded investment
 
March 31, 2012
                       
Loans without a specific valuation allowance:
                       
Construction and land development
  $ 3,074     $ 3,120     $ -     $ 3,713  
Commercial real estate
    8,334       8,388       -       7,581  
Consumer real estate
    3,510       5,105       -       2,961  
Loans with a specific valuation allowance:
                               
Construction and land development
    10,958       12,944       3,673       10,912  
Commercial real estate
    7,245       7,548       1,201       7,074  
Consumer real estate
    3,533       3,549       645       3,223  
Total
  $ 36,654     $ 40,654     $ 5,519     $ 35,464  
 
As of December 31, 2011, we had $52.8 million of impaired loans, with $18.5 million, consisting solely of TDRs, collectively evaluated for impairment.  The other $34.3 million individually evaluated for impairment, which includes $20.2 million of TDRs, is presented below (In thousands):
   
Recorded investment
   
Unpaid contractual principal balance
   
Allocated allowance
   
Average recorded investment
 
December 31, 2011
                       
Loans without a specific valuation allowance:
                       
Construction and land development
  $ 4,351     $ 4,351     $ -     $ 3,772  
Commercial real estate
    6,827       7,105       -       4,484  
Consumer real estate
    2,412       3,990       -       2,146  
Commercial and industrial loans (except those secured by real estate)
    -       -       -       517  
Loans with a specific valuation allowance:
                               
Construction and land development
    10,867       10,867       4,071       10,235  
Commercial real estate
    6,903       6,927       1,088       7,494  
Consumer real estate
    2,913