##### Table of Contents



US Securities and Exchange Commission
 Washington, DC 20549
 Form 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2010
 Commission File Number 000-52099
 Yadkin Valley Financial Corporation
 (Exact name of registrant specified in its charter)
 North Carolina
(State of Incorporation)
    
    20-4495993
(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(Do not check if a smaller reporting company)
Smaller reporting company o o þ
 o þ




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Nine Months Ended September 30, 2010 and 2009
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
    
    
    2Condensed Consolidated Statements of Income (Loss)
Three and Nine Months Ended September 30, 2010 and 2009
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Shareholders Equity
Nine Months Ended September 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2010 and 2009
    
    
    6-7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8-26Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    27-44Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    44-45Part II. Other InformationItem 1. Legal Proceedings
    
    
    45Item 6. Exhibit Index
    
    
    46Signatures
    
    
    47ExhibitsEX-3.1.1EX-31.1EX-31.2EX-32
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2010
 1




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YADKIN VALLEY FINANCIAL CORPORATION  CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)  As of September 30, 2010 and December 31, 2009  (Amounts in thousands, except share data)
 September 30,
    
    
    December 31,*2010
    
    
    2009ASSETSCash and due from banks
    
    $
    32,112
    
    
    $
    89,668Federal funds sold
    
    
    2,427
    
    
    
    93Interest-bearing deposits
    
    
    108,665
    
    
    
    2,576Securities available-for-sale at fair value
(amortized cost $283,316 in 2010 and $179,143 in 2009)
    
    
    289,718
    
    
    
    183,841Gross loans
    
    
    1,641,387
    
    
    
    1,676,448Less: allowance for loan losses
    
    
    44,735
    
    
    
    48,625Net loans
    
    
    1,596,652
    
    
    
    1,627,823Loans held-for-sale
    
    
    76,199
    
    
    
    49,715Accrued interest receivable
    
    
    8,176
    
    
    
    7,783Premises and equipment, net
    
    
    45,368
    
    
    
    43,642Foreclosed real estate
    
    
    22,480
    
    
    
    14,345Federal Home Loan Bank stock, at cost
    
    
    9,784
    
    
    
    10,539Investment in bank-owned life insurance
    
    
    25,103
    
    
    
    24,454Goodwill
    
    
    4,944
    
    
    
    4,944Core deposit intangible (net of accumulated amortization of $7,310
in 2010 and $6,335 in 2009)
    
    
    5,212
    
    
    
    6,186Other assets
    
    
    43,949
    
    
    
    48,003Total Assets
    
    $
    2,270,789
    
    
    $
    2,113,612LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing demand deposits
    
    $
    205,856
    
    
    $
    207,850Interest-bearing deposits:NOW, savings and money market accounts
    
    
    467,731
    
    
    
    445,508Time certificates:$100 or more
    
    
    531,892
    
    
    
    560,825Other
    
    
    776,012
    
    
    
    607,569Total Deposits
    
    
    1,981,491
    
    
    
    1,821,752Short-term borrowings
    
    
    47,278
    
    
    
    44,467Long-term borrowings
    
    
    71,996
    
    
    
    79,000Capital lease obligations
    
    
    2,411
    
    
    
    2,437Accrued interest payable
    
    
    3,715
    
    
    
    3,015Other liabilities
    
    
    13,237
    
    
    
    10,675Total Liabilities
    
    
    2,120,128
    
    
    
    1,961,346Shareholders EquityPreferred stock, no par value, 1,000,000 shares authorized; 49,312 issued
and outstanding in 2010, 49,312 shares issued and outstanding in 2009
    
    
    46,616
    
    
    
    46,152Common stock, $1 par value, 50,000,000 shares authorized;
16,144,640 issued and outstanding in 2010 and 16,129,640
issued and outstanding in 2009
    
    
    16,145
    
    
    
    16,130Warrants
    
    
    3,581
    
    
    
    3,581Surplus
    
    
    114,627
    
    
    
    114,574Accumulated deficit
    
    
    (34,265
    )
    
    
    (31,080
    )Accumulated other comprehensive income
    
    
    3,957
    
    
    
    2,909Total Shareholders Equity
    
    
    150,661
    
    
    
    152,266Total Liabilities and Shareholders Equity
    
    $
    2,270,789
    
    
    $
    2,113,612
 
 *
    
    Derived from audited financial statements  
 2




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)  Three and Nine Months Ended September 30, 2010 and 2009  (Amounts in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009INTEREST INCOME:Interest and fees on loans
    
    $
    22,921
    
    
    $
    24,731
    
    
    $
    68,337
    
    
    $
    64,694Interest on federal funds sold
    
    
    1
    
    
    
    19
    
    
    
    3
    
    
    
    22Interest and dividends on securities:Taxable
    
    
    1,562
    
    
    
    1,311
    
    
    
    3,941
    
    
    
    3,849Non-taxable
    
    
    534
    
    
    
    566
    
    
    
    1,588
    
    
    
    1,463Interest-bearing deposits
    
    
    110
    
    
    
    10
    
    
    
    297
    
    
    
    31TOTAL INTEREST INCOME
    
    
    25,128
    
    
    
    26,637
    
    
    
    74,166
    
    
    
    70,059INTEREST EXPENSETime deposits of $100 or more
    
    
    3,503
    
    
    
    4,517
    
    
    
    10,138
    
    
    
    11,351Other time and savings deposits
    
    
    4,699
    
    
    
    3,005
    
    
    
    13,534
    
    
    
    10,718Borrowed funds
    
    
    618
    
    
    
    734
    
    
    
    1,781
    
    
    
    2,141TOTAL INTEREST EXPENSE
    
    
    8,820
    
    
    
    8,256
    
    
    
    25,453
    
    
    
    24,210NET INTEREST INCOME
    
    
    16,308
    
    
    
    18,381
    
    
    
    48,713
    
    
    
    45,849PROVISION FOR LOAN LOSSES
    
    
    7,879
    
    
    
    18,286
    
    
    
    18,072
    
    
    
    45,293NET INTEREST INCOME AFTER PROVISIONFOR LOAN LOSSES
    
    
    8,429
    
    
    
    95
    
    
    
    30,641
    
    
    
    556NON-INTEREST INCOME:Service charges on deposit accounts
    
    
    1,539
    
    
    
    1,577
    
    
    
    4,463
    
    
    
    4,160Other service fees
    
    
    985
    
    
    
    1,189
    
    
    
    2,743
    
    
    
    3,619Net gain on sales and fees of mortgage loans
    
    
    2,683
    
    
    
    2,751
    
    
    
    5,893
    
    
    
    10,752Gain on sale of available-for-sale securities
    
    
    1
    
    
    
    
    
    
    
    889
    
    
    
    Income on investment in bank-owned life insurance
    
    
    251
    
    
    
    235
    
    
    
    649
    
    
    
    701Mortgage banking income (loss)
    
    
    53
    
    
    
    7
    
    
    
    169
    
    
    
    (507
    )Other than temporary impairment of equity securities
    
    
    (115
    )
    
    
    (175
    )
    
    
    (380
    )
    
    
    (355
    )Other income
    
    
    175
    
    
    
    94
    
    
    
    379
    
    
    
    163TOTAL NON-INTEREST INCOME
    
    
    5,572
    
    
    
    5,678
    
    
    
    14,805
    
    
    
    18,533NON-INTEREST EXPENSES:Salaries and employee benefits
    
    
    8,248
    
    
    
    7,762
    
    
    
    21,852
    
    
    
    21,688Occupancy and equipment expense
    
    
    2,298
    
    
    
    1,858
    
    
    
    6,220
    
    
    
    5,028Printing and supplies
    
    
    169
    
    
    
    345
    
    
    
    702
    
    
    
    849Data processing
    
    
    380
    
    
    
    349
    
    
    
    1,077
    
    
    
    909Amortization of core deposit intangible
    
    
    315
    
    
    
    327
    
    
    
    975
    
    
    
    902Communications expense
    
    
    445
    
    
    
    372
    
    
    
    1,339
    
    
    
    1,024Advertising expense
    
    
    362
    
    
    
    357
    
    
    
    744
    
    
    
    946FDIC assessment expense
    
    
    1,122
    
    
    
    973
    
    
    
    3,240
    
    
    
    3,433Loan collection fees
    
    
    307
    
    
    
    370
    
    
    
    868
    
    
    
    595Attorney fees
    
    
    223
    
    
    
    469
    
    
    
    446
    
    
    
    992Net loss on other real estate owned
    
    
    585
    
    
    
    1,218
    
    
    
    1,784
    
    
    
    1,369Acquisition costs
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    2,594Goodwill impairment
    
    
    
    
    
    
    61,566
    
    
    
    
    
    
    
    61,566Other expenses
    
    
    2,918
    
    
    
    2,490
    
    
    
    7,637
    
    
    
    7,672TOTAL NON-INTEREST EXPENSES
    
    
    17,372
    
    
    
    78,748
    
    
    
    46,884
    
    
    
    109,567LOSS BEFORE INCOME TAXES
    
    
    (3,371
    )
    
    
    (72,975
    )
    
    
    (1,438
    )
    
    
    (90,478
    )INCOME TAX BENEFIT
    
    
    (1,299
    )
    
    
    (4,716
    )
    
    
    (566
    )
    
    
    (11,505
    )NET LOSS
    
    
    (2,072
    )
    
    
    (68,259
    )
    
    
    (872
    )
    
    
    (78,973
    )Preferred stock dividend and accretion of preferred stock
discount
    
    
    771
    
    
    
    708
    
    
    
    2,313
    
    
    
    1,681NET LOSS TO COMMON SHAREHOLDERS
    
    $
    (2,843
    )
    
    $
    (68,967
    )
    
    $
    (3,185
    )
    
    $
    (80,654
    )NET LOSS PER COMMON SHARE:Basic
    
    $
    (0.18
    )
    
    $
    (4.28
    )
    
    $
    (0.20
    )
    
    $
    (5.62
    )Diluted
    
    $
    (0.18
    )
    
    $
    (4.28
    )
    
    $
    (0.20
    )
    
    $
    (5.62
    )
  
 3




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (LOSS) (UNAUDITED)  Three and Nine Months Ended September 30, 2010 and 2009
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Amounts in thousands)NET LOSS
    
    $
    (2,072
    )
    
    $
    (68,259
    )
    
    $
    (872
    )
    
    $
    (78,973
    )OTHER COMPREHENSIVE INCOME:Unrealized holding gains on securities available-for-sale
    
    
    994
    
    
    
    1,860
    
    
    
    2,591
    
    
    
    1,674Tax effect
    
    
    (382
    )
    
    
    (717
    )
    
    
    (997
    )
    
    
    (614
    )Unrealized holding gains on securities available-for-sale,
net of tax amount
    
    
    612
    
    
    
    1,143
    
    
    
    1,594
    
    
    
    1,060Reclassification adjustment for realized gains
    
    
    (1
    )
    
    
    
    
    
    
    (889
    )
    
    
    Tax effect
    
    
    
    
    
    
    
    
    
    
    343
    
    
    
    Reclassification adjustment for realized gains,
net of tax amount
    
    
    (1
    )
    
    
    
    
    
    
    (546
    )
    
    
    OTHER COMPREHENSIVE INCOME, NET OF TAX
    
    
    611
    
    
    
    1,143
    
    
    
    1,048
    
    
    
    1,060COMPREHENSIVE INCOME (LOSS)
    
    $
    (1,461
    )
    
    $
    (67,116
    )
    
    $
    176
    
    
    $
    (77,913
    )
  
 4




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
Nine Months Ended September 30, 2010 and 2009
 Retained
    
    
    Accumulatedearnings
    
    
    other
    
    
    TotalCommon Stock
    
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    (accumulated
    
    
    comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Stock
    
    
    Warrants
    
    
    Surplus
    
    
    deficit)
    
    
    income (loss)
    
    
    equity(Amounts in thousands, except share data)BALANCE, DECEMBER 31,
2008
    
    
    11,536,500
    
    
    $
    11,537
    
    
    $
    
    
    
    $
    
    
    
    $
    88,030
    
    
    $
    48,070
    
    
    $
    2,007
    
    
    $
    149,644Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,973
    )
    
    
    
    
    
    
    (78,973
    )Shares issued under stock
option plan
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Preferred stock issued
    
    
    
    
    
    
    
    
    
    
    49,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,312Preferred stock discount
    
    
    
    
    
    
    
    
    
    
    (3,581
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,581
    )Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,581Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    
    
    
    
    (287
    )
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    55Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (1,394
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,658
    )
    
    
    
    
    
    
    (1,658
    )Shares issued in acquisition
of American Community
    
    
    4,593,132
    
    
    
    4,593
    
    
    
    
    
    
    
    
    
    
    
    26,469
    
    
    
    
    
    
    
    
    
    
    
    31,062Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060
    
    
    
    1,060BALANCE, SEPTEMBER 30,
2009
    
    
    16,129,640
    
    
    $
    16,130
    
    
    $
    46,018
    
    
    $
    3,581
    
    
    $
    114,555
    
    
    $
    (34,242
    )
    
    $
    3,067
    
    
    $
    149,109BALANCE, DECEMBER 31,
2009
    
    
    16,129,640
    
    
    
    16,130
    
    
    
    46,152
    
    
    
    3,581
    
    
    
    114,574
    
    
    
    (31,080
    )
    
    
    2,909
    
    
    
    152,266Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    (872
    )Restricted stock issued
    
    
    15,000
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    (464
    )
    
    
    
    
    
    
    Stock option compensation:stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    63restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,849
    )
    
    
    
    
    
    
    (1,849
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,048
    
    
    
    1,048BALANCE, SEPTEMBER 30,
2010
    
    
    16,144,640
    
    
    $
    16,145
    
    
    $
    46,616
    
    
    $
    3,581
    
    
    $
    114,627
    
    
    $
    (34,265
    )
    
    $
    3,957
    
    
    $
    150,661
 
 5




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 
Nine Months Ended September 30, 2010 and 2009
 Nine Months Ended September 30,2010
    
    
    2009(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (872
    )
    
    $
    (78,973
    )Adjustments
to reconcile net loss to net cash provided by operating activities:Net amortization of premiums on investment securities
    
    
    1,487
    
    
    
    476Provision for loan losses
    
    
    18,072
    
    
    
    45,293Net gain on sales of mortgage loans
    
    
    (5,893
    )
    
    
    (10,752
    )Other than temporary impairment of investments
    
    
    380
    
    
    
    355Increase in cash surrender value of life insurance
    
    
    (649
    )
    
    
    (701
    )Depreciation and amortization
    
    
    2,314
    
    
    
    2,024Loss on sale of premises and equipment
    
    
    8
    
    
    
    127Net loss on other real estate owned
    
    
    1,784
    
    
    
    1,369Gain on sale of available-for-sale securities
    
    
    (889
    )
    
    
    Impairment of goodwill
    
    
    
    
    
    
    61,566Amortization of core deposit intangible
    
    
    975
    
    
    
    902Deferred tax provision (benefit)
    
    
    4,537
    
    
    
    (9,314
    )Stock based compensation expense
    
    
    68
    
    
    
    55Originations of mortgage loans held-for-sale
    
    
    (559,491
    )
    
    
    (1,392,024
    )Proceeds from sales of mortgage loans
    
    
    538,900
    
    
    
    1,405,794Decrease in capital lease obligations
    
    
    26
    
    
    
    Increase in accrued interest receivable
    
    
    (393
    )
    
    
    (213
    )Increase in other assets
    
    
    (1,518
    )
    
    
    (9,774
    )Increase (decrease) in accrued interest payable
    
    
    700
    
    
    
    (754
    )Increase in other liabilities
    
    
    2,510
    
    
    
    5,750NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    2,056
    
    
    $
    21,206CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale securities
    
    $
    (177,347
    )
    
    $
    (31,229
    )Proceeds from sales of available-for-sale securities
    
    
    29,180
    
    
    
    41,889Proceeds from maturities of available-for-sale securities
    
    
    43,395
    
    
    
    8,000Decrease in loans
    
    
    (2,296
    )
    
    
    (65,295
    )Acquisition of American Community
    
    
    
    
    
    
    2,041Purchases of premises and equipment
    
    
    (4,048
    )
    
    
    (4,021
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (2,385
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    755
    
    
    
    1,851Proceeds from sale of premises and equipment
    
    
    
    
    
    
    895Proceeds from the sale of foreclosed real estate
    
    
    5,475
    
    
    
    3,214NET CASH USED IN INVESTING ACTIVITIES
    
    $
    (104,886
    )
    
    $
    (45,040
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    $
    20,229
    
    
    $
    49,141Net increase in time certificates
    
    
    139,510
    
    
    
    102,613Net decrease in borrowed funds
    
    
    (4,193
    )
    
    
    (125,363
    )Dividends paid
    
    
    (1,849
    )
    
    
    (4,204
    )Proceeds from the issuance of preferred stock and warrants
    
    
    
    
    
    
    49,312NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    153,697
    
    
    
    71,499NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    50,867
    
    
    
    47,665CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    92,337
    
    
    
    26,022End of period
    
    $
    143,204
    
    
    $
    73,687
 
 6




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
Nine Months Ended September 30, 2010 and 2009
 Nine Months Ended September 30,2010
    
    2009(Amounts in thousands)SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    25,609
    
    
    
    27,908Income taxes, net of refunds
    
    
    13
    
    
    
    2,897Noncash investing and financing activities:Unrealized gain on investment securities available for sale, net of tax effect
    
    
    1,594
    
    
    
    1,061Transfer from loans to foreclosed real estate
    
    
    15,395
    
    
    
    9,498Issuance of shares in acquisition of American Community
    
    
    
    
    
    
    31,062
  
 7




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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




---



##### Table of Contents



4. Investment Securities
  September 30, 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
    
    $
    12,079
    
    
    $
    537
    
    
    $
    38
    
    
    $
    12,578After 5 but within 10 years
    
    
    8,624
    
    
    
    764
    
    
    
    
    
    
    
    9,38820,703
    
    
    
    1,301
    
    
    
    38
    
    
    
    21,966Government sponsored agencies:Residential mortgage-backed securities
due:After 1 but within 5 years
    
    
    1,211
    
    
    
    40
    
    
    
    
    
    
    
    1,251After 5 but within 10 years
    
    
    8,436
    
    
    
    649
    
    
    
    
    
    
    
    9,085After 10 years
    
    
    23,354
    
    
    
    1,211
    
    
    
    18
    
    
    
    24,54733,001
    
    
    
    1,900
    
    
    
    18
    
    
    
    34,883Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    12,619
    
    
    
    169
    
    
    
    17
    
    
    
    12,771After 10 years
    
    
    143,714
    
    
    
    858
    
    
    
    895
    
    
    
    143,677156,333
    
    
    
    1,027
    
    
    
    912
    
    
    
    156,448Private label collateralized mortgage
obligations due:After 10 years
    
    
    2,196
    
    
    
    20
    
    
    
    189
    
    
    
    2,0272,196
    
    
    
    20
    
    
    
    189
    
    
    
    2,027State and municipal securities due:Within 1 year
    
    
    2,379
    
    
    
    33
    
    
    
    
    
    
    
    2,412After 1 but within 5 years
    
    
    10,787
    
    
    
    431
    
    
    
    24
    
    
    
    11,194After 5 but within 10 years
    
    
    21,001
    
    
    
    1,023
    
    
    
    
    
    
    
    22,024After 10 years
    
    
    35,803
    
    
    
    1,858
    
    
    
    56
    
    
    
    37,60569,970
    
    
    
    3,345
    
    
    
    80
    
    
    
    73,235Common and preferred stocks:
    
    
    1,113
    
    
    
    47
    
    
    
    1
    
    
    
    1,159Total available-for-sale securities
    
    $
    283,316
    
    
    $
    7,640
    
    
    $
    1,238
    
    
    $
    289,718
 
 10




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##### Table of Contents



December 31, 2009Unrealized
    
    
    UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amounts in     thousands)Available-for-sale securities:Securities of U.S. government
agencies due:Within 1 year
    
    $
    4,996
    
    
    $
    124
    
    
    $
    
    
    
    $
    5,120After 1 but within 5 years
    
    
    19,364
    
    
    
    502
    
    
    
    
    
    
    
    19,866After 5 but within 10 years
    
    
    17,506
    
    
    
    451
    
    
    
    49
    
    
    
    17,90841,866
    
    
    
    1,077
    
    
    
    49
    
    
    
    42,894Government sponsored agencies:Residential mortgage-backed securities due:Within 1 year
    
    
    765
    
    
    
    7
    
    
    
    
    
    
    
    772After 1 but within 5 years
    
    
    3,198
    
    
    
    45
    
    
    
    5
    
    
    
    3,238After 5 but within 10 years
    
    
    7,704
    
    
    
    376
    
    
    
    
    
    
    
    8,080After 10 years
    
    
    37,237
    
    
    
    1,560
    
    
    
    4
    
    
    
    38,79348,904
    
    
    
    1,988
    
    
    
    9
    
    
    
    50,883Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    4,930
    
    
    
    126
    
    
    
    
    
    
    
    5,056After 10 years
    
    
    19,621
    
    
    
    551
    
    
    
    10
    
    
    
    20,16224,551
    
    
    
    677
    
    
    
    10
    
    
    
    25,218Private label collateralized mortgage
obligations due:After 10 years
    
    
    2,652
    
    
    
    1
    
    
    
    366
    
    
    
    2,2872,652
    
    
    
    1
    
    
    
    366
    
    
    
    2,287State and municipal securities due:Within 1 year
    
    
    5,725
    
    
    
    55
    
    
    
    
    
    
    
    5,780After 1 but within 5 years
    
    
    14,016
    
    
    
    488
    
    
    
    
    
    
    
    14,504After 5 but within 10 years
    
    
    15,273
    
    
    
    394
    
    
    
    16
    
    
    
    15,651After 10 years
    
    
    25,038
    
    
    
    547
    
    
    
    142
    
    
    
    25,44360,052
    
    
    
    1,484
    
    
    
    158
    
    
    
    61,378Common and preferred stocks:
    
    
    1,118
    
    
    
    68
    
    
    
    5
    
    
    
    1,181Total available-for-sale securities
    
    $
    179,143
    
    
    $
    5,295
    
    
    $
    597
    
    
    $
    183,841
  
 11




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##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSeptember 30, 2010
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(Amounts in thousands)Securities available-for-sale:U.S. government agencies
    
    $
    4,913
    
    
    $
    38
    
    
    $
    
    
    
    $
    
    
    
    $
    4,913
    
    
    $
    38Government sponsored agencies:Mortgage-backed securities
    
    
    1,147
    
    
    
    16
    
    
    
    138
    
    
    
    2
    
    
    
    1,285
    
    
    
    18Collateralized mortgage obligations
    
    
    90,896
    
    
    
    912
    
    
    
    
    
    
    
    
    
    
    
    90,896
    
    
    
    912Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    1,559
    
    
    
    189
    
    
    
    1,559
    
    
    
    189State and municipal securities
    
    
    4,442
    
    
    
    72
    
    
    
    290
    
    
    
    8
    
    
    
    4,732
    
    
    
    80Common and preferred stocks
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    1
    
    
    
    6
    
    
    
    1Total temporarily impaired securities
    
    $
    101,398
    
    
    $
    1,038
    
    
    $
    1,993
    
    
    $
    200
    
    
    $
    103,391
    
    
    $
    1,238
 
 12




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##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2009
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(Amounts in thousands)Securities available-for-sale:U.S. government agencies
    
    $
    4,201
    
    
    $
    49
    
    
    $
    
    
    
    $
    
    
    
    $
    4,201
    
    
    $
    49Government sponsored agencies:Residential mortgage-backed
securities
    
    
    29
    
    
    
    5
    
    
    
    142
    
    
    
    4
    
    
    
    172
    
    
    
    9Collateralized mortgage obligation
    
    
    285
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    10Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    1,758
    
    
    
    366
    
    
    
    1,758
    
    
    
    366State and municipal securities
    
    
    6,545
    
    
    
    113
    
    
    
    1,049
    
    
    
    45
    
    
    
    7,594
    
    
    
    158Common and preferred stocks,
and other
    
    
    16
    
    
    
    3
    
    
    
    5
    
    
    
    2
    
    
    
    21
    
    
    
    5Total temporarily impaired securities
    
    $
    11,076
    
    
    $
    180
    
    
    $
    2,954
    
    
    $
    417
    
    
    $
    14,031
    
    
    $
    597
  5. Commitments and Contingencies
   
 13




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##### Table of Contents



6. Net Income (Loss) Per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Basic EPS denominator:Weighted average number of
common shares outstanding
    
    
    16,129,640
    
    
    
    16,129,632
    
    
    
    16,129,640
    
    
    
    14,356,544Dilutive effect arising from assumed
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS denominator
    
    
    16,129,640
    
    
    
    16,129,632
    
    
    
    16,129,640
    
    
    
    14,356,544
  7. Shareholders Equity
    
 14




---



##### Table of Contents



8. Derivatives
    
 15




---



##### Table of Contents



9. Allowance for Loan Losses
   September 30, 2010
    
    
    September 30, 2009(Amounts in thousands)Balance, December 31, 2009 and 2008
    
    $
    48,625
    
    
    $
    22,355Charge-offs
    
    
    (23,308
    )
    
    
    (13,762
    )Recoveries
    
    
    1,346
    
    
    
    384Provision for loan losses
    
    
    18,072
    
    
    
    45,293Allowance for Loan Losses
    
    $
    44,735
    
    
    $
    54,270
 
 16




---



##### Table of Contents



September 30, 2010
    
    
    December 31, 2009(Amounts in thousands)Impaired loans under $100,000 that are not individually reviewed
    
    $
    7,546
    
    
    $
    6,001Impaired loans without a related allowance for loan losses
    
    
    21,682
    
    
    
    16,959Impaired loans with a related allowance for loan losses
    
    
    53,570
    
    
    
    24,497Impaired loans acquired without a related allowance for loan losses
    
    
    1,883
    
    
    
    2,515Impaired loans acquired with subsequent deterioration and
related allowance for loan losses
    
    
    
    
    
    
    2,725Total impaired loans
    
    $
    84,681
    
    
    $
    52,697Allowance for loan losses related to impaired loans
    
    $
    15,834
    
    
    $
    10,971Nonaccrual loans
    
    $
    63,093
    
    
    $
    36,255Troubled debt restructured loans
    
    
    14,733
    
    
    
    5,544Other impaired loans*
    
    
    6,855
    
    
    
    10,898Total impaired loans
    
    $
    84,681
    
    
    $
    52,697
 
 *
    
    Other impaired loans consists of loans for which regular payments are still received
but for which some uncertainty exists regarding whether the full contractual amounts
will be collected in accordance with the terms of the loan agreement.   Fair ValueContractual
    
    
    AdjustmentPrincipal
    
    
    (nonaccretable
    
    
    CarryingReceivable
    
    
    difference)
    
    
    Amount(Amounts in thousands)As of April 17, 2009 acquisition date
    
    $
    14,513
    
    
    $
    3,825
    
    
    $
    10,688Change due to payment received
    
    
    (457
    )
    
    
    (63
    )
    
    
    (394
    )Transfer to foreclosed real estate
    
    
    (4,339
    )
    
    
    (266
    )
    
    
    (4,073
    )Change due to charge-offs
    
    
    (4,329
    )
    
    
    (2,999
    )
    
    
    (1,330
    )Balance at December 31, 2009
    
    
    5,388
    
    
    
    497
    
    
    
    4,891Change due to payment received
    
    
    (1,234
    )
    
    
    (20
    )
    
    
    (1,214
    )Transfer to foreclosed real estate
    
    
    (1,345
    )
    
    
    (159
    )
    
    
    (1,186
    )Change due to charge-offs
    
    
    (854
    )
    
    
    (246
    )
    
    
    (608
    )Balance at September 30, 2010
    
    $
    1,955
    
    
    $
    72
    
    
    $
    1,883
 
 17




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##### Table of Contents



10. Fair Value
   Available-for-Sale Investment Securities
  Interest Rate Swaps
   Level 3Fair Value- Assets
    
    
    Fair Value- Liabilities(Amounts in thousands)Balance, December 31, 2009
    
    $
    
    
    
    $
    Purchases, sales, issuances and settlements
    
    
    
    
    
    
    Gains/losses included in other income
    
    
    223
    
    
    
    (223
    )Balance, September 30, 2010
    
    $
    223
    
    
    $
    (223
    )
 
 18




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##### Table of Contents



Interest Rate Locks and Forward Loan Sale Commitments
  Mortgage Servicing Rights
   Level 32010
    
    
    2009Fair Value
    
    
    Fair Value(Amounts in thousands)Balance, December 31, 2009 and 2008
    
    $
    1,918
    
    
    $
    1,745Capitalized
    
    
    342
    
    
    
    584Losses included in other income
    
    
    (219
    )
    
    
    (906
    )Balance, September 30, 2010 and 2009
    
    $
    2,041
    
    
    $
    1,423
 Mortgage Loans Held-for-Sale
  Impaired Loans
  
 19




---



##### Table of Contents



Other Real Estate Owned
   September 30, 2010 (in thousands)
    
    Fair Value
    
    Level 1
    
    Level 2
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    21,966
    
    
    $
    
    
    
    $
    21,966
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    34,883
    
    
    
    
    
    
    
    34,883
    
    
    
    Collateralized mortgage obligations
    
    
    156,448
    
    
    
    
    
    
    
    156,448
    
    
    
    Private label collateralizedmortgage obligations
    
    
    2,027
    
    
    
    
    
    
    
    2,027
    
    
    
    State and municipal securities
    
    
    73,235
    
    
    
    
    
    
    
    73,235
    
    
    
    Common and preferred stocks
    
    
    1,159
    
    
    
    1,159
    
    
    
    
    
    
    
    Interest rate swap- asset
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    223Interest rate swap- liability
    
    
    (223
    )
    
    
    
    
    
    
    
    
    
    
    (223
    )Interest rate lock commitments
    
    
    1,088
    
    
    
    
    
    
    
    1,088
    
    
    
    Forward loan sale commitments
    
    
    (607
    )
    
    
    
    
    
    
    (607
    )
    
    
    Mortgage servicing rights
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    2,041
 
 20




---



##### Table of Contents



December 31, 2009 (in thousands)
    
    Fair Value
    
    Level 1
    
    Level 2
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    42,894
    
    
    $
    
    
    
    $
    42,894
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    50,883
    
    
    
    
    
    
    
    50,883
    
    
    
    Collateralized mortgage obligations
    
    
    25,218
    
    
    
    
    
    
    
    25,218
    
    
    
    Private label collateralizedmortgage obligations
    
    
    2,287
    
    
    
    
    
    
    
    2,287
    
    
    
    State and municipal securities
    
    
    61,378
    
    
    
    
    
    
    
    61,378
    
    
    
    Common and preferred stocks
    
    
    1,181
    
    
    
    1,181
    
    
    
    
    
    
    
    Interest rate lock commitments
    
    
    (791
    )
    
    
    
    
    
    
    (791
    )
    
    
    Forward loan sale commitments
    
    
    1,020
    
    
    
    
    
    
    
    1,020
    
    
    
    Mortgage servicing rights
    
    
    1,918
    
    
    
    
    
    
    
    
    
    
    
    1,918
  Fair Value
    
    Level 1
    
    Level 2
    
    Level 3(Amounts in thousands)Other real estate owned at September 30, 2010
    
    $
    2,989
    
    
    $
    
    
    
    $
    

    
    
    $
    2,989Other real estate owned at December 31, 2009
    
    
    2,510
    
    
    
    

    
    
    
    
    
    

    
    2,510Impaired loans at September 30, 2010
    
    
    37,736
    
    
    
    

    
    
    
    

    
    
    
    37,736Impaired loans at December 31, 2009
    
    
    16,251
    
    
    
    
    
    

    
    

    
    
    
    16,251Cost method investments at September 30, 2010
    
    
    758
    
    
    
    

    
    
    
    

    
    
    
    758Cost method investments at December 31, 2009
    
    
    115
    
    
    
    

    
    
    
    

    
    
    
    115
   
 21




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##### Table of Contents



11. Financial Instruments
  September 30, 2010
    
    December 31, 2009Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair value(Amounts in thousands)Financial assets:Cash and cash equivalents
    
    $
    143,204
    
    
    $
    143,204
    
    
    $
    92,337
    
    
    $
    92,337Investment securities
    
    
    289,718
    
    
    
    289,718
    
    
    
    183,841
    
    
    
    183,841Loans and loans held-for-sale, net
    
    
    1,672,851
    
    
    
    1,599,357
    
    
    
    1,677,538
    
    
    
    1,676,845Accrued interest receivable
    
    
    8,176
    
    
    
    8,176
    
    
    
    7,783
    
    
    
    7,783Federal Home Loan Bank stock
    
    
    9,784
    
    
    
    9,784
    
    
    
    10,539
    
    
    
    10,539Investment in Bank owned life
insurance
    
    
    25,103
    
    
    
    25,103
    
    
    
    24,454
    
    
    
    24,454Interest rate swap  asset
    
    
    223
    
    
    
    223
    
    
    
    
    
    
    
    Interest rate lock commitments
    
    
    1,088
    
    
    
    1,088
    
    
    
    (791
    )
    
    
    (791
    )Financial liabilities:Demand deposits, NOW, savingsand money market accounts
    
    $
    673,587
    
    
    $
    673,587
    
    
    $
    653,358
    
    
    $
    653,358Time deposits
    
    
    1,307,904
    
    
    
    1,316,429
    
    
    
    1,168,394
    
    
    
    1,185,405Borrowed funds
    
    
    119,274
    
    
    
    120,791
    
    
    
    123,468
    
    
    
    124,947Accrued interest payable
    
    
    3,715
    
    
    
    3,715
    
    
    
    3,015
    
    
    
    3,015Interest rate swap  liability
    
    
    (223
    )
    
    
    (223
    )
    
    
    
    
    
    
    Forward loan sale commitments
    
    
    (607
    )
    
    
    (607
    )
    
    
    1,020
    
    
    
    1,020
       
 22




---



##### Table of Contents



12. Goodwill
   13. Business Segment Information
  
 23




---



##### Table of Contents



Bank
    
    
    Sidus
    
    
    Other
    
    
    Total(Amounts in thousands)For Three Months Ended September 30, 2010Interest income
    
    $
    24,567
    
    
    $
    561
    
    
    $
    
    
    
    $
    25,128Interest expense
    
    
    8,567
    
    
    
    45
    
    
    
    208
    
    
    
    8,820Net interest income
    
    
    16,000
    
    
    
    516
    
    
    
    (208
    )
    
    
    16,308Provision for loan losses
    
    
    7,828
    
    
    
    51
    
    
    
    
    
    
    
    7,879Net interest income (loss) after provision
    
    
    8,172
    
    
    
    465
    
    
    
    (208
    )
    
    
    8,429for loan lossesOther income
    
    
    2,988
    
    
    
    2,684
    
    
    
    (100
    )
    
    
    5,572Other expense
    
    
    15,091
    
    
    
    2,217
    
    
    
    64
    
    
    
    17,372Income (loss) before income tax benefit
    
    
    (3,931
    )
    
    
    932
    
    
    
    (372
    )
    
    
    (3,371
    )Income tax
benefit
    
    
    (1,299
    )
    
    
    
    
    
    
    
    
    
    
    (1,299
    )Net income (loss)
    
    $
    (2,632
    )
    
    $
    932
    
    
    $
    (372
    )
    
    $
    (2,072
    )Total assets
    
    $
    2,247,183
    
    
    $
    87,889
    
    
    $
    (64,283
    )
    
    $
    2,270,789Net loans
    
    
    1,596,652
    
    
    
    
    
    
    
    
    
    
    
    1,596,652Loans held for sale
    
    
    50
    
    
    
    76,149
    
    
    
    
    
    
    
    76,199Goodwill
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944For Nine Months Ended September 30, 2010Interest income
    
    $
    72,841
    
    
    $
    1,325
    
    
    $
    
    
    
    $
    74,166Interest expense
    
    
    24,768
    
    
    
    108
    
    
    
    577
    
    
    
    25,453Net interest income
    
    
    48,073
    
    
    
    1,217
    
    
    
    (577
    )
    
    
    48,713Provision for loan losses
    
    
    17,791
    
    
    
    281
    
    
    
    
    
    
    
    18,072Net interest income (loss) after provision
    
    
    30,282
    
    
    
    936
    
    
    
    (577
    )
    
    
    30,641for loan lossesOther income
    
    
    9,233
    
    
    
    5,894
    
    
    
    (322
    )
    
    
    14,805Other expense
    
    
    40,984
    
    
    
    5,616
    
    
    
    284
    
    
    
    46,884Income (loss) before income tax benefit
    
    
    (1,469
    )
    
    
    1,214
    
    
    
    (1,183
    )
    
    
    (1,438
    )Income tax benefit
    
    
    (566
    )
    
    
    
    
    
    
    
    
    
    
    (566
    )Net income (loss)
    
    $
    (903
    )
    
    $
    1,214
    
    
    $
    (1,183
    )
    
    $
    (872
    )
 
 (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 ($59,180 in 2010), the Banks Investment in Sidus ($3,000 in 2010), and the Banks accounts
receivable from Sidus ($50 in 2010). Also included in this column are Holding Company assets
($2,053 in 2010) and Holding Company income and expenses. 
 24




---



##### Table of Contents



Bank
    
    
    Sidus
    
    
    Other
    
    
    Total(Amounts in thousands)For Three Months Ended September 30, 2009Interest income
    
    $
    25,968
    
    
    $
    669
    
    
    $
    
    
    
    $
    26,637Interest expense
    
    
    7,978
    
    
    
    46
    
    
    
    231
    
    
    
    8,255Net interest income
    
    
    17,990
    
    
    
    623
    
    
    
    (231
    )
    
    
    18,382Provision for loan losses
    
    
    18,293
    
    
    
    (7
    )
    
    
    
    
    
    
    18,286Net interest income (loss) after provision
for loan losses
    
    
    (303
    )
    
    
    630
    
    
    
    (231
    )
    
    
    96Other income
    
    
    1,677
    
    
    
    2,772
    
    
    
    186
    
    
    
    4,635Other expense
    
    
    13,810
    
    
    
    2,135
    
    
    
    194
    
    
    
    16,139Goodwill impairment
    
    
    61,566
    
    
    
    
    
    
    
    
    
    
    
    61,566Income (loss) before income taxes (benefit)
    
    
    (74,002
    )
    
    
    1,267
    
    
    
    (239
    )
    
    
    (72,974
    )Income taxes
(benefit)
    
    
    (5,209
    )
    
    
    494
    
    
    
    
    
    
    
    (4,715
    )Net income(loss)
    
    $
    (68,793
    )
    
    $
    773
    
    
    $
    (239
    )
    
    $
    (68,259
    )Total assets
    
    $
    2,169,541
    
    
    $
    56,736
    
    
    $
    (174,604
    )
    
    $
    2,051,673Net loans
    
    
    1,590,497
    
    
    
    1,559
    
    
    
    
    
    
    
    1,592,056Loans held for sale
    
    
    1,210
    
    
    
    45,700
    
    
    
    
    
    
    
    46,910Goodwill
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944For Nine Months Ended September 30, 2009Interest income
    
    $
    66,939
    
    
    $
    3,121
    
    
    $
    
    
    
    $
    70,060Interest expense
    
    
    23,215
    
    
    
    319
    
    
    
    677
    
    
    
    24,211Net interest income
    
    
    43,724
    
    
    
    2,802
    
    
    
    (677
    )
    
    
    45,849Provision for loan losses
    
    
    45,239
    
    
    
    54
    
    
    
    
    
    
    
    45,293Net interest income (loss) after provision
for loan losses
    
    
    (1,515
    )
    
    
    2,748
    
    
    
    (677
    )
    
    
    556Other income
    
    
    6,151
    
    
    
    10,764
    
    
    
    603
    
    
    
    17,518Other expense
    
    
    39,482
    
    
    
    6,949
    
    
    
    555
    
    
    
    46,986Goodwill impairment
    
    
    61,566
    
    
    
    
    
    
    
    
    
    
    
    61,566Income (loss) before income taxes (benefit)
    
    
    (96,412
    )
    
    
    6,563
    
    
    
    (629
    )
    
    
    (90,478
    )Income taxes (benefit)
    
    
    (14,065
    )
    
    
    2,560
    
    
    
    
    
    
    
    (11,505
    )Net income(loss)
    
    $
    (82,347
    )
    
    $
    4,003
    
    
    $
    (629
    )
    
    $
    (78,973
    )
 
 (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 ($175,000 in 2009), the Banks Investment in Sidus ($3,000 in 2009), and the Banks account
receivable from Sidus ($67 in 2009). Also included in this column are Holding Company assets
($3,471 in 2009) and Holding Company income and expenses. 14. Sale of Credit Card Receivables
  
 25




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15. Cost Savings Initiatives
    
 26




---



##### 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;
 
 27




---



##### Table of Contents




    
    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
     
 28




---



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Changes in Financial Position
    
 29




---



##### Table of Contents



30




---



##### Table of Contents



September 30, 2010
    
    December 31, 2009Holding
    
    
    
    
    
    HoldingCompany
    
    Bank
    
    Company
    
    BankTotal risk-based capital ratio
    
    
    10.5
    %
    
    
    10.4
    %
    
    
    10.6
    %
    
    
    10.3
    %Tier 1 risk-based capital ratio
    
    
    9.3
    %
    
    
    9.1
    %
    
    
    9.4
    %
    
    
    9.0
    %Leverage ratio
    
    
    7.6
    %
    
    
    7.4
    %
    
    
    8.4
    %
    
    
    8.0
    %
   Liquidity, Interest Rate Sensitivity and Market Risk
  SM
  
 31




---



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Results of Operations
   Net Interest Income
  
 32




---



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33




---



##### Table of Contents



Nine Months Ended September 30, 2010
    
    
    Nine Months Ended September 30, 2009Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Interest Rates Earned and Paid
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Federal funds sold
    
    $
    2,029
    
    
    $
    3
    
    
    
    0.22
    %
    
    $
    15,946
    
    
    $
    22
    
    
    
    0.18
    %Interest-bearing deposits
    
    
    161,434
    
    
    
    297
    
    
    
    0.25
    %
    
    
    10,190
    
    
    
    31
    
    
    
    0.41
    %Investment securities (1)
    
    
    206,941
    
    
    
    6,231
    
    
    
    4.03
    %
    
    
    172,597
    
    
    
    5,957
    
    
    
    4.61
    %Total loans (1)(2)(6)
    
    
    1,692,518
    
    
    
    68,468
    
    
    
    5.41
    %
    
    
    1,563,466
    
    
    
    64,813
    
    
    
    5.54
    %Total interest-earning assets
    
    
    2,062,922
    
    
    
    74,999
    
    
    
    4.86
    %
    
    
    1,762,199
    
    
    
    70,823
    
    
    
    5.37
    %Non-earning assets
    
    
    140,893
    
    
    
    
    
    
    
    
    
    
    
    185,963Total assets
    
    $
    2,203,815
    
    
    
    
    
    
    
    
    
    
    $
    1,948,162Interest-bearing liabilities:Deposits (7):NOW and money market
    
    $
    398,904
    
    
    $
    2,373
    
    
    
    0.80
    %
    
    $
    332,470
    
    
    $
    2,266
    
    
    
    0.91
    %Savings
    
    
    54,874
    
    
    
    103
    
    
    
    0.25
    %
    
    
    45,822
    
    
    
    92
    
    
    
    0.27
    %Time certificates
    
    
    1,251,289
    
    
    
    21,196
    
    
    
    2.26
    %
    
    
    999,200
    
    
    
    19,711
    
    
    
    2.64
    %Total
interest-bearing deposits
    
    
    1,705,067
    
    
    
    23,672
    
    
    
    1.86
    %
    
    
    1,377,492
    
    
    
    22,069
    
    
    
    2.14
    %Repurchase agreements sold
    
    
    46,851
    
    
    
    294
    
    
    
    0.84
    %
    
    
    57,051
    
    
    
    506
    
    
    
    1.19
    %Borrowed funds (7)
    
    
    77,273
    
    
    
    1,487
    
    
    
    2.57
    %
    
    
    82,594
    
    
    
    1,635
    
    
    
    2.65
    %Total interest-bearing liabilities
    
    
    1,829,191
    
    
    
    25,453
    
    
    
    1.86
    %
    
    
    1,517,137
    
    
    
    24,210
    
    
    
    2.13
    %Noninterest-bearing deposits
    
    
    207,996
    
    
    
    
    
    
    
    
    
    
    
    178,193Shareholders equity
    
    
    154,401
    
    
    
    
    
    
    
    
    
    
    
    206,860Other liabilities
    
    
    12,227
    
    
    
    
    
    
    
    
    
    
    
    45,972Total average liabilities and
shareholders equity
    
    $
    2,203,815
    
    
    
    
    
    
    
    
    
    
    $
    1,948,162Net interest income (3)
and interest rate spread (5)
    
    
    
    
    
    $
    49,546
    
    
    
    3.00
    %
    
    
    
    
    
    $
    46,613
    
    
    
    3.24
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.21
    %
    
    
    
    
    
    
    
    
    
    
    3.54
    %
 
 (1)
    
    Yields related 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 for 2010 and 2009 includes $1,359 and $4,994, respectively, in accretion of fair market value adjustments
related to recent mergers(7)
    
    Interest expense on deposits and borrowings in 2010 and 2009 includes $776 and $3,393, respectively, in accretion of fair market
value adjustments related to recent mergers. Provisions and Allowance for Loan Losses
  
 34




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##### Table of Contents



For the nine months ended
    
    
    For the nine months endedSeptember 30, 2010
    
    
    September 30, 2009Net charge-offs
    
    
    
    
    
    
    Net charge-offsto average
    
    
    
    
    
    
    to averageLoan Type
    
    Net Charge-offs
    
    
    loans
    
    
    Net Charge-offs
    
    
    loans(Amounts in thousands)Construction
    
    $
    11,048
    
    
    
    0.87
    %
    
    $
    4,576
    
    
    
    1.50
    %Commercial, financial and
other
    
    
    2,429
    
    
    
    0.19
    %
    
    
    4,658
    
    
    
    2.36
    %Mortgage
    
    
    2,048
    
    
    
    0.16
    %
    
    
    270
    
    
    
    0.11
    %Commercial real estate
    
    
    3,708
    
    
    
    0.29
    %
    
    
    1,726
    
    
    
    0.34
    %Installment loans
    
    
    404
    
    
    
    0.03
    %
    
    
    737
    
    
    
    0.96
    %Revolving 1-4 family loans
    
    
    2,326
    
    
    
    0.18
    %
    
    
    1,411
    
    
    
    0.85
    %Total
    
    $
    21,963
    
    
    
    1.73
    %
    
    $
    13,378
    
    
    
    1.14
    %
     
 36




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Nonperforming Assets
     
 38




---



##### Table of Contents



September 30, 2010
    
    
    December 31, 2009% of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    TotalBalance
    
    
    Loans
    
    
    Balance
    
    
    Loans(in thousands)Construction
    
    $
    35,448
    
    
    
    2.06
    %
    
    $
    27,786
    
    
    
    1.66
    %Commercial, financial, and other
    
    
    9,711
    
    
    
    0.57
    %
    
    
    5,085
    
    
    
    0.30
    %Mortgage
    
    
    8,589
    
    
    
    0.50
    %
    
    
    8,891
    
    
    
    0.53
    %Commercial real estate
    
    
    27,992
    
    
    
    1.63
    %
    
    
    10,244
    
    
    
    0.61
    %Installment loans
    
    
    505
    
    
    
    0.03
    %
    
    
    677
    
    
    
    0.04
    %Open end, unsecured
    
    
    2,436
    
    
    
    0.14
    %
    
    
    14
    
    
    
    0.00
    %Total impaired
    
    $
    84,681
    
    
    
    4.93
    %
    
    $
    52,697
    
    
    
    3.14
    %
 Noninterest Income
   Nine Months
    
    Increase/
    
    American
    
    Increase/(decrease)Ended
    
    (decrease)
    
    Community
    
    excluding AmericanSeptember 30, 2010
    
    over 2009
    
    Increase (decrease)
    
    Community regionService charges on deposit
accounts
    
    $
    4,463
    
    
    $
    303
    
    
    $
    397
    
    
    $
    (94
    )Other service fees
    
    
    2,743
    
    
    
    (876
    )
    
    
    158
    
    
    
    (1,034
    )Net gain on sales of
mortgage loans
    
    
    5,893
    
    
    
    (4,859
    )
    
    
    
    
    
    
    (4,859
    )Gains on sales of securities
    
    
    889
    
    
    
    889
    
    
    
    
    
    
    
    889Income on investment in
bank owned
life insurance
    
    
    649
    
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )Mortgage banking income
    
    
    169
    
    
    
    676
    
    
    
    
    
    
    
    676Other than temporary
impairment of
securities
    
    
    (380
    )
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Other income
    
    
    379
    
    
    
    216
    
    
    
    77
    
    
    
    139
 
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
    
    Service charges on deposit accounts decreased for the quarter as total NSF fees (a
major component of service charges) decreased $160,000, or 13.6% compared to the second
quarter of 2009. ATM service charge income was up by $69,000, or 67.9%. Checking and
savings account service charges increased 2.0%.
    
    Service charges on deposit accounts increased for the first nine months of the year
as ATM service charge income increased $179,000, or 62.8%. Checking and savings account
service charges were also up 9.5%. Offsetting this increase was a decrease in total NSF
fees (a major component of service charges) of $51,000, or 1.7%.
  
    
    The decrease in other service fees for the quarter was due primarily to decreases in
commissions and fees on mortgages originated and commissions and fees on mutual funds
and annuities. Quarter-to-date, commission and fees on mortgages originated decreased
$110,000, or 21.7%, and commissions and fees on mutual funds and annuities decreased
$64,000, or 34.4% as compared to the previous year. Year-to-date commission and fees on
mortgages originated decreased $592,000, or 37.2%, and commissions and fees on mutual
funds and annuities decreased $198,000, or 32.6% as compared to the previous year.
    
    Year-to-date, gain on sale of mortgage loans decreased by $4.9 million or 45.2%. as
total loans originated and sold decreased due to lower market-related refinancing
activities. Mortgage loans originated decreased from $1,392.0 million in the first
nine months of 2009 to $585.0 million in the first nine months of 2010. Net gain in the
sale of mortgages for the quarter decreased approximately $68,000, or 2.5%
    
    Income on investment in bank-owned life insurance (BOLI) increased by 6.8% during
the three month period ended September 30, 2010. Year-to-date income on BOLI decreased
by 7.4%.
    
    Mortgage banking income increased approximately $46,000 for the quarter due to an
increase in the servicing fees received. Year-to-date mortgage banking income
increased $676,000.
    
    Other income increased by approximately $81,000 for the quarter and $216,000 for the
year due primarily to other income recorded in relation to the interest rate floors.
 Noninterest Expense
  
 40




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##### Table of Contents



Nine months
    
    Increase
    
    American
    
    Increase (decrease)Ended
    
    (decrease)
    
    Community
    
    excluding AmericanSeptember 30, 2009
    
    over 2009
    
    Increase (decrease)
    
    Community regionSalaries and employee benefits
    
    $
    21,852
    
    
    $
    164
    
    
    $
    236
    
    
    $
    (72
    )Occupancy expenses
    
    
    6,220
    
    
    
    1,192
    
    
    
    539
    
    
    
    653Printing and supplies
    
    
    702
    
    
    
    (147
    )
    
    
    (12
    )
    
    
    (135
    )Data processing expenses
    
    
    1,077
    
    
    
    168
    
    
    
    
    
    
    
    168Communication expenses
    
    
    1,339
    
    
    
    315
    
    
    
    176
    
    
    
    139Advertising expenses
    
    
    744
    
    
    
    (202
    )
    
    
    (2
    )
    
    
    (200
    )FDIC assessments
    
    
    3,240
    
    
    
    (193
    )
    
    
    
    
    
    
    (193
    )Loss on other real estate owned
    
    
    1,784
    
    
    
    415
    
    
    
    194
    
    
    
    221Other expenses
    
    
    7,637
    
    
    
    (35
    )
    
    
    (214
    )
    
    
    179
 
    
    Quarter-to-date, salaries and employee benefit expenses increased by $486,000, or
6.3%. The major components of this increase are summarized as follows: Salaries
and wages increased by $645,000 due to the accrual of severance payments; and
salaries and benefit costs directly related to loan originations, which are expensed
over the life of the loan, decreased $329,000, increasing salaries even further.
Related payroll taxes also increased $80,000 as salaries and wages increased.
Offsetting the increases were decreases in Employee incentive of $239,000. Other
personnel expenses also decreased $342,000 and commission expenses decreased by
$107,000 as mortgage origination production at the Bank decreased.
  
    
    Occupancy and equipment expenses increased by $440,000, or 23.7% for the quarter
and $1.2 million or 23.7% year-to-date. The increase is primarily attributable to
the addition of the American Community branches and increases in property taxes.
 
 41




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##### Table of Contents




    
    Printing and supplies decreased by $176,000, or 51.0%, comparing the third
quarter 2010 with the third quarter 2009 as consolidation of American Community
vendors and supplies is completed. Year-to-date printing and supplies decreased
$147,000, or 17.4%.
    
    Data processing expense increased $31,000, or 8.8% for the quarter $168,000, or
18.5% for the year, due primarily to increases in average deposits as well as the
outsourcing of nightly processing to an outside company beginning in June 2009.
    
    Communication expense increased $73,000 or 19.7% for the third quarter compared
to the third quarter of 2009. Year-to-date communication expense increased
$315,000, or 30.8%, with $176,000 attributable to American Community expenses.
Excluding American Community, communication expense increased $139,000.
    
    Advertising and marketing expense increased $5,000, or 1.4% for the quarter and
decreased $202,000, or 21.4% year-to-date. The decreases are due to the fact that
in the prior year, additional advertising and marketing campaigns were initiated due
to the merger with American Community, and the introduction of new products.
    
    FDIC assessment expenses increased $149,000 for the quarter and decreased
$193,000 for the year.
    
    Loss on sale of other real estate owned decreased $633,000 compared to the third
quarter of 2009. This loss increased to $1.8 million for the first nine months of
2010 as compared to $1.4 million for the first nine months of 2009 due to increased
foreclosures and significant declines in real estate values over the past year.
    
    Quarter-to-date other operating expenses (including attorney fees, accounting
fees, loan collection fees, acquisition costs and amortization of core deposit
intangibles) decreased approximately $184,000, or 4.7%. The decrease was driven
primarily by $292,000 of non-recurring acquisition costs related to the American
Community merger in 2009, a decrease in attorney fees of $246,000 and a decrease in
checking account losses of $113,000. These decreases were offset by an increase of
$491,000 in expenses related to other real estate owned.Year-to-date other operating expenses (including attorney fees, accounting fees, loan
collection fees and amortization of core deposit intangibles) decreased approximately
$2.8 million or 22.2%. The decrease was driven by non-recurring 2009 acquisition
costs of $2.6 million as well as a decrease in attorney fees of $546,000.
 Income Tax Expense
     42




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##### Table of Contents



2007*
    
    
    2008
    
    
    2009
    
    
    2010**
    
    
    Total(Amounts in thousands)Income (loss) before income taxes
    
    $
    4,551
    
    
    $
    5,108
    
    
    $
    (83,933
    )
    
    $
    (1,437
    )
    
    $
    (75,711
    )Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    61,566
    
    
    
    
    
    
    
    61,566$
    4,551
    
    
    $
    5,108
    
    
    $
    (22,367
    )
    
    $
    (1,437
    )
    
    $
    (14,145
    )
 
 *
    
    4th Quarter of 2007**
    
    First nine months of 2010   43




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##### Table of Contents



Tax BenefitNet Operating Loss
    
    
    Recorded atCarryforward at
    
    
    September 30,September 30, 2010
    
    
    2010
    
    
    Expiration(Amounts in thousands)Cardinal State Bank acquisition
    
    $
    2,424
    
    
    $
    848
    
    
    
    2029American Community Bank acquisition
    
    
    1,361
    
    
    
    463
    
    
    
    2030Total Loss Carryforwards
    
    $
    3,785
    
    
    $
    1,311
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
    44




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
    45




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##### Table of Contents



Item 6. Exhibits
 Exhibit #
    
    Description3.1
    
    Amended and Restated Articles of
Incorporation (incorporated by reference to Exhibit 3(i) to the
Current Report on Form 8K dated July 1, 2006)3.1.1
    
    Articles of Amended to the Amended
and Restated Articles of Incorporation31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certification
   46




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##### Table of Contents



Signatures
  Yadkin Valley Financial CorporationBY:
    /s/ William A. LongWilliam A. Long, President and Chief Executive OfficerBY:
    /s/ Jan H. HollarJan H. Hollar, Principal Accounting Officer,Executive Vice President and Chief Financial Officer    47