StellarOne CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - StellarOne CORP	ex32.htm
EX-31.2 - EXHIBIT 31.2 - StellarOne CORP	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - StellarOne CORP	ex31_1.htm

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, 2011

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

(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 5, 2011 there were 22,978,274 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

STELLARONE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION

ITEM 1	Financial Statements (Unaudited):
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Changes in Stockholders' Equity & Comprehensive Income	3
	Consolidated Statements of Cash Flows	4
	Notes to Unaudited Consolidated Financial Statements	5

ITEM 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	33

ITEM 4	Controls and Procedures	33

PART II - OTHER INFORMATION

ITEM 1	Legal Proceedings	34

ITEM 1A	Risk Factors	34

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	34

ITEM 3	Defaults Upon Senior Securities	34

ITEM 4	(Removed and Reserved)	34

ITEM 5	Other Information	34

ITEM 6	Exhibits	35

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Financial statements (Unaudited)

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
	March 31,		December 31,
	2011		2010
Assets
Cash and due from banks	$	40,023	$	35,144
Federal funds sold		32,943		55,643
Interest-bearing deposits in banks		105,456		49,099
Cash and cash equivalents		178,422		139,886
Investment securities available for sale, at fair value		380,078		381,231
Mortgage loans held for sale		12,047		51,722
Loans receivable, net of allowance for loan losses, 2011, $37,519; 2010, $37,649		2,027,809		2,061,835
Premises and equipment, net		77,893		79,033
Accrued interest receivable		9,147		9,317
Deferred income tax asset		2,413		1,909
Core deposit intangibles, net		6,249		6,662
Goodwill		113,652		113,652
Bank owned life insurance		31,435		31,116
Foreclosed assets		9,036		10,894
Other assets		50,215		53,185
Total assets	$	2,898,396	$	2,940,442

Liabilities
Deposits:
Noninterest-bearing	$	307,847	$	322,924
Interest-bearing		2,056,717		2,063,178
Total deposits		2,364,564		2,386,102
Short-term borrowings		1,156		987
Federal Home Loan Bank advances		60,000		85,000
Subordinated debt		32,991		32,991
Accrued interest payable		2,158		2,278
Other liabilities		8,658		6,647
Total liabilities		2,469,527		2,514,005

Stockholders' Equity
Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding;		-		-
Preferred stock; $1,000 per share liquidation preference; 30,000 shares issued and outstanding;		28,858		28,763
Common stock; $1 par value; 35,000,000 shares authorized; 2011: 22,775,733 shares issued and outstanding; 2010: 22,748,062 shares issued and outstanding.		22,776		22,748
Additional paid-in capital		270,396		270,047
Retained earnings		102,677		101,188
Accumulated other comprehensive income		4,162		3,691
Total stockholders' equity		428,869		426,437
Total liabilities and stockholders' equity	$	2,898,396	$	2,940,442

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

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
	Three Months Ended March 31,
	2011			2010
Interest and Dividend Income
Loans, including fees	$	27,264		$	29,086
Federal funds sold and deposits in other banks		68			61
Investment securities:
Taxable		1,721			2,258
Tax-exempt		1,253			1,047
Dividends		-			29
Total interest income		30,306			32,481

Interest Expense
Deposits		5,533			8,609
Federal funds repurchased and securities sold under agreements to repurchase		8			6
Federal Home Loan Bank advances		640			1,110
Subordinated debt		262			257
Total interest expense		6,443			9,982
Net interest income		23,863			22,499
Provision for loan losses		4,500			6,700
Net interest income after provision for loan losses		19,363			15,799

Noninterest Income
Retail banking fees		3,556			3,920
Commissions and fees from fiduciary activities		904			834
Brokerage fee income		435			359
Mortgage banking-related fees		2,065			1,994
Losses on mortgage indemnifications and repurchases		(265	)		(133	)
Gain on sale of financial center		-			748
Gains on sale of premises and equipment		-			27
Gains on sale of securities available for sale		10			302
Losses on sale / impairment of foreclosed assets		(128	)		(231	)
Income from bank owned life insurance		319			324
Other operating income		774			673
Total noninterest income		7,670			8,814

Non-interest Expense
Compensation and employee benefits		12,355			11,310
Net occupancy		2,073			2,179
Supplies and equipment		2,207			2,178
Amortization of intangible assets		413			413
Marketing		327			153
State franchise taxes		598			554
FDIC insurance		877			1,109
Data processing		636			543
Professional fees		633			675
Telecommunications		376			425
Other operating expenses		3,041			3,008
Total noninterest expense		23,536			22,547

Income before income taxes		3,497			2,066
Income tax expense		626			212
Net income	$	2,871		$	1,854
Dividends and accretion on preferred stock		(465	)		(458	)
Net income available to common shareholders	$	2,406		$	1,396

Basic net income per common share available to common shareholders	$	0.11		$	0.06

Diluted net income per common share available to common shareholders	$	0.11		$	0.06

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

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
										Accumulated
										Other
					Additional					Compre-		Compre-
	Preferred		Common		Paid-In		Retained			hensive		hensive
	Stock		Stock		Capital		Earnings			Income		Income			Total
Balance, January 1, 2010	$	28,398	$	22,661	$	268,965	$	96,947		$	3,814				$	420,785
Comprehensive income:
Net income		-		-		-		1,854			-	$	1,854			1,854
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period (net of tax of $409)		-		-		-		-			-		761			-
Reclassification adjustment (net of tax of $106)		-		-		-		-			-		196			-
Change in post retirement liability (net of tax, $66)		-		-		-		-			-		(122	)		-
Other comprehensive income		-		-		-		-			835		835			835
Total comprehensive income		-		-		-		-			-	$	2,689			-
Cash dividends paid or accrued:
Common ($0.04 per share)		-		-		-		(912	)		-					(912	)
Preferred cumulative 5%		-		-		-		(370	)		-					(370	)
Accretion on preferred stock discount		88		-		-		(88	)		-					-
Stock-based compensation expense (7,385 shares)		-		7		145		-			-					152
Exercise of stock options (16,306 shares)		-		17		131		-			-					148
Balance, March 31, 2010	$	28,486	$	22,685	$	269,241	$	97,431		$	4,649				$	422,492

Balance, January 1, 2011	$	28,763	$	22,748	$	270,047	$	101,188		$	3,691				$	426,437
Comprehensive income:
Net income		-		-		-		2,871			-	$	2,871			2,871
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period (net of tax of $288)		-		-		-		-			-		535			-
Reclassification adjustment (net of tax of $4)		-		-		-		-			-		(6	)		-
Change in post retirement liability (net of tax, $42)		-		-		-		-			-		(78	)		-
Change in cash flow hedge (net of tax, $11)		-		-		-		-			-		20			-
Other comprehensive income		-		-		-		-			471		471			471
Total comprehensive income		-		-		-		-			-	$	3,342			-
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

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

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	Three Months Ended March 31,
	2011			2010
Cash Flows from Operating Activities
Net income	$	2,871		$	1,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,680			1,637
Amortization of intangible assets		413			413
Provision for loan losses		4,500			6,700
Deferred tax benefit		(843	)		(329	)
Stock-based compensation expense		165			152
Losses / impairments on foreclosed assets		128			231
Gains on sale of premises and equipment		-			(27	)
Gain on sale of financial center		-			(748	)
Gains on sale of securities available for sale		(10	)		(302	)
Mortgage banking-related fees		(2,065	)		(1,994	)
Proceeds from sale of mortgage loans		121,217			121,047
Origination of mortgage loans for sale		(79,477	)		(104,273	)
Amortization of securities premiums and accretion of discounts, net		272			341
Income on bank owned life insurance		(319	)		(324	)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		170			(398	)
Decrease (increase) in other assets		3,192			(120	)
Decrease in accrued interest payable		(2,278	)		(379	)
Increase (decrease) in other liabilities		4,169			60
Net cash provided by operating activities	$	53,785		$	23,541

Cash Flows from Investing Activities
Proceeds from maturities and principal payments of securities available for sale	$	23,858		$	17,431
Proceeds from sales and calls of securities available for sale		10,483			20,072
Purchase of securities available for sale		(32,634	)		(37,323	)
Net decrease in loans		28,313			17,550
Proceeds from sale of premises and equipment		-			19
Purchase of premises and equipment		(561	)		(361	)
Proceeds from sale of foreclosed assets		2,736			2,885
Cash paid in sale of financial center, net		-			(13,349	)
Net cash provided by investing activities	$	32,195		$	6,924

Cash Flows from Financing Activities
Net (decrease) increase in demand, money market and savings deposits	$	(13,047	)	$	21,839
Net decrease in certificates of deposit		(8,491	)		(33,856	)
Net increase in federal funds purchased and securities sold under agreements to repurchase		169			169
Principal payments on Federal Home Loan Bank advances		(25,000	)		(5,000	)
Proceeds from exercise of stock options		212			164
Cash dividends paid		(1,287	)		(1,287	)
Net cash used by financing activities	$	(47,444	)	$	(17,971	)

Increase in cash and cash equivalents	$	38,536		$	12,494

Cash and Cash Equivalents
Beginning		139,886			152,926
Ending	$	178,422		$	165,420
Supplemental Schedule of Noncash Activities
Foreclosed assets acquired in settlement of loans	$	1,213		$	868

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

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	Organization

StellarOne Corporation (“Company”) is a Virginia bank holding company headquartered in Charlottesville, Virginia. The Company’s sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia. Additional subsidiaries of the Company include VFG Limited Liability Trust and FNB (VA) Statutory Trust II, both of which are associated with the Company’s subordinated debt issues and are not subject to consolidation. The consolidated statements include the accounts of the Company and its 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, 2011 and December 31, 2010, and the results of operations and cash flows for the three months ended March 31, 2011 and 2010. The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.

2.	Participation in U.S. Treasury Capital Purchase Program

On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury for $30 million pursuant to the U.S. Treasury Capital Purchase Program (“CPP”). Additionally, the Company issued 302,622 common stock warrants to the U.S. Treasury as a condition to its participation in the CPP. The warrants are immediately exercisable, expire 10 years from the date of issuance and have an exercise price of $14.87 per share. Proceeds from this sale of the preferred stock have been used for general corporate purposes, including supporting the continued, anticipated growth of the Company. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. The Company may redeem the preferred shares with the approval of the Federal Reserve during the first three years at par value plus accrued and unpaid dividends and thereafter without restriction.

A value of $1.9 million was assigned to the common stock warrants based on their relative fair value, accordingly, $28.1 million has been assigned to the Series A preferred stock. The discount is being accreted up to the redemption amount of $30 million over a five year term.

See Footnote 12. Subsequent Events for a discussion of a partial redemption of the preferred shares that occurred subsequent to the end of the reporting period.

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3.	Investment Securities

A summary of the amortized cost and fair value of securities with gross unrealized gains and losses is presented below (in thousands).

	March 31, 2011									December 31, 2010
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Securities Available for Sale:
U. S. Government agencies	$	101,324	$	1,034	$	(50	)	$	102,308	$	101,864	$	1,389	$	-		$	103,253
State and municipals		134,242		4,166		(200	)		138,208		134,465		3,248		(890	)		136,823
Corporate bonds		6,518		340		-			6,858		6,527		377		-			6,904
Collateralized mortgage obligations		8,625		82		(17	)		8,690		9,294		203		-			9,497
Agency mortgage backed securities		120,682		3,398		(66	)		124,014		119,595		3,587		(43	)		123,139
Other		-		-		-			-		1,615		-		-			1,615
Total	$	371,391	$	9,020	$	(333	)	$	380,078	$	373,360	$	8,804	$	(933	)	$	381,231

The book value of securities pledged to secure deposits and for other purposes amounted to $147.9 million and $156.3 million at March 31, 2011 and December 31, 2010, respectively.

Information pertaining to sales and calls of securities available for sale is as follows (in thousands):

	Three Months Ended
	March 31,
	2011		2010

Proceeds from sales/calls	$	10,483	$	20,072
Gross realized gains		10		310
Gross realized losses		-		(8	)

As of March 31, 2011, 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	$	24,948	$	(50	)	$	-	$	-	$	24,948	$	(50	)
Agency mortgage backed securities		11,630		(66	)		-		-		11,630		(66	)
State and municipals		15,003		(200	)		-		-		15,003		(200	)
Collateralized mortgage obligations		4,309		(17	)		-		-		4,309		(17	)
Total temporarily impaired securities	$	55,890	$	(333	)	$	-	$	-	$	55,890	$	(333	)

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 March 31, 2011, management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. 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 repricing 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. Accordingly, as of March 31, 2011, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

The amortized cost and fair value of securities at March 31, 2011 are presented below by contractual maturity (in thousands).

	Available for Sale
	Amortized Cost		Fair Value
Due in one year or less	$	31,082	$	31,317
Due after one year through five years		111,851		114,543
Due after five years through ten years		66,291		68,346
Due after ten years		162,167		165,872
Total	$	371,391	$	380,078

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

Table of Contents

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4.	Derivative Financial Instruments

The Company uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps, caps and floors. 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. The Company’s interest rate swap qualifies as a cash flow hedge. The Company’s cash flow hedge effectively modifies the Company’s exposure to interest rate risk by converting floating rate debt to a fixed rate debt with a maturity in 2013.

The notional amount of the cash flow hedge is $32.0 million. At March 31, 2011, the cash flow hedge had a fair value of $128 thousand and is recorded in other assets. The cash flow hedge was fully effective at March 31, 2011 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.

5.	Loans and Allowance for Loan Losses

The Company, through its banking subsidiary, grants 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 the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.

Loans that management has 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.

The Company’s loan portfolio is composed of the following (in thousands):

	March 31, 2011			December 31, 2010
Construction and land development	$	233,514		$	237,632
Commercial real estate:
Commercial real estate		733,672			751,670
Farmland		17,651			17,561
Multifamily, nonresidential and junior liens		103,956			103,641
Total commercial real estate		855,279			872,872
Consumer real estate:
Home equity lines		266,025			264,961
Secured by 1-4 family residential, secured by first deeds of trust		456,286			457,243
Secured by 1-4 family residential, secured by second deeds of trust		44,478			46,108
Total consumer real estate		766,789			768,312
Commercial and industrial loans (except those secured by real estate)		181,650			177,020
Consumer and other:
Consumer installment loans		24,809			28,703
Deposit overdrafts		1,008			1,396
All other loans		1,684			12,961
Total consumer and other		27,501			43,060
Total loans		2,064,733			2,098,896
Deferred loan costs		596			588
Allowance for loan losses		(37,519	)		(37,649	)
Net loans	$	2,027,810		$	2,061,835

As of March 31, 2011 and December 31, 2010, the book value of loans pledged as collateral for advances outstanding with the Federal Home Loan Bank of Atlanta totaled $644.8.0 million and $630.5 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.

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2011		December 31, 2010		March 31, 2011		December 31, 2010
Construction and land development	$	16,368	$	15,443	$	-	$	937
Commercial real estate		9,216		8,060		-		531
Consumer real estate		14,761		15,154		99		-
Commercial and industrial loans (except those secured by real estate)		2,809		4,277		-		423
Consumer and other		20		26		49		19
Total	$	43,174	$	42,960	$	148	$	1,910

If interest had been earned on non-accrual loans, such income would have approximated $344 thousand and $622 thousand for the three months ended March 31, 2011 and 2010, respectively.

The following table presents the aging of the recorded investment in past due loans as of March 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, 2011
Construction and land development	$	7,436	$	1,659	$	-	$	16,368	$	25,463	$	208,051	$	233,514
Commercial real estate		6,656		7,990		-		9,216		23,862		831,417		855,279
Consumer real estate		12,856		2,688		99		14,761		30,404		736,385		766,789
Commercial and industrial loans (except those secured by real estate)		1,446		631		-		2,809		4,886		176,764		181,650
Consumer and other		368		42		49		20		479		27,022		27,501
Total loans	$	28,762	$	13,010	$	148	$	43,174	$	85,094	$	1,979,639	$	2,064,733

December 31, 2010
Construction and land development	$	7,467	$	1,064	$	937	$	15,443	$	24,911	$	212,721	$	237,632
Commercial real estate		7,586		4,685		531		8,060		20,862		852,010		872,872
Consumer real estate		22,586		6,805		-		15,154		44,545		723,767		768,312
Commercial and industrial loans (except those secured by real estate)		791		1,139		423		4,277		6,630		170,390		177,020
Consumer and other		513		147		19		26		705		42,355		43,060
Total loans	$	38,943	$	13,840	$	1,910	$	42,960	$	97,653	$	2,001,243	$	2,098,896

The allowance for loan losses (“ALLL”) is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan balances are charged off against the allowance when management believes a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance.

The Company conducts an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with the identification of 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 the Company’s calculation of the loss embedded in the individual loan. In addition to specific reserves on impaired loans, the Company has 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 the key lending areas of the Company, 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 the Company's outsourced loan review consultants. The total of specific reserves required for impaired classified loans and the calculated reserves comprise the allowance for loan losses.

During the current quarter management expanded the look-back period for calculating historical losses from 2 to 3 years. Management feels it is currently appropriate to expand the look-back period to a more normalized period given where the Company is in the current credit cycle. Management contracted the look-back period to accurately reflect the risk in the loan portfolio when economic conditions deteriorated rapidly and the anticipated recovery was expected to be sluggish. The most current 12 month period continues to be heavily weighted as management considers it to be the most relevant considering current economic conditions. 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 the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Activity in the allowance for loan losses is as follows (in thousands):

	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		(947	)		(1,351	)		(878	)		(1,496	)		42			(4,630	)
Balance, March 31, 2011	$	11,408		$	7,879		$	11,305		$	6,721		$	206		$	37,519

	Three Months Ended March 31, 2010
	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, 2010	$	17,867		$	4,210		$	9,244		$	7,655		$	1,196		$	40,172
Provisions for loan losses		2,819			995			1,596			1,191			99			6,700
Loans charged off		(3,241	)		(461	)		(2,109	)		(568	)		(330	)		(6,709	)
Recoveries		22			6			66			107			280			481
Net charge-offs		(3,219	)		(455	)		(2,043	)		(461	)		(50	)		(6,228	)
Balance, March 31, 2010	$	17,467		$	4,750		$	8,797		$	8,385		$	1,245		$	40,644

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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, 2011 and December 31, 2010 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, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	2,418	$	731	$	319	$	1,399	$	-	$	4,867
Collectively evaluated for impairment		8,990		7,148		10,986		5,322		206		32,652
Total ending allowance	$	11,408	$	7,879	$	11,305	$	6,721	$	206	$	37,519

Loans:
Individually evaluated for impairment	$	12,983	$	9,291	$	3,881	$	4,421	$	-	$	30,576
Collectively evaluated for impairment		220,531		845,988		762,908		177,229		27,501		2,034,157
Total loans	$	233,514	$	855,279	$	766,789	$	181,650	$	27,501	$	2,064,733

December 31, 2010
Allowance for loan losses:
Individually evaluated for impairment	$	1,607	$	886	$	364	$	2,667	$	-	$	5,524
Collectively evaluated for impairment		9,430		7,325		10,500		4,721		149		32,125
Total ending allowance	$	11,037	$	8,211	$	10,864	$	7,388	$	149	$	37,649

Loans:
Individually evaluated for impairment	$	13,538	$	10,209	$	4,403	$	5,703	$	-	$	33,853
Collectively evaluated for impairment		224,094		862,663		763,909		171,317		43,060		2,065,043
Total loans	$	237,632	$	872,872	$	768,312	$	177,020	$	43,060	$	2,098,896

A loan is considered impaired when, based on current information and events, it is probable that the Company 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, the Company does not separately identify individual consumer and residential loans for impairment.

Impaired loans totaled $61.6 million and $62.4 million at March 31, 2011 and December 31, 2010, respectively. Included in these balances were $45.4 million and $43.2 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. All TDRs are considered impaired.

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Interest is not typically accrued on impaired loans. However, for loans classified as TDRs, the Company further evaluates the loans as performing or non-performing. If, at the time of restructure, the loan is not considered non-accrual, it will be classified as performing. At March 31, 2011 and December 31, 2010, $41.3 million and $39.7 million, respectively, of TDRs were accruing interest as they were classified as performing. The following table shows interest income recognized on impaired loans (in thousands):

	Interest income recognized		Cash-basis interest income recognized
March 31, 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
Consumer and other		-		-
Total	$	216	$	218

March 31, 2010
Construction and land development	$	-	$	-
Commercial real estate		5		21
Consumer real estate		2		3
Commercial and industrial loans (except those secured by real estate)		-		-
Consumer and other		-		-
Total	$	7	$	24

Other than these TDRs, no interest income has been recognized on impaired loans subsequent to their classification as impaired.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In order to measure the amount of impairment, the Company evaluates 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 $61.6 million of impaired loans, $31.0 million was collectively evaluated for impairment and $30.6 million was individually evaluated for impairment. The detail of loans individually evaluated for impairment, which includes $14.4 million of TDRs, is presented below (in thousands):

	Recorded investment		Unpaid contractual principal balance		Allocated allowance		Average recorded investment
March 31, 2011
Loans without a specific valuation allowance:
Construction and land development	$	4,907	$	5,175	$	-	$	4,161
Commercial real estate		4,365		5,002		-		5,763
Consumer real estate		3,353		4,024		-		3,277
Commercial and industrial loans (except those secured by real estate)		-		-		-		-
Consumer and other		-		-		-		-
Loans with a specific valuation allowance:
Construction and land development		8,077		9,289		2,418		9,101
Commercial real estate		4,926		4,930		731		3,988
Consumer real estate		527		536		319		865
Commercial and industrial loans (except those secured by real estate)		4,421		6,986		1,399		5,062
Consumer and other		-		-				-
Total	$	30,576	$	35,942	$	4,867	$	32,217

As of December 31, 2010, the Company had $62.4 million of impaired loans, with $28.5 million collectively evaluated for impairment and $33.9 million individually evaluated for impairment, which includes $14.7 million of TDRs, is presented below (in thousands):

	Recorded investment		Unpaid contractual principal balance		Allocated allowance		Average recorded investment
December 31, 2010
Loans without a specific valuation allowance:
Construction and land development	$	3,414	$	3,420	$	-	$	7,091
Commercial real estate		7,160		7,185		-		6,341
Consumer real estate		3,200		3,855		-		1,459
Commercial and industrial loans (except those secured by real estate)		-		-		-		880
Consumer and other		-		-		-		-
Loans with a specific valuation allowance:
Construction and land development		10,124		11,574		1,607		13,126
Commercial real estate		3,049		4,041		886		3,095
Consumer real estate		1,203		1,216		364		2,814
Commercial and industrial loans (except those secured by real estate)		5,703		7,008		2,667		7,158
Consumer and other		-		-		-		-
Total	$	33,853	$	38,299	$	5,524	$	41,964

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality Indicators

The Company categorizes all business and commercial purpose loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by setting the risk grade at the inception of a loan through the approval process. The definitions used were last updated in early 2010. The risk grades are formally affirmed quarterly by loan officers. In addition, a certain percentage of loan dollars is reviewed each year through the Company’s loan review process. The risk rating process is inherently subjective and based upon management’s evaluation of the specific facts and circumstances for individual borrowers. As such, the assigned risk ratings are subject to change based upon changes in borrower status and changes in the external environment affecting the borrower. The Company uses the following definitions for risk ratings:

·	Risk Grade 1 – Prime Risk. Loss potential is rated as none or extremely low. Loans fully secured by deposit accounts at the Company’s subsidiary bank will also be rated as Risk Grade 1.

·	Risk Grade 2 – Excellent Risk. Loss potential is demonstrably low. Loans have liquid financial statements or are secured by marketable securities or other liquid collateral.

·	Risk Grade 3 – Good Risk. Loss potential is low. Asset quality and liquidity are considered good. Overall leverage and liquidity measures are better than the industry in which the borrower operates and they are stable.

Risk Grade 4 – Average Risk. Loss potential is low, but evidence of risk exists. Margins and cash flow generally equal or exceed industry norm and policy guidelines, but some inconsistency may be evident. Asset quality is average with liquidity comparable to industry norms. Leverage may be slightly higher than the industry, but is stable.

·	Risk Grade 5 – Marginal Risk. Loss potential is variable, but there is potential for deterioration. Asset quality is marginally acceptable. Leverage may fluctuate and is above normal for the industry. Cash flow is marginally adequate.

·	Risk Grade 6 – Special Mention. Loss potential moderate if corrective action not taken. Evidence of declining revenues or margins, inadequate cash flow, and possibly high leverage or tightening liquidity.

·	Risk Grade 7 – Substandard. Distinct possibility of loss to the bank. Repayment ability of borrower is weak and the loan may have exhibited excessive overdue status, extension, or renewals.

·	Risk Grade 8 – Doubtful. Loss potential is extremely high. Ability of the borrower to service the debt is weak, constant overdue status, loan has been placed on non-accrual status and no definitive repayment schedule exists.

·	Risk Grade 9 – Loss. Loans are considered fully uncollectible and charged off.

The Company utilizes its nine point grading system in order to evaluate the level of inherent risk in the loan portfolio as part of its allowance for loan losses methodology. Loans collectively evaluated for impairment are 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 risk grade, historical loss experience, economic conditions, overall portfolio quality including delinquency rates and commercial real estate loan concentrations (as applicable). Loans graded 5 or worse are assigned an additional reserve factor stated in basis points in order to account for the added inherent risk. Additional basis points are applied as a reserve factor to the loan balances as the corresponding loan grades indicate additional risk and increase from grade 5 to grade 8.

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Loans not rated are either commercial loans less than $25 thousand, consumer purpose loans or are included in groups of homogenous loans. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

	Risk Grade
		1		2		3		4		5		6		7		8		9
March 31, 2011
Construction and land development	$	-	$	271	$	2,231	$	69,365	$	35,717	$	20,554	$	55,096	$	4,867	$	-
Commercial real estate		-		1,892		92,942		439,310		202,119		29,188		90,055		983		-
Consumer real estate		-		667		12,555		113,518		67,091		5,675		34,131		2,014		-
Commercial and industrial loans (except those secured by real estate)		1,032		4,508		30,322		97,917		26,688		9,088		9,674		1,352		-
Consumer and other		-		-		1		923		81		-		58		-		-
Total	$	1,032	$	7,338	$	138,051	$	721,033	$	331,696	$	64,505	$	189,014	$	9,216	$	-

December 31, 2010
Construction and land development	$	-	$	275	$	2,481	$	79,613	$	31,468	$	12,588	$	59,301	$	4,464	$	-
Commercial real estate		-		1,957		102,520		451,984		178,279		55,178		82,232		624		98
Consumer real estate		-		991		12,533		121,066		53,867		11,627		28,238		1,301		-
Commercial and industrial loans (except those secured by real estate)		1,190		1,901		26,915		105,294		20,622		8,342		9,662		3,094		-
Consumer and other		-		873		3,404		6,406		2,278		-		-		-		-
Total	$	1,190	$	5,997	$	147,853	$	764,363	$	286,514	$	87,735	$	179,433	$	9,483	$	98

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For smaller-balance homogenous residential and consumer loans, the Company also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity:

	Consumer real estate				Consumer and other
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010
Performing	$	568,713	$	577,388	$	26,304	$	30,073
Nonperforming		7,811		8,743		19		26
Total	$	576,524	$	586,131	$	26,323	$	30,099

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Earnings Per Share

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock for the three month periods ended March 31, 2011 and 2010. Potential dilutive stock had no effect on income available to common stockholders for the three month periods (in thousands, except share and per share amounts).

	March 31,
	2011			2010
Earnings per common share
Net income	$	2,871		$	1,854
Preferred stock dividends and accretion		(465	)		(458	)
Net income available to common shareholders		2,406			1,396
Weighted average common shares issued and outstanding		22,764,099			22,674,490
Earnings per common share	$	0.11		$	0.06

Diluted earnings per common share
Weighted average common shares issued and outstanding		22,764,099			22,674,490
Restricted stock		71,662			43,942
Incentive stock options		1,615			1,523
Stock options		10,057			9,711
Total diluted weighted average common shares issued and outstanding		22,847,433			22,729,666
Diluted earnings per common share	$	0.11		$	0.06

In 2011 and 2010, stock options representing 444,546 and 504,834 shares, respectively, were not included in the three month calculation of earnings per share, as their effect would have been anti-dilutive.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock-Based Compensation

Stock-based compensation expense included within compensation and employee benefits expense totaled $165 thousand and $152 thousand during the three months ended March 31, 2011 and 2010, respectively.

A summary of the stock option plan at March 31, 2011 and 2010 and changes during the periods ended on those dates are as follows:

	2011					2010
				Weighted					Weighted
	Number			Average		Number			Average
	of			Exercise		of			Exercise
	Shares			Price		Shares			Price

Outstanding at January 1,		498,174		$	19.98		575,046		$	18.93
Forfeited		(9,841	)		19.04		(317	)		23.33
Expired		(7,304	)		19.90		-			-
Exercised		(21,840	)		9.71		(16,306	)		9.73
Outstanding at March 31,		459,189		$	20.50		558,423		$	19.20

Exercisable at March 31, 2011		400,059					462,391

The aggregate intrinsic value of the options outstanding as of March 31, 2011 was $135 thousand. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended March 31, 2011 and the exercise price, multiplied by the number of options outstanding). The aggregate intrinsic value of the options currently exercisable as of March 31, 2011 was $123 thousand. The weighted average remaining contractual life is 3.1 years for exercisable options at March 31, 2011.

The following table summarizes nonvested restricted shares outstanding as of March 31, 2011 and the related activity during the period:

Nonvested Shares	Number of Shares			Weighted Average Grant-Date Fair Value		Total Intrinsic Value
						(in thousands)

Nonvested at January 1, 2011		152,091		$	12.21	$	2,211
Granted		54,152			14.23
Vested and exercised		(5,832	)		13.01	$	82
Forfeited		(7,951	)		12.57
Nonvested at March 31, 2011		192,460		$	12.74	$	2,723

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2011 that will be recognized in future periods is as follows (in thousands):

	Stock Options		Nonvested Restricted Stock		Total

For the remaining nine months of 2011	$	40	$	451	$	491
For year ended December 31, 2012		54		555		609
For year ended December 31, 2013		19		496		515
For year ended December 31, 2014		1		239		240
For year ended December 31, 2015		-		62		62
For year ended December 31, 2016		-		7		7
Total	$	114	$	1,810	$	1,924

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or the most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Under the guidance in ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. These levels are:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare. There were no transfers between levels in 2011 or 2010.

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Assets and Liabilities Measured on a Recurring Basis:

Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Deferred compensation plans: Liabilities associated with deferred compensation plans are recorded at fair value on a recurring basis as Level 1 based on the fair value of the underlying securities. Fair value measurement is based upon the fair value of the securities as described above.

Cash flow hedges: Cash flow hedges held by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivative instruments held or issued for risk management purposes as Level 2.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 are summarized below (in thousands).

			Fair Value Measurements at
			March 31, 2011
			Using
			Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Investment securities available-for-sale
U. S. Government agencies	$	102,308	$	-	$	102,308	$	-
State and municipals		138,208		-		138,208		-
Corporate bonds		6,858		-		6,858		-
Collateralized mortgage obligations		8,690		-		8,690		-
Mortgage backed securities		124,014		-		124,014		-
Other assets		2,752		2,752		-		-
Cash flow hedge		128		-		128		-
Total assets at fair value	$	382,958	$	2,752	$	380,206	$	-

Other liabilities 1	$	2,752	$	2,752	$	-	$	-
Total liabilities at fair value	$	2,752	$	2,752	$	-	$	-

1 Includes liabilities associated with deferred compensation plans.

			Fair Value Measurements at
			December 31, 2010
			Using
			Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Investment securities available-for-sale
U. S. Government agencies	$	103,253	$	-	$	103,253	$	-
State and municipals		136,823		-		136,823		-
Corporate bonds		6,904		-		6,904		-
Collateralized mortgage obligations		9,497		-		9,497		-
Mortgage backed securities		123,139		-		123,139		-
Other		4,335		4,335		-		-
Cash flow hedge		98		-		98		-
Total assets at fair value	$	384,049	$	4,335	$	379,714	$	-

Other liabilities 1		2,720		2,720		-		-
Total liabilities at fair value	$	2,720	$	2,720	$	-	$	-

1 Includes liabilities associated with deferred compensation plans.

The change in the balance sheet carrying values associated with company determined market priced assets measured at fair value on a recurring basis during the three months ended March 31, 2011 was not significant and there were no transfers between Levels 1, 2 or 3 during the three months ended March 31, 2011.

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Measured on a Nonrecurring Basis:

Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with authoritative accounting guidance under FASB ASC Topic 310, “Accounting by Creditors for Impairment of a Loan.” The fair value of impaired loans is estimated using one of three methods: the fair value of the collateral (less estimated selling costs), the loan’s observable market value or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with guidance under FASB ASC Topic 310, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral has deteriorated below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Foreclosed assets: Foreclosed assets are initially recorded at fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. As such, the Company records the foreclosed asset as nonrecurring Level 3.

Assets measured at fair value on a nonrecurring basis as of March 31, 2011 are included in the table below (in thousands).

			Fair Value Measurements at
			March 31, 2011
			Using
	Total		Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Loans - impaired loans	$	61,611	$	-	$	13,143	$	48,468
Loans held for sale - mortgage		12,047		-		12,047		-
Loans held for sale - other assets		301		-		-		301
Foreclosed assets		9,036		-		-		9,036
Total assets at fair value	$	82,995	$	-	$	25,190	$	57,805

			Fair Value Measurements at
			December 31, 2010
			Using
	Total		Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Loans - impaired loans	$	62,397	$	-	$	15,121	$	47,276
Loans held for sale - mortgage		51,722		-		51,722		-
Loans held for sale - other assets		514		-		-		514
Foreclosed assets		10,894		-		-		10,894
Total assets at fair value	$	125,527	$	-	$	66,843	$	58,684

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

Loans: For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Federal Home Loan Bank Advances: The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Subordinated Debt: The values of the Company’s subordinated debt are variable rate instruments that reprice on a quarterly basis; therefore, carrying value is adjusted for the three month repricing lag in order to approximate fair value.

Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2011 and 2010, the fair value of loan commitments and stand-by letters of credit was immaterial.

The estimated fair values of the Company's financial instruments at March 31, 2011 and December 31, 2010, are as follows:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	178,422		178,422	$	139,886	$	139,886
Investment securities		380,078		380,078		381,231		381,231
Mortgage loans held for sale		12,047		12,047		51,722		51,722
Loans, net		2,027,809		1,841,876		2,061,835		1,794,267
Accrued interest receivable		9,147		9,147		9,317		9,317

Financial liabilities:
Deposits	$	2,364,564	$	2,371,347	$	2,386,102	$	2,394,156
Federal funds purchased and securities sold under agreements to repurchase		1,156		1,156		987		987
Federal Home Loan Bank advances		60,000		61,893		85,000		86,363
Subordinated debt		32,991		32,945		32,991		32,945
Accrued interest payable		2,158		2,158		2,278		2,278

9. Restricted Investment in FHLB Stock

Restricted stock, which represents a required investment in the common stock of a correspondent bank, is carried at cost and, as of March 31, 2011 and December 31, 2010, consisted of the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta.

Management evaluates the restricted stock for impairment in accordance with authoritative accounting guidance under ASC Topic 320, “Investments – Debt and Equity Securities.” Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost of an investment is influenced by criteria such as (1) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (2) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

The FHLB of Atlanta neither provides dividend guidance prior to the end of each quarter, nor conducts repurchases of excess activity-based stock on a daily basis, instead making such determinations quarterly. The FHLB of Atlanta announced on March 25, 2011, that it approved a dividend at the rate of 0.79% for the fourth quarter of 2010. The FHLB made no repurchases during the first quarter, leaving a remaining balance of $5.1 million in excess FHLB capital stock as of March 31, 2011.

Based on evaluation of criteria under ASC Topic 320, management believes that no impairment charge in respect of the restricted stock is necessary as of March 31, 2011.

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Segment Information

The Company operates in three business segments, organized around the different products and services offered:

·	Commercial Banking

·	Mortgage Banking

·	Wealth Management

Commercial Banking includes commercial, business and retail banking. This segment provides customers with products such as commercial loans, small business loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. Mortgage Banking engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best-efforts basis. Wealth Management provides investment and financial advisory services to businesses and individuals, including financial planning, retirement planning, estate planning, trust and custody services, investment management, escrows, and retirement plans.

Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three months ended March 31, 2011 and 2010 is as follows:

At and for the Three Months Ended March 31, 2011 (in thousands):

	Commercial		Mortgage		Wealth					Intersegment
	Banking		Banking		Management		Other			Elimination			Consolidated
Net interest income	$	23,879	$	245	$	-	$	(261	)	$	-		$	23,863
Provision for loan losses		4,500		-		-		-			-			4,500
Noninterest income		5,644		1,875		1,339		26			(1,214	)		7,670
Noninterest expense		21,555		1,906		1,093		196			(1,214	)		23,536
Provision for income taxes		645		64		74		(157	)		-			626
Net income (loss)	$	2,823	$	150	$	172	$	(274	)	$	-		$	2,871

Total Assets	$	2,876,655	$	12,613	$	498	$	465,231		$	(456,601	)	$	2,898,396
Average Assets	$	2,875,903	$	24,683	$	166	$	464,309		$	(454,819	)	$	2,910,242

At and for the Three Months Ended March 31, 2010 (in thousands):

	Commercial		Mortgage		Wealth					Intersegment
	Banking		Banking		Management		Other			Elimination			Consolidated
Net interest income	$	22,401	$	355	$	-	$	(257	)	$	-		$	22,499
Provision for loan losses		6,700		-		-		-			-			6,700
Noninterest income		6,603		1,881		1,192		212			(1,073	)		8,815
Noninterest expense		20,369		1,764		987		501			(1,073	)		22,548
Provision for income taxes		189		142		61		(181	)		-			211
Net income (loss)	$	1,746	$	330	$	144	$	(365	)	$	-		$	1,855

Total Assets	$	2,953,335	$	30,829	$	473	$	459,417		$	(441,437	)	$	3,002,617
Average Assets	$	2,948,033	$	33,634	$	197	$	459,469		$	(442,350	)	$	2,998,983

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11.	New Authoritative Accounting Guidance

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This Update temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public companies. The delay is intended to allow FASB to complete its deliberations on what constitutes a troubled debt restructuring. The guidance on both disclosures about troubled debt restructurings and determining what constitutes a troubled debt restructuring will be coordinated and is anticipated to be issued for interim and annual periods ending after June 15, 2011.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update outlines the parameters of what constitutes a troubled debt restructuring, as well as clarifies the guidance on those parameters. The clarifying guidance is meant to eliminate current diversity in practice of identifying restructurings of receivables. This guidance becomes effective for the Company in the first interim period beginning after June 15, 2011. The Company will apply the provisions retrospectively in its 2011 third quarter results. $2.4 million of troubled debt restructurings were added in the first quarter of 2011. If the Company identifies receivables that are newly considered impaired based on the newly adopted guidance, the amendments will be applied prospectively. In addition, the Company will begin disclosing those items deferred by ASU 2011-01, discussed above. The Company does not expect a material effect on its consolidated financial position or consolidated results of operations based on the new measurement parameters.

12.	Subsequent Events

On April 13, 2011, the Company redeemed 25%, or 7,500 shares, of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Preferred Stock”), sold to the U.S. Department of the Treasury on December 19, 2008, as part of the Capital Purchase Program established by the Treasury under the Emergency Economic Stabilization Act of 2008. The Company paid $7.6 million to the Treasury to redeem the Preferred Stock.

The preferred stock that the Company repurchased for $7.5 million had a current carrying value of $7.2 million, net of $285 thousand unaccreted discount, on the Company’s consolidated balance sheet. As a result of the repurchase, the Company will accelerate the accretion of the $285 thousand discount and record a total reduction in shareholders’ equity of $7.5 million. The accelerated accretion of the discount will be treated in a manner consistent with that for preferred dividends in reporting earnings available to common shareholders in the Company’s results of operations for the second quarter of 2011.

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STELLARONE CORPORATION

ITEM 2. 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 (“StellarOne,” or the “Company”) and its affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.

Results of Operations

The Company’s first quarter 2011 earnings were $2.9 million and net income available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock was $2.4 million, or $0.11 net income per diluted common share. Those results compare to net income available to common shareholders of $1.4 million, or $0.06 net income per diluted common share during the same quarter in the prior year, and net income available to common shareholders of $2.4 million or $0.10 net income per diluted common share recognized for the fourth quarter of 2010. Continued asset quality improvement resulting in lower loan loss provision levels, along with decreasing OREO and mortgage indemnification losses, contributed to the growth in recurring earnings.

Operating Segment Results

Revenue from the mortgage banking segment totaled $2.1 million for the first quarter of 2011, or down $577 thousand or 21.8% compared to $2.6 million for the fourth quarter of 2010 and up $71 thousand or 3.6% when compared to the same quarter in 2010. This sequential quarter revenue decrease was associated with higher mortgage rates resulting in reduced refinance activity. Indemnification expense totaled $265 thousand for the quarter, down $589 thousand or greater than 100% compared to the $854 thousand in the fourth quarter of 2010 and up $132 thousand or 99.3% compared to $133 thousand for the same quarter in 2010.

Retail banking fee income from the commercial bank segment amounted to $3.6 million for the first quarter of 2011, a decrease of $343 thousand or 8.8% compared to $3.9 million for the fourth quarter of 2010. This sequential quarter decrease was attributable to a decrease of $282 thousand and $35 thousand in consumer NSF and commercial NSF income, respectively, while interchange fee income remained flat on a sequential quarter basis.

Wealth management revenues from trust and brokerage fees for the first quarter of 2011 were $1.3 million or up $182 thousand or 15.7% and $147 thousand or 12.3% when compared to $1.2 million realized during both the fourth and first quarters of 2010, respectively. Higher fee realizations attributed to the revenue increase. Fiduciary assets decreased $23.1 million sequentially to $466.6 million, compared to $489.7 million at December 31, 2010, with much of the decrease associated with market valuation declines in the first quarter.

Net Interest Income

Net interest income on a tax-equivalent basis amounted to $24.6 million for the first quarter of 2011, which compares to $25.4 million for the fourth quarter of 2010, and $23.1 million for the same period in prior year. The net interest margin was 3.85% for the first quarter, compared to 3.87% for the fourth quarter of 2010 and 3.52% for the first quarter of 2010. The average yield on earning assets for the current quarter decreased 8 basis points sequentially to 4.85% as compared to 4.93% for the fourth quarter of 2010, which was offset by improvement in the cost of interest bearing liabilities, which contracted 6 basis points from 1.26% during the fourth quarter of 2010 to 1.20% during the first quarter of 2011. Continued asset quality improvement resulting in lower loan loss provision levels, along with decreasing OREO and mortgage indemnification losses, contributed to the growth in recurring earnings. The re-pricing sensitivity of interest earning assets outpaced interest bearing liabilities during the first quarter as loan yields contracted 9 basis points sequentially due to repricing within the current portfolio and lower yields realized on new production due to the protracted, exceptionally low rate environment. The cost of FHLB advances and subordinated debt both increased 4 basis points sequentially. This was offset by decreases of 7 basis points and 12 basis points for time deposits less than $100 thousand and greater than $100 thousand, respectively, which contributed to the 6 basis point improvement to the cost of funds.

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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)
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands)


	For the Three Months Ended March 31,
	2011							2010
	Average		Interest		Average			Average		Interest		Average
	Balance		Inc/Exp		Rates			Balance		Inc/Exp		Rates
Assets
Loans receivable, net (1)	$	2,104,031	$	27,303		5.26	%	$	2,204,297	$	29,137		5.36	%
Investment securities
Taxable		229,709		1,720		3.00	%		259,875		2,287		3.52	%
Tax exempt (1)		129,318		1,928		5.96	%		105,681		1,611		6.10	%
Total investments		359,027		3,648		4.06	%		365,556		3,898		4.27	%

Interest bearing deposits		77,042		36		0.19	%		44,060		28		0.25	%
Federal funds sold		51,390		32		0.25	%		52,948		33		0.25	%
Total other earning assets		487,459		3,716		3.05	%		462,564		3,959		3.43	%

Total earning assets		2,591,490	$	31,019		4.85	%		2,666,861	$	33,096		5.04	%

Total nonearning assets		318,752							332,122
Total assets	$	2,910,242						$	2,998,983

Liabilities and Stockholders' Equity
Interest-bearing deposits
Interest checking	$	559,393	$	533		0.39	%	$	558,797	$	1,332		0.97	%
Money market		420,202		1,041		1.00	%		392,243		1,294		1.34	%
Savings		268,854		468		0.71	%		200,064		450		0.91	%
Time deposits:
Less than $100,000		542,760		2,243		1.68	%		643,709		3,577		2.25	%
$100,000 and more		264,169		1,248		1.92	%		312,297		1,956		2.54	%
Total interest-bearing deposits		2,055,378		5,533		1.09	%		2,107,110		8,609		1.66	%

Federal funds purchased and securities sold under agreements to repurchase		1,044		8		3.07	%		861		6		2.79	%
Federal Home Loan Bank advances and other borrowings		80,000		640		3.20	%		127,167		1,110		3.49	%
Subordinated debt		32,991		262		3.18	%		32,991		257		3.12	%
Total other interest-bearing liabilities		114,035		910		3.19	%		161,019		1,373		3.41	%

Total interest-bearing liabilities		2,169,413		6,443		1.20	%		2,268,129		9,982		1.78	%

Total noninterest-bearing liabilities		312,666							308,594

Total liabilities		2,482,079							2,576,723
Stockholders' equity		427,732							422,260

Total liabilities and stockholders' equity	$	2,909,811						$	2,998,983


Net interest income (tax equivalent)			$	24,576						$	23,114
Average interest rate spread						3.65	%						3.26	%
Interest expense as percentage of average earning assets						1.01	%						1.52	%
Net interest margin						3.85	%						3.52	%

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

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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 non-interest income amounted to $7.7 million for the first quarter of 2011, or up $560 thousand or 7.9% on a sequential basis compared to $7.1 million for the fourth quarter of 2010, and essentially flat compared to the same period in prior year. The sequential quarter increase on a consolidated basis is largely attributable to a $589 thousand decrease in losses on mortgage indemnifications, a $560 thousand decrease in losses on foreclosed assets and a $186 thousand increase in wealth management revenues which were offset by a $577 thousand decrease in mortgage banking fees and a $343 thousand contraction in retail banking fees. While operating noninterest income remained flat compared to the same quarter in the prior year, retail banking fees contracted $363 thousand and were offset by increases of $147 thousand $102 thousand and $71 thousand in wealth management revenues, other operating income and mortgage banking fees, respectively.

Noninterest Expense

StellarOne’s efficiency ratio was 71.3% for the first quarter of 2011, compared to 71.5% for the fourth quarter of 2010 and 69.7% for the same quarter in 2010. The sequential quarter stability in the efficiency ratio reflects a slight decrease in both noninterest expense and total revenue. Non-interest expense for the first quarter amounted to $23.5 million, or down $420 thousand or 1.8% when compared to $24.0 million for the fourth quarter of 2010 and up $989 thousand or 4.4% when compared to the first quarter in 2010. The sequential quarter decrease was driven by decreases of $593 thousand in FDIC insurance expense and $422 thousand in other operating expenses, which were offset by a $552 thousand increase in compensation and employee benefits. The decrease in FDIC insurance expense is expected to continue going forward while the decrease in other expenses is related to the lower mortgage volume and will be dependent on future volume. The increase in compensation and benefits is related to incentive expense that is linked to performance goal attainments in the quarter.

Income Taxes

Income tax expense for the first quarter of 2011 was $626 thousand, resulting in an effective tax rate of 17.9%, compared to an income tax expense of $212 thousand for the first quarter of 2010, or an effective rate of 10.3%. The volatility in the effective tax rate on a comparative basis is a result of elevated provisioning levels in the prior year that reduced pretax earnings to a near breakeven level, which is proportionately much smaller in relation to our permanent tax differences. As pretax results approach the breakeven point 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. Given the uncertainty surrounding the current economic environment, which is causing provisioning to be elevated on a historical basis and is driving the Company’s effective tax rate; the effective rate for the first three months of 2011 is within the estimated range of probable rates expected for the annualized period.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Quality

StellarOne’s non-performing assets totaled $52.2 million at March 31, 2011, down $2.2 million or 4.0% from $54.4 million at December 31, 2010 and down $9.8 million or 15.8% compared to $62.0 million at March 31, 2010. The ratio of non-performing assets as a percentage of total assets decreased sequentially to 1.80% as of March 31, 2011, compared to 1.85% at December 31, 2010 and 2.07% at March 31, 2010. Non-performing loans totaled $43.2 million at March 31, 2011, essentially flat when compared to $43.5 million at December 31, 2010 and down $16.6 million or 27.8% compared to $59.8 million at March 31, 2010. Foreclosed assets totaled $9.0 million, down $1.9 million or 17.4% compared to $10.9 million at December 31, 2010 and up $6.8 million or greater than 100% compared to March 31, 2010. Past due and matured loans between 30 and 89 days totaled $41.8 million at March 31, 2011, down $11 million or 20.8% compared to $52.8 million at December 31, 2010.

Annualized net charge-offs as a percentage of average loans receivable amounted to 0.88% for the first quarter of 2011, down compared to 1.43% for the fourth quarter 2010 results and down from 1.13% for the first quarter of 2010. Net charge-offs for the first quarter of 2011 totaled $4.6 million or down $3.0 million compared to the $7.6 million realized during the fourth quarter of 2010 and down $1.6 million when compared to $6.2 million during the first quarter of 2010.

The mix of non-performing loans continues to be weighted to the construction and land development loan segment of our portfolio. Of the total nonaccrual loans of $43.2 million at March 31, 2011, approximately $16.4 million are residential development and construction loans.

StellarOne recorded a provision for loan losses of $4.5 million for the first quarter of 2011, a decrease of $0.8 million compared to the fourth quarter of 2010 and a decrease of $2.2 million compared to the first quarter of 2010. The first quarter 2011 provision compares to net charge-offs of $4.6 million, resulting in an allowance as a percentage of total loans of 1.82% or up three basis points when compared to 1.79% as of December 31, 2010. Specific reserves within the allowance dropped $657 thousand from the fourth quarter 2010 to the first quarter due to the resolution of problem loans and related charge-offs taken during the current quarter. This resulted in an increase to the allowance as a percentage of total loans and a slight decrease to the coverage of non-performing loans. The allowance represents 86.9% of non-performing loans at March 31, 2011, or down .70% when compared to 87.6% at December 31, 2010.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides information on performing and nonperforming restructures for the periods presented (in thousands):

	March 31,		December 31,
	2011		2010
Performing restructurings:
Construction and land development	$	5,160	$	5,163
Commercial real estate		6,474		6,680
Consumer real estate		26,097		24,674
Commercial and industrial loans (except those secured by real estate)		3,604		3,181
Consumer and other		-		-
Total performing restructurings	$	41,335	$	39,698

Nonperforming restructurings:
Construction and land development	$	456	$	300
Commercial real estate		97		-
Consumer real estate		3,525		3,208
Commercial and industrial loans (except those secured by real estate)		-		-
Consumer and other		-		-
Total performing restructurings	$	4,078	$	3,508

The Company’s nonaccrual loans are composed of the following (in thousands):

	March 31, 2011
	Loans Outstanding		Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding
Construction and land development	$	233,514	$	16,368		6.17	%
Commercial real estate		855,279		9,216		1.08	%
Consumer real estate		766,789		14,761		2.22	%
Commercial and industrial loans (except those secured by real estate)		181,650		2,809		1.55	%
Consumer and other		27,501		20		0.07	%
Total loans	$	2,064,732	$	43,174		2.11	%

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

	March 31, 2011			December 31, 2010			March 31, 2010
Non-accrual loans	$	39,096		$	39,966		$	57,951
Troubled debt restructurings		4,078			3,508			1,810
Foreclosed assets		9,036			10,894			2,267
Total non-performing assets	$	52,210		$	54,368		$	62,028
Nonperforming assets to total assets		1.80	%		1.85	%		2.07	%
Nonperforming assets to loans and foreclosed property		2.52	%		2.58	%		2.87	%
Allowance for loan losses as a percentage of loans receivable		1.82	%		1.79	%		1.88	%
Allowance for loan losses as a percentage of nonperforming loans		86.90	%		87.60	%		65.53	%
Annualized net charge-offs as a percentage of average loans receivable		0.88	%		1.43	%		1.13	%

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. The Company’s capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its “well-capitalized” position at the banking subsidiary.

The primary source of additional capital to the Company is earnings retention, which represents net income less dividends declared. The Company paid or accrued $917 thousand and $370 thousand in common and preferred dividends, respectively, during the three month period ended March 31, 2011. These dividends combined with net income of $2.9 million resulted in an increase to retained earnings of $1.5 million during the period. Future dividends will be dependent upon the Company’s ability to generate earnings in future periods.

The Company and its 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 the Company 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”), the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of their 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 the Company and its banking subsidiary 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 the Company and the subsidiary bank as “well capitalized” under FIDICIA. There are no conditions or events that management believes have changed the Company’s or subsidiary bank’s well capitalized position including the redemption of 25%, or 7,500 shares, of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Preferred Stock”) which occurred on April 13, 2011.

The following table includes information with respect to the Company’s risk-based capital and equity levels as of March 31, 2011 (in thousands):

	Corporation			Bank
Tier 1 capital		337,501			317,774
Tier 2 capital		28,464			28,372
Total risk-based capital		365,965			346,146
Total risk-weighted assets		2,268,096			2,260,574
Average adjusted total assets		2,790,119			2,783,728
Capital ratios:
Tier 1 risk-based capital ratio		14.88	%		14.06	%
Total risk-based capital ratio		16.14	%		15.31	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		12.10	%		11.42	%
Equity to assets ratio		14.80	%		15.24	%
Tangible common equity to assets ratio		10.08	%		10.06	%

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity

Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or at other short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economic conditions in the market served, concentrations of business and industry, competition, and the Company’s overall financial condition. The Company’s bank subsidiary has available a $212 million line of credit with the Federal Home Loan Bank of Atlanta, uncollateralized, unused lines of credit totaling $70 million with nonaffiliated banks and access to the Federal Reserve discount window to support liquidity as conditions dictate.

The liquidity of the parent Company also represents an important aspect of liquidity management. The parent Company’s cash outflows consist of overhead associated with corporate expenses, executive management, finance, marketing, human resources, loan and deposit operations, information technology, audit, compliance and credit administration functions. It also includes outflows associated with dividends to common shareholders, dividends to preferred shareholders and interest on subordinated debt. The main sources of funding for the parent Company are the management fees and dividends it receives from its banking subsidiary and availability on the equity market as deemed necessary.

In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs may arise.

Off Balance Sheet Items

There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010.

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates and thus the Company’s asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets.

Forward Looking Statements

This report on Form 10-Q and other reports issued by the Company, including reports filed with the SEC, may contain “forward-looking” statements that deal with future results, plans or performance. In addition, the Company’s management may make such statements orally to the media, or to securities analysts, investors or others. Forward-looking statements deal with matters that do not relate strictly to historical facts. The Company’s future results may differ materially from historical performance and forward-looking statements about the Company’s expected financial results or other plans and are subject to a number of risks and uncertainties. These include, but are not limited to, continued or deepening deterioration in general economic and banking industry conditions; continued increases in unemployment in the Company’s primary banking markets; limitations on the Company’s ability to pay dividends at current levels or to increase dividends in the future because of financial performance deterioration, regulatory restrictions, or limitations imposed as a result of the Company’s participation in the U.S. Treasury Department’s Capital Purchase Program; increased deposit insurance premiums or other costs related to deteriorating conditions in the banking industry and the economic impact on banks of the Emergency Economic Stabilization Act or other related legislative and regulatory developments; the imposition of requirements with an adverse financial impact relating to the Company’s lending, loan collection and other business activities as a result of the EESA, the Company’s participation in the CPP, or other legislative or regulatory developments such as mortgage foreclosure moratorium laws; possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins, deposit outflows, an inability to increase the number of deposit accounts and the possibility that deposit account losses (fraudulent checks, etc.) may increase; impact of legislative, regulatory or other changes affecting customer account charges and fee income; legislative changes to bankruptcy laws which would result in the loss of all or part of the Company’s security interest due to collateral value declines (so-called “cramdown” provisions); reduced demand for financial services and loan and lease products; adverse developments affecting the Company’s banking relationships; changes in accounting standards or interpretations of existing standards; monetary, fiscal or tax policies of the federal or state governments, including adoption of state legislation that would increase state taxes; adverse findings in tax audits or regulatory examinations and resulting enforcement actions; changes in credit and other risks posed by the Company’s loan, lease, investment, and securities available for sale portfolios, including continuing declines in commercial or residential real estate values or changes in allowance for loan and lease losses methodology dictated by new market conditions or regulatory requirements; lack of or inadequate insurance coverage for claims against the Company; technological, computer related or operational difficulties or loss or theft of information; adverse changes in securities markets directly or indirectly affecting the Company’s ability to sell assets or to fund its operations; results of litigation; heightened regulatory practices, requirements or expectations, including but not limited to requirements related to the Bank Secrecy Act and anti-money laundering compliance activity; or other significant uncertainties.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Access to Filings

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the internet at http://www.sec.gov. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are posted on the Company’s website at http://www.stellarone.com under the “Investor Relations” tab as soon as reasonably practical after filing electronically with the SEC.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining inherent losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use.

Investment Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The initial classification of securities is determined at the date of purchase.

Based on management’s interpretations of related authoritative accounting guidance, management has determined that other-than-temporary impairment on equity securities exists and should be recorded if the fair value of an equity security represents (1) less than 70% of the book value of a security regardless of loss period, or (2) if the loss period has been more than 18 months regardless of the fair value’s relationship to carrying value. If either of these conditions does not exist, but management becomes aware of possible impairment outside of this scope, management will conduct additional research to determine if market price recoveries can reasonably be expected to occur within an acceptable forecast period. For purposes of this analysis, a near term recovery period has been defined as 3-6 months.

Purchase premiums and discounts are recognized in interest income using the effective interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated increase in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Please see Note 3 of Notes to Unaudited Consolidated Financial Statements for additional information related to investment securities.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have been incurred, but not realized through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company’s banking subsidiary conducts an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. When a loan has been identified as impaired (i.e. it is probable that the Company will be unable to collect amounts due according to the original contractual terms), a specific reserve may be established based on management’s calculation of the loss embedded in the individual loan. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. In addition to impairment testing, the banking subsidiary has a grading system which is applied to each non-homogeneous loan in the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, overall portfolio quality including delinquency rates and commercial real estate loan concentrations. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are then used to compute an estimated range of losses which is then compared to the recorded allowance for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management for impaired loans include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower than we would otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Accrued Losses Associated With Mortgage Indemnifications and Repurchases

When the Company is notified by an investor that there is an inherent loss and an underwriting exception associated with a mortgage loan previously sold by the Company to the investor, the Company goes through a process to determine if it is probable that the loss will need to be absorbed by the Company and if the loss is able to be estimated. The Company accrues the related loss if management determines that it is probable that the loss will be recognized by the Company and it is able to be estimated. Members of the Company’s management meet monthly to discuss outstanding notices received from investors and document the associated probability of loss being recognized and any estimation of the associated loss to determine the amount that should be accrued.

Goodwill

Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Company’s annual impairment date is September 30. During the six months following completion of the Company’s most recent annual impairment test, there have been no significant negative changes in market conditions or forecasted future income; and actual earnings have improved. As such, we determined there were no additional indicators of potential impairment and no interim goodwill impairment test was performed. The annual assessment as of September 30, 2011 will be completed during the fourth quarter.

Additionally, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. No such valuation is deemed necessary as of March 31, 2011, as management has not taken any tax positions that it deems to be considered uncertain.

Stock-Based Compensation

The Company has a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. The Company’s stock options typically have an exercise price equal to at least the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally five years. The Company recognizes the associated compensation cost relating to share-based payment transactions in the consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

New awards to employees eligible for retirement prior to the award becoming fully vested are recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.

Foreclosed Assets

Real estate acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation are included in other operating expenses.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing noninterest 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 noninterest income excluding only gains on securities. The efficiency ratio is not a recognized reporting measure under USGAAP. Management believes this measure provides investors with important information regarding the Company’s operational efficiency. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for USGAAP. The Company, in referring to its net income, is referring to income under USGAAP. Comparison of the efficiency ratio with those of other companies may not be possible, because other companies may calculate the efficiency ratio differently.

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STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the quantitative and qualitative market risk disclosures in the Company’s Form 10-K for the year ended December 31, 2010.

ITEM 4 – CONTROLS AND PROCEDURES

The Company is required to include in its periodic reports information regarding controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company has established disclosure controls and procedures to ensure that material information related to the Company is made known to the principal executive officer and principal financial officer on a regular basis, in particular during the periods in which quarterly and annual reports are being prepared. The principal executive officer and principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report and, based on their evaluation, concluded that the disclosure controls and procedures are operating effectively.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the organization to disclose material information otherwise required to be set forth in the period reports.

Management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. In the normal course of business, the Company reviews and changes internal controls to reflect changes in business including acquisition related improvements. There have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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STELLARONE CORPORATION

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

There are no material legal proceedings to which the Company or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened. Any legal proceeding presently pending or threatened against StellarOne Corporation and its subsidiaries is either not material in respect to the amount in controversy or fully covered by insurance.

ITEM 1a.

RISK FACTORS.

There have been no material changes to the risk factors as previously disclosed in Part I, Item IA of the Company’s Annual Report on Form 10K for the fiscal year ended December 31, 2010.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company has a stock repurchase program authorized that is not currently active, with 210,000 shares remaining available for repurchase.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION.

Not applicable.

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STELLARONE CORPORATION

PART II OTHER INFORMATION

ITEM 6. EXHIBITS:

(a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:

Exhibit No. 2.1

Agreement and Plan of Reorganization, dated as of July 26, 2007, between Virginia Financial Group, Inc. and FNB Corporation. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed July 30, 2007.

Exhibit No. 3.1

Articles of Incorporation StellarOne Corporation, as amended. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 10, 2010)

Exhibit No. 3.2

Bylaws of StellarOne Corporation, as amended and restated February 28, 2008. (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed on May 28, 2010)

Exhibit No. 4.1

Warrant to purchase up to 302,623 shares of Common Stock (incorporated by reference to Exhibit 4.1 to Form 8K filed on December 23, 2008)

Exhibit No. 31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

Exhibit No. 31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

Exhibit No. 32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STELLARONE CORPORATION

/s/ O. R. Barham, Jr.

O.R. Barham, Jr.

President and Chief Executive Officer

May 9, 2011

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

May 9, 2011

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