##### Table of Contents



Form 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2006
 Yadkin Valley Financial Corporation
 209 North Bridge Street
Elkin, North Carolina 28621
FDIC Certificate 19861-7
Incorporating State: North Carolina
I.R.S. Employer Identification No. 20-4495993
Telephone: 336-526-6300
 þ o
  o þ o
 o þ




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##### 



Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II. Other InformationItem 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 6. Exhibit Index
    
    
    20Signatures
    
    
    21Exhibits
    
    
    22-24EX-31.1EX-31.2EX-32.1
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005*ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    38,137,682
    
    
    $
    37,690,917Federal funds sold
    
    
    12,517,000
    
    
    
    3,460,000Interest-bearing deposits
    
    
    1,302,432
    
    
    
    14,342,570Total cash and cash equivalents
    
    
    51,957,114
    
    
    
    55,493,487SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $124,719,258 in 2006 and $115,179,002 in 2005)
    
    
    122,300,228
    
    
    
    113,716,460LOANS  Less allowance for loan losses of $10,276,785
in 2006 and $9,473,615 in 2005
    
    
    765,426,104
    
    
    
    728,056,390LOANS HELD FOR SALE
    
    
    44,900,073
    
    
    
    31,426,729ACCRUED INTEREST RECEIVABLE
    
    
    5,115,873
    
    
    
    4,802,890PREMISES AND EQUIPMENT, NET
    
    
    27,460,131
    
    
    
    27,373,055FEDERAL HOME LOAN BANK STOCK, AT COST
    
    
    4,568,600
    
    
    
    4,298,000INVESTMENT IN BANK-OWNED LIFE INSURANCE
    
    
    16,890,223
    
    
    
    16,598,498GOODWILL
    
    
    32,136,183
    
    
    
    32,136,183CORE DEPOSIT INTANGIBLE (net of accumulated
amortization of $3,043,542 in 2006 and $2,628,683 in 2005)
    
    
    5,435,966
    
    
    
    5,850,825OTHER ASSETS
    
    
    4,073,032
    
    
    
    4,541,987TOTAL
    
    $
    1,080,263,527
    
    
    $
    1,024,294,504LIABILITIES AND STOCKHOLDERS EQUITYDEPOSITSNoninterest-bearing demand deposits
    
    $
    160,018,427
    
    
    $
    135,911,821Interest-bearing deposits:NOW, savings, and money market accounts
    
    
    229,862,153
    
    
    
    251,422,817Time certificates:Over $100,000
    
    
    200,720,070
    
    
    
    170,573,819Other
    
    
    276,488,489
    
    
    
    256,444,131Total deposits
    
    
    867,089,139
    
    
    
    814,352,588BORROWED FUNDS
    
    
    87,274,860
    
    
    
    85,989,712ACCRUED INTEREST PAYABLE
    
    
    2,627,893
    
    
    
    1,815,805OTHER LIABILITIES
    
    
    4,129,360
    
    
    
    5,813,502TOTAL LIABILITIES
    
    
    961,121,252
    
    
    
    907,971,607STOCKHOLDERS EQUITYCommon stock, $1.00 par value; authorized 20,000,000
shares; issued 10,648,300 shares in 2006 and 10,680,061
shares in 2005
    
    
    10,648,300
    
    
    
    10,680,061Surplus
    
    
    71,776,540
    
    
    
    71,993,212Retained earnings
    
    
    38,210,082
    
    
    
    34,554,032Accumulated other comprehensive loss
    
    
    (1,492,647
    )
    
    
    (904,408
    )Total stockholders equity
    
    
    119,142,275
    
    
    
    116,322,897TOTAL
    
    $
    1,080,263,527
    
    
    $
    1,024,294,504
  
 *
    
    Derived from audited consolidated financial statements 
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005INTEREST INCOMEInterest and fees on loans
    
    $
    15,433,527
    
    
    $
    11,730,691
    
    
    $
    29,254,917
    
    
    $
    22,571,807Interest on federal funds sold
    
    
    39,057
    
    
    
    38,883
    
    
    
    65,382
    
    
    
    46,903Interest on securities:Taxable
    
    
    994,532
    
    
    
    767,492
    
    
    
    1,853,593
    
    
    
    1,549,498Non-taxable
    
    
    282,566
    
    
    
    256,125
    
    
    
    571,859
    
    
    
    514,433Interest-bearing deposits
    
    
    12,199
    
    
    
    22,309
    
    
    
    51,599
    
    
    
    39,945Total interest income
    
    
    16,761,882
    
    
    
    12,815,500
    
    
    
    31,797,350
    
    
    
    24,722,586INTEREST EXPENSETime deposits of $100,000 or more
    
    
    1,989,878
    
    
    
    1,021,477
    
    
    
    3,642,223
    
    
    
    1,907,112Other deposits
    
    
    3,595,299
    
    
    
    2,614,926
    
    
    
    6,865,008
    
    
    
    4,909,740Borrowed funds
    
    
    863,282
    
    
    
    708,339
    
    
    
    1,182,005
    
    
    
    1,368,969Total interest expense
    
    
    6,448,459
    
    
    
    4,344,742
    
    
    
    11,689,236
    
    
    
    8,185,821NET INTEREST INCOME
    
    
    10,313,422
    
    
    
    8,470,758
    
    
    
    20,108,114
    
    
    
    16,536,765PROVISION FOR LOAN LOSSES
    
    
    550,000
    
    
    
    382,000
    
    
    
    1,115,000
    
    
    
    764,000NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    9,763,422
    
    
    
    8,088,758
    
    
    
    18,993,114
    
    
    
    15,772,765NONINTEREST INCOMEService charges on deposit accounts
    
    
    904,694
    
    
    
    920,006
    
    
    
    1,801,840
    
    
    
    1,736,981Other service fees
    
    
    798,430
    
    
    
    760,110
    
    
    
    1,568,527
    
    
    
    1,465,022Net gain on sales of mortgage loans
    
    
    1,519,340
    
    
    
    1,258,624
    
    
    
    2,683,759
    
    
    
    2,272,149Net gain on sales of investment securities
    
    
    7,000
    
    
    
    
    
    
    
    18,724
    
    
    
    1,239Income on investment in bank owned life insurance
    
    
    146,801
    
    
    
    143,914
    
    
    
    291,725
    
    
    
    287,914Mortgage banking income
    
    
    49,027
    
    
    
    92,128
    
    
    
    127,906
    
    
    
    212,894Other income
    
    
    64,120
    
    
    
    56,317
    
    
    
    139,703
    
    
    
    183,882Total noninterest income
    
    
    3,489,412
    
    
    
    3,231,099
    
    
    
    6,632,184
    
    
    
    6,160,081NONINTEREST EXPENSESalaries and employee benefits
    
    
    4,559,281
    
    
    
    4,221,800
    
    
    
    9,124,480
    
    
    
    8,317,580Occupancy and equipment expenses
    
    
    916,421
    
    
    
    769,245
    
    
    
    1,870,945
    
    
    
    1,549,591Printing and supplies
    
    
    131,946
    
    
    
    173,398
    
    
    
    293,677
    
    
    
    342,835Data processing
    
    
    93,585
    
    
    
    188,464
    
    
    
    206,089
    
    
    
    360,153Amortization of core deposit intangible
    
    
    207,429
    
    
    
    217,391
    
    
    
    414,859
    
    
    
    434,781Other
    
    
    1,996,650
    
    
    
    1,530,585
    
    
    
    3,917,637
    
    
    
    3,111,937Total noninterest expense
    
    
    7,905,312
    
    
    
    7,100,883
    
    
    
    15,827,687
    
    
    
    14,116,877INCOME BEFORE INCOME TAXES
    
    
    5,347,522
    
    
    
    4,218,974
    
    
    
    9,797,611
    
    
    
    7,815,969INCOME TAXES
    
    
    1,927,697
    
    
    
    1,411,654
    
    
    
    3,449,584
    
    
    
    2,545,938NET INCOME
    
    $
    3,419,824
    
    
    $
    2,807,320
    
    
    $
    6,348,027
    
    
    $
    5,270,031NET INCOME PER COMMON SHARE:Basic
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.60
    
    
    $
    0.49Diluted
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    0.59
    
    
    $
    0.49CASH DIVIDENDS PER COMMON SHARE
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    0.21
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NET INCOME
    
    $
    3,419,824
    
    
    $
    2,807,320
    
    
    $
    6,348,027
    
    
    $
    5,270,031OTHER COMPREHENSIVE INCOME, BEFORE TAX:Unrealized holding gains (losses) on securities available for sale
    
    
    (768,296
    )
    
    
    375,877
    
    
    
    (937,763
    )
    
    
    (1,100,022
    )Tax effect
    
    
    295,794
    
    
    
    (144,713
    )
    
    
    361,039
    
    
    
    423,515Unrealized holding gains (losses) on securities available for sale, net of tax
    
    
    (472,502
    )
    
    
    231,164
    
    
    
    (576,724
    )
    
    
    (676,507
    )Reclassification adjustment for realized (gains) losses
    
    
    (7,000
    )
    
    
    
    
    
    
    (18,724
    )
    
    
    (1,239
    )Tax effect
    
    
    2,695
    
    
    
    
    
    
    
    7,209
    
    
    
    477Reclassification adjustment for realized (gains) losses, net of tax
    
    
    (4,305
    )
    
    
    
    
    
    
    (11,515
    )
    
    
    (762
    )OTHER COMPREHENSIVE (LOSS), NET OF TAX
    
    
    (476,807
    )
    
    
    231,164
    
    
    
    (588,239
    )
    
    
    (677,269
    )COMPREHENSIVE INCOME
    
    $
    2,943,017
    
    
    $
    3,038,484
    
    
    $
    5,759,788
    
    
    $
    4,592,762
  
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##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,348,027
    
    
    $
    5,270,031Adjustments to reconcile net income to net cash provided by
operating activities:Net amortization of premiums on investment securities
    
    
    178,543
    
    
    
    268,434Provision for loan losses
    
    
    1,115,000
    
    
    
    764,000Net gain on sales of mortgage loans held for sale
    
    
    (2,683,759
    )
    
    
    (2,272,149
    )Net (gain) loss on sales of available for sale securities
    
    
    19,305
    
    
    
    (1,239
    )Increase in income on investment in Bank owned life insurance
    
    
    (291,725
    )
    
    
    (287,914
    )Depreciation and amortization
    
    
    976,249
    
    
    
    814,738Net (gain) loss on sale of premises and equipment
    
    
    47,860
    
    
    
    (283,343
    )Amortization of core deposit intangible
    
    
    414,859
    
    
    
    434,781Originations of mortgage loans held-for-sale
    
    
    (400,175,144
    )
    
    
    (206,466,857
    )Proceeds from sales of mortgage loans
    
    
    389,385,559
    
    
    
    200,400,683Increase (decrease) in accrued interest receivable
    
    
    (312,983
    )
    
    
    62,115Decrease in other assets
    
    
    468,956
    
    
    
    245,894Increase in accrued interest payable
    
    
    812,088
    
    
    
    417,742(Decrease) increase in other liabilities
    
    
    (1,315,896
    )
    
    
    84,021Net cash provided by (used in) operating activities
    
    
    (5,013,061
    )
    
    
    (549,063
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available for sale securities
    
    
    (23,048,964
    )
    
    
    (12,103,733
    )Proceeds from sales of available for sale securities
    
    
    5,000,860
    
    
    
    14,744,248Proceeds from maturities of available for sale securities
    
    
    8,310,000
    
    
    
    Net change in loans
    
    
    (38,484,714
    )
    
    
    (20,357,335
    )Purchases of premises and equipment
    
    
    (1,139,715
    )
    
    
    (3,008,830
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    985,500
    
    
    
    Purchases of Federal Home Loan Bank stock
    
    
    (1,256,100
    )
    
    
    (181,300
    )Proceeds from sale of premises and equipment
    
    
    28,531
    
    
    
    9,700Net cash provided by (used in) investing activities
    
    
    (49,604,602
    )
    
    
    (20,897,250
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    
    2,545,942
    
    
    
    (1,287,147
    )Net increase in time certificates
    
    
    50,190,609
    
    
    
    28,958,422Net increase in borrowed funds
    
    
    1,285,148
    
    
    
    1,010,493Purchases of common stock
    
    
    (516,063
    )
    
    
    (235,520
    )Dividends paid
    
    
    (2,451,207
    )
    
    
    (2,243,996
    )Retired fractional shares
    
    
    
    
    
    
    (1,552
    )Payment of stock appreciation rights
    
    
    
    
    
    
    (26,826
    )Proceeds from exercise of stock options
    
    
    26,861
    
    
    
    137,538Net cash provided by financing activities
    
    
    51,081,290
    
    
    
    26,311,412NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (3,536,373
    )
    
    
    4,865,099CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    55,493,487
    
    
    
    32,314,157End of period
    
    $
    51,957,114
    
    
    $
    37,179,256
  
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##### Table of Contents



Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. Stock-based Compensation
   
 7




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##### Table of Contents



Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2005Net Income:As reported
    
    $
    2,807,320
    
    
    $
    5,270,031Deduct  total stock based
compensation determined under
fair value based for all
awards
    
    
    (29,946
    )
    
    
    (59,892
    )Pro forma   for SFAS No. 123
    
    $
    2,777,374
    
    
    $
    5,210,139Basic Earnings per shareAs reported
    
    $
    0.26
    
    
    $
    0.49Pro forma  for SFAS No. 123
    
    $
    0.26
    
    
    $
    0.49Diluted Earnings per shareAs reported
    
    $
    0.26
    
    
    $
    0.49Pro forma  for SFAS No. 123
    
    $
    0.26
    
    
    $
    0.48
 
 8




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##### Table of Contents



3. Acquisition of Sidus Financial, LLC
   Fair ValueAssets:Cash and cash equivalents
    
    $
    498,976Loans, net
    
    
    22,947,443Other tangible assets acquired
    
    
    560,447Goodwill
    
    
    4,383,155Liabilities:Other liabilities
    
    
    (21,006,866
    )Total net assets acquired/consideration given
    
    $
    7,383,155
  4. Commitments and Contingencies
   
 9




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##### Table of Contents



5. Earnings per share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Basic EPS denominator:Weighted average
number of common
shares outstanding
    
    
    10,650,739
    
    
    
    10,688,679
    
    
    
    10,660,533
    
    
    
    10,682,662Dilutive effect
arising from assumed
exercise of stock
options
    
    
    137,081
    
    
    
    141,971
    
    
    
    140,171
    
    
    
    146,783Diluted EPS denominator
    
    
    10,787,821
    
    
    
    10,830,650
    
    
    
    10,800,704
    
    
    
    10,829,445
  6. Stockholders Equity
    7. Business Segment Information
  
 10




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##### Table of Contents



June 30, 2006
    
    Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    30,816,097
    
    
    $
    1,109,971
    
    
    $
    (128,718
    )
    
    $
    31,797,350Interest expense (1)
    
    
    10,929,906
    
    
    
    888,048
    
    
    
    (128,718
    )
    
    
    11,689,236Net interest income
    
    
    19,886,191
    
    
    
    221,923
    
    
    
    
    
    
    
    20,108,114Provision for loan losses
    
    
    1,115,000
    
    
    
    
    
    
    
    
    
    
    
    1,115,000Net interest income after provision for
loan losses
    
    
    18,771,191
    
    
    
    221,923
    
    
    
    
    
    
    
    18,993,114Net gain (loss) on sales of
investment securities
    
    
    18,724
    
    
    
    
    
    
    
    
    
    
    
    18,724Other income
    
    
    3,929,701
    
    
    
    2,683,759
    
    
    
    
    
    
    
    6,613,460Other expense
    
    
    13,302,959
    
    
    
    2,524,728
    
    
    
    
    
    
    
    15,827,687Income before income taxes
    
    
    9,416,657
    
    
    
    380,954
    
    
    
    
    
    
    
    9,797,611Income taxes (2)
    
    
    3,302,917
    
    
    
    146,667
    
    
    
    
    
    
    
    3,449,584Net Income
    
    $
    6,113,740
    
    
    $
    234,287
    
    
    $
    
    
    
    $
    6,348,027Total Assets (3)
    
    $
    1,091,976,384
    
    
    $
    50,895,026
    
    
    $
    (62,607,883
    )
    
    $
    1,080,263,527Net Loans
    
    
    765,426,104
    
    
    
    
    
    
    
    
    
    
    
    765,426,104Loans held for sale
    
    
    
    
    
    
    44,900,073
    
    
    
    
    
    
    
    44,900,073Goodwill
    
    
    32,136,183
    
    
    
    4,383,155
    
    
    
    (4,383,155
    )
    
    
    32,136,183
 June 30, 2005
    
    Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalInterest income (1)
    
    $
    23,795,755
    
    
    $
    926,831
    
    
    $
    
    
    
    $
    24,722,586Interest expense (1)
    
    
    7,722,237
    
    
    
    463,584
    
    
    
    
    
    
    
    8,185,821Net interest income
    
    
    16,073,518
    
    
    
    463,247
    
    
    
    
    
    
    
    16,536,765Provision for loan losses
    
    
    764,000
    
    
    
    
    
    
    
    
    
    
    
    764,000Net interest income after provision for
loan losses
    
    
    15,309,518
    
    
    
    463,247
    
    
    
    
    
    
    
    15,772,765Net gain (loss) on sales of
investment securities
    
    
    1,239
    
    
    
    
    
    
    
    
    
    
    
    1,239Other income
    
    
    3,882,875
    
    
    
    2,275,967
    
    
    
    
    
    
    
    6,158,842Other expense
    
    
    12,003,495
    
    
    
    2,113,382
    
    
    
    
    
    
    
    14,116,877Income before income taxes
    
    
    7,190,137
    
    
    
    625,832
    
    
    
    
    
    
    
    7,815,969Income taxes
    
    
    2,545,938
    
    
    
    
    
    
    
    
    
    
    
    2,545,938Net Income
    
    $
    4,644,199
    
    
    $
    625,832
    
    
    $
    
    
    
    $
    5,270,031Total Assets (3)
    
    $
    998,664,053
    
    
    $
    54,246,417
    
    
    $
    (62,138,248
    )
    
    $
    990,772,222Net Loans
    
    
    698,284,315
    
    
    
    
    
    
    
    
    
    
    
    698,284,315Loans held for sale
    
    
    775,625
    
    
    
    49,169,269
    
    
    
    
    
    
    
    49,944,894Goodwill
    
    
    31,672,131
    
    
    
    3,919,103
    
    
    
    (3,919,103
    )
    
    
    31,672,131
 
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##### Table of Contents



8. Reclassifications
  9. Subsequent Events
   
 Part I. Financial Information
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
 12




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Changes in Financial Position
       
 13




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##### Table of Contents



Liquidity, Interest Rate Sensitivity and Market Risk
     Results of Operations
  
 14




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##### Table of Contents



Net Interest Income
  
 15




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##### Table of Contents



Average Balance Sheets and Net Interest Income Analysis
(Dollars in Thousands)
 June 30, 2006
    
    
    June 30, 2005(Unaudited)
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Six Months Ended:
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateINTEREST EARNING ASSETSFederal funds sold
    
    $
    2,874
    
    
    $
    65
    
    
    
    4.56
    %
    
    $
    3,589
    
    
    $
    47
    
    
    
    2.64
    %Interest bearing deposits
    
    
    2,399
    
    
    
    51
    
    
    
    4.29
    %
    
    
    3,239
    
    
    
    40
    
    
    
    2.49
    %Investment securities (1,2)
    
    
    123,129
    
    
    
    2,680
    
    
    
    4.39
    %
    
    
    110,734
    
    
    
    2,290
    
    
    
    4.17
    %Total loans (2)
    
    
    787,340
    
    
    
    29,312
    
    
    
    7.51
    %
    
    
    724,363
    
    
    
    22,572
    
    
    
    6.23
    %Total average earning assets (1)
    
    
    915,742
    
    
    
    32,108
    
    
    
    7.07
    %
    
    
    841,925
    
    
    
    24,949
    
    
    
    5.98
    %Noninterest earning assets
    
    
    114,344
    
    
    
    
    
    
    
    
    
    
    
    118,030Total average assets
    
    $
    1,030,086
    
    
    
    
    
    
    
    
    
    
    $
    959,955INTEREST BEARING LIABILITIESNOW and money market
    
    $
    197,869
    
    
    $
    1,815
    
    
    
    1.85
    %
    
    $
    214,006
    
    
    $
    1,503
    
    
    
    1.42
    %Savings
    
    
    40,294
    
    
    
    200
    
    
    
    1.00
    %
    
    
    44,254
    
    
    
    241
    
    
    
    1.10
    %Time certificates
    
    
    441,535
    
    
    
    8,492
    
    
    
    3.88
    %
    
    
    351,982
    
    
    
    5,072
    
    
    
    2.91
    %Total interest bearing deposits
    
    
    679,698
    
    
    
    10,507
    
    
    
    3.12
    %
    
    
    610,242
    
    
    
    6,816
    
    
    
    2.25
    %Repurchase agreements sold
    
    
    30,091
    
    
    
    421
    
    
    
    2.82
    %
    
    
    32,105
    
    
    
    231
    
    
    
    1.45
    %Borrowed funds
    
    
    51,778
    
    
    
    762
    
    
    
    2.97
    %
    
    
    72,561
    
    
    
    1,138
    
    
    
    3.16
    %Total interest bearing liabilities
    
    
    761,567
    
    
    
    11,690
    
    
    
    3.10
    %
    
    
    714,908
    
    
    
    8,185
    
    
    
    2.31
    %Noninterest bearing deposits
    
    
    143,731
    
    
    
    
    
    
    
    
    
    
    
    121,303Stockholders equity
    
    
    118,748
    
    
    
    
    
    
    
    
    
    
    
    112,956Other liabilities
    
    
    6,040
    
    
    
    
    
    
    
    
    
    
    
    10,788Total average liabilities and
stockholders equity
    
    $
    1,030,086
    
    
    
    
    
    
    
    
    
    
    $
    959,955NET INTEREST INCOME/
YIELD (3,4)
    
    
    
    
    
    $
    20,418
    
    
    
    4.50
    %
    
    
    
    
    
    $
    16,764
    
    
    
    4.02
    %INTEREST SPREAD (5)
    
    
    
    
    
    
    
    
    
    
    3.98
    %
    
    
    
    
    
    
    
    
    
    
    3.67
    %
 
 1.
    
    Yields related to securities and loans exempt from Federal income taxes are stated on a fully
tax-equivalent basis, assuming a Federal income tax rate of 34%, reduced by the nondeductible portion of
interest expense2.
    
    The loan average includes loans on which accrual of interest has been discontinued.3.
    
    Net interest income is the difference between income from earning assets and interest expense.4.
    
    Net interest yield is net interest income divided by total average earning assets.5.
    
    Interest spread is the difference between the average interest rate received on earning assets
and the average rate paid on interest bearing liabilities. 
 16




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Provisions and Allowance for Loan Losses
   Noninterest Income
      
 17




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##### Table of Contents



Noninterest Expense
    
 18




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##### Table of Contents



Income Tax Expense
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  
 Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Numberof Shares
    
    
    Maximum NumberPurchased as
    
    
    of Shares ThatTotal Number
    
    
    Average Price
    
    
    Part of
    
    
    May Yet Beof Shares
    
    
    Paid per
    
    
    Publicly
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    Share
    
    
    Announced Program
    
    
    the Program(1)April 1, 2006 to April 30, 2006
    
    
    20,562
    
    
    $
    14.49
    
    
    
    20,562
    
    
    
    265,914May 1, 2006 to May 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0June 1, 2006 to June 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Total
    
    
    20,562
    
    
    $
    14.49
    
    
    
    20,562
 
 19




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##### Table of Contents



(1)
    
    The Companys stock repurchase program, as approved
by shareholders effective May 2005, allowed for repurchase
of up to 300,000 shares until April 30, 2006. As of June
30, 2006, 35,562 shares had been repurchased at a total
cost of $516,034. Effective June 2006, the shareholders
approved the repurchase of up to 100,000 shares until
April 30, 2007. There were no shares purchased under the
new 2006 plan. 
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal 1:
    
    Shareholders elected J.T. Alexander, Jr., Ralph L. Bentley, M.D., Nolan G. Brown, Faye E.
Cooper, Harry M. Davis, James A. Harrell, Jr., William A. Long, Daniel J. Park, Eldon H. Parks,
James L. Poindexter, James N. Smoak, Harry C. Spell, Hal M. Stuart and C. Kenneth
Wilcox to serve one-year terms on the Board of Directors or until their successors are
elected and qualified. Votes for each nominee were as follows:
 Name
    
    For
    
    Withheld
    
    AbstainJ.T. Alexander, Jr.
    
    
    9,044,661
    
    
    
    
    
    
    
    112,144Ralph L. Bentley, M.D.
    
    
    8,925,982
    
    
    
    
    
    
    
    230,824Nolan G. Brown
    
    
    8,909,370
    
    
    
    
    
    
    
    247,435Faye E. Cooper
    
    
    8,875,004
    
    
    
    
    
    
    
    281,802Harry M. Davis
    
    
    8,921,497
    
    
    
    
    
    
    
    235,309James A. Harrell, Jr.
    
    
    8,962,792
    
    
    
    
    
    
    
    193,070William A. Long
    
    
    8,911,655
    
    
    
    
    
    
    
    245,150Daniel J. Park
    
    
    9,042,707
    
    
    
    
    
    
    
    114,098Eldon H. Parks
    
    
    9,066,232
    
    
    
    
    
    
    
    90,574James L. Poindexter
    
    
    8,799,558
    
    
    
    
    
    
    
    357,248James N. Smoak
    
    
    9,036,003
    
    
    
    
    
    
    
    120,803Harry C. Spell
    
    
    8,895,063
    
    
    
    
    
    
    
    261,743Hal M. Stuart
    
    
    9,001,078
    
    
    
    
    
    
    
    155,727C. Kenneth Wilcox
    
    
    8,907,025
    
    
    
    
    
    
    
    249,781
 Proposal 2:
    
    Shareholders approved a proposal to form a holding company for the
Bank to be accomplished through an exchange of each Bank share for a share in
a newly formed holding company whereby the Bank will become a wholly-owned
subsidiary of the holding company and the shareholders of the Bank will become
the shareholders of the holding company. The votes on the proposal were
as follows:
 For
    
    Against
    
    Abstain6,684,644
    
    
    217,586
    
    
    
    346,163
 
 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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Yadkin Valley Financial CorporationBY:
    
    /s/ William A. LongWilliam A. Long, President and Chief Executive OfficerBY:
    
    /s/ Edwin E. LawsEdwin E. Laws, Chief Financial Officer
  
 21