10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended       June 30, 2009

OR

¨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 incorporation or organization)	(I.R.S. Employer 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¨.

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   ¨   No¨.

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 ¨     Accelerated filer x        Non-accelerated filer ¨    Smaller reporting company ¨

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

As of August 4, 2009 there were 22,707,529 shares of common stock, $1.00 par value per share, issued and outstanding.

1

STELLARONE CORPORATION

INDEX

PART I - FINANCIAL INFORMATION

		Page No.
ITEM 1	Financial Statements:
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4-5
	Consolidated Statements of Changes in Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8-21
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-33
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	33
ITEM 4	Controls and Procedures	34
PART II - OTHER INFORMATION
ITEM 1	Legal Proceedings	35
ITEM 1A	Risk Factors	35
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM 3	Defaults Upon Senior Securities	35
ITEM 4	Submission of Matters to a Vote of Security Holders	35
ITEM 5	Other Information	35
ITEM 6	Exhibits	36-40

2

PART I – FINANCIAL INFORMATION
ITEM 1. Financial statements
STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
	JUNE 30		DECEMBER 31,
	2009		2008
	(unaudited)
ASSETS
Cash and due from banks	$	52,328	$	66,239
Federal funds sold		51,339		3,837
Interest-bearing deposits in banks		80,723		45,453
Cash and cash equivalents		184,390		115,529
Investment securities (fair value: 2009, $353,971; 2008, $328,096)		353,967		328,093
Mortgage loans held for sale		51,229		15,847
Loans receivable, net of allowance for loan losses, 2009, $34,923; 2008, $30,464		2,206,174		2,234,122
Premises and equipment, net		85,837		89,022
Accrued interest receivable		9,922		10,230
Deferred income tax asset		852		-
Core deposit intangibles, net		9,393		10,266
Goodwill		74,880		74,582
Bank owned life insurance		29,538		28,903
Foreclosed assets		4,121		4,627
Other assets		46,612		45,293
Total assets	$	3,056,915	$	2,956,514
LIABILITIES
Deposits:
Noninterest-bearing	$	318,879	$	307,621
Interest-bearing		2,130,459		2,015,487
Total deposits		2,449,338		2,323,108
Short-term borrowings		503		699
Federal Home Loan Bank advances		170,000		187,700
Subordinated debt		32,991		32,991
Accrued interest payable		4,799		5,476
Deferred income tax liability		-		1,224
Other liabilities		9,578		10,531
Total liabilities		2,667,209		2,561,729
STOCKHOLDERS’ EQUITY
Preferred stock; no par value;  5,000,000 shares authorized; no shares issued and outstanding;		-		-
Preferred stock; $1,000 liquidation preference; 30,000 shares issued and outstanding;		28,224		28,121
Common stock, $1 par value; 35,000,000 shares authorized; 2009: 22,652,792 shares issued and outstanding; 2008: 22,605,063 shares issued and outstanding		22,653		22,605
Additional paid-in capital		229,918		229,522
Retained earnings		108,045		113,661
Accumulated other comprehensive income, net		866		876
Total stockholders’ equity		389,706		394,785
Total liabilities and stockholders’ equity	$	3,056,915	$	2,956,514

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

3

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
	THREE MONTHS ENDED
	JUNE 30,
	2009			2008
	(unaudited)			(unaudited)
Interest Income
Loans, including fees	$	31,694		$	39,208
Federal funds sold and deposits in other banks		52			363
Investment securities:
Taxable		2,426			3,147
Tax exempt		972			995
Dividends		198			339
Total interest income		35,342			44,052
Interest Expense
Deposits		11,360			12,458
Federal funds purchased and securities sold under agreements to repurchase		3			5
Federal Home Loan Bank advances		1,558			1,631
Subordinated debt		338			466
Short-term borrowings		-			159
Total interest expense		13,259			14,719
Net interest income		22,083			29,333
Provision for loan losses		6,500			2,835
Net interest income after provision for loan losses		15,583			26,498
Noninterest Income
Retail banking fees		4,113			3,896
Commissions and fees from fiduciary activities		744			1,071
Brokerage fee income		245			318
Mortgage banking-related fees		2,083			1,357
Losses on sale of foreclosed assets		(355	)		(260	)
Losses on sale of premises and equipment		(289	)		(21	)
Gains on sale of securities available for sale		11			206
Income from bank owned life insurance		331			319
Other operating income		780			761
Total noninterest income		7,663			7,647
Noninterest Expense
Compensation and employee benefits		10,836			11,763
Net occupancy		2,163			1,834
Supplies and equipment		2,265			2,170
Amortization-intangible assets		434			531
Marketing		388			831
State franchise taxes		574			585
FDIC insurance		2,088			68
Data processing		645			992
Professional fees		489			640
Telecommunications		477			457
Other operating expenses		3,698			4,738
Total noninterest expense		24,057			24,609
(Loss) income before income taxes		(811	)		9,536
Income tax (benefit) expense		(485	)		3,396
Net (loss) income		(326	)		6,140
Preferred stock dividends		(374	)		-
Accretion of preferred stock discount		(85	)		-
Net (loss) income available to common shareholders	$	(785	)	$	6,140
Basic net (loss) income per common share available to common shareholders	$	(0.03	)	$	0.27
Diluted net (loss) income per common share available to common shareholders	$	(0.03	)	$	0.27
The accompanying notes are an integral part of these consolidated financial statements.

4

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
	SIX MONTHS ENDED
	JUNE 30,
	2009			2008
	(unaudited)			(unaudited)
Interest Income
Loans, including fees	$	64,186		$	66,469
Federal funds sold and deposits in other banks		84			563
Investment securities:
Taxable		5,009			5,210
Tax exempt		1,820			1,832
Dividends		373			606
Total interest income		71,472			74,680
Interest Expense
Deposits		23,011			22,663
Federal funds purchased and securities sold under agreements to repurchase		7			60
Federal Home Loan Bank advances		3,121			3,539
Subordinated debt		700			930
Short-term borrowings		-			641
Total interest expense		26,839			27,833
Net interest income		44,633			46,847
Provision for loan losses		14,250			3,787
Net interest income after provision for loan losses		30,383			43,060
Noninterest Income
Retail banking fees		7,824			6,463
Commissions and fees from fiduciary activities		1,502			1,969
Brokerage fee income		498			638
Mortgage banking-related fees		3,507			2,228
Losses on sale of foreclosed assets		(620	)		(759	)
Losses on sale of premises and equipment		(90	)		(64	)
Gains on sale of securities available for sale		13			238
Income from bank owned life insurance		635			511
Other operating income		1,371			1,588
Total noninterest income		14,640			12,812
Noninterest Expense
Compensation and employee benefits		21,362			22,931
Net occupancy		4,254			2,995
Supplies and equipment		4,406			3,710
Amortization-intangible assets		872			691
Marketing		628			1,248
State franchise taxes		1,170			980
FDIC insurance		3,193			115
Data processing		1,502			2,076
Professional fees		993			1,214
Telecommunications		944			746
Other operating expenses		6,956			6,941
Total noninterest expense		46,280			43,647
(Loss) income before income taxes		(1,257	)		12,225
Income tax (benefit) expense		(1,077	)		3,998
Net (loss) income		(180	)		8,227
Preferred stock dividends		(744	)		-
Accretion of preferred stock discount		(159	)		-
Net (loss) income available to common shareholders	$	(1,083	)	$	8,227
Basic net (loss) income per common share available to common shareholders	$	(0.05	)	$	0.44
Diluted net (loss) income per common share available to common shareholders	$	(0.05	)	$	0.44
The accompanying notes are an integral part of these consolidated financial statements.

5

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(In thousands, except per share data)
(unaudited)
	Preferred Stock			Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Total
Balance, January 1, 2008	$	-		$	10,796	$	34,488	$	117,009		$	475					$	162,768
Comprehensive income:
Net income		-			-		-		8,227			-		$	8,227			8,227
Other comprehensive income net of tax:
Unrealized holding gains arising during the period (net of tax of $1,046)		-			-		-		-			-			(1,943	)		-
Reclassification adjustment (net of tax of $83)		-			-		-		-			-			155			-
Change in funded status of pension plans		-			-		-		-			-			134
Other comprehensive loss		-			-		-		-			(1,654	)		(1,654	)		(1,654	)
Total comprehensive income		-			-		-		-			-		$	6,573			-
Cash dividends ($.32 per share)		-			-		-		(5,371	)		-						(5,371	)
Common stock issued in Merger (11,748,933 shares)		-			11,749		189,382											201,131
Stock-based compensation expense associated with Merger (23,519 shares)		-			24		1,088		-			-						1,112
Stock-based compensation expense (7,018 shares)		-			7		61											68
Exercise of stock options (24,944 shares)		-			24		239		-			-						263
Balance, June 30, 2008	$	-		$	22,600	$	225,258	$	119,865		$	(1,179	)				$	366,544
Balance, January 1, 2009	$	28,121		$	22,605	$	229,522	$	113,661		$	876					$	394,785
Comprehensive income:
Net loss		-			-		-		(180	)		-		$	(180	)		(180	)
Other comprehensive loss, net of tax:
Unrealized holding loss arising during the period (net of tax of $1)		-			-		-		-			-			(2	)		-
Reclassification adjustment (net of tax of $5)		-			-		-		-			-			(8	)		-
Other comprehensive loss		-			-		-		-			(10	)		(10	)		(10	)
Total comprehensive loss		-			-		-		-			-		$	(190	)		-
Cash dividends paid or accrued
Common ($.20 per share)		-			-		-		(4,533	)		-						(4,533	)
Preferred cummulative 5%		-			-		-		(744	)		-						(744	)
Accretion on preferred stock discount		159			-		-		(159	)		-						-
Preferred stock issuance costs		(56	)		-		-		-			-						(56	)
Stock-based compensation expense (18,894 shares)		-			19		145		-			-						164
Exercise of stock options (28,835 shares)		-			29		251		-			-						280
Balance, June 30, 2009	$	28,224		$	22,653	$	229,918	$	108,045		$	866					$	389,706

6

STELLARONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	SIX MONTHS ENDED
	JUNE 30,
	2009			2008
	(unaudited)			(unaudited)
Cash Flows from Operating Activities
Net (loss) income	$	(180	)	$	8,227
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		3,246			2,788
Amortization of intangible assets		872			691
Amortization of purchase adjustments		-			(5,024	)
Provision for loan losses		14,250			3,787
Deferred tax (benefit) expense		(2,071	)		2,625
Employee benefit plan expense		-			105
Stock-based compensation expense		164			1,180
Losses on foreclosed assets		620			759
Losses on sale of premises and equipment		90			64
Gains on sale of securities available for sale		(13	)		(238	)
Mortgage banking-related fees		(3,507	)		(2,228	)
Proceeds from sale of mortgage loans		290,014			117,494
Origination of mortgage loans held for sale		(321,889	)		(109,851	)
Amortization of securities premiums and   accretion of discounts, net		(1,072	)		458
Income on bank owned life insurance		(635	)		(511	)
Changes in assets and liabilities
Decrease in accrued interest receivable		308			2,568
Increase in other assets		(136	)		(217	)
Decrease in accrued interest payable		(677	)		(1,814	)
Decrease in other liabilities		(1,073	)		(19,479	)
Net cash (used) provided by operating activities	$	(21,689	)	$	1,384
Cash Flows from Investing Activities
Proceeds from maturities and principal payments of securities available for sale	$	46,739		$	40,059
Proceeds from sales and calls of securities available for sale		19,306			88,343
Purchase of securities available for sale		(92,354	)		(49,876	)
Net increase in loans		14,144			16,972
Proceeds from sale of premises and equipment		637			1,522
Purchase of premises and equipment		(2,589	)		(6,793	)
Proceeds from sale of foreclosed assets		1,120			2,857
Cash acquired in merger		-			45,146
Net cash (used) provided by investing activities	$	(12,997	)	$	138,230
Cash Flows from Financing Activities
Net increase in demand, money market and savings deposits	$	122,561		$	114,083
Net increase (decrease) in certificates of deposit		3,799			(54,005	)
Net decrease in short-term borrowings		(196	)		(20,850	)
Proceeds from Federal Home Loan Bank advances		-			89,600
Principal payments on Federal Home Loan Bank advances		(17,700	)		(100,022	)
Net decrease in commercial paper		-			(68,745	)
Proceeds from exercise of stock options		280			263
Payment of preferred stock issuance costs		(56	)		-
Cash dividends paid		(5,141	)		(5,371	)
Net cash provided (used by) financing activities	$	103,547		$	(45,047	)
Increase in cash and cash equivalents	$	68,861		$	94,567
Cash and Cash Equivalents
Beginning		115,529			41,793
Ending	$	184,390		$	136,360
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	27,516		$	26,121
Income taxes		-			3,000
Supplemental Schedule of Noncash Activities
Foreclosed assets acquired in settlement of loans	$	1,234		$	1,504
Common stock issued in Merger	$	-		$	201,131

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

7

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

StellarOne Corporation (the “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.  On February 28, 2008, Virginia Financial Group, Inc (“VFG”) and FNB Corporation (“FNB”) merged and changed the surviving corporation’s name to StellarOne Corporation.  The Company collapsed all of its previous affiliates into StellarOne Bank on May 27, 2008.  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 June 30, 2009 and December 31, 2008, the results of operations for the three and six months ended June 30, 2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008.  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, 2008.  The results of operations for the six month period ended June 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the full year.  The Company has evaluated subsequent events for possible recognition and / or disclosure through August 7, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10Q were issued.

2.       Participation in U.S. Treasury Capital Purchase Program “CPP”

On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury for $30 million pursuant to the CPP. Additionally, the Company issued 302,623 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 preferred stock have been used to support general lending activities and provide liquidity for mortgage modification and builder loan programs.  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 at par value plus accrued and unpaid dividends.

As noted $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 and will be accreted up to the redemption amount of $30 million over the next five years.

8

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Investment Securities

A summary of the amortized cost and estimated fair value of securities with gross unrealized gains and losses is presented below.

	June 30, 2009									December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Securities Held to Maturity:
State and municipal	$	427	$	4	$	-		$	431	$	894	$	3	$	-		$	897
Mortgage backed securities		23		-		-			23		26		-		-			26
Total	$	450	$	4	$	-		$	454	$	920	$	3	$	-		$	923
Securities Available for Sale:
U. S. Government agencies	$	84,858	$	908	$	(170	)	$	85,596	$	68,477	$	1,107	$	(36	)	$	69,548
State and municipals		114,643		1,817		(1,161	)		115,299		86,021		1,031		(287	)		86,765
Corporate bonds		6,576		201		(7	)		6,770		7,603		48		(189	)		7,462
Collateralized mortgage obligations		10,288		91		(359	)		10,020		12,375		7		(604	)		11,778
Mortgage backed securities		129,721		3,356		(3	)		133,074		145,321		3,587		(59	)		148,849
Certificates of deposit		765		-		-			765		747		-		-			747
Equity securities		3,984		2		(2,004	)		1,982		3,933		2		(1,920	)		2,015
Other		11		-		-			11		9		-		-			9
Total	$	350,846	$	6,375	$	(3,704	)	$	353,517	$	324,486	$	5,782	$	(3,095	)	$	327,173

The book value of securities pledged to secure deposits and for other purposes amounted to $171.2 million and $120.0 million at June 30, 2009 and December 31, 2008, respectively.

Sales of securities available for sale were as follows:

	Three Months Ended					Six Months Ended
	June 30, 2009					June 30, 2009
	2009		2008			2009		2008
Proceeds from sales	$	13,516	$	23,527		$	19,306	$	88,343
Gross realized gains		11		548			13		648
Gross realized losses		-		(342	)		-		(410	)

As of June 30, 2009, securities with unrealized losses segregated by length of impairment were as follows:

	Less than 12 months				12 months or more				Total
Description of Securities	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Available for Sale
U. S. Government Agencies	$	21,171	$	155	$	2,070	$	15	$	23,241	$	170
Mortgage backed securities		675		1		377		2		1,052		3
State and municipals		27,236		1,079		931		82		28,167		1,161
Corporate bonds		-		-		4,034		359		4,034		359
Collateralized mortgage obligations		-		-		1,009		7		1,009		7
Subtotal debt securities		49,082		1,235		8,421		465		57,503		1,700
Equity securities		-		-		1,742		2,004		1,742		2,004
Total	$	49,082	$	1,235	$	10,163	$	2,469	$	59,245	$	3,704

9

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

As of June 30, 2009, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is 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 any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2009, 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 estimated fair value of securities at June 30, 2009 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Equity securities are shown separately since they are not due at a single maturity date.

	Held to Maturity				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	427	$	431	$	24,940	$	25,064
Due after one year through five years		-		-		113,432		115,426
Due after five years through ten years		23		23		69,746		70,420
Due after ten years		-		-		138,733		140,614
Equity securities		-		-		3,984		1,982
Other		-		-		11		11
Total	$	450	$	454	$	350,846	$	353,517

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Loans Receivable

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

	June 30,			December 31,
	2009			2008
	(unaudited)
Real estate loans:
Construction and land development	$	344,694		$	380,833
Secured by 1-4 family residential		720,832			706,727
Commercial and multifamily		888,804			876,649
Commercial, financial and agricultural loans		220,557			225,637
Consumer loans		50,783			60,042
All other loans		14,443			13,403
Total loans		2,240,113			2,263,291
Deferred loan costs		984			1,295
Allowance for loan losses		(34,923	)		(30,464	)
Net loans	$	2,206,174		$	2,234,122

5. Allowance for Loan Losses

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

	June 30,			December 31,			June 30,
	2009			2008			2008
	(unaudited)						(unaudited)
Balance, beginning	$	30,464		$	15,082		$	15,082
Provisions for loan losses		14,250			20,787			3,787
Loans charged off		(11,225	)		(18,191	)		(2,526	)
Recoveries		1,434			1,247			733
Net charge-offs		(9,791	)		(16,944	)		(1,793	)
Allowance assumed via acquisition		-			11,539			11,539
Balance, ending	$	34,923		$	30,464		$	28,615

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STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Information about impaired loans as of the periods indicated is as follows (In thousands):

	June 30,		December 31,
	2009		2008
	(unaudited)
Impaired loans for which an allowance has been provided	$	43,006	$	34,055
Impaired loans for which an allowance has not been provided		14,018		24,650
Total impaired loans	$	57,024	$	58,705
Allowance provided for impaired loans, included in the allowance for loan losses	$	12,270	$	5,503

6. (Loss) Earnings Per Share

The following shows the weighted average number of shares used in computing (loss) earnings per share and the effect on weighted average number of shares of diluted potential common stock for the three month periods ended June 30, 2009 and 2008.  Potential dilutive stock had no effect on (loss) income available to common stockholders for the three month period.

	June 30,			June 30,
(In thousands, except per share amounts)	2009			2008
	(unaudited)			(unaudited)
Net (loss) income	$	(326	)	$	6,140
Less:
Preferred stock dividends		(374	)		-
Accretion of preferred stock discount		(85	)		-
Net (loss) income available to common shareholders (numerator)	$	(785	)	$	6,140
(Loss) earnings per common share
Weighted average common shares outstanding (denominator)		22,641,114			22,585,161
(Loss) earnings per common share	$	(0.03	)	$	0.27
Diluted (loss) earnings per common share
Weighted average common shares issued and outstanding		22,641,114			22,585,161
Add:
Restricted stock		-			16,232
Incentive stock options		-			7,355
Stock options		-			43,243
Diluted weighted average common shares outstanding (denominator)		22,641,114			22,651,991
Diluted (loss) earnings per common share	$	(0.03	)	$	0.27

12

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following shows the weighted average number of shares used in computing (loss) earnings per share and the effect on weighted average number of shares of diluted potential common stock for the six month periods ended June 30, 2009 and 2008.  Potential dilutive stock had no effect on (loss) income available to common stockholders for the three month period.

	June 30,			June 30,
(In thousands, except per share amounts)	2009			2008
	(unaudited)			(unaudited)
Net (loss) income	$	(180	)	$	8,227
Less:
Preferred stock dividends		(744	)		-
Accretion of preferred stock discount		(159	)		-
Net (loss) income available to common shareholders (numerator)	$	(1,083	)	$	8,227
(Loss) earnings per common share
Weighted average common shares outstanding (denominator)		22,630,323			18,831,352
(Loss) earnings per common share	$	(0.05	)	$	0.44
Diluted (loss) earnings per common share
Weighted average common shares issued and outstanding		22,630,323			18,831,352
Add:
Restricted stock		-			12,794
Incentive stock options		-			8,540
Stock options		-			46,669
Diluted weighted average common shares outstanding (denominator)		22,630,323			18,899,355
Diluted (loss) earnings per common share	$	(0.05	)	$	0.44

Due to the loss available to common shareholders during the three and six month periods in 2009 all unvested restricted stock and stock options would have been anti-dilutive and were not included in the three or six month calculations for 2009.  In 2008, stock options representing 380,464 and 333,634 shares were not included in the three and six month calculations of earnings per share, respectively, as their effect would have been anti-dilutive.

13

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock-Based Compensation

FASB Statement No. 123 (R), “Share-Based Payment” requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

SFAS 123 (R) also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be 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.  The Company had no such awards granted during the three month period.

Stock-based compensation expense included within compensation and employee benefits expense totaled $134 thousand and $259 thousand during the three and the six months ended June 30, 2009 and $55 thousand and $1.5 million during the three and six months ended June 30, 2008.  An acceleration adjustment of $1.3 million related to the merger is included in compensation and employee benefit expense for the six month period ended June 30, 2008.

Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.  Fair value was estimated using the Black-Scholes option pricing model with the following assumptions for: option term until exercise of approximately 4.5 to 6.5 years, volatility ranging from 24.3 to 28.6%, risk-free interest rate of 1.90% to 2.68% and an expected dividend yield of 3.7% to 4.3%.

A summary of the stock option plan at June 30, 2009 and 2008 and changes during the periods ended on those dates are as follows:

	2009					2008
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding, January 1		614,198		$	18.58		239,671		$	23.37
Acquired via merger		-			-		311,606			14.02
Granted		17,392			12.78		123,061			18.27
Forfeited		(4,880	)		-		(3,593	)		21.17
Expired		-			-		(13,144	)		11.79
Exercised		(28,835	)		9.73		(25,784	)		10.58
Outstanding, June 30,		597,875		$	18.69		631,817		$	18.53
Exercisable, June 30,		482,947					509,656

14

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The aggregate intrinsic value of the options outstanding as of June 30, 2009 was $371 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 June 30, 2009 and the exercise price, multiplied by the number of options outstanding).  The aggregate intrinsic value of the options currently exercisable as of June 30, 2009 was $369 thousand.  The weighted average remaining contractual life is 4.2 years for exercisable options at June 30, 2009.

The following table summarizes nonvested restricted shares outstanding as of June 30, 2009 and the related activity during the period:

Nonvested Shares	Number of Shares			Weighted-Average Grant-Date Fair Value		(In thousands) Total Intrinsic Value
Nonvested at January 1, 2009		35,401		$	16.31	$	598
Granted		37,430			12.68
Vested & Exercised		(18,894	)		16.25	$	(237	)
Forfeited		(200	)		15.65
Nonvested at June 30, 2009		53,737		$	13.81	$	696

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of June 30, 2009 that will be recognized in future periods is as follows (In thousands):

	Stock Options		Nonvested Restricted Stock		Total
For the remaining six months of 2009	$	35	$	186	$	221
For year ended December 31,  2010		70		220		290
For year ended December 31,  2011		70		101		171
For year ended December 31,  2012		70		55		125
For year ended December 31,  2013		24		44		68
For year ended December 31,  2014		1		3		4
Total	$	270	$	609	$	879

15

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.    Fair Value Option and Fair Value Measurements

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position “FSP” No. FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. FAS 157-2 has been deferred and therefore has not been adopted.  The impact of adopting FAS 157 involved adding additional disclosure information and had no direct effect on the Company’s financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard became effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

Fair Value Measurement

Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This FSP clarifies the application of FASB Statement No. 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This guidance was considered in determining the fair value of financial assets for the Company as of June 30, 2009.

Under SFAS No. 157, 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.

16

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 relaying 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.

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.

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 impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan”.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and 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 June 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, 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 is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at 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. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

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.

17

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 are summarized below (In thousands).

(unaudited)	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale	$	353,517	$	1,981	$	351,536	$	-
Total assets at fair value	$	353,517	$	1,981	$	351,536	$	-
Other liabilities (1)	$	2,440	$	2,440	$	-	$	-
Total liabilities at fair value	$	2,440	$	2,440	$	-	$	-

(1) Includes liabilities associated with deferred compensation plans

Assets and Liabilities Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market whose fair value was recognized to be below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of June 30, 2009 are included in the table below (In thousands).

(unaudited)	Total		Level 1		Level 2		Level 3
Loans - impaired loans	$	57,024	$	-	$	36,231	$	20,793
Loans held for sale - mortgage		51,229		-		51,229		-
Foreclosed assets		4,121		-		1,785		2,336
Total assets at fair value	$	112,374	$	-	$	89,245	$	23,129
Total liabilities at fair value	$	-	$	-	$	-	$	-

18

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SFAS 107, “Disclosures about Fair Value of Financial Instruments,” as amended, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the 2008 Form 10-K.

The estimated fair values of financial instruments were as follows:

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	184,390	$	184,390	$	115,529	$	115,529
Investment securities		353,967		353,971		328,093		328,096
Mortgage loans held for sale		51,229		51,229		15,847		15,847
Loans, net		2,206,174		2,218,155		2,234,122		2,248,579
Accrued interest receivable		9,922		9,922		10,230		10,230
Financial liabilities:
Deposits	$	2,449,338	$	2,465,381	$	2,323,108	$	2,340,791
Federal funds purchased and securities sold under agreements to repurchase		503		503		699		699
Federal Home Loan Bank advances		170,000		175,514		187,700		195,955
Subordinated debt		32,991		33,063		32,991		33,086
Accrued interest payable		4,799		4,799		5,476		5,476

9.     Recent Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position FAS (“FSP”) No.  FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,”.  This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction that is, between market participants at the measurement date under current market conditions with the assumption that the sale is not a forced liquidation or distressed sale.  FSP No. FAS 157-4 is effective for fiscal years and interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  Adoption of this FSP did not have a significant effect on the Corporation’s consolidated financial statements.

19

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On June 29, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162.” SFAS 168 which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. SFAS 168 will be effective for the Company’s consolidated financial statements for periods ending after September 15, 2009. SFAS 168 is not expected have a significant effect on the Corporation’s consolidated financial statements.

On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” SFAS 166 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. SFAS 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. SFAS 166 will be effective January 1, 2010 and is not expected to have a significant effect on the Corporation’s consolidatedfinancial statements.

On May 28, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”).  Under SFAS 165, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities.  SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process.  Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.  SFAS 165 also requires entities to disclose the date through which subsequent events have been evaluated.  SFAS 165 was effective for interim and annual reporting periods ending after June 15, 2009.  The Company adopted the provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and adoption did not have a significant effect on the Corporation’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” to require, on an interim basis, disclosures about the fair value of financial instruments for public entities, and to improve the transparency and quality of information provided to financial statement users by increasing the frequency of disclosures about fair value. The FSP applies to financial instruments within the scope of FASB Statement 107, Disclosures about Fair Value of Financial Instruments, held by publicly traded companies, as defined in AICPA Accounting Principles Board Opinion 28, Interim Financial Reporting.  Previously, the disclosure was required only in annual financial statements.  FSP No. FAS 107-1 and APB 28-1is effective for fiscal years and interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  Adoption of this FSP did not have a significant effect on the Corporation’s consolidated financial statements.

20

STELLARONE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In April 2009, the FASB issued proposed FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which makes existing other-than-temporary impairment guidance pertaining to debt securities more operational and improves the presentation of other-than-temporary impairments in the financial statements. This FSP requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and any remaining portion in the other comprehensive income category of stockholders’ equity, if the entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis. This FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  Adoption of these FSP’s did not have a significant effect on the Corporation’s consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. Adoption of this FSP had no effect on the Corporation’s consolidated financial statements, but will be utilized to determine useful lives of intangibles associated with any future acquisitions.

In February 2008, FASB issued FSP 140-3 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” This FSP addresses the accounting for a transfer of a financial asset and a repurchasing financing.  The FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement under Statement 140.  However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under Statement 140.  This FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those years.  Adoption of this FSP did not have a significant effect on the Corporation’s consolidated financial statements.

10.   Subsequent Event

On July 13, 2009, StellarOne Corporation announced that its subsidiary, StellarOne Bank, signed a purchase and assumption agreement to sell a financial service center located in Woodstock, Virginia to First Bank, with principal offices located in Strasburg, Virginia.  The branch sale, which is subject to regulatory approval, includes all deposit accounts, fixed assets, and real estate. At June 30, 2009, the branch reported deposits of $15.2 million. The proposed transaction is expected to close in the fourth quarter of 2009.

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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.

OVERVIEW

StellarOne Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, StellarOne is one of the largest independent commercial bank holding companies headquartered in the Commonwealth of Virginia. The Company’s sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia.  Additional affiliates 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 Company collapsed all of its previous affiliates into StellarOne Bank on May 27, 2008.  The organization has a network of fifty-nine full-service financial centers, one loan production office, and sixty-six ATMs stretching from the New River Valley, Roanoke Valley, Shenandoah Valley and Central and North Central Virginia.

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.

Purchase premiums and discounts are recognized in interest income using the 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. There are a total of twenty-three (23) securities that had unrealized losses for 12 months or more as of June 30, 2009 totaling $2.5 million.  StellarOne has the ability and intent to hold these securities for the time thought to be necessary to recover its cost, and does not consider them to be other-than-temporarily impaired.

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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, 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 ten point grading system for 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 is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision 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 in determining impairment 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.  

Goodwill

The Company has adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”).  Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test.  Additionally, under SFAS 142, 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.  Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142.  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.  Amortization expense charged to operations was $872 thousand and $691 thousand for the six months ended June 30, 2009 and 2008, respectively.

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STELLARONE CORPORATION

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

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.

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 has adopted SFAS 123 (R), which requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

FASB Statement No. 123 (R), “Share-Based Payment” SFAS 123 (R) also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be 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.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income excluding gains or losses on securities, fixed assets and foreclosed assets.  Additionally we refer and define core margin and noninterest income on an operating basis below in our discussions of operations.  These are non-GAAP financial measures that we believe provide investors with important information regarding our operational efficiency and margin production. Such information is not in accordance with GAAP and should not be construed as such. 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 GAAP. The Company, in referring to its net income, is referring to income under GAAP.

Results of Operations

The Company’s loss for the second quarter of 2009 was $326 thousand, or a net loss available to common shareholders of $785 thousand, or $0.03 per diluted common share. Those results compare to net income of $6.1 million, or diluted earnings per share of $0.27 during the same period in the prior year, and a net loss to common shareholders of $298 thousand or $0.01 per diluted common share recognized for the first quarter of 2009.   The results for the second quarter of 2009 were impacted by a provision for loan losses totaling $6.5 million that approximated net charge-offs of $6.9 million for the period, and compares to a provision for loan losses of $7.75 million during the first quarter of 2009 and $2.8 million for the same quarter in the prior year.  Additionally, second quarter 2009 results were reduced by a special assessment from the FDIC totaling $1.3 million.

24

STELLARONE CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The Company’s loss for the six month period ended June 30, 2009 was $180 thousand, or a net loss available to common shareholders of $1.1 million, or $0.05 per diluted common share. Those results compare to net income of $8.2 million, or diluted earnings per share of $0.44 during the same period in the prior year.  Similar to the three month period, the results for the fist six months of 2009 were impacted by an increased provision for loan losses totaling $14.3 million that approximated net charge-offs of $9.8 million for the period, and compares to a provision for loan losses of $3.8 million during the first six months of 2008.  Additionally, the results for the six month period in 2009 were also reduced by a $3.1 million increase in total FDIC assessment expense when compared to the same period in the prior year.

Net Interest Income

Net interest income, on a tax-equivalent basis and excluding the effects of purchase accounting amortization, amounted to $22.0 million for both the first and second quarters of 2009 and compare to $25.3 million for the second quarter of 2008. The core net interest margin, adjusted to exclude the effect of purchasing accounting amortization, was 3.24% for the second quarter of 2009, compared to 3.36% for the first quarter 2009 and 3.69% for the second quarter of 2008. Including the effects of purchase accounting adjustments, the net interest margin was 3.34% for the second quarter 2009, compared to 3.52% for the first quarter 2009 and 4.37% for the second quarter of 2008.

Net interest income, on a tax-equivalent basis and excluding the effects of purchase accounting amortization, amounted to $44.0 million for the first six months of 2009 and compares to $45.8 million for first half of 2008. The core net interest margin, adjusted to exclude the effect of purchasing accounting amortization, was 3.30% for the first six months of 2009, compared to 3.94% for the first half of 2008.  Including the effects of purchase accounting adjustments, the net interest margin was 3.43% for the first six months of 2009, compared to 4.08% for the first half of 2008.

The compression noted for both the three and six month periods continues to be yield driven, with the average yield on earning assets decreasing 30 basis points to 5.29% as compared to 5.59% for the first quarter of 2009 and down 122 basis points compared to the same quarter in 2008. Contributing factors include a relatively high level of fixed rate re-pricing in the loan portfolio, the impact of an increasing amount of loans in nonaccrual status and a higher level of short term liquidity in the balance sheet.  The cost of interest bearing liabilities contracted 14 basis points from 2.45% during the first quarter of 2009 to 2.31% during the second quarter of 2009 and down 22 basis points compared to the same quarter in 2008, but remained much less sensitive to repricing when compared to interest earning assets.  Irrespective of the effects related to the merger of equals transaction consummated in the first quarter of 2008, the comparisons of the six month periods mirror those discussed above for the quarterly results.

Factors impacting the net interest margin for the remainder of the year include the acceleration of liability repricing and improvement of cost of funds associated with reduced wholesale funding, higher amounts of CD repricing.  Additionally, loan yields are expected to continue to be negatively impacted by the short-term rate reductions with loan growth remaining minimal due to market conditions, and the positive effects of amortizing the purchase adjustments will continue to lessen.

25

STELLARONE CORPORATION

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

	For the Three Months Ended June 30,
	(unaudited)
	2009							2008
Dollars in thousands	Average Balance		Interest Inc/Exp		Average Rates			Average Balance		Interest Inc/Exp		Average Rates
Assets
Loans receivable, net	$	2,291,735	$	31,801		5.57	%	$	2,288,804	$	39,329		6.91	%
Investment securities
Taxable		230,102		2,624		4.51	%		307,571		3,500		4.50	%
Tax exempt		97,122		1,496		6.09	%		95,604		1,531		6.34	%
Total investments		327,224		4,120		4.98	%		403,175		5,031		4.94	%
Interest bearing deposits		51,966		31		0.24	%		3,943		9		0.90	%
Federal funds sold		58,560		20		0.14	%		63,198		340		2.13	%
		437,750		4,171		3.77	%		470,316		5,380		4.53	%
Total earning assets		2,729,485	$	35,972		5.29	%		2,759,120	$	44,709		6.51	%
Total nonearning assets		283,599							290,706
Total assets	$	3,013,084						$	3,049,826
Liabilities and Stockholders' Equity
Interest-bearing deposits
Interest checking	$	524,408	$	1,255		0.96	%	$	497,074	$	505		0.41	%
Money market		275,534		1,047		1.52	%		191,406		817		1.71	%
Savings		191,788		420		0.88	%		211,158		1,755		3.33	%
Time deposits:
Less than $100,000		794,180		5,926		2.99	%		769,415		5,664		2.95	%
$100,000 and more		305,297		2,712		3.56	%		364,876		3,717		4.09	%
Total interest-bearing deposits		2,091,207		11,360		2.18	%		2,033,929		12,458		2.46	%
Federal funds purchased and securities sold under agreements to repurchase		464		3		2.56	%		7,919		5		0.25	%
Federal Home Loan Bank advances and other borrowings		170,067		1,553		3.61	%		236,759		1,634		2.73	%
Subordinated debt		32,991		343		4.11	%		32,991		466		5.59	%
Commercial paper		-		-		N/A			23,821		156		2.59	%
		203,522		1,899		3.69	%		301,490		2,261		2.97	%
Total interest-bearing liabilities		2,294,729		13,259		2.31	%		2,335,419		14,719		2.53	%
Total noninterest-bearing liabilities		327,425							347,080
Total liabilities		2,622,154							2,682,499
Stockholders' equity		390,930							367,327
Total liabilities and stockholders' equity	$	3,013,084						$	3,049,826
Net interest income (tax equivalent)			$	22,713						$	29,990
Average interest rate spread						2.97	%						3.98	%
Interest expense as percentage of average earning assets						1.95	%						2.14	%
Net interest margin						3.34	%						4.37	%

26

STELLARONE CORPORATION

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

	For the Six Months Ended June 30,
	(unaudited)
	2009							2008
	Average		Interest		Average			Average		Interest		Average
Dollars in thousands	Balance		Inc/Exp		Rates			Balance		Inc/Exp		Rates
Assets
Loans receivable, net	$	2,288,118	$	64,400		5.69	%	$	1,958,566	$	66,628		6.84	%
Investment securities
Taxable		228,873		5,382		4.68	%		255,090		6,468		5.02	%
Tax exempt		90,414		2,801		6.16	%		89,971		1,838		4.04	%
Total investments		319,287		8,183		5.10	%		345,061		8,306		4.76	%
Interest bearing deposits		50,885		40		0.16	%		2,214		12		1.07	%
Federal funds sold		38,046		43		0.22	%		44,910		523		2.29	%
		408,218		8,266		4.03	%		392,185		8,841		4.46	%
Total earning assets		2,696,336	$	72,666		5.44	%		2,350,751	$	75,469		6.45	%
Total nonearning assets		286,494							228,856
Total assets	$	2,982,830						$	2,579,607
Liabilities and Stockholders' Equity
Interest-bearing deposits
Interest checking	$	520,463	$	2,652		1.03	%	$	401,052	$	898		0.45	%
Money market		255,453		1,877		1.48	%		161,291		1,482		1.84	%
Savings		190,103		830		0.88	%		169,115		2,796		3.32	%
Time deposits:
Less than $100,000		778,506		11,986		3.10	%		641,569		10,962		3.43	%
$100,000 and more		314,643		5,666		3.63	%		310,141		6,525		4.22	%
Total interest-bearing deposits		2,059,168		23,011		2.25	%		1,683,168		22,663		2.70	%
Federal funds purchased and securities sold under agreements to repurchase		405		7		3.44	%		6,681		60		1.78	%
Federal Home Loan Bank advances and other borrowings		177,155		3,120		3.50	%		210,851		3,545		3.34	%
Subordinated debt		32,991		700		4.22	%		28,708		930		6.41	%
Commercial paper		-		-		N/A			49,010		635		2.56	%
		210,551		3,827		3.62	%		295,928		5,170		3.46	%
Total interest-bearing liabilities		2,269,719		26,838		2.38	%		1,979,096		27,833		2.81	%
Total noninterest-bearing liabilities		320,650							306,688
Total liabilities		2,590,369							2,285,784
Stockholders' equity		392,461							293,823
Total liabilities and stockholders' equity	$	2,982,830						$	2,579,607
Net interest income (tax equivalent)			$	45,828						$	47,636
Average interest rate spread						3.06	%						3.64	%
Interest expense as percentage of average earning assets						2.01	%						2.37	%
Net interest margin						3.43	%						4.08	%

27

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 of assets, total non-interest income amounted to $8.3 million for the second quarter of 2009, an increase of $1.3 million or 17.8% from $7.0 million for first quarter of 2009 and an increase of $574 thousand or 7.4% from $7.7 million for second quarter of 2008. Mortgage banking revenue totaled $2.1 million for the second quarter, an increase of $660 thousand or 46.4% compared to $1.4 million for the first quarter of 2009 and an increase of $726 thousand or 53.5% compared to $1.4 million for the second quarter of 2008.  The increased originations are primarily a reflection of the favorable interest rate environment and have resulted in an increase in the earnings contribution from the mortgage line of business during the second quarter.  Retail banking fee income amounted to $4.1 million for the second quarter, an increase of $402 thousand or 10.8% compared to $3.7 million for the first quarter of 2009 and an increase of $217 thousand or 5.6% compared to $3.9 million for the second quarter of 2008.  These increases are largely a result of more NSF charge activity and a higher realization rate associated with these fees.  Wealth management revenues from trust and brokerage fees for the second quarter of 2009 were $989 thousand or essentially flat compared to $1.0 million in the first quarter of 2009 and down $400 thousand or 28.8% compared to the second quarter of 2008.  Revenues from this line of business remain suppressed due to lower market valuations for assets under management. Despite revenue contraction, wealth management contributed earnings to the company during both the first and second quarters of 2009.  Revenues from other miscellaneous income sources for the second quarter of 2009 were $780 thousand, up $189 thousand or 32.0% compared to $591 thousand for the first quarter of 2009 and up $19 thousand or 2.5% compared to $761 thousand for the same quarter in 2008.  The increase compared to the first quarter relates principally to seasonal insurance related revenues and was therefore comparative to the same period in the prior year.

On an operating basis for the six month period, which excludes gains and losses from sales of assets, total non-interest income amounted to $15.3 million for the first six months of 2009, an increase of $1.9 million or 14.5% from $13.4 million for the same period in the prior year.  All increases for the six month period were influenced to some extent by the merger of equals transaction consummated in February of 2008, however, the effect was not the primary factor in any of the variances noted.  Mortgage banking revenue totaled $3.5 million for the first half of 2009, an increase of $1.3 million or 57.4% compared to $2.2 million for the first half of 2008.  The increased originations are primarily a reflection of the favorable interest rate environment and have resulted in an increase in the earnings contribution from the mortgage line of business during the first half of 2009.  Retail banking fee income amounted to $7.8 million for the first six months of 2009, an increase of $1.4 million or 21.1% compared to $6.5 million for the first half of 2008.  This increase is largely a result of more NSF charge activity, analysis fee charges and a higher realization rate associated with these fees.  Wealth management revenues from trust and brokerage fees for the first six months of 2009 were $2.0 million, down $607 thousand or 23.3% compared to the same period in 2008.  Revenues from this line of business remain suppressed due to lower market valuations for assets under management. Despite revenue contraction, wealth management contributed earnings to the company during the first six months of 2009.  Revenues from other miscellaneous income sources for the first six months of 2009 were $1.4 million, down $217 thousand or 13.7% compared to $1.6 million for the first half of 2008.  The decrease compared to the same period in the prior year relates primarily to a non-recurring Visa class B stock redemption that occurred during the first six months of 2008.

28

STELLARONE CORPORATION

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

Noninterest Expense

Non-interest expense for the second quarter of 2009 amounted to $24.1 million, or up $1.9 million or 8.6% when compared to the $22.2 million for the first quarter of 2009 and down $553 thousand or 2.2% when compared to the same quarter in the prior year.  A special assessment from the FDIC totaling $1.3 million, which is payable in September 2009, was accrued during the current quarter.  Additionally, due to increased originations generated by a favorable interest rate environment experienced during the second quarter, mortgage commissions increased $391 thousand and $600 thousand when compared to the first quarter 2009 and the second quarter 2008, respectively.  Likewise, loan operations expense increased $275 thousand and $662 thousand when compared to the first quarter 2009 and the second quarter 2008, respectively.  Exclusive of these items, noninterest expense was relatively flat compared to the first quarter of 2009 and down $1.8 million or 7.3% compared to the same quarter in the prior year.  StellarOne’s efficiency ratio was 77.58% for the second quarter of 2009, compared to 73.70% for the first quarter of 2009 and 65.26% for the second quarter of 2008, reflecting the increased expenses as noted for the period.

Non-interest expense for the first six months of 2009 amounted to $46.3 million, or up $2.6 million or 6.0% when compared to the $43.6 million for the first half of 2008.  StellarOne’s efficiency ratio was 75.67% for the first six months of 2009, compared to 71.51% for the first half of 2009.  The reasons for increases in both total expense and the related efficiency ratio for the six month period mirror those explained above for the three month period.  However, the total increase in FDIC assessment expense for the six month period was $3.1 million when compared to the same period in the prior year.

Income Taxes  

Income tax benefit for the second quarter of 2009 was $485 thousand resulting in an effective tax rate of 59.8% compared to $3.4 million in income tax expense, or 35.6%, for the second quarter of 2008.  For the six month period ended June 30, 2009, income tax benefit amounted to $1.1 million, resulting in an effective tax rate of 85.6% compared to $4.0 million in income tax expense, or 32.7% for the same period in 2008.  The significant increase in the effective tax rate for both the three and six month periods in 2009 is a result of increased provisioning that has reduced pretax earnings to a level which is proportionately much smaller in relation to our permanent differences when compared to the same period in the prior year.  Pretax results near the breakeven point tend to generate substantial shifts in the effective tax rate due to comparing a lower level of earnings or losses to a relatively steady level of permanent differences.  Given the current economic environment and that elevated levels of provisioning are driving the effective rate; the effective rate for both the three and six month periods of 2009 is within the estimated range of probable rates expected for the annualized period.

29

STELLARONE CORPORATION

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

Asset Quality

StellarOne’s ratio of non-performing assets as a percentage of total assets increased to 2.60% as of June 30, 2009, compared to 1.66% as of December 31, 2008 and 0.86% as of June 30, 2008.  Annualized net charge-offs as a percentage of average loans receivable amounted to 1.20% for the second quarter of 2009, compared to 0.51% for the first quarter of 2009 and 0.22% for the second quarter of 2008.  Net charge-offs for the second quarter totaled $6.9 million and were up $4.0 million compared to the $2.9 million in net charge-offs recognized during the first quarter of 2009 and up $5.6 million compared to the $1.3 million in net charge-offs posted during the second quarter of 2008.  The primary concentration of credit issues within the portfolio continues to be the residential development and construction loan segment of our portfolio, with emphasis on a concentration at Smith Mountain Lake (SML). Of the total nonaccrual loans of $73.0 million at June 30, 2009, approximately $41.6 million are residential development and construction loans, of which approximately $25.3 million or 61% are SML related.

StellarOne recorded a provision for loan losses of $6.5 million for the second quarter of 2009, a decrease of $1.3 million compared to the first quarter of 2009. The second quarter provision compares to net charge-offs of $6.9 million for the quarter, resulting in the allowance as a percentage of total loans remaining flat at 1.56% for June 30, 2009 when compared to March 31, 2009. While there are encouraging signs in the economy and past-due levels improved for the quarter, StellarOne continues to anticipate elevated non-performing assets and net charge-off levels throughout the remainder of 2009, and will likely see some migration of nonaccrual loans to foreclosed assets.

At June 30, 2009 StellarOne had $6.9 million in loans under troubled debt restructuring terms.  These restructurings occur when a loan customer has experienced or is anticipated to experience, financial difficulties in the short term.  Consequently, a modification is granted to the borrower that would not otherwise be considered.  These loans continue to accrue interest as long as the borrower complies with the modified loan terms and conditions and has demonstrated repayment performance under the modified agreement.

Accruing restructured loans were $5.5 million at June 30, 2009 compared to none at March 31, 2009.  These loans are primarily residential real estate related and are being restructured in order to assist our customers in retaining their homes and minimize our exposure to potential losses.  These loans have been restructured by either reducing the related interest rate, extending the terms or both.

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

	June 30, 2009			December 31, 2008			June 30, 2008
	(unaudited)						(unaudited)
Non-accrual loans	$	71,590		$	44,491		$	22,392
Troubled debt restructurings		1,405			-			814
Foreclosed assets		4,121			4,627			2,260
Loans past due 90 days accruing interest		2,458			-			465
Total non-performing assets	$	79,574		$	49,118		$	25,931
Nonperforming assets to total assets		2.60	%		1.66	%		0.86	%
Nonperforming assets to loans and foreclosed property		3.55	%		2.17	%		1.13	%
Allowance for loan losses as a percentage of loans receivable		1.56	%		1.35	%		1.25	%
Allowance for loan losses as a percentage of nonperforming assets		43.89	%		62.02	%		110.35	%
Annualized net charge-offs as a percentage of average loans receiveable		1.20	%		0.80	%		0.22	%

30

STELLARONE CORPORATION

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

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.  Confident in its strong capital position, the Company paid or accrued $4.5 million and $744 thousand in common and preferred dividends, respectively, during the six month period ended June 30, 2009.  This exceeded the net loss of $180 thousand by $5.5 million during the six month period.  As previously announced, the Company has reduced its quarterly dividend from $0.16 per share to $0.04 per share, beginning with the dividend paid on May 29, 2009 in an effort to preserve capital.  Management anticipates maintaining this dividend level until earnings conditions improve.  On December 19, 2008, the Company issued 30,000 shares of preferred stock to the U.S. Treasury in exchange for $30 million pursuant to the U.S. Treasury CPP under TARP which further enhanced capital.

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 banks’ financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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.  As of June 30, 2009, the Company and the subsidiary bank met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized.”  There are no conditions or events that management believes have changed the subsidiary bank’s well capitalized position.

The following table includes information with respect to the Company’s risk-based capital and equity levels as of June 30, 2009 (In thousands):

	Corporation			Bank
Tier 1 capital	$	340,224		$	289,361
Tier 2 capital		31,624			31,592
Total risk-based capital		371,848			320,953
Total risk-weighted assets		2,526,583			2,524,052
Average adjusted total assets		2,937,012			2,915,463
Capital ratios:
Tier 1 risk-based capital ratio		13.47	%		11.46	%
Total risk-based capital ratio		14.72	%		12.72	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		11.58	%		9.93	%
Equity to assets ratio		13.15	%		12.70	%
Tangible equity to assets ratio		10.27	%		9.78	%

31

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 at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand.  These events may occur daily or 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, economy of markets served, concentrations of business and industry, competition, and the Company’s overall financial condition.  The Bank’s primary sources of liquidity are cash and the securities in our available for sale portfolio.  In addition, the Bank has substantial lines of credit from its correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.

The liquidity of the Company also represents an important aspect of liquidity management. The 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 loan review functions. It also includes outflows associated with dividends to shareholders. The main sources of funding for the Company are the management fees and dividends it receives from its banking subsidiary, and availability of the subordinated debt security market as deemed necessary. The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.

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, 2008.

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, 2008.

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.

32

STELLARONE CORPORATION

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

Forward Looking Statements

StellarOne Corporation. (the “Company”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “likely,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of the Company to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) continuation of the historically low short-term interest rate environment, (iii) the inability of the Company to continue to grow its loan portfolio, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the development of any new market, (vi) a merger or acquisition, (vii) any activity in the capital markets that would cause the Company to conclude that there was impairment of any asset including intangible assets, (viii) the impact of governmental restrictions on entities participating in the US Treasury Department Capital Purchase Program, (ix) the deterioration in carrying amounts of impaired assets and other real estate and (x) changes in state and Federal legislation, regulations or policies applicable to Banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy. A more detailed description of these and other risks is contained in the Company’s most recent annual report on Form 10-K. Many of such factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. StellarOne Corporation disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.

Access to Filings

The Company provides access to its SEC filings through the corporate Website at http://www.StellarOne.com.  After accessing the Website, the filings are available upon selecting Investor Relations, then the SEC Filings & Other Documents icon.  Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.

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, 2008.

33

STELLARONE CORPORATION

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

ITEM 4 – CONTROLS AND PROCEDURES

We are required to include in our periodic reports information regarding our 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 by us in the reports we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

We have established disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared.  Our 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 our 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 our 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 our period reports.

Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our 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 we review and change our internal controls to reflect changes in our business including acquisition related improvements. There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

34

STELLARONE CORPORATION

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no material legal proceedings to which the Company or any of its subsidiary, 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 are 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 our risk factors as previously disclosed in Part I, Item IA of our Annual Report on Form 10K for the fiscal year ended December 31, 2008.

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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The annual meeting of stockholders of the Company was held on April 28, 2009. 

The following directors were elected for terms expiring in 2012, with the following votes:

	For		Withheld
Beverley E. Dalton		16,661,402		1,904,019
Steven D. Irvin.		16,835,169		1,730,252
H. Wayne Parrish		16,528,105		2,037,316
Charles W. Steger		16,568,088		1,997,333

The amendment to the articles of incorporation to increase the number of authorized shares of common stock to 35,000,000 was approved, with the following votes:

For	Against	Abstain
15,285,334	3,042,491	237,596

In an advisory (non-binding) vote, of the executive compensation disclosed in the proxy statement was approved, with the following votes:

For	Against	Abstain
14,749,497	3,406,728	409,196

ITEM 5. OTHER INFORMATION.

Not applicable.

35

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 Form 8-K filed July 30, 2007.

Exhibit No. 3.1 Articles of Incorporation of StellarOne Corporation (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 28, 2008)

Exhibit No. 3.1(a) Articles of Amendment to the Articles of Incorporation, effective December 19, 2008, establishing Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to Form 8-K filed on December 23, 2008)

Exhibit No. 3.1(b) Articles of Amendment to the Articles of Incorporation, effective June 1, 2009, changing the number of authorized shares of capital stock (filed herewith)

Exhibit No. 3.2 Bylaws of StellarOne Corporation, as amended and restated February 28, 2008. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on February 28, 2008)

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.

36

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

August 7, 2009

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar, CPA

Executive Vice President and Chief Financial Officer

August 7, 2009

 37

EX-3.1(B)

Exhibit 3.1(b)

ARTICLES OF AMENDMENT

TO THE ARTICLES OF INCORPORATION OF

STELLARONE CORPORATION

1.             Name.  The name of the corporation is StellarOne Corporation (the “Corporation”).

2.             Text of Amendment.  Section 1 of Article III to the Articles of Incorporation of the Corporation is hereby amended to read as follows in order to change the number of authorized shares of the Corporation’s common stock and thereby the number of authorized shares of the Corporation:

Section 1. The total number of shares of capital stock that the Corporation shall have authority to issue is 40,000,000, of which 35,000,000 shares shall be shares of common stock, par value $1.00 per share (“Common Stock”), and 5,000,000 shares shall be shares of preferred stock, no par value per share (“Preferred Stock”).

3.             Board Adoption and Shareholder Approval.  The amendment referenced in paragraph 2 of these Articles of Amendment was adopted on February 24, 2009 by the Corporation’s Board of Directors and recommended and submitted to the holders of the voting common stock of the Corporation, the only class of voting capital stock outstanding, at the Corporation’s annual meeting of shareholders called and held in accordance with the Virginia Stock Corporation Act on April 28, 2009.  As of the record date of that meeting, 22,684,505 shares of the Corporation’s voting common stock were issued and outstanding and entitled to vote.  At that meeting, 15,285,334 undisputed shares were voted in favor of the amendment, 237,596 shares abstained, and 3,042,491 shares were voted against the amendment.  This represented approval by 67.4% of the total shares of voting common stock issued and outstanding and was sufficient for approval by the Corporation’s shareholders.

4.             Effective Date.  The Certificate of Amendment to be issued as a result of the filing of these Articles shall become effective as of 9:00 a.m. on June 1, 2009.

[signature on following page]

Dated:	May 26, 2009	STELLARONE CORPORATION
		By:	/s/ Jeffrey W. Farrar
			Jeffrey W. Farrar
			Executive Vice President
			and Chief Financial Officer

EX-31.1

CERTIFICATIONS

Exhibit 31.1

I, O. R. Barham, Jr., certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of StellarOne Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009

/s/ O. R. Barham, Jr.

O. R. Barham, Jr.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Jeffrey W. Farrar, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of StellarOne Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009

/s/ Jeffrey W. Farrar

Jeffrey W. Farrar

Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

Pursuant to §Sec. 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350)

The undersigned, as the Chief Executive Officer and Chief Financial Officer of StellarOne Corporation, respectively, certify that the Quarterly Report on Form 10-Q for the period ended June 30, 2009, which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of StellarOne Corporation at the dates and for the periods indicated.  The foregoing certification is made pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350), and no purchaser or seller of securities or any other person shall be entitled to rely upon the foregoing certification for any purpose.  The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

Date: August 7, 2009

/s/ O. R. Barham, Jr.

President and Chief Executive Officer

/s/ Jeffrey W. Farrar

Executive Vice President and Chief Financial Officer