##### Table of Contents



US Securities and Exchange Commission
Washington, DC 20549
 Form 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d)
 Of the Securities Exchange Act of 1934 
For the Quarterly Period Ended March 31, 2010
 Commission File Number 000-52099
 Yadkin Valley Financial Corporation
 (Exact name of registrant specified in its charter)
 North Carolina
    
    20-4495993(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 209 North Bridge Street, Elkin, North Carolina 28621
(address of principal executive offices)
 336-526-6300
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting companyo(Do not check if a smaller reporting company)
 o þ
  o o




---



##### 



YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended March 31, 2010 and 2009
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
March 31, 2010 and December 31, 2009
    
    
    2Condensed Consolidated Statements of Income (Loss)
Three Months Ended March 31, 2010 and 2009
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2010 and 2009
    
    
    4Condensed Consolidated Statement of Shareholders Equity
Three Months Ended March 31, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2010 and 2009
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-21Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22-35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35-36Part II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 5.
Other Information
    
    
    36-37Item 6. Exhibit Index
    
    
    38Signatures
    
    
    39Exhibits
    
    
    40-42EX-31.1EX-31.2EX-32.1
 
  1




---



##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Three Months Ended March 31, 2010 and 2009
 March 31,
    
    
    December 31,*2010
    
    
    2009ASSETS
    
    (Amounts in thousands, except share data)Cash and due from banks
    
    $
    27,002
    
    
    $
    89,668Federal funds sold
    
    
    8
    
    
    
    93Interest-bearing deposits
    
    
    208,727
    
    
    
    2,576Securities available-for-sale at fair value
(amortized cost $167,925 in 2010 and $179,143 in 2009)
    
    
    173,196
    
    
    
    183,841Gross loans
    
    
    1,656,031
    
    
    
    1,676,448Less: allowance for loan losses
    
    
    45,399
    
    
    
    48,625Net loans
    
    
    1,610,632
    
    
    
    1,627,823Loans held-for-sale
    
    
    24,308
    
    
    
    49,715Accrued interest receivable
    
    
    7,866
    
    
    
    7,783Premises and equipment, net
    
    
    44,075
    
    
    
    43,642Foreclosed real estate
    
    
    16,656
    
    
    
    14,345Federal Home Loan Bank stock, at cost
    
    
    10,539
    
    
    
    10,539Investment in bank-owned life insurance
    
    
    24,660
    
    
    
    24,454Goodwill
    
    
    4,944
    
    
    
    4,944Core deposit intangible (net of accumulated amortization of $6,669 in 2010 and $6,335 in 2009)5,852
    
    
    
    6,186Other assets
    
    
    44,647
    
    
    
    48,003Total Assets
    
    $
    2,203,112
    
    
    $
    2,113,612LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing demand deposits
    
    $
    211,272
    
    
    $
    207,850Interest-bearing deposits:NOW, savings and money market accounts
    
    
    455,189
    
    
    
    445,508Time certificates:$100,000 or more
    
    
    529,253
    
    
    
    560,825Other
    
    
    713,351
    
    
    
    607,569Total Deposits
    
    
    1,909,065
    
    
    
    1,821,752Short-term borrowings
    
    
    49,601
    
    
    
    44,467Long-term borrowings
    
    
    76,999
    
    
    
    79,000Capital lease obligations
    
    
    2,429
    
    
    
    2,437Accrued interest payable
    
    
    3,437
    
    
    
    3,015Other liabilities
    
    
    8,645
    
    
    
    10,675Total Liabilities
    
    
    2,050,176
    
    
    
    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
    
    
    46,307
    
    
    
    46,152Common stock, $1 par value, 20,000,000 shares authorized;
16,134,640 issued and outstanding in 2010 and 16,129,640
issued and outstanding in 2009
    
    
    16,135
    
    
    
    16,130Warrants
    
    
    3,581
    
    
    
    3,581Surplus
    
    
    114,588
    
    
    
    114,574Retained earnings (accumulated deficit)
    
    
    (30,937
    )
    
    
    (31,080
    )Accumulated other comprehensive income
    
    
    3,262
    
    
    
    2,909Total Shareholders Equity
    
    
    152,936
    
    
    
    152,266Total Liabilities and Shareholders Equity
    
    $
    2,203,112
    
    
    $
    2,113,612
 
 *
    
    Derived from audited financial statements  2




---



##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(UNAUDITED)
Three Months Ended March 31, 2010 and 2009
 Three Months Ended March 31,2010
    
    
    2009(Amounts in thousands,except per share data)INTEREST INCOME:Interest and fees on loans
    
    $
    22,958
    
    
    $
    16,028Interest on federal funds sold
    
    
    
    
    
    
    1Interest and dividends on securities:Taxable
    
    
    1,209
    
    
    
    1,175Non-taxable
    
    
    562
    
    
    
    385Interest-bearing deposits
    
    
    61
    
    
    
    11TOTAL INTEREST INCOME
    
    
    24,790
    
    
    
    17,600INTEREST EXPENSETime deposits of $100,000 or more
    
    
    3,361
    
    
    
    3,101Other time and savings deposits
    
    
    4,055
    
    
    
    3,960Borrowed funds
    
    
    567
    
    
    
    625TOTAL INTEREST EXPENSE
    
    
    7,983
    
    
    
    7,686NET INTEREST INCOME
    
    
    16,807
    
    
    
    9,914PROVISION FOR LOAN LOSSES
    
    
    4,384
    
    
    
    10,550NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    12,423
    
    
    
    (636
    )NON-INTEREST INCOME:Service charges on deposit accounts
    
    
    1,437
    
    
    
    1,047Other service fees
    
    
    841
    
    
    
    1,065Net gain on sales and fees of mortgage loans
    
    
    1,334
    
    
    
    3,199Gain on sale of available-for-sale securities
    
    
    44
    
    
    
    Income on investment in bank-owned life insurance
    
    
    207
    
    
    
    231Mortgage banking income (loss)
    
    
    56
    
    
    
    (307
    )Other than temporary impairment of securities
    
    
    (205
    )
    
    
    (179
    )Other income
    
    
    66
    
    
    
    50TOTAL NON-INTEREST INCOME
    
    
    3,780
    
    
    
    5,106NON-INTEREST EXPENSES:Salaries and employee benefits
    
    
    6,663
    
    
    
    5,627Occupancy and equipment expense
    
    
    1,966
    
    
    
    1,327Printing and supplies
    
    
    274
    
    
    
    232Data processing
    
    
    313
    
    
    
    133Amortization of core deposit intangible
    
    
    334
    
    
    
    225Communications expense
    
    
    459
    
    
    
    323Advertising expense
    
    
    178
    
    
    
    376FDIC assessment expense
    
    
    830
    
    
    
    662Loan collection fees
    
    
    272
    
    
    
    64Net loss on other real estate owned
    
    
    796
    
    
    
    13Other expenses
    
    
    2,447
    
    
    
    2,645TOTAL NON-INTEREST EXPENSES
    
    
    14,532
    
    
    
    11,627INCOME (LOSS) BEFORE INCOME TAXES
    
    
    1,671
    
    
    
    (7,157
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    757
    
    
    
    (2,994
    )NET INCOME (LOSS)
    
    
    914
    
    
    
    (4,163
    )Preferred stock dividend and accretion of preferred stock discount
    
    
    771
    
    
    
    445NET INCOME (LOSS) TO COMMON SHAREHOLDERS
    
    $
    143
    
    
    $
    (4,608
    )NET INCOME (LOSS) PER COMMON SHARE:Basic
    
    $
    0.01
    
    
    $
    (0.40
    )Diluted
    
    $
    0.01
    
    
    $
    (0.40
    )CASH DIVIDENDS PER COMMON SHARE
    
    $
    
    
    
    $
    0.06
  3




---



##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)
Three Months Ended March 31, 2010 and 2009
 Three Months Ended March 31,2010
    
    
    2009(Amounts in thousands)NET INCOME (LOSS)
    
    $
    914
    
    
    $
    (4,163
    )OTHER COMPREHENSIVE INCOME:Unrealized holding gains (losses) on securities available-for-sale
    
    
    616
    
    
    
    (477
    )Tax effect
    
    
    (236
    )
    
    
    184Unrealized holding gains (losses) on securities available-for-sale,
net of tax amount
    
    
    380
    
    
    
    (293
    )Reclassification adjustment for realized gains
    
    
    (44
    )
    
    
    Tax effect
    
    
    17
    
    
    
    Reclassification adjustment for realized gains,net of tax amount
    
    
    (27
    )
    
    
    OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
    
    
    353
    
    
    
    (293
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    1,267
    
    
    $
    (4,456
    )
  4




---



##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
 Three Months Ended March 31, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,163
    )
    
    
    
    
    
    
    (4,163
    )Preferred stock issued
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,000Preferred stock discount
    
    
    
    
    
    
    
    
    
    
    (1,731
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,731
    )Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,731Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (692
    )
    
    
    
    
    
    
    (692
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )
    
    
    
    
    
    
    (445
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293
    )
    
    
    (293
    )BALANCE, MARCH 31, 2009
    
    
    11,536,500
    
    
    
    11,537
    
    
    
    34,346
    
    
    
    1,731
    
    
    
    88,049
    
    
    
    42,693
    
    
    
    1,714
    
    
    
    180,070BALANCE, DECEMBER 31,
2009
    
    
    16,129,640
    
    
    
    16,130
    
    
    
    46,152
    
    
    
    3,581
    
    
    
    114,574
    
    
    
    (31,080
    )
    
    
    2,909
    
    
    
    152,266Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    914Restricted stock issued
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    Stock option compensation:stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    (616
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353
    
    
    
    353BALANCE, MARCH 31, 2010
    
    
    16,134,640
    
    
    $
    16,135
    
    
    $
    46,307
    
    
    $
    3,581
    
    
    $
    114,588
    
    
    $
    (30,937
    )
    
    $
    3,262
    
    
    $
    152,936
  5




---



##### Table of Contents



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended March 31, 2010 and 2009
 Three Months Ended March 31,2010
    
    
    2009(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    914
    
    
    $
    (4,163
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Net amortization (accretion) of premiums on investment securities
    
    
    192
    
    
    
    (6
    )Provision for loan losses
    
    
    4,384
    
    
    
    10,550Net gain on sales of mortgage loans
    
    
    (1,334
    )
    
    
    (3,199
    )Other than temporary impairment of investments
    
    
    205
    
    
    
    179Increase in cash surrender value of life insurance
    
    
    (207
    )
    
    
    (231
    )Depreciation and amortization
    
    
    766
    
    
    
    548Loss on sale of premises and equipment
    
    
    8
    
    
    
    Net loss on other real estate owned
    
    
    796
    
    
    
    13Gain on sale of available-for-sale securities
    
    
    (44
    )
    
    
    Amortization of core deposit intangible
    
    
    334
    
    
    
    225Deferred tax provision
    
    
    4,537
    
    
    
    216Stock based compensation expense
    
    
    20
    
    
    
    19Originations of mortgage loans held-for-sale
    
    
    (171,956
    )
    
    
    (563,540
    )Proceeds from sales of mortgage loans
    
    
    198,698
    
    
    
    436,604Decrease in capital lease obligations
    
    
    8
    
    
    
    (Increase) decrease in accrued interest receivable
    
    
    (83
    )
    
    
    166Increase in other assets
    
    
    (1,605
    )
    
    
    (5,642
    )Increase (decrease) in accrued interest payable
    
    
    422
    
    
    
    (380
    )Increase (decrease) in other liabilities
    
    
    (2,046
    )
    
    
    5,083NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    34,009
    
    
    
    (123,558
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale securities
    
    
    
    
    
    
    (8,727
    )Proceeds from sales of available-for-sale securities
    
    
    154
    
    
    
    10,885Proceeds from maturities of available-for-sale securities
    
    
    10,916
    
    
    
    2,575Net increase in loans
    
    
    7,923
    
    
    
    2,319Purchases of premises and equipment
    
    
    (1,208
    )
    
    
    (1,574
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (2,025
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    
    
    
    
    1,643Proceeds from the sale of foreclosed real estate
    
    
    1,776
    
    
    
    544NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    19,561
    
    
    
    5,640CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    $
    13,103
    
    
    $
    19,897Net increase in time certificates
    
    
    74,210
    
    
    
    76,900Net increase (decrease) in borrowed funds
    
    
    3,133
    
    
    
    (18,803
    )Dividends paid
    
    
    (616
    )
    
    
    (1,644
    )Proceeds from the issuance of preferred stock and warrants
    
    
    
    
    
    
    36,000NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    89,830
    
    
    
    112,350NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    143,400
    
    
    
    (5,568
    )CASH AND CASH EQUIVALENTS:Beginning of year
    
    
    92,337
    
    
    
    26,022End of year
    
    $
    235,737
    
    
    $
    20,454
  6




---



##### 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
    7




---



##### Table of Contents



3. Stock-based Compensation
     8




---



##### Table of Contents



4. Investment Securities
  March 31, 2010Unrealized
    
    
    UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amounts in thousands)Available-for-sale securities:Securities of U.S. government
agencies due:Within 1 year
    
    $
    4,997
    
    
    $
    66
    
    
    $
    
    
    
    $
    5,063After 1 but within 5 years
    
    
    16,358
    
    
    
    505
    
    
    
    
    
    
    
    16,863After 5 but within 10 years
    
    
    17,244
    
    
    
    586
    
    
    
    
    
    
    
    17,83038,599
    
    
    
    1,157
    
    
    
    
    
    
    
    39,756Government sponsored agencies:Residential mortgage-backed securities due:Within 1 year
    
    
    535
    
    
    
    3
    
    
    
    
    
    
    
    538After 1 but within 5 years
    
    
    3,016
    
    
    
    59
    
    
    
    5
    
    
    
    3,070After 5 but within 10 years
    
    
    7,037
    
    
    
    434
    
    
    
    
    
    
    
    7,471After 10 years
    
    
    34,606
    
    
    
    1,728
    
    
    
    3
    
    
    
    36,33145,194
    
    
    
    2,224
    
    
    
    8
    
    
    
    47,410Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    4,319
    
    
    
    122
    
    
    
    
    
    
    
    4,441After 10 years
    
    
    18,313
    
    
    
    601
    
    
    
    10
    
    
    
    18,90422,632
    
    
    
    723
    
    
    
    10
    
    
    
    23,345Private label collateralized mortgage
obligations due:After 10 years
    
    
    2,375
    
    
    
    10
    
    
    
    330
    
    
    
    2,0552,375
    
    
    
    10
    
    
    
    330
    
    
    
    2,055State and municipal securities due:Within 1 year
    
    
    5,345
    
    
    
    28
    
    
    
    
    
    
    
    5,373After 1 but within 5 years
    
    
    13,474
    
    
    
    494
    
    
    
    
    
    
    
    13,968After 5 but within 10 years
    
    
    16,047
    
    
    
    530
    
    
    
    9
    
    
    
    16,568After 10 years
    
    
    23,251
    
    
    
    543
    
    
    
    129
    
    
    
    23,66558,117
    
    
    
    1,595
    
    
    
    138
    
    
    
    59,574Common and preferred stocks due:After 10 years
    
    
    1,008
    
    
    
    48
    
    
    
    
    
    
    
    1,0561,008
    
    
    
    48
    
    
    
    
    
    
    
    1,056Total available-for-sale securities
    
    $
    167,925
    
    
    $
    5,757
    
    
    $
    486
    
    
    $
    173,196
 9




---



##### 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:After 10 years
    
    
    1,118
    
    
    
    68
    
    
    
    5
    
    
    
    1,1811,118
    
    
    
    68
    
    
    
    5
    
    
    
    1,181Total available-for-sale securities
    
    $
    179,143
    
    
    $
    5,295
    
    
    $
    597
    
    
    $
    183,841
  10




---



##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    lossesMarch 31, 2010
    
    
    
    
    
    
    
    
    
    (Amounts in thousands)Securities available-for-sale:Government sponsored agencies:Mortgage-backed securities
    
    $
    25
    
    
    $
    5
    
    
    $
    141
    
    
    $
    3
    
    
    $
    166
    
    
    $
    8Collateralized mortgage obligations
    
    
    254
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    254
    
    
    
    10Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    2,584
    
    
    
    330
    
    
    
    2,584
    
    
    
    330State and municipal securities
    
    
    7,207
    
    
    
    93
    
    
    
    1,049
    
    
    
    45
    
    
    
    8,256
    
    
    
    138Common and preferred stocks
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    Total temporarily impaired securities
    
    $
    7,486
    
    
    $
    108
    
    
    $
    3,781
    
    
    $
    378
    
    
    $
    11,267
    
    
    $
    486
 11




---



##### Table of Contents



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    lossesDecember 31, 2009
    
    
    
    
    
    
    
    
    
    (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
   12




---



##### Table of Contents



6. Earnings Per Common Share
  Three Months EndedMarch 31,2010
    
    
    2009Basic EPS denominator:Weighted average number of
common shares outstanding
    
    
    16,129,640
    
    
    
    11,536,500Dilutive effect arising from assumed
exercise of stock options
    
    
    
    
    
    
    Diluted EPS denominator
    
    
    16,129,640
    
    
    
    11,536,500
  7. Shareholders Equity
   13




---



##### Table of Contents



8. Derivatives
   9. Allowance for Loan Losses
   14




---



##### Table of Contents



March 31, 2010
    
    
    March 31, 2009(Amounts in thousands)Balance, December 31, 2009 and 2008
    
    $
    48,625
    
    
    $
    22,355Charge-offs
    
    
    (8,171
    )
    
    
    (2,023
    )Recoveries
    
    
    561
    
    
    
    22Provision for loan losses
    
    
    4,384
    
    
    
    10,550Allowance for Loan Losses
    
    $
    45,399
    
    
    $
    30,904
  March 31, 2010
    
    
    December 31, 2009(Amounts in thousands)Impaired loans under $100,000 that are not individually
reviewed
    
    $
    6,595
    
    
    $
    6,001Impaired loans without a related allowance for loan losses
    
    
    15,181
    
    
    
    16,959Impaired loans with a related allowance for loan losses
    
    
    35,171
    
    
    
    24,497Impaired loans acquired without a related allowance for
loan losses
    
    
    2,223
    
    
    
    2,515Impaired loans acquired with subsequent deterioration and
related allowance for loan loss
    
    
    1,915
    
    
    
    2,725Total impaired loans
    
    $
    61,085
    
    
    $
    52,697Allowance for loan losses related to impaired loans
    
    $
    12,825
    
    
    $
    10,971Nonaccrual loans
    
    $
    52,870
    
    
    $
    36,255Troubled debt restructured loans
    
    
    5,267
    
    
    
    5,544Other impaired loans*
    
    
    2,948
    
    
    
    10,898Total impaired loans
    
    $
    61,085
    
    
    $
    52,697
 
 *
    
    Other impaired loans consists of loans in which regular payments are still received however some
uncertainty exists as to whether or not the full contractual amounts will be collected in
accordance with the terms of the loan agreement.  15




---



##### Table of Contents



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
    
    
    (210
    )
    
    
    
    
    
    
    (210
    )Transfer to foreclosed real estate
    
    
    (9
    )
    
    
    (159
    )
    
    
    150Change due to charge-offs
    
    
    (249
    )
    
    
    (246
    )
    
    
    (3
    )Balance at March 31, 2010
    
    $
    4,920
    
    
    $
    92
    
    
    $
    4,828
  10. Fair Value
   Available-for-Sale Investment Securities
  16




---



##### Table of Contents



Interest Rate Locks and Forward Loan Sale Commitments
  Mortgage Servicing Rights
   Level 3Fair Value
    
    
    Fair ValueBalance, December 31, 2009 and 2008
    
    $
    1,917,941
    
    
    $
    1,745,466Capitalized
    
    
    100,731
    
    
    
    286,821Gains/losses included in other income
    
    
    (77,736
    )
    
    
    (437,576
    )Balance, March 31, 2010 and 2009
    
    $
    1,940,936
    
    
    $
    1,594,711
 Mortgage Loans Held-for-Sale
  Impaired Loans
  17




---



##### Table of Contents



Other Real Estate Owned
   March 31, 2010 (in thousands)
    
    Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    39,756
    
    
    $
    
    
    
    $
    39,756
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    47,410
    
    
    
    
    
    
    
    47,410
    
    
    
    Collateralized mortgage obligations
    
    
    23,345
    
    
    
    
    
    
    
    23,345
    
    
    
    Private label collateralized
mortgage obligations
    
    
    2,055
    
    
    
    
    
    
    
    2,055
    
    
    
    State and municipal securities
    
    
    59,574
    
    
    
    
    
    
    
    59,574
    
    
    
    Common and preferred stocks
    
    
    1,056
    
    
    
    1,056
    
    
    
    
    
    
    
    Interest rate lock commitments
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    Forward loan sale commitments
    
    
    257
    
    
    
    
    
    
    
    257
    
    
    
    Mortgage servicing rights
    
    
    1,941
    
    
    
    
    
    
    
    
    
    
    
    1,941
 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 collateralized
mortgage 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
 18




---



##### Table of Contents



Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Amounts in thousands)Other real estate owned at March 31, 2010
    
    $
    3,774
    
    
    $
    
    
    
    $
    
    
    
    $
    3,774Other real estate owned at December 31, 2009
    
    
    2,510
    
    
    
    
    
    
    
    
    
    
    
    2,510Impaired loans at March 31, 2010
    
    
    24,261
    
    
    
    
    
    
    
    
    
    
    
    24,261Impaired loans at December 31, 2009
    
    
    16,251
    
    
    
    
    
    
    
    
    
    
    
    16,251Cost method investments at March 31, 2010
    
    
    942
    
    
    
    
    
    
    
    
    
    
    
    942Cost method investments at December 31, 2009
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    115
   11. Financial Instruments
  March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Amounts in thousands)Financial assets:Cash and cash equivalents
    
    $
    235,737
    
    
    $
    235,737
    
    
    $
    92,337
    
    
    $
    92,337Investment securities
    
    
    173,196
    
    
    
    173,196
    
    
    
    183,841
    
    
    
    183,841Loans and loans held-for-sale, net
    
    
    1,634,940
    
    
    
    1,658,842
    
    
    
    1,677,538
    
    
    
    1,676,845Accrued interest receivable
    
    
    7,866
    
    
    
    7,866
    
    
    
    7,783
    
    
    
    7,783Federal Home Loan Bank stock
    
    
    10,539
    
    
    
    10,539
    
    
    
    10,539
    
    
    
    10,539Investment in Bank owned life insurance
    
    
    24,660
    
    
    
    24,660
    
    
    
    24,454
    
    
    
    24,454Forward loan sale commitments
    
    
    257
    
    
    
    257
    
    
    
    1,020
    
    
    
    1,020Financial liabilities:Demand deposits, NOW, savings
and money market accounts
    
    
    666,461
    
    
    
    666,461
    
    
    
    653,358
    
    
    
    653,358Time deposits
    
    
    1,242,604
    
    
    
    1,234,826
    
    
    
    1,168,394
    
    
    
    1,185,405Borrowed funds
    
    
    126,600
    
    
    
    125,748
    
    
    
    123,468
    
    
    
    124,947Accrued interest payable
    
    
    3,437
    
    
    
    3,437
    
    
    
    3,015
    
    
    
    3,015Interest rate lock commitments
    
    
    21
    
    
    
    21
    
    
    
    791
    
    
    
    791
 19




---



##### Table of Contents



12. Goodwill
   13. Business Segment Information
  20




---



##### Table of Contents



Bank
    
    
    Sidus
    
    
    Other
    
    
    TotalFor Three
Months Ended March 31, 2010
    
    (Amounts in thousands)Interest income
    
    $
    24,439
    
    
    $
    351
    
    
    $
    
    
    
    $
    24,790Interest expense
    
    
    7,791
    
    
    
    10
    
    
    
    182
    
    
    
    7,983Net interest income
    
    
    16,648
    
    
    
    341
    
    
    
    (182
    )
    
    
    16,807Provision for loan losses
    
    
    4,384
    
    
    
    
    
    
    
    
    
    
    
    4,384Net interest income (loss) after provision
for loan losses
    
    
    12,264
    
    
    
    341
    
    
    
    (182
    )
    
    
    12,423Other income
    
    
    2,634
    
    
    
    1,335
    
    
    
    (189
    )
    
    
    3,780Other expense
    
    
    13,058
    
    
    
    1,378
    
    
    
    96
    
    
    
    14,532Income
(loss) before income taxes
    
    
    1,840
    
    
    
    298
    
    
    
    (467
    )
    
    
    1,671Income taxes
    
    
    757
    
    
    
    
    
    
    
    
    
    
    
    757Net income(loss)
    
    $
    1,083
    
    
    $
    298
    
    
    $
    (467
    )
    
    $
    914Total assets
    
    $
    2,176,939
    
    
    $
    33,882
    
    
    $
    (7,709
    )
    
    $
    2,203,112Net loans
    
    
    1,610,632
    
    
    
    
    
    
    
    
    
    
    
    1,610,632Loans held for sale
    
    
    768
    
    
    
    23,540
    
    
    
    
    
    
    
    24,308Goodwill
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944For Three Months Ended March 31, 2009Interest income
    
    $
    16,561
    
    
    $
    1,039
    
    
    $
    
    
    
    $
    17,600Interest expense
    
    
    7,348
    
    
    
    132
    
    
    
    206
    
    
    
    7,686Net interest income
    
    
    9,213
    
    
    
    907
    
    
    
    (206
    )
    
    
    9,914Provision for loan losses
    
    
    10,539
    
    
    
    11
    
    
    
    
    
    
    
    10,550Net interest income (loss) after provision
for loan losses
    
    
    (1,326
    )
    
    
    896
    
    
    
    (206
    )
    
    
    (636
    )Other income
    
    
    1,636
    
    
    
    3,199
    
    
    
    271
    
    
    
    5,106Other expense
    
    
    9,338
    
    
    
    2,133
    
    
    
    156
    
    
    
    11,627Income (loss) before income taxes (benefit)
    
    
    (9,028
    )
    
    
    1,962
    
    
    
    (91
    )
    
    
    (7,157
    )Income taxes (benefit)
    
    
    (2,994
    )
    
    
    
    
    
    
    
    
    
    
    (2,994
    )Net income(loss)
    
    $
    (6,034
    )
    
    $
    1,962
    
    
    $
    (91
    )
    
    $
    (4,163
    )Total assets
    
    
    1,622,325
    
    
    
    190,985
    
    
    
    (176,227
    )
    
    
    1,637,083Net loans
    
    
    1,151,506
    
    
    
    
    
    
    
    
    
    
    
    1,151,506Loans held for sale
    
    
    444
    
    
    
    179,621
    
    
    
    
    
    
    
    180,065Goodwill
    
    
    48,559
    
    
    
    4,944
    
    
    
    
    
    
    
    53,503
 
 (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 ($6,853,856 in 2010 and $175,000,000 in 2009), the Banks Investment in
Sidus ($3,000,000 in 2010 and 2009), and the Banks A/R from Sidus ($71,632 in 2010 and
$119,344 in 2009). Also included in this column are Holding Company assets ($2,216,809 in 2010
and $1,892,612 in 2009) and Holding Company income and expenses. 21




---



##### 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 our regulatory capital ratios;
    
    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;
    
    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;
    
    changes occurring in business conditions and inflation;
    
    changes in technology;
    
    changes in monetary and tax policies;
    
    ability of borrowers to repay loans, which can be adversely affected by a number of
factors, including changes in economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business closings or
lay-offs, natural disasters, which could be exacerbated by potential climate change, and
international instability;
    
    changes in deposit flows;
    
    changes in accounting principles, policies or guidelines;
 22




---



##### Table of Contents




    
    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 its liquidity needs;
    
    loss of consumer confidence and economic disruptions resulting from terrorist
activities;
    
    our ability to retain our existing customers, including our deposit relationships;
    
    the effect of final rules amending Regulation E that prohibit financial institutions
from charging consumer fees for paying overdrafts on ATM and one-time debit card
transactions, unless the consumer consents or opts-in to the overdraft service for those
types of transactions;
    
    changes in the securities markets; and
    
    other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission (the SEC).
   Overview
      23




---



##### Table of Contents



Changes in Financial Position
       24




---



##### Table of Contents



March 31, 2010
    
    
    December 31, 2009Holding
    
    
    
    
    
    
    HoldingCompany
    
    
    Bank
    
    
    Company
    
    
    BankTotal risk-based capital ratio
    
    
    10.7
    %
    
    
    10.5
    %
    
    
    10.6
    %
    
    
    10.3
    %Tier 1 risk-based capital ratio
    
    
    9.5
    %
    
    
    9.3
    %
    
    
    9.4
    %
    
    
    9.0
    %Leverage ratio
    
    
    8.0
    %
    
    
    7.8
    %
    
    
    8.4
    %
    
    
    8.0
    %
  Liquidity, Interest Rate Sensitivity and Market Risk
  ® SM
 25




---



##### Table of Contents



® ®
    Results of Operations
  Net Interest Income
  26




---



##### Table of Contents



Interest Rates Earned and Paid
 Three Months Ended March 31, 2010
    
    
    Three Months Ended March 31, 2009Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Federal funds sold
    
    $
    632
    
    
    $
    
    
    
    
    0.25
    %
    
    $
    4,709
    
    
    $
    1
    
    
    
    0.09
    %Interest-bearing deposits
    
    
    134,627
    
    
    
    61
    
    
    
    0.18
    %
    
    
    1,971
    
    
    
    11
    
    
    
    2.26
    %Investment securities (1)
    
    
    180,026
    
    
    
    2,018
    
    
    
    4.55
    %
    
    
    133,439
    
    
    
    1,685
    
    
    
    5.12
    %Total loans (1)(2)(6)
    
    
    1,683,199
    
    
    
    23,002
    
    
    
    5.54
    %
    
    
    1,283,418
    
    
    
    16,063
    
    
    
    5.08
    %Total interest-earning assets
    
    
    1,998,484
    
    
    
    25,081
    
    
    
    5.09
    %
    
    
    1,423,537
    
    
    
    17,760
    
    
    
    5.06
    %Non-earning assets
    
    
    140,599
    
    
    
    
    
    
    
    
    
    
    
    147,593Total assets
    
    $
    2,139,083
    
    
    
    
    
    
    
    
    
    
    $
    1,571,130Interest-bearing liabilities:Deposits (7):NOW and money market
    
    $
    387,493
    
    
    
    790
    
    
    
    0.83
    %
    
    $
    260,257
    
    
    
    703
    
    
    
    1.10
    %Savings
    
    
    53,662
    
    
    
    33
    
    
    
    0.25
    %
    
    
    36,962
    
    
    
    24
    
    
    
    0.26
    %Time certificates
    
    
    1,199,571
    
    
    
    6,592
    
    
    
    2.23
    %
    
    
    748,478
    
    
    
    6,334
    
    
    
    3.43
    %Total interest bearing deposits
    
    
    1,640,726
    
    
    
    7,415
    
    
    
    1.83
    %
    
    
    1,045,697
    
    
    
    7,061
    
    
    
    2.74
    %Repurchase agreements sold
    
    
    47,402
    
    
    
    132
    
    
    
    1.13
    %
    
    
    54,763
    
    
    
    158
    
    
    
    1.17
    %Borrowed funds (8)
    
    
    74,163
    
    
    
    436
    
    
    
    2.38
    %
    
    
    130,734
    
    
    
    467
    
    
    
    1.45
    %Total interest-bearing liabilities
    
    
    1,762,291
    
    
    
    7,983
    
    
    
    1.84
    %
    
    
    1,231,194
    
    
    
    7,686
    
    
    
    2.53
    %Non-interest bearing deposits
    
    
    205,848
    
    
    
    
    
    
    
    
    
    
    
    148,720Stockholders equity
    
    
    153,973
    
    
    
    
    
    
    
    
    
    
    
    182,448Other liabilities
    
    
    16,971
    
    
    
    
    
    
    
    
    
    
    
    8,768Total average liabilities and
stockholders equity
    
    $
    2,139,083
    
    
    
    
    
    
    
    
    
    
    $
    1,571,130Net interest income (3)
and interest rate spread (5)
    
    
    
    
    
    $
    17,098
    
    
    
    3.25
    %
    
    
    
    
    
    $
    10,074
    
    
    
    2.53
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.47
    %
    
    
    
    
    
    
    
    
    
    
    2.87
    %
 
 (1)
    
    Yields relate to investment securities and loans exempt from Federal income taxes are stated on
a fully tax-equivalent basis, assuming a Federal income tax rate of 35%. The calculation includes
an adjustment for the nondeductible portion of interest expense used to fund tax-exempt assets.(2)
    
    The loan average includes loans on which accrual of interest has been discontinued.(3)
    
    The net interest income is the difference between income from earning assets and
interest expense.(4)
    
    Net interest margin is net interest income divided by total
average earning assets.(5)
    
    Interest spread is the difference between the average interest rate received on earning assets
and the average interest rate paid on interest-bearing liabilities.(6)
    
    Interest income on loans includes $571,000 in accretion of fair market value adjustments
related to recent mergers(7)
    
    Interest expense on deposits includes $390,000 in accretion of fair market value
adjustments related to recent mergers.(8)
    
    Interest expense on borrowings includes $15,000 in accretion of fair market value adjustments
related to recent mergers. 27




---



##### Table of Contents



Provisions and Allowance for Loan Losses
      28




---



##### Table of Contents



For the three months ended
    
    
    For the three months endedMarch 31, 2010
    
    
    March 31, 2009Net charge-offs
    
    
    
    
    
    
    Net charge-offsto average
    
    
    
    
    
    
    to averageLoan Type
    
    Net Charge-offs
    
    
    loans
    
    
    Net Charge-offs
    
    
    loans(Amounts in thousands)Construction
    
    $
    4,295
    
    
    
    1.03
    %
    
    $
    133
    
    
    
    0.04
    %Commercial, financial and other
    
    
    658
    
    
    
    0.16
    %
    
    
    1,374
    
    
    
    0.43
    %Mortgage
    
    
    805
    
    
    
    0.19
    %
    
    
    96
    
    
    
    0.03
    %Commercial real estate
    
    
    1,182
    
    
    
    0.28
    %
    
    
    
    
    
    
    0.00
    %Installment loans
    
    
    108
    
    
    
    0.03
    %
    
    
    159
    
    
    
    0.05
    %Revolving 1-4 family loans
    
    
    562
    
    
    
    0.14
    %
    
    
    238
    
    
    
    0.07
    %Total
    
    $
    7,610
    
    
    
    1.83
    %
    
    $
    2,000
    
    
    
    0.62
    %
     29




---



##### Table of Contents



30




---



##### Table of Contents



Nonperforming Assets
      31




---



##### Table of Contents



March 31, 2010
    
    
    December 31, 2009% of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    TotalBalance
    
    
    Loans
    
    
    Balance
    
    
    Loans(in thousands)Construction
    
    $
    29,926
    
    
    
    1.78
    %
    
    $
    27,786
    
    
    
    1.66
    %Commercial, financial, and other
    
    
    7,081
    
    
    
    0.42
    %
    
    
    5,085
    
    
    
    0.30
    %Mortgage
    
    
    6,580
    
    
    
    0.39
    %
    
    
    8,891
    
    
    
    0.53
    %Commercial real estate
    
    
    15,359
    
    
    
    0.91
    %
    
    
    10,244
    
    
    
    0.61
    %Installment loans
    
    
    476
    
    
    
    0.03
    %
    
    
    677
    
    
    
    0.04
    %Open end, unsecured
    
    
    1,663
    
    
    
    0.10
    %
    
    
    14
    
    
    
    0.00
    %Total Impaired
    
    $
    61,085
    
    
    
    3.64
    %
    
    $
    52,697
    
    
    
    3.14
    %
 Noninterest Income
   Increase/
    
    
    American
    
    
    Increase/(decrease)Quarter ended
    
    
    (decrease)
    
    
    Community
    
    
    excluding AmericanMarch 31, 2010
    
    
    over 2009
    
    
    region
    
    
    Community regionService charges on deposit accounts
    
    $
    1,437
    
    
    $
    390
    
    
    $
    443
    
    
    $
    (53
    )Other service fees
    
    
    841
    
    
    
    (224
    )
    
    
    85
    
    
    
    (309
    )Net gain on sales of mortgage loans
    
    
    1,334
    
    
    
    (1,865
    )
    
    
    
    
    
    
    (1,865
    )Gains on sales of securitites
    
    
    44
    
    
    
    44
    
    
    
    
    
    
    
    44Income on investment in bank owned
life insurance
    
    
    207
    
    
    
    (24
    )
    
    
    
    
    
    
    (24
    )Mortgage banking income
    
    
    56
    
    
    
    363
    
    
    
    
    
    
    
    363Other than temporary impairment of
securities
    
    
    (205
    )
    
    
    (26
    )
    
    
    
    
    
    
    (26
    )Other income
    
    
    66
    
    
    
    16
    
    
    
    40
    
    
    
    (24
    )
 
    
    Service charges on deposit accounts increased as total NSF fees (a major component of
service charges) increased $229,000, or 30.3% due primarily to the addition of American
Community. ATM service charge income was up by $62,000, or 77.5%. NOW, savings, and
money market account service charges increased 36.0%.  32




---



##### Table of Contents



Noninterest Expense
   Increase
    
    
    American
    
    
    IncreaseQuarter ended
    
    
    (decrease)
    
    
    Community
    
    
    excluding AmericanMarch 31, 2010
    
    
    over 2009
    
    
    region
    
    
    Community regionSalaries and employee benefits
    
    $
    6,663
    
    
    $
    1,036
    
    
    $
    858
    
    
    $
    178Occupancy expenses
    
    
    1,966
    
    
    
    639
    
    
    
    399
    
    
    
    240Printing and supplies
    
    
    274
    
    
    
    42
    
    
    
    31
    
    
    
    11Data processing expenses
    
    
    313
    
    
    
    180
    
    
    
    
    
    
    
    180Communication expenses
    
    
    459
    
    
    
    136
    
    
    
    139
    
    
    
    (3
    )Advertising expenses
    
    
    178
    
    
    
    (198
    )
    
    
    7
    
    
    
    (205
    )FDIC assessments
    
    
    830
    
    
    
    168
    
    
    
    
    
    
    
    168Loss on other real estate owned
    
    
    796
    
    
    
    783
    
    
    
    202
    
    
    
    581Other expenses
    
    
    3,053
    
    
    
    119
    
    
    
    338
    
    
    
    (219
    )
 33




---



##### Table of Contents




    
    Salaries and employee benefit expenses increased by $1.0 million, or 18.4%. The
major components of the $1.0 million increase are summarized as follows: Salaries and
wages increased by $1.6 million, with $858,000 related to the American Community
acquisition. Salaries and benefit costs directly related to loan originations, which are
expensed over the life of the loan, increased $185,000, directly offsetting the increase
in wages. These increased cost deferrals were a product of increases in loan volume due
to the addition of American Community. Other personnel expenses increased by $79,000,
primarily for (1) post-retirement benefit accruals from split-dollar policies and for
(2) expenses associated with operating the American Community division after its
acquisition. In the aggregate, employee group insurance expense increased by $128,000,
payroll taxes by $177,000, and 401(k) matching contributions by $48,000. Most of the
increases in these categories were associated with the addition of previous American
Community employees. These increases were offset by the reduction in the mortgage
lending subsidiarys bonus incentive plan of $588,000. Commission expenses decreased by
$42,000 as mortgage origination production at the Bank decreased.
    
    Occupancy and equipment expenses increased by $639,000, or 48.1%. The increase
attributable to the addition of the American Community branches was $399,000.
    
    Printing and supplies increased by $42,000, or 18.2%, comparing first quarter 2010
with first quarter 2009. The increase attributable to the addition of the American
Community branches was $31,000.
    
    Data processing expense increased $180,000, or 135.5%, due primarily to the addition
of American Community as well as the outsourcing of nightly processing to an outside
company beginning in June 2009.
    
    Communication expense increased $136,000, or 42.2%, with $139,000 attributable to
American Community expenses. Excluding American Community, communication expense
decreased $3,000.
    
    Advertising and marketing expense decreased $198,000, or 52.8%. The decrease is 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 $168,000, due to additional assessments imposed by
the FDIC and an increase in deposits related to the American Community merger.
    
    Loss on sale of other real estate owned increased to $796,000 as compared to $13,000
in the prior year due to increased foreclosures and significant declines in real estate
values over the past year.
    
    Other operating expenses (including attorney fees, accounting fees, loan collection
fees and amortization of core deposit intangibles) increased approximately $119,000, or
4.1%, with American Community contributing $338,000 of the increase. Excluding American
Community, other expenses decreased $219,000. The largest increases were in the
following categories: loan collection expense (up $208,000) and outside professional
service fees (up $7,000). These increases were offset by decreases in attorney fees
(down $39,000) and accounting fees (down $82,000).
 Income Tax Expense
   34




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
   Changes in Internal Control over Financial Reporting
  35




---



##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings.
  
 Item 5.
Other Information
 2010 Annual Meeting of Shareholders
  Proposal 1:
 Name
    
    For
    
    
    Against
    
    
    Withheld
    
    
    Non-voteJ.T. Alexander, Jr.
    
    
    9,501,169
    
    
    
    
    
    
    
    1,116,979
    
    
    
    2,821,444Ralph L. Bentley
    
    
    9,429,884
    
    
    
    
    
    
    
    1,188,264
    
    
    
    2,821,444Nolan G. Brown
    
    
    9,622,337
    
    
    
    
    
    
    
    995,811
    
    
    
    2,821,444Harry M. Davis
    
    
    9,526,131
    
    
    
    
    
    
    
    1,092,017
    
    
    
    2,821,444Thomas J. Hall
    
    
    9,541,436
    
    
    
    
    
    
    
    1,076,712
    
    
    
    2,821,444James A. Harrell, Jr.
    
    
    9,746,531
    
    
    
    
    
    
    
    871,617
    
    
    
    2,821,444Larry S. Helms
    
    
    9,470,390
    
    
    
    
    
    
    
    1,147,758
    
    
    
    2,821,444Dan W. Hill, III
    
    
    9,557,296
    
    
    
    
    
    
    
    1,060,852
    
    
    
    2,821,444William A. Long
    
    
    9,302,380
    
    
    
    
    
    
    
    1,315,768
    
    
    
    2,821,444Peter A. Pappas
    
    
    9,486,839
    
    
    
    
    
    
    
    1,131,309
    
    
    
    2,821,444James L. Poindexter
    
    
    9,694,497
    
    
    
    
    
    
    
    923,651
    
    
    
    2,821,444Morris L. Shambley
    
    
    9,566,539
    
    
    
    
    
    
    
    1,051,609
    
    
    
    2,821,444Alison J. Smith
    
    
    9,481,373
    
    
    
    
    
    
    
    1,136,775
    
    
    
    2,821,444James N. Smoak
    
    
    9,022,288
    
    
    
    
    
    
    
    1,595,860
    
    
    
    2,821,444Harry C. Spell
    
    
    9,567,806
    
    
    
    
    
    
    
    1,050,342
    
    
    
    2,821,444C. Kenneth Wilcox
    
    
    9,589,821
    
    
    
    
    
    
    
    1,028,327
    
    
    
    2,821,444
 Proposal 2:
 For
    
    Against
    
    
    Abstain
    
    
    Non-vote10,126,655
    
    
    3,014,424
    
    
    
    291,668
    
    
    
    
 36




---



##### Table of Contents



Proposal
3:
 For
    
    Against
    
    
    Abstain
    
    
    Non-vote6,429,029
    
    
    3,945,350
    
    
    
    236,924
    
    
    
    2,821,444
 Proposal 4:
 For
    
    Against
    
    
    Abstain
    
    
    Non-vote10,153,488
    
    
    2,745,557
    
    
    
    533,702
    
    
    
    
 Proposal 5:
 For
    
    Against
    
    Abstain
    
    Non-vote9,376,210
    
    
    3,803,598
    
    
    
    252,939
    
    
    
  37




---



##### Table of Contents



Item 6. Exhibits
 Exhibit #
    
    Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certification
 38




---



##### 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, Executive Vice President and Chief Financial Officer  39