updated 10/21/2010 7:19:04 AM ET 2010-10-21T11:19:04

CHARLOTTESVILLE, Va., Oct. 21, 2010 (GLOBE NEWSWIRE) -- StellarOne Corporation (Nasdaq:STEL) (StellarOne) today reported third quarter 2010 earnings of $3.5 million and net income available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock, of $3.1 million, or $0.13 net income per diluted common share. Those results compare to a net loss to common shareholders of $9.4 million, or $0.41 loss per diluted common share during the same quarter in the prior year, and net income to common shareholders of $1.1 million or $0.05 per diluted common share recognized for the second quarter of 2010. Strong noninterest income contributions from mortgage banking, lower loan loss provisioning and reduced losses on foreclosed assets offset impacts from higher mortgage indemnification losses and reduced retail banking fees, resulting in the highest earnings level in eight quarters.

Third quarter 2010 notable elements include:

  • Nonperforming asset levels decreased $8.4 million on a sequential basis. The ratio of non-performing assets as a percentage of total assets decreased sequentially to 2.13% as of September 30, 2010, compared to 2.36% as of June 30, 2010.
     
  • The third quarter provision for loan losses totaled $3.5 million which compares to a provision for loan losses of $7.4 million for the second quarter of 2010 and $20.1 million for the third quarter of 2009. The third quarter provision for loan losses of $3.5 million compares to net charge-offs of $5.1 million.
     
  • Annualized net charge-offs as a percentage of average loans outstanding were 0.94% for the third quarter of 2010, compared to 2.47% for the corresponding quarter in the prior year and 1.19% for the second quarter of 2010.
     
  • The allowance for loan losses as a percentage of non-performing loans increased. The allowance represents 78.2% of non-performing loans at September 30, 2010, or up 13.4% when compared to 64.8% at June 30, 2010.
     
  • Net interest margin expanded another 4 basis points on a sequential quarter basis, which was the net result of a 16 basis point reduction in the associated cost of funds and a 9 basis point contraction on interest earning assets.
     
  • Noninterest income on an operating basis decreased 4.8% due to lower fee income from retail banking and wealth management, while increased mortgage banking fees were offset by higher losses from mortgage indemnifications.
     
  • Pre-tax, pre-provision earnings amounted to $8.1 million for the third quarter, a decrease of $691 thousand or 7.9% compared to the second quarter of 2010, and an increase of $3.0 million or 58.8% compared to the same period in the prior year.

Operating Noninterest Income Decreases

On an operating basis, which excludes gains and losses from sales and impairments of securities and other assets, total non-interest income amounted to $8.0 million for the third quarter of 2010, or down $397 thousand or 4.8% on a sequential basis compared to the second quarter of 2010, and an increase of $217 thousand or 2.8% from $7.7 million for the same period in prior year. Total noninterest income contracted slightly on a sequential basis largely due to higher losses on mortgage indemnifications, lower retail banking revenues and decreased other operating revenues. This decrease was somewhat offset by the elevated revenue contribution from the mortgage banking segment, reduced losses associated with foreclosed assets and $336 thousand in nonrecurring gains recognized on the sale of available for sale securities.

Mortgage banking revenue totaled $2.6 million for the third quarter of 2010, or up $549 thousand or 26.8% compared to $2.1 million for the second quarter of 2010 and up $764 thousand or 41.5% when compared to the same quarter in 2009. The mortgage revenue increase for the third quarter was offset by $809 thousand in indemnification losses accrued in the third quarter of 2010. Losses continue to be related to 2006 and 2007 production from our wholesale division with minimal losses realized from subsequent production periods. These losses were up $340 thousand or 72.5% on a sequential basis and up $753 thousand or greater than 100% when compared to the same quarter in the prior year. In spite of the indemnification impact, the business segment remained modestly profitable for the quarter.

Retail banking fee income amounted to $4.1 million for the third quarter of 2010, a decrease of $170 thousand or 4.0% compared to $4.3 million for the second quarter of 2010. This sequential quarter decrease was attributable to a decrease of $169 thousand in consumer NSF and interchange fee income, which resulted from implementing the modifications to Regulation E that became effective during the current quarter. Based on the initial impact of Regulation E noted during the third quarter, retail banking fee income would contract by approximately $1.5 million to $1.8 million on an annual basis. 

Wealth management revenues from trust and brokerage fees for the third quarter of 2010 were $1.1 million or down $135 thousand or 10.6% when compared to $1.3 million realized during the second quarter of 2010, and flat when compared to third quarter of 2009. Lower fee realizations attributed to the revenue decline. Fiduciary assets under management increased to $457.9 million, compared to $455.8 million at June 30, 2010.

Net Interest Margin Expands for Fourth Consecutive Quarter

Net interest income on a tax-equivalent basis amounted to $24.1 million for the third quarter of 2010, which compares to $23.8 million for the second quarter of 2010, and $22.7 million for the same period in prior year. The net interest margin was 3.63% for the third quarter, compared to 3.59% for the second quarter of 2010 and 3.30% for the third quarter of 2009. The average yield on earning assets for the current quarter decreased 9 basis points to 4.84% as compared to 4.93% for the second quarter of 2010, which was offset by improvement in the cost of interest bearing liabilities, which contracted 16 basis points from 1.59% during the second quarter of this year to 1.43% during the third quarter of 2010. The re-pricing sensitivity of interest bearing liabilities outpaced interest earning assets during the third quarter as approximately $196.5 million or 22.5% of the CD portfolio re-priced, while the cost of funds associated with interest checking and money market accounts was reduced by 22 basis points and 4 basis points, respectively. Average earning assets contracted sequentially, with average earnings assets of $2.64 billion at September 30, 2010 or down $21.4 million or 0.8% when compared to $2.67 billion at June 30, 2010.  The net decrease in earning assets for the third quarter 2010 was driven by sequential loan contraction of $24.3 million or 1.1% and a decrease in federal funds sold of $22.9 million or 36.9%, which were offset by increased investment balances of $25.0 million or 6.7%. While new loan production is showing signs of improvement, it has not kept pace with loan contractions attributable to both consumers and businesses reducing the level of debt outstanding, and the Company's continuing deliberate effort to reduce its exposure to construction and real estate lending.

Non-performing Asset Levels Decrease Sequentially

StellarOne's non-performing assets totaled $62.1 million at September 30, 2010, down $8.4 million or 11.9% from $70.6 million at June 30, 2010 and up $15.3 million or 32.8% compared to $46.8 million at September 30, 2009. The ratio of non-performing assets as a percentage of total assets decreased sequentially to 2.13% as of September 30, 2010, compared to 2.36% as of June 30, 2010, and increased compared to 1.55% at September 30, 2009. Non-performing loans totaled $51.1 million at September 30, 2010, down $13.0 million or 20.3% when compared to $64.1 million at June 30, 2010 and up $8.5 million or 19.9% compared to $42.6 million at September 30, 2009. Foreclosed assets totaled $10.5 million, up $4.5 million or 77.0% compared to $6.0 million at June 30, 2010 and up $6.3 million or greater than 100% compared to September 30, 2009. Past due and matured loans between 30 and 89 days totaled $49.3 million at September 30, 2010, up $7.9 million or 19.1% compared to $41.4 million at June 30, 2010. 

Annualized net charge-offs as a percentage of average loans receivable amounted to 0.94% for the third quarter of 2010, down compared to 2.22% for the full-year 2009 results and down sequentially from 1.19% for the second quarter of 2010.  Net charge-offs for the third quarter of 2010 totaled $5.1 million or down $1.4 million or 21.9% compared to the $6.5 million realized during the second quarter of 2010 and down $8.8 million or 63.7% when compared to $13.9 million during the third quarter of 2009.

The mix of non-performing loans continues to be weighted to the residential development and construction loan segment of our portfolio. Of the total nonaccrual loans of $51.1 million at September 30, 2010, approximately $23.3 million are residential development and construction loans, of which approximately $13.3 million are located at Smith Mountain Lake, Virginia. Real estate exposure at Smith Mountain Lake was reduced $5.2 million or 15% during the third quarter, resulting in total real estate exposure of $29.5 million at September 30, 2010, as compared to $47.4 million at September 30, 2009.

StellarOne recorded a provision for loan losses of $3.5 million for the third quarter of 2010, a decrease of $16.6 million compared to same period in the prior year and down $3.9 million on a sequential quarter basis. The third quarter 2010 provision compares to net charge-offs of $5.1 million, resulting in an allowance as a percentage of total loans of 1.92% or down three basis points when compared to 1.95% as of June 30, 2010. The allowance represents 78.2% of non-performing loans at September 30, 2010, or up 13.4% when compared to 64.8% at June 30, 2010.

Efficiency Ratio Increases Sequentially

StellarOne's efficiency ratio was 71.81% for the third quarter of 2010, compared to 77.68% for the third quarter of 2009 and 69.05% for the second quarter of 2010. The sequential quarter increase in the efficiency ratio reflects an increase in noninterest expense while total revenues remained relatively flat. Non-interest expense for the third quarter amounted to $23.7 million, or up $875 thousand or 3.8% when compared to the $22.8 million for the second quarter of 2010 and up $918 thousand or 4.0% when compared to the third quarter in 2009. The sequential increase was driven by an increase in FDIC insurance expense of $295 thousand and increases in compensation and benefit expense and appraisal expenses both of which are associated with higher mortgage production levels.  As mentioned previously, mortgage revenues were elevated during the quarter, but were offset by an increase in mortgage indemnification expense incurred.

Strong Capital Levels Enhanced By Earnings Retention

StellarOne's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. The period-end tangible common equity ratio was 9.96% at September 30, 2010 compared to 9.57% at June 30, 2010. Tier 1 risk-based and total risk-based capital ratios were 14.49% and 15.74%, respectively, at September 30, 2010 compared to 14.01% and 15.27% at June 30, 2010. Excluding the $30 million in preferred stock issued in connection with participation in the TARP program, StellarOne's Tier 1 risk-based common ratio was 13.19% compared to 12.67% at June 30, 2010. Shareholder's equity, excluding the preferred stock, represented 13.68% of total assets at September 30, 2010, while book value per common share was $17.56 per share.

Balance Sheet Remains Liquid and Contracts Slightly

Average loans for the third quarter of 2010 were $2.14 billion, or down approximately 1.4% when compared to $2.17 billion for the second quarter of 2010. Average securities were $397.9 million for the third quarter, up $25.0 million or 6.7% from $372.9 million for the second quarter of 2010. Average deposits for the third quarter of 2010 were $2.38 billion or down slightly from $2.39 billion on a sequential quarter basis. Average interest bearing deposits decreased sequentially by approximately $20.2 million, while non-interest bearing deposits increased approximately $4.0 million. At September 30, 2010, total assets were $2.92 billion, compared to $2.99 billion at June 30, 2010. Cash and cash equivalents were $108.9 million at September 30, 2010, a decrease of $17.4 million or 13.8% compared to $126.3 million at June 30, 2010.

About StellarOne

StellarOne Corporation is a traditional community bank, offering a full range of business and consumer banking services, including trust and wealth management services. Through the activities of its sole subsidiary, StellarOne Bank, StellarOne operates 56 full-service financial centers, one loan production office, and a suite of ATMs serving the New River Valley, Roanoke Valley, Shenandoah Valley, and Central and North Central Virginia.

Earnings Webcast

To hear a live webcast of StellarOne's third quarter 2010 earnings conference call at 11:00 a.m. (EDT) today, please visit our website at www.StellarOne.com and click on the Investor Relations section for detailed instructions on how to participate. Replays of the conference call will be available from 2:00 p.m. (EDT) on Thursday, October 21, 2010 through midnight (EDT) on Wednesday, October 27, 2010, by dialing toll free (800) 642-1687 and using passcode #17939843.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing non-interest expense less amortization of intangibles, foreclosed property expense and goodwill impairments as a percent of the sum of net interest income on a tax equivalent basis and non-interest income excluding only gains on securities. Comparison of our efficiency ratio or operating earnings with those of other companies may not be possible because other companies may calculate them differently. It also refers to operating earnings, which reflects net income adjusted for non-recurring expenses associated with mergers, asset gains and losses or expenses that are unusual in nature. Pre-tax, pre-provision earnings, which adds back provision and tax expense to net income, is used to demonstrate a more representative comparison of operational performance without the volatility of credit quality that is typically present in times of economic stress. The tangible common equity and Tier 1 common equity ratios are used by management to assess the quality of capital and management believes that investors may find them useful in their analysis of the company. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies. Such information is not in accordance with generally accepted accounting principles in the United States (GAAP) and should not be construed as such. These are non-GAAP financial measures that we believe provide investors with important information regarding our operational efficiency. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information should not be viewed as a substitute for GAAP. StellarOne, in referring to its net income, is referring to income under GAAP.

Forward-Looking Statements

In addition to historical information, this press release contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. When we use words such as "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. StellarOne wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect StellarOne's actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from StellarOne's acquisitions and dispositions, (ii) competitive pressure in the banking industry or in StellarOne's markets may increase significantly, (iii) changes in the interest rate environment may reduce margins, (iv) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (v) changes may occur in banking legislation and regulation, (vi) changes may occur in general business conditions, (vii) changes may occur in the securities markets, and (viii) the impact of governmental restrictions on entities participating in the US Treasury Department Capital Purchase Program. Please refer to StellarOne's filings with the Securities and Exchange Commission for additional information, which may be accessed at www.StellarOne.com.

NOTE: Risk-based capital ratios are preliminary.

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