YADKIN FINANCIAL Corp - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - YADKIN FINANCIAL Corp	g25028exv32.htm
EX-31.2 - EX-31.2 - YADKIN FINANCIAL Corp	g25028exv31w2.htm
EX-31.1 - EX-31.1 - YADKIN FINANCIAL Corp	g25028exv31w1.htm
EX-3.1.1 - EX-3.1.1 - YADKIN FINANCIAL Corp	g25028exv3w1w1.htm

US Securities and Exchange Commission

Washington, DC 20549

Form 10-Q

Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2010

Commission File Number 000-52099

Yadkin Valley Financial Corporation

(Exact name of registrant specified in its charter)


North Carolina (State of Incorporation)		20-4495993 (I.R.S. Employer Identification No.)

209 North Bridge Street, Elkin, North Carolina 28621
(address of principal executive offices)

336-526-6300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

Common shares outstanding as of October 29, 2010, par value $1.00 per share, were 16,144,640.

YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Nine Months Ended September 30, 2010 and 2009


Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2010 and December 31, 2009			2
Condensed Consolidated Statements of Income (Loss) Three and Nine Months Ended September 30, 2010 and 2009			3
Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended September 30, 2010 and 2009			4
Condensed Consolidated Statements of Shareholders’ Equity Nine Months Ended September 30, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 and 2009			6-7
Notes to Unaudited Condensed Consolidated Financial Statements			8-26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27-44
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44-45

Part II. Other Information
Item 1. Legal Proceedings			45
Item 6. Exhibit Index			46
Signatures			47
Exhibits
EX-3.1.1
EX-31.1
EX-31.2
EX-32



Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of September 30, 2010 and December 31, 2009
(Amounts in thousands, except share data)


	September 30,			December 31,*
	2010			2009
ASSETS
Cash and due from banks	$	32,112		$	89,668
Federal funds sold		2,427			93
Interest-bearing deposits		108,665			2,576
Securities available-for-sale at fair value (amortized cost $283,316 in 2010 and $179,143 in 2009)		289,718			183,841
Gross loans		1,641,387			1,676,448
Less: allowance for loan losses		44,735			48,625

Net loans		1,596,652			1,627,823

Loans held-for-sale		76,199			49,715
Accrued interest receivable		8,176			7,783
Premises and equipment, net		45,368			43,642
Foreclosed real estate		22,480			14,345
Federal Home Loan Bank stock, at cost		9,784			10,539
Investment in bank-owned life insurance		25,103			24,454
Goodwill		4,944			4,944
Core deposit intangible (net of accumulated amortization of $7,310 in 2010 and $6,335 in 2009)		5,212			6,186
Other assets		43,949			48,003

Total Assets	$	2,270,789		$	2,113,612


LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Noninterest-bearing demand deposits	$	205,856		$	207,850
Interest-bearing deposits:
NOW, savings and money market accounts		467,731			445,508
Time certificates:
$100 or more		531,892			560,825
Other		776,012			607,569

Total Deposits		1,981,491			1,821,752

Short-term borrowings		47,278			44,467
Long-term borrowings		71,996			79,000
Capital lease obligations		2,411			2,437
Accrued interest payable		3,715			3,015
Other liabilities		13,237			10,675

Total Liabilities		2,120,128			1,961,346


Shareholders’ Equity
Preferred stock, no par value, 1,000,000 shares authorized; 49,312 issued and outstanding in 2010, 49,312 shares issued and outstanding in 2009		46,616			46,152
Common stock, $1 par value, 50,000,000 shares authorized; 16,144,640 issued and outstanding in 2010 and 16,129,640 issued and outstanding in 2009		16,145			16,130
Warrants		3,581			3,581
Surplus		114,627			114,574
Accumulated deficit		(34,265	)		(31,080	)
Accumulated other comprehensive income		3,957			2,909

Total Shareholders’ Equity		150,661			152,266

Total Liabilities and Shareholders’ Equity	$	2,270,789		$	2,113,612


*		Derived from audited financial statements

See notes to condensed consolidated financial statements

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three and Nine Months Ended September 30, 2010 and 2009
(Amounts in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
INTEREST INCOME:
Interest and fees on loans	$	22,921		$	24,731		$	68,337		$	64,694
Interest on federal funds sold		1			19			3			22
Interest and dividends on securities:
Taxable		1,562			1,311			3,941			3,849
Non-taxable		534			566			1,588			1,463
Interest-bearing deposits		110			10			297			31

TOTAL INTEREST INCOME		25,128			26,637			74,166			70,059

INTEREST EXPENSE
Time deposits of $100 or more		3,503			4,517			10,138			11,351
Other time and savings deposits		4,699			3,005			13,534			10,718
Borrowed funds		618			734			1,781			2,141

TOTAL INTEREST EXPENSE		8,820			8,256			25,453			24,210

NET INTEREST INCOME		16,308			18,381			48,713			45,849
PROVISION FOR LOAN LOSSES		7,879			18,286			18,072			45,293

NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		8,429			95			30,641			556

NON-INTEREST INCOME:
Service charges on deposit accounts		1,539			1,577			4,463			4,160
Other service fees		985			1,189			2,743			3,619
Net gain on sales and fees of mortgage loans		2,683			2,751			5,893			10,752
Gain on sale of available-for-sale securities		1			—			889			—
Income on investment in bank-owned life insurance		251			235			649			701
Mortgage banking income (loss)		53			7			169			(507	)
Other than temporary impairment of equity securities		(115	)		(175	)		(380	)		(355	)
Other income		175			94			379			163

TOTAL NON-INTEREST INCOME		5,572			5,678			14,805			18,533

NON-INTEREST EXPENSES:
Salaries and employee benefits		8,248			7,762			21,852			21,688
Occupancy and equipment expense		2,298			1,858			6,220			5,028
Printing and supplies		169			345			702			849
Data processing		380			349			1,077			909
Amortization of core deposit intangible		315			327			975			902
Communications expense		445			372			1,339			1,024
Advertising expense		362			357			744			946
FDIC assessment expense		1,122			973			3,240			3,433
Loan collection fees		307			370			868			595
Attorney fees		223			469			446			992
Net loss on other real estate owned		585			1,218			1,784			1,369
Acquisition costs		—			292			—			2,594
Goodwill impairment		—			61,566			—			61,566
Other expenses		2,918			2,490			7,637			7,672

TOTAL NON-INTEREST EXPENSES		17,372			78,748			46,884			109,567

LOSS BEFORE INCOME TAXES		(3,371	)		(72,975	)		(1,438	)		(90,478	)
INCOME TAX BENEFIT		(1,299	)		(4,716	)		(566	)		(11,505	)

NET LOSS		(2,072	)		(68,259	)		(872	)		(78,973	)
Preferred stock dividend and accretion of preferred stock discount		771			708			2,313			1,681

NET LOSS TO COMMON SHAREHOLDERS	$	(2,843	)	$	(68,967	)	$	(3,185	)	$	(80,654	)

NET LOSS PER COMMON SHARE:
Basic	$	(0.18	)	$	(4.28	)	$	(0.20	)	$	(5.62	)
Diluted	$	(0.18	)	$	(4.28	)	$	(0.20	)	$	(5.62	)

See notes to condensed consolidated financial statements

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (LOSS) (UNAUDITED)
Three and Nine Months Ended September 30, 2010 and 2009


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands)
NET LOSS	$	(2,072	)	$	(68,259	)	$	(872	)	$	(78,973	)

OTHER COMPREHENSIVE INCOME:
Unrealized holding gains on securities available-for-sale		994			1,860			2,591			1,674
Tax effect		(382	)		(717	)		(997	)		(614	)


Unrealized holding gains on securities available-for-sale, net of tax amount		612			1,143			1,594			1,060

Reclassification adjustment for realized gains		(1	)		—			(889	)		—
Tax effect		—			—			343			—


Reclassification adjustment for realized gains, net of tax amount		(1	)		—			(546	)		—


OTHER COMPREHENSIVE INCOME, NET OF TAX		611			1,143			1,048			1,060


COMPREHENSIVE INCOME (LOSS)	$	(1,461	)	$	(67,116	)	$	176		$	(77,913	)

See notes to condensed consolidated financial statements

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended September 30, 2010 and 2009


													Retained			Accumulated
													earnings			other		Total
	Common 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	$	149,644

Net loss		—		—		—			—		—			(78,973	)		—		(78,973	)
Shares issued under stock option plan		8		—		—			—		1			—			—		1
Preferred stock issued		—		—		49,312			—		—			—			—		49,312
Preferred stock discount		—		—		(3,581	)		—		—			—			—		(3,581	)
Warrants issued		—		—		—			3,581		—			—			—		3,581
Discount accretion on preferred stock		—		—		287			—		—			(287	)		—		—
Stock option compensation		—		—		—			—		55			—			—		55
Cash dividends declared		—		—		—			—		—			(1,394	)		—		(1,394	)
Preferred stock dividends		—		—		—			—		—			(1,658	)		—		(1,658	)
Shares issued in acquisition of American Community		4,593,132		4,593		—			—		26,469			—			—		31,062
Other comprehensive income		—		—		—			—		—			—			1,060		1,060


BALANCE, SEPTEMBER 30, 2009		16,129,640	$	16,130	$	46,018		$	3,581	$	114,555		$	(34,242	)	$	3,067	$	149,109

BALANCE, DECEMBER 31, 2009		16,129,640		16,130		46,152			3,581		114,574			(31,080	)		2,909		152,266

Net loss		—		—		—			—		—			(872	)		—		(872	)
Restricted stock issued		15,000		15		—			—		(15	)		—			—		—
Discount accretion on preferred stock		—		—		464			—		—			(464	)		—		—
Stock option compensation:
stock options		—		—		—			—		63			—			—		63
restricted stock		—		—		—			—		5			—			—		5
Preferred stock dividends		—		—		—			—		—			(1,849	)		—		(1,849	)
Other comprehensive income		—		—		—			—		—			—			1,048		1,048


BALANCE, SEPTEMBER 30, 2010		16,144,640	$	16,145	$	46,616		$	3,581	$	114,627		$	(34,265	)	$	3,957	$	150,661

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2010 and 2009


	Nine Months Ended September 30,
	2010			2009
	(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(872	)	$	(78,973	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net amortization of premiums on investment securities		1,487			476
Provision for loan losses		18,072			45,293
Net gain on sales of mortgage loans		(5,893	)		(10,752	)
Other than temporary impairment of investments		380			355
Increase in cash surrender value of life insurance		(649	)		(701	)
Depreciation and amortization		2,314			2,024
Loss on sale of premises and equipment		8			127
Net loss on other real estate owned		1,784			1,369
Gain on sale of available-for-sale securities		(889	)		—
Impairment of goodwill		—			61,566
Amortization of core deposit intangible		975			902
Deferred tax provision (benefit)		4,537			(9,314	)
Stock based compensation expense		68			55
Originations of mortgage loans held-for-sale		(559,491	)		(1,392,024	)
Proceeds from sales of mortgage loans		538,900			1,405,794
Decrease in capital lease obligations		26			—
Increase in accrued interest receivable		(393	)		(213	)
Increase in other assets		(1,518	)		(9,774	)
Increase (decrease) in accrued interest payable		700			(754	)
Increase in other liabilities		2,510			5,750

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	2,056		$	21,206

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities	$	(177,347	)	$	(31,229	)
Proceeds from sales of available-for-sale securities		29,180			41,889
Proceeds from maturities of available-for-sale securities		43,395			8,000
Decrease in loans		(2,296	)		(65,295	)
Acquisition of American Community		—			2,041
Purchases of premises and equipment		(4,048	)		(4,021	)
Purchase of Federal Home Loan Bank stock		—			(2,385	)
Proceeds from redemption of Federal Home Loan Bank stock		755			1,851
Proceeds from sale of premises and equipment		—			895
Proceeds from the sale of foreclosed real estate		5,475			3,214

NET CASH USED IN INVESTING ACTIVITIES	$	(104,886	)	$	(45,040	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking, NOW, money market and savings accounts	$	20,229		$	49,141
Net increase in time certificates		139,510			102,613
Net decrease in borrowed funds		(4,193	)		(125,363	)
Dividends paid		(1,849	)		(4,204	)
Proceeds from the issuance of preferred stock and warrants		—			49,312

NET CASH PROVIDED BY FINANCING ACTIVITIES		153,697			71,499

NET INCREASE IN CASH AND CASH EQUIVALENTS		50,867			47,665

CASH AND CASH EQUIVALENTS:
Beginning of period		92,337			26,022

End of period	$	143,204		$	73,687

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

YADKIN VALLEY FINANCIAL CORPORATION
CODENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
Nine Months Ended September 30, 2010 and 2009


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

See notes to condensed consolidated financial statements

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Notes to Unaudited Condensed Consolidated Financial Statements

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Yadkin Valley Financial Corporation and its subsidiary, Yadkin Valley Bank and Trust Company. On July 1, 2006, Yadkin Valley Bank and Trust Company (the “Bank”) became a subsidiary of Yadkin Valley Financial Corporation (the “Company”) through a one for one share exchange of the then outstanding 10,648,300 shares. Sidus Financial, LLC (“Sidus”) is a single member LLC with the Bank as its single member. Sidus offers mortgage banking services and is headquartered in Greenville, NC. The Company acquired American Community Bancshares Inc. (“American Community”) on April 17, 2009. The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial statements and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited consolidated financial statements and accompanying footnotes included with the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 5, 2010. Operating results, for the three and nine months ended September 30, 2010, do not necessarily indicate the results that may be expected for the year or other interim periods.

In the opinion of management, the accompanying condensed consolidated financial statements contain all the adjustments, all of which are normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2010 and December 31, 2009, and the results of its operations and cash flows for the three and nine months ended September 30, 2010 and 2009. The accounting policies followed are set forth in Note 1 to the Consolidated Financial Statements in the Company’s 2009 Annual Report on Form 10-K.

2. New Accounting Standards

Recently Adopted Accounting Standards

In the second quarter of 2010, additional guidance was issued under the Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses. In July, 2010 the FASB issued the new standard governing the disclosures associated with credit quality and the allowance for loan losses. This standard requires additional disclosures related to the allowance for loan losses with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with its effect on the allowance for loan losses. The provisions of this standard are effective for interim and annual periods ending on or after December 15, 2010. The adoption of this standard will not have a material impact on the Company’s financial position and results of operations. However, it will increase the amount of disclosures in the notes to the consolidated financial statements.

In the first quarter of 2010, additional guidance was issued under the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification requiring disclosures of significant transfers in and out of Levels 1 and 2 fair value and the reasons for the transfers. Certain additional disclosures are now required in interim and annual periods to discuss the inputs and valuation technique(s) used to measure fair value. The adoption of the new accounting disclosures did not have a material effect on the Company’s financial position or results of operations; however, it did result in additional disclosures. See Note 10 for the related fair value disclosures.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

In June 2009, the FASB issued an update to the accounting standards for transfers and servicing of financial assets which eliminates the concept of a qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures, including information about continuing exposure to risks related to transferred financial assets. This update is effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009. The disclosure requirements must be applied to transfers that occurred before and after the effective date. The adoption of the new practices did not have an effect on the Company’s financial position or results of operations.

In June 2009, the FASB issued an update to the accounting standards for consolidation which contains new criteria for determining the primary beneficiary, eliminates the exception to consolidating QSPE’s, requires continual reconsideration of conclusions reached in determining the primary beneficiary, and requires additional disclosures. This update for consolidations is effective as of the beginning of fiscal years beginning after November 15, 2009 and is applied using a cumulative effect adjustment to retained earnings for any carrying amount adjustments (e.g., for newly- consolidated Variable Interest Entities). The adoption of the new practices did not have an effect on the Company’s financial position or results of operations.

3. Stock-based Compensation

During the three and nine months ended September 30, 2010, 1,100 and 26,300 options were vested, respectively. During the three and nine months ended September 30, 2009, 100 and 26,700 options were vested, respectively. At September 30, 2010, there were 75,800 options unvested and 190,000 shares available for future grants of options under the Omnibus Plan.

There were no shares of restricted stock granted during the third quarter of 2010. During the second quarter of 2010, there were 10,000 shares of restricted stock granted at a fair value of $4.99 per share. The fair value of each share grant is based on the closing market price of the stock on the date of issuance. Restricted shares vest over a three-year period. There were 5,000 shares of restricted stock granted at a fair value of $3.71 per share during the first quarter of 2010. A total of 15,000 shares of restricted stock are nonvested as of September 30, 2010. There were no options granted during the first nine months of 2010. During the third quarter of 2009, there were 5,000 options granted at a weighted average fair value of $3.607 per option. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2009: dividend yield of 0.00%, expected volatility of 56.90%, risk-free interest rate of 2.59%, and expected life of 5.5 years.

The compensation expense related to options and restricted shares was $24,938 for the three-month period ending September 30, 2010 and $68,241 for the nine month period ending September 30, 2010. As of September 30, 2010, there was $215,560 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under all of the Company’s stock benefit plans. This cost is expected to be recognized over an average vesting period of 2.4 years. The compensation expense related to options was $18,416 for the three-month period ending September 30, 2009 and $54,929 for the nine month period ending September 30, 2009.

There were no options exercised during the three and nine months ended September 30, 2010. Cash received from the options exercised during the nine months ended September 30, 2009 was $119. There were no options exercised during the three months ended September 30, 2009.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

4. Investment Securities

Investment securities at September 30, 2010 and December 31, 2009 are summarized as follows:


	September 30, 2010
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
	(Amounts in thousands)
Available-for-sale securities:

Securities of U.S. government agencies due:
After 1 but within 5 years	$	12,079	$	537	$	38	$	12,578
After 5 but within 10 years		8,624		764		—		9,388

		20,703		1,301		38		21,966

Government sponsored agencies:
Residential mortgage-backed securities due:
After 1 but within 5 years		1,211		40		—		1,251
After 5 but within 10 years		8,436		649		—		9,085
After 10 years		23,354		1,211		18		24,547

		33,001		1,900		18		34,883

Collateralized mortgage obligations due:
After 5 but within 10 years		12,619		169		17		12,771
After 10 years		143,714		858		895		143,677

		156,333		1,027		912		156,448

Private label collateralized mortgage obligations due:
After 10 years		2,196		20		189		2,027

		2,196		20		189		2,027

State and municipal securities due:
Within 1 year		2,379		33		—		2,412
After 1 but within 5 years		10,787		431		24		11,194
After 5 but within 10 years		21,001		1,023		—		22,024
After 10 years		35,803		1,858		56		37,605

		69,970		3,345		80		73,235

Common and preferred stocks:		1,113		47		1		1,159

Total available-for-sale securities	$	283,316	$	7,640	$	1,238	$	289,718

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


	December 31, 2009
			Unrealized		Unrealized
	Amortized 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	$	—	$	5,120
After 1 but within 5 years		19,364		502		—		19,866
After 5 but within 10 years		17,506		451		49		17,908

		41,866		1,077		49		42,894


Government sponsored agencies:
Residential mortgage-backed securities due:
Within 1 year		765		7		—		772
After 1 but within 5 years		3,198		45		5		3,238
After 5 but within 10 years		7,704		376		—		8,080
After 10 years		37,237		1,560		4		38,793

		48,904		1,988		9		50,883


Collateralized mortgage obligations due:
After 5 but within 10 years		4,930		126		—		5,056
After 10 years		19,621		551		10		20,162

		24,551		677		10		25,218


Private label collateralized mortgage obligations due:
After 10 years		2,652		1		366		2,287

		2,652		1		366		2,287

State and municipal securities due:
Within 1 year		5,725		55		—		5,780
After 1 but within 5 years		14,016		488		—		14,504
After 5 but within 10 years		15,273		394		16		15,651
After 10 years		25,038		547		142		25,443

		60,052		1,484		158		61,378


Common and preferred stocks:		1,118		68		5		1,181

Total available-for-sale securities	$	179,143	$	5,295	$	597	$	183,841

Mortgage-backed securities are included in maturity groups based upon stated maturity date. At September 30, 2010, $34.9 million of the Bank’s mortgage-backed securities were pass-through securities and $158.5 million were collateralized mortgage obligations. At December 31, 2009, $50.9 million of the Bank’s mortgage-backed securities

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

were pass-through securities and $27.5 million were collateralized mortgage obligations. Actual maturity will vary based on repayment of the underlying mortgage loans.

Gross realized gains on the sale of securities for the nine months ended September 30, 2010 were $889,000. There were $990 in gross realized gains for the three months ended September 30, 2010. There were no gross realized gains or losses on sale of securities for the three or nine months ended September 30, 2009.

Investment securities with carrying values of approximately $103.1 million at September 30, 2010 and December 31, 2009 were pledged as collateral for public deposits and for other purposes as required or permitted by law.

The following table presents the gross unrealized losses and fair value of investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009. Securities that have been in a loss position for twelve months or more at September 30, 2010 include one mortgage-backed security, one municipal securities and one private label collateralized mortgage obligation. The key factors considered in evaluating the private label collateralized mortgage obligations were cash flows of this investment and the assessment of other relative economic factors. Securities that have been in a loss position for twelve months or more at December 31, 2009 include one mortgage-backed security, three municipal securities and one private label collateralized mortgage obligation. The unrealized losses relate to securities that have incurred fair value reductions due to a shift in demand from non-governmental securities and municipals to U.S. Treasury bonds and governmental agencies due to credit market concerns. The unrealized losses are not likely to reverse until market interest rates decline to the levels that existed when the securities were purchased. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations. It is more likely than not that the Company will not have to sell the investments before recovery of their amortized cost basis.

If management determines that an investment has experienced an other than temporary impairment, the loss is recognized in the income statement. At September 30, 2010 and December 31, 2009, there were no securities available-for-sale deemed to have OTTI.


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

Total temporarily impaired securities	$	101,398	$	1,038	$	1,993	$	200	$	103,391	$	1,238

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


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

Total temporarily impaired securities	$	11,076	$	180	$	2,954	$	417	$	14,031	$	597

The aggregate cost of the Company’s cost method investments totaled $12.9 million at September 30, 2010 and $14.1 million at December 31, 2009. Cost method investments at September 30, 2010 include $9,784,300 in FHLB stock and $3,149,267 of investments in various trust and financial companies, which are included in other assets. All cost method investments were evaluated for impairment at September 30, 2010. The following factors have been considered in determining the carrying amount of FHLB stock; 1) the recoverability of the par value, 2) the Company has sufficient liquidity to meet all operational needs in the foreseeable future and would not need to dispose of the stock below recorded amounts, 3) redemptions and purchases of the stock are at the discretion of the FHLB, 4) the Company believes the FHLB has the ability to absorb economic losses given the expectation that the various FHLBs’ have a high degree of government support, and 5) the unrealized losses related to securities owned by the FHLB are manageable given the capital levels of the organization. The Company estimated that the fair value equaled or exceeded the cost of each of these investments (that is, the investments were not impaired) on the basis of the redemption provisions of the issuing entities with the following exceptions. The Company’s investment in a financial services company was considered to be OTTI and approximately $87,000 was charged-off in the first nine months of 2010. In addition, the Company’s investment in two local community banks were considered to be OTTI and approximately $292,000 was charged-off in the first nine months of 2010. During the first nine months of 2009, the Company’s investment in Silverton Financial Services and the Company’s investment in two financial services companies were considered to be OTTI and $151,722, $171,036, and $32,140 were charged-off, respectively.

5. Commitments and Contingencies

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying financial statements. At September 30, 2010, the Company had commitments outstanding of $294.2 million for additional loan amounts. Commitments of Sidus, the Bank’s mortgage lending subsidiary, are excluded from this amount and discussed in the paragraph below. Additional commitments totaling $8.8 million were outstanding under standby letters of credit. Management does not expect any significant losses to result from these commitments.

At September 30, 2010, Sidus had $232.3 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $308.2 million of forward commitments outstanding under best efforts contracts to sell mortgages to agencies and other investors. The Bank had $50,000 of loans held-for-sale that were in process as of September 30, 2010. See Note 8 for additional disclosures on these derivative financial instruments.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

6. Net Income (Loss) Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the reporting periods. Diluted net income available to common shareholders per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The numerators of the basic net income per share computations are the same as the numerators of the diluted net income per common share computations for all the periods presented. Weighted average shares outstanding for the quarter ended September 30, 2010 excludes 15,000 shares of unvested restricted stock. A reconciliation of the denominator of the basic net income per common share computations to the denominator of the diluted net income per common share computations is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Basic EPS denominator:
Weighted average number of common shares outstanding		16,129,640		16,129,632		16,129,640		14,356,544
Dilutive effect arising from assumed exercise of stock options		—		—		—		—

Diluted EPS denominator		16,129,640		16,129,632		16,129,640		14,356,544

For the three months ended September 30, 2010 and 2009, net income (loss) for determining net income (loss) per common share was reported as net income (loss) less the dividend on preferred stock. During the quarter ended September 30, 2010, there were 566,901 warrants and stock options outstanding to purchase shares of the Company’s common stock not considered dilutive at a price range of $3.84 to $19.07 per share. During the quarter ended September 30, 2009, 614,516 warrants and stock options were not considered dilutive because the exercise prices exceeded the average market price of $6.20 per share. These non-dilutive shares had exercise prices ranging from $6.36 to $19.07 per share. Unvested shares of restricted stock and all other common stock equivalents were excluded from the determination of diluted earnings per share for the three and nine months ended September 30, 2009 due to the Company’s loss position for those periods.

7. Shareholders’ Equity

On September 21, 2009, the Company announced that its Board of Directors voted to suspend payment of the Company’s quarterly cash dividend in order to preserve capital. There were no cash dividends paid to common shareholders during the quarter ended September 30, 2010.

The payment of cash dividends by the Company in the future are subject to certain other legal and regulatory limitations (including the requirement that the Company’s capital be maintained at certain minimum levels) and will be subject to ongoing review and approval by banking regulators.

On May 24, 2007, the Board approved a plan to repurchase up to 100,000 shares of the Company’s outstanding common shares (“2007 plan”). The Company did not repurchase any common shares during the first nine months of

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

2010 or 2009. There were no 2008 purchase plans or repurchases in 2008. Under the 2007 plan, the Company repurchased a total of 71,281 common shares at an average price of $17.10 per share during 2007. There are 28,719 common shares available to purchase under the 2007 plan at September 30, 2010. However, the Company will be subject to restrictions on share repurchases for so long as it remains a participant in the Capital Purchase Program under the Treasury’s Troubled Asset Relief Program. Generally, the Company must obtain Treasury’s consent for any repurchases that would be made prior to July 24, 2012 (the third anniversary of the second of the Company’s two issuances of securities under this program), and the Company will be prohibited from making any repurchases at any time that it is delinquent in making dividend payments on the Treasury preferred stock.

The Bank has committed to regulators that it will maintain a Tier 1 Leverage Ratio of 8%. Although the Bank has currently fallen below this level, the Company has a number of alternatives available to assist the Bank in achieving this ratio including but not limited to raising additional capital, and decreasing the asset size of the Bank. Management, on an ongoing basis, continues to monitor capital levels closely and evaluate options which would improve the capital position.

8. Derivatives

The Company currently has derivative instrument contracts consisting of interest rate swaps and interest rate lock commitments and commitments to sell mortgages. The primary objective for each of these contracts is to minimize interest rate risk. The Company’s strategy is to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods. The Company does not enter into derivative financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest income during the period of change.

As part of interest rate risk management, the Company has entered into two interest rate swap agreements to convert certain fixed-rate receivables to floating rates and certain fixed-rate obligations to floating rates. The interest rate swaps are used to provide fixed rate financing while managing interest rate risk and were not designated as hedges. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR, with payments being calculated on the notional amount. The interest rate swaps are settled quarterly and mature on June 15, 2016. The interest rate swaps each have a notional amount of $1.3 million, representing the amount of outstanding fixed-rate receivables and obligations outstanding at September 30, 2010, and are included in other assets and other liabilities at their fair value of $223,000. The Company had a gain of $223,000 on the interest rate swap asset and a loss of $223,000 on the interest rate swap liability for the nine months ended September 30, 2010. The interest rate swaps were not designated as hedges and all changes in fair value are recorded in other income within noninterest income. Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

The Company is exposed to certain risks relating to its ongoing mortgage origination business. Sidus, the Company’s mortgage lending subsidiary, enters into interest rate lock commitments and commitments to sell mortgages. The primary risks managed by derivative instruments are these interest rate lock commitments and forward-loan-sale commitments. Interest rate lock commitments are entered into to manage interest rate risk associated with the Company’s fixed rate loan commitments. The period of time between the issuance of a loan commitment and the closing and sale of the loan generally ranges from 10 to 60 days. Such interest rate lock commitments and forward-loan-sale commitments represent derivative instruments which are required to be carried at fair value. These derivative instruments do not qualify as hedges under the Derivatives and Hedging topic of the FASB Accounting Standards Codification. The fair value of the Company’s interest rate lock commitments and forward-loan-sales commitments are based on current secondary market pricing and included on the balance sheet in loans held-for-sale and on the income statement in gain on sale of mortgages. The gains and losses from the future sales of the mortgages is recognized when the Company, the borrower and the investor enter into the loan contract and the resulting gain or loss is recorded on the income statement.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

At September 30, 2010, Sidus had $232.3 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $308.2 million of forward commitments outstanding for original commitments and outstanding mortgage loans held-for-sale under best efforts contracts to sell mortgages to agencies and other investors. The fair value of forward sales commitments recorded in other liabilities was $(607,000) at September 30, 2010. The fair value of the interest rate lock commitments recorded in assets was $1,088,000 at September 30, 2010. Recognition of gains related to the change in fair value of the interest rate lock commitments and gains related to forward sales commitments were $90,705 and $189,721, respectively, for the three months ended September 30, 2010, and are included in other income within noninterest income. Recognition of gains related to the change in fair value of the interest rate lock commitments and gains related to forward sales commitments were $86,780 and $251,631, respectively, for the nine months ended September 30, 2010, and are included in other income. Recognition of losses related to the change in fair value of the interest rate lock commitments and forward sales commitments were $122,854 and $7,593, respectively, for the three months ended September 30, 2009, and are included in other income. Recognition of losses related to the change in fair value of the interest rate lock commitments and forward sales commitments were $4,704 and $47,214, respectively, for the nine months ended September 30, 2009, and are included in other income. At December 31, 2009, Sidus had $97.5 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $147.2 million of forward commitments outstanding under best efforts contracts to sell mortgages to agencies and other investors. The fair value of interest rate locks recorded in other liabilities was $(790,608). The fair value of the forward sales commitments recorded in assets was $1,020,177.

9. Allowance for Loan Losses

The Company calculated an allowance for loan losses of $44.7 million at September 30, 2010 as compared to $48.6 million at December 31, 2009 based on the application of its model for the allowance calculation applied to the loan portfolio at each balance sheet date. The allowance model is applied to determine the specific allowance balance for impaired loans and the general allowance balance for unimpaired loans grouped by loan type.

Changes in the allowance for loan losses for the nine months ended September 30, 2010 and 2009 are as follows:


	September 30, 2010			September 30, 2009
	(Amounts in thousands)
Balance, December 31, 2009 and 2008	$	48,625		$	22,355
Charge-offs		(23,308	)		(13,762	)
Recoveries		1,346			384
Provision for loan losses		18,072			45,293

Allowance for Loan Losses	$	44,735		$	54,270

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

The following table presents the Company’s investment in loans considered to be impaired and related information on those impaired loans:


	September 30, 2010		December 31, 2009
	(Amounts in thousands)
Impaired loans under $100,000 that are not individually reviewed	$	7,546	$	6,001
Impaired loans without a related allowance for loan losses		21,682		16,959
Impaired loans with a related allowance for loan losses		53,570		24,497
Impaired loans acquired without a related allowance for loan losses		1,883		2,515
Impaired loans acquired with subsequent deterioration and related allowance for loan losses		—		2,725

Total impaired loans	$	84,681	$	52,697


Allowance for loan losses related to impaired loans	$	15,834	$	10,971


Nonaccrual loans	$	63,093	$	36,255
Troubled debt restructured loans		14,733		5,544
Other impaired loans*		6,855		10,898

Total impaired loans	$	84,681	$	52,697


*		Other impaired loans consists of loans for which regular payments are still received but for which some uncertainty exists regarding whether the full contractual amounts will be collected in accordance with the terms of the loan agreement.

Impaired loans acquired from American Community without a related allowance for loan losses includes loans for which no additional reserves have been recorded in excess of credit discounts for purchased impaired loans. Impaired loans acquired from American Community with subsequent deterioration and related allowance for loan losses are loans in which additional impairment has been identified in excess of credit discounts resulting in additional reserves. These additional reserves are included in the allowance for loan losses related to impaired loans.

The following table presents information regarding all purchased impaired loans, which includes the Company’s acquisition of American Community on April 17, 2009:


				Fair Value
	Contractual			Adjustment
	Principal			(nonaccretable			Carrying
	Receivable			difference)			Amount
	(Amounts in thousands)
As of April 17, 2009 acquisition date	$	14,513		$	3,825		$	10,688
Change 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			4,891

Change due to payment received		(1,234	)		(20	)		(1,214	)
Transfer to foreclosed real estate		(1,345	)		(159	)		(1,186	)
Change due to charge-offs		(854	)		(246	)		(608	)

Balance at September 30, 2010	$	1,955		$	72		$	1,883

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

At September 30, 2010, the outstanding balance of purchased impaired loans from American Community, which includes principal, interest and fees due, was $1,882,859 with no additional allowances for loan losses. Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans. All purchased impaired loans from Cardinal State Bank have been paid or charged-off.

10. Fair Value

The Company utilizes fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities, interest rate swaps, mortgage servicing rights, interest rate lock commitments and forward sale loan commitments are recorded at fair value on a monthly basis. Additionally, from time to time, the Company may be required to record other assets at fair value, such as loans held-for-investment and certain other assets. These nonrecurring fair value adjustments usually involve writing the asset down to fair value or the lower of cost or market value.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-Sale Investment Securities

Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the quarter ended September 30, 2010. Valuation techniques are consistent with techniques used in prior periods.

Interest Rate Swaps

Interest rate swaps are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. As a result, the Company classifies interest rate swaps as Level 3.

The following table presents a rollforward of interest rate swaps from December 31, 2009 to September 30, 2010 and shows that the interest rate swaps are classified as Level 3 as discussed above.


	Level 3
	Fair Value- Assets		Fair Value- Liabilities
	(Amounts in thousands)
Balance, December 31, 2009	$	—	$	—
Purchases, sales, issuances and settlements		—		—
Gains/losses included in other income		223		(223	)

Balance, September 30, 2010	$	223	$	(223	)

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Interest Rate Locks and Forward Loan Sale Commitments

Sidus, the Company’s mortgage lending subsidiary, enters into interest rate lock commitments and commitments to sell mortgages. The Company classifies the fair value of these interest rate lock commitments and commitments to sell mortgages as Level 2. At September 30, 2010, the amount of fair value associated with these interest rate lock commitments and sale commitments was $1,088,000 and $(607,000) respectively. At December 31, 2009, the amount of fair value associated with these interest rate lock commitments and sale commitments was $(790,608) and $1,020,177, respectively. Interest rate locks and forward loan sale commitments are recorded at fair value on a recurring basis. There have been no changes in valuation techniques for the quarter ended September 30, 2010. Valuation techniques are consistent with techniques used in prior periods.

Mortgage Servicing Rights

Mortgage servicing rights are recorded at fair value on a recurring basis. A valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. The present value of the future earnings is the estimated market value for the pool, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing. As such, the Company classifies loan servicing rights as Level 3. There have been no changes in valuation techniques for the quarter ended September 30, 2010. Valuation techniques are consistent with techniques used in prior periods.

The following table presents a rollforward of mortgage servicing rights from December 31, 2009 to September 30, 2010 and December 31, 2008 to September 30, 2009 and shows that the mortgage servicing rights are classified as Level 3 as discussed above.


	Level 3
	2010			2009
	Fair Value			Fair Value
	(Amounts in thousands)
Balance, December 31, 2009 and 2008	$	1,918		$	1,745
Capitalized		342			584
Losses included in other income		(219	)		(906	)

Balance, September 30, 2010 and 2009	$	2,041		$	1,423

Mortgage Loans Held-for-Sale

Loans held-for-sale are carried at lower of cost or market value on a recurring basis. The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held-for-sale as Level 2. At September 30, 2010 the cost of the Company’s mortgage loans held-for-sale was less than the market value. Accordingly, at quarter end the Company’s loans held-for-sale were carried at cost. There have been no changes in valuation techniques for the quarter ended September 30, 2010. Valuation techniques are consistent with techniques used in prior periods.

Impaired Loans

The Company does not record loans held-for-investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

loans is estimated using one of several methods including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2010, the majority of impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the quarter ended September 30, 2010. Valuation techniques are consistent with techniques used in prior periods.

Other Real Estate Owned

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO on a nonrecurring basis. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the OREO as nonrecurring Level 3. The carrying value of OREO at September 30, 2010 is $22,480,059. At December 31, 2009 the carrying value of OREO was $14,344,599. For the periods ending September 30, 2010 and December 31, 2009, all OREO was recorded as nonrecurring Level 3. There have been no changes in valuation techniques for the quarter ended September 30, 2010. The fair value tables include only those foreclosed properties that were written down subsequent to the initial transfer to OREO. Valuation techniques are consistent with techniques used in prior periods.

Assets subjected to recurring fair value adjustments:


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

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


December 31, 2009 (in thousands)	Fair Value			Level 1		Level 2			Level 3
Available-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

Assets subjected to nonrecurring fair value adjustments:


	Fair Value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Other real estate owned at September 30, 2010	$	2,989	$	—	$	—	$	2,989
Other real estate owned at December 31, 2009		2,510		—		—		2,510
Impaired loans at September 30, 2010		37,736		—		—		37,736
Impaired loans at December 31, 2009		16,251		—		—		16,251
Cost method investments at September 30, 2010		758		—		—		758
Cost method investments at December 31, 2009		115		—		—		115

The carrying value of OREO at September 30, 2009 was $9.4 million with a $1.4 million loss included in earnings for the first nine months of 2009.

There were no transfers between valuation levels for any assets during the quarter ended September 30, 2010. If different valuation techniques are deemed necessary, the Company would consider those transfers to occur at the end of the period when the assets are valued.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

11. Financial Instruments

The following is a summary of the carrying amounts and fair values of the Company’s financial assets and liabilities at September 30, 2010 and December 31, 2009:


	September 30, 2010						December 31, 2009
	Carrying			Estimated			Carrying			Estimated
	amount			fair value			amount			fair value
	(Amounts in thousands)

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

The carrying amounts of cash and cash equivalents approximate their fair value.

The fair value of marketable securities is based on quoted market prices, prices quoted for similar instruments, and prices obtained from independent pricing services.

For certain categories of loans, such as installment and commercial loans, the fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The cost of fixed rate mortgage loans held-for-sale approximates the lower of cost or market as these loans are typically sold within 60 days of origination. Fair values for adjustable-rate mortgages are based on quoted market prices of similar loans adjusted for differences in loan characteristics. The Company applied an additional illiquidity discount in the amount of 5.0% at September 30, 2010.

The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB stock.

The investment in bank-owned life insurance represents the cash value of the policies at September 30, 2010 and December 31, 2009. The rates are adjusted annually thereby minimizing market fluctuations.

The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2010 and December 31, 2009, respectively. The fair value of fixed-maturity certificates of deposit and individual retirement accounts is estimated using the present value of the projected cash flows using rates currently offered for similar deposits with similar maturities.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

The fair values of borrowings are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. The carrying values of short-term borrowings, including overnight, securities sold under agreements to repurchase, federal funds purchased and FHLB advances, approximates the fair values due to the short maturities of those instruments. The Company’s credit risk is not material to calculation of fair value because these borrowings are collateralized.

The carrying values of accrued interest receivable and accrued interest payable approximates fair values due to the short-term duration.

The fair values of forward loan sales commitments and interest rate lock commitments are based on changes in the reference price for similar instruments as quoted by secondary market investors.

12. Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. An impairment loss is recorded to the extent that the carrying value of goodwill exceeds its implied fair value.

All remaining goodwill at September 30, 2010 was related to Sidus. Goodwill is evaluated by management on an annual basis at October 1st or more frequently if circumstances indicate possible impairment for the Sidus reporting unit. During the quarter ended September 30, 2010, there were no events or circumstances that indicated possible impairment and no additional testing was performed.

13. Business Segment Information

The Company has two reportable segments, including the Bank and Sidus, a single member LLC with the Bank as the single member. Sidus is headquartered in Greenville, North Carolina and offers mortgage banking services to its customers in Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia and West Virginia. The following table details the results of operations for the first three and nine months of 2010 and 2009 for the Bank and for Sidus.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


	Bank			Sidus		Other			Total
	(Amounts in thousands)
For Three Months Ended September 30, 2010
Interest income	$	24,567		$	561	$	—		$	25,128
Interest expense		8,567			45		208			8,820

Net interest income		16,000			516		(208	)		16,308

Provision for loan losses		7,828			51		—			7,879

Net interest income (loss) after provision		8,172			465		(208	)		8,429
for loan losses
Other income		2,988			2,684		(100	)		5,572
Other expense		15,091			2,217		64			17,372

Income (loss) before income tax benefit		(3,931	)		932		(372	)		(3,371	)
Income tax benefit		(1,299	)		—		—			(1,299	)

Net income (loss)	$	(2,632	)	$	932	$	(372	)	$	(2,072	)


Total assets	$	2,247,183		$	87,889	$	(64,283	)	$	2,270,789
Net loans		1,596,652			—		—			1,596,652
Loans held for sale		50			76,149		—			76,199
Goodwill		—			4,944		—			4,944

For Nine Months Ended September 30, 2010
Interest income	$	72,841		$	1,325	$	—		$	74,166
Interest expense		24,768			108		577			25,453

Net interest income		48,073			1,217		(577	)		48,713
Provision for loan losses		17,791			281		—			18,072

Net interest income (loss) after provision		30,282			936		(577	)		30,641
for loan losses
Other income		9,233			5,894		(322	)		14,805
Other expense		40,984			5,616		284			46,884

Income (loss) before income tax benefit		(1,469	)		1,214		(1,183	)		(1,438	)
Income tax benefit		(566	)		—		—			(566	)

Net income (loss)	$	(903	)	$	1,214	$	(1,183	)	$	(872	)


(1)		As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which is taxed on that income.

(2)		Note: The “Other” column includes asset eliminations representing the Bank’s Due from Sidus account ($59,180 in 2010), the Bank’s Investment in Sidus ($3,000 in 2010), and the Bank’s accounts receivable from Sidus ($50 in 2010). Also included in this column are Holding Company assets ($2,053 in 2010) and Holding Company income and expenses.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


	Bank			Sidus			Other			Total
	(Amounts in thousands)
For Three Months Ended September 30, 2009
Interest income	$	25,968		$	669		$	—		$	26,637
Interest expense		7,978			46			231			8,255

Net interest income		17,990			623			(231	)		18,382

Provision for loan losses		18,293			(7	)		—			18,286

Net interest income (loss) after provision for loan losses		(303	)		630			(231	)		96
Other income		1,677			2,772			186			4,635
Other expense		13,810			2,135			194			16,139
Goodwill impairment		61,566			—			—			61,566

Income (loss) before income taxes (benefit)		(74,002	)		1,267			(239	)		(72,974	)
Income taxes (benefit)		(5,209	)		494			—			(4,715	)

Net income(loss)	$	(68,793	)	$	773		$	(239	)	$	(68,259	)


Total assets	$	2,169,541		$	56,736		$	(174,604	)	$	2,051,673
Net loans		1,590,497			1,559			—			1,592,056
Loans held for sale		1,210			45,700			—			46,910
Goodwill		—			4,944			—			4,944

For Nine Months Ended September 30, 2009
Interest income	$	66,939		$	3,121		$	—		$	70,060
Interest expense		23,215			319			677			24,211

Net interest income		43,724			2,802			(677	)		45,849
Provision for loan losses		45,239			54			—			45,293

Net interest income (loss) after provision for loan losses		(1,515	)		2,748			(677	)		556
Other income		6,151			10,764			603			17,518
Other expense		39,482			6,949			555			46,986
Goodwill impairment		61,566			—			—			61,566

Income (loss) before income taxes (benefit)		(96,412	)		6,563			(629	)		(90,478	)
Income taxes (benefit)		(14,065	)		2,560			—			(11,505	)

Net income(loss)	$	(82,347	)	$	4,003		$	(629	)	$	(78,973	)


(1)		As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which is taxed on that income.

(2)		Note: The “Other” column includes asset eliminations representing the Bank’s Due from Sidus account ($175,000 in 2009), the Bank’s Investment in Sidus ($3,000 in 2009), and the Bank’s account receivable from Sidus ($67 in 2009). Also included in this column are Holding Company assets ($3,471 in 2009) and Holding Company income and expenses.

14. Sale of Credit Card Receivables

On August 31, 2010, the Company sold credit card receivables for a net gain of $32,600 after termination and deconversion fees. The net book value of the portfolio was $3.2 million for which the Company received approximately $3.4 million in cash proceeds. This transaction was accounted for as a sale and as a result the related credit card receivables have been excluded from the accompanying consolidated balance sheet at September 30, 2010. The Company will continue to service the credit card accounts until early 2011 as part of the agreement with the purchaser. Any servicing rights are immaterial and have not been recorded on the transaction.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

15. Cost Savings Initiatives

During the third quarter of 2010, the Company implemented an earnings improvement initiative in order to streamline the organization during this prolonged economic cycle. An evaluation of the branch network, regional structure, and staffing levels across all areas of the Bank was performed. As a result of these evaluations, the decision was made to consolidate the internal reporting structure from five regional divisions to three regional divisions. This consolidation is expected to be completed by the end of October 2010. Severance payments in the amount of $825,000 have been accrued in salaries and employee benefits expense as part of this consolidation.

In addition to the changes in the regional structure, the Bank has made the decision to consolidate four branch offices across the franchise. This decision was a result of an extensive evaluation of the entire network of branches. These consolidations will take place in the first quarter of 2011.

Finally, the Company has made the decision to modify the Saturday banking branch strategy. The plan is to consolidate Saturday banking in 12 offices across the franchise. The change is anticipated to begin no later than mid-November after proper notification has been provided to customers.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

The following is our discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This commentary should be read in conjunction with the financial statements and the related notes and the other statistical information included in this report.

This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2009 as filed with the SEC and the following:

	•		reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

	•		reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

	•		the rate of delinquencies and amount of loans charged-off;

	•		the adequacy of the level of our allowance for loan losses;

	•		the amount of our loan portfolio collateralized by real estate, and the weakness in the commercial real estate market;

	•		our efforts to raise capital or otherwise increase and maintain our regulatory capital ratios above the statutory minimums;

	•		the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;

	•		adverse changes in asset quality and resulting credit risk-related losses and expenses;

	•		increased funding costs due to market illiquidity, increased competition for funding, and increased regulatory requirements with regard to funding;

	•		significant increases in competitive pressure in the banking and financial services industries;

	•		changes in the interest rate environment which could reduce anticipated or actual margins;

	•		changes in political conditions or the legislative or regulatory environment, including the effect of recent financial reform legislation on the banking industry;

	•		general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

	•		our ability to retain our existing customers, including our deposit relationships;

	•		changes occurring in business conditions and inflation;

	•		changes in technology;

	•		changes in monetary and tax policies;

	•		ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, which could be exacerbated by potential climate change, and international instability;

	•		changes in deposit flows;

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

	•		changes in accounting principles, policies or guidelines;

	•		changes in the assessment of whether a deferred tax valuation allowance is necessary;

	•		our ability to maintain internal control over financial reporting;

	•		our reliance on secondary sources such as Federal Home Loan Bank advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;

	•		loss of consumer confidence and economic disruptions resulting from terrorist activities;

	•		changes in the securities markets; and

	•		other risks and uncertainties detailed from time to time in our filings with the SEC.

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on us. There can be no assurance that these unprecedented recent developments will not continue to materially and adversely affect our business, financial condition and results of operations. Additionally, on July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a comprehensive regulatory framework that will affect every financial institution in the U.S. Over the next 6 to 18 months, regulatory agencies will begin to implement new regulations which will establish the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on our bank and the banking industry in general.

Overview

The following discussion describes our results of operations for the three and nine months periods ended September 30, 2010 and 2009 and also analyzes our financial condition as of September 30, 2010 as compared to December 31, 2009. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or occurrences after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Effective at the beginning of business on April 17, 2009, the Company acquired 100% of the outstanding common stock of American Community and its subsidiary American Community Bank, headquartered in Charlotte, NC. American Community had $529.4 million in tangible assets, including $416.3 million in loans and $14.4 million in tangible equity at the closing date. Results of operations for the quarter ended September 30, 2009 reflect the impact of the acquisition.

Changes in Financial Position

Total assets at September 30, 2010 were $2,270.8 million, an increase of $157.2 million, or 7.4%, compared to assets of $2,113.6 million at December 31, 2009. This increase was mainly due to an increase in cash and cash equivalents from $92.3 million as of December 31, 2009 to $143.2 million as of September 30, 2010. The loan portfolio, net of allowance for losses, was $1,596.7 million compared to $1,627.8 million at December 31, 2009. Gross loans held-for-investment decreased by $35.1 million, or 2.1%. The allowance for loan losses decreased $3.9 million driven primarily by decreases in gross loans as well as a decrease in classified loans not considered impaired. Allowance for loan losses assessed on classified loans decreased as improvements were made in the calculation of potential losses related to classified loans. Beginning in the first quarter of 2010, we began to incorporate actual loss data over a twelve month period of default trends and historical charge-offs, rather than the single point we used in prior quarters, which resulted in decreased reserves of $3.9 million within the general allowance portfolio. This decrease resulted as the Company noted that loss estimates and actual charge-offs data for the previous 12 month period varied from management estimates made at December 31, 2009 (using data as of a single point in time) as loss experiences over a period of time is a better indicator of expected losses than loss experience at a single point in time. We believe that the twelve month loss data results in a more accurate calculation of probable loss. Offsetting the resulting decrease related to classified loans and decreases in loan balances were increases in other factors impacted by increased past dues, nonaccruals and charge-offs.

Mortgage loans held-for-sale increased by $26.5 million, or 53.3%, from December 31, 2009 to September 30, 2010 as the Bank continued its strategy of selling mortgage loans mostly to various investors with servicing rights released and to a lesser extent to the Federal National Mortgage Association with servicing rights retained. These loans are normally held for a period of two to three weeks before being sold to investors. Mortgage loans closed in the first nine months of 2010 ranged from a low of $40.4 million in February to a high of $98.4 million in September and totaled $585.0 million. Mortgage loans closed during the nine months ended September 30, 2009 totaled $1,392.0 million. The slowdown in refinance activity and overall decrease in real estate sales, contributed to the decrease in gains on sales of mortgages and to the decreased volume in mortgage loans originated and sold.

The Company maintains reserves for mortgage loans sold to agencies and investors in the event that, either through error or disagreement between the parties, the Company is required to indemnify the purchase. The reserves take into consideration risks associated with underwriting, key factors in the mortgage industry, loans with specific reserve requirements, past due loans and potential indemnification by the Company. Reserves are estimated based on consideration of factors in the mortgage industry such as declining collateral values and rising levels of delinquency, default and foreclosure, coupled with increased incidents of quality reviews at all levels of the mortgage industry seeking justification for pushing back losses to loan originators and wholesalers. As of September 30, 2010, the Company had reserves for mortgage loans sold of $1.9 million, and charges against reserves for the nine months ended September 30, 2010 were $384,335. For the year-ended December 31, 2009, the Company recorded $1.4 million in provision expense related to potential repurchase and warranties exposure on the $1.6 billion in loan sales that

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

occurred during that year. For the year ended December 31, 2009, the Company repurchased $182,800 of mortgage loans sold and recorded actual charges against reserves totaling $356,000.

The securities portfolio increased from $183.8 million at December 31, 2009, to $289.7 million at September 30, 2010, an increase of $105.9 million. The portfolio is comprised of securities of U.S. government agencies (7.6%), mortgage-backed securities (66.7%), state and municipal securities (25.3%), and publicly traded common and preferred stocks (0.4%). Temporary investments, including federal funds sold, increased from approximately $93,000 at December 31, 2009 to $2.4 million at September 30, 2010.

Other assets decreased $4.1 million due to a decrease in income tax receivables and related deferred tax assets of $3.0 million as well as decreases in prepaid FDIC assessments of $3.1 million. These decreases were offset by an increase in other receivables of $2.1 million which included a receivable related to the sale of the credit card portfolio in August 2010. OREO increased $8.1 million due to foreclosures in the amount of $15.4 million less dispositions of $5.5 million and losses of $1.8 million during the year.

Deposits increased $159.7 million, or 8.8%, comparing September 30, 2010 to December 31, 2009. Overall, noninterest-bearing demand deposits decreased $2.0 million, or 1.0%, NOW, savings, and money market accounts increased $22.2 million, or 5.0%, Certificates of deposit (“CODs”) over $100,000 decreased $28.9 million, or 5.2%, and other CODs increased $168.4 million, or 27.7%. The Bank promoted one or more special money market account and COD rates during the first quarter which attributed to the majority of the increase in other CODs.

Borrowed funds decreased $4.2 million or 3.4% comparing September 30, 2010 to December 31, 2009. Repurchase agreements decreased $3.7 million, while advances from FHLB and overnight borrowings decreased $1.1 million. Long term borrowings included $35.0 million in trust preferred securities, advances from the FHLB of $32.0 million and wholesale repurchase agreements of $5.0 million. The American Community merger added $10.4 million in trust preferred securities at a rate equal to the three-month LIBOR rate plus 2.80% and will mature in 2033. Yadkin Valley Statutory Trust I (“the Trust”) issued $25.9 million in trust preferred securities at a rate equal to the three-month LIBOR rate plus 1.32%. The trust preferred securities mature in 30 years, and can be called by the Trust without penalty after five years.

Other liabilities and accrued interest payable combined increased by $3.2 million, or 23.8%, from December 31, 2009 to September 30, 2010. Accrued interest payable increased $700,000 as deposits increased. In addition, temporary payables for participation loan remittances increased to $2.5 million due to timing of payments at quarter end.

Overall, the Company continues its effort to build liquidity through core deposits and short-term borrowings and is slow to reinvest this increased liquidity at current rates which resulted in decreases in loans and increases in cash.

At September 30, 2010, total shareholders’ equity was $150.7 million, or a book value of $6.44 per common share, compared to $152.3 million, or a book value of $6.58 per common share, at December 31, 2009. The Company’s equity to assets ratio was 6.63% and 7.20%, at September 30, 2010 and December 31, 2009, respectively.

The following table sets forth the Company’s and the Bank’s various capital ratios as of September 30, 2010, and December 31, 2009. The Company and the Bank exceeded the minimum regulatory capital ratios as of September 30, 2010, as well as the ratios to be considered “well capitalized.” The Bank has committed to regulators that we will maintain a Tier 1 Leverage Ratio of 8%. Although the Bank has fallen below this level, the Company has a number of alternatives available to assist the Bank in achieving this ratio including but not limited to raising additional capital and decreasing the asset size of the Bank. Management, on an ongoing basis, continues to monitor capital levels closely and evaluate options which would improve the capital position.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


	September 30, 2010						December 31, 2009
	Holding						Holding
	Company			Bank			Company			Bank

Total risk-based capital ratio		10.5	%		10.4	%		10.6	%		10.3	%
Tier 1 risk-based capital ratio		9.3	%		9.1	%		9.4	%		9.0	%
Leverage ratio		7.6	%		7.4	%		8.4	%		8.0	%

The management of equity is a critical aspect of capital management in any business. The determination of the appropriate amount of equity is affected by a number of factors. The primary factor for a regulated financial institution is the amount of capital needed to meet regulatory requirements, although other factors, such as the “risk equity” the business requires and balance sheet leverage, also affect the determination.

Capital adequacy is an important indicator of financial stability and performance. In order to be considered “well capitalized”, the Bank must exceed total risk-based capital ratios of 10%, and Tier 1 risk-based capital ratios of 6% and leverage ratios of 5%. Our goal has been to maintain a “well-capitalized” status for the Bank since failure to meet or exceed this classification affects how regulatory applications for certain activities, including acquisitions, and continuation and expansion of existing activities, are evaluated and could make our customers and potential investors less confident in our Bank.

Liquidity, Interest Rate Sensitivity and Market Risk

The Bank derives the majority of its liquidity from its core deposit base and to a lesser extent from wholesale borrowing. The balance sheet liquidity ratio, measured by the sum of cash (less reserve requirements), investments, and loans held for sale reduced by pledged securities, as compared to deposits and short-term borrowings, was 20.0% at September 30, 2010 compared to 11.9% at December 31, 2009. Additional liquidity is provided by $146.1 million in unused credit including federal funds purchased lines provided by correspondent banks as well as credit availability from the FHLB. At September 30, 2010, brokered deposits totaled $60.9 million, or 3.1% of total deposits. Brokered certificates of deposit are primarily short-term with maturities of nine months or less. The Bank also maintains a brokered deposit NOW account to add municipal deposits totaling $3.3 million at September 30, 2010.

The Bank contracted with Promontory Interfinancial Network in 2008 for various services including wholesale CD funding. Promontory’s CDARS® product, One-Way Buy^SM, enables the Bank to bid on a weekly basis through a private auction for CD terms ranging from four weeks to 260 weeks (approximately five years) with settlement available each Thursday. At September 30, 2010, the balance of funds acquired through the One-Way Buy product totaled $34.5 million, compared to $25.7 million at September 30, 2009.

Promontory also provides a product, CDARS® Reciprocal, which allows the Bank’s customers to place funds in excess of the FDIC insurance limit with Promontory’s network of participating Banks so that the customer is fully insured for the amount deposited. Promontory provides reciprocating funds to the Bank from funds placed at other banks by their customers. The Bank sets its customers’ interest rates when they place deposits through the network and pays/receives the rate difference to/from the other banks whose reciprocal funds are held by the Bank. The overall impact of this process is that the Bank effectively pays the rate offered to its relationship customer. Therefore, the Bank does not consider these funds to be wholesale or brokered funds. In compliance with FDIC reporting requirements, the Bank reports include reciprocal deposits as brokered deposits in its quarterly Federal Financial Institutions Examination Council Call Report. At September 30, 2010, CDARS® reciprocal deposits totaled $23.0 million, compared to $23.0 million at September 30, 2009.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Management continues to assess interest rate risk internally and by utilizing outside sources. The balance sheet is asset sensitive over a three-month period, meaning that there will be more assets than liabilities immediately repricing as market rates change. Over a period of twelve months, the balance sheet remains slightly asset sensitive. We generally would benefit from increasing market interest rates when we have an asset-sensitive, or a positive interest rate gap, and we would generally benefit from decreasing market interest rates when we have liability-sensitive, or a negative interest rate gap.

From January 1, 2009 through September 30, 2010, participants in our 401(k) Profit Sharing Plan purchased shares of our common stock for an aggregate purchase price of approximately $308,000. These transactions may not have been exempt from the registration requirements of federal securities laws, and we did not seek to register these transactions under such laws. Accordingly, the shares of our common stock purchased in the 401(k) Profit Sharing Plan may have been purchased in violation of federal securities laws and may be subject to rescission. In order to address this issue, we are considering making a rescission offer to the purchasers of those shares; however, we are restricted from making any such offer at this time due to our participation in the CPP. If a rescission offer is made and accepted by all offerees, we could be required to make aggregate payments to those participants of up to approximately $308,000, excluding statutory interest. At this time we are not aware of any claims for rescission against us and we do not expect our aggregate exposure under federal securities laws to exceed approximately $308,000, excluding statutory interest.

Results of Operations

Net loss for the three-month period ended September 30, 2010 was $2.1 million before preferred dividends, compared to a net loss of $68.3 million in the same period of 2009. Net loss available to common shareholders for the three-month period ended September 30, 2010 was $2.8 million. Net loss available to common shareholders for the three-month period ended September 30, 2009 was $69.0 million. Basic and diluted losses per common share were $0.18 for the three-month period ended September 30, 2010. Basic and diluted losses per common share were $4.28 for the three month period ended September 30, 2009. On an annualized basis, third quarter results represent a return on average assets of (0.51)% at September 30, 2010 compared to (12.70)% at September 30, 2009, and a return on average equity of (7.37)% compared to (125.9)% at September 30, 2009. The net loss in the third quarter of 2009 included a $61.6 million goodwill impairment charge.

Net loss for the nine month period ended September 30, 2010 was $872,000 before preferred dividends, compared to a net loss of $79.0 million in the same period of 2009. Net loss available to common shareholders for the nine months ended September 30, 2010 was $3.2 million, compared to a net loss available to common shareholders of $80.7 million for the nine months ended September 30, 2009. Basic and diluted losses per common share were $0.20 for the nine months ended September 30, 2010. Basic and diluted losses per common share were $5.62 for the nine months ended September 30, 2009. On an annualized basis, year-to-date results represent a return on average assets of (0.29)% at September 30, 2010 compared to (5.54)% at September 30, 2009, and a return on average equity of (4.16)% compared to (51.0)% at September 30, 2009.

Net Interest Income

Net interest income, the largest contributor to earnings, decreased $2.1 million or 11.3% to $16.3 million in the third quarter of 2010, compared with $18.4 million in the same period of 2009. The decrease was attributable to an increase in average interest bearing liabilities over 2009 resulting in increased expenses coupled with the compression of loan interest related to increased charge-offs. In addition, the accretion of acquisition related fair market value adjustments

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

decreased from $4.4 million for the quarter ended September 30, 2009 to $494,000 for the quarter ended September 30, 2010. The net interest margin decreased to 3.12% in the third quarter of 2010 from 3.82% in the third quarter of 2009. Excluding the accretion of acquisition related fair market value adjustments, net interest margin for the third quarter of 2010 increased to 3.03% as compared to 2.93% in the third quarter of 2009, as liabilities begin to reprice at lower rates.

Net interest income for the nine months ended September 30, 2010 increased to $48.7 million from $45.8 million when compared to the same period in 2009. Additional net interest income earned by American Community of $8.9 million in the first nine months of 2010 as compared to $4.7 million in 2009 contributed to the increase. This increase was offset by a decrease in the accretion of acquisition related fair market value adjustments of $6.3 million from the prior year. The net interest margin decreased to 3.21% in the first nine months of 2010 from 3.54% in the first nine months of 2009. Excluding the accretion of acquisition related fair market value adjustments, net interest margin for the third quarter of 2010 increased to 3.07% as compared to 2.89% in the third quarter of 2009.

The increase in net interest margin excluding the accretion of fair market value adjustments was due to the repricing of liabilities at lower rates in 2010. The Company is asset sensitive, whereby assets adjust more quickly than liabilities to interest rate changes. When the Wall Street Journal prime rates declined 400 basis points in 2008, this led to assets repricing more quickly than liabilities in 2009. In 2010, liabilities began to reprice more quickly resulting in lower interest expense. The Company maintains an asset-sensitive position with respect to the impact of changing rates on net interest income.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010


	Nine Months Ended September 30, 2010							Nine Months Ended September 30, 2009
	Average				Yield/			Average				Yield/
Interest Rates Earned and Paid	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Federal funds sold	$	2,029	$	3		0.22	%	$	15,946	$	22		0.18	%
Interest-bearing deposits		161,434		297		0.25	%		10,190		31		0.41	%
Investment securities (1)		206,941		6,231		4.03	%		172,597		5,957		4.61	%
Total loans (1)(2)(6)		1,692,518		68,468		5.41	%		1,563,466		64,813		5.54	%

Total interest-earning assets		2,062,922		74,999		4.86	%		1,762,199		70,823		5.37	%

Non-earning assets		140,893							185,963

Total assets	$	2,203,815						$	1,948,162


Interest-bearing liabilities:
Deposits (7):
NOW and money market	$	398,904	$	2,373		0.80	%	$	332,470	$	2,266		0.91	%
Savings		54,874		103		0.25	%		45,822		92		0.27	%
Time certificates		1,251,289		21,196		2.26	%		999,200		19,711		2.64	%

Total interest-bearing deposits		1,705,067		23,672		1.86	%		1,377,492		22,069		2.14	%
Repurchase agreements sold		46,851		294		0.84	%		57,051		506		1.19	%
Borrowed funds (7)		77,273		1,487		2.57	%		82,594		1,635		2.65	%

Total interest-bearing liabilities		1,829,191		25,453		1.86	%		1,517,137		24,210		2.13	%


Noninterest-bearing deposits		207,996							178,193
Shareholders’ equity		154,401							206,860
Other liabilities		12,227							45,972

Total average liabilities and shareholders’ equity	$	2,203,815						$	1,948,162

Net interest income (3) and interest rate spread (5)			$	49,546		3.00	%			$	46,613		3.24	%

Net interest margin (4)						3.21	%						3.54	%


(1)		Yields related to investment securities and loans exempt from Federal income taxes are stated on a fully tax-equivalent basis, assuming a Federal income tax rate of 35%. The calculation includes an adjustment for the nondeductible portion of interest expense used to fund tax-exempt assets.

(2)		The loan average includes loans on which accrual of interest has been discontinued.

(3)		The net interest income is the difference between income from earning assets and interest expense.

(4)		Net interest margin is net interest income divided by total average earning assets.

(5)		Interest spread is the difference between the average interest rate received on earning assets and the average interest rate paid on interest-bearing liabilities.

(6)		Interest income on loans for 2010 and 2009 includes $1,359 and $4,994, respectively, in accretion of fair market value adjustments related to recent mergers

(7)		Interest expense on deposits and borrowings in 2010 and 2009 includes $776 and $3,393, respectively, in accretion of fair market value adjustments related to recent mergers.

Provisions and Allowance for Loan Losses

Adequacy of the allowance or reserve for loan losses of the Bank is a significant estimate that is based on management’s assumptions regarding, among other factors, general and local economic conditions, which are difficult to predict and are beyond the Bank’s control. In estimating these loss reserve levels, management also considers the

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.

The loan loss provision is determined by management’s assessment of the amount of allowance for loan losses to absorb losses inherent in the loan portfolio due to credit deterioration or changes in the risk profile. The allowance for loan losses is created by direct charges to provision expense. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses.

The Bank calculated an allowance for loan losses of $44.7 million at September 30, 2010, or 2.73% of loans held-for-investment, as compared to $48.6 million, or 2.90% of loans held-for-investment, at December 31, 2009 based on the application of its model for the allowance calculation applied to the loan portfolio at each balance sheet date. Decreases in the allowance for loan losses were due to decreases in gross loans as well as a decrease in criticized loan factors. Increases in non-performing loans partially offset these decreases as the weak economic environment continued to take a toll on numerous borrowers’ ability to pay as scheduled. This has resulted in increased loan delinquencies, and in some cases impairment of the value of the collateral used to secure real estate loans and the ability to sell the collateral upon foreclosure. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. In response to this deterioration in real estate loan quality, management is aggressively monitoring its classified loans and is continuing to monitor credits with material weaknesses.

Out of the $44.7 million in total allowance for loans losses at September 30, 2010, the allowance for impaired loans accounted for $15.8 million, up from $9.4 million and $11.0 million from June 30, 2010 and December 31, 2009, respectively. The remaining general allowance, $29.3 million, was attributed to performing loans and was down from $34.9 million at June 30, 2010 and $37.6 million at December 31, 2009. The decrease in the general allowance was driven primarily by a decrease in unimpaired loans and qualitative factors in the model as improvements were made in the calculation of potential losses related to classified loans. The general allowance decrease from June 30, 2010 was primarily due to a decrease in total unimpaired loans, as additional loans became impaired during the quarter. The allowance model is applied to the loan portfolio quarterly to determine the specific allowance balance for impaired loans and the general allowance balance for performing loans grouped by loan type. In 2010, changes were made to incorporate twelve months of default trends and historical charge-offs for classified loans. The use of twelve month data is a better assessment of losses associated with classified loans as opposed to a single data point used in prior quarters to ensure that the analysis incorporates the most current and statistically relevant trends. Improvements in other qualitative factors, including increased controls over credit and better identification of potential losses (as evidenced by the increase in impaired loans), also had an impact on general reserves as management placed greater emphasis on specifically reserving loans in which potential problems had been identified. Also contributing to the decrease in the general allowance for loan losses was a decrease in gross loans as of September 30, 2010 as compared to December 31, 2009. Offsetting the decreases in qualitative factors related to classified loans and decreases in loan balances were increases in other qualitative factors including increasing past dues, nonaccruals and increased charge-offs.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Net loan charge-offs (recoveries) were $22.0 million , or 1.73% (annualized), of average loans, for the nine months ended September 30, 2010 compared to $13.4 million, or 1.14% (annualized), of average loans for the nine months ended September 30, 2009. The increase over last year was caused by some weakening in the economy resulting in an uptick in charge-offs across all loan types. The following is a summary of charge-offs by loan category:


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

Total	$	21,963		1.73	%	$	13,378		1.14	%

Generally, all loans with outstanding balances of $100,000 or greater that have been identified as impaired, are reviewed periodically in order to determine if a specific allowance is required. Charge-off history, credit administration’s determination of loan impairment and risk grades, and other internal and external qualitative factors are primary considerations in calculating the allowance for loan losses. The risk grades are based on several factors including historical data, current economic factors, and assessments of individual credits within specific loan types. Because these factors are dynamic, the provision for loan losses can fluctuate. Periodic credit quality reviews performed on a sample basis are based primarily on analysis of borrowers’ cash flows, with asset values considered only as a second source of payment (except where the sale of the asset is considered to be the primary source of repayment).

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues for the entire life of the loan. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk levels. The loan officer monitors the loan’s performance and credit quality and makes changes to the risk grade as conditions warrant. The Chief Credit Officer coordinates the loan approval process for loans not involving the Board of Directors by delegating authority to certain lenders with Board approval. The Bank Loan Committee is comprised of senior bank management and approves new loans and relationship exposures over certain dollar amounts. Officer loan approval limits are reviewed and approved by the Board of Directors. The Chief Credit Officer is responsible for the credit policy which includes underwriting guidelines and procedures. The Chief Credit Officer is a voting member of the Bank Loan Committee.

Management uses the information developed from the procedures above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in determining the appropriate levels of the allowance for loan losses.

As a part of the continual grading process, loans over $20,000 are assigned a credit risk grade based on their credit quality, which is subject to change as conditions warrant. Any changes in risk assessments as determined by loan officers, credit administrators, regulatory examiners and management are also considered. Management considers certain loans graded “doubtful” or “loss” to be individually impaired and may consider “substandard” loans individually impaired depending on the borrower’s payment history. The Bank measures impairment based upon probable cash flows and the value of the collateral. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. Updated appraisals are required for all impaired loans and typically at renewal or modification of material loans if the appraisal is greater than 12 months old. Impaired loans are identified and evaluated for specific reserves in a periodic analysis of the adequacy of the reserve. In estimating reserve levels, the Bank aggregates the remaining

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

loans not deemed to be impaired and reviews the historical loss experience as well as environmental factors by type of loan as additional criteria to allocate the allowance. The historical loss experience factors applied to “watch list” and “substandard” loans that are not individually impaired are adjusted for other factors that are not necessarily captured in the historical loss ratios. Internal environmental factors applied to performing loan pools include past-due and nonaccrual trends, risk grade migration trends, loan concentrations, and the assessment of underwriting and servicing. Loss factors for past-due and nonaccrual loans increased during the quarter ended September 30, 2010, while loss factors for loan concentrations remained relatively the same. Factors for underwriting and servicing and loan review remained the same. External environmental factors include interest rate trends which remained the same, unemployment rate trends which decreased, and other regulatory conditions stayed constant.

Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of September 30, 2010. No assurance can be given in this regard, however, especially considering the overall weakness in the commercial real estate market in the Bank’s market areas. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and will consider future changes to the allowance that may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the recognition of adjustments to the allowances based on their judgments of information available to them at the time of their examinations.

Management realizes that general economic trends greatly affect loan losses. The recent downturn in the real estate market has resulted in increased loan delinquencies, defaults and foreclosures. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses and our net charge-offs which could have a material adverse effect on our financial condition and results of operations. Assurances cannot be made either (1) that further charges to the allowance account will not be significant in relation to the normal activity or (2) that further evaluation of the loan portfolio based on prevailing conditions may not require sizable additions to the allowance and charges to provision expense.

Our real estate portfolio has approximately $321.9 million of construction loans, $650.2 million of commercial real estate loans, $166.3 million in first lien mortgage loans, $208.7 million in home equity lines of credit, and $4.7 million in junior lien mortgage loans as of September 30, 2010. We consider our construction and junior lien mortgage loans to be the riskiest loans within our real estate portfolio. Construction loans are typically comprised of loans to borrowers for real estate to be developed into properties such as sub-divisions or spec houses. The majority of these borrowers are having financial difficulties. Normally, these loans are repaid with the proceeds from the sale of the developed property. We are also seeing declines in commercial real estate values and a greater degree of strain on these types of real estate loans. The significance of both construction and commercial real estate loans to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. Our analysis has resulted in significant charge-offs and increases in nonaccrual loans. Loans are placed on nonaccrual status when the loan is past due 90 days or when it is apparent that the collection of principal and/or interest is doubtful. Net charge-offs (recoveries) of construction and commercial real estate loans were $11.0 million and $3.7 million, respectively, for the nine months ended September 30, 2010, an increase of $6.5 million and $2.0 million from the nine months ended September 30, 2009.

As of September 30, 2010, $28.6 million of our real estate loans had interest reserves including both borrower and bank funded. Even though the Company has implemented review policies to identify and monitor all loans with interest reserves, there is a risk that an interest reserve could mask problems with a borrower’s willingness and ability to repay the debt consistent with the terms and conditions of the loan obligation.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

As of September 30, 2010, the allowance for loan losses was $44.7 million, or 2.73%, of gross loans held-for-investment. This allowance level compares with $48.6 million, or 2.90%, of loans held-for-investment at December 31, 2009, and $54.3 million, or 3.30%, at September 30, 2009.

Nonperforming Assets

Total nonperforming assets (which includes nonaccrual loans, loans over 90 days past due but still accruing, and foreclosed real estate) increased from $50.6 million to $85.6 million and from 2.39% to 3.77% of total assets as of December 31, 2009 and September 30, 2010, respectively. Total OREO increased from approximately $14.3 million at December 31, 2009 to $22.5 million at September 30, 2010. Total nonaccrual loans increased from $36.3 million, or 2.10% of total loans, at December 31, 2009 to $63.1 million, or 3.67% of total loans, at September 30, 2010. The increases in nonaccrual loans, impaired loans, and OREO are the result of continued economic softening in our markets during the past nine months. We have analyzed our nonperforming loans to determine what we believe is the amount needed to reserve in the allowance for loan losses based on an assessment of the collateral value or discounted cash flows of the loan. We have downgraded loans for which we believe the probability of collection is uncertain and written down OREO where we believe net realizable values have declined. Allowance for nonperforming loans accounted for $15.8 million, up from $11.0 million at year end.

The increase in nonperforming loans from December 31, 2009 to September 30, 2010 is related primarily to continued deterioration in the Bank’s overall construction and commercial real estate loan portfolio. The total number of loans on nonaccrual has increased from 322 to 419 since December 31, 2009. The average non-accrual loan balance was $112,000 and $148,000 as of December 31, 2009 and September 30, 2010, respectively. At September 30, 2010, 90% of the non-accrual loans were secured by real estate.

The largest amount of nonaccrual loans for one customer totaled $4.2 million of land development loans which have been written down to net realizable value during the second quarter, and no specific reserve was assigned to these loans based on the result of the quarterly impairment analysis. Nonaccrual loans also included three other large relationships totaling $2.7 million, $2.3 million and $2.2 million, respectively. The first relationship consists of commercial real estate with specific reserves of $712,466. The second relationship consists of land development loans with $1.7 million of specific allowances. The third relationship is a non real estate loan, with specific allowances of $518,228. These loans were placed in nonaccrual status because of the customers’ inability to pay, collateral deterioration and stressed future industry outlook. Reserves were established based on recent valuations of collateral, industry outlook and the customer’s ability to pay.

Loans more than 90 days past due are typically put on nonaccrual and stop accruing interest. In addition, loans are placed on nonaccrual status if, based on current information, circumstances, or events, we believe it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Nonaccrual loan relationships with balances of at least $100,000 will be considered impaired and evaluated for specific allowances as needed. When a nonaccrual loan has paid according to the schedule for at least six months, or a waiver has been granted by the Chief Credit Officer, and the customer demonstrates the intent and ability to continue to pay in a timely manner, the Bank may begin accruing interest, and it will no longer be considered impaired.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

Impaired loans consist of nonperforming loans, troubled debt restructured loans, and other impaired loans for which regular payments are still received, but some uncertainty exists as to whether or not the full contractual amounts will be collected in accordance with the terms of the loan agreements. The following table is a breakdown of all impaired loans by type:


	September 30, 2010					December 31, 2009
			% of					% of
			Total					Total
	Balance		Loans			Balance		Loans
	(in thousands)
Construction	$	35,448		2.06	%	$	27,786		1.66	%
Commercial, financial, and other		9,711		0.57	%		5,085		0.30	%
Mortgage		8,589		0.50	%		8,891		0.53	%
Commercial real estate		27,992		1.63	%		10,244		0.61	%
Installment loans		505		0.03	%		677		0.04	%
Open end, unsecured		2,436		0.14	%		14		0.00	%

Total impaired	$	84,681		4.93	%	$	52,697		3.14	%

Noninterest Income

Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Total noninterest income decreased approximately $106,000, or 1.9%, comparing the third quarters of 2010 and 2009. A decrease in other service fees of $204,000 offset by an increase in other income of $81,000 made up the majority of the decrease. Service charges on deposit accounts were down by $38,000 or 2.4% and net gains on sales of mortgage loans were down by $68,000 or 2.5%. Total noninterest income for the nine months ended September 30, 2010 was $14.8 million, a decrease of $3.7 million or 20.1%, from $18.5 million for the nine months ended September 30, 2009. A decrease in the gain on sale of mortgages of $4.9 million offset by $0.9 million of gains on sales of available-for-sale securities made up the majority of the decrease. Service charges on deposit accounts were up by $303,000 or 7.3% and other service fees were down by $876,000 or 24.2%. These decreases were offset by the impact of income generated from the American Community acquisition for the full nine months of 2010 as compared to six months in 2009.

The following table presents certain noninterest income accounts that were significantly impacted by the American Community acquisition for the first nine months of the year.


	Nine Months			Increase/			American		Increase/(decrease)
	Ended			(decrease)			Community		excluding American
	September 30, 2010			over 2009			Increase (decrease)		Community region
Service charges on deposit accounts	$	4,463		$	303		$	397	$	(94	)
Other service fees		2,743			(876	)		158		(1,034	)
Net gain on sales of mortgage loans		5,893			(4,859	)		—		(4,859	)
Gains on sales of securities		889			889			—		889
Income on investment in bank owned life insurance		649			(52	)		—		(52	)
Mortgage banking income		169			676			—		676
Other than temporary impairment of securities		(380	)		(25	)		—		(25	)
Other income		379			216			77		139

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

	•		Service charges on deposit accounts decreased for the quarter as total NSF fees (a major component of service charges) decreased $160,000, or 13.6% compared to the second quarter of 2009. ATM service charge income was up by $69,000, or 67.9%. Checking and savings account service charges increased 2.0%.

	•		Service charges on deposit accounts increased for the first nine months of the year as ATM service charge income increased $179,000, or 62.8%. Checking and savings account service charges were also up 9.5%. Offsetting this increase was a decrease in total NSF fees (a major component of service charges) of $51,000, or 1.7%.

The November 2009 amendment to Regulation E of the Electronic Fund Transfer Act, which is effective July 1, 2010, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions unless a consumer consents to the overdraft service for those types of transactions. The impact of the change from Regulation E resulted in a reduction of 16% of such overdraft fees.

	•		The decrease in other service fees for the quarter was due primarily to decreases in commissions and fees on mortgages originated and commissions and fees on mutual funds and annuities. Quarter-to-date, commission and fees on mortgages originated decreased $110,000, or 21.7%, and commissions and fees on mutual funds and annuities decreased $64,000, or 34.4% as compared to the previous year. Year-to-date commission and fees on mortgages originated decreased $592,000, or 37.2%, and commissions and fees on mutual funds and annuities decreased $198,000, or 32.6% as compared to the previous year.

	•		Year-to-date, gain on sale of mortgage loans decreased by $4.9 million or 45.2%. as total loans originated and sold decreased due to lower market-related refinancing activities. Mortgage loans originated decreased from $1,392.0 million in the first nine months of 2009 to $585.0 million in the first nine months of 2010. Net gain in the sale of mortgages for the quarter decreased approximately $68,000, or 2.5%

	•		Income on investment in bank-owned life insurance (“BOLI”) increased by 6.8% during the three month period ended September 30, 2010. Year-to-date income on BOLI decreased by 7.4%.

	•		Mortgage banking income increased approximately $46,000 for the quarter due to an increase in the servicing fees received. Year-to-date mortgage banking income increased $676,000.

	•		Other income increased by approximately $81,000 for the quarter and $216,000 for the year due primarily to other income recorded in relation to the interest rate floors.

Noninterest Expense

Total noninterest expenses were $17.4 million for the third quarter of 2010, compared to $78.7 million in the same period of 2009, a decrease of $61.4 million, or 77.9%. In September 2009, the Company recorded $61.6 million in goodwill impairments. Excluding the goodwill impairment, total noninterest expenses increased $190,000. Noninterest expense includes salaries and employee benefits, occupancy and equipment expenses, and all other operating costs. Management uses the following non-GAAP financial measures because it believes it is useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provides users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. Noninterest expense to average assets for the quarter ended September 30, 2010 and 2009 was 0.77%, and 3.62%, respectively. Efficiency ratios for 2010 and 2009

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

were 71.34% and 329.65%, respectively. The efficiency ratio is the ratio of noninterest expenses less amortization of intangibles to the total of the taxable equivalent net interest income and noninterest income.

Noninterest expenses were $46.9 million for the nine months ended September 30, 2010, compared to $109.6 million for the same period of 2009, a decrease of $62.7 million or 57.2%. Excluding the goodwill impairment charge in September 2009, noninterest expenses for the nine months ended September 30, 2010 decreased $1.1 million or 2.3%.

The following table presents certain noninterest expense accounts that were significantly impacted by the American Community acquisition for the first nine months of the year.


	Nine months		Increase			American			Increase (decrease)
	Ended		(decrease)			Community			excluding American
	September 30, 2009		over 2009			Increase (decrease)			Community region
Salaries and employee benefits	$	21,852	$	164		$	236		$	(72	)
Occupancy expenses		6,220		1,192			539			653
Printing and supplies		702		(147	)		(12	)		(135	)
Data processing expenses		1,077		168			—			168
Communication expenses		1,339		315			176			139
Advertising expenses		744		(202	)		(2	)		(200	)
FDIC assessments		3,240		(193	)		—			(193	)
Loss on other real estate owned		1,784		415			194			221
Other expenses		7,637		(35	)		(214	)		179

•

Quarter-to-date, salaries and employee benefit expenses increased by $486,000, or 6.3%. The major components of this increase are summarized as follows: Salaries and wages increased by $645,000 due to the accrual of severance payments; and salaries and benefit costs directly related to loan originations, which are expensed over the life of the loan, decreased $329,000, increasing salaries even further. Related payroll taxes also increased $80,000 as salaries and wages increased. Offsetting the increases were decreases in Employee incentive of $239,000. Other personnel expenses also decreased $342,000 and commission expenses decreased by $107,000 as mortgage origination production at the Bank decreased.

Year-to-date, salaries and employee benefit expenses increased by $164,000, or 0.8%. The major components of this decrease are summarized as follows: Salaries and wages increased by $1.7 million primarily due to severance payments accrued in the amount of $825,000 as a part of the earnings improvement initiative. These increases also led to an increase in payroll taxes of $287,000. Increases in wages were offset by the reduction in the employee incentive expense of $1.5 million and a reduction in miscellaneous personnel expense of $410,000. Commission expenses decreased by $307,000 as mortgage origination production at the Bank decreased.

•

Occupancy and equipment expenses increased by $440,000, or 23.7% for the quarter and $1.2 million or 23.7% year-to-date. The increase is primarily attributable to the addition of the American Community branches and increases in property taxes.

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report September 30, 2010

	•		Printing and supplies decreased by $176,000, or 51.0%, comparing the third quarter 2010 with the third quarter 2009 as consolidation of American Community vendors and supplies is completed. Year-to-date printing and supplies decreased $147,000, or 17.4%.

	•		Data processing expense increased $31,000, or 8.8% for the quarter $168,000, or 18.5% for the year, due primarily to increases in average deposits as well as the outsourcing of nightly processing to an outside company beginning in June 2009.

	•		Communication expense increased $73,000 or 19.7% for the third quarter compared to the third quarter of 2009. Year-to-date communication expense increased $315,000, or 30.8%, with $176,000 attributable to American Community expenses. Excluding American Community, communication expense increased $139,000.

	•		Advertising and marketing expense increased $5,000, or 1.4% for the quarter and decreased $202,000, or 21.4% year-to-date. The decreases are due to the fact that in the prior year, additional advertising and marketing campaigns were initiated due to the merger with American Community, and the introduction of new products.

	•		FDIC assessment expenses increased $149,000 for the quarter and decreased $193,000 for the year.

	•		Loss on sale of other real estate owned decreased $633,000 compared to the third quarter of 2009. This loss increased to $1.8 million for the first nine months of 2010 as compared to $1.4 million for the first nine months of 2009 due to increased foreclosures and significant declines in real estate values over the past year.

	•		Quarter-to-date other operating expenses (including attorney fees, accounting fees, loan collection fees, acquisition costs and amortization of core deposit intangibles) decreased approximately $184,000, or 4.7%. The decrease was driven primarily by $292,000 of non-recurring acquisition costs related to the American Community merger in 2009, a decrease in attorney fees of $246,000 and a decrease in checking account losses of $113,000. These decreases were offset by an increase of $491,000 in expenses related to other real estate owned.

			Year-to-date other operating expenses (including attorney fees, accounting fees, loan collection fees and amortization of core deposit intangibles) decreased approximately $2.8 million or 22.2%. The decrease was driven by non-recurring 2009 acquisition costs of $2.6 million as well as a decrease in attorney fees of $546,000.

Income Tax Expense

Income tax benefit for the third quarter of 2010 was $1.3 million compared to $4.7 million in the third quarter of 2009, a decrease of 72.5%. The effective tax rate for the third quarter of 2010 was (38.5)% compared to (6.5)% for the same period of 2009. The decrease is attributable to a decrease in net losses incurred in the third quarter of 2010 compared to the net loss incurred in the third quarter of 2009. The goodwill impairment recorded in 2009 had no impact on the effective rate for the quarter.

Income tax benefit for the nine months ended September 30, 2010 was $566,000 compared to income tax benefit of $11.5 million for the nine months ended September 30, 2009, a decrease of 95.1%. The decrease in income tax benefit was due to a decrease in net losses incurred for the first nine months of 2010 as compared to net losses for the first nine months of 2009. The effective tax rate for the nine months ended September 30, 2010 was (39.3)% compared to (12.7)% for the same period of 2009. The goodwill impairment recorded in 2009 had no impact on the effective rate.

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

Our net deferred tax asset was $11.9 million and $12.4 million at September 30, 2010 and December 31, 2009, respectively. This decrease is related to the elimination of certain temporary differences. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including recent earnings trends and projected earnings, asset quality, etc. As of September 30, 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset and need for valuation allowance. Significant negative trends in credit quality, losses from operations, etc. could impact the realizability of the deferred tax asset in the future.

Management believes that the Bank’s strong history of earnings since the inception of the bank, and particularly over the past 10 years, shows the Company has been profitable historically. The Company has no history of expiration of loss carryforwards, and improvements in both net interest margin and the stabilization of credit losses should enable the Company to continue these earnings trends. We believe our forecasted earnings over the next three years provides positive evidence to support a conclusion that a valuation allowance is not needed. Management’s past projections have proven to be close to actual results verifying the reliability of management’s forecasting methodology. Management closely monitors the previous twelve quarters of income (loss) before income taxes in determining the need for a valuation allowance which is called the cumulative loss test. Negatively, in 2009 we incurred a loss which did result in the failure of the cumulative loss test; however, excluding the goodwill impairment, as it is a loss of infrequent nature and is an aberration rather than a continuing condition, the Company passed the cumulative loss test by $4.6 million as of December 31, 2009. As of September 30, 2010, the Company did not pass the cumulative loss test by $14.1 million; although, with the pre-tax impact of management’s considerations, the Company feels confident that deferred tax assets are more likely than not to be realized. Although the Company had positive earnings in the first and second quarters of 2010, a net loss was recorded for the third quarter. If this trend continues and negative evidence grows, valuation allowances may be necessary in the future. The 2010 deficit is reflected in the following table:

September 30, 2010 Cumulative Loss Test



	2007*		2008		2009			2010**			Total
	(Amounts in thousands)
Income (loss) before income taxes	$	4,551	$	5,108	$	(83,933	)	$	(1,437	)	$	(75,711	)
Goodwill impairment		—		—		61,566			—			61,566

	$	4,551	$	5,108	$	(22,367	)	$	(1,437	)	$	(14,145	)


*		4th Quarter of 2007

**		First nine months of 2010

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

The Company’s loss carryforwards for the tax period ending December 31, 2009 include net operating loss carryforwards generated in the acquisition of Cardinal State Bank in 2008 and American Community Bank in 2009. The expiration of the loss carryforwards for the tax period ending December 31, 2009 are as follows:


			Tax Benefit
	Net Operating Loss		Recorded at
	Carryforward at		September 30,
	September 30, 2010		2010		Expiration
	(Amounts in thousands)
Cardinal State Bank acquisition	$	2,424	$	848		2029
American Community Bank acquisition		1,361		463		2030

Total Loss Carryforwards	$	3,785	$	1,311

Deferred tax assets of $15.3 million reduced by $3.4 million in carryback capacity, resulted in a net deferred tax asset of approximately $11.9 million as of September 30, 2010. Deferred tax assets of $19.3 million as of December 31, 2009, reduced by $6.9 million in carryback capacity, resulted in a net deferred tax asset of approximately $12.4 million. Management believes that it is more likely than not that the Company will return to profitability and generate taxable income in the near term sufficient to realize the remaining $11.9 million in deferred tax assets. However, if negative trends occur with credit quality and earnings, valuation allowances may be needed in future quarters.

The Company is not relying upon any tax planning strategies or offset of deferred tax liabilities due to the strength of the positive evidence in management’s evaluation of the Company’s outlook.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations. The information contained in Item 2 in the section captioned “Liquidity, Interest Rate Sensitivity and Market Risk” is incorporated herein by reference. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities. The acquisition of American Community and expansion into new market areas in North and South Carolina have marketing risks that are mitigated by retaining the American Community brand name in these markets. Credit risk associated with loans acquired in the merger are part of the overall discussion of credit risk in the sections captioned “Provision and Allowance for Loan Losses” and “Non-Performing Assets.”

The primary objective of asset and liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the next twelve months. Following a period of rate increases (or decreases) net interest income will increase (or decrease) over both a three-month and a twelve-month period.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

Part II. Other Information

Item 1. Legal Proceedings

We are not a party to, nor are any of our properties subject to, any material legal proceedings, other than legal proceedings that we believe are routine litigation incidental to our business.

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

Item 6. Exhibits


Exhibit #		Description

3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i) to the Current Report on Form 8K dated July 1, 2006)

3.1.1		Articles of Amended to the Amended and Restated Articles of Incorporation

31.1		Rule 13a-14(a)/15d-14(a) Certification

31.2		Rule 13a-14(a)/15d-14(a) Certification

32.1		Section 1350 Certification

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

Signatures

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Yadkin Valley Financial Corporation
BY:	/s/ William A. Long
	William A. Long, President and Chief Executive Officer


BY:	/s/ Jan H. Hollar
	Jan H. Hollar, Principal Accounting Officer,
	Executive Vice President and Chief Financial Officer

October 29, 2010

Yadkin Valley Financial Corporation

Form 10-Q Quarterly Report September 30, 2010

YADKIN FINANCIAL Corp - FORM 10-Q - October 29, 2010

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