##### 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 March 31, 2011
 Commission File Number 000-52099
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
 o o




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the Three Months Ended March 31, 2011 and 2010
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
March 31, 2011 and December 31, 2010
    
    
    2Condensed Consolidated Statements of Income (Loss)
Three Months Ended March 31, 2011 and 2010
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2011 and 2010
    
    
    4Condensed Consolidated Statement of Shareholders Equity
Three Months Ended March 31, 2011 and 2010
    
    
    5Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2011 and 2010
    
    
    6-7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8-36Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    37-46Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    47Part II. Other InformationItem 1. Legal Proceedings
    
    
    48Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 5.
Other Information
    
    
    48Item 6. Exhibit Index
    
    
    49Signatures
    
    
    50Exhibits
    
    
    51-53EX-31.1EX-31.2EX-32
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 As of March 31,
2011 and December 31, 2010
 March 31,
    
    
    December 31,*2011
    
    
    2010(Amounts in thousands, except share data)ASSETSCash and due from banks
    
    $
    31,537
    
    
    $
    31,967Federal funds sold
    
    
    50
    
    
    
    31Interest-bearing deposits
    
    
    188,003
    
    
    
    197,782Securities available-for-sale at fair value
(amortized cost $299,936 in 2011 and $297,086 in 2010)
    
    
    301,529
    
    
    
    298,002Gross loans
    
    
    1,552,707
    
    
    
    1,600,539Less: allowance for loan
losses
    
    
    35,860
    
    
    
    37,752Net loans
    
    
    1,516,847
    
    
    
    1,562,787Loans held-for-sale
    
    
    32,880
    
    
    
    50,419Accrued interest receivable
    
    
    7,515
    
    
    
    7,947Premises and equipment, net
    
    
    46,245
    
    
    
    45,970Foreclosed real estate
    
    
    27,461
    
    
    
    25,582Federal Home Loan Bank stock, at cost
    
    
    9,416
    
    
    
    9,416Investment in bank-owned life insurance
    
    
    25,441
    
    
    
    25,278Goodwill
    
    
    4,944
    
    
    
    4,944Core deposit intangible (net of accumulated amortization of $7,920
in 2011 and $7,615 in 2010)
    
    
    4,602
    
    
    
    4,907Other assets
    
    
    34,421
    
    
    
    35,562Total Assets
    
    $
    2,230,891
    
    
    $
    2,300,594LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing demand deposits
    
    $
    222,457
    
    
    $
    216,161Interest-bearing deposits:NOW, savings and money market accounts
    
    
    631,791
    
    
    
    589,790Time certificates:$100 or more
    
    
    442,725
    
    
    
    477,030Other
    
    
    662,833
    
    
    
    737,425Total Deposits
    
    
    1,959,806
    
    
    
    2,020,406Short-term borrowings
    
    
    42,458
    
    
    
    44,773Long-term borrowings
    
    
    66,994
    
    
    
    71,995Capital lease obligations
    
    
    2,393
    
    
    
    2,402Accrued interest payable
    
    
    2,811
    
    
    
    3,302Other liabilities
    
    
    9,921
    
    
    
    10,259Total Liabilities
    
    
    2,084,383
    
    
    
    2,153,137Shareholders EquityPreferred stock, no par value, 6,000,000 shares authorized; 49,312
issued and outstanding in 2011 and 2010.
    
    
    46,925
    
    
    
    46,770Common stock, $1 par value, 50,000,000 shares authorized;
16,292,640 issued and outstanding in 2011 and 16,147,640
issued and outstanding in 2010
    
    
    16,293
    
    
    
    16,148Warrants
    
    
    3,581
    
    
    
    3,581Surplus
    
    
    114,540
    
    
    
    114,649Accumulated deficit
    
    
    (35,830
    )
    
    
    (34,273
    )Accumulated other comprehensive income
    
    
    999
    
    
    
    582Total Shareholders Equity
    
    
    146,508
    
    
    
    147,457Total Liabilities and Shareholders Equity
    
    $
    2,230,891
    
    
    $
    2,300,594
 
 *
    
    Derived from audited financial statements  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
 Three Months Ended
March 31, 2011 and 2010
 Three Months Ended March 31,2011
    
    
    2010(Amounts in thousands,except per share data)INTEREST INCOME:Interest and fees on loans
    
    $
    21,349
    
    
    $
    22,958Interest on federal funds sold
    
    
    6
    
    
    
    Interest and dividends on securities:Taxable
    
    
    1,504
    
    
    
    1,209Non-taxable
    
    
    604
    
    
    
    562Interest-bearing deposits
    
    
    115
    
    
    
    61TOTAL INTEREST INCOME
    
    
    23,578
    
    
    
    24,790INTEREST EXPENSETime deposits of $100 or more
    
    
    2,938
    
    
    
    3,361Other time and savings deposits
    
    
    4,380
    
    
    
    4,055Borrowed funds
    
    
    570
    
    
    
    567TOTAL INTEREST EXPENSE
    
    
    7,888
    
    
    
    7,983NET INTEREST INCOME
    
    
    15,690
    
    
    
    16,807PROVISION FOR LOAN LOSSES
    
    
    4,867
    
    
    
    4,384NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    10,823
    
    
    
    12,423NON-INTEREST INCOME:Service charges on deposit accounts
    
    
    1,345
    
    
    
    1,437Other service fees
    
    
    962
    
    
    
    841Net gain on sales and fees of mortgage loans
    
    
    1,899
    
    
    
    1,334Net gain on
sale of securities
    
    
    93
    
    
    
    44Income on investment in bank-owned life insurance
    
    
    163
    
    
    
    207Mortgage banking income
    
    
    207
    
    
    
    56Other than temporary impairment of securities
    
    
    (20
    )
    
    
    (205
    )Other income
    
    
    142
    
    
    
    66TOTAL NON-INTEREST INCOME
    
    
    4,791
    
    
    
    3,780NON-INTEREST EXPENSES:Salaries and employee benefits
    
    
    7,870
    
    
    
    6,663Occupancy and equipment expense
    
    
    2,170
    
    
    
    1,966Printing and supplies
    
    
    181
    
    
    
    274Data processing
    
    
    373
    
    
    
    313Amortization of core deposit intangible
    
    
    305
    
    
    
    334Communications expense
    
    
    445
    
    
    
    459FDIC assessment expense
    
    
    1,350
    
    
    
    830Loan collection fees
    
    
    433
    
    
    
    272Net cost of operation on other real estate owned
    
    
    794
    
    
    
    1,108Franchise taxes
    
    
    381
    
    
    
    Other expenses
    
    
    2,607
    
    
    
    2,313TOTAL NON-INTEREST EXPENSES
    
    
    16,909
    
    
    
    14,532INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,295
    )
    
    
    1,671INCOME TAX EXPENSE (BENEFIT)
    
    
    (509
    )
    
    
    757NET INCOME (LOSS)
    
    
    (786
    )
    
    
    914Preferred stock dividend and accretion of preferred stock discount
    
    
    771
    
    
    
    771NET INCOME (LOSS) TO COMMON SHAREHOLDERS
    
    $
    (1,557
    )
    
    $
    143NET INCOME (LOSS) PER COMMON SHARE:Basic
    
    $
    (0.10
    )
    
    $
    0.01Diluted
    
    $
    (0.10
    )
    
    $
    0.01CASH DIVIDENDS PER COMMON SHARE
    
    $
    
    
    
    $
    
 
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)
 Three Months Ended March 31, 2011 and 2010
 Three Months Ended March 31,2011
    
    
    2010(Amounts in thousands)NET INCOME (LOSS)
    
    $
    (786
    )
    
    $
    914OTHER COMPREHENSIVE INCOME:Unrealized holding gains on securities available-for-sale
    
    
    850
    
    
    
    616Tax effect
    
    
    (327
    )
    
    
    (236
    )Unrealized holding gains on securities available-for-sale,
net of tax amount
    
    
    523
    
    
    
    380Reclassification adjustment for realized gains
    
    
    (173
    )
    
    
    (44
    )Tax effect
    
    
    67
    
    
    
    17Reclassification adjustment for realized gains,
net of tax amount
    
    
    (106
    )
    
    
    (27
    )OTHER COMPREHENSIVE INCOME, NET OF TAX
    
    
    417
    
    
    
    353COMPREHENSIVE INCOME (LOSS)
    
    $
    (369
    )
    
    $
    1,267
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
 Three Months Ended March 31, 2011 and 2010
 Accumulatedother
    
    
    TotalCommon Stock
    
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Stock
    
    
    Warrants
    
    
    Surplus
    
    
    deficit
    
    
    income (loss)
    
    
    equity(Amounts in thousands, except share data)BALANCE, DECEMBER 31,
2009
    
    
    16,129,640
    
    
    
    16,130
    
    
    
    46,152
    
    
    
    3,581
    
    
    
    114,574
    
    
    
    (31,080
    )
    
    
    2,909
    
    
    
    152,266Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    914Restricted stock issued
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    Stock option compensation:stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    (616
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353
    
    
    
    353BALANCE, MARCH 31, 2010
    
    
    16,134,640
    
    
    
    16,135
    
    
    
    46,307
    
    
    
    3,581
    
    
    
    114,588
    
    
    
    (30,937
    )
    
    
    3,262
    
    
    
    152,936BALANCE, DECEMBER 31,
2010
    
    
    16,147,640
    
    
    
    16,148
    
    
    
    46,770
    
    
    
    3,581
    
    
    
    114,649
    
    
    
    (34,273
    )
    
    
    582
    
    
    
    147,457Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (786
    )
    
    
    
    
    
    
    (786
    )Restricted stock issued
    
    
    145,000
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    
    
    
    
    Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    Stock option compensation:stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    (616
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417
    
    
    
    417BALANCE, MARCH 31, 2011
    
    
    16,292,640
    
    
    $
    16,293
    
    
    $
    46,925
    
    
    $
    3,581
    
    
    $
    114,540
    
    
    $
    (35,830
    )
    
    $
    999
    
    
    $
    146,508
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended March 31, 2011 and 2010
 Three Months Ended March 31,2011
    
    
    2010(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (786
    )
    
    $
    914Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Net amortization of premiums on investment securities
    
    
    1,251
    
    
    
    192Provision for loan losses
    
    
    4,867
    
    
    
    4,384Net gain on sales of mortgage loans
    
    
    (1,899
    )
    
    
    (1,334
    )Other than temporary impairment of investments
    
    
    20
    
    
    
    205Increase in cash surrender value of life insurance
    
    
    (163
    )
    
    
    (207
    )Depreciation and amortization
    
    
    730
    
    
    
    766Loss on sale of premises and equipment
    
    
    4
    
    
    
    8Net loss on sale of foreclosed real estate
    
    
    173
    
    
    
    796Gain on sale of available-for-sale securities
    
    
    (93
    )
    
    
    (44
    )Amortization of core deposit intangible
    
    
    305
    
    
    
    334Deferred tax provision
    
    
    8,614
    
    
    
    4,537Stock based compensation expense
    
    
    36
    
    
    
    20Originations of mortgage loans held-for-sale
    
    
    (183,147
    )
    
    
    (171,956
    )Proceeds from sales of mortgage loans
    
    
    202,585
    
    
    
    198,698Decrease in capital lease obligations
    
    
    9
    
    
    
    8(Increase) decrease in accrued interest receivable
    
    
    432
    
    
    
    (83
    )Increase in other assets
    
    
    (7,834
    )
    
    
    (1,605
    )Increase (decrease) in accrued interest payable
    
    
    (491
    )
    
    
    422Decrease in other liabilities
    
    
    (355
    )
    
    
    (2,046
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    24,258
    
    
    
    34,009CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale securities
    
    
    (19,443
    )
    
    
    Proceeds from sales of available-for-sale securities
    
    
    4,562
    
    
    
    154Proceeds from maturities of available-for-sale securities
    
    
    10,953
    
    
    
    10,916Net decrease in loans
    
    
    36,624
    
    
    
    7,923Purchases of premises and equipment
    
    
    (1,009
    )
    
    
    (1,208
    )Proceeds from the sale of foreclosed real estate
    
    
    2,398
    
    
    
    1,776NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    34,085
    
    
    
    19,561CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    $
    48,296
    
    
    $
    13,103Net increase (decrease) in time certificates
    
    
    (108,897
    )
    
    
    74,210Net increase (decrease) in borrowed funds
    
    
    (7,316
    )
    
    
    3,133Dividends paid
    
    
    (616
    )
    
    
    (616
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    (68,533
    )
    
    
    89,830
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)

Three Months Ended March 31, 2011 and 2010
 Three Months Ended March 31,2011
    
    
    2010(Amounts in thousands)NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (10,190
    )
    
    
    143,400CASH AND CASH EQUIVALENTS:Beginning of year
    
    
    229,780
    
    
    
    92,337End of year
    
    $
    219,590
    
    
    $
    235,737SUPPLEMENTARY CASH FLOW INFORMATION:Cash paid for interest
    
    $
    8,496
    
    
    $
    7,863Cash paid for income taxes
    
    $
    26
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NONCASHINVESTING AND FINANCING ACTIVITIES:Transfer from loans to foreclosed real estate
    
    $
    4,449
    
    
    $
    4,884Unrealized gain on investment securities available
for sale, net of tax effect
    
    $
    417
    
    
    $
    353
  
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##### Table of Contents



Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. New Accounting Standards
 Recently Adopted Accounting Standards
   
 8




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##### Table of Contents



3. Stock-based Compensation
     
 9




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##### Table of Contents



4. Investment Securities
  March 31, 2011Unrealized
    
    
    UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amounts in thousands)Available-for-sale securities:Securities of U.S. government
agencies due:After 1 but within 5 years
    
    $
    24,294
    
    
    $
    3
    
    
    $
    35
    
    
    $
    24,26224,294
    
    
    
    3
    
    
    
    35
    
    
    
    24,262Government sponsored agencies:Residential mortgage-backed securities due:After 1 but within 5 years
    
    
    881
    
    
    
    29
    
    
    
    
    
    
    
    910After 5 but within 10 years
    
    
    9,270
    
    
    
    728
    
    
    
    
    
    
    
    9,998After 10 years
    
    
    37,697
    
    
    
    919
    
    
    
    480
    
    
    
    38,13647,848
    
    
    
    1,676
    
    
    
    480
    
    
    
    49,044Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    19,431
    
    
    
    163
    
    
    
    80
    
    
    
    19,514After 10 years
    
    
    138,247
    
    
    
    590
    
    
    
    1,019
    
    
    
    137,818157,678
    
    
    
    753
    
    
    
    1,099
    
    
    
    157,332Private label collateralized mortgage
obligations due:After 5 but within 10 years
    
    
    393
    
    
    
    14
    
    
    
    
    
    
    
    407After 10 years
    
    
    1,293
    
    
    
    
    
    
    
    39
    
    
    
    1,2541,686
    
    
    
    14
    
    
    
    39
    
    
    
    1,661State and municipal securities due:Within 1 year
    
    
    1,942
    
    
    
    6
    
    
    
    
    
    
    
    1,948After 1 but within 5 years
    
    
    8,060
    
    
    
    265
    
    
    
    46
    
    
    
    8,279After 5 but within 10 years
    
    
    20,682
    
    
    
    597
    
    
    
    108
    
    
    
    21,171After 10 years
    
    
    36,633
    
    
    
    602
    
    
    
    543
    
    
    
    36,69267,317
    
    
    
    1,470
    
    
    
    697
    
    
    
    68,090Common and preferred stocks:
    
    
    1,113
    
    
    
    58
    
    
    
    31
    
    
    
    1,1401,113
    
    
    
    58
    
    
    
    31
    
    
    
    1,140Total available-for-sale securities
    
    $
    299,936
    
    
    $
    3,974
    
    
    $
    2,381
    
    
    $
    301,529
 
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##### Table of Contents



December 31, 2010Unrealized
    
    
    UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amounts in thousands)Available-for-sale securities:Securities of U.S. government
agencies due:After 1 but within 5 years
    
    $
    14,547
    
    
    
    6
    
    
    
    3
    
    
    
    14,55014,547
    
    
    
    6
    
    
    
    3
    
    
    
    14,550Government sponsored agencies:Residential mortgage-backed securities due:After 1 but within 5 years
    
    
    1,040
    
    
    
    36
    
    
    
    
    
    
    
    1,076After 5 but within 10 years
    
    
    7,839
    
    
    
    602
    
    
    
    
    
    
    
    8,441After 10 years
    
    
    41,863
    
    
    
    1,132
    
    
    
    437
    
    
    
    42,55850,742
    
    
    
    1,770
    
    
    
    437
    
    
    
    52,075Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    16,063
    
    
    
    165
    
    
    
    57
    
    
    
    16,171After 10 years
    
    
    140,021
    
    
    
    672
    
    
    
    938
    
    
    
    139,755156,084
    
    
    
    837
    
    
    
    995
    
    
    
    155,926Private label collateralized mortgage
obligations due:After 5 but within 10 years
    
    
    406
    
    
    
    17
    
    
    
    
    
    
    
    423After 10 years
    
    
    1,430
    
    
    
    
    
    
    
    148
    
    
    
    1,2821,836
    
    
    
    17
    
    
    
    148
    
    
    
    1,705State and municipal securities due:Within 1 year
    
    
    2,476
    
    
    
    18
    
    
    
    
    
    
    
    2,494After 1 but within 5 years
    
    
    10,680
    
    
    
    327
    
    
    
    53
    
    
    
    10,954After 5 but within 10 years
    
    
    21,348
    
    
    
    413
    
    
    
    236
    
    
    
    21,525After 10 years
    
    
    38,260
    
    
    
    295
    
    
    
    906
    
    
    
    37,64972,764
    
    
    
    1,053
    
    
    
    1,195
    
    
    
    72,622Common and preferred stocks:
    
    
    1,113
    
    
    
    36
    
    
    
    25
    
    
    
    1,1241,113
    
    
    
    36
    
    
    
    25
    
    
    
    1,124Total available-for-sale securities
    
    $
    297,086
    
    
    $
    3,719
    
    
    $
    2,803
    
    
    $
    298,002
  
 11




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##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedMarch 31, 2011
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(Amounts in thousands)Securities available-for-sale:U.S. Government agencies
    
    $
    14,281
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    14,281
    
    
    $
    35Government sponsored agencies:Mortgage-backed securities
    
    
    18,053
    
    
    
    478
    
    
    
    135
    
    
    
    2
    
    
    
    18,188
    
    
    
    480Collateralized mortgage obligations
    
    
    66,905
    
    
    
    1,099
    
    
    
    
    
    
    
    
    
    
    
    66,905
    
    
    
    1,099Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    1,254
    
    
    
    39
    
    
    
    1,254
    
    
    
    39State and municipal securities
    
    
    21,988
    
    
    
    684
    
    
    
    285
    
    
    
    13
    
    
    
    22,273
    
    
    
    697Common and preferred stocks
    
    
    73
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    31Total temporarily impaired securities
    
    $
    121,300
    
    
    $
    2,327
    
    
    $
    1,674
    
    
    $
    54
    
    
    $
    122,974
    
    
    $
    2,381
 
 12




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##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2010
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(Amounts in thousands)Securities available-for-sale:U.S. government agencies
    
    $
    4,569
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    4,569
    
    
    $
    3Government sponsored agencies:Residential mortgage-backed
securities
    
    
    21,637
    
    
    
    435
    
    
    
    136
    
    
    
    2
    
    
    
    21,773
    
    
    
    437Collateralized mortgage obligation
    
    
    76,925
    
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    76,925
    
    
    
    995Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    1,283
    
    
    
    148
    
    
    
    1,283
    
    
    
    148State and municipal securities
    
    
    31,775
    
    
    
    1,174
    
    
    
    276
    
    
    
    21
    
    
    
    32,051
    
    
    
    1,195Common and preferred stocks,
and other
    
    
    79
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    25Total temporarily impaired securities
    
    $
    134,985
    
    
    $
    2,632
    
    
    $
    1,695
    
    
    $
    171
    
    
    $
    136,680
    
    
    $
    2,803
  5. Commitments and Contingencies
   
 13




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##### Table of Contents



6. Earnings Per Common Share
  Three Months EndedMarch 31,2011
    
    
    2010Basic EPS denominator:Weighted average number of
common shares outstanding
    
    
    16,130,529
    
    
    
    16,129,640Dilutive effect arising from assumed
exercise of stock options
    
    
    
    
    
    
    Diluted EPS denominator
    
    
    16,130,529
    
    
    
    16,129,640
  7. Shareholders Equity
   
 14




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##### Table of Contents



8. Derivatives
     
 15




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##### Table of Contents



9. Loans and Allowance for Loan Losses
 General.
  March 31,
    
    
    December 31,2011
    
    
    2010(in thousands)Construction and land development
    
    $
    261,083
    
    
    $
    300,877Commercial real estate:Owner occupied
    
    
    359,720
    
    
    
    309,198Non-owner occupied
    
    
    256,933
    
    
    
    312,231Residential mortgages:1-4 family
    
    
    181,057
    
    
    
    174,536Multifamily
    
    
    30,004
    
    
    
    29,268Home equity lines of credit
    
    
    207,308
    
    
    
    209,319Commercial
    
    
    191,481
    
    
    
    199,696Consumer and other
    
    
    64,639
    
    
    
    65,003Total
    
    
    1,552,225
    
    
    
    1,600,128Less: Net deferred loan origination fees
    
    
    482
    
    
    
    411Allowance for loan losses
    
    
    (35,860
    )
    
    
    (37,752
    )Loans, net
    
    $
    1,516,847
    
    
    $
    1,562,787
 Real Estate Loans.
   
 16




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##### Table of Contents



Commercial Loans.
 Loans to Individuals
 Loan Approvals.
  Credit Review and Evaluation.
  
 17




---



##### Table of Contents



1  Highest Quality-
 2  Good Quality-
 3  Satisfactory-
 4  Satisfactory  Merits Attention-
 5  Watch or Special Mention 
 
 18




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##### Table of Contents



6  Substandard-
 7  Doubtful (also includes any loans over 90 days past due, excluding sold mortgages )-
 8  Loss-
 
 19




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##### Table of Contents



Real Estate Credit Exposure as of March 31, 2011
 Commercial Real EstateNon-owner
    
    
    OwnerConstruction
    
    
    occupied
    
    
    occupied
    
    
    1-4 Family
    
    
    Multifamily
    
    
    Home EquityHigh Quality
    
    $
    
    
    
    $
    
    
    
    $
    130
    
    
    $
    437
    
    
    $
    
    
    
    $
    147Good Quality
    
    
    597
    
    
    
    143
    
    
    
    1,468
    
    
    
    1,864
    
    
    
    
    
    
    
    8,038Satisfactory
    
    
    36,770
    
    
    
    59,710
    
    
    
    117,640
    
    
    
    96,792
    
    
    
    7,851
    
    
    
    131,098Merits Attention
    
    
    114,839
    
    
    
    145,438
    
    
    
    184,687
    
    
    
    59,280
    
    
    
    20,071
    
    
    
    56,798Special Mention
    
    
    47,958
    
    
    
    27,773
    
    
    
    28,144
    
    
    
    8,316
    
    
    
    441
    
    
    
    4,752Substandard
    
    
    27,163
    
    
    
    11,721
    
    
    
    10,152
    
    
    
    5,678
    
    
    
    586
    
    
    
    2,924Doubtful
    
    
    33,756
    
    
    
    12,148
    
    
    
    17,499
    
    
    
    8,690
    
    
    
    1,055
    
    
    
    3,551Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    261,083
    
    
    $
    256,933
    
    
    $
    359,720
    
    
    $
    181,057
    
    
    $
    30,004
    
    
    $
    207,308
 Other Credit Exposures as of March 31, 2011
 ConsumerCommercial
    
    
    and otherHigh Quality
    
    $
    3,800
    
    
    $
    2,765Good Quality
    
    
    6,741
    
    
    
    1,594Satisfactory
    
    
    62,492
    
    
    
    32,578Merits Attention
    
    
    79,361
    
    
    
    25,260Special Mention
    
    
    22,369
    
    
    
    1,247Substandard
    
    
    7,464
    
    
    
    519Doubtful
    
    
    9,254
    
    
    
    676Loss
    
    
    
    
    
    
    $
    191,481
    
    
    $
    64,639
 
 20




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##### Table of Contents



Real Estate Credit Exposure as of December 31, 2010
 Commercial Real EstateNon-owner
    
    
    OwnerConstruction
    
    
    occupied
    
    
    occupied
    
    
    1-4 Family
    
    
    Multifamily
    
    
    Home EquityHigh Quality
    
    $
    
    
    
    $
    
    
    
    $
    132
    
    
    $
    440
    
    
    $
    
    
    
    $
    153Good Quality
    
    
    612
    
    
    
    195
    
    
    
    1,535
    
    
    
    1,924
    
    
    
    
    
    
    
    8,465Satisfactory
    
    
    53,704
    
    
    
    73,825
    
    
    
    98,531
    
    
    
    95,541
    
    
    
    7,964
    
    
    
    132,155Merits Attention
    
    
    124,699
    
    
    
    163,648
    
    
    
    150,494
    
    
    
    55,300
    
    
    
    19,922
    
    
    
    57,513Special Mention
    
    
    49,369
    
    
    
    37,018
    
    
    
    27,478
    
    
    
    6,966
    
    
    
    90
    
    
    
    4,938Substandard
    
    
    37,798
    
    
    
    24,219
    
    
    
    15,132
    
    
    
    7,117
    
    
    
    311
    
    
    
    3,012Doubtful
    
    
    34,695
    
    
    
    13,326
    
    
    
    15,896
    
    
    
    7,248
    
    
    
    981
    
    
    
    3,083Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    300,877
    
    
    $
    312,231
    
    
    $
    309,198
    
    
    $
    174,536
    
    
    $
    29,268
    
    
    $
    209,319
 Other Credit Exposures as of December 31, 2010
 ConsumerCommercial
    
    
    and otherHigh Quality
    
    $
    5,005
    
    
    $
    1,952Good Quality
    
    
    6,620
    
    
    
    1,589Satisfactory
    
    
    63,472
    
    
    
    34,841Merits Attention
    
    
    78,188
    
    
    
    24,424Special Mention
    
    
    31,311
    
    
    
    1,224Substandard
    
    
    6,391
    
    
    
    311Doubtful
    
    
    8,709
    
    
    
    662Loss
    
    
    
    
    
    
    $
    199,696
    
    
    $
    65,003
 Nonaccrual loans and past due loans
  
 21




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##### Table of Contents



March 31, 2011
    
    
    December 31, 2010(in thousands)Financing Receivables on Nonaccrual statusConstruction
    
    $
    28,001
    
    
    $
    25,833Commercial Real Estate:Non-owner occupied
    
    
    11,013
    
    
    
    10,767Owner occupied
    
    
    14,738
    
    
    
    12,829Mortgages:1-4 Family first lien
    
    
    8,627
    
    
    
    7,889Multifamily
    
    
    1,040
    
    
    
    967Home Equity lines of credit
    
    
    3,537
    
    
    
    3,068Commercial
    
    
    3,821
    
    
    
    3,420Consumer and other
    
    
    591
    
    
    
    627Total
    
    $
    71,368
    
    
    $
    65,400
  
 22




---



##### Table of Contents



30-59 Days
    
    
    60-89 Days
    
    
    Greater Than
    
    
    Total PastPast Due
    
    
    Past Due
    
    
    90 Days
    
    
    Due
    
    
    Current
    
    
    Total Loans(in Thousands)March 31, 2011Construction
    
    $
    6,160
    
    
    $
    4,128
    
    
    $
    11,426
    
    
    $
    21,714
    
    
    $
    239,369
    
    
    $
    261,083Commercial real estate:Non-owner occupied
    
    
    2,693
    
    
    
    497
    
    
    
    3,049
    
    
    
    6,239
    
    
    
    250,694
    
    
    
    256,933Owner occupied commercial
    
    
    4,703
    
    
    
    1,408
    
    
    
    5,448
    
    
    
    11,559
    
    
    
    348,161
    
    
    
    359,720Commercial
    
    
    2,688
    
    
    
    728
    
    
    
    500
    
    
    
    3,916
    
    
    
    187,565
    
    
    
    191,481Mortgages:Secured 1-4 family- first lien
    
    
    3,519
    
    
    
    2,060
    
    
    
    5,154
    
    
    
    10,733
    
    
    
    170,324
    
    
    
    181,057Multifamily
    
    
    31
    
    
    
    17
    
    
    
    216
    
    
    
    264
    
    
    
    29,740
    
    
    
    30,004Open ended secured 1-4 family
    
    
    172
    
    
    
    581
    
    
    
    1,930
    
    
    
    2,683
    
    
    
    204,625
    
    
    
    207,308Consumer and other
    
    
    487
    
    
    
    49
    
    
    
    183
    
    
    
    719
    
    
    
    63,920
    
    
    
    64,639Total
    
    $
    20,453
    
    
    $
    9,468
    
    
    $
    27,906
    
    
    $
    57,827
    
    
    $
    1,494,398
    
    
    $
    1,552,225
 (in Thousands)December 31, 2010Construction
    
    $
    5,747
    
    
    $
    3,951
    
    
    $
    11,542
    
    
    $
    21,240
    
    
    $
    279,637
    
    
    $
    300,877Commercial real estate:Non-owner occupied
    
    
    1,616
    
    
    
    722
    
    
    
    530
    
    
    
    2,868
    
    
    
    309,363
    
    
    
    312,231Owner occupied commercial
    
    
    5,814
    
    
    
    1,635
    
    
    
    5,464
    
    
    
    12,913
    
    
    
    296,285
    
    
    
    309,198Commercial
    
    
    1,086
    
    
    
    949
    
    
    
    241
    
    
    
    2,276
    
    
    
    197,419
    
    
    
    199,695Mortgages:Secured 1-4 family- first lien
    
    
    3,457
    
    
    
    1,988
    
    
    
    5,643
    
    
    
    11,088
    
    
    
    163,448
    
    
    
    174,536Multifamily
    
    
    845
    
    
    
    150
    
    
    
    40
    
    
    
    1,035
    
    
    
    28,233
    
    
    
    29,268Open ended secured 1-4 family
    
    
    2,388
    
    
    
    211
    
    
    
    2,045
    
    
    
    4,644
    
    
    
    204,675
    
    
    
    209,319Consumer and other
    
    
    669
    
    
    
    285
    
    
    
    232
    
    
    
    1,186
    
    
    
    63,817
    
    
    
    65,003Total
    
    $
    21,622
    
    
    $
    9,891
    
    
    $
    25,737
    
    
    $
    57,250
    
    
    $
    1,542,877
    
    
    $
    1,600,127
 Impaired Loans.
  
 23




---



##### Table of Contents



Unpaid
    
    
    
    
    
    
    Average
    
    
    InterestRecorded
    
    
    Principal
    
    
    Related
    
    
    Recorded
    
    
    IncomeInvestment
    
    
    Balance
    
    
    Allowance
    
    
    Investment
    
    
    Recognized(in thousands)March 31, 2011Impaired loans without a related
allowance for loan lossesConstruction
    
    $
    24,272
    
    
    $
    36,984
    
    
    $
    
    
    
    $
    21,767
    
    
    $
    143Commercial real estate:Non-owner occupied commercial real estate
    
    
    6,919
    
    
    
    9,021
    
    
    
    
    
    
    
    6,104
    
    
    
    38Owner occupied commercial real estate
    
    
    10,659
    
    
    
    12,666
    
    
    
    
    
    
    
    10,850
    
    
    
    142Commercial
    
    
    1,838
    
    
    
    2,473
    
    
    
    
    
    
    
    1,957
    
    
    
    25Mortgages:Secured 1-4 family real estate
    
    
    2,339
    
    
    
    2,771
    
    
    
    
    
    
    
    2,560
    
    
    
    16Multifamily
    
    
    300
    
    
    
    308
    
    
    
    
    
    
    
    305
    
    
    
    3Open ended secured 1-4 family
    
    
    853
    
    
    
    864
    
    
    
    
    
    
    
    928
    
    
    
    4Consumer and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impaired loans with a related
allowance for loan lossesConstruction
    
    $
    7,364
    
    
    $
    8,728
    
    
    $
    1,052
    
    
    $
    9,955
    
    
    $
    96Commercial real estate:Non-owner occupied commercial real estate
    
    
    3,914
    
    
    
    3,928
    
    
    
    657
    
    
    
    5,851
    
    
    
    40Owner occupied commercial real estate
    
    
    6,425
    
    
    
    6,458
    
    
    
    1,652
    
    
    
    5,417
    
    
    
    53Commercial
    
    
    6,299
    
    
    
    6,299
    
    
    
    2,003
    
    
    
    5,593
    
    
    
    42Mortgages:Secured 1-4 family real estate
    
    
    2,990
    
    
    
    3,040
    
    
    
    850
    
    
    
    2,226
    
    
    
    20Multifamily
    
    
    450
    
    
    
    466
    
    
    
    63
    
    
    
    459
    
    
    
    9Open ended secured 1-4 family
    
    
    569
    
    
    
    572
    
    
    
    159
    
    
    
    785
    
    
    
    3Consumer and other
    
    
    125
    
    
    
    132
    
    
    
    26
    
    
    
    132
    
    
    
    6Total impaired loansConstruction
    
    $
    31,636
    
    
    $
    45,712
    
    
    $
    1,052
    
    
    $
    31,722
    
    
    $
    239Commercial real estate:Non-owner occupied commercial real estate
    
    
    10,833
    
    
    
    12,949
    
    
    
    657
    
    
    
    11,955
    
    
    
    78Owner occupied commercial real estate
    
    
    17,084
    
    
    
    19,124
    
    
    
    1,652
    
    
    
    16,267
    
    
    
    195Commercial
    
    
    8,137
    
    
    
    8,772
    
    
    
    2,003
    
    
    
    7,550
    
    
    
    67Mortgages:Secured 1-4 family real estate
    
    
    5,329
    
    
    
    5,811
    
    
    
    850
    
    
    
    4,786
    
    
    
    36Multifamily
    
    
    750
    
    
    
    774
    
    
    
    63
    
    
    
    764
    
    
    
    12Open ended secured 1-4 family
    
    
    1,422
    
    
    
    1,436
    
    
    
    159
    
    
    
    1,713
    
    
    
    7Consumer and other
    
    
    125
    
    
    
    132
    
    
    
    26
    
    
    
    132
    
    
    
    6Total impaired loans individually reviewed
for impairment
    
    $
    75,316
    
    
    $
    94,710
    
    
    $
    6,462
    
    
    $
    74,889
    
    
    $
    640
 
 24




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##### Table of Contents



Unpaid
    
    
    
    
    
    
    Average
    
    
    InterestRecorded
    
    
    Principal
    
    
    Related
    
    
    Recorded
    
    
    IncomeInvestment
    
    
    Balance
    
    
    Allowance
    
    
    Investment
    
    
    Recognized(in thousands)December 31, 2010Impaired loans without a related
allowance for loan lossesConstruction
    
    $
    21,677
    
    
    $
    32,573
    
    
    $
    
    
    
    $
    11,427
    
    
    $
    230Commercial real estate:Non-owner occupied commercial real estate
    
    
    5,732
    
    
    
    6,660
    
    
    
    
    
    
    
    2,380
    
    
    
    99Owner occupied commercial real estate
    
    
    11,573
    
    
    
    13,892
    
    
    
    
    
    
    
    5,109
    
    
    
    207Commercial
    
    
    1,998
    
    
    
    2,630
    
    
    
    
    
    
    
    1,226
    
    
    
    45Mortgages:Secured 1-4 family real estate
    
    
    3,122
    
    
    
    4,056
    
    
    
    
    
    
    
    1,427
    
    
    
    64Multifamily
    
    
    310
    
    
    
    315
    
    
    
    
    
    
    
    192
    
    
    
    13Open ended secured 1-4 family
    
    
    953
    
    
    
    961
    
    
    
    
    
    
    
    294
    
    
    
    12Consumer and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    5Impaired loans with a related
allowance for loan lossesConstruction
    
    $
    11,116
    
    
    $
    12,845
    
    
    $
    2,141
    
    
    $
    16,379
    
    
    $
    263Commercial real estate:Non-owner occupied commercial real estate
    
    
    6,484
    
    
    
    6,861
    
    
    
    1,096
    
    
    
    5,758
    
    
    
    141Owner occupied commercial real estate
    
    
    5,077
    
    
    
    5,104
    
    
    
    860
    
    
    
    4,416
    
    
    
    134Commercial
    
    
    5,435
    
    
    
    5,435
    
    
    
    1,318
    
    
    
    4,266
    
    
    
    101Mortgages:Secured 1-4 family real estate
    
    
    2,133
    
    
    
    2,225
    
    
    
    343
    
    
    
    3,270
    
    
    
    57Multifamily
    
    
    469
    
    
    
    476
    
    
    
    82
    
    
    
    159
    
    
    
    9Open ended secured 1-4 family
    
    
    898
    
    
    
    898
    
    
    
    439
    
    
    
    780
    
    
    
    14Consumer and other
    
    
    134
    
    
    
    135
    
    
    
    35
    
    
    
    73
    
    
    
    3Total impaired loansConstruction
    
    $
    32,793
    
    
    $
    45,418
    
    
    $
    2,141
    
    
    $
    27,806
    
    
    $
    493Commercial real estate:Non-owner occupied commercial real estate
    
    
    12,216
    
    
    
    13,521
    
    
    
    1,096
    
    
    
    8,138
    
    
    
    240Owner occupied commercial real estate
    
    
    16,650
    
    
    
    18,996
    
    
    
    860
    
    
    
    9,525
    
    
    
    341Commercial
    
    
    7,433
    
    
    
    8,065
    
    
    
    1,318
    
    
    
    5,492
    
    
    
    146Mortgages:Secured 1-4 family real estate
    
    
    5,255
    
    
    
    6,281
    
    
    
    343
    
    
    
    4,697
    
    
    
    121Multifamily
    
    
    779
    
    
    
    791
    
    
    
    82
    
    
    
    351
    
    
    
    22Open ended secured 1-4 family
    
    
    1,851
    
    
    
    1,859
    
    
    
    439
    
    
    
    1,074
    
    
    
    26Consumer and other
    
    
    134
    
    
    
    135
    
    
    
    35
    
    
    
    145
    
    
    
    8Total impaired loans individually reviewed
for impairment
    
    $
    77,111
    
    
    $
    95,066
    
    
    $
    6,314
    
    
    $
    57,228
    
    
    $
    1,397
  
 25




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##### Table of Contents



ContractualPrincipal
    
    
    Nonaccretable
    
    
    CarryingReceivable
    
    
    Difference
    
    
    Amount(in thousands)Balance at December 31, 2009
    
    $
    5,388
    
    
    $
    497
    
    
    $
    4,891Change due to payoff received
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )Transfer to foreclosed real estate
    
    
    (9
    )
    
    
    (159
    )
    
    
    150Change due to charge-offs
    
    
    (249
    )
    
    
    (246
    )
    
    
    (3
    )Balance at March 31, 2010
    
    $
    4,920
    
    
    $
    92
    
    
    $
    4,828Balance at December 31, 2010
    
    $
    1,655
    
    
    $
    72
    
    
    $
    1,583Change due to payoff received
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Balance at March 31, 2011
    
    $
    1,649
    
    
    $
    72
    
    
    $
    1,577
  Allowance for Loan Losses.
    
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##### Table of Contents



December 31,2010
    
    
    Charge-offs
    
    
    Recoveries
    
    
    Provision
    
    
    March 31, 2011(Amounts in thousands)Construction
    
    $
    12,014
    
    
    $
    3,778
    
    
    $
    73
    
    
    $
    1,283
    
    
    $
    9,592Commercial real estate:Non owner occupied
    
    
    7,150
    
    
    
    977
    
    
    
    
    
    
    
    (904
    )
    
    
    5,269Owner occupied
    
    
    5,958
    
    
    
    739
    
    
    
    76
    
    
    
    1,939
    
    
    
    7,234Commercial
    
    
    4,335
    
    
    
    218
    
    
    
    68
    
    
    
    754
    
    
    
    4,939Mortgages:Secured 1-4 family- first lien
    
    
    3,706
    
    
    
    541
    
    
    
    30
    
    
    
    1,128
    
    
    
    4,323Multifamily
    
    
    424
    
    
    
    12
    
    
    
    
    
    
    
    74
    
    
    
    486Open ended secured 1-4 family
    
    
    3,298
    
    
    
    532
    
    
    
    39
    
    
    
    339
    
    
    
    3,144Consumer and other
    
    
    867
    
    
    
    284
    
    
    
    36
    
    
    
    254
    
    
    
    873$
    37,752
    
    
    $
    7,081
    
    
    $
    322
    
    
    $
    4,867
    
    
    $
    35,860
 Reserves forReserves for
    
    
    
    
    
    
    loansloans
    
    
    Loans
    
    
    collectively
    
    
    Loansindividually
    
    
    individually
    
    
    evaluated
    
    
    collectivelyevaluated for
    
    
    evaluated for
    
    
    for
    
    
    evaluated forimpairment
    
    
    impairment
    
    
    impairment
    
    
    impairment(Amounts in thousands)As of March 31, 2011Construction
    
    $
    1,052
    
    
    $
    31,636
    
    
    $
    8,540
    
    
    $
    229,447Commercial real estate:Non owner occupied
    
    
    657
    
    
    
    10,833
    
    
    
    4,612
    
    
    
    246,100Owner occupied
    
    
    1,652
    
    
    
    17,084
    
    
    
    5,582
    
    
    
    342,636Commercial
    
    
    2,003
    
    
    
    8,137
    
    
    
    2,936
    
    
    
    183,344Mortgages:Secured 1-4 family- first lien
    
    
    850
    
    
    
    5,329
    
    
    
    3,473
    
    
    
    175,728Multifamily
    
    
    63
    
    
    
    750
    
    
    
    423
    
    
    
    29,254Open ended secured 1-4 family
    
    
    159
    
    
    
    1,422
    
    
    
    2,985
    
    
    
    205,886Consumer and other
    
    
    26
    
    
    
    125
    
    
    
    847
    
    
    
    64,514$
    6,462
    
    
    $
    75,316
    
    
    $
    29,398
    
    
    $
    1,476,909
  
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##### Table of Contents



Reserves forReserves for
    
    
    
    
    
    
    loansloans
    
    
    Loans
    
    
    collectively
    
    
    Loansindividually
    
    
    individually
    
    
    evaluated
    
    
    collectivelyevaluated for
    
    
    evaluated for
    
    
    for
    
    
    evaluated forimpairment
    
    
    impairment
    
    
    impairment
    
    
    impairmentAs of December 31, 2010
    
    (Amounts in thousands)Construction
    
    $
    2,141
    
    
    $
    32,793
    
    
    $
    9,873
    
    
    $
    268,084Commercial real estate:Non owner occupied
    
    
    1,096
    
    
    
    12,216
    
    
    
    6,054
    
    
    
    300,015Owner occupied
    
    
    860
    
    
    
    16,650
    
    
    
    5,098
    
    
    
    292,548Commercial
    
    
    1,318
    
    
    
    7,433
    
    
    
    3,016
    
    
    
    192,262Mortgages:Secured 1-4 family- first lien
    
    
    343
    
    
    
    5,255
    
    
    
    3,363
    
    
    
    169,281Multifamily
    
    
    82
    
    
    
    779
    
    
    
    342
    
    
    
    28,489Open ended secured 1-4 family
    
    
    439
    
    
    
    1,851
    
    
    
    2,859
    
    
    
    207,468Consumer and other
    
    
    35
    
    
    
    134
    
    
    
    832
    
    
    
    64,869$
    6,314
    
    
    $
    77,111
    
    
    $
    31,437
    
    
    $
    1,523,016
 December 31,2009
    
    
    Charge-offs
    
    
    Recoveries
    
    
    Provision
    
    
    March 31, 2010(Amounts in thousands)Construction
    
    $
    19,978
    
    
    $
    4,329
    
    
    $
    33
    
    
    $
    1,515
    
    
    $
    17,197Commercial real estate:Non owner occupied
    
    
    9,756
    
    
    
    1,094
    
    
    
    0
    
    
    
    (433
    )
    
    
    8,229Owner occupied
    
    
    6,423
    
    
    
    447
    
    
    
    186
    
    
    
    594
    
    
    
    6,756Commercial
    
    
    3,299
    
    
    
    681
    
    
    
    192
    
    
    
    2,157
    
    
    
    4,967Mortgages:Secured 1-4 family- first lien
    
    
    3,926
    
    
    
    840
    
    
    
    35
    
    
    
    193
    
    
    
    3,314Multifamily
    
    
    493
    
    
    
    
    
    
    
    0
    
    
    
    (82
    )
    
    
    411Open ended secured 1-4 family
    
    
    3,401
    
    
    
    572
    
    
    
    10
    
    
    
    394
    
    
    
    3,233Consumer and other
    
    
    1,349
    
    
    
    204
    
    
    
    100
    
    
    
    46
    
    
    
    1,291$
    48,625
    
    
    $
    8,167
    
    
    $
    556
    
    
    $
    4,384
    
    
    $
    45,398
   
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##### Table of Contents



10. Fair Value
   Available-for-Sale Investment Securities
  
 29




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##### Table of Contents



Interest Rate Locks and Forward Loan Sale Commitments
  Interest Rate Lock CommitmentsLevel 3Fair Value
    
    
    Fair ValueBalance, December 31, 2010 and 2009
    
    $
    104,810
    
    
    $
    (790,608
    )Gains/losses included in other income
    
    
    232,643
    
    
    
    769,807Transfer in and out
    
    
    
    
    
    
    Balance, March 31, 2011 and 2010
    
    $
    337,453
    
    
    $
    (20,801
    )
 Mortgage Servicing Rights
   Level 3Fair Value
    
    
    Fair ValueBalance, December 31, 2010 and 2009
    
    $
    2,144,139
    
    
    $
    1,917,941Capitalized
    
    
    135,147
    
    
    
    100,731Gains/losses included in other income
    
    
    (59,575
    )
    
    
    (77,736
    )Balance, March 31, 2011 and 2010
    
    $
    2,219,711
    
    
    $
    1,940,936
 Mortgage Loans Held-for-Sale
  
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##### Table of Contents



Impaired Loans
  Interest Rate Swaps
   Level 3Fair Value- Assets
    
    
    Fair Value- Liabilities(Amounts in thousands)Balance, December 31, 2010
    
    $
    159
    
    
    $
    159Purchases, sales, issuances and settlements
    
    
    
    
    
    
    Gains/losses included in other income
    
    
    (26
    )
    
    
    (26
    )Balance, March 31, 2011
    
    $
    133
    
    
    $
    133
 Other Real Estate Owned
  
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##### Table of Contents



March 31, 2011 (in thousands)
    
    Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    24,262
    
    
    $
    
    
    
    $
    24,262
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    49,044
    
    
    
    
    
    
    
    49,044
    
    
    
    Collateralized mortgage obligations
    
    
    157,332
    
    
    
    
    
    
    
    157,332
    
    
    
    Private
label collateralized
 mortgage obligations
    
    
    1,661
    
    
    
    
    
    
    
    1,661
    
    
    
    State and municipal securities
    
    
    68,090
    
    
    
    
    
    
    
    68,090
    
    
    
    Common and preferred stocks
    
    
    1,140
    
    
    
    1,140
    
    
    
    
    
    
    
    Interest rate swap agreements
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    133Interest rate swap agreements
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    (133
    )Interest rate lock commitments
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    337Forward loan sale commitments
    
    
    215
    
    
    
    
    
    
    
    215
    
    
    
    Mortgage servicing rights
    
    
    2,220
    
    
    
    
    
    
    
    
    
    
    
    2,220
 December 31, 2010 (in thousands)
    
    Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    14,550
    
    
    $
    
    
    
    $
    14,550
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    52,075
    
    
    
    
    
    
    
    52,075
    
    
    
    Collateralized mortgage obligations
    
    
    155,926
    
    
    
    
    
    
    
    155,926
    
    
    
    Private
label 
collateralized mortgage obligations
    
    
    1,705
    
    
    
    
    
    
    
    1,705
    
    
    
    State and municipal securities
    
    
    72,622
    
    
    
    
    
    
    
    72,622
    
    
    
    Common and preferred stocks
    
    
    1,124
    
    
    
    1,124
    
    
    
    
    
    
    
    Interest rate swap agreements
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    159Interest rate swap agreements
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (159
    )Interest rate lock commitments
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Forward loan sale commitments
    
    
    161
    
    
    
    
    
    
    
    161
    
    
    
    Mortgage servicing rights
    
    
    2,144
    
    
    
    
    
    
    
    
    
    
    
    2,144
 
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##### Table of Contents



March 31, 2011 (Amounts in thousands)
    
    Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Other real estate owned
    
    $
    1,364
    
    
    $
    
    
    
    $
    
    
    
    $
    1,364Impaired loans:Construction
    
    
    6,312
    
    
    
    
    
    
    
    
    
    
    
    6,312Commercial real estate:Non-owner occupied
    
    
    3,257
    
    
    
    
    
    
    
    
    
    
    
    3,257Owner occupied
    
    
    4,773
    
    
    
    
    
    
    
    
    
    
    
    4,773Commercial
    
    
    4,296
    
    
    
    
    
    
    
    
    
    
    
    4,296Mortgages:Secured 1-4 family real estate
    
    
    2,140
    
    
    
    
    
    
    
    
    
    
    
    2,140Multifamily
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    387Open ended secured 1-4 family
    
    
    410
    
    
    
    
    
    
    
    
    
    
    
    410Consumer and other
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99December 31, 2010Other real estate owned
    
    $
    2,941
    
    
    $
    
    
    
    $
    
    
    
    $
    2,941Impaired loans:Construction
    
    
    8,975
    
    
    
    
    
    
    
    
    
    
    
    8,975Commercial real estate:Non-owner occupied
    
    
    5,388
    
    
    
    
    
    
    
    
    
    
    
    5,388Owner occupied
    
    
    4,217
    
    
    
    
    
    
    
    
    
    
    
    4,217Commercial
    
    
    4,117
    
    
    
    
    
    
    
    
    
    
    
    4,117Mortgages:Secured 1-4 family real estate
    
    
    1,790
    
    
    
    
    
    
    
    
    
    
    
    1,790Multifamily
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    387Open ended secured 1-4 family
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    459Consumer and other
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99
   
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##### Table of Contents



11. Financial Instruments
  March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Amounts in thousands)Financial assets:Cash and cash equivalents
    
    $
    219,590
    
    
    $
    219,590
    
    
    $
    229,780
    
    
    $
    229,780Investment securities
    
    
    301,529
    
    
    
    301,529
    
    
    
    298,002
    
    
    
    298,002Loans and loans held-for-sale, net
    
    
    1,549,727
    
    
    
    1,476,927
    
    
    
    1,613,206
    
    
    
    1,541,071Accrued interest receivable
    
    
    7,515
    
    
    
    7,515
    
    
    
    7,947
    
    
    
    7,947Federal Home Loan Bank stock
    
    
    9,416
    
    
    
    9,416
    
    
    
    9,416
    
    
    
    9,416Investment in Bank owned life insurance
    
    
    25,441
    
    
    
    25,441
    
    
    
    25,278
    
    
    
    25,278Interest rate swap agreements
    
    
    133
    
    
    
    133
    
    
    
    159
    
    
    
    159Interest rate lock commitments
    
    
    337
    
    
    
    337
    
    
    
    105
    
    
    
    105Forward sales commitments
    
    
    215
    
    
    
    215
    
    
    
    161
    
    
    
    161Financial liabilities:Demand deposits, NOW, savings
and money market accounts
    
    
    854,248
    
    
    
    854,248
    
    
    
    805,951
    
    
    
    805,951Time deposits
    
    
    1,105,558
    
    
    
    1,116,611
    
    
    
    1,214,455
    
    
    
    1,227,628Borrowed funds
    
    
    109,452
    
    
    
    110,314
    
    
    
    116,768
    
    
    
    117,741Accrued interest payable
    
    
    2,811
    
    
    
    2,811
    
    
    
    3,302
    
    
    
    3,302Interest rate swap agreements
    
    
    133
    
    
    
    133
    
    
    
    159
    
    
    
    159
      
 34




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##### Table of Contents



12. Goodwill
   13. Subsequent Events
  
 35




---



##### Table of Contents



14. Business Segment Information
  Bank
    
    
    Sidus
    
    
    Other
    
    
    Total(Amounts in thousands)For Three Months Ended March 31, 2011Interest income
    
    $
    23,197
    
    
    $
    381
    
    
    $
    
    
    
    $
    23,578Interest expense
    
    
    7,626
    
    
    
    72
    
    
    
    190
    
    
    
    7,888Net interest income
    
    
    15,571
    
    
    
    309
    
    
    
    (190
    )
    
    
    15,690Provision for loan losses
    
    
    4,849
    
    
    
    18
    
    
    
    
    
    
    
    4,867Net interest
income (loss) after provision for loan losses
    
    
    10,722
    
    
    
    291
    
    
    
    (190
    )
    
    
    10,823Other income
    
    
    2,968
    
    
    
    1,899
    
    
    
    (76
    )
    
    
    4,791Other expense
    
    
    14,405
    
    
    
    2,504
    
    
    
    
    
    
    
    16,909Income (loss) before income taxes (benefit)
    
    
    (715
    )
    
    
    (314
    )
    
    
    (266
    )
    
    
    (1,295
    )Income taxes
    
    
    (509
    )
    
    
    
    
    
    
    
    
    
    
    (509
    )Net income(loss)
    
    $
    (206
    )
    
    $
    (314
    )
    
    $
    (266
    )
    
    $
    (786
    )Total assets
    
    $
    2,203,545
    
    
    $
    45,624
    
    
    $
    (18,278
    )
    
    $
    2,230,891Net loans
    
    
    1,516,847
    
    
    
    
    
    
    
    
    
    
    
    1,516,847Loans held for sale
    
    
    675
    
    
    
    32,205
    
    
    
    
    
    
    
    32,880Goodwill
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944For Three Months Ended March 31, 2010Interest income
    
    $
    24,439
    
    
    $
    351
    
    
    $
    
    
    
    $
    24,790Interest expense
    
    
    7,791
    
    
    
    10
    
    
    
    182
    
    
    
    7,983Net interest income
    
    
    16,648
    
    
    
    341
    
    
    
    (182
    )
    
    
    16,807Provision for loan losses
    
    
    4,384
    
    
    
    
    
    
    
    
    
    
    
    4,384Net interest
income (loss) after provision for loan losses
    
    
    12,264
    
    
    
    341
    
    
    
    (182
    )
    
    
    12,423Other income
    
    
    2,634
    
    
    
    1,335
    
    
    
    (189
    )
    
    
    3,780Other expense
    
    
    13,058
    
    
    
    1,378
    
    
    
    96
    
    
    
    14,532Income (loss) before income taxes (benefit)
    
    
    1,840
    
    
    
    298
    
    
    
    (467
    )
    
    
    1,671Income taxes (benefit)
    
    
    757
    
    
    
    
    
    
    
    
    
    
    
    757Net income(loss)
    
    $
    1,083
    
    
    $
    298
    
    
    $
    (467
    )
    
    $
    914Total assetsNet loans
    
    $
    2,176,939
    
    
    $
    33,882
    
    
    $
    (7,709
    )
    
    $
    2,203,112Loans held for sale
    
    
    1,610,632
    
    
    
    
    
    
    
    
    
    
    
    1,610,632Goodwill
    
    
    768
    
    
    
    23,540
    
    
    
    
    
    
    
    24,308
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944
 
 (1)
    
    As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which is
taxed on that income.(2)
    
    Note: The Other column includes asset eliminations representing the Banks Due from Sidus
account ($16,549,066 in 2011 and $6,853,856 in 2010), the Banks Investment in Sidus ($3,000,000 in
2011 and 2010), and the Banks A/R from Sidus ($15,055 in 2011 and $71,632 in 2010). Also included
in this column are Holding Company assets ($1,285,967 in 2011 and $2,216,809 in 2010) and Holding
Company income and expenses. 
 36




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
   
    
    reduced earnings due to higher credit losses generally and specifically because losses in the
sectors of our loan portfolio secured by real estate are greater than expected due to economic
factors, including declining real estate values, increasing interest rates, increasing
unemployment, or changes in payment behavior or other factors;
    
    reduced earnings due to higher credit losses because our loans are concentrated by loan type,
industry segment, borrower type, or location of the borrower or collateral;
    
    the rate of delinquencies and amount of loans charged-off;
    
    the adequacy of the level of our allowance for loan losses;
    
    the amount of our loan portfolio collateralized by real estate, and the weakness in the
commercial real estate market;
    
    our efforts to raise capital or otherwise increase and maintain our regulatory capital ratios
above the statutory minimums;
    
    the impact of our efforts to raise capital on our financial position, liquidity, capital, and
profitability;
    
    adverse changes in asset quality and resulting credit risk-related losses and expenses;
    
    increased funding costs due to market illiquidity, increased competition for funding, and
increased regulatory requirements with regard to funding;
    
    significant increases in competitive pressure in the banking and financial services industries;
    
    changes in the interest rate environment which could reduce anticipated or actual margins;
    
    changes in political conditions or the legislative or regulatory environment, including the
effect of recent financial reform legislation on the banking industry;
    
    general economic conditions, either nationally or regionally and especially in our primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
    
    our ability to retain our existing customers, including our deposit relationships;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in monetary and tax policies;
    
    ability of borrowers to repay loans, which can be adversely affected by a number of factors,
including changes in economic conditions, adverse trends or events affecting business industry
groups, reductions in real estate values or markets, business closings or lay-offs, natural
disasters, which could be exacerbated by potential climate change, and international
instability;
    
    changes in deposit flows;
    
    changes in accounting principles, policies or guidelines;
    
    changes in the assessment of whether a deferred tax valuation allowance is necessary;
    
    our ability to maintain internal control over financial reporting;
    
    our reliance on secondary sources such as Federal Home Loan Bank advances, sales of securities
and loans, federal funds lines of credit from correspondent banks and out-of-market time
deposits, to meet our liquidity needs;
    
    loss of consumer confidence and economic disruptions resulting from terrorist activities;
    
    changes in the securities markets; and
    
    other risks and uncertainties detailed from time to time in our filings with the SEC.
   Overview
    
 37




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##### Table of Contents



Changes in Financial Position
       
 38




---



##### Table of Contents



As of
    
    
    As ofMarch 31, 2011
    
    
    December 31, 2010Holding
    
    
    
    
    
    
    HoldingCompany
    
    
    Bank
    
    
    Company
    
    
    BankTotal risk-based capital ratio
    
    
    10.6%
    
    
    
    10.7%
    
    
    
    10.6%
    
    
    
    10.5%Tier 1 risk-based capital ratio
    
    
    9.4%
    
    
    
    9.4%
    
    
    
    9.4%
    
    
    
    9.2%Leverage ratio
    
    
    7.1%
    
    
    
    7.1%
    
    
    
    7.2%
    
    
    
    7.0%
 
 Liquidity, Interest Rate Sensitivity and Market Risk
  ® SM
 
 39




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##### Table of Contents



® ®
    Results of Operations
  Net Interest Income
  
 40




---



##### Table of Contents



Three Months Ended March 31, 2011
    
    
    Three Months Ended March 31, 2010Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Interest Rates Earned and Paid
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Federal funds sold
    
    $
    9,769
    
    
    $
    6
    
    
    
    0.25
    %
    
    $
    632
    
    
    $
    
 
    
    
    0.25
    %Interest-bearing deposits
    
    
    207,707
    
    
    
    115
    
    
    
    0.22
    %
    
    
    134,627
    
    
    
    61
    
    
    
    0.18
    %Investment securities (1)
    
    
    296,220
    
    
    
    2,375
    
    
    
    3.25
    %
    
    
    180,026
    
    
    
    2,018
    
    
    
    4.55
    %Total loans (1)(2)(6)
    
    
    1,602,393
    
    
    
    21,391
    
    
    
    5.41
    %
    
    
    1,683,199
    
    
    
    23,002
    
    
    
    5.54
    %Total interest-earning assets
    
    
    2,116,089
    
    
    
    23,887
    
    
    
    4.58
    %
    
    
    1,998,484
    
    
    
    25,081
    
    
    
    5.09
    %Non-earning assets
    
    
    148,253
    
    
    
    
    
    
    
    
    
    
    
    140,599Total assets
    
    $
    2,264,342
    
    
    
    
    
    
    
    
    
    
    $
    2,139,083Interest-bearing liabilities:Deposits (7):NOW and money market
    
    $
    550,688
    
    
    
    1,176
    
    
    
    0.87
    %
    
    $
    387,493
    
    
    
    790
    
    
    
    0.83
    %Savings
    
    
    54,451
    
    
    
    27
    
    
    
    0.20
    %
    
    
    53,662
    
    
    
    33
    
    
    
    0.25
    %Time certificates
    
    
    1,167,136
    
    
    
    6,115
    
    
    
    2.12
    %
    
    
    1,199,571
    
    
    
    6,592
    
    
    
    2.23
    %Total interest bearing deposits
    
    
    1,772,275
    
    
    
    7,318
    
    
    
    1.67
    %
    
    
    1,640,726
    
    
    
    7,415
    
    
    
    1.83
    %Repurchase agreements sold
    
    
    39,673
    
    
    
    106
    
    
    
    1.08
    %
    
    
    47,402
    
    
    
    132
    
    
    
    1.13
    %Borrowed funds (8)
    
    
    71,393
    
    
    
    464
    
    
    
    2.64
    %
    
    
    74,163
    
    
    
    436
    
    
    
    2.38
    %Total interest-bearing liabilities
    
    
    1,883,341
    
    
    
    7,888
    
    
    
    1.70
    %
    
    
    1,762,291
    
    
    
    7,983
    
    
    
    1.84
    %Non-interest bearing deposits
    
    
    218,444
    
    
    
    
    
    
    
    
    
    
    
    205,848Stockholders equity
    
    
    147,939
    
    
    
    
    
    
    
    
    
    
    
    153,973Other liabilities
    
    
    14,618
    
    
    
    
    
    
    
    
    
    
    
    16,971Total average liabilities and
stockholders equity
    
    $
    2,264,342
    
    
    
    
    
    
    
    
    
    
    $
    2,139,083Net interest income (3)
and interest rate spread (5)
    
    
    
    
    
    $
    15,999
    
    
    
    2.88
    %
    
    
    
    
    
    $
    17,098
    
    
    
    3.25
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.07
    %
    
    
    
    
    
    
    
    
    
    
    3.47
    %
 
 (1)
    
    Yields relate to investment securities and loans exempt from Federal income taxes are
stated on a fully tax-equivalent basis,
assuming a Federal income tax rate of 35%. The calculation includes an adjustment for the
nondeductible portion of interest expense
used to fund tax-exempt assets.(2)
    
    The loan average includes loans on which accrual of interest has been discontinued.(3)
    
    The net interest income is the difference between income from earning assets and interest
expense.(4)
    
    Net interest margin 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 interest rate paid on
interest-bearing liabilities.(6)
    
    Interest income on loans includes $176,000 and $571,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively.(7)
    
    Interest expense on deposits includes $86,000 and $390,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively.(8)
    
    Interest expense on borrowings includes $30,000 and $15,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively 
 41




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Provisions and Allowance for Loan Losses
       
 42




---



##### Table of Contents



Nonperforming Assets
    
 43




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##### Table of Contents



Noninterest Income
  
    
    Service charges on deposit accounts decreased $92,000, or 6.4%, as total NSF fees (a
major component of service charges) decreased $117,000, or 11.8%, as new legislation
regarding overdraft fees was implemented in the third quarter of 2010. Service charges
on depository accounts, including NOW, savings, and money market account service charges
increased 6.0%.
    
    The increase in other service fees of $121,000 was due primarily to increases in
commissions and fees on mutual funds and annuities of $224,000 from the previous year.
These increases were offset by decreases in commissions and fees on mortgages originated
of $99,000.
    
    Net gain in the sale of mortgages increased approximately
$565,000, or 42.4%, as total
loans originated and sold increased during the quarter. Mortgage loans originated
increased from $146 million in the first quarter of 2010 to $183 million in the first
quarter of 2011.
    
    Net gain on sale of investment securities also increased $49,000, or 111.4%, as the
Company sold approximately $4.6 million in securities during the quarter.
    
    Income on investment in bank-owned life insurance (BOLI) decreased by 21.3% during
the three month period ended March 31, 2011. As changes were made in the fourth quarter
of 2010 to death benefits paid to beneficiaries, limiting it total death benefit
proceeds less cash surrender value.
    
    Mortgage banking income increased approximately $151,000 for the quarter due to an
increase in the change in fair value of mortgage servicing rights (MSR) as compared to
the first quarter of 2010 and an increase in the servicing fees received.
    
    Other income increased by approximately $76,000, or 116.4%, for the quarter primarily
due to a $29,000 increase in dividends received from the FHLB of Atlanta, as well as an
increase in miscellaneous other income of $57,000.
 Noninterest Expense
  
    
    Salaries and employee benefit expenses increased by
$1.2 million, or 18.1%, primarily
due to the fact that in the prior year the Company recorded an adjustment to previously
accrued incentive expenses which decreased incentive expense by $588,000 in 2010. Other
major components of salaries and employee
 
 44




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##### Table of Contents



benefit expenses include the following: Salaries and wages (down $19,000),
overtime wages (up $67,000), and commissions related primarily to mortgage lending
activities (up $72,000). In the addition, employee group insurance expense increased by
$73,000, payroll taxes by $97,000, and miscellaneous personnel expenses decreased
$19,000. Salaries and benefit costs directly related to loan originations, which are
expensed over the life of the loan, also decreased $211,000.
    
    Occupancy and equipment expenses increased by $204,000, or
10.4%, due primarily to and
increase of $104,000 in rental expense, as well as a $129,000 increase in equipment
maintenance expenses. The increase in rental expense was due to normal increases in
lease payments, as well as additional accrual of common area maintenance charges.
    
    Printing and supplies decreased by $93,000, or 33.9%, comparing first quarter 2011
with first quarter 2010 due to timing of printing expenses which fluctuate based on
advertising campaigns.
    
    Data processing expense increased $60,000, or 19.2%, due primarily to timing and
increase in activity as the result of a 8% increase in average deposits since the first
quarter of 2010.
    
    Communication expense decreased slightly by $14,000, or 3.1%.
    
    FDIC assessment expenses increased $520,000, due to additional assessments imposed by
the FDIC and an increase in deposits since March 31, 2010.
    
    Net cost of other real estate owned decreased to $794,000 as compared to $1.1 million
in the prior year due to a decrease in losses recognized on sale of foreclosed property
as the Bank is able to more accurately value properties at foreclosure.
    
    Other operating expenses (including attorney fees, accounting fees, loan collection
fees and amortization of core deposit intangibles) increased approximately $807,000, or
27.6%. The largest increases were in the following categories: loan collection expense
(up $161,000), net charge-offs and fraud expense (up $69,000) and outside professional
and other service fees (up $221,000) and accounting fees (up $51,000). These increases
were offset by decreases in travel expenses (down $33,000) and postage expense (down
$25,000).
 Income Tax Expense
    
 45




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##### Table of Contents



2008*
    
    
    2009
    
    
    2010
    
    
    2011**
    
    
    TotalIncome (loss) before income taxes
    
    $
    914
    
    
    $
    (83,933
    )
    
    $
    (1,401
    )
    
    $
    (1,295
    )
    
    $
    (85,715
    )Goodwill impairment
    
    
    
    
    
    
    61,566
    
    
    
    
    
    
    
    
    
    
    
    61,566$
    914
    
    
    $
    (22,367
    )
    
    $
    (1,401
    )
    
    $
    (1,295
    )
    
    $
    (24,149
    )
 
 *
    
    2nd, 3rd and 4th quarter of 2008**
    
    First three months of 2011  Tax BenefitNet Operating Loss
    
    
    Recorded atCarryforward at
    
    
    December 31,December 31, 2010
    
    
    2010
    
    
    Expiration(Amounts in thousands)Cardinal State Bank acquisition
    
    $
    2,424
    
    
    $
    849
    
    
    
    2029American Community Bank acquisition
    
    
    345
    
    
    
    15
    
    
    
    2030Yadkin
Valley Federal Tax
    
    
    9,011
    
    
    
    3,154
    
    
    
    2031Yadkin
Valley State Tax
    
    
    14,684
    
    
    
    634
    
    
    
    2031Total Loss Carryforwards
    
    $
    26,464
    
    
    $
    4,652
   
 46




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 47




---



##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     
 Item 5. Other Information.
  
 48




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##### Table of Contents



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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##### Table of Contents



Signatures
  Yadkin Valley Financial CorporationBY:
    /s/ Joseph H. TowellJoseph H. Towell, President and Chief Executive OfficerBY:
    /s/ Jan H. HollarJan H. Hollar, Executive Vice
President and Principal Financial Officer  
 50