##### 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, 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
     Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007




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##### 



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-12Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12-21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21-22Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    23Item 6. Exhibit Index
    
    
    23Signatures
    
    
    24Exhibits
    
    
    24-26Exhibit 31.1Exhibit 31.2Exhibit 32.1
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION  CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 SEPTEMBER 30,
    
    
    DECEMBER 31,2007
    
    
    2006*ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    21,332,969
    
    
    $
    42,387,101Interest-bearing deposits
    
    
    1,784,390
    
    
    
    1,669,033Total cash and cash equivalents
    
    
    23,117,359
    
    
    
    44,056,134SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $142,571,623 in 2007 and $128,278,242 in 2006)
    
    
    142,385,422
    
    
    
    127,520,514GROSS LOANS
    
    
    851,613,647
    
    
    
    814,909,853Less: Allowance for loan losses
    
    
    (11,229,272
    )
    
    
    (10,828,882
    )NET LOANS
    
    
    840,384,375
    
    
    
    804,080,971LOANS HELD FOR SALE
    
    
    36,050,302
    
    
    
    42,350,915ACCRUED INTEREST RECEIVABLE
    
    
    6,412,671
    
    
    
    5,796,450PREMISES AND EQUIPMENT, NET
    
    
    26,749,373
    
    
    
    27,098,420FEDERAL HOME LOAN BANK STOCK, AT COST
    
    
    2,782,300
    
    
    
    3,632,600INVESTMENT IN BANK-OWNED LIFE INSURANCE
    
    
    22,786,838
    
    
    
    22,796,932GOODWILL
    
    
    32,696,900
    
    
    
    32,696,900CORE DEPOSIT INTANGIBLE (net of accumulated
amortization of $4,030,885 in 2007 and $3,441,799 in 2006)
    
    
    4,448,623
    
    
    
    5,037,709OTHER ASSETS
    
    
    6,152,161
    
    
    
    4,834,028TOTAL ASSETS
    
    $
    1,143,966,324
    
    
    $
    1,119,901,573LIABILITIES AND STOCKHOLDERS EQUITYDEPOSITSNoninterest-bearing demand deposits
    
    $
    153,045,731
    
    
    $
    151,811,660Interest-bearing deposits:NOW, savings, and money market accounts
    
    
    229,370,547
    
    
    
    233,031,838Time certificates:Over $100,000
    
    
    253,575,271
    
    
    
    228,553,689Other
    
    
    313,067,019
    
    
    
    294,449,712Total deposits
    
    
    949,058,568
    
    
    
    907,846,899SHORT-TERM BORROWINGS
    
    
    42,693,531
    
    
    
    62,062,598LONG-TERM BORROWINGS
    
    
    12,000,000
    
    
    
    17,000,000ACCRUED INTEREST PAYABLE
    
    
    3,435,948
    
    
    
    2,975,097OTHER LIABILITIES
    
    
    5,843,787
    
    
    
    5,617,838TOTAL LIABILITIES
    
    
    1,013,031,834
    
    
    
    995,502,432STOCKHOLDERS EQUITYCommon stock, $1.00 par value; authorized 20,000,000
shares; issued 10,572,849 shares as of September 30, 2007
and 10,611,052 shares as of December 31, 2006
    
    
    10,572,849
    
    
    
    10,611,052SURPLUS
    
    
    70,982,287
    
    
    
    71,151,626RETAINED EARNINGS
    
    
    49,503,715
    
    
    
    43,107,431ACCUMULATED OTHER COMPREHENSIVE LOSS
    
    
    (124,361
    )
    
    
    (470,968
    )TOTAL STOCKHOLDERS EQUITY
    
    
    130,934,490
    
    
    
    124,399,141TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    1,143,966,324
    
    
    $
    1,119,901,573
  
 *
    
    Derived from audited consolidated financial statements Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
 3




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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOMEInterest and fees on loans
    
    $
    17,368,558
    
    
    $
    15,993,036
    
    
    $
    50,693,524
    
    
    $
    45,247,953Interest on federal funds sold
    
    
    99,381
    
    
    
    70,412
    
    
    
    267,569
    
    
    
    135,794Interest on securities:Taxable
    
    
    1,407,074
    
    
    
    1,095,078
    
    
    
    3,895,345
    
    
    
    2,948,670Non-taxable
    
    
    308,657
    
    
    
    275,520
    
    
    
    887,379
    
    
    
    847,380Interest-bearing deposits
    
    
    47,434
    
    
    
    19,550
    
    
    
    110,164
    
    
    
    71,150Total interest income
    
    
    19,231,104
    
    
    
    17,453,596
    
    
    
    55,853,981
    
    
    
    49,250,947INTEREST EXPENSETime deposits of $100,000 or more
    
    
    3,130,594
    
    
    
    2,358,500
    
    
    
    8,857,793
    
    
    
    6,000,723Other deposits
    
    
    4,873,263
    
    
    
    4,066,384
    
    
    
    14,122,831
    
    
    
    10,931,392Borrowed funds
    
    
    499,702
    
    
    
    639,459
    
    
    
    1,519,931
    
    
    
    1,821,464Total interest expense
    
    
    8,503,559
    
    
    
    7,064,343
    
    
    
    24,500,555
    
    
    
    18,753,579NET INTEREST INCOME
    
    
    10,727,545
    
    
    
    10,389,253
    
    
    
    31,353,426
    
    
    
    30,497,368PROVISION FOR LOAN LOSSES
    
    
    300,000
    
    
    
    525,000
    
    
    
    800,000
    
    
    
    1,640,000NET INTEREST INCOME AFTER PROVISION FOR LOAN
    
    
    10,427,545
    
    
    
    9,864,253
    
    
    
    30,553,426
    
    
    
    28,857,368NONINTEREST INCOMEService charges on deposit accounts
    
    
    1,002,897
    
    
    
    976,648
    
    
    
    2,937,543
    
    
    
    2,778,488Other service fees
    
    
    863,393
    
    
    
    970,513
    
    
    
    2,719,193
    
    
    
    2,539,040Net gain on sales of mortgage loans
    
    
    1,337,985
    
    
    
    1,686,130
    
    
    
    4,394,351
    
    
    
    4,369,889Net gain on sales of investment securities
    
    
    44,674
    
    
    
    
    
    
    
    44,674
    
    
    
    18,724Income on investment in bank owned life insurance
    
    
    255,000
    
    
    
    159,000
    
    
    
    785,343
    
    
    
    450,725Mortgage banking income
    
    
    63,916
    
    
    
    50,352
    
    
    
    276,183
    
    
    
    178,257Bank owned life insurance death benefit
    
    
    
    
    
    
    
    
    
    
    481,940
    
    
    
    Other income (loss)
    
    
    (11,399
    )
    
    
    83,123
    
    
    
    108,381
    
    
    
    222,826Total noninterest income
    
    
    3,556,466
    
    
    
    3,925,766
    
    
    
    11,747,608
    
    
    
    10,557,949NONINTEREST EXPENSESalaries and employee benefits
    
    
    4,624,760
    
    
    
    4,897,747
    
    
    
    14,452,777
    
    
    
    14,022,227Occupancy and equipment expenses
    
    
    984,639
    
    
    
    1,030,115
    
    
    
    2,987,256
    
    
    
    2,901,060Printing and supplies
    
    
    126,734
    
    
    
    170,536
    
    
    
    409,404
    
    
    
    464,213Data processing
    
    
    104,856
    
    
    
    97,667
    
    
    
    315,495
    
    
    
    303,756Amortization of core deposit intangible
    
    
    194,149
    
    
    
    200,789
    
    
    
    589,086
    
    
    
    615,648Other
    
    
    1,981,143
    
    
    
    1,815,299
    
    
    
    6,209,743
    
    
    
    5,732,938Total noninterest expense
    
    
    8,016,281
    
    
    
    8,212,153
    
    
    
    24,963,761
    
    
    
    24,039,842INCOME BEFORE INCOME TAXES
    
    
    5,967,730
    
    
    
    5,577,866
    
    
    
    17,337,273
    
    
    
    15,375,475INCOME TAXES
    
    
    2,045,373
    
    
    
    1,940,764
    
    
    
    5,716,111
    
    
    
    5,390,348NET INCOME
    
    $
    3,922,357
    
    
    $
    3,637,102
    
    
    $
    11,621,162
    
    
    $
    9,985,127NET INCOME PER COMMON SHARE:Basic
    
    $
    0.37
    
    
    $
    0.34
    
    
    $
    1.10
    
    
    $
    0.94Diluted
    
    $
    0.37
    
    
    $
    0.34
    
    
    $
    1.08
    
    
    $
    0.93CASH DIVIDENDS PER COMMON SHARE
    
    $
    0.13
    
    
    $
    0.12
    
    
    $
    0.38
    
    
    $
    0.35
 Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NET INCOME
    
    $
    3,922,357
    
    
    $
    3,637,102
    
    
    $
    11,621,162
    
    
    $
    9,985,127OTHER COMPREHENSIVE LOSS, BEFORE TAX:Unrealized holding gains on securities available for sale
    
    
    2,045,595
    
    
    
    1,167,896
    
    
    
    616,202
    
    
    
    230,133Tax effect
    
    
    (798,047
    )
    
    
    (449,661
    )
    
    
    (242,120
    )
    
    
    (88,622
    )Unrealized holding gains on securities available for sale, net of tax
    
    
    1,247,548
    
    
    
    718,235
    
    
    
    374,082
    
    
    
    141,511Reclassification adjustment for realized gains
    
    
    (44,674
    )
    
    
    
    
    
    
    (44,674
    )
    
    
    (18,724
    )Tax effect
    
    
    17,199
    
    
    
    
    
    
    
    17,199
    
    
    
    7,209Reclassification adjustment for realized gains, net of tax
    
    
    (27,475
    )
    
    
    
    
    
    
    (27,475
    )
    
    
    (11,515
    )OTHER COMPREHENSIVE GAIN, NET OF TAX
    
    
    1,220,073
    
    
    
    718,235
    
    
    
    346,607
    
    
    
    129,996COMPREHENSIVE INCOME
    
    $
    5,142,430
    
    
    $
    4,355,337
    
    
    $
    11,967,769
    
    
    $
    10,115,123
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    11,621,162
    
    
    $
    9,985,127Adjustments to reconcile net income to net cash used by
operating activities:Net amortization of premiums on investment securities
    
    
    68,439
    
    
    
    304,705Provision for loan losses
    
    
    800,000
    
    
    
    1,640,000Net gain on sales of mortgage loans held for sale
    
    
    (4,394,351
    )
    
    
    (4,369,889
    )Net gain on sales of available for sale securities
    
    
    (44,674
    )
    
    
    (18,724
    )Increase in investment in Bank owned life
insurance
    
    
    (1,267,283
    )
    
    
    (450,725
    )Depreciation and amortization
    
    
    1,455,675
    
    
    
    1,482,208Net (gain) loss on sale of premises and equipment
    
    
    (76,823
    )
    
    
    47,860Amortization of core deposit intangible
    
    
    589,086
    
    
    
    615,648Originations of mortgage loans held-for-sale
    
    
    (690,149,132
    )
    
    
    (639,451,109
    )Proceeds from sales of mortgage loans
    
    
    700,844,096
    
    
    
    634,086,466Increase in accrued interest receivable
    
    
    (616,221
    )
    
    
    (678,089
    )Decrease in other assets
    
    
    731,348
    
    
    
    500,086Increase in accrued interest payable
    
    
    460,851
    
    
    
    909,479Increase (decrease) in other liabilities
    
    
    (2,048,451
    )
    
    
    (1,282,139
    )Net cash provided by operating activities
    
    
    17,973,722
    
    
    
    3,320,904CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available for sale securities
    
    
    (40,163,656
    )
    
    
    (34,982,611
    )Proceeds from sales of available for sale securities
    
    
    22,911,510
    
    
    
    6,828,948Proceeds from maturities of available for sale securities
    
    
    2,935,000
    
    
    
    13,310,000Net change in loans
    
    
    (37,103,404
    )
    
    
    (42,043,231
    )Purchases of premises and equipment
    
    
    (2,655,612
    )
    
    
    (1,443,339
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    850,300
    
    
    
    2,110,500Purchases of Federal Home Loan Bank stock
    
    
    
    
    
    
    (2,156,100
    )Proceeds from sale of premises and equipment
    
    
    1,625,807
    
    
    
    28,531Proceeds
from death benefit from Bank owned life insurance
    
    
    1,277,376Investment in bank owned life insurance policies
    
    
    
    
    
    
    (5,500,000
    )Net cash used in investing activities
    
    
    (50,322,679
    )
    
    
    (63,847,302
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    
    (2,427,220
    )
    
    
    (15,883,143
    )Net increase in time certificates
    
    
    43,638,889
    
    
    
    67,712,218Net increase (decrease) in borrowed funds
    
    
    (24,369,067
    )
    
    
    13,019,874Purchases of common stock
    
    
    (1,941,865
    )
    
    
    (1,181,295
    )Dividends paid
    
    
    (4,026,260
    )
    
    
    (3,724,405
    )Proceeds from exercise of stock options
    
    
    535,705
    
    
    
    57,168Net cash provided by financing activities
    
    
    11,410,182
    
    
    
    60,000,417NET DECREASE IN CASH AND CASH
EQUIVALENTS
    
    
    (20,938,775
    )
    
    
    (525,981
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    44,056,134
    
    
    
    55,493,487End of period
    
    $
    23,117,359
    
    
    $
    54,967,506
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. Stock-based Compensation
    Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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3. Commitments and Contingencies
   4. Pending Litigation
  5. Earnings per share
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Basic EPS denominator:Weighted average number of common shares
outstanding
    
    
    10,584,092
    
    
    
    10,635,205
    
    
    
    10,603,937
    
    
    
    10,651,998Dilutive effect arising from assumed exercise of
stock options
    
    
    136,997
    
    
    
    147,889
    
    
    
    178,428
    
    
    
    139,447Diluted EPS denominator10,721,089
    
    
    
    10,783,094
    
    
    
    10,782,365
    
    
    
    10,791,445
  6. Stockholders Equity
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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##### Table of Contents



6. Stockholders Equity (continued)
  7. Business Segment Information
  September 30, 2007
 Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    54,101,240
    
    
    $
    1,911,454
    
    
    $
    (158,712
    )
    
    $
    55,853,981Interest expense
    
    
    23,147,701
    
    
    
    1,511,566
    
    
    
    (158,712
    )
    
    
    24,500,555Net interest income
    
    
    30,953,539
    
    
    
    399,887
    
    
    
    
    
    
    
    31,353,426Provision for loan losses
    
    
    800,000
    
    
    
    
    
    
    
    
    
    
    
    800,000Net interest income after provision
for loan losses
    
    
    30,153,539
    
    
    
    399,887
    
    
    
    
    
    
    
    30,553,426Net gain (loss) on sale of investment
Securities
    
    
    44,674
    
    
    
    
    
    
    
    
    
    
    
    44,674Other income
    
    
    7,308,583
    
    
    
    4,394,351
    
    
    
    
    
    
    
    11,702,934Other expense
    
    
    21,219,884
    
    
    
    3,743,877
    
    
    
    
    
    
    
    24,963,761Income before income taxes
    
    
    16,286,912
    
    
    
    1,050,361
    
    
    
    
    
    
    
    17,337,273Income taxes (2)
    
    
    5,306,470
    
    
    
    409,641
    
    
    
    
    
    
    
    5,716,111Net income
    
    $
    10,980,442
    
    
    $
    640,720
    
    
    
    (84,440
    )
    
    $
    11,621,162Total assets (3)
    
    $
    1,163,903,701
    
    
    $
    42,926,785
    
    
    $
    (62,864,162
    )
    
    $
    1,143,966,324Net loans
    
    
    840,384,375
    
    
    
    
    
    
    
    
    
    
    
    840,384,375Loans held for sale
    
    
    
    
    
    
    36,050,302
    
    
    
    
    
    
    
    36,050,302Goodwill
    
    
    32,696,900
    
    
    
    4,943,872
    
    
    $
    (4,943,872
    )
    
    
    32,696,900
 Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
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##### Table of Contents



7. Business Segment Information (continued)
 September 30, 2006
 Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    47,722,281
    
    
    $
    1,721,398
    
    
    $
    (192,732
    )
    
    $
    49,250,947Interest expense
    
    
    17,569,247
    
    
    
    1,377,064
    
    
    
    (192,732
    )
    
    
    18,753,579Net interest income
    
    
    30,153,034
    
    
    
    344,334
    
    
    
    
    
    
    
    30,497,368Provision for loan losses
    
    
    1,640,000
    
    
    
    
    
    
    
    
    
    
    
    1,640,000Net interest income after
provision
for loan losses
    
    
    28,513,034
    
    
    
    344,334
    
    
    
    
    
    
    
    28,857,368Net gain (loss) on sale of
investment
Securities
    
    
    18,724
    
    
    
    
    
    
    
    
    
    
    
    18,724Other income
    
    
    6,163,034
    
    
    
    4,376,191
    
    
    
    
    
    
    
    10,539,225Other expense
    
    
    20,138,715
    
    
    
    3,853,314
    
    
    
    47,813
    
    
    
    24,039,842Income before income taxes
    
    
    14,556,077
    
    
    
    867,211
    
    
    
    (47,813
    )
    
    
    15,375,475Income taxes (2)
    
    
    5,056,471
    
    
    
    333,877
    
    
    
    
    
    
    
    5,390,348Net income
    
    $
    9,499,606
    
    
    $
    533,334
    
    
    $
    (47,813
    )
    
    $
    9,985,127Total assets
    
    $
    1,109,386,409
    
    
    $
    47,247,782
    
    
    $
    (62,515,393
    )
    
    $
    1,094,118,798Net loans
    
    
    768,459,621
    
    
    
    
    
    
    
    
    
    
    
    768,459,621Loans held for sale
    
    
    
    
    
    
    41,161,261
    
    
    
    
    
    
    
    41,161,261Goodwill
    
    
    32,136,183
    
    
    
    4,383,155
    
    
    
    (4,383,155
    )
    
    
    32,136,183
 
 (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 ($229,775 in 2007 and $134,699 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 ($309,485 in 2007 and $2,461 in 2006) and Holding Company income and expenses. 8. Reclassifications
  Yadkin Valley Financial Corporation 
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9. New Accounting Standards
 
  10. Business Combination
 , www.yadkinvalleybank.com
  11. Subsequent Events
  Yadkin Valley Financial Corporation 
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
   
    
    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;
    
    general economic conditions, either nationally or regionally and especially in primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
 Yadkin Valley Financial Corporation 
Form 10-Q Quarterly Report September 30, 2007
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
    
    changes in deposit flows;
    
    the level of allowance for loan loss;
    
    the rate of delinquencies and amounts of charge-offs;
    
    the rates of loan growth;
    
    adverse changes in asset quality and resulting credit risk-related losses and expenses;
    
    changes in monetary and tax policies;
    
    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
Securities and Exchange Commission.
  Overview
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Form 10-Q Quarterly Report September 30, 2007
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Changes in Financial Position
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Form 10-Q Quarterly Report September 30, 2007
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Liquidity, Interest Rate Sensitivity and Market Risk
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Form 10-Q Quarterly Report September 30, 2007
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Results of Operations
    Net Interest Income
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Average Balance Sheets and Net Interest Income Analysis
(Dollars in Thousands)
 Nine Months Ended:
 September 30, 2007
    
    
    September 30, 2006Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateINTEREST EARNING ASSETSFederal funds sold
    
    $
    6,626
    
    
    $
    268
    
    
    
    5.41
    %
    
    $
    3,674
    
    
    $
    136
    
    
    
    4.95
    %Interest bearing deposits
    
    
    3,162
    
    
    
    110
    
    
    
    4.65
    %
    
    
    2,270
    
    
    
    71
    
    
    
    4.18
    %Investment securities (1)
    
    
    135,703
    
    
    
    5,174
    
    
    
    5.10
    %
    
    
    122,725
    
    
    
    4,173
    
    
    
    4.55
    %Total loans (1,2)
    
    
    855,011
    
    
    
    50,808
    
    
    
    7.94
    %
    
    
    794,979
    
    
    
    45,342
    
    
    
    7.63
    %Total average earning assets (1)
    
    
    1,000,502
    
    
    
    56,360
    
    
    
    7.53
    %
    
    
    923,648
    
    
    
    49,722
    
    
    
    7.20
    %Noninterest earning assets
    
    
    110,521
    
    
    
    
    
    
    
    
    
    
    
    118,669Total average assets
    
    $
    1,111,258
    
    
    
    
    
    
    
    
    
    
    $
    1,042,317INTEREST BEARING LIABILITIESNOW and money market
    
    $
    187,946
    
    
    $
    3,118
    
    
    
    2.22
    %
    
    $
    187,234
    
    
    $
    2,792
    
    
    
    1.99
    %Savings
    
    
    36,445
    
    
    
    273
    
    
    
    1.00
    %
    
    
    39,872
    
    
    
    298
    
    
    
    1.00
    %Time certificates
    
    
    545,262
    
    
    
    19,590
    
    
    
    4.80
    %
    
    
    456,409
    
    
    
    13,842
    
    
    
    4.05
    %Total interest bearing deposits
    
    
    769,653
    
    
    
    22,981
    
    
    
    3.99
    %
    
    
    683,515
    
    
    
    16,932
    
    
    
    3.31
    %Repurchase agreements sold
    
    
    34,681
    
    
    
    866
    
    
    
    3.34
    %
    
    
    30,573
    
    
    
    650
    
    
    
    2.84
    %Borrowed funds
    
    
    18,912
    
    
    
    654
    
    
    
    4.62
    %
    
    
    47,673
    
    
    
    1,172
    
    
    
    3.29
    %Total interest bearing liabilities
    
    
    823,246
    
    
    
    24,501
    
    
    
    3.98
    %
    
    
    761,761
    
    
    
    18,754
    
    
    
    3.29
    %Noninterest bearing deposits
    
    
    152,976
    
    
    
    
    
    
    
    
    
    
    
    146,012Stockholders equity
    
    
    128,579
    
    
    
    
    
    
    
    
    
    
    
    118,637Other liabilities
    
    
    6,457
    
    
    
    
    
    
    
    
    
    
    
    15,907Total average liabilities and
stockholders equity
    
    $
    $1,111,258
    
    
    
    
    
    
    
    
    
    
    $
    1,042,317NET INTEREST INCOME/
YIELD (3,4)
    
    
    
    
    
    $
    31,859
    
    
    
    4.26
    %
    
    
    
    
    
    $
    30,968
    
    
    
    4.48
    %INTEREST SPREAD (5)
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    3.91
    %
 
 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
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Form 10-Q Quarterly Report September 30, 2007
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Noninterest Income
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
    
    Service charges on deposit accounts increased $26,249 or 2.7% due to an increase in
Automated Teller Machine (ATM) service fee income. Also, customer overdraft income, net
of collection expense increased. This was due to a decrease in the collection expense
after the collection process was brought inhouse when the vendor contract expired. Consumer and commercial non-sufficient funds (NSF) fees dropped 3.3% offsetting the increases.
    
    Other service fees decreased by $107,120 or 11.0%, due mainly to a $75,166 or 18.4%
decrease in Sidus commission fees and a $79,009 or 35.0% decrease in annuity commissions.
Offsetting the decreases were increases in merchant fee income and credit card user fees
of 29.7%.
    
    Net gain on sale of mortgages decreased $348,145 or 20.7% due to the decrease in total
loans sold (11.1%) that resulted from a decrease in total loans closed (11.7%).
    
    Net gain on sale of investments increased $44,674. Sale of a $3.0 million US Treasury Bond
following a rally in the treasury market contributed a gain of $126,000. Losses on various
bonds in other investment categories offset this gain. Funds were reinvested in securities
with a higher tax equivalent yield than those sold.
    
    Income on investment in bank-owned life insurance (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 $13,564 or 26.9% due to an adjustment of Mortgage
Servicing Rights (MSR) to reflect a more recent valuation of the MSR.
    
    Other income decreased by $94,522 or 113.7% mainly due to losses on the sale of other real
estate owned that increased by $96,867.
  
    
    Service charges on deposit accounts were up $159,055 or 5.7% due to commercial NSF fees
increasing by $139,518 or 30.0% and ATM service charge income was up by $49,046 or 21.5%.
Also, customer overdraft income, net of collection expense increased. This was due to a
decrease in the collection expense after the collection process was brought inhouse when
the vendor contract expired.
    
    Other service fees increased by $180,153 or 7.1% due mainly to a $72,783 or 6.5% increase
in Sidus commission fees and a $106,036 or 27.3% increase in merchant fee income and
credit card user fees. The Bank had a larger amount of mortgages originated in the first
nine months of 2007 than 2006.
    
    Net gain on sale of mortgages had an increase of $24,462 or 0.6% due to the increase in
total loans sold and total loans originated.
    
    Net gain on sale of investments increased $25,950. The gain resulted from disposition
discussed in the quarterly summary above in addition to earlier gains from prior quarters
sales.
    
    Income on investment in BOLI increased $334,618 as a result of additional investment in
BOLI
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in August 2006 and the conversion of existing policies to a higher yielding product in
November 2006.
    
    Mortgage banking income increased $97,926 or 54.9% due to an adjustment of 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 $114,445 or 51.4% mainly due to losses on sale of other real
estate owned that increased by $91,886.
 Noninterest Expense
  
    
    Salaries and employee benefit expenses decreased $272,987 or 5.6%. The cost of group
insurance for the employees decreased due to the August 2007 premium holiday
declared by the provider. Accruals for the bonus incentive plan were reduced due to
sufficient amounts accrued in previous quarters. Salaries expense increased by 2.2%
due to normal annual increases.
    
    Occupancy and equipment expense decreased by $45,476 or 4.4%. The decrease was
attributable to lower occupancy expenses for Sidus and to lower depreciation
expenses as equipment and computer items were fully depreciated in the third quarter
of 2007.
    
    Printing and supplies decreased by $43,802 or 25.7%. Supplies for the holding
company formed in the second quarter of 2006 created additional expense along with
normal variations in the timing of ordering supplies.
    
    Data processing expense increased $11,739 or 3.9% 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 $6,640 or 3.3% in accordance with the scheduled amortization expense.
    
    Other operating expenses increased $165,844 or 9.1%. In January 2007, the Bank began
accruing expenses related to former employees suit for breach of contract.
Telephone expense increased as the Bank changed service providers and incurred extra
expense related to the transition. Decreases in outside service fees from utilizing
fewer consultant services helped offset the impact of the increases above.
Accounting fees decreased in the third quarter of 2007 as professional engagements
were scheduled to occur later in the year as compared to 2006. ATM service fees
increased as charges increased from the ATM service provider due to a larger number
of debit cards being issued along with increased usage.
  
    
    Salaries and employee benefit expenses increased $430,550 or 3.1% over the last year
due to additional employees to staff the new branch in Pfafftown and the new loan
production office in Wilmington in
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Form 10-Q Quarterly Report September 30, 2007
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April 2007. Normal salary and wage increases were offset by reduction in group
insurance expense and bonus accruals as discussed in the quarterly discussion above.
    
    Occupancy and equipment costs increased $86,196 or 3.0%. The increases were due to
higher expenses from Bank growth, especially for the 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 $26,562 or 4.3% in accordance with the scheduled amortization expense.
    
    Printing and supplies costs decreased $54,808 or 11.8% due to additional expenses in
the third quarter of 2006 associated with the formation of the holding company.
    
    Other operating expenses increased $476,805 or 8.3%. The largest increases were in
expenses related to ATM charges from the service provider. In 2007, the Bank accrued
expenses related to former employees suit for breach of contract. Telephone expenses
increased as the Bank added new offices in and transitioned to a new service provider
in 2007. Expenses related to loan collections and other real estate owned increased
while outside service fees and accounting fees decreased as fewer professional
services were engaged during the nine-month period ended September 30, 2007.
 Income Tax Expense
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Yadkin Valley Financial Corporation 
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Item 4. Controls and Procedures
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Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Numberof Shares
    
    
    Maximum NumberPurchased as
    
    
    of Shares ThatTotal Number
    
    
    Average Price
    
    
    Part of
    
    
    May Yet Beof Shares
    
    
    Paid per
    
    
    Publicly
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    Share
    
    
    Announced Program
    
    
    the Program(1)July 1, 2007 to July 30, 2007
    
    
    24,500
    
    
    $
    18.42
    
    
    
    24,500
    
    
    
    75,388August 1, 2007 to August 31, 2007
    
    
    30,489
    
    
    
    16.73
    
    
    
    30,489
    
    
    
    44,899September 1, 2007 to September
30, 2007
    
    
    2,500
    
    
    
    16.32
    
    
    
    2,500
    
    
    
    42,399Total
    
    
    57,489
    
    
    $
    17.43
    
    
    
    57,489
 
 (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 57,601 shares purchased under
the 2007 plan. 
 Item 6. Exhibits
 Exhibit #
    
    Description31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    
    Section 1350 Certification
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Signature
   BY:
    
    /s/ William A. LongWilliam A. Long, President and Chief Executive OfficerBY:
    
    /s/ Edwin E. LawsEdwin E. Laws, Chief Financial Officer
  Yadkin Valley Financial CorporationForm 10-Q Quarterly Report September 30, 2007
 24