##### 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 June 30, 2007
 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
 
 
   1




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##### 



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-11Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11-18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. Other InformationItem 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    19Item. 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 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)
 JUNE 30,
    
    
    DECEMBER 31,2007
    
    
    2006*ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    24,584,182
    
    
    $
    42,387,101Federal funds sold
    
    
    11,264,000
    
    
    
    Interest-bearing deposits
    
    
    8,275,081
    
    
    
    1,669,033Total cash and cash equivalents
    
    
    44,123,263
    
    
    
    44,056,134SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $138,640,652 in 2007 and $128,278,242 in 2006)
    
    
    136,453,530
    
    
    
    127,520,514GROSS LOANS
    
    
    816,467,436
    
    
    
    814,909,853Less: Allowance for loan losses
    
    
    (11,276,486
    )
    
    
    (10,828,882
    )NET LOANS
    
    
    805,190,950
    
    
    
    804,080,971LOANS HELD FOR SALE
    
    
    40,888,618
    
    
    
    42,350,915ACCRUED INTEREST RECEIVABLE
    
    
    5,828,602
    
    
    
    5,796,450PREMISES AND EQUIPMENT, NET
    
    
    27,806,657
    
    
    
    27,098,420FEDERAL HOME LOAN BANK STOCK, AT COST
    
    
    2,782,300
    
    
    
    3,632,600INVESTMENT IN BANK-OWNED LIFE INSURANCE
    
    
    22,531,838
    
    
    
    22,796,932GOODWILL
    
    
    32,696,900
    
    
    
    32,696,900CORE DEPOSIT INTANGIBLE (net of accumulated
amortization of $3,836,737 in 2007 and $3,441,799 in 2006)
    
    
    4,642,771
    
    
    
    5,037,709OTHER ASSETS
    
    
    6,510,611
    
    
    
    4,834,028TOTAL ASSETS
    
    $
    1,129,456,040
    
    
    $
    1,119,901,573LIABILITIES AND STOCKHOLDERS EQUITYDEPOSITSNoninterest-bearing demand deposits
    
    $
    156,776,241
    
    
    $
    151,811,660Interest-bearing deposits:NOW, savings, and money market accounts
    
    
    229,365,719
    
    
    
    233,031,838Time certificates:Over $100,000
    
    
    243,921,503
    
    
    
    228,553,689Other
    
    
    312,451,120
    
    
    
    294,449,712Total deposits
    
    
    942,514,583
    
    
    
    907,846,899SHORT-TERM BORROWINGS
    
    
    37,911,335
    
    
    
    62,062,598LONG-TERM BORROWINGS
    
    
    12,000,000
    
    
    
    17,000,000ACCRUED INTEREST PAYABLE
    
    
    3,378,851
    
    
    
    2,975,097OTHER LIABILITIES
    
    
    5,670,077
    
    
    
    5,617,838TOTAL LIABILITIES
    
    
    1,001,474,846
    
    
    
    995,502,432STOCKHOLDERS EQUITYCommon stock, $1.00 par value; authorized 20,000,000
shares; issued 10,608,287 shares in 2007 and 10,611,052
shares in 2006
    
    
    10,608,287
    
    
    
    10,611,052SURPLUS
    
    
    71,204,636
    
    
    
    71,151,626RETAINED EARNINGS
    
    
    47,512,705
    
    
    
    43,107,431ACCUMULATED OTHER COMPREHENSIVE LOSS
    
    
    (1,344,434
    )
    
    
    (470,968
    )TOTAL STOCKHOLDERS EQUITY
    
    
    127,981,194
    
    
    
    124,399,141TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,129,456,040
    
    
    $
    1,119,901,573
 
 *
    
    Derived from audited consolidated financial statements  
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOMEInterest and fees on loans
    
    $
    16,915,817
    
    
    $
    15,433,527
    
    
    $
    33,324,966
    
    
    $
    29,254,917Interest on federal funds sold
    
    
    128,245
    
    
    
    39,057
    
    
    
    168,188
    
    
    
    65,382Interest on securities:Taxable
    
    
    1,261,819
    
    
    
    994,532
    
    
    
    2,488,271
    
    
    
    1,853,593Non-taxable
    
    
    291,810
    
    
    
    282,566
    
    
    
    578,722
    
    
    
    571,859Interest-bearing deposits
    
    
    49,417
    
    
    
    12,199
    
    
    
    62,730
    
    
    
    51,599Total interest income
    
    
    18,647,108
    
    
    
    16,761,881
    
    
    
    36,622,877
    
    
    
    31,797,350INTEREST EXPENSETime deposits of $100,000 or more
    
    
    3,008,730
    
    
    
    1,989,878
    
    
    
    5,727,199
    
    
    
    3,642,223Other deposits
    
    
    4,757,494
    
    
    
    3,595,299
    
    
    
    9,249,568
    
    
    
    6,865,008Borrowed funds
    
    
    471,799
    
    
    
    863,282
    
    
    
    1,020,229
    
    
    
    1,182,005Total interest expense
    
    
    8,238,023
    
    
    
    6,448,459
    
    
    
    15,996,996
    
    
    
    11,689,236NET INTEREST INCOME
    
    
    10,409,085
    
    
    
    10,313,422
    
    
    
    20,625,881
    
    
    
    20,108,114PROVISION FOR LOAN LOSSES
    
    
    200,000
    
    
    
    550,000
    
    
    
    500,000
    
    
    
    1,115,000NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    10,209,085
    
    
    
    9,763,422
    
    
    
    20,125,881
    
    
    
    18,993,114NONINTEREST INCOMEService charges on deposit accounts
    
    
    954,231
    
    
    
    904,694
    
    
    
    1,934,646
    
    
    
    1,801,840Other service fees
    
    
    1,013,679
    
    
    
    798,430
    
    
    
    1,855,800
    
    
    
    1,568,527Net gain on sales of mortgage loans
    
    
    1,645,664
    
    
    
    1,519,340
    
    
    
    3,056,366
    
    
    
    2,683,759Net gain on sales of investment securities
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    18,724Income on investment in bank owned life insurance
    
    
    313,574
    
    
    
    146,801
    
    
    
    530,343
    
    
    
    291,725Mortgage banking income
    
    
    132,981
    
    
    
    49,027
    
    
    
    212,267
    
    
    
    127,906Bank owned life insurance death benefit
    
    
    
    
    
    
    
    
    
    
    481,940
    
    
    
    Other income
    
    
    52,385
    
    
    
    64,120
    
    
    
    119,780
    
    
    
    139,703Total noninterest income
    
    
    4,112,514
    
    
    
    3,489,412
    
    
    
    8,191,142
    
    
    
    6,632,184NONINTEREST EXPENSESalaries and employee benefits
    
    
    4,989,416
    
    
    
    4,559,281
    
    
    
    9,828,017
    
    
    
    9,124,480Occupancy and equipment expenses
    
    
    987,709
    
    
    
    916,421
    
    
    
    2,002,617
    
    
    
    1,870,945Printing and supplies
    
    
    139,165
    
    
    
    131,946
    
    
    
    282,670
    
    
    
    293,677Data processing
    
    
    109,712
    
    
    
    93,585
    
    
    
    210,639
    
    
    
    206,089Amortization of core deposit intangible
    
    
    197,468
    
    
    
    207,429
    
    
    
    394,937
    
    
    
    414,859Other
    
    
    2,259,602
    
    
    
    1,996,651
    
    
    
    4,228,600
    
    
    
    3,917,637Total noninterest expense
    
    
    8,683,072
    
    
    
    7,905,313
    
    
    
    16,947,480
    
    
    
    15,827,687INCOME BEFORE INCOME TAXES
    
    
    5,638,527
    
    
    
    5,347,521
    
    
    
    11,369,543
    
    
    
    9,797,611INCOME TAXES
    
    
    1,852,128
    
    
    
    1,927,697
    
    
    
    3,670,738
    
    
    
    3,449,584NET INCOME
    
    $
    3,786,399
    
    
    $
    3,419,824
    
    
    $
    7,698,805
    
    
    $
    6,348,027NET INCOME PER COMMON SHARE:Basic
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.73
    
    
    $
    0.60Diluted
    
    $
    0.35
    
    
    $
    0.32
    
    
    $
    0.71
    
    
    $
    0.59CASH DIVIDENDS PER COMMON SHARE
    
    $
    0.13
    
    
    $
    0.12
    
    
    $
    0.25
    
    
    $
    0.23
  
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NET INCOME
    
    $
    3,786,399
    
    
    $
    3,419,824
    
    
    $
    7,698,805
    
    
    $
    6,348,027OTHER COMPREHENSIVE LOSS, BEFORE TAX:Unrealized holding losses on securities
available for sale
    
    
    (1,966,042
    )
    
    
    (768,296
    )
    
    
    (1,429,393
    )
    
    
    (937,763
    )Tax effect
    
    
    762,538
    
    
    
    295,794
    
    
    
    555,927
    
    
    
    361,039Unrealized holding losses on securities
available for sale, net of tax
    
    
    (1,203,504
    )
    
    
    (472,502
    )
    
    
    (873,466
    )
    
    
    (576,724
    )Reclassification adjustment for realized gains
    
    
    
    
    
    
    (7,000
    )
    
    
    
    
    
    
    (18,724
    )Tax effect
    
    
    
    
    
    
    2,695
    
    
    
    
    
    
    
    7,209Reclassification adjustment for realized
gains, net of tax
    
    
    
    
    
    
    (4,305
    )
    
    
    
    
    
    
    (11,515
    )OTHER COMPREHENSIVE LOSS, NET OF TAX
    
    
    (1,203,504
    )
    
    
    (476,807
    )
    
    
    (873,466
    )
    
    
    (588,239
    )COMPREHENSIVE INCOME
    
    $
    2,582,895
    
    
    $
    2,943,017
    
    
    $
    6,825,339
    
    
    $
    5,759,788
  
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 SIX MONTHS ENDED JUNE 30, 2007 AND 2006
 2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,698,805
    
    
    $
    6,348,027Adjustments to reconcile net income to net cash used by
operating activities:Net amortization of premiums on investment securities
    
    
    42,931
    
    
    
    178,543Provision for loan losses
    
    
    500,000
    
    
    
    1,115,000Net gain on sales of mortgage loans held for sale
    
    
    (3,056,366
    )
    
    
    (2,683,759
    )Net loss on sales of available for sale securities
    
    
    
    
    
    
    19,305(Increase) decrease in investment in Bank owned life insurance
    
    
    265,093
    
    
    
    (291,725
    )Depreciation and amortization
    
    
    1,000,210
    
    
    
    976,249Net (gain) loss on sale of premises and equipment
    
    
    (7,030
    )
    
    
    47,860Amortization of core deposit intangible
    
    
    394,937
    
    
    
    414,859Originations of mortgage loans held-for-sale
    
    
    (495,955,031
    )
    
    
    (400,175,144
    )Proceeds from sales of mortgage loans
    
    
    500,473,694
    
    
    
    389,385,559Increase in accrued interest receivable
    
    
    (32,151
    )
    
    
    (312,983
    )(Increase) decrease in other assets
    
    
    (1,676,582
    )
    
    
    468,956Increase in accrued interest payable
    
    
    403,754
    
    
    
    812,088Increase (decrease) in other liabilities
    
    
    594,417
    
    
    
    (1,315,896
    )Net cash provided by (used in) operating activities
    
    
    10,646,681
    
    
    
    (5,013,061
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available for sale securities
    
    
    (21,325,213
    )
    
    
    (23,048,964
    )Proceeds from sales of available for sale securities
    
    
    7,998,622
    
    
    
    5,000,860Proceeds from maturities of available for sale securities
    
    
    2,935,000
    
    
    
    8,310,000Net change in loans
    
    
    (1,609,979
    )
    
    
    (38,484,714
    )Purchases of premises and equipment
    
    
    (1,732,340
    )
    
    
    (1,139,715
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    850,300
    
    
    
    985,500Purchases of Federal Home Loan Bank stock
    
    
    
    
    
    
    (1,256,100
    )Proceeds from sale of premises and equipment
    
    
    30,925
    
    
    
    28,531Net cash used in investing activities
    
    
    (12,852,685
    )
    
    
    (49,604,602
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    
    1,298,462
    
    
    
    2,545,942Net increase in time certificates
    
    
    33,369,222
    
    
    
    50,190,609Net increase (decrease) in borrowed funds
    
    
    (29,151,263
    )
    
    
    1,285,148Purchases of common stock
    
    
    (939,774
    )
    
    
    (516,063
    )Dividends paid
    
    
    (2,653,633
    )
    
    
    (2,451,207
    )Proceeds from exercise of stock options
    
    
    350,119
    
    
    
    26,861Net cash provided by financing activities
    
    
    2,273,133
    
    
    
    51,081,290NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    67,129
    
    
    
    (3,536,373
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    44,056,134
    
    
    
    55,493,487End of period
    
    $
    44,123,263
    
    
    $
    51,957,114
  
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Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. Stock-based Compensation
      
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3. Commitments and Contingencies
   4. Pending Litigation
  5. Earnings per share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic EPS denominator:Weighted average
number of common
shares outstanding
    
    
    10,613,687
    
    
    
    10,650,739
    
    
    
    10,613,902
    
    
    
    10,660,533Dilutive effect
arising from assumed
exercise of stock
options
    
    
    178,741
    
    
    
    137,081
    
    
    
    184,037
    
    
    
    140,171Diluted EPS denominator
    
    
    10,792,428
    
    
    
    10,787,821
    
    
    
    10,797,939
    
    
    
    10,800,704
  6. Stockholders Equity
 
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7. Business Segment Information
  June 30, 2007
    
    Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    35,320,232
    
    
    $
    1,379,645
    
    
    $
    (77,000
    )
    
    $
    36,622,877Interest expense
    
    
    14,979,819
    
    
    
    1,096,223
    
    
    
    (79,046
    )
    
    
    15,996,996Net interest income
    
    
    20,340,413
    
    
    
    283,422
    
    
    
    2,046
    
    
    
    20,625,881Provision for loan losses
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000Net interest income after
provision for loan losses
    
    
    19,840,413
    
    
    
    283,422
    
    
    
    2,046
    
    
    
    20,125,881Net gain (loss) on sale
of investment Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    5,134,776
    
    
    
    3,056,366
    
    
    
    
    
    
    
    8,191,142Other expense
    
    
    14,330,830
    
    
    
    2,530,164
    
    
    
    86,486
    
    
    
    16,947,480Income before income taxes
    
    
    10,644,359
    
    
    
    809,624
    
    
    
    (84,440
    )
    
    
    11,369,543Income taxes (2)
    
    
    3,354,985
    
    
    
    315,753
    
    
    
    
    
    
    
    3,670,738Net income
    
    $
    7,289,374
    
    
    $
    493,871
    
    
    
    (84,440
    )
    
    $
    7,698,805Total assets (3)
    
    $
    1,144,643,474
    
    
    $
    47,638,748
    
    
    $
    (62,826,182
    )
    
    $
    1,129,456,040Net loans
    
    
    805,190,950
    
    
    
    
    
    
    
    
    
    
    
    805,190,950Loans held for sale
    
    
    97,000
    
    
    
    40,791,618
    
    
    
    
    
    
    
    40,888,618Goodwill
    
    
    32,696,900
    
    
    
    4,943,872
    
    
    $
    (4,943,872
    )
    
    
    32,696,900
 
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June 30, 2006
    
    Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    30,816,097
    
    
    $
    1,109,971
    
    
    $
    (128,718
    )
    
    $
    31,797,350Interest expense
    
    
    10,929,906
    
    
    
    888,048
    
    
    
    (128,718
    )
    
    
    11,689,236Net interest income
    
    
    19,886,191
    
    
    
    221,923
    
    
    
    
    
    
    
    20,108,114Provision for loan losses
    
    
    1,115,000
    
    
    
    
    
    
    
    
    
    
    
    1,115,000Net interest income after
provision for loan losses
    
    
    18,771,191
    
    
    
    221,923
    
    
    
    
    
    
    
    18,993,114Net gain (loss) on sale
of investment Securities
    
    
    18,724
    
    
    
    
    
    
    
    
    
    
    
    18,724Other income
    
    
    3,929,701
    
    
    
    2,683,759
    
    
    
    
    
    
    
    6,613,460Other expense
    
    
    13,302,959
    
    
    
    2,524,728
    
    
    
    
    
    
    
    15,827,687Income before income taxes
    
    
    9,416,657
    
    
    
    380,954
    
    
    
    
    
    
    
    9,797,611Income taxes (2)
    
    
    3,302,917
    
    
    
    146,667
    
    
    
    
    
    
    
    3,449,584Net income
    
    $
    6,113,740
    
    
    $
    234,287
    
    
    
    
    
    
    $
    6,348,027Total assets (3)
    
    $
    1,091,976,384
    
    
    $
    50,895,026
    
    
    $
    (62,607,883
    )
    
    $
    1,080,263,527Net loans
    
    
    765,426,104
    
    
    
    
    
    
    
    
    
    
    
    765,426,104Loans held for sale
    
    
    
    
    
    
    44,900,073
    
    
    
    
    
    
    
    44,900,073Goodwill
    
    
    32,136,183
    
    
    
    4,383,155
    
    
    
    (4,383,155
    )
    
    
    32,136,183
 
 (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.(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: The Other column includes asset eliminations representing the Banks Due from Sidus
account ($55,000,000 in 2007 and 2006), the Banks Investment in Sidus ($3,000,000 in 2007 and
2006), the Banks A/R from Sidus ($191,797 in 2007 and $224,728 in 2006), and Sidus Goodwill
account ($4,943,872 in 2007 and $4,383,155 in 2006). Also included in this column are Holding
Company assets ($309,487 in 2007 and $2,461 in 2006) and Holding Company income and expenses. 8. Business Combination
 , , www.yadkinvalleybank.com
 9. Reclassifications
  10. New Accounting Standards
  
 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Changes in Financial Position
  
 11




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Liquidity, Interest Rate Sensitivity and Market Risk
  
 12




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Results of Operations
    Net Interest Income
 
 13




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14




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Average Balance Sheets and Net Interest Income Analysis
(Dollars in Thousands)
 Six Months Ended:
 June 30, 2007
    
    
    June 30, 2006Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateINTEREST EARNING ASSETSFederal funds sold
    
    $
    6,137
    
    
    $
    168
    
    
    
    5.52
    %
    
    $
    2,874
    
    
    $
    65
    
    
    
    4.56
    %Interest bearing deposits
    
    
    2,728
    
    
    
    63
    
    
    
    4.66
    %
    
    
    2,399
    
    
    
    51
    
    
    
    4.29
    %Investment securities (1)
    
    
    132,036
    
    
    
    3,322
    
    
    
    5.07
    %
    
    
    123,129
    
    
    
    2,680
    
    
    
    4.39
    %Total loans (1,2)
    
    
    849,781
    
    
    
    33,399
    
    
    
    7.93
    %
    
    
    787,340
    
    
    
    29,312
    
    
    
    7.51
    %Total average earning assets (1)
    
    
    990,682
    
    
    
    36,952
    
    
    
    7.52
    %
    
    
    915,742
    
    
    
    32,108
    
    
    
    7.07
    %Noninterest earning assets
    
    
    112,928
    
    
    
    
    
    
    
    
    
    
    
    114,344Total average assets
    
    $
    1,103,610
    
    
    
    
    
    
    
    
    
    
    $
    1,030,086INTEREST BEARING LIABILITIESNOW and money market
    
    $
    187,481
    
    
    $
    2,059
    
    
    
    2.21
    %
    
    $
    197,869
    
    
    $
    1,815
    
    
    
    1.85
    %Savings
    
    
    36,160
    
    
    
    182
    
    
    
    1.01
    %
    
    
    40,294
    
    
    
    200
    
    
    
    1.00
    %Time certificates
    
    
    537,494
    
    
    
    12,735
    
    
    
    4.78
    %
    
    
    441,535
    
    
    
    8,492
    
    
    
    3.88
    %Total interest bearing deposits
    
    
    761,135
    
    
    
    14,976
    
    
    
    3.97
    %
    
    
    679,698
    
    
    
    10,507
    
    
    
    3.12
    %Repurchase agreements sold
    
    
    34,879
    
    
    
    570
    
    
    
    3.30
    %
    
    
    30,091
    
    
    
    421
    
    
    
    2.82
    %Borrowed funds
    
    
    19,607
    
    
    
    451
    
    
    
    4.64
    %
    
    
    51,778
    
    
    
    762
    
    
    
    2.97
    %Total interest bearing liabilities
    
    
    815,621
    
    
    
    15,997
    
    
    
    3.96
    %
    
    
    761,567
    
    
    
    11,690
    
    
    
    3.10
    %Noninterest bearing deposits
    
    
    152,553
    
    
    
    
    
    
    
    
    
    
    
    143,731Stockholders equity
    
    
    127,719
    
    
    
    
    
    
    
    
    
    
    
    118,748Other liabilities
    
    
    7,717
    
    
    
    
    
    
    
    
    
    
    
    6,040Total average liabilities and
stockholders equity
    
    $
    1,103,610
    
    
    
    
    
    
    
    
    
    
    $
    1,030,086NET INTEREST INCOME/
YIELD (3,4)
    
    
    
    
    
    $
    20,955
    
    
    
    4.27
    %
    
    
    
    
    
    $
    20,418
    
    
    
    4.50
    %INTEREST SPREAD (5)
    
    
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    
    
    
    
    
    
    
    
    3.98
    %
 
 1.
    
    Interest income and 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. Provisions and Allowance for Loan Losses
   
 15




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##### Table of Contents



Noninterest Income
  
    
    Service charges on deposit accounts increased $49,537 or 5.5% due largely to an
increase in service charge income on business checking, NOW, and money market accounts
as well as paid overdraft fees on commercial accounts and ATM service charge fees.
    
    Other service fees increased by $215,249 or 27.0%, due mainly to a $95,765 or 27.6%
increase in Sidus commission fees and a $95,195 or 88.8% increase in annuity and mutual
funds commissions. Also, a higher volume of annuities were sold along with recurring
income from annuities sold earlier.
    
    Net gain on sale of mortgages increased $126,324 or 8.3% due to the increase in total
loans sold (14.3%) that resulted from an increase in total loans closed (23.4%).
    
    Net gain on sale of investments decreased $7,000. Investments were not sold due to
sufficient liquidity during the second quarter.
    
    Income on investment in BOLI increased as a result of additional investment in BOLI
during August 2006 and a conversion of existing policies to a higher yielding product
in November 2006
    
    Mortgage banking income increased $83,954 or 171.2% due to an adjustment of Mortgage
Servicing Rights (MSR) to reflect a more recent valuation of the MSR
    
    Other income decreased by $11,735 or 18.3% mainly due to the increased loss on the
sale of other real estate owned, which increased by $11,314.
  
    
    Service charges on deposit accounts up $132,806 or 7.4% due to NSF fees increasing by
$113,691 or 6.4% and ATM service charge income up by $16,333 or 10.9%. NOW and Money
Market service charges increased as regular checking and club checking service charges
decreased.
    
    Other service fees increased by $287,273 or 18.3% due mainly to a $139,136 or 20.7%
increase in Sidus commission fees and a $90,024 or 80.3% increase in annuity and mutual
fund commissions. The Bank had a larger amount of mortgages originated in the first six
months of 2007 than 2006 and a greater volume of annuities sold.
    
    Net gain on sale of mortgages had an increase of $372,607 or 13.9% due to the
increase in total loans sold and total loans originated.
    
    Net gain on sale of investments decreased $18,724. The Banks liquidity remained at
sufficient levels and did not necessitate any investment sales.
 
 16




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##### Table of Contents




    
    Income on investment in BOLI increased $238,618 as a result of additional investments
in BOLI in August 2006 and the conversion of existing policies to a higher yielding product in
November 2006.
    
    Mortgage banking income increased $84,361 or 66.0% due to an adjustment of Mortgage
Servicing Rights (MSR) in the second quarter to reflect a more recent valuation of the
MSR.
    
    The Bank received a BOLI death benefit resulting in income of $481,940 in the first
quarter of 2007.
    
    Other income decreased by $19,923 or 14.3% mainly due to a decrease in dividends
earned on FHLB stock as the Bank owned a lesser number of shares during 2007 and due to
check cashing fees decreasing by $13,445 or 36.9%.
 Noninterest Expense
  
    
    Salaries and employee benefit expenses increased $430,135 or 9.4%. Salaries expense
increased by $295,656 due to the new position added in administration and normal annual
increases. Commission expense increased by $99,197 due to additional revenue generated by
mortgage originators and investment brokers.
    
    Occupancy and equipment expense increased by $71,288 or 7.8%. The largest contributor
to the increase was the expense incurred to prepare the new branch in Pfafftown for
opening in April 2007. Also, an increase in depreciation expense as the Bank upgrades
equipment and adds to new offices.
    
    Printing and supplies increased only $7,219 or 5.5%. The addition of a loan production
office in Wilmington and a branch in Pfafftown being the most significant factors.
    
    Data processing expense increased $16,127 or 17.2% due mainly to enhancements to the
internet banking products.
    
    Amortization of the core deposit intangible, recognized with the purchases of Main
Street BankShares, Inc. in 2002 and High Country Financial Corporation in 2004, decreased
$9,961 or 4.8% in accordance with the scheduled amortization expense.
    
    Other operating expenses increased $262,950 or 13.2%. Miscellaneous expense increased
as the Bank accrued for expenses relating to former employees suit for breach of
contract. Telephone expense
increased as the Bank changed service providers and incurred extra expense relating to
the switch over. Decreases in outside service fees helped offset the impact of the
increases as fewer consultant services were utilized. Accounting fees in the second
quarter of 2007 showed an increase over the first quarter of the year. ATM service fees
increased as charges increased from ATM service provider due to a larger number of
debit cards being issued along with increased usage.
  
    
    Salaries and employee benefit expenses increased $703,537 or 7.7% over the last year
due to additional employees to staff the new branch scheduled to open in April 2007 and
normal salary and wage increases. The largest increase was in commissions paid due to the
increase in revenue from the investment brokerage division and the mortgage originators.
 
 17




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##### Table of Contents




    
    Occupancy and equipment costs increased $131,672 or 7.0%. The increases were due to
higher depreciation costs as the Bank grows and expenses for new offices in Pfafftown and
Wilmington.
    
    Amortization of the core deposit intangible, recognized with the purchases of Main
Street BankShares, Inc. in 2002 and High Country Financial Corporation in 2004, decreased
$19,922 or 4.8% in accordance with the scheduled amortization expense.
    
    Other operating expenses increased $310,963 or 7.9%. The largest increases were in
expenses related to utilities due to the increased fuel costs and ATM fees due to
increased fees from the service provider. Miscellaneous expense increased as the Bank
accrued for expenses relating to former employees suit for breach of contract, as did
telephone expenses as the Bank added offices. Decreases in outside service fees helped
offset the impact of the increases as fewer professional services were engaged.
 Income Tax Expense
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  
 Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 18




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##### Table of Contents



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)April 1, 2007 to April 30, 2007
    
    
    1,500
    
    
    $
    19.34
    
    
    
    1,500
    
    
    
    17,290May 1, 2007 to May 31, 2007
    
    
    12,402
    
    
    
    18.98
    
    
    
    12,402
    
    
    
    4,888June 1, 2007 to June 30, 2007 (2006 plan)
    
    
    4,888
    
    
    
    19.04
    
    
    
    4,888
    
    
    
    -0-June 1, 2007 to June 30, 2007 (2007 plan)
    
    
    112
    
    
    
    19.04
    
    
    
    112
    
    
    
    99,888Total
    
    
    18,902
    
    
    $
    19.03
    
    
    
    18,902
 
 (1)
    
    The Companys stock repurchase program, as
approved by the Board of Directors on May 24, 2007
provides for the repurchase of up to 100,000 shares.
There have been 112 shares purchased under the 2007
plan. Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal 1:
    
    Shareholders elected J.T. Alexander, Jr., Ralph L. Bentley, M.D., Nolan G. Brown, Faye
E. Cooper, Harry M. Davis, James A. Harrell, Jr., William A. Long, Daniel J. Park, James L.
Poindexter, James N. Smoak, Harry C. Spell and C. Kenneth
Wilcox to serve one-year terms on the Board of Directors or until their successors
are            elected and qualified. Votes for each nominee were as follows:
 Name
    
    For
    
    WithheldJ.T. Alexander, Jr.
    
    
    7,601,418
    
    
    
    144,490Ralph L. Bentley, M.D.
    
    
    7,599,213
    
    
    
    146,695Nolan G. Brown
    
    
    7,588,556
    
    
    
    157,352Faye E. Cooper
    
    
    7,562,052
    
    
    
    183,856Harry M. Davis
    
    
    7,633,479
    
    
    
    112,429James A. Harrell, Jr.
    
    
    7,631,157
    
    
    
    114,751William A. Long
    
    
    7,634,326
    
    
    
    111,582Daniel J. Park
    
    
    7,569,675
    
    
    
    176,233James L. Poindexter
    
    
    7,563,076
    
    
    
    182,832James N. Smoak
    
    
    7,639,114
    
    
    
    106,794Harry C. Spell
    
    
    7,604,271
    
    
    
    141,637C. Kenneth Wilcox
    
    
    7,483,183
    
    
    
    262,725
 
 Item 6. Exhibits
 Exhibit #
    
    Description10.1
    
    Definitive Agreement and Plan of Reorganization with Cardinal State Bank (incorporated by
reference to exhibit 2.1 to Form 8-K filed on August 18, 2007 (file 000-52099))31.1
    
    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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Yadkin Valley Financial CorporationBY:
    
    /s/ William A. LongWilliam A. Long, President and Chief Executive OfficerBY:
    
    /s/ Edwin E. LawsEdwin E. Laws, Chief Financial Officer
  
 20