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STEL > SEC Filings for STEL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for STELLARONE CORP

Form 10-Q for STELLARONE CORP


8-Nov-2012

Quarterly Report


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 third quarter 2012 earnings were $5.6 million or $0.24 net income per diluted common share. This represents a 41.7% increase over net income available to common shareholders of $3.9 million or $0.17 net income per diluted common share during the same quarter in the prior year. Continuing improvements in asset quality, solid noninterest income growth primarily from our mortgage segment and improved commercial lending activity in our new markets contributed to the growth in recurring earnings.

Our net income for the nine month period ended September 30, 2012 was $15.9 million, or $0.69 net income per diluted common share. Those results compare to net income available to common shareholders of $9.6 million, or $0.42 net income per diluted common share during the same period in the prior year. Solid noninterest income growth from continued strong production volume from our mortgage segment contributed to the growth in recurring earnings.

Operating Segment Results

Revenue from the mortgage banking segment totaled $2.3 million for the third quarter of 2012, or up $583 thousand or 33.3% compared to $1.8 million for the second quarter of 2012 and up $368 thousand or 18.7% when compared to the same quarter in 2011. The increase is primarily volume driven and not margin related as loans sold in the third quarter of 2012 totaled $70.8 million or up $15.8 million or 28.7% from the $55.0 million sold during the second quarter of 2012. The volume increase during the third quarter is attributable to our ability to capitalize on the market demand for mortgage refinancing driven by the low rate environment. In addition to this revenue increase, a sequential decrease in mortgage indemnification expense of $174 thousand contributed to a significant improvement in earnings contribution from the mortgage segment, with after-tax earnings of $588 thousand, representing $0.03 per common diluted share.

Revenue from the mortgage banking segment totaled $6.3 million for the first nine months of 2012, or up $709 thousand or 12.7% compared to $5.6 million for the first nine months of 2011. The increase is attributable to higher fee realization on loans sold.

Retail banking fee income from the commercial banking segment remained stable at $3.8 million for the third quarter of 2012 and amounted to $11.5 million for the first nine months of 2012, an increase of $35 thousand or essentially flat compared to $11.4 million for the first nine months of 2011. The revenue mix from this line of business had a slight uptick in overdraft revenue with an offsetting decrease in interchange income.

Wealth management revenues from trust and brokerage fees for the third quarter of 2012 were $1.3 million or essentially flat on a sequential quarter basis and up $95 thousand or 7.9% when compared to the $1.2 million realized during the third quarter of 2011. The year over year increase is primarily due to higher fee realizations attributable to new asset growth and to a lesser extent increases in the market value of underlying assets. Fiduciary assets increased sequentially by $8.5 million or 1.9% amounting to $466.9 million at September 30, 2012, compared to $458.4 million at June 30, 2012. These increases were driven by both market value improvement and growth from new assets. Wealth management revenues from trust and brokerage fees for the first nine months of 2012 were $4.0 million, an increase of $69 thousand or 1.8% compared to the first nine months of 2011.


Table of Contents
STELLARONE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Net Interest Income

The net interest margin was 3.77% for the third quarter of 2012, compared to 3.84% for the second quarter of 2012 and 3.77% for the third quarter of 2011. The current low interest rate environment, market loan pricing pressures and U.S. monetary policy has accelerated asset yield compression, resulting in some margin compression. The average yield on earning assets for the current quarter decreased 12 basis points to 4.45% on a sequential basis. Investment yields and loan yields contracted 24 basis points and 10 basis points, respectively, on a sequential basis. Investment yields contracted due to lower yields realized on the recent investment activity in the current low rate environment. Loan yields contracted due to re-pricing within the current portfolio and reduced yields on new production. Due to lower rates paid on deposits, a 6 basis point improvement in the cost of interest bearing liabilities was noted sequentially, moving from 0.89% during the second quarter of 2012 to 0.83% during the third quarter of 2012. Higher earning assets offset the margin compression experienced during the quarter as net interest income on a tax-equivalent basis remained stable at $25.0 million for the third quarter of 2012, compared to $25.1 million for the third quarter last year and $24.9 million in the second quarter of 2012.

Net interest income on a tax-equivalent basis amounted to $74.6 million for the first nine months of 2012, which compares to $74.5 million for the same period in 2011. The net interest margin was 3.82% for the first nine months of 2012 and 3.81% for the first nine months of 2011. The average yield on earning assets for the first nine months of 2012 decreased 23 basis points to 4.55% as compared to 4.78% for the first nine months of 2011, which was more than offset by improvement in the cost of interest bearing liabilities, which contracted 27 basis points from 1.16% during the first nine months of 2011 to 0.89% during the first nine months of 2012. The re-pricing of interest bearing liabilities outpaced interest earning assets during the first nine months as we experienced decreases in the cost of all deposit categories and a 36 basis point decrease in the cost of FHLB advances. Loan yields contracted 17 basis points due to re-pricing within the current portfolio and lower yields realized on new production due to the protracted low rate environment.

STELLARONE CORPORATION
(NASDAQ: STEL)
CONSOLIDATED AVERAGE BALANCES, YIELDS
AND RATES (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, 2012 AND
2011
(Dollars in thousands)
                                                 For the Three Months Ended September 30,
                                            2012                                          2011
                            Average        Interest       Average         Average        Interest       Average
                            Balance        Inc/Exp         Rates          Balance        Inc/Exp         Rates

Assets
Loans receivable, net
(1)                       $ 2,066,911     $   25,865           4.98 %   $ 2,064,789     $   27,044           5.20 %
Investment securities
Taxable                       414,806          1,725           1.63 %       292,359          1,829           2.45 %
Tax exempt (1)                133,539          1,972           5.78 %       153,964          2,260           5.74 %
Total investments             548,345          3,697           2.64 %       446,323          4,089           3.58 %

Federal funds sold and
deposits in banks              28,712             24           0.33 %       127,651             77           0.24 %
                              577,057          3,721           2.53 %       573,974          4,166           2.84 %

Total earning assets        2,643,968     $   29,586           4.45 %     2,638,763     $   31,210           4.69 %

Total nonearning assets       329,543                                       314,550

Total assets              $ 2,973,511                                   $ 2,953,313

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
  Interest checking       $   604,102     $      309           0.20 %   $   573,871     $      538           0.37 %
  Money market                437,761            506           0.46 %       445,187            970           0.86 %
  Savings                     316,922            219           0.27 %       280,640            423           0.60 %
  Time deposits:
    Less than $100,000        484,365          1,699           1.40 %       537,180          2,185           1.61 %
    $100,000 and more         251,863          1,046           1.65 %       267,116          1,241           1.84 %
Total interest-bearing
deposits                    2,095,013          3,779           0.72 %     2,103,994          5,357           1.01 %

Federal funds purchased
and securities sold
under agreements to
repurchase                      1,920              8           1.63 %         1,075              8           2.91 %
Federal Home Loan Bank
advances and other
borrowings                     55,000            413           2.94 %        60,000            523           3.41 %
Subordinated debt              32,991            344           4.08 %        32,991            263           3.12 %

                               89,911            765           3.33 %        94,066            794           3.30 %

  Total
interest-bearing
liabilities                 2,184,924          4,544           0.83 %     2,198,060          6,151           1.11 %

  Total
noninterest-bearing
liabilities                   363,901                                       325,577

Total liabilities           2,548,825                                     2,523,637
Stockholders' equity          424,686                                       429,676

Total liabilities and
stockholders' equity      $ 2,973,511                                   $ 2,953,313


Net interest income
(tax equivalent)                          $   25,042                                    $   25,059
  Average interest rate
spread                                                         3.62 %                                        3.58 %
  Interest expense as
percentage of average
earning assets                                                 0.68 %                                        0.92 %
  Net interest margin                                          3.77 %                                        3.77 %

(1) Income and yields are reported on a taxable equivalent basis using a 35% tax rate.


Table of Contents
STELLARONE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

STELLARONE CORPORATION
(NASDAQ: STEL)
CONSOLIDATED AVERAGE BALANCES, YIELDS
AND RATES (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2012 AND
2011
(Dollars in thousands)
                                                  For the Nine Months Ended September 30,
                                            2012                                          2011
                            Average        Interest       Average         Average        Interest       Average
                            Balance        Inc/Exp         Rates          Balance        Inc/Exp         Rates

Assets
Loans receivable, net
(1)                       $ 2,057,773     $   77,836           5.05 %   $ 2,084,621     $   81,457           5.22 %
Investment securities
Taxable                       370,541          5,054           1.79 %       260,266          5,373           2.72 %
Tax exempt (1)                136,568          5,980           5.75 %       142,909          6,337           5.85 %
Total investments             507,109         11,034           2.86 %       403,175         11,710           3.83 %

Federal funds sold and
deposits in banks              46,117             90           0.26 %       125,409            211           0.22 %
                              553,226         11,124           2.64 %       528,584         11,921           2.97 %

Total earning assets        2,610,999     $   88,960           4.55 %     2,613,205     $   93,378           4.78 %

Total nonearning assets       325,312                                       314,253

Total assets              $ 2,936,311                                   $ 2,927,458

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
  Interest checking       $   593,817     $    1,101           0.25 %   $   567,188     $    1,601           0.38 %
  Money market                421,755          1,551           0.49 %       430,565          3,064           0.95 %
  Savings                     307,840            800           0.35 %       275,404          1,306           0.63 %
  Time deposits:
    Less than $100,000        495,902          5,381           1.45 %       539,790          6,710           1.66 %
    $100,000 and more         255,595          3,220           1.68 %       265,587          3,743           1.88 %
Total interest-bearing
deposits                    2,074,909         12,053           0.78 %     2,078,534         16,424           1.06 %

Federal funds purchased
and securities sold
under agreements to
repurchase                      1,209             20           2.17 %         1,091             24           2.95 %
Federal Home Loan Bank
advances and other
borrowings                     55,785          1,260           2.97 %        66,593          1,681           3.33 %
Subordinated debt              32,991          1,028           4.09 %        32,991            790           3.16 %

                               89,985          2,308           3.37 %       100,675          2,495           3.27 %

  Total
interest-bearing
liabilities                 2,164,894         14,361           0.89 %     2,179,209         18,919           1.16 %

  Total
noninterest-bearing
liabilities                   350,606                                       320,679

Total liabilities           2,515,500                                     2,499,888
Stockholders' equity          420,811                                       427,570

Total liabilities and
stockholders' equity      $ 2,936,311                                   $ 2,927,458


Net interest income
(tax equivalent)                          $   74,599                                    $   74,459
  Average interest rate
spread                                                         3.66 %                                        3.62 %
  Interest expense as
percentage of average
earning assets                                                 0.73 %                                        0.97 %
  Net interest margin                                          3.82 %                                        3.81 %

(1) Income and yields are reported on a taxable equivalent basis using a 35% tax rate.


Table of Contents
STELLARONE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Noninterest Income

On an operating basis, which excludes gains and losses from sales and impairments of securities and other assets, total noninterest income amounted to $8.7 million for the third quarter of 2012, up $499 thousand or 6.1% on a sequential basis compared to $8.2 million for the second quarter of 2012, and up $937 thousand or 12.1% compared to the same quarter last year. Both the sequential quarter and year over year increases in operating noninterest income stemmed largely from continued strong production volumes from our mortgage segment.

Total non-interest income amounted to $24.9 million for the first nine months of 2012, or up $2.1 million or 9.4% compared to the same period in the prior year. Strong performance from our mortgage banking line contributed $709 thousand of the increase, paired with increases in other operating income of $614 thousand from loan swap fee income and $635 thousand in pass-through income.

Noninterest Expense

The efficiency ratio was 67.94% for the third quarter of 2012, compared to 71.72% for the second quarter of 2012 and 69.01% for the same quarter in 2011. The sequential quarter decrease in the efficiency ratio reflects the absence of the $824 thousand one-time charge associated with severance costs incurred during the second quarter along with improved noninterest income revenues. The year over year decrease is a result of increased revenues from noninterest income.

The efficiency ratio was 69.80% for the first nine months in 2012, compared to 69.88% for the same period in 2011. The stability in the efficiency ratio reflects an increase in revenues offset by an increase in noninterest expense. Noninterest expense for the first nine months of 2012 amounted to $71.4 million, or up $1.5 million or 2.2% when compared to $69.8 million for the same period in the prior year. The increase was driven primarily by the $824 thousand one-time severance charges described above. In addition, professional fees increased $279 thousand, primarily associated with consulting services related to CEO succession planning, phase two of our efficiency initiative and strategic training opportunities and marketing increased $267 thousand as we promoted the opening of our three new branches in Charlottesville, Richmond and Tidewater in 2012.

Phase two of our efficiency initiative is well underway, which contains strategies to enhance revenues and streamline processes in order to achieve further improvement in efficiency and effectiveness. Phase three of the initiative has begun and will serve to align our real estate holdings and associated expense structure with our current and future needs. We view these as longer-term commitments which will facilitate some immediate enhancements while other strategies implemented will be realized over a twelve to eighteen month horizon.

Income Taxes

Income tax expense for the third quarter of 2012 was $2.0 million, resulting in an effective tax rate of 26.0%, compared to an income tax expense of $1.2 million for the third quarter of 2011, or an effective rate of 22.7%. For the nine month period ended September 30, 2012, income tax expense was $5.8 million, or an effective rate of 26.8% compared to $3.0 million, or an effective rate of 21.5% for the same period in 2011. The volatility in the effective tax rate when comparing the three and nine month periods to the same periods in the prior year is a result of elevated provisioning levels in the prior year that reduced pretax earnings to a level proportionately smaller in relation to permanent tax differences. As pretax results fluctuate, substantial shifts in the effective tax rate are generated due to comparing a lower level of earnings or losses to a relatively steady level of permanent differences. The effective rate of 26.8% for the first nine months of 2012 is slightly higher than 26.3%, which represents our anticipated effective rate for the remainder of 2012.

Asset Quality

Non-performing assets, as shown below, totaled $43.1 million at September 30,
2012, up $583 thousand or 1.4% sequentially from $42.5 million at June 30, 2012
and down $9.4 million or 17.9% compared to $52.5 million at September 30,
2011. The ratio of non-performing assets as a percentage of total assets
remained stable sequentially at 1.46% as of September 30, 2012, compared to
1.43% as of June 30, 2012 and was down compared to 1.77% at September 30, 2011.

                                                      September                            September
                                                       30, 2012        June 30, 2012        30, 2011
Non accrual loans                                    $     32,544     $        30,511     $     35,025
Non accrual TDR's                                           2,628               4,971            8,445
Total non-performing loans                                 35,172              35,482           43,470
Foreclosed assets                                           7,907               7,014            9,009
Total non-performing assets                          $     43,079     $        42,496     $     52,479

Net charge-offs for the third quarter of 2012 totaled $2.2 million, down $691 thousand or 24.1% compared to the $2.9 million for the second quarter of 2012 and down $1.6 million or 42.1% when compared to $3.8 million for the third quarter of 2011. Annualized net charge-offs as a percentage of average loans receivable amounted to 0.42% for the third quarter of 2012, down from 0.56% for the second quarter of 2012 and down from 0.73% for the third quarter of 2011.

Foreclosed assets totaled $7.9 million at September 30, 2012, up $893 thousand or 12.7% compared to $7.0 million at June 30, 2012 and down $1.1 million or 12.2% compared to $9.0 million at September 30, 2011.

Included in the loan portfolio at September 30, 2012, are loans classified as troubled debt restructurings ("TDRs") totaling $27.0 million or 1.4% of total loans. TDRs were reduced sequentially by 9.4% or $2.8 million as compared to $29.8 million at June 30, 2012 and 33.7% or $13.7 million as compared to $40.7 million at September 30, 2011. At September 30, 2012, $24.4 million or 90.3% of total TDRs were performing under the modified terms.

We recorded a provision for loan losses of $1.9 million for the third quarter of 2012, an increase of $500 thousand compared to the $1.4 million recognized for the second quarter of 2012 and a decrease of $1.4 million compared to the third quarter of 2011. The decreased provisioning in the first three quarters of 2012 is reflective of the continued improvement in underlying credit quality metrics used in measuring the risk inherent in the loan portfolio. The allowance as a percentage of non-performing loans was 84.9% at September 30, 2012, or essentially unchanged from 85.0% at June 30, 2012 and up from 81.1% at September 30, 2011. The third quarter 2012 provision compares to net charge-offs of $2.2 million, resulting in an allowance for loan losses of $29.9 million at September 30, 2012, a decrease of $282 thousand when compared to $30.1 million at June 30, 2012 and $5.4 million when compared to $35.3 million at September 30, 2011. The allowance as a percentage of total loans was 1.45% at September 30, 2012, compared to 1.48% at June 30, 2012 and 1.74% at September 30, 2011.


Table of Contents
                             STELLARONE CORPORATION
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

Our nonaccrual loans are composed of the following (in thousands):
                                                                         September 30, 2012
                                                                                              Nonaccrual Loans
                                                        Loans                                     to Loans
                                                     Outstanding       Nonaccrual Loans         Outstanding
Construction and land development                    $    188,868     $            9,408                   4.98 %
Commercial real estate                                    913,324                 11,404                   1.25 %
Consumer real estate                                      738,464                 13,712                   1.86 %
Commercial and industrial loans (except those
secured by real estate)                                   185,041                    625                   0.34 %
Consumer and other                                         29,402                     23                   0.08 %
Total loans                                          $  2,055,099     $           35,172                   1.71 %

The following table provides information on asset quality statistics for the periods presented (in thousands):

                                                      September        December        September
                                                       30, 2012        31, 2011         30, 2011
Non-accrual loans                                    $     32,544     $    30,985     $     35,025
Troubled debt restructurings - non-accrual status           2,628           8,189            8,445
Foreclosed assets                                           7,907           8,575            9,009
Total non-performing assets                          $     43,079     $    47,749     $     52,479
Nonperforming assets to total assets                         1.46 %          1.64 %           1.77 %
Nonperforming assets to loans and foreclosed
property                                                     2.09 %          2.34 %           2.58 %
Allowance for loan losses as a percentage of loans
receivable                                                   1.45 %          1.60 %           1.74 %
Allowance for loan losses as a percentage of
nonperforming loans                                         84.90 %         83.19 %          81.13 %
Annualized net charge-offs as a percentage of
average loans receivable                                     0.42 %          0.86 %           0.73 %

Liquidity and Capital Resources

Capital Resources

The management of capital in a regulated financial services industry must properly balance return on equity to stockholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the resulting accounting treatment. 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 $4.2 million in common dividends during the nine month period ended September 30, 2012. These dividends combined with net income of $15.9 million resulted in an increase to retained earnings of $11.7 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.

. . .

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