XNAS:STEL Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012



 
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  June 30, 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 Corporation 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 August 7, 2012 there were 23,104,397 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 4
  5
  6
  7
     
ITEM 2
22
     
ITEM 3
34
     
ITEM 4
35
     
PART II - OTHER INFORMATION
ITEM 1
36
     
ITEM 1A
36
     
ITEM 2
36
     
ITEM 3
36
     
ITEM 4
36
     
ITEM 5
36
     
ITEM 6
37
 



 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Assets
           
  Cash and due from banks
  $ 46,079     $ 40,931  
  Federal funds sold
    42       21,117  
  Interest-bearing deposits in banks
    27,339       37,922  
    Cash and cash equivalents
    73,460       99,970  
  Investment securities available for sale, at fair value
    582,813       477,964  
  Mortgage loans held for sale
    20,602       42,027  
  Loans receivable, net of allowance for loan losses, 2012, $30,142;  2011, $32,588
    2,007,001       1,998,842  
  Premises and equipment, net
    72,099       74,602  
  Accrued interest receivable
    8,297       8,908  
  Core deposit intangibles, net
    4,186       5,011  
  Goodwill
    113,652       113,652  
  Bank owned life insurance
    43,291       42,413  
  Foreclosed assets
    7,014       8,575  
  Other assets
    47,451       45,964  
    Total assets
  $ 2,979,866     $ 2,917,928  
                 
Liabilities
               
  Deposits:
               
  Noninterest-bearing
  $ 347,385     $ 310,756  
  Interest-bearing
    2,098,678       2,084,844  
    Total deposits
    2,446,063       2,395,600  
  Federal Home Loan Bank advances
    55,000       60,000  
  Subordinated debt
    32,991       32,991  
  Accrued interest payable
    1,847       2,122  
  Deferred income tax liability
    3,900       2,654  
  Other liabilities
    18,031       10,388  
Total liabilities
    2,557,832       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: 22,874,676 shares issued and outstanding; 2011: 22,819,000 shares issued and outstanding.
    22,875       22,819  
  Additional paid-in capital
    271,295       271,080  
  Retained earnings
    118,552       110,940  
  Accumulated other comprehensive income
    9,312       9,334  
    Total stockholders' equity
    422,034       414,173  
    Total liabilities and stockholders' equity
  $ 2,979,866     $ 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
 
   
June 30,
 
   
2012
   
2011
 
Interest Income
           
  Loans, including fees
  $ 25,879     $ 27,084  
  Federal funds sold and deposits in other banks
    31       64  
  Investment securities:
               
    Taxable
    1,719       1,824  
    Tax-exempt
    1,305       1,397  
      Total interest income
    28,934       30,369  
                 
Interest Expense
               
  Deposits
    3,996       5,533  
  Federal funds purchased and securities sold under agreements to repurchase
    6       9  
  Federal Home Loan Bank advances
    409       518  
  Subordinated debt
    343       266  
      Total interest expense
    4,754       6,326  
  Net interest income
    24,180       24,043  
  Provision for loan losses
    1,400       3,150  
      Net interest income after provision for loan losses
    22,780       20,893  
                 
Noninterest Income
               
  Retail banking fees
    3,812       3,840  
  Commissions and fees from fiduciary activities
    872       847  
  Brokerage fee income
    450       506  
  Mortgage banking-related fees
    1,752       1,531  
  (Losses) gains on mortgage indemnifications and repurchases
    (202 )     2  
  Gains on sale of premises and equipment
    8       3  
  Gains on sale of securities available for sale
    7       11  
  Losses on sale / impairments of foreclosed assets
    (219 )     (366 )
  Income from bank owned life insurance
    438       323  
  Other operating income
    1,279       824  
      Total noninterest income
    8,197       7,521  
Noninterest Expense
               
  Compensation and employee benefits
    13,332       12,304  
  Net occupancy
    2,096       1,980  
  Equipment
    2,152       2,164  
  Amortization of intangible assets
    413       413  
  Marketing
    379       258  
  State franchise taxes
    559       594  
  FDIC insurance
    543       641  
  Data processing
    706       664  
  Professional fees
    883       599  
  Telecommunications
    410       439  
  Other operating expenses
    2,855       3,164  
      Total noninterest expense
    24,328       23,220  
                 
      Income before income taxes
    6,649       5,194  
  Income tax expense
    1,768       1,169  
      Net income
  $ 4,881     $ 4,025  
  Dividends and accretion on preferred stock
    -       (720 )
      Net income available to common shareholders
  $ 4,881     $ 3,305  
                 
Basic net income per common share available to common shareholders
  $ 0.21     $ 0.15  
Diluted net income per common share available to common shareholders
  $ 0.21     $ 0.14  
 
The accompanying notes are an integral part of these consolidated financial statements.



 
STELLARONE CORPORATION AND SUBSIDIARY
 
CONSOLIDATED INCOME STATEMENTS
 
(In thousands, except per share data)
 
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
Interest Income
           
  Loans, including fees
  $ 51,893     $ 54,347  
  Federal funds sold and deposits in other banks
    65       133  
  Investment securities:
               
    Taxable
    3,329       3,544  
    Tax-exempt
    2,605       2,650  
      Total interest income
    57,892       60,674  
                 
Interest Expense
               
  Deposits
    8,273       11,067  
  Federal funds purchased and securities sold under agreements to repurchase
    13       16  
  Federal Home Loan Bank advances
    847       1,158  
  Subordinated debt
    684       528  
      Total interest expense
    9,817       12,769  
  Net interest income
    48,075       47,905  
  Provision for loan losses
    2,250       7,650  
      Net interest income after provision for loan losses
    45,825       40,255  
                 
Noninterest Income
               
  Retail banking fees
    7,606       7,396  
  Commissions and fees from fiduciary activities
    1,801       1,751  
  Brokerage fee income
    865       941  
  Mortgage banking-related fees
    3,936       3,596  
  Losses on mortgage indemnifications and repurchases
    (556 )     (263 )
  (Losses) gains on sale of premises and equipment
    (7 )     3  
  Gains on sale of securities available for sale
    79       21  
  Losses on sale / impairments on foreclosed assets
    (670 )     (495 )
  Income from bank owned life insurance
    878       642  
  Other operating income
    2,287       1,599  
      Total noninterest income
    16,219       15,191  
Noninterest Expense
               
  Compensation and employee benefits
    25,956       24,659  
  Net occupancy
    4,159       4,050  
  Equipment
    4,369       4,184  
  Amortization of intangible assets
    825       825  
  Marketing
    628       584  
  State franchise taxes
    1,128       1,192  
  FDIC insurance
    1,182       1,518  
  Data processing
    1,377       1,299  
  Professional fees
    1,565       1,231  
  Telecommunications
    835       815  
  Other operating expenses
    5,756       6,398  
      Total noninterest expense
    47,780       46,755  
                 
      Income before income taxes
    14,264       8,691  
  Income tax expense
    3,882       1,794  
      Net income
  $ 10,382     $ 6,897  
  Dividends and accretion on preferred stock
    -       (1,186 )
      Net income available to common shareholders
  $ 10,382     $ 5,711  
                 
Basic net income per common share available to common shareholders
  $ 0.45     $ 0.25  
Diluted net income per common share available to common shareholders
  $ 0.45     $ 0.25  

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



 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
                         
   
Three months ended June 30,
 
   
2012
   
2011
 
Net income
        $ 4,881           $ 4,025  
   Other comprehensive income, net of tax:
                           
     Unrealized holding gains arising during the period (net of tax 2012: $342, 2011: $917)
   $ 634              $ 1,705          
     Reclassification adjustment (net of tax 2012: $2, 2011: $4)
    (4 )             (8 )        
     Change in post retirement liability (net of tax 2012: $0, 2011: $84)
    -               156          
     Change in cash flow hedge (net of tax 2012: $147, 2011: $136)
    (273 )             (253 )        
   Other comprehensive income
            357               1,600  
Total comprehensive income
          $ 5,238             $ 5,625  
 
 
   
Six months ended June 30,
 
     2012      2011  
Net income
          $ 10,382             $ 6,897  
   Other comprehensive income, net of tax:
                               
     Unrealized holding gains arising during the period (net of tax 2012: $178, 2011: $1,206)
   $ 327              $ 2,240          
     Reclassification adjustment (net of tax 2012: $28, 2011: $7)
    (51 )             (14 )        
     Change in post retirement liability (net of tax 2012: $1, 2011: $42)
    2               78          
     Change in cash flow hedge (net of tax 2012: $162, 2011: $125)
    (300 )             (233 )        
   Other comprehensive (loss)  income
            (22 )             2,071  
Total comprehensive income
          $ 10,360             $ 8,968  
 
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
    -       -       -       6,897       -       6,897  
  Other comprehensive income
    -       -       -       -       2,071       2,071  
  Cash dividends paid or accrued:
                                            -  
     Common ($0.08 per share)
    -       -       -       (1,836 )     -       (1,836 )
     Preferred cumulative 5%
    -       -       -       (724 )     -       (724 )
    Accretion of preferred stock discount
    177       -       -       (177 )     -       -  
    Partial repurchase of preferred stock issued to U.S. Treasury and associated accelerated accretion
    (7,215 )                     (285 )             (7,500 )
  Stock-based compensation expense (20,419 shares)
    -       20       331       -       -       351  
  Exercise of stock options (31,920 shares)
    -       32       278       -       -       310  
Balance, June 30, 2011
  $ 21,725     $ 22,800     $ 270,656     $ 105,063     $ 5,762     $ 426,006  
                                                 
Balance, January 1, 2012
  $ -     $ 22,819     $ 271,080     $ 110,940     $ 9,334     $ 414,173  
  Net income
    -       -       -       10,382       -       10,382  
  Other comprehensive loss
    -       -       -       -       (22 )     (22 )
  Common dividends paid ($0.12 per share)
    -       -       -       (2,770 )     -       (2,770 )
  Stock-based compensation expense (52,484 shares)
    -       53       426       -       -       479  
  Exercise of stock options (3,192 shares)
    -       3       (211 )     -       -       (208 )
Balance, June 30, 2012
  $ -     $ 22,875     $ 271,295     $ 118,552     $ 9,312     $ 422,034  

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



 
STELLARONE CORPORATION AND SUBSIDIARY
 
 
(In thousands)
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 10,382     $ 6,897  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    3,345       3,391  
Amortization of intangible assets
    825       825  
Provision for loan losses
    2,250       7,650  
Deferred tax expense (benefit)
    1,268       (466 )
Stock-based compensation expense
    479       351  
Losses on sale / impairments of foreclosed assets
    670       495  
Losses on mortgage indemnifications and repurchases
    556       263  
Losses (gains) on sale of premises and equipment
    7       (3 )
Gains on sale of securities available for sale
    (79 )     (21 )
Mortgage banking-related fees
    (3,936 )     (3,596 )
Proceeds from sale of mortgage loans
    153,739       197,885  
Origination of mortgage loans for sale
    (128,378 )     (162,686 )
Amortization of securities premiums and accretion of discounts, net
    872       595  
Income on bank owned life insurance
    (878 )     (642 )
Changes in assets and liabilities:
               
Decrease in accrued interest receivable
    611       216  
Decrease in other assets
    167       3,828  
Decrease in accrued interest payable
    (275 )     (125 )
Increase in other liabilities
    6,411       2,072  
 Net cash provided by operating activities
  $ 48,036     $ 56,929  
                 
Cash Flows from Investing Activities
               
Proceeds from maturities, calls and principal payments of securities available for sale
  $ 68,960     $ 66,923  
Proceeds from sales of securities available for sale
    -       1,095  
Purchase of securities available for sale
    (174,178 )     (145,172 )
Net (increase) decrease in loans
    (12,848 )     27,039  
Proceeds from sale of premises and equipment
    1,033       4  
Purchase of premises and equipment
    (3,568 )     (1,087 )
Proceeds from sale of foreclosed assets
    3,570       5,120  
Net cash used by investing activities
  $ (117,031 )   $ (46,078 )
                 
Cash Flows from Financing Activities
               
Net increase in demand, money market and savings deposits
  $ 87,049     $ 20,216  
Net decrease in certificates of deposit
    (36,586 )     (2,165 )
Principal payments on Federal Home Loan Bank advances
    (5,000 )     (25,000 )
Proceeds from exercise of stock options
    (208 )     310  
Partial repurchase of preferred stock issued to the U.S. Treasury
    -       (7,500 )
Cash dividends paid
    (2,770 )     (2,560 )
 Net cash provided (used) by financing activities
  $ 42,485     $ (16,699 )
                 
  Decrease in cash and cash equivalents
  $ (26,510 )   $ (5,848 )
                 
Cash and Cash Equivalents
               
Beginning
    99,970       139,886  
Ending
  $ 73,460     $ 134,038  
                 
Supplemental Schedule of Noncash Activities
               
Foreclosed assets acquired in settlement of loans
  $ 2,440     $ 4,078  

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


 
6


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 June 30, 2012 and December 31, 2011, the results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 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 six month period ended June 30, 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 with gross unrealized gains and losses is presented below (In thousands).
 
   
June 30, 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. Treasuries
  $ 10,000     $ -     $ -     $ 10,000     $ -     $ -     $ -     $ -  
U. S. Government agencies
    263,899       1,392       (108 )     265,183       151,155       1,370       (58 )     152,467  
State and municipals
    144,022       11,011       (4 )     155,029       148,933       10,582       -       159,515  
Corporate bonds
    4,814       87       (8 )     4,893       4,478       140       -       4,618  
Collateralized mortgage obligations
    6,231       206       -       6,437       7,251       221       -       7,472  
Mortgage backed securities
    126,604       5,668       -       132,272       139,330       5,563       -       144,893  
Certificates of deposits
    8,999       -       -       8,999       8,999       -       -       8,999  
Total
  $ 564,569     $ 18,364     $ (120 )   $ 582,813     $ 460,146     $ 17,876     $ (58 )   $ 477,964  
 
The carrying value of securities pledged to secure deposits and for other purposes amounted to $177.4 million and $157.4 million at June 30, 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Proceeds from sales/calls
  $ 12,740     $ 14,467     $ 15,445     $ 24,950  
Gross realized gains
    7       11       79       21  

As of June 30, 2012, available for sale 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
 
U. S. Government agencies
  $ 47,132     $ (108 )   $ -     $ -     $ 47,132     $ (108 )
State and municipals
    1,786       (4 )     -       -       1,786       (4 )
Corporate bonds
    1,316       (8 )     -       -       1,316       (8 )
Total temporarily impaired securities
  $ 50,234     $ (120 )   $ -     $ -     $ 50,234     $ (120 )
 
Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

As of June 30, 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 June 30, 2012 are presented below by contractual maturity (In thousands):
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 52,509     $ 52,828  
Due after one year through five years
    265,700       268,187  
Due after five years through ten years
    87,641       92,472  
Due after ten years
    158,719       169,326  
Total
  $ 564,569     $ 582,813  
 
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
 
 
 
7

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 June 30, 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 June 30, 2012, the cash flow hedge had a fair value of $1.3 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.

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 $36.4 million as of June 30, 2012.
 
 
 
8

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
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.

Our loan portfolio is composed of the following (In thousands):
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Construction and land development:
           
   Residential
  $ 52,308     $ 49,995  
   Commercial
    148,503       164,672  
      Total construction and land development
    200,811       214,667  
Commercial real estate:
               
  Commercial real estate - owner occupied
    296,361       317,976  
  Commercial real estate - non-owner occupied
    473,810       417,658  
  Farmland
    11,881       15,756  
  Multifamily, nonresidential and junior liens
    94,641       93,470  
      Total commercial real estate
    876,693       844,860  
Consumer real estate:
               
  Home equity lines
    256,807       263,035  
  Secured by 1-4 family residential, secured by first deeds of trust
    446,768       450,667  
  Secured by 1-4 family residential, secured by second deeds of trust
    39,486       42,534  
      Total consumer real estate
    743,061       756,236  
Commercial and industrial loans (except those secured by real estate)
    192,369       189,887  
Consumer and other:
               
  Consumer installment loans
    21,843       20,216  
  Deposit overdrafts
    760       3,526  
  All other loans
    1,629       1,739  
      Total consumer and other
    24,232       25,481  
Total loans
    2,037,166       2,031,131  
Deferred loan costs
    (23 )     299  
Allowance for loan losses
    (30,142 )     (32,588 )
Net loans
  $ 2,007,001     $ 1,998,842  

 

 
9

STELLARONE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


As of June 30, 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 $632.3 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
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
   
2012
   
2011
   
2012
   
2011
 
Construction and land development
  $ 7,603     $ 8,324     $ 125     $ -  
Commercial real estate
    13,817       15,055       -       1,416  
Consumer real estate
    13,359       14,629       507       -  
Commercial and industrial loans (except those secured by real estate)
    644       1,141       651       96  
Consumer and other
    59       25       26       4  
Total
  $ 35,482     $ 39,174     $ 1,309     $ 1,516  
 
If interest under the accrual method had been recognized on nonaccrual loans, such income would have approximated $493 thousand and $416 thousand for the three months ended June 30, 2012 and 2011, respectively and $844 thousand and $1.1 million for the six months ended June 30, 2012 and 2011, respectively.

The following table presents the aging of the recorded investment in past due loans as of June 30, 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
 
June 30, 2012
                                         
Construction and land development
  $ 2,452     $ 1,272     $ 125     $ 7,603     $ 11,452     $ 189,359     $ 200,811  
Commercial real estate
    3,246       5,209       -       13,817       22,272       854,421       876,693  
Consumer real estate
    11,776       5,707       507       13,359       31,349       711,712       743,061  
Commercial and industrial loans (except those secured by real estate)
    502       581       651       644       2,378       189,991       192,369  
Consumer and other
    180       90       26       59       355       23,877       24,232  
Total loans
  $ 18,156     $ 12,859     $ 1,309     $ 35,482     $ 67,806     $ 1,969,360     $ 2,037,166  
                                                         
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  

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.  The remaining 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.  Management believes this period appropriately reflects the current credit cycle and accurately reflects the risk in the loan portfolio.  The four 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 heavily weighted as management considers it to be the most relevant indicator of current economic conditions.  Due to the prolonged economic downturn and suppressed real estate values, an additional qualitative factor to capture the risk associated with loans secured by junior liens was also added to the methodology during the current quarter.  This refinement to the ALLL calculation was 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.


 
10

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 June 30, 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, April 1, 2012
  $ 9,416     $ 8,230     $ 10,526     $ 3,364     $ 79     $ 31,615  
Provision for loan losses
    (568 )     1,626       1,121       (754 )     (25 )     1,400  
Loans charged off
    (896 )     (960 )     (1,281 )     (234 )     (40 )     (3,411 )
Recoveries
    2       160       156       150       70       538  
Net (charge-offs) recoveries
    (894 )     (800 )     (1,125 )     (84 )     30       (2,873 )
Balance, June 30, 2012
  $ 7,954     $ 9,056     $ 10,522     $ 2,526     $ 84     $ 30,142  
                                                 
                                                 
   
Three Months Ended June 30, 2011
 
       
   
Construction and Land Development
   
Commercial Real Estate
   
Consumer Real Estate
   
Commercial and Industrial (Except those Secured by Real Estate)
   
Consumer and Other
   
Total Allowance
 
Balance, April 1, 2011
  $ 11,408     $ 7,879     $ 11,305     $ 6,721     $ 206     $ 37,519  
Provisions for loan losses
    884       773       906       576       11       3,150  
Loans charged off
    (2,897 )     (287 )     (1,299 )     (1,208 )     (129 )     (5,820 )
Recoveries
    481       68       45       155       138       887  
Net (charge-offs) recoveries
    (2,416 )     (219 )     (1,254 )     (1,053 )     9       (4,933 )
Balance, June 30, 2011
  $ 9,876     $ 8,433     $ 10,957     $ 6,244     $ 226     $ 35,736  
                                                 
                                                 
   
Six Months Ended June 30, 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  
Provision for loan losses
    (621 )     2,020       2,417       (1,467 )     (99 )     2,250  
Loans charged off
    (1,297 )     (1,756 )     (2,169 )     (484 )     (88 )     (5,794 )
Recoveries
    16       227       255       418       182       1,098  
Net (charge-offs) recoveries
    (1,281 )     (1,529 )     (1,914 )     (66 )     94       (4,696 )
Balance, June 30, 2012
  $ 7,954     $ 9,056     $ 10,522     $ 2,526     $ 84     $ 30,142  
                                                 
                                                 
   
Six Months Ended June 30, 2011
 
       
   
Construction and Land Development
   
Commercial Real Estate
   
Consumer Real Estate
   
Commercial and Industrial (Except those Secured by Real Estate)
   
Consumer and Other
   
Total Allowance
 
Balance, January 1, 2011
  $ 11,037     $ 8,211     $ 10,864     $ 7,388     $ 149     $ 37,649  
Provisions for loan losses
    2,202       1,792       2,225       1,405       26       7,650  
Loans charged off
    (3,859 )     (1,640 )     (2,235 )     (2,830 )     (235 )     (10,799 )
Recoveries
    496       70       103       281       286       1,236  
Net (charge-offs) recoveries
    (3,363 )     (1,570 )     (2,132 )     (2,549 )     51       (9,563 )
Balance, June 30, 2011
  $ 9,876     $ 8,433     $ 10,957     $ 6,244     $ 226     $ 35,736  

 

 
11

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 June 30, 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 Allowance
 
June 30, 2012
                                   
Allowance for loan losses:
                                   
Individually evaluated for impairment
  $ 3,140     $ 1,921     $ 439     $ -     $ -     $ 5,500  
Collectively evaluated for impairment
    4,814       7,135       10,083       2,526       84       24,642  
Total ending allowance
  $ 7,954     $ 9,056     $ 10,522     $ 2,526     $ 84     $ 30,142  
                                                 
                                                 
Loans:
                                               
Individually evaluated for impairment
  $ 12,239     $ 25,225     $ 6,523     $ -     $ -     $ 43,987  
Collectively evaluated  for impairment
    188,572       851,468       736,538       192,369       24,232       1,993,179  
Total loans
  $ 200,811     $ 876,693     $ 743,061     $ 192,369     $ 24,232     $ 2,037,166