US Securities and Exchange Commission
 Washington, DC 20549
 Form 10-Q
 Quarterly Report Pursuant To Section 13 or 15(d) Of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 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 company o(Do not check if a smaller reporting company)
  o þ
  o þ




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Six Months Ended June 30, 2010 and 2009
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets June 30, 2010 and December 31, 2009
    
    
    2Condensed Consolidated Statements of Income (Loss) Three and Six Months Ended June 30, 2010 and 2009
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Shareholders Equity Six Months Ended June 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2010 and 2009
    
    
    6-7Notes to Unaudited Condensed Consolidated Financial Statements
    
    

    8-25Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    26-42Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    43Part II. Other InformationItem 1. Legal Proceedings
    
    
    44Item 6. Exhibit Index
    
    
    45Signatures
    
    
    46Exhibits
    
    
    47-49
  
 1




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2010 and December 31, 2009
 June 30,
    
    
    December 31,*2010
    
    
    2009(Amounts in thousands, except share data)ASSETSCash and due from banks
    
    $
    30,178
    
    
    $
    89,668Federal funds sold
    
    
    6,123
    
    
    
    93Interest-bearing deposits
    
    
    184,592
    
    
    
    2,576Securities available-for-sale at fair value
(amortized cost $ 202,871 in 2010 and $179,143 in 2009)
    
    
    208,280
    
    
    
    183,841Gross loans
    
    
    1,647,775
    
    
    
    1,676,448Less: allowance for loan losses
    
    
    44,306
    
    
    
    48,625Net loans
    
    
    1,603,469
    
    
    
    1,627,823Loans held-for-sale
    
    
    49,542
    
    
    
    49,715Accrued interest receivable
    
    
    7,520
    
    
    
    7,783Premises and equipment, net
    
    
    44,434
    
    
    
    43,642Foreclosed real estate
    
    
    18,195
    
    
    
    14,345Federal Home Loan Bank stock, at cost
    
    
    10,539
    
    
    
    10,539Investment in bank-owned life insurance
    
    
    24,852
    
    
    
    24,454Goodwill
    
    
    4,944
    
    
    
    4,944Core deposit intangible (net of accumulated amortization of $6,995 in 2010 and $6,335
in 2009)
    
    
    5,527
    
    
    
    6,186Other assets
    
    
    41,986
    
    
    
    48,003Total Assets
    
    $
    2,240,181
    
    
    $
    2,113,612LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing demand deposits
    
    $
    210,940
    
    
    $
    207,850Interest-bearing deposits:NOW, savings and money market accounts
    
    
    468,773
    
    
    
    445,508Time certificates:$100,000 or more
    
    
    516,146
    
    
    
    560,825Other
    
    
    757,579
    
    
    
    607,569Total Deposits
    
    
    1,953,438
    
    
    
    1,821,752Short-term borrowings
    
    
    46,623
    
    
    
    44,467Long-term borrowings
    
    
    71,998
    
    
    
    79,000Capital lease obligations
    
    
    2,423
    
    
    
    2,437Accrued interest payable
    
    
    3,791
    
    
    
    3,015Other liabilities
    
    
    9,195
    
    
    
    10,675Total Liabilities
    
    
    2,087,468
    
    
    
    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
    
    
    46,461
    
    
    
    46,152Common stock, $1 par value, 20,000,000 shares authorized; 16,144,640 issued and
outstanding in 2010 and 16,129,640 issued and outstanding in 2009
    
    
    16,145
    
    
    
    16,130Warrants
    
    
    3,581
    
    
    
    3,581Surplus
    
    
    114,602
    
    
    
    114,574Accumulated deficit
    
    
    (31,422
    )
    
    
    (31,080
    )Accumulated other comprehensive income
    
    
    3,346
    
    
    
    2,909Total Shareholders Equity
    
    
    152,713
    
    
    
    152,266Total Liabilities and Shareholders Equity
    
    $
    2,240,181
    
    
    $
    2,113,612
  
 *
    
    Derived from audited financial statements 
 2




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three and Six Months Ended June 30, 2010 and 2009
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Amounts in thousands, except per share data)INTEREST INCOME:Interest and fees on loans
    
    $
    22,458
    
    
    $
    23,936
    
    
    $
    45,416
    
    
    $
    39,964Interest on federal funds sold
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    2Interest and dividends on
securities:Taxable
    
    
    1,170
    
    
    
    1,363
    
    
    
    2,379
    
    
    
    2,538Non-taxable
    
    
    492
    
    
    
    513
    
    
    
    1,054
    
    
    
    898Interest-bearing deposits
    
    
    126
    
    
    
    10
    
    
    
    187
    
    
    
    21TOTAL INTEREST INCOME
    
    
    24,248
    
    
    
    25,823
    
    
    
    49,038
    
    
    
    43,423INTEREST EXPENSETime deposits of $100,000 or
more
    
    
    3,274
    
    
    
    3,733
    
    
    
    6,635
    
    
    
    6,835Other time and savings deposits
    
    
    4,780
    
    
    
    3,753
    
    
    
    8,835
    
    
    
    7,713Borrowed funds
    
    
    596
    
    
    
    782
    
    
    
    1,163
    
    
    
    1,407TOTAL INTEREST EXPENSE
    
    
    8,650
    
    
    
    8,268
    
    
    
    16,633
    
    
    
    15,955NET INTEREST INCOME
    
    
    15,598
    
    
    
    17,555
    
    
    
    32,405
    
    
    
    27,468PROVISION FOR LOAN LOSSES
    
    
    5,809
    
    
    
    16,458
    
    
    
    10,193
    
    
    
    27,007NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    9,789
    
    
    
    1,097
    
    
    
    22,212
    
    
    
    461NON-INTEREST INCOME:Service charges on deposit
accounts
    
    
    1,486
    
    
    
    1,535
    
    
    
    2,924
    
    
    
    2,583Other service fees
    
    
    917
    
    
    
    1,365
    
    
    
    1,758
    
    
    
    2,430Net gain on sales and fees of
mortgage loans
    
    
    1,876
    
    
    
    4,802
    
    
    
    3,210
    
    
    
    8,001Gain on sale of
available-for-sale securities
    
    
    844
    
    
    
    
    
    
    
    888
    
    
    
    Income on investment in
bank-owned life insurance
    
    
    191
    
    
    
    234
    
    
    
    398
    
    
    
    466Mortgage banking income (loss)
    
    
    60
    
    
    
    (207
    )
    
    
    116
    
    
    
    (514
    )Other than temporary impairment
of securities
    
    
    (61
    )
    
    
    
    
    
    
    (266
    )
    
    
    (179
    )Other income
    
    
    139
    
    
    
    16
    
    
    
    205
    
    
    
    67TOTAL NON-INTEREST INCOME
    
    
    5,452
    
    
    
    7,745
    
    
    
    9,233
    
    
    
    12,854NON-INTEREST EXPENSES:Salaries and employee benefits
    
    
    6,941
    
    
    
    8,300
    
    
    
    13,604
    
    
    
    13,926Occupancy and equipment expense
    
    
    1,956
    
    
    
    1,842
    
    
    
    3,922
    
    
    
    3,170Printing and supplies
    
    
    259
    
    
    
    272
    
    
    
    533
    
    
    
    504Data processing
    
    
    384
    
    
    
    427
    
    
    
    697
    
    
    
    560Amortization of core deposit intangible
    
    
    326
    
    
    
    350
    
    
    
    660
    
    
    
    575Communications expense
    
    
    435
    
    
    
    329
    
    
    
    894
    
    
    
    652Advertising expense
    
    
    204
    
    
    
    213
    
    
    
    382
    
    
    
    589FDIC assessment expense
    
    
    1,288
    
    
    
    1,797
    
    
    
    2,118
    
    
    
    2,459Loan collection fees
    
    
    289
    
    
    
    162
    
    
    
    561
    
    
    
    225Attorney fees
    
    
    148
    
    
    
    409
    
    
    
    223
    
    
    
    523Net loss on other real estate owned
    
    
    403
    
    
    
    138
    
    
    
    1,199
    
    
    
    151Acquisition costs
    
    
    
    
    
    
    2,192
    
    
    
    
    
    
    
    2,302Other expenses
    
    
    2,347
    
    
    
    2,761
    
    
    
    4,719
    
    
    
    5,182TOTAL NON-INTEREST EXPENSES
    
    
    14,980
    
    
    
    19,192
    
    
    
    29,512
    
    
    
    30,818INCOME (LOSS) BEFORE INCOME
TAXES
    
    
    261
    
    
    
    (10,350
    )
    
    
    1,933
    
    
    
    (17,503
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    (24
    )
    
    
    (3,795
    )
    
    
    733
    
    
    
    (6,789
    )NET INCOME (LOSS)
    
    
    285
    
    
    
    (6,555
    )
    
    
    1,200
    
    
    
    (10,714
    )Preferred stock dividend and accretion
of preferred stock
discount
    
    
    771
    
    
    
    528
    
    
    
    1,542
    
    
    
    973NET LOSS TO COMMON SHAREHOLDERS
    
    $
    (486
    )
    
    $
    (7,083
    )
    
    $
    (342
    )
    
    $
    (11,687
    )NET LOSS PER COMMON SHARE:Basic
    
    $
    (0.03
    )
    
    $
    (0.46
    )
    
    $
    (0.02
    )
    
    $
    (0.87
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.46
    )
    
    $
    (0.02
    )
    
    $
    (0.87
    )CASH DIVIDENDS PER COMMON SHARE
    
    $
    
    
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.12
  
 3




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (LOSS) (UNAUDITED)
 Three and Six Months Ended June 30, 2010 and 2009
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Amounts in thousands)
    
    
    (Amounts in thousands)NET INCOME (LOSS)
    
    $
    285
    
    
    $
    (6,555
    )
    
    $
    1,200
    
    
    $
    (10,714
    )OTHER COMPREHENSIVE INCOME (LOSS):Unrealized holding gains (losses) on securities available-for-sale
    
    
    981
    
    
    
    292
    
    
    
    1,597
    
    
    
    (185
    )Tax effect
    
    
    (378
    )
    
    
    (81
    )
    
    
    (614
    )
    
    
    102Unrealized holding gains (losses) on securities available-for-sale,
net of tax amount
    
    
    603
    
    
    
    211
    
    
    
    983
    
    
    
    (83
    )Reclassification adjustment for realized gains
    
    
    (844
    )
    
    
    
    
    
    
    (888
    )
    
    
    Tax effect
    
    
    325
    
    
    
    
    
    
    
    342
    
    
    
    Reclassification adjustment for realized gains,
net of tax amount
    
    
    (519
    )
    
    
    
    
    
    
    (546
    )
    
    
    OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
    
    
    84
    
    
    
    211
    
    
    
    437
    
    
    
    (83
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    369
    
    
    $
    (6,344
    )
    
    $
    1,637
    
    
    $
    (10,797
    )
  
 4




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##### 



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
 Six Months Ended June 30, 2010 and 2009
 Retained
    
    
    Accumulatedearnings
    
    
    other
    
    
    TotalCommon Stock
    
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    (accumulated
    
    
    comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Stock
    
    
    Warrants
    
    
    Surplus
    
    
    deficit)
    
    
    income (loss)
    
    
    equity(Amounts in thousands, except share data)BALANCE, DECEMBER 31,
2008
    
    
    11,536,500
    
    
    $
    11,537
    
    
    $
    
    
    
    $
    
    
    
    $
    88,030
    
    
    $
    48,070
    
    
    $
    2,007
    
    
    $
    149,644Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,714
    )
    
    
    
    
    
    
    (10,714
    )Shares issued under stock
option plan
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Preferred stock issued
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,000Preferred stock discount
    
    
    
    
    
    
    
    
    
    
    (1,731
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,731
    )Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,731Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    (153
    )
    
    
    
    
    
    
    Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,658
    )
    
    
    
    
    
    
    (1,658
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (820
    )
    
    
    
    
    
    
    (820
    )Shares issued in acquisition
of American Community
    
    
    4,593,132
    
    
    
    4,593
    
    
    
    
    
    
    
    
    
    
    
    26,469
    
    
    
    
    
    
    
    
    
    
    
    31,062Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    (83
    )BALANCE, JUNE 30, 2009
    
    
    16,129,640
    
    
    $
    16,130
    
    
    $
    34,422
    
    
    $
    1,731
    
    
    $
    114,537
    
    
    $
    34,725
    
    
    $
    1,924
    
    
    $
    203,469BALANCE, DECEMBER 31,
2009
    
    
    16,129,640
    
    
    
    16,130
    
    
    
    46,152
    
    
    
    3,581
    
    
    
    114,574
    
    
    
    (31,080
    )
    
    
    2,909
    
    
    
    152,266Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    1,200Restricted stock issued
    
    
    15,000
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Discount accretion on
preferred stock
    
    
    
    
    
    
    
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    (309
    )
    
    
    
    
    
    
    Stock option compensation:stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,233
    )
    
    
    
    
    
    
    (1,233
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    437BALANCE, JUNE 30, 2010
    
    
    16,144,640
    
    
    $
    16,145
    
    
    $
    46,461
    
    
    $
    3,581
    
    
    $
    114,602
    
    
    $
    (31,422
    )
    
    $
    3,346
    
    
    $
    152,713
  
 5




---



##### 



YADKIN VALLEY FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months Ended June 30, 2010 and 2009
 Six Months Ended June 30,2010
    
    
    2009(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,200
    
    
    $
    (10,714
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Net amortization of premiums on investment securities
    
    
    467
    
    
    
    215Provision for loan losses
    
    
    10,193
    
    
    
    27,007Net gain on sales of mortgage loans
    
    
    (3,210
    )
    
    
    (8,001
    )Other than temporary impairment of investments
    
    
    266
    
    
    
    180Increase in cash surrender value of life insurance
    
    
    (398
    )
    
    
    (466
    )Depreciation and amortization
    
    
    1,532
    
    
    
    1,252Loss on sale of premises and equipment
    
    
    8
    
    
    
    Net loss on other real estate owned
    
    
    1,199
    
    
    
    151Gain on sale of available-for-sale securities
    
    
    (888
    )
    
    
    Amortization of core deposit intangible
    
    
    660
    
    
    
    575Deferred tax provision (benefit)
    
    
    4,523
    
    
    
    (9,316
    )Stock based compensation expense
    
    
    43
    
    
    
    37Originations of mortgage loans held-for-sale
    
    
    (179,429
    )
    
    
    (1,140,114
    )Proceeds from sales of mortgage loans
    
    
    182,812
    
    
    
    1,076,902Decrease in capital lease obligations
    
    
    17
    
    
    
    Decrease in accrued interest receivable
    
    
    263
    
    
    
    56Decrease (increase) in other assets
    
    
    941
    
    
    
    (2,274
    )Increase (decrease) in accrued interest payable
    
    
    776
    
    
    
    (608
    )Increase (decrease) in other liabilities
    
    
    (1,511
    )
    
    
    8,489NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    $
    19,464
    
    
    $
    (56,629
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale securities
    
    
    (83,414
    )
    
    
    (20,723
    )Proceeds from sales of available-for-sale securities
    
    
    29,180
    
    
    
    Proceeds from maturities of available-for-sale securities
    
    
    30,939
    
    
    
    32,978(Increase) decrease in loans
    
    
    4,997
    
    
    
    (44,904
    )Acquisition of American Community
    
    
    
    
    
    
    2,043Purchases of premises and equipment
    
    
    (2,332
    )
    
    
    (2,655
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (2,385
    )Proceeds from redemption of Federal Home Loan Bank stock
    
    
    
    
    
    
    1,851Proceeds from sale of premises and equipment
    
    
    
    
    
    
    170Proceeds from the sale of foreclosed real estate
    
    
    4,115
    
    
    
    1,126NET CASH USED IN INVESTING ACTIVITIES
    
    $
    (16,515
    )
    
    $
    (32,499
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in checking, NOW, money market
and savings accounts
    
    $
    26,355
    
    
    $
    27,857Net increase in time certificates
    
    
    105,331
    
    
    
    155,312Net decrease in borrowed funds
    
    
    (4,846
    )
    
    
    (108,873
    )Dividends paid
    
    
    (1,233
    )
    
    
    (2,092
    )Proceeds from the issuance of preferred stock and warrants
    
    
    
    
    
    
    36,000NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    125,607
    
    
    
    108,204NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    128,556
    
    
    
    19,076CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    92,337
    
    
    
    26,022End of period
    
    $
    220,893
    
    
    $
    45,098
 
 6




---



##### 



YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
Six Months Ended June 30, 2010 and 2009
 Six Months Ended June 30,2010
    
    
    2009(Amounts in thousands)SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    16,478
    
    
    
    17,327Income taxes, net of refunds
    
    
    5
    
    
    
    5,857Noncash investing and financing activities:Unrealized gain on investment securities available for sale, net of tax effect
    
    
    983
    
    
    
    (83
    )Transfer from loans to foreclosed real estate
    
    
    9,164
    
    
    
    5,857Issuance of shares in acquisition of American Community
    
    
    
    
    
    
    31,062
  
 7




---



##### 



Notes to Unaudited Condensed Consolidated Financial Statements
 1. Significant Accounting Policies
 Basis of Presentation
   2. New Accounting Standards
 Recently Adopted Accounting Standards
   
 8




---



##### 



3. Stock-based Compensation
     
 9




---



##### 



4. Investment Securities
  June 30, 2010Unrealized
    
    
    UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Amounts in thousands)Available-for-sale securities:Securities of U.S. government
agencies due:Within 1 year
    
    $
    2,000
    
    
    $
    12
    
    
    $
    
    
    
    $
    2,012After 1 but within 5 years
    
    
    7,304
    
    
    
    180
    
    
    
    22
    
    
    
    7,462After 5 but within 10 years
    
    
    14,946
    
    
    
    854
    
    
    
    
    
    
    
    15,80024,250
    
    
    
    1,046
    
    
    
    22
    
    
    
    25,274Government sponsored agencies:Residential mortgage-backed securities due:After 1 but within 5 years
    
    
    1,396
    
    
    
    23
    
    
    
    
    
    
    
    1,419After 5 but within 10 years
    
    
    5,706
    
    
    
    415
    
    
    
    
    
    
    
    6,121After 10 years
    
    
    27,424
    
    
    
    1,803
    
    
    
    2
    
    
    
    29,22534,526
    
    
    
    2,241
    
    
    
    2
    
    
    
    36,765Collateralized mortgage obligations due:After 5 but within 10 years
    
    
    13,177
    
    
    
    123
    
    
    
    71
    
    
    
    13,229After 10 years
    
    
    73,328
    
    
    
    829
    
    
    
    191
    
    
    
    73,96686,505
    
    
    
    952
    
    
    
    262
    
    
    
    87,195Private label collateralized mortgage
obligations due:After 10 years
    
    
    2,284
    
    
    
    5
    
    
    
    245
    
    
    
    2,0442,284
    
    
    
    5
    
    
    
    245
    
    
    
    2,044State and municipal securities due:Within 1 year
    
    
    2,382
    
    
    
    45
    
    
    
    
    
    
    
    2,427After 1 but within 5 years
    
    
    11,095
    
    
    
    399
    
    
    
    
    
    
    
    11,494After 5 but within 10 years
    
    
    15,462
    
    
    
    540
    
    
    
    2
    
    
    
    16,000After 10 years
    
    
    25,255
    
    
    
    781
    
    
    
    89
    
    
    
    25,94754,194
    
    
    
    1,765
    
    
    
    91
    
    
    
    55,868Common and preferred stocks due:After 10 years
    
    
    1,112
    
    
    
    23
    
    
    
    1
    
    
    
    1,1341,112
    
    
    
    23
    
    
    
    1
    
    
    
    1,134Total available-for-sale securities
    
    $
    202,871
    
    
    $
    6,032
    
    
    $
    623
    
    
    $
    208,280
 
 10




---



##### 



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
  
 11




---



##### 



Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(Amounts in thousands)June 30, 2010Securities available-for-sale:U.S. government agencies
    
    $
    5,227
    
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    5,227
    
    
    $
    22Government sponsored agencies:Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    2
    
    
    
    140
    
    
    
    2Collateralized mortgage obligations
    
    
    24,656
    
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    24,656
    
    
    
    262Private label collateralized
mortgage obligations
    
    
    
    
    
    
    
    
    
    
    1,564
    
    
    
    245
    
    
    
    1,564
    
    
    
    245State and municipal securities
    
    
    2,537
    
    
    
    40
    
    
    
    1,986
    
    
    
    51
    
    
    
    4,523
    
    
    
    91Common and preferred stocks
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    5
    
    
    
    1Total temporarily impaired securities
    
    $
    32,420
    
    
    $
    324
    
    
    $
    3,695
    
    
    $
    299
    
    
    $
    36,115
    
    
    $
    623
 
 12




---



##### 



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




---



##### 



6. Earnings Per Common Share
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009Basic EPS denominator:Weighted average number of
common shares outstanding
    
    
    16,129,640
    
    
    
    15,322,043
    
    
    
    16,129,640
    
    
    
    13,439,725Dilutive effect arising from assumed
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS denominator
    
    
    16,129,640
    
    
    
    15,322,043
    
    
    
    16,129,640
    
    
    
    13,439,725
  7. Shareholders Equity
   
 14




---



##### 



8. Derivatives
     
 15




---



##### 



9. Allowance for Loan Losses
   June 30, 2010
    
    
    June 30, 2009(Amounts in thousands)Balance, December 31, 2009 and 2008
    
    $
    48,625
    
    
    $
    22,355Charge-offs
    
    
    (15,580
    )
    
    
    (3,323
    )Recoveries
    
    
    1,068
    
    
    
    204Provision for loan losses
    
    
    10,193
    
    
    
    27,007Allowance for Loan Losses
    
    $
    44,306
    
    
    $
    46,243
  
 16




---



##### 



June 30, 2010
    
    
    December 31, 2009(Amounts in thousands)Impaired loans under $100,000
that are not individually
reviewed
    
    $
    5,826
    
    
    $
    6,001Impaired loans without a related
allowance for loan losses
    
    
    21,545
    
    
    
    16,959Impaired loans with a related
allowance for loan losses
    
    
    32,285
    
    
    
    24,497Impaired loans acquired without a
related allowance for loan losses
    
    
    3,174
    
    
    
    2,515Impaired loans acquired with
subsequent deterioration and
related allowance for loan loss
    
    
    
    
    
    
    2,725Total impaired loans
    
    $
    62,830
    
    
    $
    52,697Allowance for loan losses related
to impaired loans
    
    $
    9,370
    
    
    $
    10,971Nonaccrual loans
    
    $
    50,853
    
    
    $
    36,255Troubled debt restructured loans
    
    
    8,184
    
    
    
    5,544Other impaired loans*
    
    
    3,793
    
    
    
    10,898Total impaired loans
    
    $
    62,830
    
    
    $
    52,697
 
 *
    
    Other impaired loans consists of loans for which regular payments are still received but for
which some uncertainty exists regarding whether the full contractual amounts will be collected in
accordance with the terms of the loan agreement.   Fair ValueContractual
    
    
    AdjustmentPrincipal
    
    
    (nonaccretable
    
    
    CarryingReceivable
    
    
    difference)
    
    
    Amount(Amounts in thousands)As of April 17, 2009 acquisition date
    
    $
    14,513
    
    
    $
    3,825
    
    
    $
    10,688Change due to payment received
    
    
    (457
    )
    
    
    (63
    )
    
    
    (394
    )Transfer to foreclosed real estate
    
    
    (4,339
    )
    
    
    (266
    )
    
    
    (4,073
    )Change due to charge-offs
    
    
    (4,329
    )
    
    
    (2,999
    )
    
    
    (1,330
    )Balance at December 31, 2009
    
    
    5,388
    
    
    
    497
    
    
    
    4,891Change due to payment received
    
    
    (214
    )
    
    
    (20
    )
    
    
    (194
    )Transfer to foreclosed real estate
    
    
    (9
    )
    
    
    (159
    )
    
    
    150Change due to charge-offs
    
    
    (386
    )
    
    
    (246
    )
    
    
    (140
    )Balance at June 30, 2010
    
    $
    4,779
    
    
    $
    72
    
    
    $
    4,707
 
 17




---



##### 



10. Fair Value
   Available-for-Sale Investment Securities
  Interest Rate Swaps
   Level 3Fair Value- Assets
    
    
    Fair Value- Liabilities(Amounts in thousands)Balance, December 31, 2009
    
    $
    
    
    
    $
    Purchases, sales, issuances and settlements
    
    
    
    
    
    
    Gains/losses included in other income
    
    
    162
    
    
    
    (162
    )Balance, June 30, 2010
    
    $
    162
    
    
    $
    (162
    )
 
 18




---



##### 



Interest Rate Locks and Forward Loan Sale Commitments
   Mortgage Servicing Rights
   Level 3Fair Value
    
    
    Fair Value(Amounts in thousands)Balance, December 31, 2009 and 2008
    
    $
    1,918
    
    
    $
    1,745Capitalized
    
    
    181
    
    
    
    497Gains/losses included in other income
    
    
    (139
    )
    
    
    (764
    )Balance, June 30, 2010 and 2009
    
    $
    1,960
    
    
    $
    1,478
 Mortgage Loans Held-for-Sale
  Impaired Loans
  
 19




---



##### 



Other Real Estate Owned
   June 30, 2010 (in thousands)
    
    Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Available-for-sale securities:U.S. government agencies
    
    $
    25,274
    
    
    $
    
    
    
    $
    25,274
    
    
    $
    Government sponsored agencies:Residential mortgage-backed securities
    
    
    36,765
    
    
    
    
    
    
    
    36,765
    
    
    
    Collateralized mortgage obligations
    
    
    87,195
    
    
    
    
    
    
    
    87,195
    
    
    
    Private label collateralized mortgage obligations
    
    
    2,044
    
    
    
    
    
    
    
    2,044
    
    
    
    State and municipal securities
    
    
    55,868
    
    
    
    
    
    
    
    55,868
    
    
    
    Common and preferred stocks
    
    
    1,134
    
    
    
    1,134
    
    
    
    
    
    
    
    Interest rate swap- asset
    
    
    162
    
    
    
    
    
    
    
    
    
    
    
    162Interest rate swap- liability
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    (162
    )Interest rate lock commitments
    
    
    394
    
    
    
    
    
    
    
    394
    
    
    
    Forward loan sale commitments
    
    
    (103
    )
    
    
    
    
    
    
    (103
    )
    
    
    Mortgage servicing rights
    
    
    1,960
    
    
    
    
    
    
    
    
    
    
    
    1,960
 
 20




---



##### 



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
  Fair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Amounts in thousands)Other real estate owned at June 30, 2010
    
    $
    2,666
    
    
    $
    
    
    
    $
    
    
    
    $
    2,666Other real estate owned at December 31, 2009
    
    
    2,510
    
    
    
    
    
    
    
    
    
    
    
    2,510Impaired loans at June 30, 2010
    
    
    22,915
    
    
    
    
    
    
    
    
    
    
    
    22,915Impaired loans at December 31, 2009
    
    
    16,251
    
    
    
    
    
    
    
    
    
    
    
    16,251Cost method investments at June 30, 2010
    
    
    872
    
    
    
    
    
    
    
    
    
    
    
    872Cost method investments at December 31, 2009
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    115
   
 21




---



##### 



11. Financial Instruments
  June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Amounts in thousands)Financial assets:Cash and cash equivalents
    
    $
    220,893
    
    
    $
    220,893
    
    
    $
    92,337
    
    
    $
    92,337Investment securities
    
    
    208,280
    
    
    
    208,280
    
    
    
    183,841
    
    
    
    183,841Loans and loans held-for-sale, net
    
    
    1,653,011
    
    
    
    1,591,100
    
    
    
    1,677,538
    
    
    
    1,676,845Accrued interest receivable
    
    
    7,520
    
    
    
    7,520
    
    
    
    7,783
    
    
    
    7,783Federal Home Loan Bank stock
    
    
    10,539
    
    
    
    10,539
    
    
    
    10,539
    
    
    
    10,539Investment in Bank owned life insurance
    
    
    24,852
    
    
    
    24,852
    
    
    
    24,454
    
    
    
    24,454Interest rate swap  asset
    
    
    162
    
    
    
    162
    
    
    
    
    
    
    
    Interest rate lock commitments
    
    
    394
    
    
    
    394
    
    
    
    (791
    )
    
    
    (791
    )Financial liabilities:Demand deposits, NOW, savings
and money market accounts
    
    
    679,713
    
    
    
    679,713
    
    
    
    653,358
    
    
    
    653,358Time deposits
    
    
    1,273,725
    
    
    
    1,271,317
    
    
    
    1,168,394
    
    
    
    1,185,405Borrowed funds
    
    
    118,621
    
    
    
    117,726
    
    
    
    123,468
    
    
    
    124,947Accrued interest payable
    
    
    3,791
    
    
    
    3,791
    
    
    
    3,015
    
    
    
    3,015Interest rate swap  liability
    
    
    (162
    )
    
    
    (162
    )
    
    
    
    
    
    
    Forward loan sale commitments
    
    
    (103
    )
    
    
    (103
    )
    
    
    1,020
    
    
    
    1,020
       
 22




---



##### 



12. Goodwill
   13. Business Segment Information
  
 23




---



##### 



Bank
    
    
    Sidus
    
    
    Other
    
    
    Total(Amounts in thousands)For Three Months Ended June 30, 2010Interest income
    
    $
    23,835
    
    
    $
    413
    
    
    $
    
    
    
    $
    24,248Interest expense
    
    
    8,409
    
    
    
    54
    
    
    
    187
    
    
    
    8,650Net interest income
    
    
    15,426
    
    
    
    359
    
    
    
    (187
    )
    
    
    15,598Provision for loan losses
    
    
    5,580
    
    
    
    229
    
    
    
    
    
    
    
    5,809Net interest income (loss) after provision
for loan losses
    
    
    9,846
    
    
    
    130
    
    
    
    (187
    )
    
    
    9,789Other income
    
    
    3,609
    
    
    
    1,876
    
    
    
    (33
    )
    
    
    5,452Other expense
    
    
    12,834
    
    
    
    2,021
    
    
    
    125
    
    
    
    14,980Income (loss) before income taxes (benefit)
    
    
    621
    
    
    
    (15
    )
    
    
    (345
    )
    
    
    261Income taxes
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    (24
    )Net income(loss)
    
    $
    645
    
    
    $
    (15
    )
    
    $
    (345
    )
    
    $
    285Total assets
    
    $
    2,217,984
    
    
    $
    59,823
    
    
    $
    (37,626
    )
    
    $
    2,240,181Net loans
    
    
    1,603,469
    
    
    
    
    
    
    
    
    
    
    
    1,603,469Loans held for sale
    
    
    816
    
    
    
    48,726
    
    
    
    
    
    
    
    49,542Goodwill
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    4,944For Six Months Ended June 30, 2010Interest income
    
    $
    48,274
    
    
    $
    764
    
    
    $
    
    
    
    $
    49,038Interest expense
    
    
    16,201
    
    
    
    63
    
    
    
    369
    
    
    
    16,633Net interest income
    
    
    32,073
    
    
    
    701
    
    
    
    (369
    )
    
    
    32,405Provision for loan losses
    
    
    9,964
    
    
    
    229
    
    
    
    
    
    
    
    10,193Net interest income (loss) after provision
for loan losses
    
    
    22,109
    
    
    
    472
    
    
    
    (369
    )
    
    
    22,212Other income
    
    
    6,244
    
    
    
    3,211
    
    
    
    (222
    )
    
    
    9,233Other expense
    
    
    25,892
    
    
    
    3,399
    
    
    
    221
    
    
    
    29,512Income (loss) before income taxes (benefit)
    
    
    2,461
    
    
    
    284
    
    
    
    (812
    )
    
    
    1,933Income taxes (benefit)
    
    
    733
    
    
    
    
    
    
    
    
    
    
    
    733Net income(loss)
    
    $
    1,728
    
    
    $
    284
    
    
    $
    (812
    )
    
    $
    1,200
 
 (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 ($32,477 in 2010), the Banks Investment in Sidus ($3,000 in 2010), and the Banks A/R from
Sidus ($12 in 2010). Also included in this column are Holding Company assets ($2,137 in 2010) and
Holding Company income and expenses. 
 24




---



##### 



Bank
    
    
    Sidus
    
    
    Other
    
    
    Total(Amounts in thousands)For Three Months Ended June 30, 2009Interest income
    
    $
    24,410
    
    
    $
    1,414
    
    
    $
    
    
    
    $
    25,824Interest expense
    
    
    7,889
    
    
    
    141
    
    
    
    239
    
    
    
    8,269Net interest income
    
    
    16,521
    
    
    
    1,273
    
    
    
    (239
    )
    
    
    17,555Provision for loan losses
    
    
    16,407
    
    
    
    51
    
    
    
    
    
    
    
    16,458Net interest income (loss) after provision
for loan losses
    
    
    114
    
    
    
    1,222
    
    
    
    (239
    )
    
    
    1,097Other income
    
    
    2,810
    
    
    
    4,793
    
    
    
    142
    
    
    
    7,745Other expense
    
    
    16,307
    
    
    
    2,680
    
    
    
    205
    
    
    
    19,192Income (loss) before income taxes (benefit)
    
    
    (13,383
    )
    
    
    3,335
    
    
    
    (302
    )
    
    
    (10,350
    )Income taxes
    
    
    (3,795
    )
    
    
    
    
    
    
    
    
    
    
    (3,795
    )Net income(loss)
    
    $
    (9,588
    )
    
    $
    3,335
    
    
    $
    (302
    )
    
    $
    (6,555
    )Total assets
    
    $
    2,198,972
    
    
    $
    130,287
    
    
    $
    (170,899
    )
    
    $
    2,158,360Net loans
    
    
    1,592,849
    
    
    
    2,005
    
    
    
    
    
    
    
    1,594,854Loans held for sale
    
    
    985
    
    
    
    120,157
    
    
    
    
    
    
    
    121,142Goodwill
    
    
    61,566
    
    
    
    4,944
    
    
    
    
    
    
    
    66,510For Six Months Ended June 30, 2009Interest income
    
    $
    40,971
    
    
    $
    2,452
    
    
    $
    
    
    
    $
    43,423Interest expense
    
    
    15,237
    
    
    
    272
    
    
    
    445
    
    
    
    15,954Net interest income
    
    
    25,734
    
    
    
    2,180
    
    
    
    (445
    )
    
    
    27,469Provision for loan losses
    
    
    26,946
    
    
    
    62
    
    
    
    
    
    
    
    27,008Net interest income (loss) after provision
for loan losses
    
    
    (1,212
    )
    
    
    2,118
    
    
    
    (445
    )
    
    
    461Other income
    
    
    4,474
    
    
    
    7,992
    
    
    
    417
    
    
    
    12,883Other expense
    
    
    25,672
    
    
    
    4,814
    
    
    
    361
    
    
    
    30,847Income (loss) before income taxes (benefit)
    
    
    (22,410
    )
    
    
    5,296
    
    
    
    (389
    )
    
    
    (17,503
    )Income taxes (benefit)
    
    
    (6,789
    )
    
    
    
    
    
    
    
    
    
    
    (6,789
    )Net income(loss)
    
    $
    (15,621
    )
    
    $
    5,296
    
    
    $
    (389
    )
    
    $
    (10,714
    )
 
 (1)
    
    As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which is
taxed on that income.(2)
    
    Note: The Other column includes asset eliminations representing the Banks Due from Sidus
account ($175,000 in 2009), the Banks Investment in Sidus ($3,000 in 2009), and the Banks A/R
from Sidus ($119 in 2009). Also included in this column are Holding Company assets ($1,893 in
2009) and Holding Company income and expenses. 
 25




---



##### 



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, including
the effect of recent financial reform legislation on the banking industry;
    
    general economic conditions, either nationally or regionally and especially in our
primary service area, becoming less favorable than expected resulting in, among other
things, a deterioration in credit quality;
    
    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;
 
 26




---



##### 




    
    changes in accounting principles, policies or guidelines;
    
    changes in the assessment of whether a deferred tax valuation allowance is necessary;
    
    our ability to maintain internal control over financial reporting;
    
    our reliance on secondary sources such as Federal Home Loan Bank advances, sales of
securities and loans, federal funds lines of credit from correspondent banks and
out-of-market time deposits, to meet our liquidity needs;
    
    loss of consumer confidence and economic disruptions resulting from terrorist
activities;
    
    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 SEC.
   Overview
     
 27




---



##### 



Changes in Financial Position
    
 28




---



##### 



29




---



##### 



June 30, 2010
    
    
    December 31, 2009Holding
    
    
    
    
    
    
    HoldingCompany
    
    
    Bank
    
    
    Company
    
    
    BankTotal risk-based capital ratio
    
    
    10.9
    %
    
    
    10.7
    %
    
    
    10.6
    %
    
    
    10.3
    %Tier 1 risk-based capital ratio
    
    
    9.7
    %
    
    
    9.4
    %
    
    
    9.4
    %
    
    
    9.0
    %Leverage ratio
    
    
    7.8
    %
    
    
    7.5
    %
    
    
    8.4
    %
    
    
    8.0
    %
  
 Liquidity, Interest Rate Sensitivity and Market Risk
  ® SM
 ® ®
 
 30




---



##### 



Results of Operations
   Net Interest Income
  
 31




---



##### 



32




---



##### 



Interest Rates Earned and Paid
 Six Months Ended June 30, 2010
    
    
    Six Months Ended June 30, 2009Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Federal funds sold
    
    $
    1,771
    
    
    $
    2
    
    
    
    0.25
    %
    
    $
    4,309
    
    
    $
    2
    
    
    
    0.09
    %Interest-bearing deposits
    
    
    172,680
    
    
    
    181
    
    
    
    0.21
    %
    
    
    6,199
    
    
    
    21
    
    
    
    0.68
    %Investment securities (1)
    
    
    180,470
    
    
    
    3,904
    
    
    
    4.36
    %
    
    
    172,262
    
    
    
    3,832
    
    
    
    4.49
    %Total loans (1)(2)(6)
    
    
    1,685,544
    
    
    
    45,503
    
    
    
    5.44
    %
    
    
    1,488,518
    
    
    
    40,037
    
    
    
    5.42
    %Total interest-earning assets
    
    
    2,040,465
    
    
    
    49,590
    
    
    
    4.90
    %
    
    
    1,671,288
    
    
    
    43,892
    
    
    
    5.30
    %Non-earning assets
    
    
    139,284
    
    
    
    
    
    
    
    
    
    
    
    149,294Total assets
    
    $
    2,179,749
    
    
    
    
    
    
    
    
    
    
    $
    1,820,582Interest-bearing liabilities:Deposits (7):NOW and money market
    
    $
    395,115
    
    
    
    1,611
    
    
    
    0.82
    %
    
    $
    295,754
    
    
    
    1,515
    
    
    
    1.03
    %Savings
    
    
    54,682
    
    
    
    71
    
    
    
    0.26
    %
    
    
    43,236
    
    
    
    57
    
    
    
    0.27
    %Time certificates
    
    
    1,230,794
    
    
    
    13,788
    
    
    
    2.26
    %
    
    
    912,012
    
    
    
    12,976
    
    
    
    2.87
    %Total interest bearing deposits
    
    
    1,680,591
    
    
    
    15,470
    
    
    
    1.86
    %
    
    
    1,251,002
    
    
    
    14,548
    
    
    
    2.35
    %Repurchase agreements sold
    
    
    47,600
    
    
    
    204
    
    
    
    0.86
    %
    
    
    55,715
    
    
    
    341
    
    
    
    1.23
    %Borrowed funds (7)
    
    
    74,158
    
    
    
    959
    
    
    
    2.61
    %
    
    
    130,039
    
    
    
    1,066
    
    
    
    1.65
    %Total interest-bearing liabilities
    
    
    1,802,349
    
    
    
    16,633
    
    
    
    1.86
    %
    
    
    1,436,756
    
    
    
    15,955
    
    
    
    2.24
    %Non-interest bearing deposits
    
    
    206,090
    
    
    
    
    
    
    
    
    
    
    
    168,093Shareholders equity
    
    
    154,196
    
    
    
    
    
    
    
    
    
    
    
    202,766Other liabilities
    
    
    17,114
    
    
    
    
    
    
    
    
    
    
    
    12,967Total average liabilities and
shareholders equity
    
    $
    2,179,749
    
    
    
    
    
    
    
    
    
    
    $
    1,820,582Net interest income (3)
and interest rate spread (5)
    
    
    
    
    
    $
    32,957
    
    
    
    3.04
    %
    
    
    
    
    
    $
    27,937
    
    
    
    3.05
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.28
    %
    
    
    
    
    
    
    
    
    
    
    3.37
    %
 
 (1)
    
    Yields related to investment securities and loans exempt from Federal income taxes are stated
on a fully tax-equivalent basis, assuming a Federal income tax rate of 35%. The calculation
includes an adjustment for the nondeductible portion of interest expense used to fund tax-exempt
assets.(2)
    
    The loan average includes loans on which accrual of interest has been discontinued.(3)
    
    The net interest income is the difference between income from earning assets
and interest expense. (4) Net interest margin is net interest income divided by
total average earning assets.(5)
    
    Interest spread is the difference between the average interest rate received on earning assets
and the average interest rate paid on interest-bearing liabilities.(6)
    
    Interest income on loans for 2010 and 2009 includes $1,021 and $2,414, respectively, in
accretion of fair market value adjustments related to recent mergers (7) Interest expense on
deposits and borrowings in 2010 and 2009 includes $621 and $172, respectively, in accretion of fair
market value adjustments related to recent mergers. Provisions and Allowance for Loan Losses
  
 33




---



##### 



34




---



##### 



For the six months ended
    
    
    For the six months endedJune 30, 2010
    
    
    June 30, 2009Net charge-offs
    
    
    
    
    
    
    Net charge-offsLoan Type
    
    
    
    
    
    to average
    
    
    
    
    
    
    to average(Amounts in thousands)
    
    Net Charge-offs
    
    
    loans
    
    
    Net Charge-offs
    
    
    loansConstruction
    
    $
    8,899
    
    
    
    1.06
    %
    
    $
    405
    
    
    
    0.05
    %Commercial, financial and other
    
    
    1,384
    
    
    
    0.17
    %
    
    
    1,462
    
    
    
    0.20
    %Mortgage
    
    
    1,317
    
    
    
    0.16
    %
    
    
    172
    
    
    
    0.02
    %Commercial real estate
    
    
    1,989
    
    
    
    0.24
    %
    
    
    250
    
    
    
    0.03
    %Installment loans
    
    
    276
    
    
    
    0.03
    %
    
    
    333
    
    
    
    0.05
    %Revolving 1-4 family loans
    
    
    648
    
    
    
    0.08
    %
    
    
    498
    
    
    
    0.07
    %Total
    
    $
    14,513
    
    
    
    1.74
    %
    
    $
    3,120
    
    
    
    0.42
    %
     
 35




---



##### 



36




---



##### 



Nonperforming Assets
      
 37




---



##### 



June 30, 2010
    
    
    December 31, 2009% of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    TotalBalance
    
    
    Loans
    
    
    Balance
    
    
    Loans(in thousands)Construction
    
    $
    27,963
    
    
    
    1.65
    %
    
    $
    27,786
    
    
    
    1.66
    %Commercial, financial, and other
    
    
    6,723
    
    
    
    0.40
    %
    
    
    5,085
    
    
    
    0.30
    %Mortgage
    
    
    7,627
    
    
    
    0.45
    %
    
    
    8,891
    
    
    
    0.53
    %Commercial real estate
    
    
    18,031
    
    
    
    1.06
    %
    
    
    10,244
    
    
    
    0.61
    %Installment loans
    
    
    410
    
    
    
    0.02
    %
    
    
    677
    
    
    
    0.04
    %Open end, unsecured
    
    
    2,076
    
    
    
    0.12
    %
    
    
    14
    
    
    
    0.00
    %Total impaired
    
    $
    62,830
    
    
    
    3.70
    %
    
    $
    52,697
    
    
    
    3.14
    %
 Noninterest Income
   Six Months
    
    
    Increase/
    
    
    American
    
    
    Increase/(decrease)Ended
    
    
    (decrease)
    
    
    Community
    
    
    excluding AmericanJune 30, 2010
    
    
    over 2009
    
    
    region
    
    
    Community regionService charges on deposit accounts
    
    $
    2,924
    
    
    $
    341
    
    
    $
    846
    
    
    $
    (505
    )Other service fees
    
    
    1,758
    
    
    
    (672
    )
    
    
    183
    
    
    
    (855
    )Net gain on sales of mortgage loans
    
    
    3,210
    
    
    
    (4,791
    )
    
    
    
    
    
    
    (4,791
    )Gains on sales of securities
    
    
    888
    
    
    
    888
    
    
    
    
    
    
    
    888Income on
investment in bank owned life insurance
    
    
    398
    
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )Mortgage banking income
    
    
    116
    
    
    
    630
    
    
    
    
    
    
    
    630Other than
temporary impairment of securities
    
    
    (266
    )
    
    
    (87
    )
    
    
    
    
    
    
    (87
    )Other income
    
    
    205
    
    
    
    138
    
    
    
    74
    
    
    
    64
 
 38




---



##### 




    
    Service charges on deposit accounts decreased for the quarter as total NSF fees
(a major component of service charges) decreased $109,000, or 12.5% compared to the
second quarter of 2009. ATM service charge income was up by $48,000, or 46.3%. NOW,
savings, and money market account service charges decreased 2.7%.
    
    Service charges on deposit accounts increased for the first six months of the year as
total NSF fees (a major component of service charges) increased $112,000, or 8.1% due
primarily to the addition of American Community. ATM service charge income was up by
$110,000, or 59.9%. NOW, savings, and money market account service charges increased
14.0%.
  
    
    The decrease in other service fees for the quarter was due primarily to decreases in
commissions and fees on mortgages originated and commissions and fees on mutual funds
and annuities. Quarter-to-date, commission and fees on mortgages originated decreased
$376,000, or 58.9%, and commissions and fees on mutual funds and annuities decreased
$43,000, or 80.0% as compared to the previous year. Year-to-date commission and fees on
mortgages originated decreased $482,000, or 44.5%, and commissions and
fees on mutual funds and annuities decreased $133,000, or 84.5% as compared to the
previous year. Management is uncertain of the impact that the recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will have on other
service fees.
    
    Net gain in the sale of mortgages for the quarter decreased approximately $2.9
million, or 60.9% as total loans originated and sold decreased due to lower
market-related refinancing activities. Mortgage loans originated decreased from $576.6
million in the second quarter of 2009 to $191.5 million in the second quarter of 2010.
Year-to-date, gain on sale of mortgage loans decreased by $4.8 million or 59.9%.
    
    Income on investment in bank-owned life insurance (BOLI) decreased by 18.4% during
the three month period ended June 30, 2010. Year-to-date income on BOLI decreased by
14.6%.
    
    Mortgage banking income increased approximately $267,000 to a gain for the quarter of
$60,000 due to a balancing of the mortgage servicing rights (MSR) and an increase in
the servicing fees received. Year-to-date mortgage banking income increased $630,000.
    
    Other income increased by approximately $123,000 for the quarter and $138,000 for the
year due primarily to additional rent income from American Community.
 Noninterest Expense
  
 39




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##### 



Six Months
    
    
    Increase
    
    
    American
    
    
    IncreaseEnded
    
    
    (decrease)
    
    
    Community
    
    
    excluding AmericanJune 30, 2010
    
    
    over 2009
    
    
    region
    
    
    Community regionSalaries and employee benefits
    
    $
    13,604
    
    
    $
    (322
    )
    
    $
    1,786
    
    
    $
    (2,108
    )Occupancy expenses
    
    
    3,922
    
    
    
    752
    
    
    
    765
    
    
    
    (13
    )Printing and supplies
    
    
    533
    
    
    
    29
    
    
    
    53
    
    
    
    (24
    )Data processing expenses
    
    
    697
    
    
    
    137
    
    
    
    
    
    
    
    137Communication expenses
    
    
    894
    
    
    
    242
    
    
    
    245
    
    
    
    (3
    )Advertising expenses
    
    
    382
    
    
    
    (207
    )
    
    
    12
    
    
    
    (219
    )FDIC assessments
    
    
    2,118
    
    
    
    (341
    )
    
    
    
    
    
    
    (341
    )Loss on other real estate owned
    
    
    1,199
    
    
    
    1,048
    
    
    
    73
    
    
    
    975Other expenses
    
    
    6,163
    
    
    
    (2,644
    )
    
    
    500
    
    
    
    (3,144
    )
 
    
    Quarter-to-date, salaries and employee benefit expenses decreased by $1.4
million, or 16.4%. The major components of this decrease are summarized as follows:
Salaries and wages decreased by $561,000; and salaries and benefit costs directly
related to loan originations, which are expensed over the life of the loan,
increased $38,000, directly offsetting the decrease in wages. Employee incentive
expense decreased $504,000. Other personnel expenses decreased $146,000.
Commission expenses decreased by $157,000 as mortgage origination production at the
Bank decreased.Year-to-date, salaries and employee benefit expenses decreased by $322,000, or 2.3%.
The major components of this decrease are summarized as follows: Salaries and wages
increased by $1.0 million 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 $223,000, 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. These increases were offset by the reduction in the
employee incentive expense of $1.3 million. Commission expenses decreased by $199,000
as mortgage origination production at the Bank decreased.
    
    Occupancy and equipment expenses increased by $114,000, or 6.2% for the quarter
and $752,000 or 23.7% year-to-date. The increase attributable to the addition of
the American Community branches.
    
    Printing and supplies decreased by $13,000, or 4.8%, comparing the second quarter
2010 with the second quarter 2009 as consolidation of American Community vendors and
supplies is completed.
 
 40




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##### 



Increases attributable to the addition of the American
Community branches, contributed to the increase of $29,000 for the first six months
of 2010 as compared to the first six months of 2009.
 
    
    Data processing expense decreased $43,000, or 10.0% for the quarter and increased
$137,000, or 24.5% for the year, 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 $106,000 or 32.2% for the second quarter compared
to the second quarter of 2009. Year-to-date communication expense increased
$242,000, or 37.1%, with $245,000 attributable to American Community expenses.
Excluding American Community, communication expense decreased $3,000.
    
    Advertising and marketing expense decreased $9,000, or 4.2% for the quarter and
$207,000, or 35.1% year-to-date. The decreases are due to the fact that in the
prior year, additional advertising and marketing campaigns were initiated due to the
merger with American Community, and the introduction of new products.
    
    FDIC assessment expenses decreased $509,000 for the quarter and $341,000 for the
year, due to additional assessments imposed by the FDIC in 2009, including a
one-time assessment of $1.0 million.
    
    Loss on sale of other real estate owned increased $265,000 compared to the second
quarter of 2009. This loss increased to $1.2 million for the first six months of
2010 as compared to $151,000 for the first six months of 2009 due to increased
foreclosures and significant declines in real estate values over the past year.
    
    Quarter-to-date other operating expenses (including attorney fees, accounting
fees, loan collection fees and amortization of core deposit intangibles) decreased
approximately $2.8 million, or 47.1%. The decrease was driven by $2.2 million of
non-recurring 2009 acquisition costs related to the American Community merger.Year-to-date other operating expenses (including attorney fees, accounting fees, loan
collection fees and amortization of core deposit intangibles) decreased approximately
$2.6 million, or 30.0%. The decrease was driven by non-recurring 2009 acquisition
costs of $2.3 million.
 Income Tax Expense
    
 41




---



##### 



2007*
    
    
    2008
    
    
    2009
    
    
    2010**
    
    
    Total(Amounts in thousands)Income (loss) before income taxes
    
    $
    10,519
    
    
    $
    5,108
    
    
    $
    (83,933
    )
    
    $
    2,378
    
    
    $
    (65,928
    )Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    61,566
    
    
    
    
    
    
    
    61,56610,519
    
    
    
    5,108
    
    
    
    (22,367
    )
    
    
    2,378
    
    
    $
    (4,362
    )
 
 *
    
    3rd and 4th Quarters of 2007**
    
    1st and 2nd Quarters of 2010  Net Operating Loss
    
    
    Tax BenefitCarryforward at June
    
    
    Recorded at30, 2010 June
    
    
    30, 2010
    
    
    Expiration(Amounts in thousands)Cardinal State Bank acquisition
    
    $
    2,424
    
    
    $
    848
    
    
    
    2029American Community Bank acquisition
    
    
    1,361
    
    
    
    463
    
    
    
    2030Total Loss Carryforwards
    
    $
    3,785
    
    
    $
    1,311
  
 42




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##### 



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4.
    
    Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 43




---



##### 



Part II. Other Information
 
 Item 1.
    
    Legal Proceedings
  
 44




---



##### 



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
 
 45




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##### 



Signatures
  Yadkin Valley Financial CorporationBY:
    
    /s/ William A. LongWilliam A. Long, President and Chief Executive Officer BY:
    
    /s/ Jan H. HollarJan H. Hollar, Principal Accounting Officer,Executive Vice President and Chief Financial Officer  
 46