##### Table of Contents



US Securities and Exchange Commission
 Washington, DC 20549
 Form 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2006
 Commission File Number 0001366367
 Yadkin Valley Financial Corporation
 (Exact name of registrant specified in its charter)
 North Carolina
    
    20-4495993(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 209 North Bridge Street, Elkin, North Carolina 28621
(address of principal executive offices)
 336-526-6300
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-12Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12-19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20Part II. Other InformationItem 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    20Item 6. Exhibit Index
    
    
    20Signatures
    
    
    21Exhibits
    
    
    22-24EX-31.1EX-31.2EX-32.1
  
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    2005*ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    35,948,131
    
    
    $
    37,690,917Federal funds sold
    
    
    15,769,000
    
    
    
    3,460,000Interest-bearing deposits
    
    
    3,250,375
    
    
    
    14,342,570Total cash and cash equivalents
    
    
    54,967,506
    
    
    
    55,493,487SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $129,736,685 in 2006 and $115,179,002
in 2005)
    
    
    128,485,551
    
    
    
    113,716,460LOANS  Less allowance for loan losses of $10,614,970
in 2006 and $9,473,615 in 2005
    
    
    768,459,621
    
    
    
    728,056,390LOANS HELD FOR SALE
    
    
    41,161,261
    
    
    
    31,426,729ACCRUED INTEREST RECEIVABLE
    
    
    5,480,979
    
    
    
    4,802,890PREMISES AND EQUIPMENT, NET
    
    
    27,257,796
    
    
    
    27,373,055FEDERAL HOME LOAN BANK STOCK, AT COST
    
    
    4,343,600
    
    
    
    4,298,000INVESTMENT IN BANK-OWNED LIFE INSURANCE
    
    
    22,549,223
    
    
    
    16,598,498GOODWILL
    
    
    32,136,183
    
    
    
    32,136,183CORE DEPOSIT INTANGIBLE (net of accumulated
amortization of $3,244,331 in 2006 and $2,628,683 in
2005)
    
    
    5,235,177
    
    
    
    5,850,825OTHER ASSETS
    
    
    4,041,901
    
    
    
    4,541,987TOTAL
    
    $
    1,094,118,798
    
    
    $
    1,024,294,504LIABILITIES AND STOCKHOLDERS EQUITYDEPOSITSNoninterest-bearing demand deposits
    
    $
    148,246,370
    
    
    $
    135,911,821Interest-bearing deposits:NOW, savings, and money market accounts
    
    
    223,205,126
    
    
    
    251,422,817Time certificates:Over $100,000
    
    
    207,643,142
    
    
    
    170,573,819Other
    
    
    287,087,026
    
    
    
    256,444,131Total deposits
    
    
    866,181,664
    
    
    
    814,352,588BORROWED FUNDS
    
    
    99,009,586
    
    
    
    85,989,712ACCRUED INTEREST PAYABLE
    
    
    2,725,284
    
    
    
    1,815,805OTHER LIABILITIES
    
    
    4,612,774
    
    
    
    5,813,502TOTAL LIABILITIES
    
    
    972,529,308
    
    
    
    907,971,607STOCKHOLDERS EQUITYCommon stock, $1.00 par value; authorized 20,000,000
shares; issued 10,609,668 shares in 2006 and 10,680,061
shares in 2005
    
    
    10,609,668
    
    
    
    10,680,061Surplus
    
    
    71,180,248
    
    
    
    71,993,212Retained earnings
    
    
    40,573,986
    
    
    
    34,554,032Accumulated other comprehensive loss
    
    
    (774,412
    )
    
    
    (904,408
    )Total stockholders equity
    
    
    121,589,490
    
    
    
    116,322,897TOTAL
    
    $
    1,094,118,798
    
    
    $
    1,024,294,504
  
 *
    
    Derived from audited consolidated financial statements 
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005INTEREST INCOMEInterest and fees on loans
    
    $
    15,993,036
    
    
    $
    12,712,874
    
    
    $
    45,247,953
    
    
    $
    35,284,681Interest on federal funds sold
    
    
    70,412
    
    
    
    32,956
    
    
    
    135,794
    
    
    
    79,860Interest on securities:Taxable
    
    
    1,095,078
    
    
    
    741,801
    
    
    
    2,948,670
    
    
    
    2,291,300Non-taxable
    
    
    275,520
    
    
    
    279,624
    
    
    
    847,380
    
    
    
    794,056Interest-bearing deposits
    
    
    19,550
    
    
    
    32,195
    
    
    
    71,150
    
    
    
    72,140Total interest income
    
    
    17,453,596
    
    
    
    13,799,450
    
    
    
    49,250,947
    
    
    
    38,522,036INTEREST EXPENSETime deposits of $100,000 or more
    
    
    2,358,500
    
    
    
    1,277,893
    
    
    
    6,000,723
    
    
    
    3,185,005Other deposits
    
    
    4,066,384
    
    
    
    2,881,400
    
    
    
    10,931,392
    
    
    
    7,791,140Borrowed funds
    
    
    639,459
    
    
    
    841,218
    
    
    
    1,821,464
    
    
    
    2,210,187Total interest expense
    
    
    7,064,342
    
    
    
    5,000,511
    
    
    
    18,753,579
    
    
    
    13,186,332NET INTEREST INCOME
    
    
    10,389,254
    
    
    
    8,798,940
    
    
    
    30,497,368
    
    
    
    25,335,705PROVISION FOR LOAN LOSSES
    
    
    525,000
    
    
    
    498,000
    
    
    
    1,640,000
    
    
    
    1,262,000NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    9,864,254
    
    
    
    8,300,940
    
    
    
    28,857,368
    
    
    
    24,073,705NONINTEREST INCOMEService charges on deposit accounts
    
    
    976,648
    
    
    
    946,592
    
    
    
    2,778,488
    
    
    
    2,683,574Other service fees
    
    
    970,513
    
    
    
    873,990
    
    
    
    2,539,040
    
    
    
    2,339,012Net gain on sales of mortgage loans
    
    
    1,686,130
    
    
    
    1,603,368
    
    
    
    4,369,889
    
    
    
    3,875,517Net gain on sales of investment securities
    
    
    
    
    
    
    10,349
    
    
    
    18,724
    
    
    
    11,588Income on investment in bank owned life
insurance
    
    
    159,000
    
    
    
    146,503
    
    
    
    450,725
    
    
    
    434,417Mortgage banking income
    
    
    50,352
    
    
    
    82,968
    
    
    
    178,257
    
    
    
    295,862Other income
    
    
    83,123
    
    
    
    23,866
    
    
    
    222,826
    
    
    
    207,748Total noninterest income
    
    
    3,925,766
    
    
    
    3,687,637
    
    
    
    10,557,949
    
    
    
    9,847,717NONINTEREST EXPENSESalaries and employee benefits
    
    
    4,897,747
    
    
    
    4,494,696
    
    
    
    14,022,227
    
    
    
    12,812,276Occupancy and equipment expenses
    
    
    1,030,115
    
    
    
    837,950
    
    
    
    2,901,060
    
    
    
    2,387,541Printing and supplies
    
    
    170,536
    
    
    
    165,904
    
    
    
    464,213
    
    
    
    508,739Data processing
    
    
    97,667
    
    
    
    197,507
    
    
    
    303,756
    
    
    
    557,660Amortization of core deposit intangible
    
    
    200,789
    
    
    
    210,749
    
    
    
    615,648
    
    
    
    645,530Other
    
    
    1,815,301
    
    
    
    1,735,039
    
    
    
    5,732,938
    
    
    
    4,846,976Total noninterest expense
    
    
    8,212,154
    
    
    
    7,641,845
    
    
    
    24,039,842
    
    
    
    21,758,722INCOME BEFORE INCOME TAXES
    
    
    5,577,866
    
    
    
    4,346,731
    
    
    
    15,375,475
    
    
    
    12,162,700INCOME TAXES
    
    
    1,940,764
    
    
    
    1,411,555
    
    
    
    5,390,348
    
    
    
    3,957,493NET INCOME
    
    $
    3,637,102
    
    
    $
    2,935,176
    
    
    $
    9,985,127
    
    
    $
    8,205,207NET INCOME PER COMMON SHARE:Basic
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.94
    
    
    $
    0.77Diluted
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.93
    
    
    $
    0.76CASH DIVIDENDS PER COMMON SHARE
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.35
    
    
    $
    0.32
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NET INCOME
    
    $
    3,637,102
    
    
    $
    2,935,176
    
    
    $
    9,985,127
    
    
    $
    8,205,207OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:Unrealized holding gains (losses) on securities available for sale
    
    
    1,167,896
    
    
    
    (215,703
    )
    
    
    230,133
    
    
    
    (1,315,725
    )Tax effect
    
    
    (449,661
    )
    
    
    83,046
    
    
    
    (88,622
    )
    
    
    506,561Unrealized holding gains (losses) on securities available for sale, net of tax
    
    
    718,235
    
    
    
    (132,657
    )
    
    
    141,511
    
    
    
    (809,164
    )Reclassification adjustment for realized (gains) losses
    
    
    
    
    
    
    (10,349
    )
    
    
    (18,724
    )
    
    
    (11,588
    )Tax effect
    
    
    
    
    
    
    3,984
    
    
    
    7,209
    
    
    
    4,461Reclassification adjustment for realized (gains) losses, net of tax
    
    
    
    
    
    
    (6,365
    )
    
    
    (11,515
    )
    
    
    (7,127
    )OTHER COMPREHENSIVE INCOME(LOSS), NET OF TAX
    
    
    718,235
    
    
    
    (139,022
    )
    
    
    129,996
    
    
    
    (816,291
    )COMPREHENSIVE INCOME
    
    $
    4,355,337
    
    
    $
    2,796,154
    
    
    $
    10,115,123
    
    
    $
    7,388,916
  
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    9,985,127
    
    
    $
    8,205,207Adjustments to reconcile net income to net cash provided by
operating activities:Net amortization of premiums on investment securities
    
    
    304,705
    
    
    
    474,687Provision for loan losses
    
    
    1,640,000
    
    
    
    1,262,000Net gain on sales of mortgage loans held for sale
    
    
    (4,369,889
    )
    
    
    (3,875,517
    )Net gain on sales of available for sale securities
    
    
    (18,724
    )
    
    
    (11,588
    )Increase in income on investment in Bank owned life insurance
    
    
    (450,725
    )
    
    
    (434,417
    )Depreciation and amortization
    
    
    1,482,208
    
    
    
    1,137,824Net loss on sale of premises and equipment
    
    
    47,860
    
    
    
    9,633Amortization of core deposit intangible
    
    
    615,648
    
    
    
    645,530Originations of mortgage loans held-for-sale
    
    
    (639,451,109
    )
    
    
    (253,631,847
    )Proceeds from sales of mortgage loans
    
    
    634,086,466
    
    
    
    258,739,550Decrease in accrued interest receivable
    
    
    (678,089
    )
    
    
    (146,059
    )Increase (decrease) in other assets
    
    
    500,086
    
    
    
    (158,654
    )Increase in accrued interest payable
    
    
    909,479
    
    
    
    585,606(Decrease) increase in other liabilities
    
    
    (1,282,139
    )
    
    
    1,395,776Net cash provided by operating activities
    
    
    3,320,904
    
    
    
    14,197,731CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available for sale securities
    
    
    (34,982,611
    )
    
    
    (20,001,039
    )Proceeds from sales of available for sale securities
    
    
    6,828,948
    
    
    
    20,133,298Proceeds from maturities of available for sale securities
    
    
    13,310,000
    
    
    
    Net change in loans
    
    
    (42,043,231
    )
    
    
    (31,779,869
    )Purchases of premises and equipment
    
    
    (1,443,339
    )
    
    
    (4,785,975
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    2,110,500
    
    
    
    819,000Purchases of Federal Home Loan Bank stock
    
    
    (2,156,100
    )
    
    
    (181,300
    )Proceeds from sale of premises and equipment
    
    
    28,531
    
    
    
    10,520Investment in bank owned life insurance policies
    
    
    (5,500,000
    )
    
    
    Net cash used in investing activities
    
    
    (63,847,302
    )
    
    
    (35,785,365
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in checking, NOW, money market
and savings accounts
    
    
    (15,883,143
    )
    
    
    (8,986,072
    )Net increase in time certificates
    
    
    67,712,218
    
    
    
    65,853,758Net increase (decrease) in borrowed funds
    
    
    13,019,874
    
    
    
    (24,622,674
    )Purchases of common stock
    
    
    (1,181,295
    )
    
    
    (235,520
    )Dividends paid
    
    
    (3,724,405
    )
    
    
    (3,419,970
    )Retired fractional shares
    
    
    
    
    
    
    (1,552
    )Payment of stock appreciation rights
    
    
    
    
    
    
    (26,826
    )Proceeds from exercise of stock options
    
    
    57,168
    
    
    
    141,159Net cash provided by financing activities
    
    
    60,000,418
    
    
    
    28,702,303NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (525,981
    )
    
    
    7,114,669CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    55,493,487
    
    
    
    32,314,157End of period
    
    $
    54,967,506
    
    
    $
    39,428,826
  
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Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. Stock-based Compensation
   
 7




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Three Months
    
    Nine MonthsEnded Sept. 30,
    
    Ended Sept. 30,2005
    
    2005Net Income: as reported
    
    $
    2,935,176
    
    
    $
    8,205,207Deduct  total stock based
compensation determined under fair
value method for all awards
    
    
    (30,039
    )
    
    
    (89,931
    )Pro forma   for SFAS No. 123
    
    $
    2,905,137
    
    
    $
    8,115,276Basic Earnings per share: as reported
    
    $
    0.27
    
    
    $
    0.77Pro forma  for SFAS No. 123
    
    $
    0.27
    
    
    $
    0.76Diluted Earnings per share: as reported
    
    $
    0.27
    
    
    $
    0.76Pro forma  for SFAS No. 123
    
    $
    0.27
    
    
    $
    0.75
 
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##### Table of Contents



3. Acquisition of Sidus Financial, LLC
   Fair ValueAssets:Cash and cash equivalents
    
    $
    498,976Loans, net
    
    
    22,947,443Other tangible assets acquired
    
    
    560,447Goodwill
    
    
    4,383,155Liabilities:Other liabilities
    
    
    (21,006,866
    )Total net assets acquired/consideration given
    
    $
    7,383,155
  4. Commitments and Contingencies
   
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##### Table of Contents



5. Earnings per share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic EPS denominator:Weighted average
number of common
shares outstanding
    
    
    10,635,205
    
    
    
    10,690,369
    
    
    
    10,651,998
    
    
    
    10,685,259Dilutive effect
arising from assumed
exercise of stock
options
    
    
    147,889
    
    
    
    140,897
    
    
    
    139,447
    
    
    
    144,838Diluted EPS denominator
    
    
    10,783,094
    
    
    
    10,831,266
    
    
    
    10,791,445
    
    
    
    10,830,097
  6. Stockholders Equity
    7. Business Segment Information
  
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##### Table of Contents



September 30, 2006
 Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    47,722,281
    
    
    $
    1,721,398
    
    
    $
    (192,732
    )
    
    $
    49,250,947Interest expense
    
    
    17,569,247
    
    
    
    1,377,064
    
    
    
    (192,732
    )
    
    
    18,753,579Net interest income
    
    
    30,153,034
    
    
    
    344,334
    
    
    
    
    
    
    
    30,497,368Provision for loan losses
    
    
    1,640,000
    
    
    
    
    
    
    
    
    
    
    
    1,640,000Net interest income after
provision
for loan losses
    
    
    28,513,034
    
    
    
    344,334
    
    
    
    
    
    
    
    28,857,368Net gain (loss) on sale
of investment
Securities
    
    
    18,724
    
    
    
    
    
    
    
    
    
    
    
    18,724Other income
    
    
    6,163,034
    
    
    
    4,376,191
    
    
    
    
    
    
    
    10,539,225Other expense
    
    
    20,138,715
    
    
    
    3,853,314
    
    
    
    47,813
    
    
    
    24,039,842Income before income taxes
    
    
    14,556,077
    
    
    
    867,211
    
    
    
    (47,813
    )
    
    
    15,375,475Income taxes (2)
    
    
    5,056,471
    
    
    
    333,877
    
    
    
    
    
    
    
    5,390,348Net income
    
    $
    9,499,606
    
    
    $
    533,334
    
    
    $
    (47,813
    )
    
    $
    9,985,127Total assets
    
    $
    1,109,386,409
    
    
    $
    47,247,782
    
    
    $
    (62,515,393
    )
    
    $
    1,094,118,798Net loans
    
    
    768,459,621
    
    
    
    
    
    
    
    
    
    
    
    768,459,621Loans held for sale
    
    
    
    
    
    
    41,161,261
    
    
    
    
    
    
    
    41,161,261Goodwill
    
    
    32,136,183
    
    
    
    4,383,155
    
    
    
    (4,383,155
    )
    
    
    32,136,183
 September 30, 2005
 Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    37,112,975
    
    
    $
    1,622,341
    
    
    $
    (213,279
    )
    
    $
    38,522,037Interest expense
    
    
    12,298,404
    
    
    
    1,101,207
    
    
    
    (213,279
    )
    
    
    13,186,332Net interest income
    
    
    24,814,571
    
    
    
    521,134
    
    
    
    
    
    
    
    25,335,705Provision for loan losses
    
    
    1,262,000
    
    
    
    
    
    
    
    
    
    
    
    1,262,000Net interest income after
provision
for loan losses
    
    
    23,552,571
    
    
    
    521,134
    
    
    
    
    
    
    
    24,073,705Net gain (loss) on sale
of investment
Securities
    
    
    11,588
    
    
    
    
    
    
    
    
    
    
    
    11,588Other income
    
    
    5,957,061
    
    
    
    3,879,068
    
    
    
    
    
    
    
    9,836,129Other expense
    
    
    18,435,335
    
    
    
    3,323,387
    
    
    
    
    
    
    
    21,758,722Income before income taxes
    
    
    11,085,885
    
    
    
    1,076,815
    
    
    
    
    
    
    
    12,162,700Income taxes (2)
    
    
    3,542,919
    
    
    
    414,574
    
    
    
    
    
    
    
    3,957,493Net income
    
    $
    7,542,966
    
    
    $
    662,241
    
    
    
    
    
    
    $
    8,205,207Total assets (3)
    
    $
    1,014,191,797
    
    
    $
    45,278,017
    
    
    $
    (62,117,957
    )
    
    $
    997,351,857Net loans
    
    
    709,208,849
    
    
    
    
    
    
    
    
    
    
    
    709,208,849Loans held for sale
    
    
    564,550
    
    
    
    39,809,835
    
    
    
    
    
    
    
    40,374,385Goodwill
    
    
    31,672,131
    
    
    
    3,919,103
    
    
    
    (3,919,103
    )
    
    
    31,672,131
 
 (1)
    
    Note: The Bank allocates interest expense to Sidus based on the Banks cost of funds plus an
additional charge of 87.5 basis points. The additional basis points charge, reflected in interest
income to the Bank and interest expense to Sidus, is eliminated in the Other column. 
 11




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(2)
    
    Note: Income tax expense has been allocated to the Sidus business segment for comparative
purposes. As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which
is taxed on that income.(3)
    
    Note: Asset eliminations represent the Banks Due from Sidus account ($55,000,000 in 2005 and
2006), the Banks Investment in Sidus ($3,000,000 in 2005 and 2006), the Banks A/R from Sidus
($198,854 in 2005 and $134,699 in 2006), and Sidus Goodwill account ($3,919,103 in 2005 and
$4,383,155 in 2006) and Holding Company assets ($2,461 in 2006).
 8. Reclassifications
  Part I. Financial Information
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Changes in Financial Position
   
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Liquidity, Interest Rate Sensitivity and Market Risk
   
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Results of Operations
    Net Interest Income
  
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Average Balance Sheets and Net Interest Income Analysis
(Dollars in Thousands)
 September 30, 2006
    
    
    September 30, 2005Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Unaudited)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateNine Months Ended:INTEREST EARNING ASSETSFederal funds sold
    
    $
    3,674
    
    
    $
    136
    
    
    
    4.95
    %
    
    $
    3,504
    
    
    $
    80
    
    
    
    3.05
    %Interest bearing deposits
    
    
    2,270
    
    
    
    71
    
    
    
    4.18
    %
    
    
    3,341
    
    
    
    72
    
    
    
    2.88
    %Investment securities (1)
    
    
    122,725
    
    
    
    4,173
    
    
    
    4.55
    %
    
    
    111,069
    
    
    
    3,434
    
    
    
    4.13
    %Total loans (1,2)
    
    
    794,979
    
    
    
    45,342
    
    
    
    7.63
    %
    
    
    735,195
    
    
    
    35,284
    
    
    
    6.42
    %Total average earning assets (1)
    
    
    923,648
    
    
    
    49,722
    
    
    
    7.20
    %
    
    
    835,109
    
    
    
    38,870
    
    
    
    6.09
    %Noninterest earning assets
    
    
    118,669
    
    
    
    
    
    
    
    
    
    
    
    117,998Total average assets
    
    $
    1,042,317
    
    
    
    
    
    
    
    
    
    
    $
    971,107INTEREST BEARING LIABILITIESNOW and money market
    
    $
    187,234
    
    
    $
    2,792
    
    
    
    1.99
    %
    
    $
    210,503
    
    
    $
    2,322
    
    
    
    1.47
    %Savings
    
    
    39,872
    
    
    
    298
    
    
    
    1.00
    %
    
    
    43,811
    
    
    
    353
    
    
    
    1.08
    %Time certificates
    
    
    456,409
    
    
    
    13,842
    
    
    
    4.05
    %
    
    
    364,300
    
    
    
    8,301
    
    
    
    3.05
    %Total interest bearing deposits
    
    
    683,515
    
    
    
    16,932
    
    
    
    3.31
    %
    
    
    618,614
    
    
    
    10,976
    
    
    
    2.37
    %Repurchase agreements sold
    
    
    30,573
    
    
    
    650
    
    
    
    2.84
    %
    
    
    33,895
    
    
    
    511
    
    
    
    2.02
    %Borrowed funds
    
    
    47,673
    
    
    
    1,172
    
    
    
    3.29
    %
    
    
    72,222
    
    
    
    1,699
    
    
    
    3.15
    %Total interest bearing liabilities
    
    
    761,761
    
    
    
    18,754
    
    
    
    3.29
    %
    
    
    724,731
    
    
    
    13,186
    
    
    
    2.43
    %Noninterest bearing deposits
    
    
    146,012
    
    
    
    
    
    
    
    
    
    
    
    121,657Stockholders equity
    
    
    118,637
    
    
    
    
    
    
    
    
    
    
    
    113,885Other liabilities
    
    
    15,907
    
    
    
    
    
    
    
    
    
    
    
    10,834Total average liabilities and
stockholders equity
    
    $
    1,042,317
    
    
    
    
    
    
    
    
    
    
    $
    971,107NET INTEREST INCOME/
YIELD (3,4)
    
    
    
    
    
    $
    30,968
    
    
    
    4.48
    %
    
    
    
    
    
    $
    25,684
    
    
    
    4.02
    %INTEREST SPREAD (5)
    
    
    
    
    
    
    
    
    
    
    3.91
    %
    
    
    
    
    
    
    
    
    
    
    3.66
    %
 
 1.
    
    Yields related to securities and loans exempt from Federal income taxes are stated on a fully tax equivalent
basis, assuming a Federal income tax rate of 34%, reduced by the nondeductible portion of interest expense2.
    
    The loan average includes loans on which accrual of interest has been discontinued.3.
    
    Net interest income is the difference between income from earning assets and interest expense.4.
    
    Net interest yield is net interest income divided by total average earning assets.5.
    
    Interest spread is the difference between the average interest rate received on earning assets and the average
rate paid on interest bearing liabilities. 
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Provisions and Allowance for Loan Losses
   Noninterest Income
    
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Noninterest Expense
   
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Income Tax Expense
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
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Item 4. Controls and Procedures
  
 Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Numberof Shares
    
    
    Maximum NumberPurchased as
    
    
    of Shares ThatTotal Number
    
    
    Average Price
    
    
    Part of
    
    
    May Yet Beof Shares
    
    
    Paid per
    
    
    Publicly
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    Share
    
    
    Announced Program
    
    
    the Program(1)July 1, 2006 to July 31, 2006
    
    
    7,500
    
    
    $
    15.15
    
    
    
    7,500
    
    
    
    92,500August 1, 2006 to August 31, 2006
    
    
    12,593
    
    
    
    15.49
    
    
    
    12,593
    
    
    
    79,907September 1, 2006 to September 30, 2006
    
    
    22,911
    
    
    
    15.56
    
    
    
    22,911
    
    
    
    56,996Total
    
    
    43,004
    
    
    $
    15.47
    
    
    
    43,004
 
 (1)
    
    The Companys stock repurchase program, as
approved by shareholders effective May 2005, allowed
for repurchase of up to 300,000 shares until April
30, 2006. As of June 30, 2006, 35,562 shares had
been repurchased at a total cost of $516,034.
Effective June 2006, the Board approved the
repurchase of up to 100,000 shares until April 30,
2007. There were 43,004 shares purchased under the
new 2006 plan. 
 Item 6. Exhibits
 Exhibit #
    
    Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certification
 
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BY:
    
    /s/ William A. LongWilliam A. Long, President and Chief Executive OfficerBY:
    
    /s/ Edwin E. LawsEdwin E. Laws, Chief Financial Officer
  
 21