U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010. |
Commission File Number 0001366367
Yadkin Valley Financial Corporation
(Exact name of registrant as specified in its charter)
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North Carolina
(State or other jurisdiction of
incorporation or organization)
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20-4495993
(I.R.S. Employer Identification No.) |
209 North Bridge Street
Elkin, North Carolina 28621-3404
(Address of principal executive offices)
(336) 526-6300
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
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Title of each class
Common Stock, Par Value $1.00 Per Share
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Exchange on which registered
The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes [ ]
No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes [ ]
No [ X ]
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 [ X ]
No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, 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 [ ]
No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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 the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ] |
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Accelerated filer [ X ] |
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Non-accelerated filer [ ] (Do not check if smaller reporting company) |
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Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes [ ]
No [ X ]
The aggregate market value of the voting stock of the registrant held by non-affiliates was
approximately $52 million based on the closing sale price of $3.38 per share on June 30, 2010. For
purposes of the foregoing calculation only, all directors and executive officers of the registrant
have been deemed affiliates. The number of shares of common stock outstanding as of February 28,
2011 was 16,277,640.
Documents Incorporated by Reference
Portions of the Registrants Definitive Proxy Statement for its 2011 Annual Meeting of Shareholders
are incorporated by reference into Part III, Items 10-14.
Form 10-K Table of Contents
PART I
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by reference in this document,
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, and which
statements are inherently subject to risks and uncertainties. These statements are based on many
assumptions and estimates and are not guarantees of future performance. Forward looking statements
are statements that include projections, predictions, expectations or beliefs about future events
or results or otherwise are not statements of historical fact. Such statements are often
characterized by the use of qualifying words (and their derivatives) such as may, would,
could, should, will, expect, anticipate, predict, project, potential, continue,
assume, believe, intend, plan, forecast, goal, estimate, or other statements
concerning opinions or judgments of Yadkin Valley Financial Corporation, its subsidiary bank, and
its management about future events. Factors that could influence the accuracy of such forward
looking statements include, but are not limited to, the financial success or changing strategies of
the Banks customers or vendors, actions of government regulators, the level of market interest
rates, and general economic conditions.
Potential risks and uncertainties that could cause our actual results to differ materially
from those anticipated in any forward-looking statements include, but are not limited to, those
described below under Item 1A- Risk Factors and the following:
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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; |
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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; |
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the rate of delinquencies and amount of loans charged-off; |
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the adequacy of the level of our allowance for loan losses; |
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the amount of our loan portfolio collateralized by real estate, and the weakness in
the commercial real estate market; |
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our efforts to raise capital or otherwise increase our regulatory capital ratios; |
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the impact of our efforts to raise capital on our financial position, liquidity,
capital, and profitability; |
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adverse changes in asset quality and resulting credit risk-related losses and
expenses; |
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increased funding costs due to market illiquidity, increased competition for
funding, and increased regulatory requirements with regard to funding; |
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significant increases in competitive pressure in the banking and financial services
industries; |
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changes in the interest rate environment which could reduce anticipated or actual
margins; |
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changes in political conditions or the legislative or regulatory environment,
including the effect of the recent financial reform legislation on the banking and
financial services industries; |
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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; |
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changes occurring in business conditions and inflation; |
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changes in technology; |
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changes in monetary and tax policies, including confirmation of the income tax
refund claims received by the Internal Revenue Service; |
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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; |
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changes in deposit flows; |
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changes in accounting policies and practices, as may be adopted by the regulatory
agencies, as well as the Public Company Accounting Oversight Board and the Financial
Accounting Standards Board; |
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risks associated with income taxes, including the potential for adverse adjustments
and the inability to reverse valuation allowances on deferred tax assets; |
1
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our ability to maintain internal control over financial reporting; |
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our reliance on secondary sources such as Federal Home Loan Bank advances, the Board
of Governors of the Federal Reserve Discount Window borrowings, sales of securities and
loans, federal funds lines of credit from correspondent banks and out-of-market time
deposits, to meet its liquidity needs; |
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loss of consumer confidence and economic disruptions resulting from terrorist
activities or other military actions; |
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our ability to attract and retain key personnel; |
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our ability to retain our existing customers, including our deposit relationships; |
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changes in the securities markets; and |
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other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission (the SEC). |
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
our Company. During 2008, 2009 and continuing into 2010, the capital and credit markets
experienced unprecedented levels of extended volatility and disruption. 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, as well as our ability to raise
capital or other funding for liquidity and business purposes.
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.
Item 1 - Business
Corporate history and address. Yadkin Valley Financial Corporation (the Company or Yadkin)
is a bank holding company incorporated under the laws of North Carolina to serve as the holding
company for Yadkin Valley Bank and Trust Company (the Bank), a North Carolina chartered
commercial bank with its deposits insured by the Federal Deposit Insurance Corporation (FDIC) up
to applicable limits. The Bank is not a member of the Federal Reserve System (Federal Reserve).
The Bank began operations in 1968. Effective July 1, 2006, the Bank was reorganized and the Bank
became the Companys wholly owned subsidiary.
On July 31, 2002, the Bank acquired Main Street BankShares, Inc. and its subsidiary, Piedmont
Bank, of Statesville, North Carolina and continues to operate the former Piedmont Bank offices in
Iredell and Mecklenburg counties in North Carolina under the assumed name Piedmont Bank, a
division of Yadkin Valley Bank and Trust Company. On January 1, 2004, the bank acquired High
Country Financial Corporation, and its subsidiary, High Country Bank, of Boone, North Carolina and
continues to operate the former High Country Bank offices in Watauga and Avery counties in North
Carolina, under the assumed name High Country Bank, a division of Yadkin Valley Bank and Trust
Company. On October 1, 2004, the Bank acquired Sidus Financial, LLC (Sidus), a mortgage lender
that continues to operate as a wholly owned subsidiary. The Bank acquired Cardinal State Bank, of
Durham, North Carolina (Cardinal) on March 31, 2008 and operates the former Cardinal State Bank
offices in Durham, Granville and Orange Counties, North Carolina, under the assumed name Cardinal
State Bank, a division of Yadkin Valley Bank and Trust Company. On April 16, 2009, the Company
acquired American Community Bancshares, Inc., and its subsidiary, American Community Bank of
Monroe, North Carolina (American Community) and continues to operate the former American
Community offices in Union and Mecklenburg counties in North Carolina and York and Cherokee
counties in South Carolina, under the assumed name American Community Bank, a division of Yadkin
Valley Bank and Trust Company. We operate in the central piedmont, research triangle area and the
northwestern region of North Carolina and the central piedmont area of South Carolina. Our common
stock is listed on The Nasdaq Global Select Market under the trading symbol YAVY.
The American Community acquisition added approximately $529.4 million in tangible assets and
$5.0 million in losses to the banking segment, after allocation of overhead costs, for the year
ended December 31, 2009.
2
On November 1, 2007, the Company established a Delaware trust subsidiary, Yadkin Valley
Statutory Trust I (the Trust), which completed the sale of $25,000,000 of trust preferred
securities. The Trust issued the 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. Yadkin Valley Statutory Trust I used the proceeds from
the sale of the securities to purchase the Companys junior subordinated deferrable interest notes
due 2037 (the Debenture). The net proceeds from the offering were used by the Company in
connection with the acquisition of Cardinal State Bank, and for general corporate purposes.
The Debenture was issued pursuant to a Junior Subordinated Deferrable Interest Debenture
between the Company and Wilmington Trust Company dated November 1, 2007 (the Indenture), which
has been previously filed with the SEC. The terms of the Debenture are substantially the same as
the terms of the trust preferred securities. Interest payments by the Company will be used by the
trust to pay the quarterly distributions to the holders of the trust preferred securities. The
Indenture permits the Company to redeem the Debenture after five years.
The terms of the trust preferred securities are governed by an Amended and Restated
Declaration of Trust, dated November 1, 2007, between the Company, as sponsor, Wilmington Trust
Company, as institutional trustee, Wilmington Trust Company, as Delaware trustee, and the
Administrators named therein, a copy of which has been previously filed with the SEC.
Pursuant to a Guarantee Agreement dated November 1, 2007, between the Company and Wilmington
Trust Company, the Company has guaranteed the payment of distributions and payments on liquidation
or redemption of the trust preferred securities. The obligations of the Company under the
Guarantee Agreement, a copy of which has been filed with the SEC, are subordinate to all of the
Companys senior debt.
In addition to the $25.0 million in trust preferred securities issued in 2007, the Company
acquired $10.0 million in trust preferred securities in the American Community acquisition. The
trust preferred securities pay cumulative cash distributions quarterly at a rate priced off the
90-day LIBOR plus 280 basis points. The fair market value adjustment associated with the trust
preferred securities acquired in the American Community acquisition was $1.1 million at December
31, 2009.
On January 16, 2009, pursuant to the Capital Purchase Program (the CPP) established by the
U.S. Department of the Treasury (Treasury) under the Emergency Economic Stabilization Act of 2008
(the EESA), the Company entered into a Letter Agreement with Treasury dated January 16, 2009
pursuant to which the Company issued and sold to Treasury (i) 36,000 shares of the Companys Fixed
Rate Cumulative Perpetual Preferred Stock, Series T, having a liquidation preference of $1,000 per
share (Series T Preferred Stock), and (ii) a ten-year warrant to purchase up to 385,990 shares of
the Companys common stock, par value $1.00 per share, at an initial exercise price of $13.99 per
share, for an aggregate purchase price of $36,000,000 in cash. For a more detailed discussion of
the transaction, see the Companys Form 8-K filed with the SEC on January 20, 2009.
On July 24, 2009, again pursuant to the CPP, the Company issued and sold to Treasury (i)
13,312 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series T-ACB,
having a liquidation preference of $1,000 per share (the Series T-ACB Preferred Stock), and (ii)
a ten-year warrant to purchase up to 273,534 shares of the Companys common stock, par value $1.00
per share, at an initial exercise price of $7.30 per share , for an aggregate purchase price of
$13,312,000 in cash. The terms of the Series T-ACB Preferred Stock are the same as the Series T
Preferred Stock issued to Treasury on January 16, 2009. For a more detailed discussion of the
transaction, see the Companys Form 8-K filed with the SEC on July 27, 2009.
During 2009, the Bank established five North Carolina limited liability companies (LLCs),
Green Street I, LLC, Green Street II, LLC, Green Street III, LLC, Green Street IV, LLC and Green
Street V, LLC. The purpose of LLCs is to hold, maintain and sell real estate properties acquired
by the Bank.
The Companys principal executive offices are located at 209 North Bridge Street, Elkin, North
Carolina 28621-3404, and the telephone number is (336) 526-6300. Our periodic securities reports
on Forms 10-K and 10-Q and our current securities reports on Form 8-K are available on our website
at www.yadkinvalleybank.com- under the heading About Us News & Press Releases. The
information on our website is not incorporated by reference into this Annual Report on Form 10-K.
3
Business. The Banks operations are primarily retail oriented and directed toward individuals
and small and medium-sized businesses located in our banking market and, to a lesser extent, areas
surrounding our immediate banking market. We provide most traditional commercial and consumer
banking services, but our principal activities are the taking of demand and time deposits and the
making of consumer and commercial loans. The Banks primary source of revenue is the interest
income derived from its lending activities.
At December 31, 2010, the Company had total assets of $2,300.6 million, net loans held for
investment of $1,562.8 million, deposits of $2,020.4 million, and shareholders equity of $147.5
million. The Company had a net loss to common shareholders of $3.2 million and diluted losses per
share of $0.20 for the year ended December 31, 2010. The Company had a net loss to common
shareholders of $77.5 million and net income of $3.9 million and diluted losses per share of $5.23
and diluted earnings per share of $0.34 for the years ended December 31, 2009 and 2008,
respectively. Assets and net loans acquired in the American Community acquisition in 2009 were
$546.1 million and $416.3 million, respectively. For further information on the American Community
acquisition, refer to Note 2 of our consolidated financial statements. The decrease in net loss
from 2009 to 2010 in the Bank segment was a direct result of the write-off of goodwill in the
amount of $61.6 million in the prior year. In addition, provisions for loan losses also decreased
$24.1 million. The Sidus segment contributed $2.5 million to net income in 2010 and $7.9 million
in 2009. The Sidus segment decrease in net income is due primarily to a decrease in refinance
activity. See Note 20 to the Consolidated Financial Statements for segment information for the past
three years.
Business Offices. Yadkin operates 38 full-service banking offices including 11 locations
acquired in the American Community merger and is headquartered in Elkin, North Carolina. We
operate the offices in Jefferson and West Jefferson (Ashe County), Wilkesboro and North Wilkesboro
(Wilkes County), Elkin (Surry County), East Bend, Jonesville and Yadkinville (Yadkin County), and
Pfafftown (Forsyth County) under the Yadkin name. The Bank has a loan production office in
Wilmington, NC (New Hanover County) operating under the Yadkin name. The offices in Statesville and
Mooresville (Iredell County), and Cornelius and Huntersville (Mecklenburg County) are operated
under the Piedmont Bank assumed name. The offices in Boone (Watauga County) and Linville (Avery
County) are operated under the High Country Bank assumed name. We operate three offices in Durham
(Durham County) and one office in Hillsborough (Orange County) and one office in Creedmoor
(Granville County) under the Cardinal State Bank assumed name. Offices in Monroe, Indian Trail and
Marshville (Union County), Charlotte and Mint Hill (Mecklenburg County); as well as offices in Tega
Cay, South Carolina (York County) and Gaffney and Blacksburg, South Carolina (Cherokee County) are
operated under the American Community Bank assumed name.
Banking Market. The Banks current banking market consists of the central piedmont counties
(2009 population) of Mecklenburg (914,000), Union (199,000) and Iredell (158,000), the research
triangle counties of Durham (270,000), Orange (129,000) and Granville (58,000) and the northwestern
counties of Ashe (26,000), Avery (18,000), Forsyth (360,000), Surry (72,000), Watauga (45,000),
Wilkes (67,000) and Yadkin (38,000) in North Carolina and the upstate counties of South Carolina of
York (227,000) and Cherokee (55,000) counties, and to a lesser extent, the surrounding areas (the
Yadkin Market). The Yadkin Market is located along Interstate 77 in the Charlotte metropolitan
area, and west of the Piedmont Triad area of North Carolina to the northwestern border with
Virginia and Tennessee. The acquisition of Cardinal State Bank added Orange, Granville and Durham
Counties along Interstates 40 and 85 in the Triangle area of central North Carolina to our market
area.
Yadkins market area is well diversified and strong. The 15 counties in which our branches
are located had an estimated 2009 population of almost 2.6 million people. Median family income in
2010 for these counties ranged from a low of $35,000 in mostly rural Wilkes County to a high of
almost $62,000 in Union County. Over 99% of the work force is employed in nonagricultural wage and
salary positions. The government employs approximately 9% of the work force. The major
non-governmental employment sectors were retail trade (11%), health and social assistance (13%),
manufacturing (12%), accommodation and food services (9%), construction services (6%) and
administrative and waste services (7%). (Source-NC Dept of Commerce & US Census Bureau).
Competition. Commercial banking in North Carolina and South Carolina is extremely competitive
due to state laws that allow statewide branching. North Carolina is the home of one of the ten
largest commercial banks in the United States, which has branches located in the Yadkin Market.
4
The following table summarizes Yadkins share of the deposit market in each of the fifteen counties
as of June 30, 2010.
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Yadkin Valley |
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Yadkin Valley |
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Bank % of |
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Total Number of |
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Yadkin Valley |
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Total Amount of |
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Bank Deposits |
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Market |
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Branches |
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Bank Branches |
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Deposits (000s) |
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(000s) |
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Deposits |
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North Carolina: |
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Ashe |
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13 |
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3 |
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$ |
553,142 |
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$ |
169,078 |
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31 |
% |
Avery |
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9 |
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1 |
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251,534 |
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17,802 |
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7 |
% |
Durham |
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70 |
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4 |
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4,967,151 |
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198,084 |
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4 |
% |
Forsyth |
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103 |
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1 |
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13,230,606 |
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50,247 |
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<1 |
% |
Granville |
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11 |
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1 |
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538,587 |
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23,927 |
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4 |
% |
Iredell |
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58 |
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6 |
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2,183,062 |
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275,375 |
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13 |
% |
Mecklenburg |
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239 |
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6 |
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81,519,486 |
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262,095 |
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<1 |
% |
Surry |
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29 |
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2 |
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1,326,573 |
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208,021 |
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16 |
% |
Union |
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42 |
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5 |
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1,542,608 |
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188,558 |
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12 |
% |
Watauga |
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21 |
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4 |
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1,115,899 |
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145,295 |
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13 |
% |
Wilkes |
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21 |
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2 |
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776,292 |
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117,618 |
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15 |
% |
Yadkin |
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11 |
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3 |
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478,669 |
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185,392 |
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39 |
% |
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South Carolina: |
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Cherokee |
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14 |
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3 |
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484,788 |
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90,530 |
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19 |
% |
York |
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56 |
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1 |
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2,047,792 |
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23,862 |
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1 |
% |
Many of these competing banks have capital resources and legal lending limits substantially in
excess of those available to us. Thus we have significant competition in our market for deposits
from other depository institutions.
The Bank also competes for deposits in the Yadkin Market with other financial institutions
such as credit unions, consumer finance companies, insurance companies, brokerage companies,
agencies issuing United States government securities and other financial institutions with varying
degrees of regulatory restrictions. In its lending activities, Yadkin competes with all other
financial institutions as well as consumer finance companies, mortgage companies and other lenders.
Credit unions have been permitted to expand their membership criteria and expand their loan
services to include such traditional bank services as commercial lending. We expect competition in
the Yadkin Market to continue to be significant.
We believe we have sufficient capital to support our operations for the foreseeable future.
We may at some point; however, need to raise additional capital. Our ability to raise additional
capital, if needed, will depend in part on conditions in the capital markets at that time, which
are outside of our control, and on our financial performance. We intend to continue to serve the
financial needs of consumers and small-to-medium size businesses located primarily in the Yadkin
Market. Our lending efforts will be focused on making quality consumer loans, commercial loans to
small to medium sized businesses, and home equity loans. While our deposits and loans are derived
primarily from customers in our banking market, we make loans and have deposit relationships with
individual and business customers in areas surrounding our immediate banking market. We offer a
full range of deposit products to include checking and savings accounts, money market accounts,
certificates of deposit and individual retirement accounts. We rely on offering competitive
interest rates and unmatched customer service to accomplish our deposit objectives.
The Bank strives to offer its products and services in the manner that meets its customers
expectations. For those customers who prefer to do their banking in a hands-on, face-to-face
manner, the Bank offers exceptional personal service. Customers who want to do their banking when
and where they choose are able to utilize the automated teller machines, credit and debit card
programs, and a full range of internet-based banking options.
Supervision and Regulation. Banking is a complex, highly regulated industry. The primary
goals of banking regulations are to maintain a safe and sound banking system and to facilitate the
conduct of sound monetary policy. In furtherance of these goals, Congress and the North Carolina
General Assembly have created largely autonomous regulatory agencies and enacted numerous laws that
govern banks, their holding companies and the banking industry. The descriptions of and references
to the statutes and regulations below are brief summaries and do not purport to be complete. The
descriptions are qualified in their entirety by reference to the specific statutes and regulations
discussed.
5
Recent Regulatory Developments. The following is a summary of recently enacted laws and
regulations that could materially impact our business, financial condition or results of
operations. This discussion should be read in conjunction with the remainder of the Supervision
and Regulation section of this Annual Report on Form 10-K.
Markets in the United States and elsewhere have experienced extreme volatility and disruption
over the past three years. These circumstances have exerted significant downward pressure on
prices of equity securities and virtually all other asset classes, and have resulted in
substantially increased market volatility, severely constrained credit and capital markets,
particularly for financial institutions, and an overall loss of investor confidence. Loan
portfolio performances have deteriorated at many institutions resulting from, among other factors,
a weak economy and a decline in the value of the collateral supporting their loans. Dramatic
slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures
and unemployment, have created strains on financial institutions. Many borrowers are now unable to
repay their loans, and the collateral securing these loans has, in some cases, declined below the
loan balance. In response to the challenges facing the financial services sector, several
regulatory and governmental actions have been announced including:
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The EESA, approved by Congress and signed by former President Bush on October 3,
2008, which, among other provisions, allowed the Treasury to purchase troubled assets
from banks, authorized the SEC to suspend the application of mark-to-market accounting,
and raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through
December 31, 2013 which has since been permanently increased; |
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On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for
deposit insurance; |
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On October 14, 2008,
the Treasury announced the creation of a new program, the CPP,
pursuant to which the Treasury purchased senior preferred stock and warrants for common
stock from participating institutions; |
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Following a systemic risk determination, the FDIC established its Temporary
Liquidity Guarantee Program (TLGP) in October 2008. Under the interim rule for the
TLGP, there are two parts to the program: the Debt Guarantee Program and the
Transaction Account Guarantee Program. Eligible entities generally are participants
unless they exercise an opt-out right in timely fashion: |
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Debt Guarantee Program (DGP)- Under the DGP, the FDIC guarantees certain
senior unsecured debt issued by participating entities. The DGP initially
permitted participating entities to issue FDIC-guaranteed senior unsecured debt
until June 30, 2009, with the FDICs guarantee for such debt to expire on the
earlier of the maturity of the debt (or the conversion date, for mandatory
convertible debt) or June 30, 2012. To reduce the potential for market
disruptions at the conclusion of the DGP and to begin the orderly phase-out of
the program, on May 29, 2009 the FDIC issued a final rule that extended for four
months the period during which certain participating entities could issue
FDIC-guaranteed debt. All insured depository institutions and those other
participating entities that had issued FDIC-guaranteed debt on or before April
1, 2009 were permitted to participate in the extended DGP without application to
the FDIC. Other participating entities that received approval from the FDIC also
were permitted to participate in the extended DGP. The expiration of the
guarantee period was also extended from June 30, 2012 to December 31, 2012. As
a result, all such participating entities were permitted to issue
FDIC-guaranteed debt through and including October 31, 2009, with the FDICs
guarantee expiring on the earliest of the debts mandatory conversion date (for
mandatory convertible debt), the stated maturity date, or December 31, 2012. |
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Transaction Account Guarantee Program (TAGP)- For the TAGP, eligible
entities are all FDIC-insured institutions. Under the TAGP, the FDIC provides
unlimited deposit insurance coverage for noninterest-bearing transaction
accounts (typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts. Throughout 2010, participating
institutions paid fees of 15 to 25 basis points (annualized), depending on the
Risk Category assigned to the institution, on the balance of each covered
account in excess of $250,000. Coverage under the TAGP was in addition to
and separate from the basic coverage available under the FDICs general deposit
insurance rules. As a result of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) that was signed into law on July 21, 2010,
the voluntary TAGP program ended on December 31, 2010, and all institutions will
be required to provide full deposit insurance on
noninterest-bearing transaction accounts until December 31, 2012. There will not
be a separate assessment for this as there was for institutions participating in
the TAGP program. |
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On February 17, 2009, the American Recovery and Reinvestment Act (the Recovery
Act) was signed into law in an effort to, among other things, create jobs and
stimulate growth in the United States economy. The Recovery Act specifies
appropriations of approximately $787 billion for a wide range of Federal programs and
will increase or extend certain benefits payable under the Medicaid, unemployment
compensation, and nutrition assistance programs. The Recovery Act also reduces
individual and corporate income tax collections and makes a variety of other changes to
tax laws. The Recovery Act also imposes certain limitations on compensation paid by
participants in the TARP; |
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On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The
Dodd-Frank Act will likely result in dramatic changes across the financial regulatory
system, some of which become effective immediately and some of which will not become
effective until various future dates. Implementation of the Dodd-Frank Act will
require many new rules to be made by various federal regulatory agencies over the next
several years. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act
until final rulemaking is complete, which could have a material adverse impact either
on the financial services industry as a whole or on our business, financial condition,
results of operations, and cash flows. Provisions in the legislation that affect
consumer financial protection regulations, deposit insurance assessments, payment of
interest on demand deposits, and interchange fees could increase the costs associated
with deposits and place limitations on certain revenues those deposits may generate.
The Dodd-Frank Act includes provisions that, among other things, will: |
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Centralize responsibility for consumer financial protection by creating a new
agency, the Bureau of Consumer Financial Protection, responsible for
implementing, examining, and enforcing compliance with federal consumer
financial laws. |
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Create the Financial Stability Oversight Council that will recommend to the
Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk
management and other requirements as companies grow in size and complexity. |
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Provide mortgage reform provisions regarding a customers ability to repay,
restricting variable-rate lending by requiring that the ability to repay
variable-rate loans be determined by using the maximum rate that will apply
during the first five years of a variable-rate loan term, and making more loans
subject to provisions for higher cost loans, new disclosures, and certain other
revisions. |
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Change the assessment base for federal deposit insurance from the amount of
insured deposits to consolidated assets less tangible capital, eliminate the
ceiling on the size of the Deposit Insurance Fund (DIF) of the FDIC, and
increase the floor on the size of the DIF, which generally will require an
increase in the level of assessments for institutions with assets in excess of
$10 billion. |
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Make permanent the $250,000 limit for federal deposit insurance and provide
unlimited federal deposit insurance for
noninterest-bearing demand transaction accounts at all insured depository
institutions. |
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Implement corporate governance revisions, including with regard to executive
compensation and proxy access by shareholders, which apply to all public
companies, not just financial institutions. |
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Repeal the federal prohibitions on the payment of interest on demand
deposits, thereby permitting depository institutions to pay interest on business
transactions and other accounts. |
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Amend the Electronic Fund Transfer Act (EFTA) to, among other things, give
the Federal Reserve the authority to establish rules regarding interchange fees
charged for electronic debit transactions by payment card issuers having assets
over $10 billion and to enforce a new statutory requirement that such fees be
reasonable and proportional to the actual cost of a transaction to the issuer. |
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Eliminate the Office of Thrift Supervision (OTS) one year from the date of
the new laws enactment. The Office of the Comptroller of the Currency (OCC),
which is currently the primary federal regulator for national banks, will become
the primary federal regulator for federal thrifts. In addition, the Federal
Reserve will supervise and regulate all savings and loan holding companies that
were formerly regulated by the OTS. |
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On September 27, 2010, President Obama signed into law the Small Business Jobs Act
of 2010 (the Act). The Small Business Lending Fund (the SBLF), which was enacted
as part of the Act, is a $30 billion fund that encourages lending to small businesses
by providing Tier 1 capital to qualified community banks with assets of less than $10
billion. On December 21, 2010, the U.S. Treasury published the application form, term
sheet and other guidance for participation in the SBLF. Under the terms of the SBLF,
the Treasury will purchase shares of senior preferred stock from banks, bank holding
companies, and other financial institutions that will qualify as Tier 1 capital for
regulatory purposes and rank senior to a participating institutions common stock. The
application deadline for participating in the SBLF is March 31, 2011. Based on the
program criteria, we expect to apply to convert our Series T and Series T-ACB Preferred
Stock into securities under the SBLF; |
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In November 2010, the Federal Reserves monetary policymaking committee, the Federal
Open Market Committee (FOMC), decided that further support to the economy was needed.
With short-term interest rates already nearing 0%, the FOMC agreed to deliver that
support by committing to purchase additional longer-term securities, as it did in 2008
and 2009. The FOMC intends to buy an additional $600 billion of longer-term U.S.
Treasury securities by mid-2011 and will continue to reinvest repayments of principal
on its holdings of securities, as it has been doing since
August 2010; |
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On December 16, 2010, the Federal Reserve issued a proposal to implement a provision
in the Dodd-Frank Act that requires the Federal Reserve to set debit-card interchange
fees. The proposed rule, if implemented in its current form, would result in a
significant reduction in debit-card interchange revenue. Though the rule technically
does not apply to institutions with less than $10 billion in assets, there is concern
that the price controls may harm community banks, which could be pressured by the
marketplace to lower their own interchange rates; |
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On December 29, 2010, the Dodd-Frank Act was amended to include full FDIC insurance
on Interest on Lawyers Trust Accounts (IOLTAs.) IOLTAs will receive unlimited insurance
coverage as noninterest-bearing transaction accounts for two years ending December 31,
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With respect to any other potential future government assistance programs, we will evaluate
the merits of the programs, including the terms of the financing, the Companys capital position,
the cost to the Company of alternative capital, and the Companys strategy for the use of
additional capital, to determine whether it is prudent to participate.
On January 16, 2009, the Company issued 36,000 shares of Series T Preferred Stock, each with a
liquidation preference of $1,000 per share, to the Treasury for $36 million pursuant to the CPP.
Additionally, the Company issued a warrant to purchase up to 385,990 shares of common stock to the
Treasury as a condition to its participation in the CPP. The warrant has an exercise price of
$13.99 per share, is immediately exercisable and expires 10 years from the date of issuance.
Proceeds from this sale of the preferred stock were used for general corporate purposes, including
supporting the continued growth and lending in the communities served by the Bank. The Series T
Preferred Stock is non-voting, other than having class voting rights on certain matters, and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9%
thereafter. The preferred shares are redeemable at the option of the Company under certain
circumstances during the first three years and only thereafter without restriction.
As a condition of the CPP, the Company must obtain consent from the Treasury to repurchase its
common stock or to increase its cash dividend on its common stock from the June 30, 2009 quarterly
amount. Furthermore, the Company has agreed to certain restrictions on executive compensation.
Under the Recovery Act, the Company is limited to using restricted stock as the form of payment to
the top five highest compensated executives under any incentive compensation programs.
The Bank participated in the TLGP. The Company and the Bank participated in the DGP but have
elected not to have the option of issuing certain non-guaranteed senior unsecured debt before
issuing the maximum amount of guaranteed debt. Had we selected this non-guaranteed debt option,
the FDIC would have assessed the Bank 37.5 basis points times two percent of liabilities as of September 30, 2008. As a result of the enhancements to
deposit insurance protection and the demands on the FDICs DIF, our deposit insurance costs
increased significantly during 2009.
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Although it is likely that further regulatory actions will arise as the Federal government
attempts to address the economic situation, management is not aware of any further recommendations
by regulatory authorities that, if implemented, would have or would be reasonably likely to have a
material effect on liquidity, capital ratios or results of operations.
Proposed Legislation and Regulatory Action
Legislative and regulatory proposals regarding changes in banking, and the regulation of
banks, federal savings institutions, and other financial institutions and bank and bank holding
company powers are being considered by the executive branch of the federal government, Congress and
various state governments. Certain of these proposals, if adopted, could significantly change the
regulation or operations of banks and the financial services industry. New regulations and statutes
are regularly proposed that contain wide-ranging proposals for altering the structures,
regulations, and competitive relationships of the nations financial institutions. On June 17,
2009, the Treasury released a white paper entitled Financial
Regulatory Reform A New
Foundation: Rebuilding Financial Supervision and Regulation (the Proposal) which calls for
sweeping regulatory and supervisory reforms for the entire financial sector and seeks to advance
the following five key objectives: (i) promote robust supervision and regulation of financial
firms, (ii) establish comprehensive supervision of financial markets, (iii) protect consumers and
investors from financial abuse, (iv) provide the government with additional powers to monitor
systemic risks, supervise and regulate financial products and markets, and to resolve firms that
threaten financial stability, and (v) raise international regulatory standards and improve
international cooperation.
The Proposal includes the creation of a new federal government agency, the National Bank
Supervisor (NBS) that would charter and supervise all federally chartered depository
institutions, and all federal branches and agencies of foreign banks. It is proposed that the NBS
take over the responsibilities of the Office of the Comptroller of the Currency, which currently
charters and supervises nationally chartered banks, and the responsibility for the institutions
currently supervised by the Office of Thrift Supervision, which supervises federally chartered
savings institutions and federal savings institution holding companies.
The Proposal also includes the creation of a new federal agency designed to enforce consumer
protection laws. The Consumer Financial Protection Agency (CFPA) would have authority to protect
consumers of financial products and services and to regulate all providers (bank and non-bank) of
such services. The CFPA would be authorized to adopt rules for all providers of consumer financial
services, supervise and examine such institutions for compliance, and enforce compliance through
orders, fines, and penalties. The rules of the CFPA would serve as a floor and individual states
would be permitted to adopt and enforce stronger consumer protection laws. If adopted as proposed,
we may become subject to multiple laws affecting our provision of loans and other credit services
to consumers, which may substantially increase the cost of providing such services.
The new restrictions mandated by the Federal Reserve under Regulation E on overdraft fees went
into effect July 1, 2010. These restrictions ban overdraft fees on ATM withdrawals or signature
debit transactions unless consumers voluntarily opt in for overdraft protection.
Internationally, both the Basel Committee on Banking Supervision (the Basel Committee) and
the Financial Stability Board (established in April 2009 by the Group of Twenty (G-20) Finance
Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the
financial system with greater international consistency, cooperation, and transparency) have
committed to raise capital standards and liquidity buffers within the banking system (Basel III).
On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the
calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1
common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by
January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5%
with full implementation by January 2019.
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In December 2010, the Basel Committee released its final framework for strengthening
international capital and liquidity regulation, now officially identified by the Basel Committee as
Basel III. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will
require bank holding companies and their bank subsidiaries to maintain substantially more capital,
with a greater emphasis on common equity.
The Basel III final capital framework, among other things, (i) introduces as a new capital
measure Common Equity Tier 1 (CET1), (ii) specifies that Tier 1 capital consists of CET1 and
Additional Tier 1 capital instruments meeting specified requirements, (iii) defines CET1 narrowly
by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital and (iv) expands the scope of the adjustments as compared to existing
regulations.
When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly
adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%,
plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is
phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least
7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the
capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is
phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to
risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the
8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total
capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international
standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance
sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter
of the month-end ratios for the quarter).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when
national regulators determine that excess aggregate credit growth becomes associated with a buildup
of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0%
to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
The aforementioned capital conservation buffer is designed to absorb losses during periods of
economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the
minimum but below the conservation buffer (or below the combined capital conservation buffer and
countercyclical capital buffer, when the latter is applied) will face constraints on dividends,
equity repurchases and compensation based on the amount of the shortfall.
The implementation of the Basel III final framework will commence January 1, 2013. On that
date, banking institutions will be required to meet the following minimum capital ratios:
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3.5% CET1 to risk-weighted assets; |
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4.5% Tier 1 capital to risk-weighted assets; and |
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8.0% Total capital to risk-weighted assets. |
The Basel III final framework provides for a number of new deductions from and adjustments to
CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax
assets dependent upon future taxable income and significant investments in non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014
and will be phased-in over a five-year period (20% per year). The implementation of the capital
conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year
period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1,
2019).
New regulations and statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations, and competitive relationships of the nations financial
institutions. We cannot predict whether or in what form any proposed regulation or statute will be
adopted or the extent to which our business may be affected by any new regulation or statute.
10
Yadkin Valley Financial Corporation
As a bank holding company under the Bank Holding Company Act of 1956, as amended, Yadkin is
registered with and subject to regulation by the Federal Reserve. Yadkin is required to file annual
and other reports with, and furnish information to, the Federal Reserve. The Federal Reserve
conducts periodic examinations of Yadkin and may examine any of its subsidiaries, including the
Bank.
The Bank Holding Company Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve for the acquisition of more than five percent of the voting stock
or substantially all the assets of any bank or bank holding company. In addition, the Bank Holding
Company Act restricts the extension of credit to any bank holding company by its subsidiary bank.
The Bank Holding Company Act also provides that, with certain exceptions, a bank holding company
may not engage in any activities other than those of banking or managing or controlling banks and
other authorized subsidiaries or own or control more than five percent of the voting shares of any
company that is not a bank. The Federal Reserve has deemed limited activities to be closely related
to banking and therefore permissible for a bank holding company.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 significantly expanded the
types of activities in which a bank holding company may engage. Subject to various limitations, the
Modernization Act generally permits a bank holding company to elect to become a financial holding
company. A financial holding company may affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. Among the activities that are deemed
financial in nature are, in addition to traditional lending activities, securities underwriting,
dealing in or making a market in securities, sponsoring mutual funds and investment companies,
insurance underwriting and agency activities, certain merchant banking activities as well as
activities that the Federal Reserve considers to be closely related to banking.
A bank holding company may become a financial holding company under the Modernization Act if
each of its subsidiary banks is well-capitalized under the Federal Deposit Insurance Corporation
Improvement Act prompt corrective action provisions, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company
must file a declaration with the Federal Reserve that the bank holding company wishes to become a
financial holding company. A bank holding company that falls out of compliance with these
requirements may be required to cease engaging in some of its activities.
Under the Modernization Act, the Federal Reserve serves as the primary umbrella regulator of
financial holding companies, with supervisory authority over each parent company and limited
authority over its subsidiaries. Expanded financial activities of financial holding companies
generally will be regulated according to the type of such financial activity: banking activities by
banking regulators, securities activities by securities regulators and insurance activities by
insurance regulators. The Modernization Act also imposes additional restrictions and heightened
disclosure requirements regarding private information collected by financial institutions.
Enforcement Authority. Yadkin will be required to obtain the approval of the Federal Reserve
prior to engaging in or, with certain exceptions, acquiring control of more than 5% of the voting
shares of a company engaged in, any new activity. Prior to granting such approval, the Federal
Reserve must weigh the expected benefits of any such new activity to the public (such as greater
convenience, increased competition, or gains in efficiency) against the risk of possible adverse
effects of such activity (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices). The Federal Reserve has
cease-and-desist powers over bank holding companies and their nonbanking subsidiaries where their
actions would constitute a serious threat to the safety, soundness or stability of a subsidiary
bank. The Federal Reserve also has authority to regulate debt obligations (other than commercial
paper) issued by bank holding companies. This authority includes the power to impose interest
ceilings and reserve requirements on such debt obligations. A bank holding company and its
subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
Interstate Acquisitions. Federal banking law generally provides that a bank holding company
may acquire or establish banks in any state of the United States, subject to certain aging and
deposit concentration limits. In addition, North Carolina banking laws permit a bank holding
company which owns stock of a bank located outside North Carolina to acquire a bank or bank holding
company located in North Carolina. Federal banking law will not permit a bank holding company to
own or control banks in North Carolina if the acquisition would exceed 20% of the total deposits of
all federally-insured deposits in North Carolina.
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Capital Adequacy. The Federal Reserve has promulgated capital adequacy regulations for all
bank holding companies with assets in excess of $500 million. The Federal Reserves capital
adequacy regulations are based upon a risk-based capital determination, whereby a bank holding
companys capital adequacy is determined in light of the risk, both on- and off-balance sheet,
contained in the companys assets. Different categories of assets are assigned risk weightings and
are counted at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a
bank holding company, Tier 1 capital consists primarily of common stock, related surplus,
noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries and a
limited amount of qualifying cumulative preferred securities. Goodwill and certain other
intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the
allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted assets, limited other
types of preferred stock not included in Tier 1 capital, hybrid capital instruments and term
subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that
constitute capital of those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2
capital constitutes qualifying total capital. The Tier 1 component must comprise at least 50% of
qualifying total capital.
Every bank holding company has to achieve and maintain a minimum Tier 1 capital ratio of at
least 4.0% and a minimum total capital ratio of at least 8.0%. In addition, banks and bank holding
companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total
consolidated assets (leverage capital ratio) of at least 3.0% for the most highly-rated,
financially sound banks and bank holding companies and a minimum leverage ratio of at least 4.0%
for all other banks. The FDIC and the Federal Reserve define Tier 1 capital for banks in the same
manner for both the leverage ratio and the risk-based capital ratio. However, the Federal Reserve
defines Tier 1 capital for bank holding companies in a slightly different manner. As of December
31, 2010, the Banks Tier 1 capital ratio and total capital ratio were 9.2% and 10.5%,
respectively. As of December 31, 2010, the Companys Tier 1 capital ratio and total capital were
9.4% and 10.6%, respectively. We may at some point; however, need to raise additional capital.
Our ability to raise additional capital, if needed, will depend in part on conditions in the
capital markets at that time, which are outside of our control, and on our financial performance.
The guidelines also provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory level, without significant reliance on intangible assets. The guidelines also indicate
that the Federal Reserve will continue to consider a Tangible Tier 1 Leverage Ratio in evaluating
proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier
1 capital, less intangibles not deducted from Tier 1 capital, to quarterly average total assets.
Failure to meet applicable capital guidelines could subject a banking organization to a
variety of enforcement actions, including limitations on its ability to pay dividends, the issuance
by the applicable regulatory authority of a capital directive to increase capital and, in the case
of depository institutions, the termination of deposit insurance by the FDIC, as well as the
measures described under the Federal Deposit Insurance Corporation Improvement Act of 1991 below,
as applicable to undercapitalized institutions. In addition, future changes in regulations or
practices could further reduce the amount of capital recognized for purposes of capital adequacy.
Such a change could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the shareholders.
Source of Strength for Subsidiary. Bank holding companies are required to serve as a source
of financial strength for their depository institution subsidiaries, and, if their depository
institution subsidiaries become undercapitalized, bank holding companies may be required to
guarantee the subsidiaries compliance with capital restoration plans filed with their bank
regulators, subject to certain limits.
Dividends. As a holding company that does not, as an entity, currently engage in separate
business activities of a material nature, our ability to pay cash dividends depends upon the cash
dividends received from our Bank and management fees paid by the Bank. We must pay our operating
expenses from funds we receive from the Bank. Therefore, shareholders may receive cash dividends
from us only to the extent that funds are available after payment of operating expenses. In
addition, the Federal Reserve generally prohibits bank holding companies from paying cash dividends
except out of operating earnings, provided that the prospective rate of earnings retention appears
consistent with the bank holding companys capital needs, asset quality and overall financial
condition. As a North Carolina corporation, our payment of cash dividends is subject to the
restrictions under North Carolina law on the declaration of cash dividends. Under such provisions,
cash dividends may not be paid if a corporation will not be able to pay its debts as they become
due in the usual course of business
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after paying such a cash dividend or if the corporations total assets would be less than the
sum of its total liabilities plus the amount that would be needed to satisfy certain liquidation
preferential rights. Also, the payment of cash dividends by Yadkin in the future will be subject
to certain other legal and regulatory limitations (including the requirement that Yadkins capital
be maintained at certain minimum levels) and will be subject to ongoing review by banking
regulators. As long as shares of our Series T Preferred Stock or our Series T-ACB Preferred Stock
are outstanding, no dividends may be paid on our common stock unless all dividends on the Series T
Preferred Stock and Series T-ACB Preferred Stock have been paid in full. Prior to January 16,
2012, so long as the Treasury owns shares of the Series T Preferred Stock, we are not permitted to
increase cash dividends on our common stock without the Treasurys consent. The Federal Reserve
could require that we defer dividend payments on our Series T and Series T-ACB Preferred Stock as
well as interest payments on our trust preferred securities. We are able to defer interest
payments on our trust preferred securities for up to twenty consecutive quarters; however, we would
be unable to pay any dividends on our capital stock until deferred interest payments on our trust
preferred securities have been made. If we defer a total of six dividends payments on our Series T
or Series T-ACB Preferred Stock, whether consecutive or not, Treasury would be entitled to elect
two directors to Yadkins board of directors. This right would continue until Yadkin paid all due
but unpaid dividends. Additionally, prior to July 24, 2012, so long as the Treasury owns shares of
the Series T or Series T-ACB Preferred Stock, we are not permitted to increase cash dividends on
our common stock without the Treasurys consent. There is no assurance that, in the future, Yadkin
will have funds available to pay cash dividends, or, even if funds are available, that it will pay
dividends in any particular amount or at any particular times, or that it will pay dividends at
all. In additional, the Bank is currently prohibited from paying dividends to the holding company
without prior FDIC and Commissioner (as defined below) approval. There can be no assurances such
approval would be granted or with regard to how long these restrictions will remain in place.
Change in Control. In addition, and subject to certain exceptions, the Bank Holding Company
Act and the Change in Bank Control Act, together with regulations promulgated there under, require
Federal Reserve approval prior to any person or company acquiring control of a bank holding
company. Control is conclusively presumed to exist if an individual or company acquires 25% or
more of any class of voting securities of a bank holding company. Following the relaxing of these
restrictions by the Federal Reserve in September 2008, control will be presumed to exist if a
person acquires more than 33% of the total equity of a bank or bank holding company, of which it
may own, control or have the power to vote not more than 15% of any class of voting securities.
Yadkin Valley Bank and Trust Company
As a North Carolina bank, the Bank is subject to regulation, supervision and regular
examination by the North Carolina Banking Commission (the Commission) through the North Carolina
Commissioner of Banks (the Commissioner) and its applicable federal regulator is the FDIC. The
Commission and the FDIC have the power to enforce compliance with applicable banking statutes and
regulations. Deposits in the bank are insured by the FDIC up to a maximum amount, which is
currently $250,000 for each non-retirement depositor and $250,000 for certain retirement-account
depositors.
The Commission and the FDIC regulate or monitor virtually all areas of the banks operations,
including:
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security devices and procedures; |
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adequacy of capitalization and loss reserves; |
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loans; |
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investments; |
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borrowings; |
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deposits; |
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mergers; |
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issuances of securities; |
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payment of dividends; |
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interest rates payable on deposits; |
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interest rates or fees chargeable on loans; |
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establishment of branches; |
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corporate reorganizations; |
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maintenance of books and records; and |
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adequacy of staff training to carry on safe lending and deposit gathering practices. |
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Federal Regulation. As a North Carolina chartered bank, we are subject to regulation,
supervision and regular examination by the FDIC. The FDIC is required to conduct regular on-site
examinations of the operations of the Bank and enforces federal laws that set specific requirements
for bank capital, the payment of dividends, loans to officers and directors, and types and amounts
of loans and investments made by commercial banks. Among other things, the FDIC must approve the
establishment of branch offices, conversions, mergers, assumption of deposit liabilities between
insured banks and uninsured banks or institutions, and the acquisition or establishment of certain
subsidiary corporations. The FDIC can also prevent capital or surplus diminution in transactions
where the deposit accounts of the resulting, continuing or assumed bank are insured by the FDIC.
Transactions with Affiliates. A bank may not engage in specified transactions (including, for
example, loans) with its affiliates unless the terms and conditions of those transactions are
substantially the same or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with or involving other nonaffiliated entities. In the absence of
comparable transactions, any transaction between a bank and its affiliates must be on terms and
under circumstances, including credit standards, which in good faith would be offered or would
apply to nonaffiliated companies. In addition, transactions referred to as covered transactions
between a bank and its affiliates may not exceed 10% of the banks capital and surplus per
affiliate and an aggregate of 20% of its capital and surplus for covered transactions with all
affiliates. Certain transactions with affiliates, such as loans, also must be secured by
collateral of specific types and amounts. The Bank is also prohibited from purchasing low quality
assets from an affiliate. Every company under common control with the Bank is deemed to be an
affiliate of the Bank.
Loans to Insiders. Federal law also constrains the types and amounts of loans that the Bank
may make to its executive officers, directors and principal shareholders. Among other things, these
loans are limited in amount, must be approved by the Banks board of directors in advance, and must
be on terms and conditions as favorable to the Bank as those available to an unrelated person.
Regulation of Lending Activities. Loans made by the bank are also subject to numerous federal
and state laws and regulations, including the Truth-In-Lending Act, Federal Consumer Credit
Protection Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and
Home Mortgage Disclosure Act. Remedies to the borrower or consumer and penalties to the Bank are
provided if the Bank fails to comply with these laws and regulations. The scope and requirements
of these laws and regulations have expanded significantly in recent years.
Branch Banking. All banks located in North Carolina are authorized to branch statewide.
Accordingly, a bank located anywhere in North Carolina has the ability, subject to regulatory
approval, to establish branch facilities near any of our facilities and within our market area. If
other banks were to establish branch facilities near our facilities, it is uncertain whether these
branch facilities would have a material adverse effect on our business. Federal law provides for
nationwide interstate banking and branching, subject to certain aging and deposit concentration
limits that may be imposed under applicable state laws. Applicable North Carolina statutes permit
regulatory authorities to approve de novo branching in North Carolina by institutions located in
states that would permit North Carolina institutions to branch on a de novo basis into those
states. Federal regulations prohibit an out-of-state bank from using interstate branching
authority primarily for the purpose of deposit production. These regulations include guidelines to
insure that interstate branches operated by an out-of-state bank in a host state are reasonably
helping to meet the credit needs of the host state communities served by the out-of-state bank.
Reserve Requirements. Pursuant to regulations of the Federal Reserve, the Bank must maintain
average daily reserves against its transaction accounts. During 2010, no reserves were required to
be maintained on the first $10.7 million of transaction accounts, but reserves equal to 3.0% were
required on the aggregate balances of those accounts between $10.7 million and $48.1 million, and
additional reserves were required on aggregate balances in excess of $48.1 million in an amount
equal to 10.0% of the excess. These percentages are subject to annual adjustment by the Federal
Reserve, which has advised that for 2011, no reserves will be required to be maintained on the
first $10.7 million of transaction accounts, but reserves equal to 3.0% will be required on the
aggregate balances of those accounts between $10.7 million and $48.1 million, and additional
reserves are required on aggregate balances in excess of $48.1 million in an amount equal to 10.0%
of the excess. Because required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institutions interest-earning assets. As of December 31, 2010, the Bank
met its reserve requirements.
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Community Reinvestment. Under the Community Reinvestment Act (CRA), as implemented by
regulations of the federal bank regulatory agencies, an insured bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for banks, nor does it limit a banks
discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the federal bank regulatory
agencies, in connection with their examination of insured banks, to assess the banks records of
meeting the credit needs of their communities, using the ratings of outstanding, satisfactory,
needs to improve, or substantial noncompliance, and to take that record into account in its
evaluation of certain applications by those banks. All banks are required to make public
disclosure of their CRA performance ratings. The Bank received a satisfactory rating in its most
recent CRA examination.
Governmental Monetary Policies. The commercial banking business is affected not only by
general economic conditions but also by the monetary policies of the Federal Reserve, a federal
banking regulatory agency that regulates the money supply in order to mitigate recessionary and
inflationary pressures. Among the techniques used to implement these objectives are open market
transactions in United States government securities, changes in the rate paid by banks on bank
borrowings, and changes in reserve requirements against bank deposits. These techniques are used
in varying combinations to influence overall growth and distribution of bank loans, investments,
and deposits, and their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the future. In view of
changing conditions in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of the Bank.
Dividends. Under federal banking law, no cash dividend may be paid if a bank is
undercapitalized or insolvent or if payment of the cash dividend would render the bank
undercapitalized or insolvent, and no cash dividend may be paid by the bank if it is in default on
any deposit insurance assessment due to the FDIC. The Bank is currently prohibited from paying
dividends to the holding company without prior FDIC and Commissioner approval. There can be no
assurances such approval would be granted or with regard to how long these restrictions will remain
in place.
Deposit Insurance Assessments. The Banks deposits are insured up to $250,000 by the FDICs
DIF. The Bank is required to pay deposit insurance assessments set by the FDIC. The FDIC
determines the Banks deposit insurance assessment rates on the basis of four risk categories.
Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that
provides for quarterly assessments based on an insured institutions ranking in one of four risk
categories based upon supervisory and capital evaluations. For deposits held as of March 5, 2010,
institutions were assessed at annual rates ranging from 12 to 45 basis points, depending on each
institutions risk of default as measured by regulatory capital ratios and other supervisory
measures. Effective April 1, 2009, assessments also took into account each institutions reliance
on secured liabilities and brokered deposits. This resulted in assessments ranging from 7 to 77.5
basis points. As a result, we incurred increased deposit insurance costs during 2009 in comparison
to previous periods.
In addition, all FDIC-insured institutions are required to pay a pro rata portion of the
interest due on bonds issued by the Financing Corporation (FICO) to fund the closing and disposal
of failed thrift institutions by the Resolution Trust Corporation. FICO assessments are set
quarterly, and in 2010 ranged from 2.60 basis points in the first quarter to 2.55 basis points in
the fourth quarter. As the large number of recent bank failures continues to deplete the DIF, the
FDIC adopted a revised risk-based deposit insurance assessment schedule in February 2009, which
raised deposit insurance premiums. The FDIC also implemented a five basis point special assessment
of each insured depository institutions assets minus Tier 1 capital as of June 30, 2009, which
special assessment amount was capped at 10 basis points times the institutions assessment base for
the second quarter of 2009. The amount of our special assessment was $998,639. In addition, the
FDIC required financial institutions to prepay their estimated quarterly risk-based assessments for
the fourth quarter of 2009 and will require such prepayments for all of 2010 through and including
2012 in order to re-capitalize the DIF. The rule provides for increasing the FDIC-assessment rates
by three basis points effective January 1, 2011. The amount of our prepayment is approximately $6.4
million on December 31, 2010.
In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment
regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the
assessment base from one based on domestic deposits (as it has been since 1935) to one based on
assets. The assessment base changes from adjusted domestic deposits to average consolidated total
assets minus average tangible equity.
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The second proposal changes the deposit insurance assessment system for large institutions in
conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger
than the current base, the FDIC will lower assessment rates, which achieves the FDICs goal of not
significantly altering the total amount of revenue collected from the industry. Risk categories and
debt ratings will be eliminated from the assessment calculation for large banks which will instead
use scorecards. The scorecards will include financial measures that are predictive of long-term
performance. A large financial institution will continue to be defined as an insured depository
institution with at least $10 billion in assets. Both changes in the assessment system will be
effective as of April 1, 2011 and will be payable at the end of September.
In December 2010, the FDIC voted to increase the required amount of reserves for the
designated reserve ratio (DRR) to 2.0%. The ratio is higher than the 1.35% set by the Dodd-Frank
Act in July 2010 and is an integral part of the FDICs comprehensive, long-range management plan
for the DIF.
In February 2011, the FDIC approved the final rules that, as noted above, change the
assessment base from domestic deposits to average assets minus average tangible equity, adopt a new
scorecard-based assessment system for financial institutions with more than $10 billion in assets,
and finalize the DRR target size at 2.0% of insured deposits.
The FDIC may terminate the deposit insurance of any insured depository institution, including
the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent termination of insurance
if the institution has no tangible capital. If insurance of accounts is terminated, the accounts
at the institution at the time of the termination, less subsequent withdrawals, shall continue to
be insured for a period of six months to two years, as determined by the FDIC.
Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes
and regulations designed to protect consumers. Interest and other charges collected or contracted
for by the Bank are subject to state usury laws and federal laws concerning interest rates.
The Banks loan operations are also subject to federal laws applicable to credit transactions,
such as the:
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The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; |
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The Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of
the community it serves; |
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The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit; |
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The Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
Transactions Act, governing the use and provision of information to credit reporting
agencies, certain identity theft protections and certain credit and other disclosures; |
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The Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and |
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The rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws. |
The deposit operations of the Bank also are subject to:
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the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and |
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the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that Act, which governs automatic deposits to and withdrawals from
deposit accounts and customers rights and liabilities arising from the use of
automated teller machines and other electronic banking services. |
Changes in Management. Any depository institution that has been chartered less than two
years, is not in compliance with the minimum capital requirements of its primary federal banking
regulator (currently the FDIC), or is otherwise in a troubled condition must notify its primary
federal banking regulator of the proposed addition of any person to
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the board of directors or the employment of any person as a senior executive officer of the
institution at least 30 days before such addition or employment becomes effective. During this
30-day period, the applicable federal banking regulatory agency may disapprove of the addition of
such director or employment of such officer. The Bank is not subject to any such requirements.
Enforcement Authority. The federal banking laws also contain civil and criminal penalties
available for use by the appropriate regulatory agency against certain institution-affiliated
parties primarily including management, employees and agents of a financial institution, as well
as independent contractors such as attorneys and accountants and others who participate in the
conduct of the financial institutions affairs and who caused or are likely to cause more than
minimum financial loss to or a significant adverse affect on the institution, who knowingly or
recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound
practices. These practices can include the failure of an institution to timely file required
reports or the submission of inaccurate reports. These laws authorize the appropriate banking
agency to issue cease and desist orders that may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution, reimbursement,
indemnification or guarantees against loss. A financial institution may also be ordered to
restrict its growth, dispose of certain assets or take other action as determined by the primary
federal banking agency to be appropriate.
Capital Adequacy. The Bank is subject to capital requirements and limits on activities
established by the FDIC. Under the capital regulations, the Bank generally is required to maintain
Tier 1 risk-based capital, as such term is defined therein, of 4% and total risk-based capital, as
such term is defined therein, of 8%. In addition, the Bank is required to provide a minimum
leverage ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to
3%, plus an additional cushion of 1% to 2% if the Bank has less than the highest regulatory rating.
The Bank is not permitted to engage in any activity not permitted for a national bank unless (i)
it is in compliance with its capital requirements and (ii) the FDIC determines that the activity
would not pose a risk to the DIF. With certain exceptions, the Bank also is not permitted to
acquire equity investments of a type, or in an amount, not permitted for a national bank.
Prompt Corrective Action. Banks are subject to restrictions on their activities depending on
their level of capital. Federal prompt corrective action regulations divide banks into five
different categories, depending on their level of capital. Under these regulations, a bank is
deemed to be well capitalized if it has a total risk-based capital ratio of 10.0% or more, a core
capital ratio of 6.0% or more and a leverage ratio of 5.0% or more, and if the bank is not subject
to an order or capital directive to meet and maintain a certain capital level. Under these
regulations, a bank is deemed to be adequately capitalized if it has a total risk-based capital
ratio of 8.0% or more, a core capital ratio of 4.0% or more and a leverage ratio of 4.0% or more
(unless it receives the highest composite rating at its most recent examination and is not
experiencing or anticipating significant growth, in which instance it must maintain a leverage
ratio of 3.0% or more). Under these regulations, a bank is deemed to be undercapitalized if it
has a total risk-based capital ratio of less than 8.0%, a core capital ratio of less than 4.0% or a
leverage ratio of less than 4.0%. Under these regulations, a bank is deemed to be significantly
undercapitalized if it has a risk-based capital ratio of less than 6.0%, a core capital ratio of
less than 3.0% and a leverage ratio of less than 3.0%. Under such regulations, a bank is deemed to
be critically undercapitalized if it has a tangible equity ratio of less than or equal to 2.0%.
In addition, the applicable federal banking agency has the ability to downgrade a banks
classification (but not to critically undercapitalized) based on other considerations even if the
bank meets the capital guidelines. As of December 31, 2010 the Bank was well capitalized within the
meaning of the capital guidelines with $8.7 million in excess risk-based capital, $56.6 million in
excess core capital and $46.8 million in excess leverage capital.
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 Bank.
Management, on an ongoing basis, continues to monitor capital levels
closely and evaluate options which would improve the capital position.
If a state bank is not well-capitalized, it cannot accept brokered deposits without prior FDIC
approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points
on interest paid on deposits of comparable size and maturity in such institutions normal market
area for deposits accepted from within its normal market area, or national rate paid on deposits of
comparable size and maturity for deposits accepted outside the banks normal market area. Thus,
for deposits in its own normal market area, the bank must offer rates that are not in excess of 75
basis points over the average local rates. For non-local deposits, the bank must offer rates that
are not in excess of 75 basis points over either (1) the banks own local rates or (2) the
applicable non-local rates. In other words, the bank must adhere to the prevailing rates in its
own normal market area for all deposits (whether local or non-local) and also must adhere to the
prevailing rates in the non-local area for any non-local deposits. Thus, the bank would be unable
to outbid non-local institutions for non-local deposits even if the non-local rates are lower than
the rates in the banks own normal market area. Moreover, the Federal Deposit Insurance Act
generally prohibits a depository institution from making any capital distributions (including
payment of a dividend) or paying any management fee to its parent holding company if the depository
institution would thereafter be categorized as undercapitalized.
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If a state bank is classified as undercapitalized, the bank is required to submit a capital
restoration plan to the FDIC, and the FDIC may also take certain actions to correct the capital
position of the bank. An undercapitalized bank is prohibited from increasing its assets, engaging
in a new line of business, acquiring any interest in any company or insured depository institution,
or opening or acquiring a new branch office, except under certain circumstances, including the
acceptance by the FDIC of a capital restoration plan for the bank. The FDIC may not accept a
capital restoration plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the banks capital. In addition, for a
capital restoration plan to be acceptable, the banks parent holding company must guarantee that
the bank will comply with the capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of an amount equal to 5.0% of the banks total assets at
the time it became categorized as undercapitalized or the amount that is necessary (or would have
been necessary) to bring the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the plan. If a bank fails to submit an
acceptable plan, it is categorized as significantly undercapitalized.
If a state bank is classified as significantly undercapitalized, the FDIC would be required to
take one or more prompt corrective actions. These actions would include, among other things,
requiring sales of new securities to bolster capital, changes in management, limits on interest
rates paid, prohibitions on transactions with affiliates, termination of certain risky activities
and restrictions on compensation paid to executive officers. If a bank is classified as critically
undercapitalized, the bank must be placed into conservatorship or receivership within 90 days,
unless the FDIC determines otherwise.
A state bank may not pay a management fee to a bank holding company controlling that
institution or any other person having control of the institution if, after making the payment, the
bank would be undercapitalized. In addition, a bank cannot make a capital distribution, such as a
dividend or other distribution that is in substance a distribution of capital to the owners of the
bank if following such a distribution the bank would be undercapitalized. Thus, if payment of such
a management fee or the making of such would cause a bank to become undercapitalized, it could not
pay a management fee or dividend to the bank holding company.
The capital classification of a bank affects the frequency of regulatory examinations of the
bank and impacts the ability of the bank to engage in certain activities and affects the deposit
insurance premiums paid by the bank. The FDIC is required to conduct a full-scope, on-site
examination of every bank on a periodic basis.
Banks also may be restricted in their ability to accept, renew, or roll over brokered
deposits, depending on their capital classification. Well capitalized banks are permitted to
accept, renew, or roll over brokered deposits, but all banks that are not well capitalized are not
permitted to accept, renew, or roll over such deposits. The FDIC may, on a case-by-case basis,
permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines
that acceptance of such deposits would not constitute an unsafe or unsound banking practice with
respect to the bank.
Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs
that include established internal policies, procedures, and controls; a designated compliance
officer; an ongoing employee training program; and testing of the program by an independent audit
function. The Company and the Bank are also prohibited from entering into specified financial
transactions and account relationships and must meet enhanced standards for due diligence and
knowing your customer in their dealings with foreign financial institutions and foreign
customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of
account relationships to guard against money laundering and to report any suspicious transactions,
and recent laws provide law enforcement authorities with increased access to financial information
maintained by banks. Anti-money laundering obligations have been substantially strengthened as a
result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely
examine institutions for compliance with these obligations and are required to consider compliance
in connection with the regulatory review of applications. The regulatory authorities have been
active in imposing cease and desist orders and money penalty sanctions against institutions found
to be violating these obligations.
USA PATRIOT Act/Bank Secrecy Act. The USA PATRIOT Act amended, in part, the Bank Secrecy Act
and provides for the facilitation of information sharing among governmental entities and financial
institutions for the purpose of combating terrorism and money laundering by enhancing anti-money
laundering and financial transparency laws, as well as enhanced information collection tools and
enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying
customer identification at account opening; (ii) rules to promote cooperation among financial
institutions, regulators, and law enforcement entities in identifying parties that may be involved
in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with
the Treasurys Financial Crimes Enforcement Network for
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transactions exceeding $10,000; and (iv) filing suspicious activities reports if a bank
believes a customer may be violating U.S. laws and regulations and requires enhanced due diligence
requirements for financial institutions that administer, maintain, or manage private bank accounts
or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for
compliance with these obligations and are required to consider compliance in connection with the
regulatory review of applications.
Under the USA PATRIOT Act, the FBI can send to the banking regulatory agencies lists of the
names of persons suspected of involvement in terrorist activities. The Bank can be requested to
search its records for any relationships or transactions with persons on those lists. If the Bank
finds any relationships or transactions, it must file a suspicious activity report and contact the
FBI.
Office of Foreign Assets Control Regulation. The Office of Foreign Assets Control (OFAC),
which is a division of the Treasury, is responsible for helping to insure that United States
entities do not engage in transactions with enemies of the United States, as defined by various
Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory
agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in
terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on
an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI.
The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the
filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts,
wire transfers and customer files. The Bank performs these checks utilizing software, which is
updated each time a modification is made to the lists provided by OFAC and other agencies of
Specially Designated Nationals and Blocked Persons.
Privacy and Credit Reporting. Financial institutions are required to disclose their policies
for collecting and protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with nonaffiliated third parties
except under narrow circumstances, such as the processing of transactions requested by the
consumer. Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing
to consumers. It is the Banks policy not to disclose any personal information unless required by
law. The OCC and the federal banking agencies have prescribed standards for maintaining the
security and confidentiality of consumer information. The Bank is subject to such standards, as
well as standards for notifying consumers in the event of a security breach.
Like other lending institutions, the Bank utilizes credit bureau data in its underwriting
activities. Use of such data is regulated under the Federal Credit Reporting Act on a uniform,
nationwide basis, including credit reporting, prescreening, sharing of information between
affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the
FACT Act) permits states to enact identity theft laws that are not inconsistent with the conduct
required by the provisions of the FACT Act.
Check 21. The Check Clearing for the 21st Century Act gives substitute checks, such as a
digital image of a check and copies made from that image, the same legal standing as the original
paper check. Some of the major provisions include:
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allowing check truncation without making it mandatory; |
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demanding that every financial institution communicate to accountholders in writing
a description of its substitute check processing program and their rights under the
law; |
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legalizing substitutions for and replacements of paper checks without agreement from
consumers; |
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retaining in place the previously mandated electronic collection and return of
checks between financial institutions only when individual agreements are in place; |
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requiring that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and |
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requiring the re-crediting of funds to an individuals account on the next business
day after a consumer proves that the financial institution has erred. |
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Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve Banks monetary policies have had, and are likely to continue to have, an
important impact on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or combat a recession.
The monetary policies of the Federal Reserve Board have major effects upon the levels of bank
loans, investments and deposits through its open market operations in United States government
securities and through its regulation of the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not possible to predict the nature or
impact of future changes in monetary and fiscal policies.
State Regulation. As a North Carolina-chartered bank, the Bank is also subject to extensive
supervision and regulation by the Commissioner. The Commissioner enforces state laws that set
specific requirements for bank capital, the payment of dividends, loans to officers and directors,
record keeping, and types and amounts of loans and investments made by commercial banks. Among
other things, the approval of the Commissioner is generally required before a North
Carolina-chartered commercial bank may establish branch offices. North Carolina banking law
requires that any merger, liquidation or sale of substantially all of the assets of the Bank must
be approved by the Commissioner and the holders of two thirds of the Banks outstanding common
stock.
Change of Control. North Carolina banking laws provide that no person may directly or
indirectly purchase or acquire voting stock of the Bank that would result in the change in control
of the Bank unless the Commissioner has approved the acquisition. A person will be deemed to have
acquired control of the Bank if that person directly or indirectly (i) owns, controls or has
power to vote 10% or more of the voting stock of the Bank, or (ii) otherwise possesses the power to
direct or cause the direction of the management and policy of the Bank.
Loans. In its lending activities, the Bank is subject to North Carolina usury laws which
generally limit or restrict the rates of interest, fees and charges and other terms and conditions
in connection with various types of loans. North Carolina banking law also limits the amount that
may be loaned to any one borrower.
Dividends. The ability of the Bank to pay dividends is restricted under applicable law and
regulations. Under North Carolina banking law, dividends must be paid out of retained earnings and
no cash dividends may be paid if payment of the dividend would cause the Banks surplus to be less
than 50% of its paid-in capital. The Bank is currently prohibited from paying dividends to the
holding company without prior approval from the Commissioner and the FDIC. There can be no
assurances such approval would be granted or with regard to how long these restrictions will remain
in place.
Incentive Compensation. In June 2010, the Federal Reserve, the FDIC and the OCC issued a
comprehensive final guidance on incentive compensation policies intended to ensure that the
incentive compensation policies of banking organizations do not undermine the safety and soundness
of such organizations by encouraging excessive risk-taking. The guidance, which covers all
employees that have the ability to materially affect the risk profile of an organization, either
individually or as part of a group, is based upon the key principles that a banking organizations
incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking
beyond the organizations ability to effectively identify and manage risks, (ii) be compatible with
effective internal controls and risk management, and (iii) be supported by strong corporate
governance, including active and effective oversight by the organizations board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the
incentive compensation arrangements of banking organizations, such as the Company, that are not
large, complex banking organizations. These reviews will be tailored to each organization based
on the scope and complexity of the organizations activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports
of examination. Deficiencies will be incorporated into the organizations supervisory ratings,
which can affect the organizations ability to make acquisitions and take other actions.
Enforcement actions may be taken against a banking organization if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a risk to the
organizations safety and soundness and the organization is not taking prompt and effective
measures to correct the deficiencies.
Future legislation and regulations. From time to time, various legislative and regulatory
initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies.
Such initiatives may include proposals to expand or contract the powers of bank holding companies
and depository institutions or proposals to substantially change the financial institution
regulatory system. Such legislation could change banking statutes and the operating environment of
the Company
20
and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or
decrease the cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other financial
institutions. Yadkin cannot predict whether any such legislation will be enacted and, if enacted,
the effect that it, or any implementing regulations, would have on the financial condition or
results of operations of the Company. A change in statutes, regulations or regulatory policies
applicable to the Company or the Bank could have a material effect on the business of the Company.
Insurance of Accounts and Regulation by the FDIC. Yadkins deposits are insured up to
applicable limits by the DIF of the FDIC. The DIF is the successor to the Bank Insurance Fund and
the Savings Association Insurance Fund, which were merged effective March 31, 2006. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution
from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to
the insurance fund. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the Office of Thrift Supervision an opportunity to take such
action, and may terminate the deposit insurance if it determines that the institution has engaged
in unsafe or unsound practices or is in an unsafe or unsound condition.
Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system
that provides for quarterly assessments based on an insured institutions ranking in one of four
risk categories based upon supervisory and capital evaluations. Institutions are assessed at
annual rates ranging from 12 to 50 basis points, respectively, depending on each institutions risk
of default as measured by regulatory capital ratios and other supervisory measures. Under a
proposal announced by the FDIC on October 7, 2008, the assessment rate schedule would be raised
uniformly by seven basis points (annualized) beginning on January 1, 2009. Beginning with the
second quarter of 2009, base assessment rates before adjustments would range from 7 to 77.5 basis
points, and further changes would be made to the deposit insurance assessment system, including
requiring riskier institutions to pay a larger share. The proposal would impose higher assessment
rates on institutions with a significant reliance on secured liabilities and on institutions which
rely significantly on brokered deposits (but, for well-managed and well-capitalized institutions,
only when accompanied by rapid asset growth). The proposal would reduce assessment rates for
institutions that hold long-term unsecured debt and, for smaller institutions, high levels of Tier
1 (defined below) capital. In addition, on February 27, 2009, the FDIC approved an interim rule to
raise 2009 second quarter deposit insurance premiums for Risk Category I banks from 10 to 14 basis
points to 12 to 50 basis points. The FDIC also imposed a 20-basis point special emergency
assessment payable September 30, 2009, and the FDIC board authorized the FDIC to implement an
additional 10 basis-point premium in any quarter. The amount of our special assessment was
$998,639. In addition, the FDIC required financial institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and will require such prepayments for all of
2011 through and including 2012 in order to re-capitalize the Deposit Insurance Fund. The rule
provides for increasing the FDIC-assessment rates by three basis points effective January 1, 2011.
The amount of our prepayment is approximately $6.4 million on December 31, 2010.
FDIC insured institutions are required to pay a FICO assessment, in order to fund the interest
on bonds issued to resolve thrift failures in the 1980s. For the quarterly period ended December
31, 2010, the FICO assessment equaled 2.55 basis points for each $100 in domestic deposits. These
assessments, which may be revised based upon the level of deposits, will continue until the bonds
mature in the years 2017 through 2019.
In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment
regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the
assessment base from one based on domestic deposits (as it has been since 1935) to one based on
assets. The assessment base changes from adjusted domestic deposits to average consolidated total
assets minus average tangible equity.
The second proposal changes the deposit insurance assessment system for large institutions in
conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger
than the current base, the FDIC will lower assessment rates, which achieves the FDICs goal of not
significantly altering the total amount of revenue collected from the industry. Risk categories and
debt ratings will be eliminated from the assessment calculation for large banks which will instead
use scorecards. The scorecards will include financial measures that are predictive of long-term
performance. A large financial institution will continue to be defined as an insured depository
institution with at least $10 billion in assets. Both changes in the assessment system will be
effective as of April 1, 2011 and will be payable at the end of September.
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In December 2010, the FDIC voted to increase the required amount of reserves for the
designated reserve ratio (DRR) to 2.0%. The ratio is higher than the 1.35% set by the Dodd-Frank
Act in July 2010 and is an integral part of the FDICs comprehensive, long-range management plan
for the DIF.
In February 2011, the FDIC approved the final rules that, as noted above, change the
assessment base from domestic deposits to average assets minus average tangible equity, adopt a new
scorecard-based assessment system for financial institutions with more than $10 billion in assets,
and finalize the DRR target size at 2.0% of insured deposits.
The FDIC may terminate the deposit insurance of any insured depository institution, including
the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the OCC. It also may
suspend deposit insurance temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by the FDIC.
Management of the Bank is not aware of any practice, condition or violation that might lead to
termination of the banks deposit insurance.
Number of Employees
At December 31, 2010, the Company had 548 full-time employees (including our executive
officers) and 67 part-time employees. None of the employees are represented by any unions or
similar groups, and we have not experienced any type of strike or labor dispute. We consider our
relationship with our employees to be good.
Item 1A. Risk Factors
Our business, financial condition, and results of operations could be harmed by any of the
following risks, or other risks that have not been identified or which we believe are immaterial or
unlikely. Shareholders should carefully consider the risks described below in conjunction with the
other information in this Form 10-K and the information incorporated by reference in this Form
10-K, including our consolidated financial statements and related notes.
Recent negative developments in the financial industry and the domestic and international credit
markets may adversely affect our operations and results.
Negative developments in the global credit and securitization markets have resulted in
uncertainty in the financial markets in general with the expectation of continued uncertainty in
2011. As a result of this credit crunch, commercial as well as consumer loan portfolio
performances have deteriorated at many institutions and the competition for deposits and quality
loans has increased significantly. In addition, the values of real estate collateral supporting
many commercial loans and home mortgages have declined and may continue to decline. Global
securities markets, and bank holding company stock prices in particular, have been negatively
affected, as has the ability of banks and bank holding companies to raise capital or borrow in the
debt markets. Bank regulatory agencies are expected to be active in responding to concerns and
trends identified in examinations, including the expected issuance of many formal enforcement
orders. Negative developments in the financial industry and the domestic and international credit
markets, and the impact of new legislation in response to those developments, may negatively impact
our operations by restricting our business operations, including our ability to originate or sell
loans, and adversely impact our financial performance. We can provide no assurance regarding the
manner in which any new laws and regulations will affect us.
We may have higher loan losses than is provided for in our allowance for loan losses.
We attempt to maintain an appropriate allowance for loan losses to provide for losses inherent
in our loan portfolio. We periodically determine the amount of the allowance based on consideration
of several factors, including:
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an ongoing review of the quality, mix, and size of our overall loan portfolio; |
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our historical loan loss experience; |
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an evaluation of economic conditions; |
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regular reviews of loan delinquencies and loan portfolio quality; and |
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the amount and quality of collateral, including guarantees, securing the loans. |
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However, there is no precise method of estimating credit losses, since any estimate of loan
losses is necessarily subjective and the accuracy depends on the outcome of future events. If
charge-offs in future periods increase, we may be required to increase our provisions for loan
losses, which would decrease our net income and possibly our capital.
Also, our loan losses could exceed our allowance for loan losses. As of December 31, 2010,
approximately 70% of our loan portfolio was composed of construction, commercial mortgage and
commercial loans. Repayment of such loans is generally considered more subject to market risk than
repayment of residential mortgage loans. Industry experience shows that a portion of loans will
become delinquent and a portion of loans will require partial or entire charge-off. Regardless of
the underwriting criteria utilized, losses may be experienced as a result of various factors beyond
our control, including:
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cost overruns; |
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declining property values; |
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mismanaged construction; |
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inferior or improper construction techniques; |
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economic changes or downturns during construction; |
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rising interest rates that may prevent sale of the property; and |
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failure to sell completed projects or units in a timely manner. |
These risks have been exacerbated by the recent developments in national and international
financial markets and the economy in general. The occurrence of any of the preceding risks could
result in the deterioration of one or more of these loans which could significantly increase our
percentage of nonperforming assets. An increase in nonperforming loans may result in a loss of
earnings from these loans, an increase in the related provision for loan losses and an increase in
charge-offs, all of which could have a material adverse effect on our financial condition and
results of operations.
Although we believe the allowance for loan losses is a reasonable estimate of known and
inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss
allowance will be adequate in the future. Excessive loan losses could have a material impact on our
financial performance. Consistent with our loan loss reserve methodology, we expect to make
additions to our loan loss reserve levels as a result of our loan growth, which may affect our
short-term earnings.
Additionally, as part of the merger with American Community, we identified an increase in
nonperforming loans in the American Community loan portfolio, including loans or lines of credit
that needed to be adversely classified after execution of the merger agreement (due in part to a
reassessment of certain of American Communitys construction loans and loans secured by real
property in light of the continuing softness in the economic environment), and the resulting
increases in American Communitys reserves for loan losses. There can be no assurances that the
reserves for loan losses will meet the current need, or that the loan losses will not be greater
than anticipated.
Federal regulators periodically review our allowance for loan losses and may require us to
increase our provision for loan losses or recognize further loan charge-offs, based on judgments
different than those of our management. Any increase in the amount of our provision or loans
charged-off as required by these regulatory agencies could have a negative effect on our operating
results.
We could continue to sustain losses from a further decline in credit quality.
Our earnings are significantly affected by our ability to properly originate, underwrite and
service loans. We have, and could continue to, sustain losses if more borrowers, guarantors, or
related parties fail to perform in accordance with the terms of their loans or if we fail to detect
or respond to deterioration in asset quality in a timely manner. Problems with credit quality or
asset quality have, and could continue to, cause our interest income and net interest margin to
further decrease and our provisions for loan losses to further increase, which have, and could
continue to, adversely affect our business, financial condition, and results of operations. These
risks have been exacerbated by the recent developments in national and
international financial markets, and we are unable to accurately predict what effect these
uncertain market conditions will continue to have on these risks.
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Continued changes in local economic conditions have and could continue to lead to higher loan
charge-offs and reduce our net income and growth.
We are subject to periodic fluctuations of the local economic conditions, which presently have
a negative effect. These fluctuations are not predictable, cannot be controlled, and currently are
creating a material adverse impact on our operations and financial condition. Our banking
operations are locally oriented and community-based. Accordingly, we continue to be dependent upon
local business conditions as well as conditions in the local residential and commercial real estate
markets we serve. For example, increases in unemployment and decreases in real estate values, as
well as other factors, have and could continue to weaken the economies of the communities we serve.
Weaknesses in our market area have and could continue to depress our earnings and consequently our
financial condition because:
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customers may not want or need our products or services; |
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borrowers may not be able to repay their loans; |
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the value of the collateral securing loans to borrowers may decline; and |
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the quality of our loan portfolio may decline. |
All of the latter scenarios have required and could continue to require us to charge off a
higher percentage of loans and/or increase provisions for credit losses, which reduces our net
income.
We are exposed to higher credit risk by commercial real estate, commercial business, and
construction lending.
Commercial real estate, commercial business, and construction lending usually involves higher
credit risks than that of single-family residential lending. These types of loans involve larger
loan balances to a single borrower or groups of related borrowers. Commercial real estate loans
may be affected to a greater extent than residential loans by adverse conditions in real estate
markets or the economy because commercial real estate borrowers ability to repay their loans
depends on successful development of their properties, as well as the factors affecting residential
real estate borrowers. These loans also involve greater risk because they generally are not fully
amortizing over the loan period, but have a balloon payment due at maturity. A borrowers ability
to make a balloon payment typically will depend on being able to either refinance the loan or sell
the underlying property in a timely manner.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the
propertys value at completion of construction equals or exceeds the cost of the property
construction (including interest) and the availability of permanent take-out financing. During the
construction phase, a number of factors can result in delays and cost overruns. If estimates of
value are inaccurate or if actual construction costs exceed estimates, the value of the property
securing the loan may be insufficient to ensure full repayment when completed through a permanent
loan or by seizure of collateral.
Commercial business loans are typically based on the borrowers ability to repay the loans
from the cash flow of their businesses. These loans may involve greater risk because the
availability of funds to repay each loan depends substantially on the success of the business
itself. In addition, the collateral securing the loans have the following characteristics: (i)
depreciate over time, (ii) difficult to appraise and liquidate, and (iii) fluctuate in value based
on the success of the business.
Commercial real estate, commercial business, and construction loans are more susceptible to a
risk of loss during a downturn in the business cycle. Our underwriting, review, and monitoring
cannot eliminate all of the risks related to these loans.
As of December 31, 2010, our outstanding commercial real estate loans were equal to 338% of
our total risk-based capital. The banking regulators are giving commercial real estate lending
greater scrutiny, and may require banks with higher levels of commercial real estate loans to
implement improved underwriting, internal controls, risk management policies and
portfolio stress testing, as well as possibly higher levels of allowances for losses and
capital levels as a result of commercial real estate lending growth and exposures.
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Weakness in the markets for residential or commercial real estate, including the secondary
residential mortgage loan markets, could reduce our net income and profitability.
Since 2007, the United States has seen softening residential housing markets, increasing
delinquency and default rates, and increasingly volatile and constrained secondary credit markets
have been affecting the mortgage industry generally. Our financial results may be adversely
affected by changes in real estate values in areas in which it operates. Decreases in real estate
values in these areas could adversely affect the value of property used as collateral for loans and
investments. If poor economic conditions result in decreased demand for real estate loans, then our
net income and profits may decrease.
The declines in home prices in many markets across the United States, along with the reduced
availability of mortgage credit, also may result in increases in delinquencies and losses in our
portfolio of loans related to residential real estate construction and development. Further
declines in home prices coupled with an economic recession and associated rises in unemployment
levels could drive losses beyond that which are provided for in our allowance for loan losses. In
that event, our earnings could be adversely affected.
Additionally, recent weakness in the secondary market for residential lending could have an
adverse impact upon our profitability. Significant ongoing disruptions in the secondary market for
residential mortgage loans have limited the market for and liquidity of most mortgage loans other
than conforming Fannie Mae, Freddie Mac and Ginnie Mae loans. The effects of ongoing mortgage
market challenges, combined with the ongoing correction in residential real estate market prices
and reduced levels of home sales, could result in further price reductions in single family home
values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan
originations and gains on sale of mortgage loans. Continued declines in real estate values and home
sales volumes, and financial stress on borrowers as a result of job losses, or other factors, could
have further adverse effects on borrowers that result in higher delinquencies and greater
charge-offs in future periods, which would adversely affect our financial condition or results of
operations.
Continuation of the economic downturn could reduce our customer base, our level of deposits, and
demand for financial products such as loans.
Our success significantly depends upon the growth in population, income levels, deposits, and
housing starts in our markets. The current economic downturn has negatively affected the markets
in which we operate and, in turn, the quality of our loan portfolio. If the communities in which
we operate do not grow or if prevailing economic conditions locally or nationally remain
unfavorable, our business may not succeed. A continuation of the economic downturn or prolonged
recession would likely result in the continued deterioration of the quality of our loan portfolio
and reduce our level of deposits, which in turn would hurt our business. Interest received on
loans represented approximately 91.8% of our interest income for the year ended December 31, 2010.
If the economic downturn continues or a prolonged economic recession occurs in the economy as a
whole, borrowers will be less likely to repay their loans as scheduled. Moreover, in many cases
the value of real estate or other collateral that secures our loans has been adversely affected by
the economic conditions and could continue to be negatively affected. Unlike many larger
institutions, we are not able to spread the risks of unfavorable local economic conditions across a
large number of diversified economies. A continued economic downturn could, therefore, result in
losses that materially and adversely affect our business.
If we do not perform well, we may be required to recognize additional impairment of our goodwill or
to establish a valuation allowance against the deferred income tax asset, which could have a
material adverse effect on our results of operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other
businesses over the fair value of their net assets at the date of acquisition. We test goodwill at
least annually for impairment. Impairment testing is performed based upon estimates of the fair
value of the reporting unit to which the goodwill relates. The reporting unit is the operating
segment or a business one level below that operating segment if discrete financial information is
prepared and regularly reviewed by management at that level. The fair value of the reporting unit
is impacted by the performance of the business and could be adversely impacted by any efforts made
by the Company to limit risk. If it is determined that the goodwill has been impaired, the Company
must write down the goodwill by the amount of the impairment, with a
25
corresponding charge to net income. Such write downs could have a material adverse effect on
our results of operations or financial position. During 2009, we recorded an impairment charge of
$61.6 million against goodwill related to the banking segment.
If current market conditions persist during 2011, in particular if mortgage markets decline,
or if the Companys actions to limit risk associated with its products or investments causes a
significant change in any one reporting units fair value, the Company may need to reassess
goodwill impairment for the Sidus segment at the end of each quarter as part of an annual or
interim impairment test. Subsequent reviews of goodwill could result in impairment of goodwill
during 2011.
Deferred income tax represents the tax effect of the differences between the book and tax
basis of assets and liabilities. Deferred tax assets are assessed periodically by management to
determine if they are realizable. Factors in managements determination include the performance of
the business including the ability to generate capital gains from a variety of sources and tax
planning strategies. If based on available information, it is more likely than not that the
deferred income tax asset will not be realized then a valuation allowance must be established with
a corresponding charge to net income. There was no valuation allowance necessary as of December 31,
2010. Charges to record a valuation allowance could have a material adverse effect on our results
of operations and financial position.
There can be no assurance that recently enacted legislation will help stabilize the U.S. financial
system.
As described above under Supervision and Regulation, in response to the challenges facing the
financial services sector, a number of regulatory and governmental actions have been enacted or
announced. There can be no assurance that these government actions will achieve their purpose.
The failure of the financial markets to stabilize, or a continuation or worsening of the current
financial market conditions, could have a material adverse affect on our business, our financial
condition, the financial condition of our customers, our common stock trading price, as well as our
ability to access credit. It could also result in declines in our investment portfolio which could
be other-than-temporary impairments.
Yadkin may identify material weaknesses in its internal control over financial reporting that may
adversely affect Yadkins ability to properly account for non-routine transactions.
As we have grown and expanded, we have added, and expect to acquire or continue to add,
businesses and other activities that complement our core retail and commercial banking functions.
For example, we acquired American Community in a transaction that closed in April 2009. Such
acquisitions or additions frequently involve complex operational and financial reporting issues
that can, and have, influenced managements internal control system. While we make every effort to
thoroughly understand any new activity or acquired entitys business process and properly integrate
it into the Company, we encountered difficulties that impacted our internal controls over financial
reporting in 2007 and in 2008, and can give no assurance that we will not encounter additional
operational and financial reporting difficulties impacting our internal control over financial
reporting.
Because of our participation in the CPP, we are subject to several restrictions including
restrictions on compensation paid to our executives.
Pursuant to the terms of the CPP purchase agreement between us and the Treasury, we adopted
certain standards for executive compensation and corporate governance for the period during which
the Treasury holds the equity issued pursuant to the CPP purchase agreement, including the common
stock which may be issued pursuant to the CPP warrants. These standards generally apply to our
Chief Executive Officer, Chief Financial Officer, and the three next most highly compensated senior
executive officers. The standards include (1) ensuring that incentive compensation for senior
executives does not encourage unnecessary and excessive risks that threaten the value of the
financial institution; (2) required clawback of any bonus or incentive compensation paid to a
senior executive based on statements of earnings, gains or other criteria that are later proven to
be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives;
and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for
each senior executive. In particular, the change to the deductibility limit on executive
compensation will likely increase the overall cost of our compensation programs in future periods
and may make it more difficult to attract suitable candidates to serve as executive officers.
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We may be required to defer dividend payments on our Series T Preferred Stock and Series T-ACB
Preferred Stock and defer interest payments on our trust preferred securities in the future which
would prevent us from being able to pay dividends on our common stock.
The Federal Reserve may require us to defer dividend payments on our Series T and Series T-ACB
Preferred Stock and defer interest payments on our trust preferred securities. We are permitted to
defer interest payments on our trust preferred securities for up to twenty consecutive quarters.
As a condition to deferring payments of interest, we are prohibited from paying any dividends on
our capital stock until deferred interest has been paid. If we fail to pay a total of six
quarterly dividend payments on our Series T or Series T-ACB Preferred Stock, whether consecutive or
not, Treasury is entitled to elect two directors to our Board of Directors. This right would
continue until we paid all due but unpaid dividends. Also, we would be prohibited from paying any
dividends on our common stock while payments on our Series T or Series T-ACB Preferred Stock are in
arrears.
Our small- to medium-sized business target markets may have fewer financial resources to weather a
downturn in the economy.
We target the banking and financial services needs of small- and medium-sized businesses.
These businesses generally have fewer financial resources in terms of capital borrowing capacity
than larger entities. If general economic conditions continue to negatively impact these
businesses in the markets in which we operate, our business, financial condition, and results of
operation may be adversely affected.
We are exposed to changes in the regulation of financial services companies.
Proposals for further regulation of the financial services industry are continually being
introduced in the United States Congress and the General Assembly of the State of North Carolina.
The agencies regulating the financial services industry also periodically adopt changes to their
regulations. On September 7, 2008, the Treasury announced that Fannie Mae (along with Freddie Mac)
had been placed into conservatorship under the control of the newly created Federal Housing Finance
Agency. On October 3, 2008, EESA was signed into law, and on October 14, 2008 the Treasury
announced its Capital Purchase Program under EESA. Additionally, on February 17, 2009, the
Recovery Act was signed into law to, among other things, create jobs and stimulate economic growth,
and on March 23, 2009, Treasury, along with the FDIC and the Federal Reserve, announced the
Public-Private Partnership Investment Program for Legacy Assets. It is possible that additional
legislative proposals may be adopted or regulatory changes may be made that would have an adverse
effect on our business. See Risk Factors We are subject to extensive regulation that could
restrict our activities above.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
As discussed in Item 1. Business, the Banks deposits are insured up to applicable limits by
the DIF of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance.
As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium
assessments to the FDIC.
Although we cannot predict what the insurance assessment rates will be in the future, further
deterioration in either risk-based capital ratios or adjustments to the base assessment rates could
have a material adverse impact on our business, financial condition, results of operations, and
cash flows.
The FDIC may terminate deposit insurance of any insured depository institution if it
determines that the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC. It also may suspend deposit insurance temporarily if the
institution has no tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the FDIC.
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Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are required by regulatory authorities to maintain adequate levels of capital to support
our operations. To support growth, we may need to raise additional capital. In
addition, we hope to redeem the Series T and Series T-ACB Preferred Stock that we issued to the
Treasury under the CPP before the dividends on the Series T and Series T-ACB Preferred Stock
increase from 5% per annum to 9% per annum in 2014, and we may need to raise additional capital to
do so. Our ability to raise additional capital, if needed, will depend in part on conditions in
the capital markets at that time, which are outside our control. Accordingly, we cannot assure you
of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot
raise additional capital when needed, our ability to further expand our operations through internal
growth and acquisitions could be materially impaired. In addition, if we decide to raise
additional equity capital, your interest could be diluted.
We depend on out of market deposits as a source of funding.
As of December 31, 2010, 5% of our deposits were obtained from out-of-market sources. To
continue to have access to this source of funding, we are required to be classified as a well
capitalized bank by the FDIC; whereas, if we only meet the adequate capital requirement, we must
obtain permission from the FDIC in order to continue utilizing this source of funding.
Liquidity needs could adversely affect our financial condition and results of operations.
We rely on dividends from our bank subsidiary as our primary source of funds. The Bank is
currently prohibited from paying dividends to the holding company without prior FDIC and
Commissioner approval. There can be no assurances such approval would be granted or with regard to
how long these restrictions will remain in place. The primary sources of funds of the bank
subsidiary are customer deposits and loan repayments. While scheduled loan repayments are a
relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.
The ability of borrowers to repay loans 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, inclement weather,
natural disasters and international instability.
Additionally, deposit levels may be affected by a number of factors, including rates paid by
competitors, general interest rate levels, regulatory capital requirements, returns available to
customers on alternative investments and general economic conditions. Accordingly, we may be
required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or
otherwise fund operations. Such sources include proceeds from Federal Home Loan Bank advances,
sales of investment securities and loans, and federal funds lines of credit from correspondent
banks, as well as out-of-market time deposits. While we believe that these sources are currently
adequate, there can be no assurance they will be sufficient to meet future liquidity demands,
particularly if we continue to grow and experience increasing loan demand. We may be required to
slow or discontinue loan growth, capital expenditures or other investments or liquidate assets
should such sources not be adequate.
We are exposed to the possibility of technology failure.
We rely on our computer systems and the technology of outside service providers. Our daily
operations depend on the operational effectiveness of their technology. We rely on our systems to
accurately track and record our assets and liabilities. If our computer systems or outside
technology sources become unreliable, fail, or experience a breach of security, our ability to
maintain accurate financial records may be impaired, which could materially affect our business
operations and financial condition.
The capital and credit markets have experienced unprecedented levels of volatility.
During 2008 and 2009, the capital and credit markets experienced extended volatility and
disruption. In some cases, the markets produced downward pressure on stock prices and credit
capacity for certain issuers without regard to those issuers underlying financial strength. If
these levels of market disruption and volatility continue, worsen or abate and then
arise at a later date, there can be no assurance that Yadkin will not experience a material adverse
effect on its ability to access capital, its business, its financial condition, and its results of
operations.
28
In response to financial conditions affecting the banking system and financial markets and the
potential threats to the solvency of investment banks and other financial institutions, the United
States government has taken unprecedented actions. These actions include the government-assisted
acquisition of Bear Stearns by JPMorgan Chase, the federal conservatorship of Fannie Mae and
Freddie Mac, and a historic bill authorizing the Treasury to invest in financial institutions and
purchase mortgage loans and mortgage-backed and other securities from financial institutions for
the purpose of stabilizing the financial markets or particular financial institutions. There can be
no assurance as to when or if the government will take further steps to intervene in the financial
sector and what impact government actions will have on the financial markets. Governmental
intervention (or the lack thereof) could materially and adversely affect Yadkins business,
financial condition and results of operations.
Significant risks accompany our recent and continued expansion.
We have recently experienced significant growth in our acquisition of American Community, and
may continue to grow by opening new branches or loan production offices and through acquisitions.
Such expansion could place a strain on our resources, systems, operations, and cash flow. Our
ability to manage this expansion will depend on our ability to monitor operations and control
costs, maintain effective quality controls, expand our internal management and technical and
accounting systems and otherwise successfully integrate new branches and acquired businesses. If we
fail to do so, our business, financial condition, and operating results will be negatively
impacted. Because we may continue to grow by opening new branches or loan production offices and
acquiring banks or branches of other banks that we believe provide a strategic fit with our
business, we cannot assure shareholders that we will be able to adequately or profitably manage
this growth. Risks associated with acquisition activity include the following:
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difficulties and expense associated with identifying and evaluating potential
acquisitions and merger partners; |
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inaccuracies in estimates and judgments to evaluate credit, operations, management,
and market risks with respect to the target institution or assets; |
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our ability to finance an acquisition; |
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the diversion of managements attention to negotiate a transaction and integrate the
operations and personnel of an acquired business; |
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our lack of experience in markets into which we may enter; |
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difficulties and expense in integrating the operations and personnel of the combined
businesses; |
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loss of key employees and customers as a result of an acquisition that is poorly
received; and |
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the incurrence and possible impairment of goodwill associated with an acquisition
and possible adverse short-term effects on our results of operations. |
We may also issue equity securities, including common stock, and securities convertible into
shares of our common stock in connection with future acquisitions, which could cause ownership and
economic dilution to our current shareholders.
Our business strategy includes the continuation of growth plans, and our financial condition and
results of operations could be negatively affected if we fail to grow or fail to manage our growth
effectively.
We intend to continue pursuing a growth strategy for our business. Our prospects must be
considered in light of the risks, expenses and difficulties frequently encountered by companies in
growth stages of development. We cannot assure shareholders we will be able to expand our market
presence in existing markets or successfully enter new markets or that any such expansion will not
adversely affect its results of operations. Also, if our growth occurs more slowly than anticipated
or declines, our operating results could be materially adversely affected. Our ability to
successfully grow will depend on a variety of factors, including the continued availability of
desirable business opportunities, the competitive responses from other financial institutions in
our market areas and our ability to manage growth. In addition, without additional capital we may
not be able to carry out this strategy. Failure to manage our growth effectively could have a
material adverse effect on our business, future prospects, financial condition or results of
operations, and could adversely affect our ability to successfully implement our business strategy.
Our ability to grow will also depend on whether we encounter additional
operational and financial reporting difficulties as a result of future growth. If we encounter
additional operational and financial reporting difficulties, our ability to grow in the future may
be adversely affected.
29
The success of our growth strategy depends on our ability to identify and retain individuals with
experience and relationships in the markets in which we intend to expand.
We intend to expand our banking network over the next several years, not just in our current
markets of the central piedmont, research triangle and northwestern areas of North Carolina but
also in other fast-growing markets throughout North Carolina, and in contiguous states. We believe
that to expand into new markets successfully, we must identify and retain experienced key
management members with local expertise and relationships in these markets. We expect that
competition for qualified management in the markets in which we expand will be intense and that
there will be a limited number of qualified persons with knowledge of and experience in the
community banking industry in these markets. Even if we identify individuals that we believe could
assist in establishing a presence in a new market, we may be unable to recruit these individuals
away from more established banks. Many experienced banking professionals employed by our
competitors are covered by agreements not to compete or solicit their existing customers if they
were to leave their current employment. These agreements make the recruitment of these
professionals more difficult. The market for highly qualified banking professionals is competitive,
and we cannot assure shareholders that we will be successful in attracting, hiring, motivating or
retaining them.
In addition, the process of identifying and recruiting individuals with the combination of
skills and attributes required to carry out our strategy is often lengthy. Our inability to
identify, recruit, and retain talented personnel to manage new branches effectively and in a timely
manner would limit our growth and could materially adversely affect our business, financial
condition, and results of operations.
New or acquired banking office facilities and other facilities may not be profitable.
We may not be able to identify profitable locations for new banking offices. The costs to
start up new banking offices or to acquire existing branches, and the additional costs to operate
these facilities, may increase our non-interest expense and decrease our earnings in the short
term. If branches of other banks become available for sale, we may acquire those offices. It may
be difficult to adequately and profitably manage our growth through the establishment or purchase
of additional banking offices and we can provide no assurance that any such banking offices will
successfully attract enough deposits to offset the expenses of their operation. In addition, any
new or acquired banking offices will be subject to regulatory approval, and there can be no
assurance that we will succeed in securing such approval.
We depend on key individuals, and the unexpected loss of one or more of these key individuals could
curtail our growth and adversely affect our prospects.
Joseph H. Towell, our president and chief executive officer, has substantial experience in the
banking industry and has contributed significantly to our Company since joining in 2008. If we
were to lose Mr. Towells services, he would be difficult to replace and our business and
development could be materially and adversely affected. Our success is dependent on the personal
contacts and local experience of Mr. Towell and other key management personnel in each of our
market areas. Our success also depends on our continued ability to attract and retain experienced
loan originators, as well as our ability to retain current key executive management personnel,
including the chief financial officer, Jan H. Hollar. We have entered into employment agreements
with each of these executive officers. The existence of such agreements, however, does not
necessarily assure that we will be able to continue to retain their services. The unexpected loss
of either of these key personnel could adversely affect our growth strategy and prospects to the
extent we are unable to replace such personnel.
We depend on the accuracy and completeness of information about clients and counterparties and our
financial condition could be adversely affected if we rely on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and
counterparties, we may rely on information furnished to us by or on behalf of clients and
counterparties, including financial statements and other financial information, which we do not
independently verify. We also may rely on representations of clients and counterparties as to the
accuracy and completeness of that information and, with respect to financial statements, on reports
of independent
30
auditors. For example, in deciding whether to extend credit to clients, we may assume that a
customers audited financial statements conform with GAAP and present fairly, in all material
respects, the financial condition, results of operations and cash flows of the customer. Our
financial condition and results of operations could be negatively affected to the extent we rely on
financial statements that do not comply with GAAP or are materially misleading.
Interest rate volatility could significantly harm our business.
Our results of operations are affected by the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities. A significant component of our
earnings is our net interest income. Net interest income is the difference between income from
interest-earning assets, such as loans, and the expense of interest-bearing liabilities, such as
deposits. We may not be able to effectively manage changes in what we charge as interest on our
earning assets and the expense we must pay on interest-bearing liabilities, which may significantly
reduce our earnings. The Federal Reserve has made significant changes in interest rates during the
last few years. Since rates charged on loans often tend to react to market conditions faster than
do rates paid on deposit accounts, these rate changes may have a negative impact on our earnings
until we can make appropriate adjustments in our deposit rates. In addition, there are costs
associated with our risk management techniques, and these costs could be material. Fluctuations in
interest rates are not predictable or controllable and, therefore, there can be no assurances of
our ability to continue to maintain a consistent positive spread between the interest earned on our
earning assets and the interest paid on our interest-bearing liabilities. These risks are
exacerbated by the recent developments in national and international financial markets, and we are
unable to accurately predict what effect these uncertain market conditions will have on these
risks.
Changes in prevailing interest rates may reduce our profitability.
One of the key measures of our success is our amount of net interest income. Net interest
income is the difference between interest income earned on interest-earning assets and interest
expense paid on interest-bearing liabilities. Interest rates are highly sensitive to many factors
that are beyond our control, including general economic conditions and policies of various
governmental and regulatory agencies, particularly the Federal Reserve.
We are subject to interest rate risk because:
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Assets and liabilities may mature or reprice at different times (for example, if
assets reprice faster than liabilities and interest rates are generally falling, net
income will initially decline), |
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Assets and liabilities may reprice at the same time but by different amounts (for
example, when the general level of interest rates is falling, we may reduce rates paid
on transaction and savings deposit accounts by an amount that is less than the general
decline in market interest rates), |
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Short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may impact new or repricing loan yields and
funding costs differently), and/or |
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The remaining maturity of various assets or liabilities may shorten or lengthen as
interest rates change (for example, if long-term mortgage interest rates decline
sharply, mortgage-backed securities held in the investment securities available for
sale portfolio may prepay significantly earlier than anticipated, which could reduce
portfolio income). |
Interest rates may also have a direct or indirect impact on loan demand, credit losses,
mortgage origination volume, the mortgage-servicing rights portfolio, the value of our pension plan
assets and liabilities, and other financial instruments directly or indirectly impacting net
income.
Any substantial, unexpected, prolonged change in market interest rates could have a material
adverse impact on our business, financial condition, results of operations, and cash flows.
31
We are exposed to the possibility that more prepayments may be made by customers to pay down loan
balances, which could reduce our interest income and profitability.
Prepayment rates stem from consumer behavior, conditions in the housing and financial markets,
general U.S. economic conditions, and the relative interest rates on fixed-rate and adjustable-rate
loans. Therefore, changes in prepayment rates are difficult to predict. Recognition of deferred
loan origination costs and premiums paid in originating these loans are normally recognized over
the contractual life of each loan. As prepayments occur, the rate at which net deferred loan
origination costs and premiums are expensed will accelerate. The effect of the acceleration of
deferred costs and premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which varies between loans.
If prepayment occurs after the period of time when the loan is subject to a prepayment penalty,
the effect of the acceleration of premium and deferred cost amortization is no longer mitigated.
We recognize premiums paid on mortgage-backed securities as an adjustment from interest income over
the expected life of the security based on the rate of repayment of the securities. Acceleration
of prepayments on the loans underlying a mortgage-backed security shortens the life of the
security, increases the rate at which premiums are expensed and further reduces interest income.
We may not be able to reinvest loan and security prepayments at rates comparable to the prepaid
instrument particularly in a period of declining interest rates.
We are subject to extensive regulation that could limit or restrict our activities.
We operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by the North Carolina Commissioner of Banks, the FDIC, and the Federal
Reserve. Compliance with these regulations is costly and restricts certain activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest rates charged,
interest rates paid on deposits, and locations of branches. We must also meet regulatory capital
requirements. If we fail to meet these capital and other regulatory requirements, our financial
condition, liquidity, and results of operations would be materially and adversely affected. Our
failure to remain well capitalized and well managed for regulatory purposes could affect
customer confidence, our ability to grow, our cost of funds and FDIC insurance, our ability to pay
dividends on our capital stock, and our ability to make acquisitions.
The laws and regulations applicable to the banking industry could change at any time, and the
effects of these changes on our business and profitability cannot be predicted. For example, new
legislation or regulation could limit the manner in which we conduct our business, including the
ability to obtain financing, attract deposits, make loans and expand our business through opening
new branch offices. Many of these regulations are intended to protect depositors, the public, and
the FDIC, not shareholders. In addition, the burden imposed by these regulations may place us at a
competitive disadvantage compared to competitors who are less regulated. The laws, regulations,
interpretations, and enforcement policies that apply to us have been subject to significant change
in recent years, sometimes retroactively applied, and may change significantly in the future. The
cost of compliance with these laws and regulations could adversely affect our ability to operate
profitably. Moreover, as a regulated entity, we can be requested by regulators to implement changes
to our operations. We have addressed areas of regulatory concern, including interest rate risk,
through the adoption of board resolutions and improved policies and procedures.
Failure to comply with government regulation and supervision could result in sanctions by
regulatory agencies, civil money penalties, and damage to our reputation.
Our operations are subject to extensive regulation by federal, state, and local governmental
authorities. Given the current disruption in the financial markets, we expect that the government
will continue to pass new regulations and laws that will impact us. Compliance with such
regulations may increase our costs and limit our ability to pursue business opportunities. Failure
to comply with laws, regulations, and policies could result in sanctions by regulatory agencies,
civil money penalties, and damage to our reputation. While we have policies and procedures in place
that are designed to prevent violations of these laws, regulations, and policies, there can be no
assurance that such violations will not occur.
We face strong competition in our market area, which may limit our asset growth and profitability.
The banking business in our primary market area, which is currently concentrated in the
central piedmont, research triangle and northwestern areas of North Carolina, is very competitive,
and the level of competition we face may increase
32
further, which may limit our asset growth and profitability. We experience competition in both
lending and attracting funds from other banks and nonbank financial institutions located within our
market area, some of which are significantly larger, well-established institutions. Nonbank
competitors for deposits and deposit-type accounts include savings associations, credit unions,
securities firms, money market funds, life insurance companies and the mutual funds industry. For
loans, we encounter competition from other banks, savings associations, finance companies, mortgage
bankers and brokers, insurance companies, small loan and credit card companies, credit unions,
pension trusts and securities firms. We may face a competitive disadvantage as a result of our
smaller size, lack of significant multi-state geographic diversification and inability to spread
our marketing costs across a broader market.
Negative public opinion surrounding our company and the financial institutions industry generally
could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public
opinion surrounding our company and the financial institutions industry generally, is inherent in
our business. Negative public opinion can result from our actual or alleged conduct in any number
of activities, including lending practices, corporate governance and acquisitions, and from actions
taken by government regulators and community organizations in response to those activities.
Negative public opinion can adversely affect our ability to keep and attract clients and employees
and can expose us to litigation and regulatory action. Although we take steps to minimize
reputation risk in dealing with our clients and communities, this risk will always be present given
the nature of our business.
We have implemented anti-takeover strategies that could make it more difficult for another company
to purchase us, even though such a purchase may increase shareholder value.
In many cases, shareholders might receive a premium for their shares if we were purchased by
another company. State law and our articles of incorporation and bylaws make it difficult for
anyone to purchase us without the approval of our board of directors. For example, our articles of
incorporation include certain anti-takeover provisions, such as being subject to the Shareholder
Protection Act and Control Share Acquisition Act under North Carolina law, which may have the
effect of preventing shareholders from receiving a premium for their shares of common stock and
discouraging a change of control of us by allowing minority shareholders to prevent a transaction
favored by a majority of the shareholders. The primary purpose of these provisions is to encourage
negotiations with our management by persons interested in acquiring control of us. These provisions
may also tend to perpetuate present management and make it difficult for shareholders owning less
than a majority of the shares to be able to elect even a single director.
Changes in banking laws could have a material adverse effect on us.
We are extensively regulated under federal and state banking laws and regulations that are
intended primarily for the protection of depositors, federal deposit insurance funds and the
banking system as a whole. In addition, we are subject to changes in federal and state laws as well
as changes in banking and credit regulations, and governmental economic and monetary policies. We
cannot predict whether any of these changes may adversely and materially affect us. The current
regulatory environment for financial institutions entails significant potential increases in
compliance requirements and associated costs, including those related to consumer credit, with a
focus on mortgage lending. For example, the North Carolina legislature has passed a number of bills
that impose additional requirements, limitations and liabilities on mortgage loan brokers,
originators and servicers. Generally, these enactments cover banks as well as state-licensed
mortgage lenders. The legislatures of other states in which Sidus operates that do not currently
have these requirements, may enact similar legislation in the future.
Federal and state banking regulators also possess broad powers to take supervisory actions as
they deem appropriate. These supervisory actions may result in higher capital requirements, higher
insurance premiums and limitations on our activities that could have a material adverse effect on
our business and profitability.
33
Our trading volume has been low compared with larger banks and bank holding companies and the sale
of substantial amounts of our common stock in the public market could depress the price of our
common stock.
The average daily trading volume of our shares on The Nasdaq Global Select Market for the
three months ended February 28, 2011 was approximately 26,000 shares. Lightly traded stock can be
more volatile than stock trading in an active public market like that for the large bank holding
companies. We cannot predict the extent to which an active public market for our common stock will
develop or be sustained. In recent years, the stock market has experienced a high level of price
and volume volatility, and market prices for the stock of many companies have experienced wide
price fluctuations that have not necessarily been related to their operating performance.
Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times
that they desire. We cannot predict the effect, if any, that future sales of our common stock in
the market, or availability of shares of our common stock for sale in the market, will have on the
market price of our common stock. We therefore can give no assurance that sales of substantial
amounts of our common stock in the market, or the potential for large amounts of sales in the
market, would not cause the price of our common stock to decline or impair our ability to raise
capital through sales of our common stock.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. We have exposure to many different industries and
counterparties, and routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks, and other
institutional clients. Many of these transactions expose us to credit risk in the event of a
default by a counterparty or client. In addition, our credit risk may be exacerbated when the
collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the
full amount of the credit or derivative exposure due to us. Any such losses could have a material
adverse affect on our financial condition and results of operations.
Legislation or regulatory changes could cause us to seek to repurchase the preferred stock and
warrants that we sold to the Treasury pursuant to the Capital Purchase Program.
Legislation that has been adopted after we closed on our sales of Series T and Series T-ACB
Preferred Stock and warrants to the Treasury for $36.0 million and $13.3 million, respectively,
pursuant to the CPP, or any legislation or regulations that may be implemented in the future, may
have a material impact on the terms of our CPP transaction with the Treasury. If we determine that
any such legislation or any regulations, in whole or in part, alter the terms of our CPP
transaction with the Treasury in ways that we believe are adverse to our ability to effectively
manage our business, then it is possible that we may seek to unwind, in whole or in part, the CPP
transaction by repurchasing some or all of the preferred stock and warrants that we sold to the
Treasury pursuant to the CPP. If we were to repurchase all or a portion of such preferred stock or
warrants, then our capital levels could be materially reduced.
The Series T and Series T-ACB Preferred Stock impacts net income available to our common
shareholders and earnings per common share, and the warrant we issued to Treasury may be dilutive
to holders of our common stock.
The dividends declared on the Series T and Series T-ACB Preferred Stock will reduce the net
income available to common shareholders and our earnings per common share. The Series T and Series
T-ACB Preferred Stock will also receive preferential treatment in the event of liquidation,
dissolution or winding up of the Company. Additionally, the ownership interest of the existing
holders of our common stock will be diluted to the extent the warrant we issued to Treasury in
conjunction with the sale to Treasury of the Series T and Series T-ACB Preferred Stock is
exercised. The shares of common stock underlying the warrant represent approximately 3.3% of the
shares of our common stock outstanding as of December 31, 2010 (including the shares issuable upon
exercise of the warrant in total shares outstanding). Although Treasury has agreed not to vote any
of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion
of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound
by this restriction.
34
Moreover, the securities purchase agreement between us and the Treasury pursuant to the CPP
provides that prior to the earlier of (i) three years from the date of sale and (ii) the date on
which all of the shares of the preferred stock have been redeemed by us or transferred by the
Treasury to third parties, we may not, without the consent of the U.S. Treasury, (a) increase the
cash dividend on our common stock or (b) subject to limited exceptions, redeem, repurchase or
otherwise acquire shares of our common stock or preferred stock (other than the Series T and Series
T-ACB Preferred Stock) or trust preferred securities.
If we are unable to redeem the Series T and Series T-ACB Preferred Stock after five years, we will
be required to make higher dividend payments on this stock, thereby substantially increasing our
cost of capital.
If we are unable to redeem the Series T and Series T-ACB Preferred Stock prior to February 15,
2014 and July 24, 2014, respectively, the dividend rate will increase substantially on that date,
from 5.0% per annum to 9.0% per annum. Depending on our financial condition at the time, this
increase in the annual dividend rate on the preferred stock could have a material negative effect
on our liquidity, our net income available to common shareholders, and our earnings per share.
Item 1B. Unresolved Staff Comments
Not Applicable
35
Item 2 Properties
The
Company currently operates out of 38 full-service banking offices, 11 mortgage lending offices
operated by Sidus, 9 administrative offices, and one loan production office as set forth below:
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Approximate Square |
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Year Established/ |
Office location |
|
Footage |
|
Acquired |
110 West Market Street, Elkin, NC |
|
|
2,350 |
|
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1968 |
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1318 North Bridge Street Elkin, NC |
|
|
4,550 |
|
|
|
1989 |
|
101 North Bridge Street, Jonesville, NC |
|
|
2,275 |
|
|
|
1971 |
|
117 Paulines Street, East Bend, NC |
|
|
2,400 |
|
|
|
1998 |
|
1404 West D Street, North Wilkesboro, NC |
|
|
3,178 |
|
|
|
1984 |
|
301 West Main Street, Wilkesboro, NC |
|
|
2,400 |
|
|
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1991 |
|
709 East Main Street, Jefferson, NC |
|
|
4,159 |
|
|
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1986 |
|
1488 Mount Jefferson Road, West Jefferson, NC |
|
|
4,900 |
|
|
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2001 |
|
516 Hawthorne Drive, Yadkinville, NC |
|
|
4,532 |
|
|
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2007 |
|
4611 Yadkinville Road, Pfafftown, NC |
|
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2,400 |
|
|
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2007 |
|
3804 Peachtree Ave #220E, Wilmington, NC (LPO) |
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|
1,200 |
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2007 |
|
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|
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|
Offices doing business as Piedmont Bank - |
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|
|
|
|
|
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|
325 East Front Street, Statesville, NC |
|
|
4,990 |
|
|
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1998 |
|
127 North Cross Lane, Statesville, NC |
|
|
2,485 |
|
|
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1997 |
|
165 Williamson Road, Mooresville, NC |
|
|
5,093 |
|
|
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1998 |
|
520 East Plaza Drive, Mooresville, NC |
|
|
3,689 |
|
|
|
2000 |
|
19525 West Catawba Avenue, Cornelius, NC |
|
|
2,834 |
|
|
|
2000 |
|
100 North Statesville Road, Huntersville, NC |
|
|
2,923 |
|
|
|
2000 |
|
197 Medical Park Road, Mooresville, NC |
|
|
12,280 |
|
|
|
2005 |
|
3475 East Broad St, Statesville, NC |
|
|
1,800 |
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Offices doing business as High Country Bank- |
|
|
|
|
|
|
|
|
149 Jefferson Road, Boone, NC |
|
|
4,600 |
|
|
|
1998 |
|
176 Shadowline Drive, Boone, NC |
|
|
1,700 |
|
|
|
2000 |
|
783 W. King Street Ste A, Boone, NC |
|
|
1,200 |
|
|
|
2004 |
|
3618 Mitchell Ave, Linville, NC |
|
|
3,000 |
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Offices doing business as Cardinal State Bank- |
|
|
|
|
|
|
|
|
237 South Churton Street, Hillsborough, NC |
|
|
3,250 |
|
|
|
2008 |
|
5309 Highgate Drive, Durham, NC |
|
|
3,300 |
|
|
|
2008 |
|
115 East Carver Street, Durham, NC |
|
|
4,300 |
|
|
|
2008 |
|
3400 Westgate Drive, Durham, NC |
|
|
2,400 |
|
|
|
2008 |
|
405 N. Main St, Creedmoor, NC |
|
|
1,056 |
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Offices doing business as American Community Bank- |
|
|
|
|
|
|
|
|
2593 West Roosevelt Boulevard, Monroe, NC |
|
|
14,774 |
|
|
|
2009 |
|
13860 East Independence Boulevard, Indian Trail, NC |
|
|
3,850 |
|
|
|
2009 |
|
7001 East Marshville Boulevard, Marshville, NC |
|
|
3,500 |
|
|
|
2009 |
|
7200 Matthews-Mint Hill Road, Mint Hill, NC |
|
|
2,500 |
|
|
|
2009 |
|
3500 Mt. Holly-Huntersville Road, Charlotte, NC |
|
|
4,500 |
|
|
|
2009 |
|
4500 Cameron Valley Parkway, Charlotte, NC |
|
|
2,800 |
|
|
|
2009 |
|
2130 South Boulevard, Charlotte, NC |
|
|
5,400 |
|
|
|
2009 |
|
217 North Granard Street, Gaffney, SC |
|
|
11,000 |
|
|
|
2009 |
|
207 West Cherokee Street, Blacksburg, SC |
|
|
2,500 |
|
|
|
2009 |
|
626 Chesnee Highway, Gaffney, SC |
|
|
2,500 |
|
|
|
2009 |
|
1738 Gold Hill Road, Tega Cay, SC |
|
|
3,100 |
|
|
|
2009 |
|
36
|
|
|
|
|
|
|
|
|
|
|
Approximate Square |
|
Year Established/ |
Office location |
|
Footage |
|
Acquired |
Offices operated by Sidus Financial, LLC- |
|
|
|
|
|
|
|
|
1073 13th Street SE, Hickory, NC |
|
|
750 |
|
|
|
2004 |
|
350 South Cox Ste D, Asheboro, NC |
|
|
800 |
|
|
|
2004 |
|
5001 Craig Rath Blvd. Midlothian, VA |
|
|
2,691 |
|
|
|
2004 |
|
1824 E. Main St, Easley, SC |
|
|
1,000 |
|
|
|
2004 |
|
6511 Creedmoor Road Ste 207, Raleigh, NC |
|
|
1,150 |
|
|
|
2006 |
|
2403 W. Nash Street, Wilson, NC |
|
|
950 |
|
|
|
2006 |
|
#16 Causeway Shopping Center, Atlantic Beach, NC |
|
|
600 |
|
|
|
2006 |
|
1 Bedford Farms Drive Bedford NH |
|
|
3,653 |
|
|
|
2008 |
|
2300 S. Croatan Hwy, Nags Head, NC |
|
|
1100 |
|
|
|
2009 |
|
701 Green Valley Rd, Greensboro, NC |
|
|
5,000 |
|
|
|
2010 |
|
1820 Stonehenge Dr, Greenville, NC |
|
|
15,000 |
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Offices housing administration and operations- |
|
|
|
|
|
|
|
|
209 North Bridge Street, Elkin, NC |
|
|
6,120 |
|
|
|
1979 |
|
290 North Bridge Street, Elkin, NC |
|
|
2,516 |
|
|
|
1995 |
|
204 South Elm Street, Statesville, NC |
|
|
5,435 |
|
|
|
2000 |
|
120 South Elm Street, Statesville, NC |
|
|
2,381 |
|
|
|
2001 |
|
482 State Farm Road, Boone, NC |
|
|
2,900 |
|
|
|
2003 |
|
101 West Main Street, Elkin |
|
|
13,480 |
|
|
|
2004 |
|
3710 University Drive, Durham, NC |
|
|
12,000 |
|
|
|
2008 |
|
300 East Broad Street, Statesville, NC |
|
|
6,000 |
|
|
|
2009 |
|
328 East Broad Street, Statesville, NC |
|
|
2,500 |
|
|
|
2010 |
|
Item 3 Legal Proceedings
In the course of ordinary business, the Company may, from time to time, be named a party to
legal actions and proceedings. In accordance with GAAP the Company establishes reserves for
litigation and regulatory matters when those matters present loss contingencies that are both
probable and estimable. When loss contingencies are not both probable and estimable, the Company
does not establish reserves.
Although the Company is a defendant in various legal proceedings arising in the ordinary
course of business, there are no legal proceedings pending or, to the best knowledge of management,
threatened which, in the opinion of management, will have a material adverse affect on the
financial condition or results of operation of the Company.
Item 4 (Removed and Reserved)
37
PART II
Item 5 Market for Registrants Common Equity, Related Shareholder Matters, and Issuer Purchases
of Equity Securities
Market for the Common Stock of the Company. Yadkin first issued common stock during 1968 in
connection with its initial incorporation and the commencement of its banking operations. Yadkins
common stock is listed on The Nasdaq Global Select Market under the trading symbol YAVY. As of
February 28, 2011, the Company had 5,826 shareholders of record.
The following table lists high and low published closing prices of Yadkins common stock (as
reported on The Nasdaq Global Select) for the calendar quarters indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Price |
|
|
Dividends |
|
Common Stock |
|
|
Paid |
|
High |
|
Low |
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
- |
|
|
$ |
4.48 |
|
|
$ |
3.43 |
|
Second Quarter |
|
|
- |
|
|
|
5.51 |
|
|
|
3.33 |
|
Third Quarter |
|
|
- |
|
|
|
3.32 |
|
|
|
2.30 |
|
Fourth Quarter |
|
|
- |
|
|
|
2.65 |
|
|
|
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Price |
|
|
Dividends |
|
Common Stock |
|
|
Paid |
|
High |
|
Low |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
0.06 |
|
|
$ |
14.00 |
|
|
$ |
3.27 |
|
Second Quarter |
|
|
0.06 |
|
|
|
8.20 |
|
|
|
5.08 |
|
Third Quarter |
|
|
- |
|
|
|
7.25 |
|
|
|
4.67 |
|
Fourth Quarter |
|
|
- |
|
|
|
4.39 |
|
|
|
3.29 |
|
Dividends. In the future, any declaration and payment of cash dividends will be subject to
Yadkins Board of Directors evaluation of its operating results, financial condition, future
growth plans, general business and economic conditions, and tax and other relevant considerations.
Also, the payment of cash dividends by Yadkin in the future will be subject to certain other legal
and regulatory limitations (including the requirement that Yadkins capital be maintained at
certain minimum levels) and will be subject to ongoing review by banking regulators. We may be
required to defer dividend payments on the Series T and Series T-ACB Preferred Stock and interest
payments on the trust preferred securities in the future. If we defer dividend payments on the
Series T and Series T-ACB Preferred Stock and defer interest payments on our trust preferred
securities, we will be prohibited from paying any dividends on our common stock until all deferred
payments have been made in full. Prior to January 16, 2012, so long as the U.S. Treasury owns
shares of the Series T Preferred Stock, we are not permitted to increase cash dividends on our
common stock without the U.S. Treasurys consent. Additionally, prior to July 24, 2012, so long as
the Treasury owns shares of the Series T-ACB Preferred Stock, we are not permitted to increase cash
dividends on our common stock without the Treasurys consent. There is no assurance that, in the
future, Yadkin will have funds available to pay cash dividends, or, even if funds are available,
that it will pay dividends in any particular amount or at any particular times, or that it will pay
dividends at all.
Regulatory restrictions on cash dividends. As a holding company, we are dependent upon our
subsidiary, the bank, to provide funding for our operating expenses and dividends. North Carolina
banking law requires that cash dividends be paid out of retained earnings and prohibits the payment
of cash dividends if payment of the dividend would cause the banks surplus to be less than 50% of
its paid-in capital. Also, under federal banking law, no cash dividend may be paid if the Bank is
undercapitalized or insolvent or if payment of the cash dividend would render the bank
undercapitalized or insolvent, and no cash dividend may be paid by the Bank if it is in default of
any deposit insurance assessment due to the FDIC. The Bank is currently prohibited from paying
dividends to the holding company without prior FDIC and Commissioner approval. There can be no
assurances such approval would be granted or with regard to how long these restrictions will remain
in place.
We suspended our common stock repurchase plan in 2008, which we historically used to (1)
reduce the number of shares outstanding when our share price in the market made repurchases
advantageous and (2) manage capital levels. Therefore, there were no share repurchase transactions
for the quarter or year ended December 31, 2010.
38
Item 6 Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except per share data) |
|
|
At or for the Year Ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
99,002 |
|
|
$ |
95,542 |
|
|
$ |
74,526 |
|
|
$ |
75,193 |
|
|
$ |
67,306 |
|
Total interest expense |
|
|
34,333 |
|
|
|
31,831 |
|
|
|
34,536 |
|
|
|
33,300 |
|
|
|
26,429 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
64,669 |
|
|
|
63,711 |
|
|
|
39,990 |
|
|
|
41,893 |
|
|
|
40,877 |
|
Provision for loan losses |
|
|
24,349 |
|
|
|
48,439 |
|
|
|
11,109 |
|
|
|
2,489 |
|
|
|
2,165 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
40,320 |
|
|
|
15,272 |
|
|
|
28,881 |
|
|
|
39,404 |
|
|
|
38,712 |
|
Non-interest income |
|
|
22,138 |
|
|
|
24,843 |
|
|
|
15,864 |
|
|
|
15,731 |
|
|
|
14,345 |
|
Non-interest expenses |
|
|
63,859 |
|
|
|
124,048 |
|
|
|
39,637 |
|
|
|
33,246 |
|
|
|
32,093 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(1,401 |
) |
|
|
(83,933 |
) |
|
|
5,108 |
|
|
|
21,889 |
|
|
|
20,964 |
|
Provision for income taxes |
|
|
(1,389 |
) |
|
|
(8,876 |
) |
|
|
1,241 |
|
|
|
7,201 |
|
|
|
7,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(12 |
) |
|
|
(75,057 |
) |
|
|
3,867 |
|
|
|
14,688 |
|
|
|
13,792 |
|
Preferred stock dividend and amortization
of preferred stock discount |
|
|
3,181 |
|
|
|
2,435 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
(3,193 |
) |
|
$ |
(77,492 |
) |
|
$ |
3,867 |
|
|
$ |
14,688 |
|
|
$ |
13,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic |
|
$ |
(0.20 |
) |
|
$ |
(5.23 |
) |
|
$ |
0.34 |
|
|
$ |
1.39 |
|
|
$ |
1.30 |
|
Earnings (loss) per share - diluted |
|
|
(0.20 |
) |
|
|
(5.23 |
) |
|
|
0.34 |
|
|
|
1.37 |
|
|
|
1.28 |
|
Cash dividends per share |
|
|
- |
|
|
|
0.12 |
|
|
|
0.52 |
|
|
|
0.51 |
|
|
|
0.47 |
|
Weighted average shares outstanding* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,129,640 |
|
|
|
14,808,325 |
|
|
|
11,235,943 |
|
|
|
10,594,567 |
|
|
|
10,640,819 |
|
Diluted |
|
|
16,129,640 |
|
|
|
14,808,325 |
|
|
|
11,306,742 |
|
|
|
10,712,667 |
|
|
|
10,788,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Year-End Balance Sheet
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net, and loans held for sale |
|
$ |
1,613,206 |
|
|
$ |
1,677,538 |
|
|
$ |
1,215,143 |
|
|
$ |
939,061 |
|
|
$ |
846,432 |
|
Total assets |
|
|
2,300,594 |
|
|
|
2,113,612 |
|
|
|
1,524,288 |
|
|
|
1,211,077 |
|
|
|
1,120,865 |
|
Deposits |
|
|
2,020,406 |
|
|
|
1,821,752 |
|
|
|
1,155,042 |
|
|
|
963,442 |
|
|
|
907,847 |
|
Shareholders equity |
|
|
147,457 |
|
|
|
152,266 |
|
|
|
149,644 |
|
|
|
133,269 |
|
|
|
124,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average assets |
|
|
(0.14%) |
|
|
|
(3.96%) |
|
|
|
0.28% |
|
|
|
1.31% |
|
|
|
1.31% |
|
Return (loss) on average equity |
|
|
(2.08%) |
|
|
|
(40.50%) |
|
|
|
2.66% |
|
|
|
11.32% |
|
|
|
11.52% |
|
Dividend payout |
|
|
0.00% |
|
|
|
(59.09%) |
|
|
|
154.80% |
|
|
|
36.77% |
|
|
|
36.15% |
|
Average equity to average
assets |
|
|
6.89% |
|
|
|
9.78% |
|
|
|
10.55% |
|
|
|
11.53% |
|
|
|
11.69% |
|
|
|
|
* Weighted average shares outstanding excludes 18,000 shares of nonvested, restricted stock. |
The American Community and Cardinal acquisitions results of operations are included from the date
of acquisition forward.
39
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
The following presents managements discussion and analysis of our financial condition and
results of operations
and should be read in conjunction with the financial statements and related notes combined in
Item 8 of this report. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from those anticipated in these
forward-looking statements as a result of various factors. The following discussion is intended to
assist in understanding the financial condition and results of operations of the Company. Because
Yadkin Valley Financial Corporation has no material operations and conducts no business on its own
other than owning its subsidiary, Yadkin Valley Bank and Trust (the Bank), the discussion
contained in this Managements Discussion and Analysis concerns primarily the business of the Bank.
However, for ease of reading and because the financial statements are presented on a consolidated
basis, Yadkin Valley Financial Corporation and Yadkin Valley Bank and Trust are collectively
referred to herein as the Company unless otherwise noted.
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations describes our results of operations for the year ended December 31, 2010 as compared to
the year ended December 31, 2009 and the year ended December 31, 2008, and also analyzes our
financial condition as of December 31, 2010 as compared to December 31, 2009. Like most financial
institutions, 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 most of
which we pay interest. Consequently, one of the key measures of our success is the 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.
There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb
our estimate of 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.
Markets in the United States and elsewhere have experienced extreme volatility and disruption
for more than 12 months. These circumstances have exerted significant downward pressure on prices
of equity securities and virtually all other asset classes, and have resulted in substantially
increased market volatility, severely constrained credit and capital markets, particularly for
financial institutions, and an overall loss of investor confidence. Loan portfolio performances
have deteriorated at many institutions resulting from, among other factors, a weak economy and a
decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing
industry with falling home prices and increasing foreclosures and unemployment have created strains
on financial institutions. Many borrowers are now unable to repay their loans, and the value of
the collateral securing these loans has, in some cases, declined below the loan balance. The
following discussion and analysis describes our performance in this challenging economic
environment.
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 discussion and analysis in conjunction with
our financial statements and the other statistical information included in this report. Throughout
MD&A we make reference to tangible equity which is a non-GAAP
measure. See page 54 for a
reconciliation from the GAAP measure to non-GAAP measure.
Critical Accounting Policies
The accounting and reporting policies of the Company and its subsidiaries are in accordance
with accounting principles generally accepted in the United States and conform to general practices
within the banking industry. The more critical accounting and reporting policies include the
Banks accounting for loans, the provision and allowance for loan losses and goodwill. In
particular, the Banks accounting policies relating to the provision and allowance for loan losses
and possible impairment of goodwill involve the use of estimates and require significant judgments
to be made by management.
40
Different assumptions in the application of these policies could result
in material differences in the consolidated financial position or consolidated results of
operations. Please see the discussion below under Loans, Provision for Allowance for Loan
Losses, and Goodwill. Also, please refer to Note 1 in the Notes to Consolidated Financial
Statements for additional information regarding all of the Banks critical and significant
accounting policies.
LOANS Loans that management has the intent and ability to hold for the foreseeable future
are stated at their outstanding principal balances adjusted for any deferred fees and costs.
Interest on loans is calculated by using the simple interest method on daily balances of the
principal amount outstanding. Loan origination and other fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield using the interest
method.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES We have established an allowance for loan losses
through a provision for loan losses charged to expense on our statements of income. The allowance
for loan losses represents an amount which we believe will be adequate to absorb probable losses on
existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for
loan losses is based on a number of assumptions about future events, which we believe to be
reasonable, but may differ from actual results. Our determination of the allowance for loan losses
is based on evaluations of the collectability of loans, including consideration of factors such as
the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic
conditions that may affect the borrowers ability to repay, the amount and quality of collateral
securing the loans, our historical loan loss experience and a review of specific problem loans. We
also consider subjective issues such as changes in the lending policies and procedures, changes in
the local/national economy, changes in volume or type of credits, changes in volume/severity of
problem loans, quality of loan review and board of director oversight, concentrations of credit,
and peer group comparisons. Periodically, we adjust the amount of the allowance based on changing
circumstances. We charge recognized losses to the allowance for loan losses and add subsequent
recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of
loans in future periods will not exceed the allowance for loan losses as estimated at any point in
time or that provisions for loan losses will not be significant to a particular accounting period,
especially considering the overall weakness in the commercial real estate market in our market
areas.
GOODWILL Goodwill, which represents the excess of the purchase price over the fair value of
net assets acquired in a business combination, is tested at least annually for impairment. The
impairment test is a two-step process that begins with an initial impairment evaluation. If the
initial evaluation suggests that an impairment of the asset value exists, the second step will
determine the amount of the impairment, if any. If the tests conclude that goodwill is impaired,
the carrying value will be adjusted, and an impairment charge will be recorded. Given the
substantial declines in our common stock price, declining operating results, asset quality trends,
market comparables and the economic outlook for our industry, the Company recorded a $61.6 million
goodwill impairment charge to write-off all of its goodwill at the Bank reporting unit during 2009.
The remaining $4.9 million in goodwill is related to the Sidus segment and will continue to be
reviewed for impairment at least annually. For further discussion of goodwill impairment, refer to
Note 22 of the Consolidated Financial Statements.
OTHER REAL ESTATE OWNED OREO OREO property obtained in satisfaction of a loan is recorded
at its estimated fair value less anticipated selling costs based upon the propertys appraised
value at the date of transfer, with any difference between the fair value of the property and the
carrying value of the loan charged to the allowance for loan losses. Subsequent declines in value
are reported as adjustments to the carrying amount and are charged to noninterest expense. Gains or
losses resulting from the sale of OREO are recognized in noninterest expense on the date of sale.
DEFERRED TAX ASSETS At December 31, 2010, we had $15.6 million in deferred tax assets. A
valuation allowance is provided when it is more-likely-than-not that some portion of the deferred
tax asset will not be realized. All available evidence, both positive and negative, was considered
to determine whether, based on the weight of that evidence, impairment should be recognized. Our
forecast process includes judgmental and quantitative elements that may be subject to significant
change. If our forecast of taxable income within the carryforward periods available under
applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be
impaired. Based on our analysis of both positive and negative evidence we concluded there was no
impairment of the deferred tax assets at December 31, 2010.
Financial Condition
The Banks total assets increased 8.9% from $2,113.6 million at December 31, 2009 to $2,300.6
million at December 31, 2010. Total gross loans decreased 4.4% from $1,726.2 million at December
31, 2009 to $1,651.0 million at December 31, 2010. Deposits grew 10.9% from $1,821.8 million at
December 31, 2009 to $2,020.4 million at December 31, 2010.
41
Loans held for investment decreased by $75.9 million, or 4.5% for the year ended December 31, 2010.
The table below presents the increases (decreases) in loans year over year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
Balance |
|
Increase |
|
% Increase |
Loan Category |
|
12/31/10 |
|
12/31/09 |
|
(Decrease) |
|
(Decrease) |
|
|
(dollar amounts in millions) |
|
Construction |
|
$ |
300.9 |
|
|
$ |
364.9 |
|
|
$ |
(64.0 |
) |
|
|
-17.5 |
% |
Commercial real estate |
|
|
621.4 |
|
|
|
583.1 |
|
|
|
38.3 |
|
|
|
6.6 |
% |
1-4 family mortgage loans |
|
|
174.5 |
|
|
|
169.8 |
|
|
|
4.7 |
|
|
|
2.8 |
% |
1-4 family equity lines |
|
|
209.3 |
|
|
|
202.7 |
|
|
|
6.6 |
|
|
|
3.3 |
% |
Multifamily |
|
|
29.3 |
|
|
|
36.0 |
|
|
|
(6.7 |
) |
|
|
-18.6 |
% |
Commercial, other |
|
|
222.7 |
|
|
|
271.4 |
|
|
|
(48.7 |
) |
|
|
-17.9 |
% |
Consumer |
|
|
42.4 |
|
|
|
48.5 |
|
|
|
(6.1 |
) |
|
|
-12.6 |
% |
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,600.5 |
|
|
$ |
1,676.4 |
|
|
$ |
(75.9 |
) |
|
|
-4.5 |
% |
|
|
|
|
|
|
|
|
|
Loan composition includes commercial real estate loans which account for 39% of total loans,
followed by construction and land development loans at 19%, commercial and industrial loans at 14%,
home equity lines at 13%, residential 1-4 family first mortgage liens at 11%, and consumer loans at
3%.
The weighted average rate for loans held for investment at December 31, 2010 was 5.53% as
compared to 5.40% at December 31, 2009. Fixed rate loans comprised 54% of total loans held for
investment at December 31, 2010, an increase from 53% at the prior year end. Fixed rate loans
held at the end of the current and prior year yielded 6.24% and 6.27%, respectively, a decrease of
3 basis points. At December 31, 2010, and 2009, the aggregate yields of variable rate loans were
4.71% and 4.43%, respectively, an increase of 28 basis points. This increase is attributable to
strategic loan pricing on variable rate loan products and the impact of interest rate floors
established on certain variable rate loans.
Mortgage loans held-for-sale increased by $704,000, or 1.4%, as total year-to-date loan
closings at December 31, 2010 were $937.0 million, compared to year-to-date loan closings at
December 31, 2009 of $1,646.0 million. These loans are closed, managed, and sold by Sidus. The
Bank continued its strategy of selling mortgage loans mostly to various investors with servicing
released and to a lesser extent to the Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation with servicing rights retained. Loans held-for-sale are normally sold to
investors within two to three weeks after closing. Loans closed by Sidus during 2010 totaled
$937.0 million with monthly volumes ranging from $40.4 million in February to $133.8 million in
November.
The securities portfolio increased by $114.2 million, or 62.1%, due to purchases of $230.9
million. These increases were offset by $59.1 million in principal reductions and maturities, and
$53.3 million in sales. All securities were held in the available-for-sale category and included
U.S. Government agency securities of $14.6 million, or 4.9%, state and municipal securities of
$72.6 million, or 24.4%, mortgage-backed securities of $52.1 million, or 17.5%, collateralized
mortgage obligations of $157.6 million, or 52.9%, and $1.1 million, or 0.4%, in other common and
preferred stocks. The unrealized gains decreased to a net unrealized gain of $917,000 from a net
unrealized gain of $4.7 million. The tax equivalent yield on securities held at December 31, 2010
was 3.26%, a decrease from 4.77% a year earlier.
Premises and equipment, net of accumulated depreciation, increased by $2.3 million from
December 31, 2009 to December 31, 2010. Additions were $5.4 million in premises and equipment while
depreciation and disposals accounted for a $3.0 million decrease.
42
Foreclosed real estate, also referred to as Other Real Estate Owned (OREO), increased by
$11.2 million from December 31, 2009 to December 31, 2010. The following table presents the
foreclosed real estate:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Beginning balance |
|
$ |
14,344,599 |
|
|
$ |
4,017,880 |
|
Loans transferred to OREO |
|
|
21,232,204 |
|
|
|
18,641,826 |
|
OREO acquired in American Community merger |
|
|
- |
|
|
|
432,796 |
|
Proceeds of sales, net of selling expenses |
|
|
(7,570,869 |
) |
|
|
(7,189,530 |
) |
Loss on sale of OREO |
|
|
(2,423,700 |
) |
|
|
(1,558,373 |
) |
|
|
|
|
|
Ending balance of OREO |
|
$ |
25,582,234 |
|
|
$ |
14,344,599 |
|
|
|
|
|
|
Fair value of OREO is based on recent appraisals or discounted collateral values for
properties in which recent appraisals were not available.
Other assets decreased by $12.4 million from December 31, 2009 to December 31, 2010. The
majority of the decrease was related to the current income taxes receivable and deferred tax assets
that were decreased from $26.4 million to $19.9 million. In addition, prepaid FDIC insurance
decreased from $10.5 million at December 31, 2009 to $6.4 million as of December 31, 2010.
Deposits grew by $198.7 million, or 10.9%, for the year ended December 31, 2010. The table
below presents the increases year over year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
Balance |
|
Increase |
|
% Increase |
Deposit Category |
|
12/31/10 |
|
12/31/09 |
|
(Decrease) |
|
(Decrease) |
|
|
(dollar amounts in millions) |
Certificates of Deposit |
|
$ |
1,214.4 |
|
|
$ |
1,168.4 |
|
|
$ |
46.0 |
|
|
|
3.9 |
% |
Money market |
|
|
388.0 |
|
|
|
231.3 |
|
|
|
156.7 |
|
|
|
67.7 |
% |
NOW |
|
|
148.2 |
|
|
|
160.9 |
|
|
|
(12.7 |
) |
|
|
-7.9 |
% |
Savings |
|
|
53.6 |
|
|
|
53.3 |
|
|
|
0.3 |
|
|
|
0.6 |
% |
Demand deposits |
|
|
216.2 |
|
|
|
207.9 |
|
|
|
8.3 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
2,020.4 |
|
|
$ |
1,821.8 |
|
|
$ |
198.6 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
Money Market accounts were the largest contributor to deposit growth with an increase of
$156.7 million. Money Market rates were offered at rates in line with competitors rates and at
one or more special rates and priced at 25-50 basis points higher than competitors rates for
limited periods. These rates were needed in order to build a deposit base sufficient for
liquidity. Although there is no concentration of deposits from one individual or entity, the Bank
does have $477.0 million or 23.6% of its total deposits in the over $100,000 (jumbo CDs)
category. Jumbo CDs decreased by $83.8 million, or 14.9%, over the balance at December 31, 2009.
The Banks brokered CDs are approximately 5% of the Banks total deposits and are discussed in
further detail under Liquidity Management on page 50.
The weighted-average rate for CDs outstanding on December 31, 2010 was 2.23% down from 2.32%
at the end of the prior year. During 2010 the aggregate CD rate decreased as CDs repriced
throughout the year. The weighted-average rate paid on outstanding jumbo CDs at December 31, 2010
was 5 basis points higher than on other CDs, an increase from the prior year-end spread of 3 basis
points. The weighted-average remaining term on jumbo CDs at December 31, 2010 was 15.3 months, up
from 11.5 months, at the end of 2009 and 8.8 months at the end of 2008.
There was an overall increase in checking account balances and a shift in the mix from
interest bearing NOW deposits to money market accounts. This shift in mix can be attributed to the
weakening economy as rate-conscious customers continued to look for better opportunities to earn
interest on their balances.
43
In addition to deposits, funding for the Banks assets was obtained from overnight repurchase
agreements with businesses in the local market area. Funds borrowed under repurchase agreements
decreased from $48.0 million at December
31, 2009 to $41.9 million at December 31, 2010. Advances from the Federal Home Loan Bank at
December 31, 2010 totaled $39.0 million compared to $39.0 million at December 31, 2009.
On November 1, 2007,
the Company issued $25.0 million in trust preferred securities at the floating interest rate of
three month LIBOR plus 132 basis points. The initial interest rate was 6.21% for the period
beginning November 1 through December 15, 2007. The rate will adjust quarterly, thereafter. The
interest rate at December 31, 2010 was 1.62% and will be effective until March 14, 2011. These
securities are classified as long-term debt and mature in the year 2032. The Company has the
option to call for redemption of the securities in 2012. The proceeds provided funding for the
acquisition of Cardinal at the end of the first quarter of 2008. In addition to the $25.0 million
in trust preferred securities issued in 2007, the Company acquired $10.0 million in trust preferred
securities in the American Community acquisition. These trust preferred securities pay cumulative
cash distributions quarterly at a rate priced off 90-day LIBOR plus 280 basis points. Their
interest rate at December 31, 2010 was 3.09% and they are redeemable on December 15, 2033.
The Company also acquired from American Community, capital lease obligations in the amount of
$2.4 million. See Note 14 in the Consolidated Financial Statements for further details.
Other liabilities decreased by $416,000, or 3.9%, from December 31, 2009 to December 31, 2010.
The decrease was due primarily to a decrease in liabilities related to interest rate lock
commitments.
Effect of Economic Trends
The recent downturn in the real estate market has resulted in increased loan delinquencies,
defaults and foreclosures during the last three years. 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. Management continues to monitor real estate trends and its effect on our
portfolio, and is continuing to monitor credits with weaknesses.
Following an economic decline and historically low interest rates that ended in the first six
months of 2004, the Federal Reserve began increasing short-term rates as the economy showed signs
of strengthening. Between July 2004 and July 2006, the Federal Reserve increased rates at 17 of
their meetings for a total of 425 basis points. Between July 2006 and September 18, 2007, the
Federal Reserve allowed short-term rates to remain unchanged. Beginning in July 2004 and
continuing until September 18, 2007, our rates on both short-term or variable rate interest-earning
assets and interest-bearing liabilities increased. The momentum of the 17 rate increases resulted
in higher rates on interest-earning assets and higher rates on interest-bearing liabilities during
the first nine months of 2007; subsequently, as fixed rate loans, deposits, and borrowings matured
during this period they repriced at higher interest rates. In late September 2007, the Federal
Reserve reversed its position and lowered the short-term rates initially by 50 basis points and by
an additional 50 basis points in the fourth quarter of 2007. The Federal Reserve continued to
aggressively decrease rates by lowering the short-term rate 400 basis points during 2008 which has
caused the rates on our short-term or variable rate assets and liabilities to decline. The
following discussion includes our analysis of the effect that we anticipate changes in interest
rates will have on our financial condition. However, we can give no assurances as to the future
actions of the Federal Reserve or to the anticipated results that will actually occur.
Results of Operations
Net loss available to common shareholders for 2010 was $3.2 million compared to a net loss of
$77.5 million in 2009 and net income of $3.9 million in 2008. Basic net loss per common share
available to common shareholders was $(0.20) in 2010 compared to basic net loss per common share of
$(5.23) in 2009 and basic net income per common share of $0.34 in 2008. Diluted net loss per
common share available to common shareholders was $(0.20) in 2010 compared to diluted net loss per
common share of $(5.23) and diluted net income per common share of $0.34 in 2008. The Companys
net loss before preferred dividends for 2010 was $12,000, a decrease in loss of $75.0 million from
2009 net loss before preferred dividends of $75.1 million. Return (loss) on average assets was
(0.14)% in 2010, (3.96)% in 2009, and 0.28% in 2008. Return (loss) on average equity was (2.08)%
in 2010, (40.50)% in 2009, and 2.66% in 2008. Return (loss) on tangible equity (calculated as
average equity of $153.8 million, excluding average goodwill and core deposit intangibles of $10.5
million) was (2.23)% in 2010, (55.78)% in 2009 and 4.06% in 2008. The return on assets increased
significantly in 2010 as a result of decreased net loss primarily due to the write down of goodwill
in 2009. The return on equity increased as earnings
44
increased. The decrease in return on assets
in 2009 was a result of the write down of goodwill and increase in provision for loan losses as
compared to 2008.
Net Interest Income
Net interest income is the primary source of operating income for the Company. Net interest
income is the difference between interest and fee income generated from earning assets and the
interest paid on deposits and borrowed funds. The factors that influence net interest income
include both changes in interest rates and changes in volume and mix of loans and deposits.
For analytical purposes, net interest income may be reported on a tax-equivalent basis, which
illustrates the tax savings on loans and investments exempt from state and/or federal income taxes.
The tables that follow, Interest Rates Earned and Paid, and Interest Rate/Volume Analysis,
represent components of net interest income for the years 2010, 2009, and 2008. These tables
present changes in interest income and expense and net interest income changes caused by rate
and/or volume.
Net interest income increased $1.0 million, or 1.5%, in 2010 from 2009 compared to an increase
of $23.7 million, or 59.3%, in 2009 over 2008. As the Rate/Volume Variance Analysis table of
earning assets and interest-bearing liabilities shows, the increase in net interest income was
attributable to an increase in volume or asset growth offset partially by a decrease attributable
to declining interest rates on interest earning assets. The increase in volume contributed net
interest income of $2.2 million, and the decrease in rates decreased net interest income by $1.1
million. Acquisition accounting adjustments increased net interest income by $10.5 million in the
prior year and $2.5 million in the current year. Average earning assets increased $283.2 million,
or 15.7%, in 2010 over 2009 after increasing $567.2 million, or 45.8%, in 2009. Average loans
increased $100.4 million, or 6.3%, in 2010 compared with an increase of $507.5 million, or 46.6%,
in 2009. Average investment securities increased $43.2 million, or 22.8%, from 2009 to 2010
compared to an increase of $50.7 million, or 36.5%, from 2008 to 2009.
The net interest margin (tax-equivalent net interest income as a percentage of average
interest-earning assets) decreased to 3.15% from 3.59% comparing 2010 to 2009 after increasing to
3.59% from 3.29% for the prior comparative periods. This decrease is due to the decreased
accretion of fair value adjustments recognized in the American Community merger in 2010 as compared
to 2009. Excluding the accretion of fair value adjustments, net interest margin was 3.03% and 3.01%
in 2010 and 2009, respectively. As the Interest Rate/Volume Variance Analysis table (page 46)
shows, the increase in net interest income during 2010 attributable to volume (asset and liability
growth) was $2.2 million while rate decreases on interest-bearing assets and liabilities decreased
net interest income by $1.1 million.
Interest spread was 2.94% in 2010 compared to 3.31% in 2009 and 2.84% in 2008. Interest
spread measures the difference between the average yield on interest-earning assets (tax-equivalent
interest income as a percentage of average interest-earning assets) and the interest paid on
interest-bearing liabilities. The rate declines in 2009 and 2008 contributed to the earning asset
rate decline from 5.35% in 2009 to 4.79% in 2010 as assets continued to reprice at lower rates. The
general decline in rates also contributed to a decline of 19 basis points in the interest-bearing
liability rate from 2009 to 2010, as compared to the 120 basis point
decline in the earning asset rate. The following table presents the daily average balances,
interest income and expense, and average rates earned and paid on interest-earning assets and
interest-bearing liabilities of the Bank for 2010, 2009, and 2008.
45
Interest Rates Earned and Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
Year Ended December 31, 2009 |
|
|
Year Ended December 31, 2008 |
|
|
Average |
|
|
|
|
|
Yield/ |
|
Average |
|
|
|
|
|
Yield/ |
|
Average |
|
|
|
|
|
Yield/ |
|
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
|
(Dollars in thousands) |
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
4,424 |
|
|
$ |
10 |
|
|
|
0.23 |
% |
|
$ |
13,090 |
|
|
$ |
25 |
|
|
|
0.19 |
% |
|
$ |
2,451 |
|
|
$ |
56 |
|
|
|
2.28 |
% |
Interest-bearing deposits |
|
|
156,583 |
|
|
|
385 |
|
|
|
0.25 |
% |
|
|
8,344 |
|
|
|
45 |
|
|
|
0.54 |
% |
|
|
9,885 |
|
|
|
376 |
|
|
|
3.80 |
% |
Investment securities (1) |
|
|
232,577 |
|
|
|
8,742 |
|
|
|
3.76 |
% |
|
|
189,333 |
|
|
|
8,051 |
|
|
|
4.25 |
% |
|
|
138,674 |
|
|
|
7,304 |
|
|
|
5.27 |
% |
Total loans (1)(2)(6) |
|
|
1,696,469 |
|
|
|
91,012 |
|
|
|
5.36 |
% |
|
|
1,596,094 |
|
|
|
88,486 |
|
|
|
5.54 |
% |
|
|
1,088,626 |
|
|
|
67,609 |
|
|
|
6.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets |
|
|
2,090,053 |
|
|
|
100,149 |
|
|
|
4.79 |
% |
|
|
1,806,861 |
|
|
|
96,607 |
|
|
|
5.35 |
% |
|
|
1,239,636 |
|
|
|
75,345 |
|
|
|
6.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets |
|
|
142,102 |
|
|
|
|
|
|
|
|
|
|
|
150,434 |
|
|
|
|
|
|
|
|
|
|
|
136,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,232,155 |
|
|
|
|
|
|
|
|
|
|
$ |
1,957,295 |
|
|
|
|
|
|
|
|
|
|
$ |
1,375,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
$ |
417,695 |
|
|
|
3,364 |
|
|
|
0.81 |
% |
|
$ |
330,348 |
|
|
|
3,002 |
|
|
|
0.91 |
% |
|
$ |
235,836 |
|
|
|
3,866 |
|
|
|
1.64 |
% |
Savings |
|
|
54,664 |
|
|
|
133 |
|
|
|
0.24 |
% |
|
|
47,603 |
|
|
|
127 |
|
|
|
0.27 |
% |
|
|
36,949 |
|
|
|
185 |
|
|
|
0.50 |
% |
Time certificates |
|
|
1,258,639 |
|
|
|
28,396 |
|
|
|
2.26 |
% |
|
|
1,024,653 |
|
|
|
25,855 |
|
|
|
2.52 |
% |
|
|
640,282 |
|
|
|
26,210 |
|
|
|
4.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
1,730,998 |
|
|
|
31,893 |
|
|
|
|
|
|
|
1,402,604 |
|
|
|
28,984 |
|
|
|
|
|
|
|
913,067 |
|
|
|
30,261 |
|
|
|
3.31 |
% |
Repurchase agreements sold |
|
|
46,643 |
|
|
|
519 |
|
|
|
1.11 |
% |
|
|
57,465 |
|
|
|
659 |
|
|
|
1.15 |
% |
|
|
48,981 |
|
|
|
1,132 |
|
|
|
2.31 |
% |
Borrowed funds (8) |
|
|
74,074 |
|
|
|
1,921 |
|
|
|
2.59 |
% |
|
|
103,634 |
|
|
|
2,188 |
|
|
|
2.11 |
% |
|
|
103,086 |
|
|
|
3,143 |
|
|
|
3.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
|
1,851,715 |
|
|
|
34,333 |
|
|
|
1.85 |
% |
|
|
1,563,703 |
|
|
|
31,831 |
|
|
|
2.04 |
% |
|
|
1,065,134 |
|
|
|
34,536 |
|
|
|
3.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
211,027 |
|
|
|
|
|
|
|
|
|
|
|
190,363 |
|
|
|
|
|
|
|
|
|
|
|
155,503 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
154,401 |
|
|
|
|
|
|
|
|
|
|
|
191,363 |
|
|
|
|
|
|
|
|
|
|
|
145,184 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
15,012 |
|
|
|
|
|
|
|
|
|
|
|
11,866 |
|
|
|
|
|
|
|
|
|
|
|
10,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and
stockholders equity |
|
$ |
2,232,155 |
|
|
|
|
|
|
|
|
|
|
$ |
1,957,295 |
|
|
|
|
|
|
|
|
|
|
$ |
1,375,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (3)
and interest rate spread (5) |
|
|
|
|
|
$ |
65,816 |
|
|
|
2.94 |
% |
|
|
|
|
|
$ |
64,776 |
|
|
|
3.31 |
% |
|
|
|
|
|
$ |
40,809 |
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4) |
|
|
|
|
|
|
|
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
3.59 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Yields relate to investment securities and loans exempt from Federal income taxes are stated on a fully tax-equivalent basis, assuming a Federal
income tax rate of 35%. The calculation includes an adjustment for the nondeductible portion of interest expense used to fund tax-exempt assets.
(2) The loan average includes loans on which accrual of interest has been discontinued.
(3) The net interest income is the difference between income from earning assets and interest expense.
(4) Net interest margin is net interest income divided by total average earning assets.
(5) Interest spread is the difference between the average interest rate received on earning assets and the average interest paid on interest-bearing
liabilities.
(6) Interest income on loans includes $1.6 million and $6.0 million in accretion of fair market value adjustments related to recent mergers
for 2010 and 2009, respectively. Estimated accretion for 2011 is $1.3 million.
(7) Interest expense on deposits includes $778,000 and $4.3 million in accretion of fair market value adjustments related to recent mergers
for 2010 and 2009, respectively. Estimated accretion for 2011 is $302,000.
(8) Interest expense on borrowings includes $118,000 and $91,000 in accretion of fair market value adjustments related to recent mergers
for 2010 and 2009, respectively. Estimated accretion for 2011 is $111,000.
The following table analyzes the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities. The
table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the
current periods rate), and (ii) changes attributable to rate (changes in rate multiplied by the
prior periods volume).
46
Interest Rate/Volume Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010-2009 |
|
2009-2008 |
|
|
Net Increase (Decrease) |
|
|
Net Increase (Decrease) |
|
|
due to change in: |
|
due to change in: |
|
|
Average |
|
Average |
|
Increase |
|
Average |
|
Average |
|
Increase |
|
|
Balance |
|
Rate |
|
(Decrease) |
|
Balance |
|
Rate |
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
(18 |
) |
|
$ |
4 |
|
|
$ |
(14 |
) |
|
$ |
132 |
|
|
$ |
(163 |
) |
|
$ |
(31 |
) |
Investment securities |
|
|
1,732 |
|
|
|
(1,042 |
) |
|
|
690 |
|
|
|
(33 |
) |
|
|
(298 |
) |
|
|
(331 |
) |
Other investments |
|
|
582 |
|
|
|
(242 |
) |
|
|
340 |
|
|
|
2,411 |
|
|
|
(1,664 |
) |
|
|
747 |
|
Total loans |
|
|
5,475 |
|
|
|
(2,949 |
) |
|
|
2,526 |
|
|
|
29,825 |
|
|
|
(8,948 |
) |
|
|
20,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
7,771 |
|
|
|
(4,229 |
) |
|
|
3,542 |
|
|
|
32,335 |
|
|
|
(11,073 |
) |
|
|
21,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
|
749 |
|
|
|
(387 |
) |
|
|
362 |
|
|
|
1,204 |
|
|
|
(2,068 |
) |
|
|
(864 |
) |
Savings |
|
|
18 |
|
|
|
(12 |
) |
|
|
6 |
|
|
|
41 |
|
|
|
(99 |
) |
|
|
(58 |
) |
Time certificates |
|
|
5,592 |
|
|
|
(3,051 |
) |
|
|
2,541 |
|
|
|
12,717 |
|
|
|
(13,072 |
) |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
6,359 |
|
|
|
(3,450 |
) |
|
|
2,909 |
|
|
|
13,962 |
|
|
|
(15,239 |
) |
|
|
(1,277 |
) |
Borrowed funds |
|
|
(765 |
) |
|
|
358 |
|
|
|
(407 |
) |
|
|
207 |
|
|
|
(1,635 |
) |
|
|
(1,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
5,594 |
|
|
|
(3,092 |
) |
|
|
2,502 |
|
|
|
14,169 |
|
|
|
(16,874 |
) |
|
|
(2,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
2,177 |
|
|
$ |
(1,137 |
) |
|
$ |
1,040 |
|
|
$ |
18,166 |
|
|
$ |
5,801 |
|
|
$ |
23,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
-Variances caused by the changes in rate times the changes in volume are allocated equally.
-Income on non-accrual loans is included in the volume and rate variance analysis table only to the extent
that it represents interest payments received.
Market Risk, Asset/Liability Management and Interest Rate Sensitivity
The Banks principal business is the origination or purchase of loans, funded by customer
deposits, loan sales, and, to the extent necessary, other borrowed funds. Consequently, a
significant portion of the Banks assets and liabilities are monetary in nature and fluctuations in
interest rates will affect the Banks future net interest income and cash flows. Interest rate
risk is the Banks primary market risk exposure. 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 Bank has no market risk-sensitive instruments held for trading purposes.
The Banks exposure to market risk is reviewed on a regular basis by management.
The Bank measures interest rate sensitivity as the difference between amounts of
interest-earning assets and interest-bearing liabilities that either reprice or mature within a
given period of time. The difference or the interest rate repricing gap provides an indication
of the extent to which an institutions interest rate spread will be affected by changes in
interest rates. Generally, during a period of rising interest rates, a negative gap within shorter
maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in an increase in
net interest income. During a period of falling interest rates, a negative gap within shorter
maturities would result in an increase in net interest income while a positive gap within shorter
maturities would have the opposite effect. The interest rate sensitivity management function is
designed to maintain consistent growth of net interest income with acceptable levels of risk to
interest rate changes generally on a one year horizon.
47
Net interest margin decreased by 44 basis points from 3.59% in 2009 to 3.15% in 2010. The
2010 margin decrease was preceded by an increase of 30 basis points in 2009 and a decline of 91
basis points in 2008. This decrease is due primarily to the decreased accretion of fair value
adjustments recognized in the American Community merger in 2010 as compared to 2009. Excluding the
accretion of fair value adjustments, net interest margin was 3.03% and 3.01% in 2010 and 2009,
respectively.
Management uses various resources to measure interest rate risk, including simulating net
interest income under different rate scenarios, monitoring changes in asset and liability values
under similar rate scenarios and monitoring the gap between rate sensitive assets and liabilities
over different time periods.
The rate sensitivity table that follows indicates the volume of interest-earning assets and
interest-bearing liabilities as of December 31, 2010 that mature or are expected to reprice within
the stated time periods.
The asset sensitivity of the Companys net interest income is reflected in the Income Shock
Summary table following the Gap Analysis table.
48
GAP Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms to Repricing at December 31, 2010 |
|
|
|
|
|
|
More Than |
|
|
Over 1 Year |
|
|
Over 3 Years |
|
|
|
|
|
|
|
|
|
3 Months |
|
|
3 Months |
|
|
Thru |
|
|
Thru |
|
|
Over |
|
|
|
|
|
|
or Less |
|
|
to 12 Months |
|
|
3 Years |
|
|
5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
INTEREST EARNING-ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
201,792 |
|
|
$ |
31,937 |
|
|
$ |
37,190 |
|
|
$ |
1,173 |
|
|
$ |
133 |
|
|
$ |
272,225 |
|
Real estate- construction |
|
|
149,926 |
|
|
|
43,771 |
|
|
|
70,313 |
|
|
|
11,685 |
|
|
|
478 |
|
|
|
276,173 |
|
Real estate- mortgage |
|
|
485,795 |
|
|
|
131,448 |
|
|
|
268,499 |
|
|
|
113,858 |
|
|
|
6,910 |
|
|
|
1,006,510 |
|
Consumer |
|
|
17,501 |
|
|
|
13,977 |
|
|
|
14,153 |
|
|
|
- |
|
|
|
- |
|
|
|
45,631 |
|
|
|
|
Total Loans |
|
|
855,014 |
|
|
|
221,133 |
|
|
|
390,155 |
|
|
|
126,716 |
|
|
|
7,521 |
|
|
|
1,600,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and other agencies |
|
|
- |
|
|
|
- |
|
|
|
10,000 |
|
|
|
4,192 |
|
|
|
358 |
|
|
|
14,550 |
|
State and municipal securities |
|
|
388 |
|
|
|
1,945 |
|
|
|
3,714 |
|
|
|
6,966 |
|
|
|
59,609 |
|
|
|
72,622 |
|
Mortgage backed debt securities |
|
|
13,169 |
|
|
|
32,708 |
|
|
|
70,254 |
|
|
|
49,638 |
|
|
|
43,937 |
|
|
|
209,706 |
|
Mutual funds/equities |
|
|
1,124 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,124 |
|
|
|
|
Total Securities |
|
|
14,681 |
|
|
|
34,653 |
|
|
|
83,968 |
|
|
|
60,796 |
|
|
|
103,904 |
|
|
|
298,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Sold |
|
|
31 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31 |
|
Interest bearing due from banks |
|
|
197,782 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
197,782 |
|
|
|
|
TOTAL EARNING ASSETS |
|
$ |
1,067,508 |
|
|
$ |
255,786 |
|
|
$ |
474,123 |
|
|
$ |
187,512 |
|
|
$ |
111,425 |
|
|
$ |
2,096,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
$ |
9,015 |
|
|
$ |
27,045 |
|
|
$ |
72,119 |
|
|
$ |
36,059 |
|
|
$ |
- |
|
|
$ |
144,238 |
|
Money market accounts |
|
|
24,466 |
|
|
|
73,397 |
|
|
|
195,726 |
|
|
|
97,863 |
|
|
|
- |
|
|
|
391,452 |
|
Savings |
|
|
3,381 |
|
|
|
10,144 |
|
|
|
27,050 |
|
|
|
13,525 |
|
|
|
- |
|
|
|
54,100 |
|
Certificates: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over $100,000 |
|
|
83,222 |
|
|
|
179,477 |
|
|
|
136,600 |
|
|
|
67,431 |
|
|
|
- |
|
|
|
466,730 |
|
Other certificates |
|
|
158,381 |
|
|
|
334,051 |
|
|
|
196,586 |
|
|
|
58,392 |
|
|
|
314 |
|
|
|
747,724 |
|
|
|
|
Total deposits |
|
|
278,465 |
|
|
|
624,114 |
|
|
|
628,081 |
|
|
|
273,270 |
|
|
|
314 |
|
|
|
1,804,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TT&L Notes |
|
|
1,014 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,014 |
|
Repurchase Agreements/Fed Funds
Purchased |
|
|
36,934 |
|
|
|
- |
|
|
|
5,000 |
|
|
|
- |
|
|
|
- |
|
|
|
41,934 |
|
FHLB borrowings |
|
|
1,005 |
|
|
|
5,000 |
|
|
|
16,000 |
|
|
|
10,000 |
|
|
|
6,834 |
|
|
|
38,839 |
|
Junior Subordinated Debentures |
|
|
34,981 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
34,981 |
|
|
|
|
TOTAL INTEREST BEARING
LIABILITIES |
|
$ |
352,399 |
|
|
$ |
629,114 |
|
|
$ |
649,081 |
|
|
$ |
283,270 |
|
|
$ |
7,148 |
|
|
$ |
1,921,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP |
|
$ |
715,109 |
|
|
$ |
(373,328 |
) |
|
$ |
(174,958 |
) |
|
$ |
(95,758 |
) |
|
$ |
104,277 |
|
|
$ |
175,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE GAP |
|
$ |
715,109 |
|
|
$ |
341,781 |
|
|
$ |
166,823 |
|
|
$ |
71,065 |
|
|
$ |
175,342 |
|
|
$ |
175,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP % |
|
|
34.11% |
|
|
|
-17.81% |
|
|
|
-8.35% |
|
|
|
-4.57% |
|
|
|
4.97% |
|
|
|
8.36% |
|
Additional information regarding loans with maturity dates that exceed one year
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Fixed rate loans with maturities that exceed one year |
|
|
|
|
|
$ |
917.7 |
|
|
|
|
|
Variable rate loans with maturities that exceed one year |
|
|
|
|
|
$ |
215.4 |
|
|
|
|
|
|
(1) For GAP analysis purposes, certificates of deposits related to public funds and brokered deposits are not broken
down between certificates greater than $100,000 and other. As a result, classifications may vary from disclosures
and presentations throughout the financial statements.
49
Income Shock Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 - December 31, 2011 |
|
|
|
|
|
|
Rates UP (+200 bp) |
|
Rates DN (-200 bp) |
|
|
Base |
|
|
|
|
|
|
|
|
|
|
Amount |
|
Amount |
|
% Change |
|
Amount |
|
% Change |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Short-term investments |
|
$ |
292 |
|
|
$ |
4,070 |
|
|
|
1293.84 |
% |
|
$ |
292 |
|
|
|
0.00 |
% |
Securities |
|
|
10,168 |
|
|
|
11,412 |
|
|
|
12.23 |
% |
|
|
9,260 |
|
|
|
-8.93 |
% |
Loans |
|
|
86,067 |
|
|
|
102,461 |
|
|
|
19.05 |
% |
|
|
69,381 |
|
|
|
-19.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
96,527 |
|
|
|
117,943 |
|
|
|
22.19 |
% |
|
|
78,933 |
|
|
|
-18.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturing deposits |
|
$ |
3,959 |
|
|
$ |
11,462 |
|
|
|
189.52 |
% |
|
$ |
985 |
|
|
|
-75.12 |
% |
Certificates of deposits |
|
|
22,303 |
|
|
|
30,812 |
|
|
|
38.15 |
% |
|
|
18,417 |
|
|
|
-17.42 |
% |
Borrowed money |
|
|
1,148 |
|
|
|
2,541 |
|
|
|
121.34 |
% |
|
|
1,155 |
|
|
|
0.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
27,410 |
|
|
|
44,815 |
|
|
|
63.50 |
% |
|
|
20,557 |
|
|
|
-25.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
69,117 |
|
|
$ |
73,128 |
|
|
|
5.80 |
% |
|
$ |
58,376 |
|
|
|
-15.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
Liquidity Management
The primary goal of liquidity management is to provide for the availability of adequate funds
to meet the needs of loan demand, deposit withdrawals, maturing liabilities, and to satisfy reserve
requirements. This goal is achieved through a combination of deposits, borrowing through unpledged
securities, federal funds purchased lines, Federal Home Loan Bank line of credit, and availability
at the Federal Reserve discount window. Liquidity needs have been met through federal funds
purchased and the use of a line of credit at the Federal Home Loan Bank. Deposits from consumer and
business customers, both time and demand, are the primary source of funds for the Bank. In 2008,
the Bank adopted a Brokered Funds Policy that allows the Bank to obtain brokered funds up to 20% of
total deposits, and deposits obtained through a single broker are limited to 5% of total deposits.
Previously, brokered funds were authorized under the Banks Asset Liability Management Policy but
total and broker maximum amounts were not addressed by the policy. At December 31, 2010, brokered
deposits totaled $98.1 million and accounted for approximately 4.9% of total deposits. The Bank
maintains a brokered deposit NOW account to add municipal deposits which averaged $3.3 million
during 2010 and totaled $3.3 million at December 31, 2010. The custodian pools the funds from each
public depositor and distributes a portion of those funds to the Bank up to $100,000 on behalf of
each depositor. Since security pledges are not required and the accounts are non-maturing, these
municipal deposits have enhanced the Banks liquidity.
The Bank contracted with Promontory Interfinancial Network (Promontory) in 2008 for various
services including wholesale CD funding. Promontorys CDARS® and One-Way BuySM
products enable 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 December 31, 2010, the balance of funds acquired through the One-Way Buy product
totaled $24.0 million. The Banks solicited deposits from outside its primary market area in the
form of brokered certificates of
deposit totaled $50.6 million at December 31, 2010. Promontory also provides a product,
CDARS® Reciprocal, that allows the Banks customers to place funds in excess of the FDIC
insurance limit with Promontorys 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 these reciprocal deposits as brokered deposits in its quarterly
Federal Financial Institutions Examination Council Call Report. CDARS® reciprocal
certificates of deposit totaled $20.2 million at December 31, 2010.
50
Comparing
2010 to 2009, average total deposits increased 21.9%, or $349.1 million. At December
31, 2010, total deposits reflected a 10.9% increase of $198.7 million compared to December 31,
2009. Commercial sweep accounts, a noninsured product invested in repurchase agreements were $36.9
million at year-end 2010 compared to $43.0 million at year-end 2009. Deposit sources are available
to the Bank both within and outside its primary market area based on a function of price. CDs were
offered at rates in line with competitors rates and at one or more special rates and priced at
25-50 basis points higher than competitors rates for limited periods. These rates were needed in
order to build a deposit base sufficient for liquidity. As liquidity grew to levels that met
managements targets, deposit rates were reduced. Even with the reduction in deposit rates,
deposits continued to grow and loan demand remained very slow. These two events caused a
substantial increase in our cash position. With the growth in cash and not being able to deploy
the cash into loans, management made the decision to increase the investment portfolio in short
maturity and short average life assets. Deposit competition comes from other banks, both regional
and community institutions, as well as nonbank competition, including mutual funds, annuities, and
other nondeposit investments. Subject to certain conditions, unused availability from the Federal
Home Loan Bank at December 31, 2010 was $97.5 million. Federal funds available for additional
borrowings at year-end were $34.9 million.
Other Borrowed Funds
See Note 9 to the Consolidated Financial Statements.
Investment Securities
At December 31, 2010, the securities classified as available-for-sale, carried at market
value, totaled $298.0 million with an amortized cost of $297.1 million. Securities
available-for-sale are securities that will be held for an indefinite period of time, including
securities that management intends to use as a part of its asset/liability strategy. These
securities may be sold in response to changes in interest rates, to changes in prepayment risk, or
to the need to increase regulatory capital or liquidity. Securities available-for-sale consist of
U.S. Government agencies with an average life of 2.03 years, municipal securities with an average
life of 9.26 years, and mortgage-backed securities with an average life of 3.93 years. It is more
likely than not that the Company will not have to sell the investments before recovery of their
amortized cost basis. The proceeds from maturities and sales were reinvested in the investment
portfolio. Refer to Note 3 to the Consolidated Financial Statements for additional information.
The following table presents the carrying value of investment securities as of December 31, 2010,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Securities available-for-sale: |
|
(Amounts in thousands) |
U.S. government agencies |
|
$ |
14,550 |
|
|
$ |
42,894 |
|
|
$ |
43,650 |
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
securities |
|
|
52,075 |
|
|
|
50,884 |
|
|
|
42,941 |
|
Collateralized mortgage obligations |
|
|
155,926 |
|
|
|
25,217 |
|
|
|
7,180 |
|
Private label collateralized
mortgage obligations |
|
|
1,705 |
|
|
|
2,288 |
|
|
|
2,942 |
|
State and municipal securities |
|
|
72,622 |
|
|
|
61,378 |
|
|
|
41,077 |
|
Common and preferred stocks,
and other |
|
|
1,124 |
|
|
|
1,180 |
|
|
|
23 |
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
$ |
298,002 |
|
|
$ |
183,841 |
|
|
$ |
137,813 |
|
|
|
|
|
|
|
|
51
The following tables present maturities and yield of debt securities outstanding as of December 31,
2010:
Maturities and Yields of Debt Securities
as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year |
|
1 to 5 Years |
|
5 to 10 Years |
|
After 10 Years |
|
|
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Total |
|
|
(Amounts in thousands) |
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government agencies |
|
$ |
- |
|
|
|
- |
|
|
$ |
14,550 |
|
|
|
0.97 |
% |
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
14,550 |
|
Mortgage-backed securities |
|
|
- |
|
|
|
- |
|
|
|
1,076 |
|
|
|
3.43 |
% |
|
|
8,441 |
|
|
|
5.24 |
% |
|
|
42,558 |
|
|
|
4.45 |
% |
|
|
52,075 |
|
Collateralized mortgage obligations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,171 |
|
|
|
2.77 |
% |
|
|
139,755 |
|
|
|
2.10 |
% |
|
|
155,926 |
|
Private
label collateralized mortgage obligations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
423 |
|
|
|
5.36 |
% |
|
|
1,282 |
|
|
|
6.30 |
% |
|
|
1,705 |
|
Municipals |
|
|
2,494 |
|
|
|
3.32 |
% |
|
|
10,954 |
|
|
|
3.35 |
% |
|
|
21,525 |
|
|
|
3.29 |
% |
|
|
37,649 |
|
|
|
3.62 |
% |
|
|
72,622 |
|
Other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,124 |
|
|
|
0.00 |
% |
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
2,494 |
|
|
|
|
|
|
$ |
26,580 |
|
|
|
|
|
|
$ |
46,560 |
|
|
|
|
|
|
$ |
222,368 |
|
|
|
|
|
|
$ |
298,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits
The following table presents time deposits in two categories, (1) time deposits of $100,000 or
more, and (2) other time deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of Time Deposits |
|
|
|
As of December 31, 2010
|
|
|
|
Within |
|
Three to |
|
Six to |
|
One to |
|
|
|
|
Three |
|
Six |
|
Twelve |
|
Five |
|
|
|
|
Months |
|
Months |
|
Months |
|
Years |
|
Total |
|
|
(dollars in thousands) |
Time deposits of $100,000 or more |
|
$ |
89,018 |
|
|
$ |
55,011 |
|
|
$ |
148,763 |
|
|
$ |
184,238 |
|
|
$ |
477,030 |
|
Other time deposits |
|
|
152,900 |
|
|
|
115,253 |
|
|
|
194,500 |
|
|
|
274,772 |
|
|
|
737,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
241,918 |
|
|
$ |
170,264 |
|
|
$ |
343,263 |
|
|
$ |
459,010 |
|
|
$ |
1,214,455 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Adequacy
Shareholders equity at December 31, 2010, totaled $147.5 million, a decrease of 3.2% from
2009 year-end shareholders equity of $152.3 million. The 2010 shareholders equity total includes
an unrealized net gain of $582,000 compared to an unrealized net gain of $2.9 million at December
31, 2009. The Companys internal capital generation rate (net income /(loss) less cash dividends
declared, as a percentage of average equity) was (2.1)% in 2010 and (41.4)% in 2009. The dividend
payout rate in 2010 was 0.0% of after-tax earnings compared to (2.1)% in 2009 and 154.8% in 2008.
The Company had pursued a policy of increasing the dividend payout as a percentage of after-tax
earnings in earlier years until 2002. The current dividend policy is a payout of approximately 40%
of earnings up to a policy maximum of 50% of earnings. In 2009, the Board of Directors suspended
the payment of dividends in order to preserve capital.
On January 16, 2009, as part of the CPP established by the U.S. Department of the Treasury
under the EESA, of 2008, the Company entered into a Letter Agreement (including the Securities
Purchase AgreementStandard Terms) with Treasury pursuant to which the Company issued and sold to
Treasury (i) 36,000 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series
T, having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up
to 385,990 shares of the Companys common stock, par value $1.00 per share, at an initial exercise
price of $13.99 per share, for an aggregate purchase price of $36.0 million in cash.
52
As a condition of the CPP, the Company must obtain consent from the Treasury to
repurchase its common stock or increase its cash dividend on its common stock from the June 30,
2009 quarterly amount. Furthermore, the Company has agreed to certain restrictions on executive
compensation. Under the American Recovery and Reinvestment Act of 2009, the Company is limited to
using restricted stock as the form of payment to the top five highest compensated executives under
any incentive compensation programs.
Under the CPP, the Company issued an additional $13.3 million in Cumulative Perpetual
Preferred Stock, Series T-ACB, on July 24, 2009. In addition, the Company provided a warrant to
the Treasury to purchase 273,534 shares of the Companys common stock at an exercise price of $7.30
per share. These warrants are immediately exercisable and expire ten years from the date of
issuance. The preferred stock is non-voting, other than having class voting rights on certain
matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years
and 9% per annum thereafter. The preferred shares are redeemable at the option of the Company
under certain circumstances during the first three years and only thereafter without restriction.
Beginning in 2011, the holding company may not have sufficient liquidity to make payments for
Series T and Series T-ACB preferred stock dividends and without additional capital may not be able
to make these payments. As such, it is possible that payment of dividends on our preferred stock
will be deferred.
The table below presents the plans and number of common shares repurchased, and the activity
from inception through December 31, 2010. Common shares repurchased must, by North Carolina law,
be cancelled and the number of shares outstanding reduced. The 2002 through 2005 plans were
approved by a vote of the Companys shareholders. Following reorganization as a holding company on
July 1, 2006, the Board of Directors of the Company approved stock repurchases of up to 100,000
shares for the 2006 and 2007 plans. There was no 2010 or 2009 repurchase plan or repurchases in
2010 or 2009. There will be no stock repurchases without prior approval of the Treasury due to
provisions of TARP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
Repurchased & |
|
|
|
|
|
Total Reduction |
Approved by Shareholders |
|
Cancelled |
|
Average Cost |
|
of Capital |
2004 and prior plans - 1,150,000 shares approved |
|
|
589,571 |
|
|
$ |
12.61 |
|
|
$ |
7,432,590 |
|
2005 Plan - 300,000 shares approved |
|
|
54,648 |
|
|
|
14.35 |
|
|
|
784,107 |
|
2006 Plan - 100,000 shares approved |
|
|
100,000 |
|
|
|
17.42 |
|
|
|
1,741,886 |
|
2007 Plan - 100,000 shares approved |
|
|
71,281 |
|
|
|
17.10 |
|
|
|
1,219,251 |
|
|
|
|
|
|
|
|
|
|
Total Repurchased |
|
|
815,500 |
|
|
$ |
13.71 |
|
|
$ |
11,177,834 |
|
|
|
|
|
|
|
|
|
|
There were no executive stock options exercised during the year.
The Companys tangible equity ratio was 6.01%, 6.71% and 6.24% at end of year 2010, 2009, and
2008, respectively. Management believes that these non-GAAP tangible measures provide additional
useful information, particularly since these measures are widely used by industry analysts for
companies with prior merger and acquisition activities.
53
The following table presents the calculations of these ratios:
Capital Adequacy Ratios
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Total assets |
|
$ |
2,300,594,066 |
|
|
$ |
2,113,611,985 |
|
|
$ |
1,524,288,021 |
|
Goodwill |
|
|
(4,943,872 |
) |
|
|
(4,943,872 |
) |
|
|
(53,502,887 |
) |
Core deposit intangibles |
|
|
(4,907,064 |
) |
|
|
(6,186,564 |
) |
|
|
(4,660,116 |
) |
|
|
|
|
|
|
|
Tangible assets |
|
$ |
2,290,743,130 |
|
|
$ |
2,102,481,549 |
|
|
$ |
1,466,125,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
$ |
147,457,391 |
|
|
$ |
152,265,736 |
|
|
$ |
149,644,322 |
|
Goodwill |
|
|
(4,943,872 |
) |
|
|
(4,943,872 |
) |
|
|
(53,502,887 |
) |
Core deposit intangible |
|
|
(4,907,064 |
) |
|
|
(6,186,564 |
) |
|
|
(4,660,116 |
) |
|
|
|
|
|
|
|
Tangible equity* (Non-GAAP) |
|
$ |
137,606,455 |
|
|
$ |
141,135,300 |
|
|
$ |
91,481,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity ratio* (Non-GAAP) |
|
|
6.01% |
|
|
|
6.71% |
|
|
|
6.24% |
|
Equity ratio |
|
|
6.41% |
|
|
|
7.20% |
|
|
|
9.82% |
|
*Note: Tangible assets and tangible equity exclude goodwill and core deposit intangibles. |
Although the Company and Bank are well capitalized as of December 31, 2010, the elevated level
of criticized assets leads management to believe additional capital may be needed. While
criticized assets appear to be showing signs of improvement, the Company remains diligently focused
on acquiring additional capital.
Loans
Net loans held for investment (total loans held for investment less allowance for loan losses)
as of December 31, 2010 were $1,562.8 million as compared with $1,627.8 million as of December 31,
2009, a decrease of $65.0 million, or 4.0%. In addition, the Banks residential mortgage loans
classified as held-for-sale totaled $50.4 million and $49.7 million at December 31, 2010 and 2009,
respectively, representing an increase of $704,000, or 1.4%. The Bank focuses on commercial lending
to small and medium-sized businesses within its market area, consumer based installment loans, and
residential mortgage lending including equity lines of credit. The Bank adheres to regulatory
guidelines that limit exposure to any one borrower. The commercial portfolio has concentrations in
business loans secured by real estate and real estate development loans. Primary concentrations in
the consumer portfolio include home equity lines and other types of residential real estate loans.
The following table presents amounts and types of loans outstanding for the past five years ended
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
Amount |
|
% |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|
(Dollars in Thousands) |
|
Construction real estate |
|
$ |
300,877 |
|
|
|
18.8 |
% |
|
$ |
364,853 |
|
|
|
21.8 |
% |
|
$ |
227,989 |
|
|
|
19.2 |
% |
|
$ |
155,043 |
|
|
|
17.3 |
% |
|
$ |
111,353 |
|
|
|
13.7 |
% |
Commercial real estate |
|
|
621,429 |
|
|
|
38.8 |
% |
|
|
583,120 |
|
|
|
34.8 |
% |
|
|
416,872 |
|
|
|
35.1 |
% |
|
|
352,568 |
|
|
|
39.2 |
% |
|
|
323,041 |
|
|
|
39.7 |
% |
1-4 family 1st liens |
|
|
174,536 |
|
|
|
10.9 |
% |
|
|
169,790 |
|
|
|
10.1 |
% |
|
|
125,225 |
|
|
|
10.5 |
% |
|
|
75,740 |
|
|
|
8.4 |
% |
|
|
65,112 |
|
|
|
8.0 |
% |
Multifamily |
|
|
29,268 |
|
|
|
1.8 |
% |
|
|
36,031 |
|
|
|
2.2 |
% |
|
|
22,468 |
|
|
|
1.9 |
% |
|
|
20,577 |
|
|
|
2.3 |
% |
|
|
23,548 |
|
|
|
2.9 |
% |
1-4 family equity lines |
|
|
209,319 |
|
|
|
13.1 |
% |
|
|
202,676 |
|
|
|
12.1 |
% |
|
|
135,639 |
|
|
|
11.4 |
% |
|
|
100,012 |
|
|
|
11.1 |
% |
|
|
94,650 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
|
413,123 |
|
|
|
25.8 |
% |
|
|
408,497 |
|
|
|
24.4 |
% |
|
|
283,332 |
|
|
|
23.9 |
% |
|
|
196,329 |
|
|
|
21.8 |
% |
|
|
183,310 |
|
|
|
22.5 |
% |
Commercial , other |
|
|
222,664 |
|
|
|
13.9 |
% |
|
|
271,433 |
|
|
|
16.2 |
% |
|
|
225,092 |
|
|
|
19.0 |
% |
|
|
161,507 |
|
|
|
18.0 |
% |
|
|
147,473 |
|
|
|
18.1 |
% |
Consumer |
|
|
42,446 |
|
|
|
2.7 |
% |
|
|
48,545 |
|
|
|
2.9 |
% |
|
|
34,284 |
|
|
|
2.9 |
% |
|
|
33,306 |
|
|
|
3.7 |
% |
|
|
49,733 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
|
1,600,539 |
|
|
|
100.0 |
% |
|
|
1,676,448 |
|
|
|
100.0 |
% |
|
|
1,187,569 |
|
|
|
100.0 |
% |
|
|
898,753 |
|
|
|
100.0 |
% |
|
|
814,910 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(37,752 |
) |
|
|
|
|
|
|
(48,625 |
) |
|
|
|
|
|
|
(22,355 |
) |
|
|
|
|
|
|
(12,445 |
) |
|
|
|
|
|
|
(10,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,562,787 |
|
|
|
|
|
|
$ |
1,627,823 |
|
|
|
|
|
|
$ |
1,165,214 |
|
|
|
|
|
|
$ |
886,308 |
|
|
|
|
|
|
$ |
804,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The Bank requires documentation on its residential mortgage loans and does not have a
program to make loans with minimal documentation requirements. The Banks residential real estate
loans are collateralized predominately by property in North Carolina where real estate values have
been decreasing steadily over the past few years. While residential real estate values have
declined across the state, the erosion has been more acute in the coastal and mountain regions
where large vacation and second home exposures exist. The Banks total real estate loan exposure
for the mountain region is 11.5% of the Banks total real estate loan portfolio and the total real
estate loan exposure for the coastal region is 1.4% of the Banks total real estate loan portfolio.
The mountain region real estate loans were concentrated in commercial real estate (35.7%),
construction and land development (17.2%), 1-4 family equity lines (17.8%) and 1-4 family
residential (7.3%). The coastal region real estate loans were concentrated in construction and
land development (40.9%), 1 - 4 family equity lines (23.7%), and 1 - 4 family residential
(23.9%).
The Banks residential mortgage loans do not have features such as teaser rates or negative
amortization and are made at loan-to-value (LTV) ratios of 80% or lower, with the exception of
HELOCs which can have LTV of 90%. Since these loans do not have features that would create
additional risk, net interest income after loan loss provision would not be affected unfavorably by
unique loan features. Residential mortgage loans and home equity lines with risk grades that are
either substandard or doubtful, totaled $20.5 million and $14.5 million on December 31, 2010 and
2009, respectively. Continuing high levels of classified loans is attributable to the weak
economic and employment trends throughout the Banks market area. Management has determined the
appropriate loss estimate for these loans, some of which are impaired, and recorded a provision
expense to recognize the probable losses. Further weakness in the performance of these loans and
in economic conditions may result in additional provision expense. While economic weakness may
result in additional provision, improved performance may result in a credit to provision expense
for this loan group.
The Banks policy regarding appraisals includes compliance with Financial Institutions Reform
Recovery and Enforcement Act of 1989 (FIRREA) guidelines. For long-term commercial real estate
lending, all loans with outstanding balances of $500,000 or more require the account manager to
prepare an annual review discussing the performance of the borrower and the property. The annual
review is to be supported by an updated review of borrower and guarantor financial statements and
operating information on the property. Credit reports are to be updated and reviewed. Account
managers are required to perform a site visit as part of the annual review process. A discussion of
compliance with loan agreement covenants is to be included in the review. If there has been a
material adverse change in the property or market, a new appraisal may be required.
Construction loans extended by the Bank are to be supported by current appraisals in
compliance with FIRREA requirements and the Banks appraisal policies as described in the loan
policy. The borrower must obtain all appropriate building permits, and the project must comply with
applicable zoning requirements for the site. Projects are to have controlled disbursements based
upon satisfactory inspections indicating the project status merits the draw. Speculative units for
home builders are to be limited to a level the home builder can support from sources in addition to
the future sale of these units. The Bank requires that there be no secondary financing on projects
for which it is providing financing. Exempted from this requirement are construction loans to be
taken out by SBA 504 program financing, which by design, contemplates a secondary loan. During the
construction phase; however, there is to be no secondary financing. Loans with interest reserves
were $21.7 million at December 31, 2010. The Bank tracks loans with interest reserves and monitors
these loans on a regular basis for any impairment and discontinuation of interest accruals.
For residential construction revolving lines of credit to builders, valuation of collateral is
based upon the appraised value of the basic floor plans (drawings of structure to be built) offered
in the projects as determined in a master appraisal plus a value of lots based upon location, size,
and appeal, as determined in the appraisal. The account manager is to monitor sales prices and
absorption throughout the loan to ensure the assumptions in the original appraisal remain valid. If
there is a material change from original assumptions, a new appraisal is to be completed. In
general, appraisals are required for initial or refinanced real estate loans, especially if there
have been changes in the original assumptions regarding value of the property or the market in
general.
Over the past year the Bank has reduced its concentration in construction and land development
lending, decreasing balances by $64.0 million, or 17.5%. The economic conditions and their impact
on the one-to-four family residential market has reduced both demand and increased the credit risk
for this type of lending. While the Bank continues to evaluate credit opportunities presented in
this line of business, it is actively trying to diversify the loan portfolio by being selective and
trying to create opportunities in other loan types.
55
The Bank originates and maintains a significant amount of commercial real estate loans. This
lending involves loans secured principally by commercial office buildings, both investment and
owner occupied. The Bank requires the personal guaranty of principals where prudent and a
demonstrated cash flow capability sufficient to service the debt. The real estate collateral is a
secondary source of repayment. Loans secured by commercial real estate may be in greater amount
and involve a greater degree of risk than one to four family residential mortgage loans. Payments
on such loans are often dependent on successful operation or management of the properties. The
Bank also makes loans secured by commercial/investment properties provided the subject property is
typically either pre-leased or pre-sold before the Bank commits to finance its construction.
The Bank has an internal credit risk review department that reports to the Chief Credit
Officer. The focus is on policy compliance and proper grading of higher credit risk loans as well
as new and existing loans on a sample basis. Additional reporting for problem/criticized assets has
been developed along with an after-the-fact loan review. Management also utilized a report of past
due delinquency and set procedures to ensure delivery to regional executives in order that
monitoring and grading can be achieved on a comprehensive basis.
The purpose of the credit risk management team, under the direct supervision of the Chief
Credit Officer, is to develop a more intense credit risk approach by implementing the following
procedures:
|
- |
|
Improved problem loan tracking and reporting |
|
- |
|
Reporting by bank and region |
|
- |
|
Improved and more defined commercial real estate reporting |
|
- |
|
Coordination with lenders to ensure proper loan grading |
|
- |
|
Enhanced staff including regional credit risk officers |
|
- |
|
More communication and involvement with Regional Executives |
As discussed below in the Provision and Allowance for Loan Losses section, loans over $20,000
are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable loans at inception are
grades 1 through 4, and these grades have underwriting requirements that at least meet the minimum
requirements of a secondary market source. If borrowers do not meet credit history requirements,
other mitigating criteria such as substantial liquidity and low loan-to-value ratios could be
considered and would generally have to be met in order to make the loan. The Banks loan policy
states that a guarantor may be necessary if reasonable doubt exists as to the borrowers ability to
repay. The Board of Directors has authorized the loan officers to have individual approval
authority for risk grade 1 through 4 loans up to maximum exposure limits for each customer. New or
renewed loans that are graded 5 (special mention) or more must have approval from a regional credit
officer.
Nonperforming Assets
Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned property
and loans past due 90 days or more on which interest is still being accrued. It is the general
policy of the Bank to stop accruing interest when any loan is past due 90 days or when it is
apparent that the collection of principal and/or interest is doubtful. Unsecured consumer loans
are usually charged off when payments are more than 90 days delinquent. When a loan is placed on
nonaccrual status, any interest previously accrued but not collected is reversed against interest
income in the current period.
Nonperforming
loans as of December 31, 2010 totaled $65.4 million, or
4.18%, of net loans
compared with $36.3 million, or 2.23%, in 2009 and
$13.6 million, or 1.17%, in 2008. The Bank
aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as
repossessed and foreclosed collateral is aggressively liquidated by our special assets department.
The total number of loans on nonaccrual status has increased from 322 to 490 since December 31,
2009. The increase in nonperforming loans from December 31, 2009 to December 31, 2010 is related
primarily to continued deterioration in the Banks overall construction loan portfolio, as well as
the addition of $21.9 million in troubled debt restructured loans which will remain on nonaccrual
until sufficient payment evidence is obtained. Accordingly, approximately 62% of nonaccrual loans
continue to pay according to agreed upon terms as of December 31, 2010, as compared to 46% as of
December 31, 2009.
A significant portion, or 94%, of nonperforming loans at December 31, 2010 are secured by real
estate. We have evaluated the underlying collateral on these loans and believe that the collateral
on these loans is sufficient to minimize future
losses. However, the recent downturn in the real estate market has resulted in increased loan
delinquencies, defaults and foreclosures, and we believe that these trends are likely to continue.
In some cases, this downturn has resulted in a significant
56
impairment to the value of the
collateral used to secure these loans and the ability to sell the collateral upon foreclosure.
These conditions have adversely affected our loan portfolio. 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. If during a period of reduced real estate values we are required to liquidate the property
collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, this could
materially reduce our profitability and adversely affect our financial condition. The Bank has a
general policy to stop accruing interest when any loan is past due 90 days as to principal or
interest; however, some exceptions do apply. In addition, loans may be identified as nonaccrual on
a case by case basis if it is probable that the borrower will not be able to repay according to the
original terms. Nonperforming loans and other real estate owned (foreclosed real estate) comprise
nonperforming assets. At December 31, 2010, certain additional loans were considered to be
impaired, even though they were performing, where liquidation of collateral would be insufficient
to repay the balance of the loan. The impairment was determined based on current economic
conditions, the declines in the commercial borrowers industries, or specific credit or collateral
characteristics of the loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Amounts in thousands) |
Loans on nonaccrual status |
|
$ |
65,400 |
|
|
$ |
36,255 |
|
|
$ |
13,647 |
|
|
$ |
1,962 |
|
|
$ |
1,830 |
|
Other real estate owned |
|
|
25,582 |
|
|
|
14,345 |
|
|
|
4,018 |
|
|
|
602 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
90,982 |
|
|
$ |
50,600 |
|
|
$ |
17,665 |
|
|
$ |
2,564 |
|
|
$ |
2,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to
gross loans held for
investment |
|
|
5.68% |
|
|
|
3.02% |
|
|
|
1.49% |
|
|
|
0.29% |
|
|
|
0.30% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructured loans |
|
$ |
17,153 |
|
|
$ |
5,544 |
|
|
$ |
85 |
|
|
$ |
- |
|
|
$ |
- |
|
At December 31, 2010, the allowance for loan losses represented .57 times the amount of
nonperforming loans, compared to 1.3 times and 1.6 times at December 31, 2009 and 2008,
respectively. The coverage level of the allowance at December 31, 2010 decreased from the coverage
level at December 31, 2009 due to decreased specific reserves on nonperforming loans and an
increase in nonperforming loans. Collateral dependent, nonperforming loans in the amount of $10.0
million were charged down to fair value during the year and require no reserve at December 31,
2010. In addition, in 2010 the Bank added $21.9 million in troubled debt restructured loans to
nonaccrual status which are now paying according to agreed upon terms. Nonperforming loans that
have been written down to fair value will remain in nonaccrual status until consistent payment
performance is evident. Nonperforming loans are individually reviewed for impairment based on
probable cash flows and the value of collateral.
Impaired Loans
As discussed above, the Bank generally identifies loans 90 days past due as nonaccrual loans.
Impaired loans include $65.4 million in nonaccrual loans, $17.2 million in restructured loans as
well as $4.3 million in performing loans that were impaired for various concerns regarding the
ability of the borrower to repay the principal.
57
The following table presents impaired loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
Average |
|
Interest |
|
|
Recorded |
|
Principal |
|
Related |
|
Recorded |
|
Income |
|
|
Investment |
|
Balance |
|
Allowance |
|
Investment |
|
Recognized |
December 31, 2010 |
|
(in thousands) |
Impaired loans without a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
21,677 |
|
|
$ |
22,404 |
|
|
$ |
- |
|
|
$ |
11,427 |
|
|
$ |
206 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
5,732 |
|
|
|
5,803 |
|
|
|
- |
|
|
|
2,380 |
|
|
|
98 |
|
Owner occupied commercial real estate |
|
|
11,573 |
|
|
|
11,745 |
|
|
|
- |
|
|
|
5,109 |
|
|
|
187 |
|
Commercial |
|
|
1,998 |
|
|
|
2,004 |
|
|
|
- |
|
|
|
1,226 |
|
|
|
45 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
3,122 |
|
|
|
3,143 |
|
|
|
- |
|
|
|
1,427 |
|
|
|
60 |
|
Multifamily |
|
|
310 |
|
|
|
315 |
|
|
|
- |
|
|
|
192 |
|
|
|
13 |
|
Open ended secured 1-4 family |
|
|
953 |
|
|
|
961 |
|
|
|
- |
|
|
|
294 |
|
|
|
12 |
|
Consumer and other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
72 |
|
|
|
5 |
|
Impaired loans with a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
11,116 |
|
|
$ |
11,150 |
|
|
$ |
2,141 |
|
|
$ |
16,379 |
|
|
$ |
261 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
6,484 |
|
|
|
6,540 |
|
|
|
1,096 |
|
|
|
5,758 |
|
|
|
141 |
|
Owner occupied commercial real estate |
|
|
5,077 |
|
|
|
5,104 |
|
|
|
860 |
|
|
|
4,416 |
|
|
|
134 |
|
Commercial |
|
|
5,435 |
|
|
|
5,435 |
|
|
|
1,318 |
|
|
|
4,266 |
|
|
|
101 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
2,133 |
|
|
|
2,172 |
|
|
|
343 |
|
|
|
3,270 |
|
|
|
57 |
|
Multifamily |
|
|
469 |
|
|
|
476 |
|
|
|
82 |
|
|
|
159 |
|
|
|
9 |
|
Open ended secured 1-4 family |
|
|
898 |
|
|
|
898 |
|
|
|
439 |
|
|
|
780 |
|
|
|
14 |
|
Consumer and other |
|
|
134 |
|
|
|
135 |
|
|
|
35 |
|
|
|
73 |
|
|
|
3 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
32,793 |
|
|
$ |
33,554 |
|
|
$ |
2,141 |
|
|
$ |
27,806 |
|
|
$ |
467 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
12,216 |
|
|
|
12,343 |
|
|
|
1,096 |
|
|
|
8,138 |
|
|
|
239 |
|
Owner occupied commercial real estate |
|
|
16,650 |
|
|
|
16,849 |
|
|
|
860 |
|
|
|
9,525 |
|
|
|
321 |
|
Commercial |
|
|
7,433 |
|
|
|
7,439 |
|
|
|
1,318 |
|
|
|
5,492 |
|
|
|
146 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
5,255 |
|
|
|
5,315 |
|
|
|
343 |
|
|
|
4,697 |
|
|
|
117 |
|
Multifamily |
|
|
779 |
|
|
|
791 |
|
|
|
82 |
|
|
|
351 |
|
|
|
22 |
|
Open ended secured 1-4 family |
|
|
1,851 |
|
|
|
1,859 |
|
|
|
439 |
|
|
|
1,074 |
|
|
|
26 |
|
Consumer and other |
|
|
134 |
|
|
|
135 |
|
|
|
35 |
|
|
|
145 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,111 |
|
|
$ |
78,285 |
|
|
$ |
6,314 |
|
|
$ |
57,228 |
|
|
$ |
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans under $100,000 that are not
individually reviewed for impairment |
|
|
9,768 |
|
|
|
10,087 |
|
|
|
2,617 |
|
|
|
12,144 |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
86,879 |
|
|
$ |
88,372 |
|
|
$ |
8,931 |
|
|
$ |
69,372 |
|
|
$ |
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the impaired loans in the construction category consisted of non 1-4
family construction and land development loans totaling $18.3 million and 1-4 family construction
loans totaling $14.5 million. The largest impaired
construction and land development loan balance was $2.2 million for a residential development
with no specific allowance
58
recorded as the loan has been charged down to the fair value of
collateral as of December 31, 2010. Of the remaining construction and land development loans,
there were five relationships with balances in excess of $1.0 million. Specific allowances have
been recorded for each loan based on recent appraisals or discounted collateral values in cases
where recent appraisals were not available. The largest impaired 1-4 family construction loan
balance was $1.8 million with no specific allowance recorded as the loan has been charged down to
the fair value of collateral as of December 31, 2010. The remaining 1-4 family loans are spread
across various market areas and specific allowances for impaired loans have been recorded where
loan balances exceeded discounted collateral values.
Collateral values were assessed for impaired residential mortgage and commercial mortgage
loans. Ten relationships with balances exceeding $1.0 million were identified as impaired. The
impaired loans were analyzed to record specific allowances for loans with balances that exceeded
discounted collateral values. Specific allowances were assigned for loan balances in excess of
recent appraisals or discounted collateral values in cases where recent appraisals were not
available.
At December 31, 2010, most of the impaired loan balances in the commercial, financial, and
agricultural category were collateralized by accounts receivable, inventory, and equipment. The
borrowers were businesses primarily in the lumber, furniture, and equipment leasing industries
which have softened over the past year. Perfected collateral related to impaired loans is appraised
by an independent third party appraiser and recorded at the lower of loan balance or fair market
value. Specific allowances for impaired loans were assigned for loan balances in excess of
discounted collateral values for loans deemed to be impaired.
Impaired loans acquired 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 with subsequent deterioration and related allowance for loan loss
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 and were $47,000 and $67,000, respectively, at December 31, 2010
and 2009.
The following table presents changes in all purchased impaired loans, which includes the Companys
acquisition of American Community on April 17, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
Contractual |
|
Adjustment |
|
|
|
|
Principal |
|
(nonaccretable |
|
Carrying |
|
|
Receivable |
|
difference) |
|
Amount |
As of April 17, 2009 acquisition date |
|
$ |
14,513,154 |
|
|
$ |
3,824,951 |
|
|
$ |
10,688,203 |
|
Change due to payment received |
|
|
(1,985,697 |
) |
|
|
(83,415 |
) |
|
|
(1,902,282 |
) |
Transfer to foreclosed real estate |
|
|
(5,684,274 |
) |
|
|
(424,500 |
) |
|
|
(5,259,774 |
) |
Change due to charge-offs |
|
|
(5,188,438 |
) |
|
|
(3,245,464 |
) |
|
|
(1,942,974 |
) |
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
1,654,745 |
|
|
$ |
71,572 |
|
|
$ |
1,583,173 |
|
|
|
|
|
|
|
|
At December 31, 2010, the outstanding balance of purchased impaired loans from American
Community, which includes principal, interest and fees due, was $1.6 million. 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.
Provision and Allowance for Loan Losses
The primary risks inherent in the Banks loan portfolio, including the adequacy of the
allowance or reserve for loan losses, are based on managements assumptions regarding, among other
factors, general and local economic conditions, which are difficult to predict and are beyond the
Banks control. In estimating these risks, and the related loss reserve levels, management also
considers the financial conditions of specific borrowers and credit concentrations with specific
borrowers, groups of borrowers, and industries.
As part of managements plan to improve policies and procedures and internal controls over the
provision for loan losses, the framework utilized for the model to determine the allowance for loan
losses was modified during 2009. These
59
modifications led to improved written policies and procedures, a thorough review of the
allowance for loan loss model, and improved controls and support for changes in the underlying
assumptions being used in the model. Improvements to the allowance for loan loss model and related
calculations were driven primarily by a change in the methodology of calculating reserves on
unimpaired loans placing greater emphasis on the credit quality of loans. These changes were
incorporated by adding classified asset factors to classified loan categories including special
mention, substandard, and doubtful loans under $100,000. Loans were also segregated into more
defined risk categories based on the underlying collateral and characteristics in order to provide
a more accurate assessment of risks within the portfolio. Those risk categories include the
following: nonresidential construction and land development, residential construction,
owner-occupied commercial real estate, non owner-occupied commercial real estate, commercial loans,
first lien 1-4 family residential mortgages, junior lien 1-4 family residential mortgages, open
ended secured 1-4 family equity lines, and other consumer loans. In 2010, further refinement was
made to the allowance model, including changes made in the calculation of classified asset factors.
The classified asset factor was updated to incorporate twelve months of default trends and
historical charge-offs for classified loans, as opposed to single data point information previously
used. 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 periods 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.
The allowance for loan losses is adjusted 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 provision for loan losses was $24.3 million in 2010 compared to
$48.4 million in 2009 and $11.1 million in 2008. The provision expense is determined by the Banks
allowance for loan losses model. The components of the model are specific reserves for impaired
loans and a general allocation for unimpaired loans. The general allocation has two components, an
estimate based on historical loss experience and an additional estimate based on internal and
external environmental factors due to the uncertainty of historical loss experience in predicting
current embedded losses in the portfolio that will be realized in the future.
As 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 (loans graded
7) or loss (loans graded 8) to be individually impaired and may consider substandard loans
(loans graded 6) individually impaired depending on the borrowers 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 larger loans if the
appraisal is more than 12 months old.
Impaired loans, for which management has determined that receiving payment in accordance with
the terms of the original note is unlikely, are evaluated individually for specific allowances.
Management considers certain loans graded doubtful or loss to be impaired and may consider
substandard loans impaired depending on an evaluation of the probability of repayment of the loan
and the strength of any collateral. The Bank measures impairment based on the value of the
collateral and the carrying value of the loan or, alternatively, probable cash flows. Impaired
loans are identified in a periodic analysis of the adequacy of the reserve.
In determining the general allowance allocation, the ratios from the actual loss history for
the various categories are applied to the homogenous pools of loans in each category. In addition,
to recognize the probability that loans in special mention, doubtful, and substandard risk grades
are more likely to have embedded losses, additional reserve factors based on the likelihood of loss
are applied to the homogenous pools of weaker graded loans that have not yet been identified as
impaired.
A
portion of the general allocation is based on environmental factors
including estimates of losses
related to interest rate trends, unemployment trends, real estate characteristics, past due and
nonaccrual trends, watch list trends, charge-off trends, and underwriting and servicing
assessments. The factors with the largest impact on the allowance at December 31, 2010 were watch
list trends, unemployment rate trends, and underwriting and servicing assessments. Markets served
by the Bank experienced softening from the general economy and declines in real estate values. The
real estate characteristics component
60
includes trends in real estate concentrations and exceptions to FDIC guidelines for
loan-to-value ratios. The addition of a centralized team of credit spread analysts has improved
the quality of credit underwriting and risk grade identification on new loans and modifications.
Other related improvements, such as expanded use of global cash flows in the underwriting process,
has contributed to the ability to better identify and quantify potential risks inherent in the
portfolio.
The risk grades, normally assigned by the loan officers when the loan is originated and
reviewed by the regional credit officers, are based on several factors including historical data,
current economic factors, composition of the portfolio, and evaluations of the total loan portfolio
and assessments of credit quality within specific loan types. In some cases the risk grades are
assigned by regional executives, depending upon dollar exposure. Because these factors are
dynamic, the provision for loan losses can fluctuate. Credit quality reviews are based primarily
on analysis of borrowers cash flows, with asset values considered only as a second source of
payment. Regional credit officers are working with lenders in underwriting, structuring and risk
grading our credits. The Risk Review Officer focuses on lending policy compliance, credit risk
grading, and credit risk reviews on larger dollar exposures. 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.
Management considers the allowance for loan losses adequate to cover the estimated losses
inherent in the Banks loan portfolio as of December 31, 2010. Management believes it has
established the allowance in accordance with accounting principles generally accepted in the United
States and will consider future additions 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 Banks 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, and we believe that these trends are likely to continue. 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.
The
Banks allowance for loan losses was $37.8 million at December 31, 2010, or 2.36%, 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
primarily to a decrease in specific reserves related to impaired loans and a decrease in classified
loans as of December 31, 2010. In addition, the Bank saw some improving trends in the Banks past
dues and unemployment rates within the region. Overall the depressed real estate markets continue
to take a toll on our construction portfolio. This has resulted in 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.
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. Out of the $37.8 million in total allowance for loan losses at December 31, 2010,
the specific allowance for impaired loans accounted for $6.3 million, down from $10.9 million at
December 31, 2009. Decreases in specific allowances for impaired loans were due to the charge-down
of collateral dependent loans to fair market values. The remaining
general allowance of $31.5
million, was attributed to performing loans and was down from $37.7 million at December 31, 2009.
The decrease in the general allowance was driven primarily by a decrease in classified and
performing loans, as well as improvements in other qualitative factors in the model as improvements
were made in the calculation of potential losses
61
related to classified loans. In 2010, changes were made to incorporate twelve months of actual
default trends and historical charge-offs for classified loans. The use of actual twelve month
data is a better assessment of losses associated with classified loans as opposed to a single data
point used in the prior year to ensure that the analysis incorporates the most current and
statistically relevant trends. As a result of this methodology change, the qualitative reserve for
classified loans decreased by $7.5 million from December 31, 2009 to December 31, 2010.
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. These improvements decreased qualitative reserves
$2.6 million from December 31, 2009 to December 31, 2010. Also contributing to the decrease in
the general allowance for loan losses was a $75.9 million decrease in gross loans as of December
31, 2010 as compared to December 31, 2009, and a decrease of $35.9 million in classified,
unimpaired loans. Offsetting the decreases in other qualitative factors were increased charge-offs
for the rolling eight-quarters ended December 31, 2010 as compared to the eight-quarter period
ending December 31, 2009. This accounted for a $3.5 million increase in the general allowance.
The general allowance on non-classified loans as a percent of non-classified loans was 1.19% as of
December 31, 2010, as compared to 1.12% as of December 31, 2009. Usually, we expect the general
allowance on performing loans to increase when periods of economic weakness are coupled with
look-back periods of increasing charge-offs. Conversely, we expect the general allowance to
decrease as a percentage of loans when a stronger economy is combined with a decrease in the
rolling eight-quarter average of the Banks charged off loans.
Our real estate portfolio has $300.9 million of construction loans, $621.4 million of
commercial real estate loans, $174.5 million in 1-4 family mortgage loans, $209.3 million in home
equity lines of credit, and $29.3 million in multifamily mortgage loans as of December 31, 2010.
We consider our construction and junior lien mortgage loans our riskiest loans within our real
estate portfolio and we are not actively lending option ARM products or subprime loans.
Construction loans are typically comprised of loans to borrowers for real estate to be developed
(into properties such as sub-divisions or spec houses). Normally, these loans are repaid with the
proceeds from the sale of the developed property. The greater degree of strain on these real
estate types of loans and the significance to our overall loan portfolio has caused us to apply a
greater degree of scrutiny in analyzing the ultimate collectability of amounts due. The majority
of these borrowers are having financial difficulties. Our analysis has resulted in a significant
provision expense and charge-offs for the year ended December 31, 2010. As of December 31, 2010,
$21.7 million of our real estate loans had interest reserves including both borrower and bank
funded. There is a risk that an interest reserve could mask problems with a borrowers willingness
and ability to repay the debt consistent with the terms and conditions of the loan obligation;
therefore, the Company has implemented review policies to identify and monitor all loans with
interest reserves in order to identify potential impairments or discontinuation of interest
accruals.
Net loan charge-offs (recoveries) were $35.2 million, or 2.08% of average loans for the year
ended December 31, 2010, compared to $22.2 million, or 1.39% of average loans for the year ended
December 31, 2009. The increase over last year was due primarily to the writedown of $10.0 million
of collateral dependent loans to fair value.
62
The following table presents a reconciliation of the allowance for loan losses and reflects
charge-offs and recoveries by loan category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Balance at beginning of period |
|
$ |
48,625 |
|
|
$ |
22,355 |
|
|
$ |
12,445 |
|
|
$ |
10,828 |
|
|
$ |
9,473 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
|
31,846 |
|
|
|
15,009 |
|
|
|
1,720 |
|
|
|
328 |
|
|
|
419 |
|
Installment loans |
|
|
677 |
|
|
|
1,255 |
|
|
|
576 |
|
|
|
338 |
|
|
|
252 |
|
Credit card and related plans |
|
|
71 |
|
|
|
107 |
|
|
|
63 |
|
|
|
85 |
|
|
|
49 |
|
Commercial and all other |
|
|
4,226 |
|
|
|
6,432 |
|
|
|
963 |
|
|
|
351 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
36,820 |
|
|
|
22,803 |
|
|
|
3,322 |
|
|
|
1,102 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
|
889 |
|
|
|
204 |
|
|
|
135 |
|
|
|
63 |
|
|
|
69 |
|
Installment loans |
|
|
211 |
|
|
|
85 |
|
|
|
134 |
|
|
|
90 |
|
|
|
60 |
|
Credit card and related plans |
|
|
7 |
|
|
|
2 |
|
|
|
14 |
|
|
|
22 |
|
|
|
3 |
|
Commercial and all other |
|
|
491 |
|
|
|
343 |
|
|
|
181 |
|
|
|
55 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,598 |
|
|
|
634 |
|
|
|
464 |
|
|
|
230 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
|
35,222 |
|
|
|
22,169 |
|
|
|
2,858 |
|
|
|
872 |
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
24,349 |
|
|
|
48,439 |
|
|
|
11,109 |
|
|
|
2,489 |
|
|
|
2,165 |
|
Allowance acquired from Cardinal |
|
|
- |
|
|
|
- |
|
|
|
1,659 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
37,752 |
|
|
$ |
48,625 |
|
|
$ |
22,355 |
|
|
$ |
12,445 |
|
|
$ |
10,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loan charge-offs (recoveries)
to average loans |
|
|
2.08 |
% |
|
|
1.39 |
% |
|
|
0.26 |
% |
|
|
0.10 |
% |
|
|
0.10 |
% |
The following table presents the allocation of the allowance for loan losses by category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|
(Dollars in thousands) |
Real estate |
|
$ |
32,550 |
|
|
|
86.2 |
% |
|
$ |
41,044 |
|
|
|
84.4 |
% |
|
$ |
16,802 |
|
|
|
75.2 |
% |
|
$ |
8,248 |
|
|
|
66.3 |
% |
|
$ |
7,076 |
|
|
|
65.3 |
% |
Commercial,
agricultural, other |
|
|
4,335 |
|
|
|
11.5 |
% |
|
|
6,244 |
|
|
|
12.8 |
% |
|
|
4,617 |
|
|
|
20.7 |
% |
|
|
3,622 |
|
|
|
29.1 |
% |
|
|
2,869 |
|
|
|
26.5 |
% |
Consumer |
|
|
867 |
|
|
|
2.3 |
% |
|
|
1,337 |
|
|
|
2.8 |
% |
|
|
936 |
|
|
|
4.2 |
% |
|
|
575 |
|
|
|
4.6 |
% |
|
|
189 |
|
|
|
1.8 |
% |
Unallocated |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
695 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,752 |
|
|
|
100.0 |
% |
|
$ |
48,625 |
|
|
|
100.0 |
% |
|
$ |
22,355 |
|
|
|
100.0 |
% |
|
$ |
12,445 |
|
|
|
100.0 |
% |
|
$ |
10,829 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
Noninterest income is derived primarily from activities such as service fees on deposit and
loan accounts, commissions earned from the sale of insurance and investment products, income from
the mortgage banking operations,
63
gains or losses sustained from the sale or impairment of
investment securities or mortgage loans and income earned from bank-owned life insurance (BOLI).
Noninterest income decreased 10.9% or $2.7 million in 2010. A decrease in the gain on sale of
mortgages of $4.5 million and decreases in other service fees made up the majority of the decrease.
The decrease in gain on sale of mortgages was primarily related to a decrease in mortgage activity
during 2010 as refinancing activity declined. The decrease in other service fees was due primarily
to decreases in commissions and fees on mortgages originated of
$387,000, or 19.4%, decreases in
merchant and cardholder processing fees of $244,000, and decreases in commissions and fees on
mutual funds and annuities of $179,000, or 21.9%. These decreases were offset by an increase in
gains on sale of available-for-sale securities of $2.2 million. Service charges on deposit
accounts were up by $230,000, or 4.0%. NOW and money market account service charges increased 36.7%
as average balances increased and business checking account service charges increased 8.6%. ATM
service charge income was up by $162,000, or 36.0%. These increases were offset by a decrease in NSF
fees (a major component of service charges) of $189,000, or 4.5%, primarily due to the impact of new
regulations. Other service fees were also down by $872,000, or 17.9%.
Noninterest income increased 56.6%, or $9.0 million, in 2009 as compared to 2008. An increase
in the gain on sale of mortgages of $5.9 million and increases in service charges and other service
fees made up the majority of the increase. Service charges on deposit accounts were up by $1.3
million, or 30.4%, and other service fees were up by $1.5 million, or 44.1%. Service charges on
deposit accounts increased as total NSF fees (a major component of service charges) increased
$964,000, or 29.7%, due to the addition of American Community. ATM service charge income was up by
$43,000, or 10.7%. NOW and money market account service charges increased 40.7% with American
Community providing the increase. The increase in other service fees was due primarily to increases
in commissions and fees on mortgages originated of $883,000, or 76.4%, and increases in commissions
and fees on mutual funds and annuities of $203,000, or 32.8%. Merchant and cardholder processing
fee income increased $200,000, or 24.6%.
The following table presents certain noninterest income accounts that were significantly
impacted by the American Community acquisition in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
American |
|
Increase/(decrease) |
|
|
Total |
|
(decrease) |
|
Community |
|
excluding American |
|
|
2009 |
|
over 2008 |
|
region |
|
Community region |
Checking, savings and
money market account fees (1) |
|
$ |
1,069,080 |
|
|
$ |
329,286 |
|
|
$ |
319,696 |
|
|
$ |
9,590 |
|
ATM service charges |
|
|
448,388 |
|
|
|
43,450 |
|
|
|
85,690 |
|
|
|
(42,240 |
) |
Consumer NSF fees (1) |
|
|
3,112,593 |
|
|
|
732,048 |
|
|
|
879,967 |
|
|
|
(147,919 |
) |
Commercial NSF fees (1) |
|
|
1,101,402 |
|
|
|
232,438 |
|
|
|
216,614 |
|
|
|
15,824 |
|
|
|
|
|
|
|
|
|
|
Total service charge on deposit accounts |
|
$ |
5,731,463 |
|
|
$ |
1,337,222 |
|
|
$ |
1,501,967 |
|
|
$ |
(164,745 |
) |
|
|
|
|
|
|
|
|
|
Notes:
(1) included in service charges on deposit accounts line item on the
Consolidated Statements of Income
Losses due to other-than-temporary impairment of securities increased from $372,000 in 2009 to
$482,000, in 2010 primarily due to the write down of $384,000 of an investment in a financial
services company. Management also recorded other-than-temporary impairment charges on two other
investments in 2010. Mortgage banking income (loss) also increased $124,000, or 593.6%, in 2010 as
a result of a smaller decrease in the value of the mortgage servicing rights in 2010. Income from
investment in bank-owned life insurance (BOLI) decreased
$22,000, or 2.6%, in 2010. The BOLI
investment income decreased $82,000, or 8.8%, from 2008 to 2009.
Losses due to other-than-temporary impairment of securities were $372,000 in 2009, a decrease
of $644,000 as compared to losses of $1.0 million recorded in 2008. Mortgage banking income (loss)
decreased $211,000, or 111%, in 2009 after a decrease of $261,000, or 57.9%, in 2008, as a result
of a smaller decrease in the value of the mortgage servicing rights in 2009.
64
Noninterest Expense
Noninterest expense includes salaries and employee benefits, occupancy and
equipment expenses, and all other operating costs. Total noninterest expenses decreased $60.2
million, or 48.5%, comparing 2010 to 2009 and increased 213.0% comparing 2009 to 2008. Noninterest
expense to average assets for 2010 was 2.86%, and 6.34% for 2009. Excluding goodwill impairment,
efficiency ratios for 2010 and 2009 were 71.15% and 68.34%, respectively. The efficiency ratio is
the ratio of noninterest expenses less amortization of intangibles and goodwill impairment to the
total of the taxable equivalent net interest income and noninterest income. Amortization of core
deposit intangible attributable to the acquisition of Piedmont Bank totaled $340,000 in 2010 and
$379,000 in 2009, a noncash expense that will continue until 2022. Amortization of core deposit
intangible, attributable to the 2004 acquisition of High Country Bank, totaled $314,000 in 2010 and
2009, and will continue until 2012. Amortization of core deposit intangible, attributable to the
2008 acquisition of Cardinal, totaled $144,000 in 2010 and $170,000 in 2009, and will continue
until 2017. Amortization of core deposit intangible attributable to the 2009 acquisition of
American Community Bank, totaled $485,000 in 2010 and $376,000 in 2009, and will continue until
2019. All are being amortized under an accelerated method.
Salaries and employee benefits constitute the largest component of noninterest expense.
Comparing 2010 to 2009, salaries and benefits increased by $912,000, or 3.2%. These increases were
due primarily to the addition of American Community employees for twelve months in 2010, as
compared to nine months in 2009. In addition, the Company accrued compensation expense in the
amount of $825,000 related to the branch consolidations announced in the fourth quarter of 2010.
Comparing 2009 to 2008, salaries and employee benefits increased $8.7 million, or 43.7%, due
primarily to the addition of American Community employees. Occupancy and equipment expense
increased $1.5 million, or 21.6%, comparing 2010 to 2009 due primarily to the addition of American
Community branches for a full twelve months in 2010 as opposed to nine months in the previous year.
In addition, approximately $220,000 of lease termination expense was accrued in the fourth quarter
of 2010 as part of the branch consolidations. Occupancy expenses increased $2.2 million, or 46.6%,
comparing 2009 to 2008 due to the acquisition of American Community branches.
Data processing expense increased by 4.0% over 2009 and printing and supplies expenses
decreased 21.9%. Communication expense increased by 21.8%, when compared to 2009. Overall
increases in noninterest expenses were related to the addition of American Community branches for a
full twelve months in 2010 as compared to nine months in 2009. FDIC assessment expenses were also
up 7.8% due to increased assessments by the FDIC. In the prior year, additional
advertising and marketing campaigns were utilized in connection with the American Community
merger.
When comparing 2009 to 2008, data processing expense increased by 77.8% and printing and
supplies expenses increased 26.2%. Communication expense also increased by 42.2% in 2009 when
compared to 2008, due to a change in service providers. Attorney fees increased 193.5% and loan
collections expense increased 479.2% as past due and foreclosures increased significantly in 2009.
FDIC assessment expenses were also up 370.0% due to increased assessments by the FDIC compared to
FDIC assessment accruals in the prior year. Advertising and marketing expense increased by 4.8%.
Other operating expenses decreased $900,000, or 8.2%, comparing 2010 to 2009, down from a
18.3% increase from 2008 to 2009. The largest decreases in the categories under other operating
expenses were accounting fees down $456,000, transfer agent fees down $113,000, ATM/debit card
processing fees down $309,000 and other miscellaneous expenses down $619,000. Attorney fees
decreased 44.3% and loan collections expense decreased 1.7% as the Bank began to see some
improvements in past due and classified loans during 2010. The decrease in attorney fees were
primarily due to merger related attorney costs incurred in the prior year. Advertising and
marketing expense decreased by 26.9%. Other operating expenses include items such as computer
supplies, meetings and travel, directors fees, postage, mortgage origination related expenses and
professional fees.
Other operating expenses increased $1.5 million, or 18.3%, comparing 2009 to 2008. The
largest increases in the categories under other operating expenses were accounting fees up
$129,000, other professional fees up $343,000, transfer agent fees up $143,000, ATM/debit card
processing fees up $148,000 and other outside service fees up $184,000. Professional fees, such as
attorney and accounting fees and other outside service fees, increased due to increased volume and
complexity associated with financial reporting, internal auditing, and responding to regulatory
requests. Other operating expenses include items such as computer supplies, meetings and travel,
directors fees, postage, mortgage origination related expenses and professional fees.
65
The following table presents certain noninterest expense accounts that were significantly
impacted by the American Community acquisition in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American |
|
Increase |
|
|
Total |
|
Increase |
|
Community |
|
excluding American |
|
|
2009 |
|
over 2008 |
|
region |
|
Community region |
Salaries and employee benefits |
|
$ |
28,625,817 |
|
|
$ |
8,705,396 |
|
|
$ |
3,271,280 |
|
|
$ |
5,434,116 |
|
Occupancy expenses |
|
|
6,892,655 |
|
|
|
2,191,497 |
|
|
|
1,199,479 |
|
|
|
992,018 |
|
Data processing expenses |
|
|
1,397,459 |
|
|
|
611,147 |
|
|
|
269,881 |
|
|
|
341,266 |
|
Communication expenses |
|
|
1,471,505 |
|
|
|
436,634 |
|
|
|
317,228 |
|
|
|
119,406 |
|
Advertising expenses |
|
|
1,360,686 |
|
|
|
61,668 |
|
|
|
24,293 |
|
|
|
37,375 |
|
Attorney fees |
|
|
1,104,191 |
|
|
|
727,908 |
|
|
|
45,708 |
|
|
|
682,200 |
|
Loan collection fees |
|
|
1,231,791 |
|
|
|
1,019,115 |
|
|
|
4,767 |
|
|
|
1,014,348 |
|
Other expenses |
|
|
9,836,397 |
|
|
|
1,521,434 |
|
|
|
816,008 |
|
|
|
705,426 |
|
Income Taxes
Income tax benefit for the year ended December 31, 2010 was $1.4 million compared to income
tax benefit of $8.9 million for the year ended December 31, 2009, a decrease of 84.4%. The
decrease in income tax benefit was due to a decrease in net losses incurred for the year ended
December 31, 2010 as compared to net losses for the year ended December 31, 2009. The effective
tax rate for the year ended December 31, 2010 was (99.1)% compared to (10.6)% for the same period
of 2009. The goodwill impairment recorded in 2009 had no impact on the effective rate. The
change in effective tax rate in 2010 was due primarily to a large percentage of non-taxable
investment income to pretax losses for the year. See Note 10 in the consolidated financial
statements for further discussion of income taxes.
Our net deferred tax asset was $15.6 million and $19.4 million at December 31, 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
December 31, 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 Banks 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. We believe our forecasted earnings
over the next three years provides positive evidence to support a conclusion that a valuation
allowance is not needed. Managements past projections have proven to be close to actual results
verifying the reliability of managements 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 December 31, 2010, the Company did not pass the cumulative loss test by $18.7 million; although,
with the pre-tax impact of managements considerations, the Company feels confident that deferred
tax assets are more likely than not to be realized.
66
The 2010 deficit is reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 Cumulative Loss Test |
|
|
2008 |
|
2009 |
|
2010 |
|
Total |
Income (loss) before income taxes |
|
$ |
5,108 |
|
|
$ |
(83,933 |
) |
|
$ |
(1,401 |
) |
|
$ |
(80,226 |
) |
Goodwill impairment |
|
|
- |
|
|
|
61,566 |
|
|
|
- |
|
|
|
61,566 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,108 |
|
|
$ |
(22,367 |
) |
|
$ |
(1,401 |
) |
|
$ |
(18,660 |
) |
|
|
|
|
|
|
|
|
|
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 managements evaluation of the
Companys outlook.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
In the normal course of business, the Bank has various outstanding contractual obligations
that will require future cash outflows. The Banks contractual obligations for maturities of
deposits and borrowings are presented in the Gap Analysis included herein under Item 7. In
addition, in the normal course of business, the Bank enters into purchase obligations for goods or
services. The dollar amount of such purchase obligations at December 31, 2010 was not material. The
following table presents contractual obligations of the Bank as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
On Demand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Less |
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
than 1 Year |
|
1-3 Years |
|
4-5 Years |
|
5 Years |
|
Total |
|
|
(Dollars in thousands) |
Short-term borrowings |
|
$ |
44,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
44,773 |
|
Long-term borrowings |
|
|
|
|
|
|
21,000 |
|
|
|
10,000 |
|
|
|
40,995 |
|
|
|
71,995 |
|
Capital lease obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,402 |
|
|
|
2,402 |
|
Operating leases |
|
|
1,590 |
|
|
|
2,338 |
|
|
|
1,701 |
|
|
|
2,470 |
|
|
|
8,099 |
|
Other contractual obligations |
|
|
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations,
excluding deposits |
|
|
47,673 |
|
|
|
23,338 |
|
|
|
11,701 |
|
|
|
45,867 |
|
|
|
128,579 |
|
Deposits |
|
|
1,561,151 |
|
|
|
333,430 |
|
|
|
125,825 |
|
|
|
|
|
|
|
2,020,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
1,608,824 |
|
|
$ |
356,768 |
|
|
$ |
137,526 |
|
|
$ |
45,867 |
|
|
$ |
2,148,985 |
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the contractual obligations described above, the Bank, in the normal
course of business, issues various financial instruments, such as loan commitments, guarantees and
standby letters of credit, to meet the financing needs of its customers. Such commitments for the
Bank, as of December 31, 2010, are presented in Note 15 to the Consolidated Financial Statements.
As part of its ongoing business, the Bank does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as special purpose entities (SPEs), which generally are established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
New Accounting Standards
See Note 1 to the consolidated financial statements for a discussion of new accounting
standards and managements assessment of the potential impact on the Banks Consolidated Financial
Statements.
67
Fourth Quarter Summary
In the fourth quarter of 2010, the Company reported net loss to common shareholders of $8,000,
compared with net income of $3.9 million in the fourth quarter of 2009. Diluted earnings per
common share was $.00 for the fourth quarter of 2010, compared with $0.20 for the same 2009 period.
Net interest income was $16.0 million for the quarter-ended December 31, 2010, down $1.9
million, or 10.7%, from the quarter-ended December 31, 2009. The decrease in net interest income
was primarily due to a decrease in fair market value adjustments resulting from the American
Community acquisition of $1.5 million, as well as an increase in interest expense on deposits. The
net interest margin was 2.97% and 3.83% for the fourth quarter of 2010 and 2009, respectively.
Provision for loan losses increased from $3.1 million in the fourth quarter of 2009 to $6.3
million for the fourth quarter of 2010. This increase in the provision was driven primarily by
increased charge-offs in the fourth quarter of 2010 as compared to 2009. For the fourth quarter of
2010, net loan charge-offs were $13.3 million, or 3.08% of average loans (annualized), compared
with $8.8 million, or 2.05% of average loans during the fourth quarter of 2009.
Noninterest income in the fourth quarter of 2010 was $7.3 million, compared with $6.3 million
in the fourth quarter of 2009. The increase in non-interest income was primarily due to gains on
sales of securities available-for-sale of $1.3 million. Gains on sales of mortgage loans was also
up $317,000 or 11.3% as compared to the fourth quarter of 2009.
Non-interest expense totaled $17.0 million for the fourth quarter of 2010, an increase of $2.5
million, or 17.2%, from $14.5 million for the fourth quarter of 2009. Compensation and employee
benefits increased $748,000, or 10.8%, from the fourth quarter of 2009, primarily due to increased
commissions, as well as a decrease in offsetting deferred loan costs of $277,000. Occupancy and
equipment expenses increased $295,000, or 15.8%, from the fourth quarter of 2009, primarily due to
the accrual of $220,000 in lease termination costs related to the consolidation of four branches.
Inflation
Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed,
determinable amounts), the performance of a bank is affected more by changes in interest rates than
by inflation. Interest rates generally increase as the rate of inflation increases, but the
magnitude of the change in rates may not be the same.
While the effect of inflation is normally not as significant on banks as it is on those
businesses that have large investments in plant and inventories, it does have an effect. There are
normally corresponding increases in the money supply, and banks will normally experience above
average growth in assets, loans, and deposits. Also, general increases in the prices of goods and
services will result in increased operating expenses.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Market Risk, Asset/Liability Management and Interest Rate Sensitivity.
68
Item 8 Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Yadkin Valley Financial Corporation
Elkin, North Carolina
We have audited the accompanying consolidated balance sheets of Yadkin Valley Financial Corporation
and subsidiary (the Company) as of December 31, 2010 and 2009 and the related consolidated
statements of income (loss), comprehensive income (loss), shareholders equity and cash flows for
each of the years in the three-year period ended December 31, 2010. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Yadkin Valley Financial
Corporation and subsidiary
at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Yadkin Valley Financial Corporations internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 10, 2011 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s / Dixon Hughes PLLC
Charlotte, North Carolina
March 10, 2011
69
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
ASSETS |
|
(Amounts in thousands, except share and per share data) |
|
Cash and due from banks |
|
$ |
31,967 |
|
|
$ |
89,668 |
|
Federal funds sold |
|
|
31 |
|
|
|
93 |
|
Interest-bearing deposits |
|
|
197,782 |
|
|
|
2,576 |
|
Securities available-for-sale- at fair value
(amortized cost $297,086 in 2010 and $179,143 in 2009) |
|
|
298,002 |
|
|
|
183,841 |
|
Gross loans |
|
|
1,600,539 |
|
|
|
1,676,448 |
|
Less: allowance for loan losses |
|
|
37,752 |
|
|
|
48,625 |
|
|
|
|
|
|
Net loans |
|
|
1,562,787 |
|
|
|
1,627,823 |
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
|
50,419 |
|
|
|
49,715 |
|
Accrued interest receivable |
|
|
7,947 |
|
|
|
7,783 |
|
Premises and equipment, net |
|
|
45,970 |
|
|
|
43,642 |
|
Foreclosed real estate |
|
|
25,582 |
|
|
|
14,345 |
|
Federal Home Loan Bank stock, at cost |
|
|
9,416 |
|
|
|
10,539 |
|
Investment in bank-owned life insurance |
|
|
25,278 |
|
|
|
24,454 |
|
Goodwill |
|
|
4,944 |
|
|
|
4,944 |
|
Core deposit intangible (net of accumulated amortization of
$7,615 in 2010 and $6,335 in 2009) |
|
|
4,907 |
|
|
|
6,187 |
|
Other assets |
|
|
35,562 |
|
|
|
48,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,300,594 |
|
|
$ |
2,113,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
216,161 |
|
|
$ |
207,850 |
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
NOW, savings and money market accounts |
|
|
589,790 |
|
|
|
445,508 |
|
Time certificates: |
|
|
|
|
|
|
|
|
$100 or more |
|
|
477,030 |
|
|
|
560,825 |
|
Other |
|
|
737,425 |
|
|
|
607,569 |
|
|
|
|
|
|
Total Deposits |
|
|
2,020,406 |
|
|
|
1,821,752 |
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
44,773 |
|
|
|
44,467 |
|
Long-term borrowings |
|
|
71,995 |
|
|
|
79,000 |
|
Capital lease obligations |
|
|
2,402 |
|
|
|
2,437 |
|
Accrued interest payable |
|
|
3,302 |
|
|
|
3,015 |
|
Other liabilities |
|
|
10,259 |
|
|
|
10,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
$ |
2,153,137 |
|
|
$ |
1,961,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Preferred
stock, no par value, 6,000,000 shares authorized;
49,312,000 issued and outstanding in 2010 and 2009 |
|
|
46,770 |
|
|
|
46,152 |
|
Common stock, $1 par value, 50,000,000 shares authorized;
16,147,640 issued and outstanding in 2010 and 16,129,640
issued and outstanding in 2009 |
|
|
16,148 |
|
|
|
16,130 |
|
Warrants |
|
|
3,581 |
|
|
|
3,581 |
|
Surplus |
|
|
114,649 |
|
|
|
114,573 |
|
Accumulated deficit |
|
|
(34,273 |
) |
|
|
(31,080 |
) |
Accumulated other comprehensive income |
|
|
582 |
|
|
|
2,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
|
147,457 |
|
|
|
152,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
2,300,594 |
|
|
$ |
2,113,612 |
|
|
|
|
|
|
See notes to consolidated financial statements.
70
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
INTEREST INCOME: |
|
(Amounts in thousands, except share and per share data) |
|
Interest and fees on loans |
|
$ |
90,837 |
|
|
$ |
88,321 |
|
|
$ |
67,459 |
|
Interest on federal funds sold |
|
|
10 |
|
|
|
25 |
|
|
|
56 |
|
Interest and dividends on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
5,570 |
|
|
|
5,112 |
|
|
|
5,118 |
|
Non-taxable |
|
|
2,200 |
|
|
|
2,039 |
|
|
|
1,517 |
|
Interest-bearing deposits |
|
|
385 |
|
|
|
45 |
|
|
|
376 |
|
|
|
|
|
|
|
|
TOTAL INTEREST INCOME |
|
|
99,002 |
|
|
|
95,542 |
|
|
|
74,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits of $100 or more |
|
|
13,274 |
|
|
|
11,354 |
|
|
|
11,735 |
|
Other time and savings deposits |
|
|
18,619 |
|
|
|
17,630 |
|
|
|
18,526 |
|
Borrowed funds |
|
|
2,440 |
|
|
|
2,847 |
|
|
|
4,275 |
|
|
|
|
|
|
|
|
TOTAL INTEREST EXPENSE |
|
|
34,333 |
|
|
|
31,831 |
|
|
|
34,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
64,669 |
|
|
|
63,711 |
|
|
|
39,990 |
|
PROVISION FOR LOAN LOSSES |
|
|
24,349 |
|
|
|
48,439 |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
|
40,320 |
|
|
|
15,272 |
|
|
|
28,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
5,961 |
|
|
|
5,731 |
|
|
|
4,394 |
|
Other service fees |
|
|
3,997 |
|
|
|
4,869 |
|
|
|
3,378 |
|
Net gain on sales and fees of mortgage loans |
|
|
9,022 |
|
|
|
13,563 |
|
|
|
7,679 |
|
Net gain on sales of investment securities |
|
|
2,180 |
|
|
|
- |
|
|
|
- |
|
Income on investment in bank-owned life insurance |
|
|
824 |
|
|
|
846 |
|
|
|
928 |
|
Mortgage banking income (loss) |
|
|
103 |
|
|
|
(21 |
) |
|
|
190 |
|
Other than temporary impairment of securities |
|
|
(482 |
) |
|
|
(372 |
) |
|
|
(1,016 |
) |
Other income |
|
|
533 |
|
|
|
227 |
|
|
|
311 |
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST INCOME |
|
|
22,138 |
|
|
|
24,843 |
|
|
|
15,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
29,538 |
|
|
|
28,626 |
|
|
|
19,920 |
|
Occupancy and equipment expense |
|
|
8,380 |
|
|
|
6,893 |
|
|
|
4,701 |
|
Printing and supplies |
|
|
877 |
|
|
|
1,122 |
|
|
|
889 |
|
Data processing |
|
|
1,453 |
|
|
|
1,397 |
|
|
|
786 |
|
Amortization of core deposit intangible |
|
|
1,280 |
|
|
|
1,240 |
|
|
|
877 |
|
Communications expense |
|
|
1,793 |
|
|
|
1,471 |
|
|
|
1,035 |
|
Advertising expense |
|
|
995 |
|
|
|
1,361 |
|
|
|
1,299 |
|
FDIC assessment expense |
|
|
4,366 |
|
|
|
4,052 |
|
|
|
862 |
|
Acquisition related costs |
|
|
- |
|
|
|
2,590 |
|
|
|
- |
|
Loan collection costs |
|
|
1,210 |
|
|
|
1,232 |
|
|
|
213 |
|
Goodwill impairment |
|
|
- |
|
|
|
61,566 |
|
|
|
- |
|
Net cost of operation of other real estate |
|
|
3,927 |
|
|
|
1,558 |
|
|
|
363 |
|
Other expenses |
|
|
10,040 |
|
|
|
10,940 |
|
|
|
8,692 |
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST EXPENSES |
|
|
63,859 |
|
|
|
124,048 |
|
|
|
39,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
(1,401 |
) |
|
|
(83,933 |
) |
|
|
5,108 |
|
INCOME TAX EXPENSE (BENEFIT) |
|
|
(1,389 |
) |
|
|
(8,876 |
) |
|
|
1,241 |
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
(12 |
) |
|
|
(75,057 |
) |
|
|
3,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend and accretion of preferred stock discount |
|
|
3,181 |
|
|
|
2,435 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) TO COMMON SHAREHOLDERS |
|
$ |
(3,193 |
) |
|
$ |
(77,492 |
) |
|
$ |
3,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.20 |
) |
|
$ |
(5.23 |
) |
|
$ |
0.34 |
|
Diluted |
|
$ |
(0.20 |
) |
|
$ |
(5.23 |
) |
|
$ |
0.34 |
|
CASH DIVIDENDS PER COMMON SHARE |
|
$ |
- |
|
|
$ |
0.12 |
|
|
$ |
0.52 |
|
See notes to consolidated financial statements.
71
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|
(Amounts in thousands) |
NET INCOME (LOSS) |
|
$ |
(12 |
) |
|
$ |
(75,057 |
) |
|
$ |
3,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on securities available-for-sale |
|
|
(1,625 |
) |
|
|
1,417 |
|
|
|
1,220 |
|
Tax effect |
|
|
639 |
|
|
|
(515 |
) |
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) on securities available-for-sale,
net of tax amount |
|
|
(986 |
) |
|
|
902 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized (gains) losses |
|
|
(2,180 |
) |
|
|
- |
|
|
|
- |
|
Reclassification adjustment for impairment losses |
|
|
- |
|
|
|
- |
|
|
|
1,016 |
|
Tax effect |
|
|
839 |
|
|
|
- |
|
|
|
(391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized (gains) losses,
net of tax amount |
|
|
(1,341 |
) |
|
|
- |
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME, NET OF TAX |
|
|
(2,327 |
) |
|
|
902 |
|
|
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
(2,339 |
) |
|
$ |
(74,155 |
) |
|
$ |
5,242 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
72
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
Total |
|
|
Common Stock |
|
Preferred |
|
|
|
|
|
|
|
|
|
Retained |
|
comprehensive |
|
Shareholders |
|
|
Shares |
|
Amount |
|
Stock |
|
Warrants |
|
Surplus |
|
earnings |
|
income (loss) |
|
equity |
|
|
(Amounts in thousands, except share data) |
BALANCE, JANUARY 1,
2008 |
|
|
10,563,356 |
|
|
$ |
10,563 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
70,987 |
|
|
$ |
51,086 |
|
|
$ |
632 |
|
|
$ |
133,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption
of new accounting standard
(Note 1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(897 |
) |
|
|
- |
|
|
|
(897 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,867 |
|
|
|
- |
|
|
|
3,867 |
|
Shares issued under stock
option plan |
|
|
89,455 |
|
|
|
90 |
|
|
|
- |
|
|
|
- |
|
|
|
533 |
|
|
|
- |
|
|
|
- |
|
|
|
623 |
|
Stock option compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
67 |
|
|
|
- |
|
|
|
- |
|
|
|
67 |
|
Tax benefit from exercise of
stock options |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
252 |
|
|
|
- |
|
|
|
- |
|
|
|
252 |
|
Cash dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,986 |
) |
|
|
- |
|
|
|
(5,986 |
) |
Fractional shares retired |
|
|
(58 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Shares issued in acquisition of
Cardinal State Bank |
|
|
883,747 |
|
|
|
884 |
|
|
|
- |
|
|
|
- |
|
|
|
16,191 |
|
|
|
- |
|
|
|
- |
|
|
|
17,075 |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,375 |
|
|
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31,
2008 |
|
|
11,536,500 |
|
|
|
11,537 |
|
|
|
- |
|
|
|
- |
|
|
|
88,030 |
|
|
|
48,070 |
|
|
|
2,007 |
|
|
|
149,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(75,057 |
) |
|
|
- |
|
|
|
(75,057 |
) |
Shares issued under stock
option plan |
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Preferred stock issued |
|
|
- |
|
|
|
- |
|
|
|
49,312 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
49,312 |
|
Preferred stock discount |
|
|
- |
|
|
|
- |
|
|
|
(3,581 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,581 |
) |
Warrants issued |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,581 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,581 |
|
Discount accretion of
preferred stock warrants |
|
|
- |
|
|
|
- |
|
|
|
421 |
|
|
|
- |
|
|
|
- |
|
|
|
(421 |
) |
|
|
- |
|
|
|
- |
|
Stock option compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
74 |
|
|
|
- |
|
|
|
- |
|
|
|
74 |
|
Cash dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,658 |
) |
|
|
- |
|
|
|
(1,658 |
) |
Preferred stock dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,014 |
) |
|
|
- |
|
|
|
(2,014 |
) |
Shares
issued in acquisition of American Community Bank |
|
|
4,593,132 |
|
|
|
4,593 |
|
|
|
- |
|
|
|
- |
|
|
|
26,469 |
|
|
|
- |
|
|
|
- |
|
|
|
31,062 |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
902 |
|
|
|
902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31,
2009 |
|
|
16,129,640 |
|
|
|
16,130 |
|
|
|
46,152 |
|
|
|
3,581 |
|
|
|
114,573 |
|
|
|
(31,080 |
) |
|
|
2,909 |
|
|
|
152,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12 |
) |
|
|
- |
|
|
|
(12 |
) |
Restricted stock issued |
|
|
18,000 |
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
(18 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Discount accretion of
preferred stock warrants |
|
|
- |
|
|
|
- |
|
|
|
618 |
|
|
|
- |
|
|
|
- |
|
|
|
(618 |
) |
|
|
- |
|
|
|
- |
|
Stock option compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
Restricted stock compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
|
|
17 |
|
Preferred stock dividends |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,563 |
) |
|
|
- |
|
|
|
(2,563 |
) |
Other comprehensive
income (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,327 |
) |
|
|
(2,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31,
2010 |
|
|
16,147,640 |
|
|
$ |
16,148 |
|
|
$ |
46,770 |
|
|
$ |
3,581 |
|
|
$ |
114,649 |
|
|
$ |
(34,273 |
) |
|
$ |
582 |
|
|
$ |
147,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
73
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|
(Amounts in thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12 |
) |
|
$ |
(75,057 |
) |
|
$ |
3,867 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization (accretion) of premiums on investment securities |
|
|
2,643 |
|
|
|
735 |
|
|
|
(52 |
) |
Provision for loan losses |
|
|
24,349 |
|
|
|
48,439 |
|
|
|
11,109 |
|
Net gain on sales of mortgage loans |
|
|
(731 |
) |
|
|
(1,072 |
) |
|
|
(770 |
) |
Other than temporary impairment of investments |
|
|
482 |
|
|
|
372 |
|
|
|
1,016 |
|
Impairment of goodwill |
|
|
- |
|
|
|
61,566 |
|
|
|
- |
|
Net gain on sale of available-for-sale securities |
|
|
(2,180 |
) |
|
|
- |
|
|
|
- |
|
Increase in cash surrender value of life insurance |
|
|
(824 |
) |
|
|
(846 |
) |
|
|
(928 |
) |
Depreciation and amortization |
|
|
3,047 |
|
|
|
2,764 |
|
|
|
2,012 |
|
Loss on sale of premises and equipment |
|
|
55 |
|
|
|
70 |
|
|
|
49 |
|
Net loss on other real estate owned |
|
|
2,424 |
|
|
|
1,558 |
|
|
|
363 |
|
Amortization of core deposit intangible |
|
|
1,280 |
|
|
|
1,240 |
|
|
|
877 |
|
Deferred tax (benefit) |
|
|
5,293 |
|
|
|
(5,346 |
) |
|
|
(3,292 |
) |
Stock based compensation expense |
|
|
94 |
|
|
|
74 |
|
|
|
67 |
|
Originations of mortgage loans held-for-sale |
|
|
(937,003 |
) |
|
|
(1,646,149 |
) |
|
|
(1,045,770 |
) |
Proceeds from sales of mortgage loans held-for-sale |
|
|
937,030 |
|
|
|
1,647,436 |
|
|
|
1,049,365 |
|
Decrease in capital lease obligations |
|
|
(35 |
) |
|
|
(13 |
) |
|
|
- |
|
(Increase) decrease in accrued interest receivable |
|
|
(164 |
) |
|
|
(347 |
) |
|
|
1,248 |
|
(Increase) decrease in other assets |
|
|
8,180 |
|
|
|
(21,632 |
) |
|
|
(4,500 |
) |
Increase (decrease) in accrued interest payable |
|
|
287 |
|
|
|
(1,128 |
) |
|
|
(482 |
) |
Increase (decrease) in other liabilities |
|
|
(417 |
) |
|
|
828 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
43,798 |
|
|
|
13,492 |
|
|
|
14,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(230,851 |
) |
|
|
(31,267 |
) |
|
|
(33,672 |
) |
Proceeds from sales of available-for-sale securities |
|
|
53,331 |
|
|
|
- |
|
|
|
15,498 |
|
Proceeds from maturities of available-for-sale securities |
|
|
59,057 |
|
|
|
57,971 |
|
|
|
24,624 |
|
Net (increase) decrease in loans |
|
|
19,455 |
|
|
|
(113,352 |
) |
|
|
(140,096 |
) |
Acquisition of Cardinal State Bank, net of cash paid |
|
|
- |
|
|
|
- |
|
|
|
11,980 |
|
Acquisition of American Community Bank, net of cash paid |
|
|
- |
|
|
|
78 |
|
|
|
- |
|
Purchases of premises and equipment |
|
|
(5,431 |
) |
|
|
(4,253 |
) |
|
|
(3,157 |
) |
Proceeds from sales of premises and equipment |
|
|
- |
|
|
|
1,074 |
|
|
|
288 |
|
Purchase of Federal Home Loan Bank stock |
|
|
- |
|
|
|
(2,385 |
) |
|
|
(7,923 |
) |
Proceeds from redemption of Federal Home Loan Bank stock |
|
|
1,123 |
|
|
|
1,851 |
|
|
|
3,155 |
|
Proceeds from the sale of foreclosed real estate |
|
|
7,571 |
|
|
|
7,190 |
|
|
|
1,144 |
|
Proceeds from bank-owned life insurance |
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(95,745 |
) |
|
|
(83,093 |
) |
|
|
(128,157 |
) |
|
|
|
|
|
|
|
See notes to consolidated financial statements.
74
YADKIN VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|
(Amounts in thousands) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in checking, NOW, money market
and savings accounts |
|
$ |
152,594 |
|
|
$ |
83,130 |
|
|
$ |
(16,400 |
) |
Net increase in time certificates |
|
|
46,060 |
|
|
|
143,630 |
|
|
|
36,419 |
|
Net increase (decrease) in borrowed funds |
|
|
(6,700 |
) |
|
|
(136,485 |
) |
|
|
98,625 |
|
Dividends paid |
|
|
(2,563 |
) |
|
|
(3,672 |
) |
|
|
(5,986 |
) |
Tax benefit from exercise of stock options |
|
|
- |
|
|
|
- |
|
|
|
252 |
|
Proceeds from the issuance of preferred stock and warrants |
|
|
- |
|
|
|
49,312 |
|
|
|
- |
|
Proceeds from exercise of stock options |
|
|
- |
|
|
|
- |
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
189,391 |
|
|
|
135,915 |
|
|
|
113,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
137,444 |
|
|
|
66,313 |
|
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
92,336 |
|
|
|
26,023 |
|
|
|
26,326 |
|
|
|
|
|
|
|
|
End of year |
|
$ |
229,780 |
|
|
$ |
92,336 |
|
|
$ |
26,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
34,942 |
|
|
$ |
28,789 |
|
|
$ |
34,417 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
8 |
|
|
$ |
2,607 |
|
|
$ |
4,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH |
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Transfer from loans to foreclosed real estate |
|
$ |
21,232 |
|
|
$ |
18,642 |
|
|
$ |
3,917 |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities available
for sale, net of tax effect |
|
$ |
(2,327 |
) |
|
$ |
902 |
|
|
$ |
1,375 |
|
|
|
|
|
|
|
|
Issuance of shares in acquisition of Cardinal |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17,075 |
|
|
|
|
|
|
|
|
Issuance of shares in acquisition of American Community |
|
$ |
- |
|
|
$ |
31,062 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
75
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization Yadkin Valley Financial Corporation (the Company) was formed July 1, 2006 as a
holding company for Yadkin Valley Bank and Trust Company (the Bank). The Bank has eight wholly
owned subsidiaries, Main Street Investment Services, Inc., which provides investment services to
the Companys customers, Sidus Financial LLC, which provides mortgage brokerage services throughout
North Carolina and the eastern seaboard, Green Street I, LLC, Green Street II, LLC, Green Street
III, LLC, Green Street IV, LLC, Green Street V, LLC and PBRE, Inc. PBRE, Inc. is a shell company
that serves as a trustee on real estate loans. The Bank was incorporated in North Carolina on
September 16, 1968, and is a member of the Federal Deposit Insurance Corporation (FDIC). As a
result, the Bank is regulated by the state and the FDIC. The Bank is also a member of the Federal
Home Loan Bank of Atlanta. The Company is headquartered in Elkin, North Carolina and the Bank
provides consumer and commercial banking services in North Carolina and South Carolina through 38
full-service banking offices. Sidus offers mortgage-banking services to its customers in North
Carolina, South Carolina, Virginia, Georgia, Maryland, Alabama, Florida, Kentucky, Louisiana, West
Virginia, Delaware, Mississippi, Arkansas, Tennessee, Pennsylvania, Vermont, New Hampshire, Rhode
Island, Maine, Massachusetts and Connecticut. The Company and its subsidiaries are collectively
referred to herein as the Company. The Company formed Yadkin Valley Statutory Trust I (the
Trust) during November 2007 in order to facilitate the issuance of trust preferred securities.
The Trust is a statutory business trust formed under the laws of the state of Delaware. All of the
common securities of the Trust are owned by the Company. On April 17, 2009, the Company acquired
American Community Bancshares, Inc. (American Community), headquartered in Charlotte, NC (refer
to Note 2). American Community shareholders received either $12.35 in cash or 0.8517 shares of the
Companys common stock, subject to an overall allocation of 19.5% cash and 80.5% stock. The
overall acquisition cost was approximately $47.2 million based on the issuance of 4.6 million
shares of the Companys common stock at a stock price of $6.72 on the date of the merger, and cash
payment of $16.1 million to American Community shareholders.
Basis of Presentation - The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, the Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation. The investment in Yadkin Valley Statutory Trust I, in
accordance with accounting for variable interest entities, has been recorded by the Company in
other assets with the corresponding increase to long-term debt.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits, and federal funds sold. Generally, federal funds are purchased and sold
for one-day periods. Restricted cash as of December 31, 2010 and December 31, 2009 held at Sidus
Financial, LLC was $2,188,052 and $2,186,673, respectively.
Investment Securities - Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt
and equity securities that are bought and held principally for the purpose of selling in the near
term are classified as trading securities and reported at fair value with unrealized gains and
losses included in earnings. Debt and equity securities not classified as either held-to-maturity
or trading securities are classified as available-for-sale securities and reported at fair value
with unrealized gains and losses excluded from earnings and reported, net of related tax effects,
as a separate component of equity and as an item of other comprehensive income. Gains and losses on
the sale of available-for-sale securities are determined using the trade date basis. Declines in
the fair value of individual held-to-maturity and available-for-sale securities below their cost
that are other-than-temporary (OTTI) result in write-downs of the individual securities to their
fair value. The related write downs are included in earnings as realized losses. Premiums and
discounts are recognized in interest income using the interest method over the period to maturity.
Transfers of securities between classifications are accounted for at fair value. All securities
held at December 31, 2010 and 2009 are classified as available-for-sale.
Loans and Allowance for Loan Losses - Loans that management has the intent and ability to hold for
the foreseeable future are stated at their outstanding principal balances adjusted for any deferred
fees and costs. Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loan origination and other fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method.
76
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All loans over $20,000 are risk graded on a scale from 1 (highest quality) to 8 (loss). Management
considers certain loans graded doubtful or loss to be impaired and may consider substandard
loans impaired depending on an evaluation of the probability of repayment of the loan. All classes
of loans are considered impaired when all or a portion of the loan is determined to be
uncollectable. Loans that are deemed to be impaired (i.e., probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan) are evaluated based on
fair value of the collateral if the loan is collateral dependent, the fair value of the loan or,
alternatively, probable cash flows. A specific reserve is established as part of the allowance for
loan losses to record the difference between the stated principal amount and the present value or
market value of the impaired loan. Impaired loans are evaluated on a loan-by-loan basis (e.g.,
loans with risk characteristics unique to an individual borrower). For all classes of loans the
Company discontinues the accrual of interest income when the loans are either at least 90 days past
due or less than 90 days past due but the collectability of such interest and principal becomes
doubtful. Subsequent payments received on nonaccrual loans are recorded as a reduction of
principal. Interest income is recorded only after principal recovery is reasonably assured. Loans
are returned to accrual status when all principal and interest amounts contractually due are
brought current, the loan has performed for six months, and future payments are probable.
The provision for loan losses charged to operations is an amount sufficient to bring the allowance
for loan losses to an estimated balance considered adequate to absorb potential losses in the
portfolio resulting from events that occurred as of the balance sheet date. Managements
determination of the adequacy of the allowance is based on an evaluation of the portfolio, current
economic conditions, historical loan loss experience and other risk factors. Recovery of the
carrying value of loans is dependent to some extent on future economic, operating and other
conditions that may be beyond the control of the Bank. Unanticipated future adverse changes in such
conditions could result in material adjustments to the allowance for loan losses. In addition,
regulatory examiners may require the Bank to recognize changes to the allowance for loan losses
based on their judgments about information available to them at the time of their examination.
Loans Held-for-Sale - Loans held-for-sale primarily consist of one to four family residential loans
originated for sale in the secondary market and are carried at the lower of cost or market
determined on an aggregate basis. Gains and losses on sales of loans held-for-sale are included in
other non-interest income in the consolidated statements of income. Gains and losses on loan sales
are determined by the difference between the selling price and the carrying value of the loans
sold.
Foreclosed Real Estate Foreclosed real estate is stated at the lower of carrying amount or market
value less estimated cost to sell. Any initial losses at the time of foreclosure are charged
against the allowance for loan losses with any subsequent losses or write-downs included in the
consolidated statements of income as a component of other expenses.
Business Combinations - The Company accounts for all business combinations after January 1, 2009 by
the acquisition method of accounting whereby acquired assets and liabilities are recorded at fair
value on the date of acquisition with the remainder of the purchase price allocated to identified
intangible assets and goodwill. Business combinations are discussed further in Note 2.
Purchased Impaired Loans Purchased loans acquired in a business combination are recorded at
estimated fair value on the date of acquisition without the carryover of the related allowance for
loan losses, which include loans purchased in the American Community acquisition. Purchased
impaired loans are accounted for under the Receivables topic of the FASB Accounting Standards
Codification when the loans have evidence of credit deterioration since origination and it is
probable at the date of acquisition that the Company will not collect all contractually required
principal and interest payments. Evidence of credit quality deterioration as of the date of
acquisition may include statistics such as past due and nonaccural status. Purchased impaired loans
generally meet the Companys definition for nonaccrual status. The difference between contractually
required payments at acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable difference which is included in the carrying amount of the loans.
Subsequent decreases to the expected cash flows will generally result in a provision for loan
losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to
the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact
on future interest income. Further, any excess of cash flows expected at acquisition over the
estimated fair value is referred to as the accretable yield and is recognized into interest income
over the remaining life of the loan when there is a reasonable expectation about the amount and
timing of such cash flows.
77
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Purchased Performing Loans The Company accounts for performing loans acquired in business
combinations using the contractual cash flows method of recognizing discount accretion based on the
acquired loans contractual cash flows. Purchased performing loans are recorded at fair value,
including a credit discount. The fair value discount is accreted as an adjustment to yield over
the estimated lives of the loans. There is no allowance for loan losses established at the
acquisition date for purchased performing loans in the American Community acquisition. A provision
for loan losses is recorded for any further deterioration in these loans subsequent to the merger.
Mortgage Banking Activities When the Bank retains the right to service a sold mortgage loan, the
previous carrying amount is allocated between the loan sold and the retained mortgage servicing
right based on their relative fair values on the date of transfer. The Bank adopted accounting
guidance on transfers and servicing using the fair value method of accounting for mortgage
servicing rights.
Servicing assets are recognized as separate assets when rights are acquired through purchase or
through sale of financial assets. Mortgage servicing rights are carried at fair value.
At December 31, 2010, 2009 and 2008, the Bank was servicing loans for others of $245,139,672,
$212,941,536 and $184,603,881, respectively. The Bank carries fidelity bond insurance coverage of
$8,000,000 and errors and omissions insurance coverage of $1,000,000 per occurrence. Custodial
escrow balances maintained in connection with the loan servicing were $188,883 and $126,599 at
December 31, 2010 and 2009, respectively.
Mortgage servicing rights with a fair value of $2,144,139 and $1,917,941 at December 31, 2010 and
2009, respectively, are included in other assets. Amortization/market value adjustments related to
mortgage servicing rights were $(431,350), $(549,815) and $(384,062) for the years ended 2010, 2009
and 2008, respectively and recorded as a reduction to the mortgage banking income. A valuation of
the fair value of the 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 future earnings is the estimated market value for
the pool, calculated using consensus assumptions that a third party purchaser would utilize in
evaluating potential acquisition of the servicing.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation
and amortization. Additions and major replacements or betterments, which extend the useful lives of
premises and equipment, are capitalized. Maintenance, repairs and minor improvements are expensed
as incurred. Depreciation and amortization is provided based on the estimated useful lives of the
assets using both straight-line methods for buildings and land improvements and accelerated methods
for furniture and fixtures. The estimated useful lives for computing depreciation and amortization
are 10 years for land improvements, 30 to 40 years for buildings, and 3 to 10 years for furniture
and equipment. Gains or losses on dispositions of premises and equipment are reflected in income.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected
future cash flows is less than the carrying amount of the asset, an impairment loss is recognized.
Goodwill and Other Intangibles The Company performs an annual goodwill impairment assessment for
the Sidus segment as of October 1st. In addition, the Company will assess the impairment of
goodwill whenever events or changes in circumstances indicate that impairment in the value of
goodwill recorded on our balance sheet may exist. In order to estimate the fair value of goodwill,
the Company typically makes various judgments and assumptions, including, among other things, the
identification of the reporting units, the assignment of assets and liabilities to reporting units,
the future prospects for the reporting unit that the asset relates to, the market factors specific
to that reporting unit, the future cash flows to be generated by that reporting unit, and the
weighted average cost of capital for purposes of establishing a discount rate. Assumptions used in
these assessments are consistent with our internal planning. At September 30, 2009, it was
determined that impairment existed in the banking reporting unit and a goodwill impairment charge
of $61.6 million was recorded. No impairment at the Sidus segment was identified as a result of the
testing performed in 2010 and 2009. The purchase of American Community added $13.0 million to
Goodwill in 2009, (refer to Note 2), and was included in the impairment charge recorded in
September 2009. See Note 22 for further discussion of goodwill impairment. Intangible assets with
finite lives
78
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
include core deposits and a non-compete agreement with a former employee of American Community.
Intangible assets are subject to impairment testing whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Core deposit intangibles are amortized on
the sum-of-years digits method (intangibles acquired in 2002 and 2009), straight-line method
(intangibles acquired in 2004) and an accelerated method (intangibles acquired in 2008) over a
period not to exceed 20 years. Other intangibles include a non-compete agreement as part of the
American Community acquisition and is amortized over 5 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
|
|
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
12,522 |
|
|
$ |
(7,615 |
) |
|
$ |
12,522 |
|
|
$ |
(6,335 |
) |
Non-compete agreement |
|
|
880 |
|
|
|
(325 |
) |
|
|
880 |
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
13,402 |
|
|
$ |
(7,940 |
) |
|
$ |
13,402 |
|
|
$ |
(6,465 |
) |
|
|
|
|
|
|
|
|
|
The Banks projected amortization expense for the core deposit intangible for the years ending
December 31, 2011, 2012, 2013, 2014,2015 and thereafter is $1,173,992, $1,079,629, $677,872,
$590,409, $502,946, and $882,216, respectively. The remaining weighted average amortization period
is 8.2 years. The Banks projected amortization expense for the non-compete agreement for the
years ending December 31, 2011, 2012, 2013, and 2014 is $195,000, $178,320, $139,980, and $41,660,
respectively.
Income Taxes - Provisions for income taxes are based on amounts reported in the statements of
income and include changes in deferred taxes. Deferred taxes are computed using the asset and
liability approach. The tax effects of differences between the tax and financial accounting basis
of assets and liabilities are reflected in the balance sheets at the tax rates expected to be in
effect when the differences reverse.
Valuation allowances are recorded to reduce deferred tax assets to the amounts management concludes
are more-likely-than-not to be realized. Under ASC Topic 740 on Income Taxes, income tax benefits
are recognized and measured based upon a two-step model: 1) a tax position must be
more-likely-than-not to be sustained based solely on its technical merits in order to be
recognized, and 2) the benefit is measured as the largest dollar amount of that position that is
more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized
for a position in accordance with the Income Tax topic 740 model and the tax benefit claimed on a
tax return is referred to as an unrecognized tax benefit.
Earnings Per Share - Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding. Potential common stock arising from stock options and restricted
stock awards are included in diluted earnings per share.
Share-Based Payment - The Company recognizes the cost of employee services received in exchange for
an award of equity instruments in the financial statements over the period the employee is required
to perform the services in exchange for the award (presumptively the vesting period) in accordance
with Share-based Payment accounting guidance. This guidance also requires measurement of the cost
of employee services received in exchange for an award based on the grant-date fair value of the
award.
Non-marketable equity securities As a requirement for membership, the Bank invests in stock of
Federal Home Loan Bank of Atlanta (FHLB). In addition, the Company also invests in other equity
investments for which stock is not publicly traded. Due to the redemption provisions of FHLB
stock, the estimated fair value of the stock is equivalent to its respective
cost. Other equity investments are reviewed for impairment on a quarterly basis. These
investments are discussed further in Note 4.
79
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)- Comprehensive income (loss) is defined as the change in equity
[net assets] of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The term comprehensive
income includes components of comprehensive income including net income. Other comprehensive income
refers to revenues, expenses, gains and losses that under generally accepted accounting principles
in the United States (GAAP) are included in comprehensive income but excluded from net income.
Currently, the Companys other comprehensive income consists of unrealized gains and losses, net of
deferred income taxes, on available-for-sale securities.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Such
estimates include, for example, assets acquired and liabilities assumed from business combinations,
the allowance for loan losses, valuation of deferred tax assets, valuation of certain level 2 and
level 3 investment securities, evaluation of securities for other-than-temporary and goodwill
impairment. Actual results could differ from those estimates.
New Accounting Standards
Recently Adopted Accounting Standards
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 entitys 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 with the exception of certain activity disclosures and discussions of troubled
debt restructured loans. The adoption of this standard did not have a material impact on the
Companys financial position and results of operations. However, it increased 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 Companys financial position or results of
operations; however, it did result in additional disclosures. See Note 16 for the related fair
value disclosures.
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 Companys 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 QSPEs, 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 Companys financial position or results of operations.
80
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
From time to time, the FASB issues exposure drafts for proposed statements of financial accounting
standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB
and to final issuance by the FASB as statements of financial accounting standards. Management
considers the effect of the proposed statements on the consolidated financial statements of the
Corporation and monitors the status of changes to and proposed effective dates of exposure drafts.
Reclassifications
Certain expenses reported in prior periods have been reclassified to conform
to the 2010 presentation. Reclassifications include loss on other real estate owned which was
previously presented in other income, and loan collection and advertising expense both of which
were previously included in other expenses. The reclassifications had no effect on net income
(loss) or shareholders equity, as previously reported.
2. BUSINESS COMBINATION
Effective at the beginning of business on April 17, 2009, the Company acquired 100% of the
outstanding common stock of American Community Bancshares, Inc. (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. Pursuant to the agreement, for each share of American Community common stock,
American Community shareholders received either $12.35 in cash or 0.8517 shares of the Companys
common stock, subject to an overall allocation of 19.5% cash and 80.5% stock. The overall
acquisition cost was approximately $47.2 million based on the issuance of 4.6 million shares of the
Companys common stock at a stock price of $6.72 at the date of the merger, and cash payment of
$16.1 million to American Community shareholders.
The American Community merger is being accounted for under the acquisition method of accounting
(revised business combination guidance). The statement of net assets acquired as of April 17, 2009
is presented in the following table. The purchased assets, assumed liabilities, and identifiable
intangible assets were recorded at their respective acquisition date fair values. Fair values are
preliminary and subject to refinement for up to one year after the closing date of the merger as
information relative to closing date fair value becomes available. Goodwill of $13.0 million is
calculated as the purchase premium after adjusting for the fair value of net assets acquired.
During the refinement period there were no changes to goodwill calculated at merger. None of the
goodwill is expected to be deductible for income tax purposes. American Community provided revenue
of $16.3 million and net loss of $5.0 million for the period of April 17, 2009 to December 31,
2009.
81
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
2. BUSINESS COMBINATION (Continued)
American Communitys results of operations prior to the acquisition are not included in the
Companys statements of income.
|
|
|
|
|
Acquisition of American Community Bancshares, Inc. (in thousands) |
|
April 17, 2009 |
|
|
|
|
|
Consideration: |
|
|
|
|
Cash |
|
$ |
16,140 |
|
Stock |
|
|
31,063 |
|
|
|
|
Fair value of total consideration paid |
|
$ |
47,203 |
|
|
|
|
Net assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
|
16,219 |
|
Investments |
|
|
72,049 |
|
Loans, net |
|
|
416,339 |
|
Premises and equipment, net |
|
|
9,398 |
|
Core deposit intangible |
|
|
2,766 |
|
Other assets |
|
|
15,536 |
|
|
|
|
|
|
Deposits |
|
|
(439,949 |
) |
Liabilities |
|
|
(58,161 |
) |
|
|
|
Total identifiable net assets at fair value |
|
$ |
34,197 |
|
|
|
|
|
|
Goodwill |
|
|
13,006 |
|
|
|
|
Fair value of total consideration paid |
|
$ |
47,203 |
|
|
|
|
The Company performed an interim goodwill impairment valuation during the third quarter of
2009 given the substantial decline in its common stock price, operating results, asset quality
trends, market comparables and the economic outlook for the industry. As a result of this
valuation, it was determined that impairment existed in the banking segment, including the acquired
goodwill from American Community, and a full impairment charge was taken for goodwill related to
the banking segment. See Note 22 for further discussion of goodwill impairment.
The carrying amount of acquired loans at April 17, 2009 consisted of purchased impaired loans and
purchased performing loans as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
|
|
|
Purchased |
|
Performing |
|
|
|
|
Impaired Loans |
|
Loans |
|
Total Loans |
|
|
(in thousands) |
Commercial, financial, and agricultural |
|
$ |
265 |
|
|
$ |
58,033 |
|
|
$ |
58,298 |
|
Construction, land development and other land |
|
|
8,362 |
|
|
|
123,496 |
|
|
|
131,858 |
|
Real estate- 1-4 Family mortgage loans |
|
|
795 |
|
|
|
41,530 |
|
|
|
42,325 |
|
Real estate- Commercial and other |
|
|
837 |
|
|
|
98,549 |
|
|
|
99,386 |
|
Home equity lines of credit |
|
|
58 |
|
|
|
47,760 |
|
|
|
47,818 |
|
Installment loans to individuals |
|
|
63 |
|
|
|
12,878 |
|
|
|
12,941 |
|
Other loans |
|
|
308 |
|
|
|
23,405 |
|
|
|
23,713 |
|
|
|
|
|
|
|
|
Total |
|
$ |
10,688 |
|
|
$ |
405,651 |
|
|
$ |
416,339 |
|
|
|
|
|
|
|
|
82
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
2. BUSINESS COMBINATION (Continued)
The following table presents the purchased performing loans receivable at the acquisition date. The
remaining fair value adjustment for credit, interest rate and liquidity as of December 31, 2010 was
$2.3 million. The amounts include principal only and do not reflect accrued interest as of the date
of the acquisition or beyond:
|
|
|
|
|
|
|
April 17, 2009 |
|
|
(in thousands) |
|
Contractually required principal payments receivable |
|
$ |
416,833 |
|
Fair value adjustment for credit, interest rate, and liquidity |
|
|
(11,182 |
) |
|
|
|
Fair value of purchased performing loans receivable |
|
$ |
405,651 |
|
|
|
|
The following table presents the purchased impaired loans receivable at the acquisition date and at
year-end. The Company has initially applied the cost recovery method to all purchased impaired
loans at the acquisition date due to uncertainty as to the timing of expected cash flows as
reflected in the following table:
|
|
|
|
|
|
|
April 17, 2009 |
|
|
(in thousands) |
|
Contractually required principal payments receivable |
|
$ |
14,513 |
|
Nonaccretable difference |
|
|
(3,825 |
) |
|
|
|
Present value of cash flows expected to be collected |
|
|
10,688 |
|
Changes due to payments received, transfers or charge-offs |
|
|
|
|
|
|
|
Fair value of purchased impaired loans acquired |
|
$ |
10,688 |
|
|
|
|
At December 31, 2010, the outstanding balance and carrying amount of purchased impaired loans from
American Community, which includes principal, interest and fees due, was $1.7 million and $1.6
million, respectively. At December 31, 2009, the outstanding balance and carrying amount of
purchased impaired loans from American Community was $5.4 million and $4.9 million, respectively.
The proforma information presented does not necessarily reflect the results of operations that
would have resulted had the acquisition been completed at the beginning of the applicable periods
presented, nor does it indicate the results of operations in future periods. Total revenues for
American Community for 2009 were $16.7 million from April 17, 2009 through December 31, 2009 and
were included the Companys consolidated income statement for the year ended December 31, 2009.
The Company does not track post-acquisition earnings for American Community on a stand-alone basis.
The revenue and earnings of the combined entity had the acquisition date been as of January 1, 2009
and January 1, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
Earnings |
|
|
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
Supplemental proforma from 1/1/2009 - 12/31/09
|
|
$ |
129,027 |
|
|
$ |
(80,109 |
) |
Supplemental proforma from 1/1/2008 - 12/31/08
|
|
|
131,240 |
|
|
|
342 |
|
The proforma results are not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of each fiscal period presented, nor are they
necessarily indicative of future consolidated results.
83
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
3. INVESTMENT SECURITIES
The following tables present investment securities at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 |
|
$ |
14,547 |
|
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
14,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,547 |
|
|
|
6 |
|
|
|
3 |
|
|
|
14,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-backed
securities due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 but within 5 years |
|
|
1,040 |
|
|
|
36 |
|
|
|
- |
|
|
|
1,076 |
|
After 5 but within 10 years |
|
|
7,839 |
|
|
|
602 |
|
|
|
- |
|
|
|
8,441 |
|
After 10 years |
|
|
41,863 |
|
|
|
1,132 |
|
|
|
437 |
|
|
|
42,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
50,742 |
|
|
|
1,770 |
|
|
|
437 |
|
|
|
52,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 but within 10 years |
|
|
16,063 |
|
|
|
165 |
|
|
|
57 |
|
|
|
16,171 |
|
After 10 years |
|
|
140,021 |
|
|
|
672 |
|
|
|
938 |
|
|
|
139,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
156,084 |
|
|
|
837 |
|
|
|
995 |
|
|
|
155,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label collateralized mortgage
obligations due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 but within 10 years |
|
|
406 |
|
|
|
17 |
|
|
|
- |
|
|
|
423 |
|
After 10 years |
|
|
1,430 |
|
|
|
- |
|
|
|
148 |
|
|
|
1,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,836 |
|
|
|
17 |
|
|
|
148 |
|
|
|
1,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
2,476 |
|
|
|
18 |
|
|
|
- |
|
|
|
2,494 |
|
After 1 but within 5 years |
|
|
10,680 |
|
|
|
327 |
|
|
|
53 |
|
|
|
10,954 |
|
After 5 but within 10 years |
|
|
21,348 |
|
|
|
413 |
|
|
|
236 |
|
|
|
21,525 |
|
After 10 years |
|
|
38,260 |
|
|
|
295 |
|
|
|
906 |
|
|
|
37,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
72,764 |
|
|
|
1,053 |
|
|
|
1,195 |
|
|
|
72,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stocks: |
|
|
1,113 |
|
|
|
36 |
|
|
|
25 |
|
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113 |
|
|
|
36 |
|
|
|
25 |
|
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
297,086 |
|
|
$ |
3,719 |
|
|
$ |
2,803 |
|
|
$ |
298,002 |
|
|
|
|
|
|
|
|
|
|
84
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
3. INVESTMENT SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privatel 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
December 31, 2010 and 2009, the Banks mortgage-backed securities were pass-through
securities. Actual maturity will vary based on repayment of the underlying mortgage loans.
Gross realized gains on sales of available-for-sale securities in 2010 were $2,196,980. Gross
realized gains on sales of available-for-sale securities in 2008 were $25,100. There were no gross
realized gains or losses on sales of available-for-sale securities in 2009. Gross realized losses
on sales of available-for-sale securities in 2010 and 2008 were $16,919, and $25,126, respectively.
85
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
3. INVESTMENT SECURITIES (Continued)
Investment securities with carrying values of $111,803,619 and $103,074,382 at December 31, 2010
and 2009, respectively, were pledged as collateral for public deposits and for other purposes as
required or permitted by law.
If management determines that an investment has experienced an OTTI, the loss is recognized in the
income statement. The Companys investment in a financial institution was considered to be OTTI
and approximately $386,000 was charged-off in 2010. There were no OTTI charges recorded
for securities available-for-sale for the year ended December 31, 2009. During the third quarter of
2008, the market for preferred stock issued by the Federal Home Loan Mortgage Corporation (Freddie
Mac) deteriorated significantly after Freddie Mac was placed under conservatorship by the U.S.
government and consequently management recorded an OTTI charge of $972,800 (pre-tax) against
earnings. During the fourth quarter of 2008, management recorded an OTTI charge of $42,894 on
2,000 shares of Federal Agricultural Mortgage Corporation (Farmer Mac Stock) after management
determined that its impairment was unlikely to be temporary. Management believes that the market
prices of these equity securities will not recover in the immediate future due to the current
economic environment. The remaining investments in Freddie Mac and Farmer Mac Stock were $26,300
and $16,100, respectively at December 31, 2010 and 2009. All OTTI losses were deemed to be credit
related losses.
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 December 31, 2010 and 2009. Securities that have been in a
loss position for twelve months or more at December 31, 2010 include one mortgage-backed security,
one municipal security 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. Since
none of the unrealized losses relate to the marketability of the securities or the issuers ability
to honor redemption obligations, none of the securities are deemed to be OTTI. It is more likely
than not that the Company will not have to sell the investments before recovery of their amortized
cost bases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
Fair value |
|
losses |
|
Fair value |
|
losses |
|
Fair value |
|
losses |
|
|
(amounts in thousands) |
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
4,569 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,569 |
|
|
$ |
3 |
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
securities |
|
|
21,637 |
|
|
|
435 |
|
|
|
136 |
|
|
|
2 |
|
|
|
21,773 |
|
|
|
437 |
|
Collateralized mortgage obligation |
|
|
76,925 |
|
|
|
995 |
|
|
|
- |
|
|
|
- |
|
|
|
76,925 |
|
|
|
995 |
|
Private label collateralized
mortgage obligations |
|
|
- |
|
|
|
- |
|
|
|
1,283 |
|
|
|
148 |
|
|
|
1,283 |
|
|
|
148 |
|
State and municipal securities |
|
|
31,775 |
|
|
|
1,174 |
|
|
|
276 |
|
|
|
21 |
|
|
|
32,051 |
|
|
|
1,195 |
|
Common and preferred stocks,
and other |
|
|
79 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
79 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
134,985 |
|
|
$ |
2,632 |
|
|
$ |
1,695 |
|
|
$ |
171 |
|
|
$ |
136,680 |
|
|
$ |
2,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
3. INVESTMENT SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
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 |
|
|
|
171 |
|
|
|
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 |
|
|
$ |
14,030 |
|
|
$ |
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. NON-MARKETABLE EQUITY SECURITIES
The aggregate cost of the Companys cost method investments totaled $12,463,510 at December 31,
2010 and $14,107,329 at December 31, 2009. Cost method investments at December 31, 2010 include
$9,416,400 in FHLB stock and $3,047,110 of investments in various trust and financial companies,
which are included in other assets. All equity investments were evaluated for impairment at
December 31, 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 feels 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 Companys investment in a
financial services company was considered to be OTTI and approximately $86,000 was charged-off in
2010. The Companys investment of $151,722 in Silverton Financial was considered to be other than
temporarily impaired and all of the investment was written off in 2009. On May 1, 2009 the OCC
closed Silverton Bank, National Association, a wholly owned subsidiary of SFS. The OCC appointed
the FDIC as receiver, and the FDIC created a bridge bank, Silverton Bridge Bank, National
Association, to take over the operations until July 29, 2009 to allow customers to transfer their
account relationships in an orderly fashion. Additionally, the Companys investments in two
financial services companies were considered to be OTTI and $220,371 was charged off in 2009.
87
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
4. NON-MARKETABLE EQUITY SECURITIES (Continued)
The following tables present non-marketable securities at December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
December 31,
2010
|
|
Investment |
|
Original |
|
OTTI |
|
Current |
Investment |
|
Type |
|
Cost |
|
Charge |
|
Balance |
Federal Home Loan Bank of Atlanta |
|
Common stock |
|
$ |
9,416,400 |
|
|
$ |
- |
|
|
$ |
9,416,400 |
|
Yadkin Valley Statutory Trust I |
|
Common stock |
|
|
774,000 |
|
|
|
- |
|
|
|
774,000 |
|
American Community Capital Trust II |
|
Common stock |
|
|
310,000 |
|
|
|
- |
|
|
|
310,000 |
|
Limited partnerships providing lending
services to middle-market companies |
|
Limited Partner |
|
|
1,796,551 |
|
|
|
86,309 |
|
|
|
1,710,242 |
|
Other |
|
Common stock |
|
|
638,792 |
|
|
|
385,924 |
|
|
|
252,868 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
12,935,743 |
|
|
$ |
472,233 |
|
|
$ |
12,463,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
December 31,
2009
|
|
Investment |
|
Original |
|
OTTI |
|
Current |
Investment |
|
Type |
|
Cost |
|
Charge |
|
Balance |
Federal Home Loan Bank of Atlanta |
|
Common stock |
|
$ |
10,539,400 |
|
|
$ |
- |
|
|
$ |
10,539,400 |
|
Yadkin Valley Statutory Trust I |
|
Common stock |
|
|
774,000 |
|
|
|
- |
|
|
|
774,000 |
|
American Community Capital Trust II |
|
Common stock |
|
|
310,000 |
|
|
|
- |
|
|
|
310,000 |
|
Limited partnerships providing lending
services to middle-market companies |
|
Limited Partner |
|
|
1,732,431 |
|
|
|
- |
|
|
|
1,732,431 |
|
Other |
|
Common stock |
|
|
1,123,591 |
|
|
|
372,093 |
|
|
|
751,498 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
14,479,422 |
|
|
$ |
372,093 |
|
|
$ |
14,107,329 |
|
|
|
|
|
|
|
|
|
|
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
General. The Bank provides to its customers a full range of short- to medium-term commercial,
agricultural, Small Business Administration guaranteed, mortgage, home equity, and personal loans,
both secured and unsecured. The Bank also makes real estate mortgage and construction loans.
Variable rate loans accounted for 46% of the loan balances outstanding at December 31, 2010 while
fixed rate loans accounted for 54% of the balances.
88
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents loans at December 31, 2010 and 2009 classified by type:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
(in thousands) |
Construction and land development |
|
$ |
300,877 |
|
|
$ |
364,853 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Owner occupied |
|
|
309,198 |
|
|
|
244,938 |
|
Non-owner occupied |
|
|
312,231 |
|
|
|
338,182 |
|
Residential mortgages: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
174,536 |
|
|
|
164,254 |
|
Multifamily |
|
|
29,268 |
|
|
|
36,031 |
|
Home equity lines of credit |
|
|
209,319 |
|
|
|
208,212 |
|
Commercial |
|
|
199,696 |
|
|
|
271,435 |
|
Consumer and other |
|
|
65,003 |
|
|
|
48,545 |
|
|
|
|
|
|
Total |
|
|
1,600,128 |
|
|
|
1,676,450 |
|
Less: Net deferred loan origination fees |
|
|
411 |
|
|
|
(2 |
) |
Allowance for loan losses |
|
|
(37,752 |
) |
|
|
(48,625 |
) |
|
|
|
|
|
Loans, net |
|
$ |
1,562,787 |
|
|
$ |
1,627,823 |
|
|
|
|
|
|
Real Estate Loans. Real estate loans include construction and land development loans, commercial
real estate loans, home equity lines of credit, and residential mortgages.
Commercial real estate loans totaled $621.4 million at December 31, 2010. This lending has
involved loans secured by owner occupied commercial buildings for office, storage and warehouse
space, as well as non-owner occupied commercial buildings. The Bank generally requires the personal
guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt.
Loans secured by commercial real estate may be larger in size and may involve a greater degree of
risk than one-to-four family residential mortgage loans. Payments on such loans are often
dependent on successful operation or management of the properties.
Construction/development lending totaled $300.9 million at December 31, 2010. The Bank originates
one to four family residential construction loans for the construction of custom homes (where the
home buyer is the borrower) and provides financing to builders and consumers for the construction
of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from
an outside banking entity prior to financing the construction of pre-sold homes. The Bank also
makes commercial real estate construction loans, primarily for owner-occupied properties. The Bank
limits its construction lending risk through adherence to established underwriting procedures.
Residential one-to-four family loans amounted to $174.5 million at December 31, 2010. The Banks
residential mortgage loans are typically construction loans that convert into permanent financing
and are secured by properties located within the Banks market areas.
89
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Commercial Loans. At December 31, 2010, the Banks commercial loan portfolio totaled $199.7
million. Commercial loans include both secured and unsecured loans for working capital, expansion,
and other business purposes. Short-term working capital loans are secured by accounts receivable,
inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and
real estate. Lending decisions are based on an evaluation of the financial strength, cash flow,
management and credit history of the borrower, and the quality of the collateral securing the loan.
With few exceptions, the Bank requires personal guarantees and secondary sources of repayment.
Commercial loans generally provide greater yields and reprice more frequently than other types of
loans, such as real estate loans.
Loans to Individuals. Loans to individuals (consumer loans) include automobile loans, boat and
recreational vehicle financing, and miscellaneous secured and unsecured personal loans and totaled
$65.0 million at December 31, 2010. Consumer loans generally can carry significantly greater risks
than other loans, even if secured, if the collateral consists of rapidly depreciating assets such
as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not
provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to
job loss, illness and other personal factors. The Bank manages the risks inherent in consumer
lending by following established credit guidelines and underwriting practices designed to minimize
risk of loss.
Loan Approvals. The Banks loan policies and procedures establish the basic guidelines governing
its lending operations. The guidelines address the type of loans that the Bank seeks, target
markets, underwriting and collateral requirements, terms, interest rate and yield considerations
and compliance with laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrowers total outstanding
indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and
approved at least annually by the Board of Directors of the Bank. The Bank supplements its own
supervision of the loan underwriting and approval process with periodic loan reviews by
independent, outside professionals experienced in loan review. Responsibility for loan review and
loan underwriting resides with the Chief Credit Officer position. This position is responsible for
loan underwriting and approval. On an annual basis, the Board of Directors of the Bank determines
officers lending authority. Authorities may include loans, letters of credit, overdrafts,
uncollected funds and such other authorities as determined by the Board of Directors.
Substantially all of the Companys loans have been granted to customers in the Piedmont, foothills,
northwestern mountains, and the Research Triangle regions of North Carolina and the upstate region
of South Carolina.
In the normal course of business, the Company makes loans to directors and officers of the Company
and its subsidiaries. All loans and commitments made to such officers and directors and to
companies in which they are officers, or have significant ownership interest, have been made on
substantially the same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers. Loans to directors,
officers and related parties are subject to comparable loan features and present the same credit
risk as those of non-related parties. An analysis of these related party loans for the year ended
December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Balance, beginning of year |
|
$ |
20,329,480 |
|
|
$ |
9,870,047 |
|
New loans |
|
|
2,046,131 |
|
|
|
14,255,458 |
|
Repayments |
|
|
(4,663,383 |
) |
|
|
(3,796,025 |
) |
|
|
|
|
|
Balance, end of year |
|
$ |
17,712,228 |
|
|
$ |
20,329,480 |
|
|
|
|
|
|
90
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit Review and Evaluation. The Bank has a credit risk review department that reports to the
Chief Credit Officer. The focus of the department is on policy compliance and proper grading of
higher credit risk loans as well as new and existing loans on a sample basis. Additional reporting
for problem/criticized assets has been developed along with an after-the-fact loan review.
The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses
and the adequacy of the allowance for loan losses for real estate, commercial and consumer loans.
In this program, risk grades are initially assigned by loan officers, reviewed by regional credit
officers, and reviewed by internal credit review analysts on a test basis. The Bank strives to
maintain the loan portfolio in accordance with conservative loan underwriting policies that result
in loans specifically tailored to the needs of the Banks market area. Every effort is made to
identify and minimize the credit risks associated with such lending strategies.
Loans over $20,000 are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable
loans at inception are grades 1 through 4, and these grades have underwriting requirements that at
least meet the minimum requirements of a secondary market source. If borrowers do not meet credit
history requirements, other mitigating criteria such as substantial liquidity and low loan-to-value
ratios could be considered and would generally have to be met in order to make the loan. The
Banks loan policy states that a guarantor may be necessary if reasonable doubt exists as to the
borrowers ability to repay. The Board of Directors has authorized the loan officers to have
individual approval authority for risk grade 1 through 4 loans up to maximum exposure limits for
each customer. New or renewed loans that are graded 5 (special mention) or less must have approval
from a regional credit officer. Any changes in risk assessments as determined by loan officers,
credit administrators, regulatory examiners and management are also considered.
The risk grades, normally assigned by the loan officers when the loan is originated and reviewed by
the regional credit officers, are based on several factors including historical data, current
economic factors, composition of the portfolio, and evaluations of the total loan portfolio and
assessments of credit quality within specific loan types. In some cases the risk grades are
assigned by regional executives, depending upon dollar exposure. Because these factors are
dynamic, the provision for loan losses can fluctuate. Credit quality reviews are based primarily
on analysis of borrowers cash flows, with asset values considered only as a second source of
payment. Regional credit officers work with lenders in underwriting, structuring and risk grading
our credits. The Risk Review Officer focuses on lending policy compliance, credit risk grading,
and credit risk reviews on larger dollar exposures. 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.
The following is a summary of the credit risk grade definitions for all loan types:
1 Highest Quality- These loans represent a credit extension of the highest quality. The
borrowers historic (at least five years) cash flows manifest extremely large and stable margins of
coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt
service for proposed and existing debt, projected cash flows continue to be strong and provide
ample coverage. The borrower typically reflects broad geographic and product diversification and
has access to alternative financial markets.
2 Good Quality- These loans have a sound primary and secondary source of repayment. The
borrower may have access to alternative sources of financing, but sources are not as widely
available as they are to a higher graded borrower. This loan carries a normal level of risk, with
minimal loss exposure. The borrower has the ability to perform according to the terms of the
credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid
deterioration than the highest quality loans.
3 Satisfactory- The borrowers are a reasonable credit risk and demonstrate the ability to
repay the debt from normal business operations. Risk factors may include reliability of margins
and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of
management, or limited access to alternative financing sources. Historic financial information may
indicate erratic performance, but current trends are positive. Quality of financial information is
adequate, but is not as detailed and sophisticated as information found on higher graded loans. If
adverse circumstances arise, the impact on the borrower may be significant.
91
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
4 Satisfactory Merits Attention- These credit facilities have potential developing
weaknesses that deserve extra attention from the account manager and other management personnel.
If the developing weakness is not corrected or mitigated, there may be deterioration in the ability
of the borrower to repay the banks debt in the future.
5 Watch or Special Mention These loans are typically existing loans, made using the
passing grades outlined above, that have deteriorated to the point that cash flow is not
consistently adequate to meet debt service or current debt service coverage is based on
projections. Secondary sources of repayment may include specialized collateral or real estate that
is not readily marketable or undeveloped, making timely collection in doubt.
6 Substandard- Loans and other credit extensions bearing this grade are considered
inadequately protected by the current sound worth and debt service capacity of the borrower or of
any pledged collateral. These obligations, even if apparently protected by collateral value, have
well-defined weaknesses related to adverse financial, managerial, economic, market, or political
conditions jeopardizing repayment of principal and interest as originally intended. Clear loss
potential, however, does not have to exist in any individual assets classified as substandard.
7 Doubtful (also includes any loans over 90 days past due, excluding sold mortgages )- Loans
and other credit extensions graded 7 have all the weaknesses inherent in those graded 6, with
the added characteristic that the severity of the weaknesses makes collection or liquidation in
full highly questionable or improbable based upon currently existing facts, conditions, and values.
The probability of some loss is extremely high, but because of certain important and reasonably
specific factors, the amount of loss cannot be determined.
8 Loss- Loans in this classification are considered uncollectible and cannot be justified as
a viable asset of the bank. Such loans are to be charged-off or charged-down. This classification
does not mean the loan has absolutely no recovery value, but that it is neither practical nor
desirable to defer writing off this loan even though partial recovery may be obtained in the
future.
The following is a summary of credit quality indicators by class at December 31, 2010:
Real Estate Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner |
|
Owner |
|
|
|
|
|
|
|
|
Construction |
|
occupied |
|
occupied |
|
1-4 Family |
|
Multifamily |
|
Home Equity |
High Quality |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
132 |
|
|
$ |
440 |
|
|
$ |
- |
|
|
$ |
153 |
|
Good Quality |
|
|
612 |
|
|
|
195 |
|
|
|
1,535 |
|
|
|
1,924 |
|
|
|
- |
|
|
|
8,465 |
|
Satisfactory |
|
|
53,704 |
|
|
|
73,825 |
|
|
|
98,531 |
|
|
|
95,541 |
|
|
|
7,964 |
|
|
|
132,155 |
|
Merits Attention |
|
|
124,699 |
|
|
|
163,648 |
|
|
|
150,494 |
|
|
|
55,300 |
|
|
|
19,922 |
|
|
|
57,513 |
|
Special Mention |
|
|
49,369 |
|
|
|
37,018 |
|
|
|
27,478 |
|
|
|
6,966 |
|
|
|
90 |
|
|
|
4,938 |
|
Substandard |
|
|
37,798 |
|
|
|
24,219 |
|
|
|
15,132 |
|
|
|
7,117 |
|
|
|
311 |
|
|
|
3,012 |
|
Doubtful |
|
|
34,695 |
|
|
|
13,326 |
|
|
|
15,896 |
|
|
|
7,248 |
|
|
|
981 |
|
|
|
3,083 |
|
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
300,877 |
|
|
$ |
312,231 |
|
|
$ |
309,198 |
|
|
$ |
174,536 |
|
|
$ |
29,268 |
|
|
$ |
209,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Credit Exposures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and |
|
|
Commercial |
|
other |
High Quality |
|
$ |
5,005 |
|
|
$ |
1,952 |
|
Good Quality |
|
|
6,620 |
|
|
|
1,589 |
|
Satisfactory |
|
|
63,472 |
|
|
|
34,841 |
|
Merits Attention |
|
|
78,188 |
|
|
|
24,424 |
|
Special Mention |
|
|
31,311 |
|
|
|
1,224 |
|
Substandard |
|
|
6,391 |
|
|
|
311 |
|
Doubtful |
|
|
8,709 |
|
|
|
662 |
|
Loss |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
$ |
199,696 |
|
|
$ |
65,003 |
|
|
|
|
|
|
92
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Nonaccrual loans and past due loans. Nonperforming assets include loans classified as nonaccrual,
foreclosed bank-owned property and loans past due 90 days or more on which interest is still being
accrued. It is the general policy of the Bank to stop accruing interest for all classes of loans
past due 90 days or when it is apparent that the collection of principal and/or interest is
doubtful. In addition, certain restructured loans are placed on nonaccrual status until sufficient
evidence of timely payment is obtained. When a loan is placed on nonaccrual status, any interest
previously accrued but not collected is reversed against interest income in the current period.
Amounts received on non-accrual loans generally are applied first to principal and then to interest
only after all principal has been collected. There were no financing receivables past due over 90
days accruing interest as of December 31, 2010 and 2009. Unsecured consumer loans are usually
charged off when payments are more than 90 days delinquent. Real estate and commercial loans are
charged-off or charged-down when the loans are considered uncollectible and/or supporting
collateral is not considered to be sufficient to cover potential losses.
Nonperforming
loans as of December 31, 2010 totaled $65.4 million, or
4.18%, of net loans compared
with $36.3 million, or 2.23%, in 2009. The Bank aggressively pursues the collection and repayment of
all loans. Other nonperforming assets, such as repossessed and foreclosed collateral is
aggressively liquidated by our collection department. The total number of loans on nonaccrual
status has increased from 322 to 490 since December 31, 2009. The increase in nonperforming loans
from December 31, 2009 to December 31, 2010 is related primarily to continued deterioration in the
Banks overall construction loan portfolio, as well as the addition of $21.9 million in troubled
debt restructured loans which will remain on nonaccrual until sufficient payment evidence is
obtained.
For the years ended December 31, 2010, 2009 and 2008 the Company recognized interest income on
nonaccrual loans of approximately $616,000, $379,000, and $93,000, respectively. If interest on
those loans had been accrued in accordance with the original terms, interest income would have
increased by approximately $1.7 million, $1.2 million, and $269,000 for 2010, 2009 and 2008,
respectively.
The following is a breakdown of nonaccrual loans as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
December 31, 2009 |
|
|
(in thousands) |
Financing Receivables on Nonaccrual status |
|
|
|
|
|
|
|
|
Construction |
|
$ |
25,833 |
|
|
$ |
17,172 |
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
10,767 |
|
|
|
2,727 |
|
Owner occupied |
|
|
12,829 |
|
|
|
3,894 |
|
Mortgages: |
|
|
|
|
|
|
|
|
1-4 Family first lien |
|
|
7,889 |
|
|
|
6,471 |
|
Multifamily |
|
|
967 |
|
|
|
- |
|
Home Equity lines of credit |
|
|
3,068 |
|
|
|
1,871 |
|
Commercial |
|
|
3,420 |
|
|
|
3,518 |
|
Consumer and other |
|
|
627 |
|
|
|
602 |
|
|
|
|
|
|
Total |
|
$ |
65,400 |
|
|
$ |
36,255 |
|
|
|
|
|
|
Past due loans reported in the following table do not include loans granted forbearance terms since
payments terms have been modified or extended, although the loans are past due based on original
contract terms. All loans with forbearance terms are included and reported as impaired loans.
93
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Loans are considered past due if the required principal and interest income have not been received
as of the date such payments were due. The following table presents the Banks age analysis of
past due loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
30-59 Days |
|
60-89 Days |
|
Than 90 |
|
Total Past |
|
|
|
|
|
|
Past Due |
|
Past Due |
|
Days |
|
Due |
|
Current |
|
Total Loans |
|
|
(in thousands) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
5,747 |
|
|
$ |
3,951 |
|
|
$ |
11,542 |
|
|
$ |
21,240 |
|
|
$ |
279,637 |
|
|
$ |
300,877 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
1,616 |
|
|
|
722 |
|
|
|
530 |
|
|
|
2,868 |
|
|
|
309,363 |
|
|
|
312,231 |
|
Owner occupied commercial |
|
|
5,814 |
|
|
|
1,635 |
|
|
|
5,464 |
|
|
|
12,913 |
|
|
|
296,285 |
|
|
|
309,198 |
|
Commercial |
|
|
1,086 |
|
|
|
949 |
|
|
|
241 |
|
|
|
2,276 |
|
|
|
197,419 |
|
|
|
199,695 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,457 |
|
|
|
1,988 |
|
|
|
5,643 |
|
|
|
11,088 |
|
|
|
163,448 |
|
|
|
174,536 |
|
Multifamily |
|
|
845 |
|
|
|
150 |
|
|
|
40 |
|
|
|
1,035 |
|
|
|
28,233 |
|
|
|
29,268 |
|
Open ended secured 1-4 family |
|
|
2,388 |
|
|
|
211 |
|
|
|
2,045 |
|
|
|
4,644 |
|
|
|
204,675 |
|
|
|
209,319 |
|
Consumer and other |
|
|
669 |
|
|
|
285 |
|
|
|
232 |
|
|
|
1,186 |
|
|
|
63,817 |
|
|
|
65,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,622 |
|
|
$ |
9,891 |
|
|
$ |
25,737 |
|
|
$ |
57,250 |
|
|
$ |
1,542,877 |
|
|
$ |
1,600,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
4,784 |
|
|
$ |
2,509 |
|
|
$ |
12,369 |
|
|
$ |
19,662 |
|
|
$ |
345,191 |
|
|
$ |
364,853 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
3,016 |
|
|
|
2,023 |
|
|
|
1,535 |
|
|
|
6,574 |
|
|
|
305,826 |
|
|
|
312,400 |
|
Owner occupied commercial |
|
|
1,832 |
|
|
|
413 |
|
|
|
3,333 |
|
|
|
5,578 |
|
|
|
265,141 |
|
|
|
270,719 |
|
Commercial |
|
|
3,256 |
|
|
|
774 |
|
|
|
456 |
|
|
|
4,486 |
|
|
|
215,740 |
|
|
|
220,226 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,686 |
|
|
|
1,008 |
|
|
|
2,733 |
|
|
|
7,427 |
|
|
|
162,363 |
|
|
|
169,790 |
|
Multifamily |
|
|
819 |
|
|
|
90 |
|
|
|
- |
|
|
|
909 |
|
|
|
35,122 |
|
|
|
36,031 |
|
Open ended secured 1-4 family |
|
|
2,504 |
|
|
|
163 |
|
|
|
951 |
|
|
|
3,618 |
|
|
|
199,058 |
|
|
|
202,676 |
|
Consumer and other |
|
|
919 |
|
|
|
259 |
|
|
|
222 |
|
|
|
1,400 |
|
|
|
98,355 |
|
|
|
99,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,816 |
|
|
$ |
7,239 |
|
|
$ |
21,599 |
|
|
$ |
49,654 |
|
|
$ |
1,626,796 |
|
|
$ |
1,676,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans. Management considers certain loans graded doubtful (loans graded 7) or loss
(loans graded 8) to be individually impaired and may consider substandard loans (loans graded 6)
individually impaired depending on the borrowers payment history. The Bank measures impairment
based upon probable cash flows or 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 larger loans if the appraisal is more
than 12 months old.
Impaired loans typically include nonaccrual loans, loans over 90 days past due still accruing,
restructured loans and other potential problem loans considered impaired based on other underlying
factors. Restructured loans are those for which concessions, including the reduction of interest
rates below a rate otherwise available to that borrower or the deferral of interest or principal
have been granted due to the borrowers weakened financial condition. Interest on restructured
loans is accrued at the restructured rates when it is anticipated that no loss of original
principal will occur and a sustained payment performance period is obtained. Due to the borrowers
inability to make the payments required under the original loan terms, the Bank modified the terms
by granting a longer amortized repayment structure or reduced interest rates. Potential problem
loans are loans which are currently performing and are not included in non-accrual or restructured
loans above, but about which we have serious doubts as to the borrowers ability to comply with
present repayment terms. These loans are likely to be included later in nonaccrual, past due or
restructured loans, so they are considered by management in assessing the adequacy of the allowance
for loan losses.
94
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the Banks investment in loans considered to be impaired and related
information on those impaired loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
Average |
|
Interest |
|
|
Recorded |
|
Principal |
|
Related |
|
Recorded |
|
Income |
|
|
Investment |
|
Balance |
|
Allowance |
|
Investment |
|
Recognized |
December 31, 2010 |
|
(in thousands) |
|
Impaired loans without a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
21,677 |
|
|
$ |
22,404 |
|
|
$ |
- |
|
|
$ |
11,427 |
|
|
$ |
206 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real
estate |
|
|
5,732 |
|
|
|
5,803 |
|
|
|
- |
|
|
|
2,380 |
|
|
|
98 |
|
Owner occupied commercial real
estate |
|
|
11,573 |
|
|
|
11,745 |
|
|
|
- |
|
|
|
5,109 |
|
|
|
187 |
|
Commercial |
|
|
1,998 |
|
|
|
2,004 |
|
|
|
- |
|
|
|
1,226 |
|
|
|
45 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
3,122 |
|
|
|
3,143 |
|
|
|
- |
|
|
|
1,427 |
|
|
|
60 |
|
Multifamily |
|
|
310 |
|
|
|
315 |
|
|
|
- |
|
|
|
192 |
|
|
|
13 |
|
Open ended secured 1-4 family |
|
|
953 |
|
|
|
961 |
|
|
|
- |
|
|
|
294 |
|
|
|
12 |
|
Consumer and other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
72 |
|
|
|
5 |
|
Impaired loans with a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
11,116 |
|
|
$ |
11,150 |
|
|
$ |
2,141 |
|
|
$ |
16,379 |
|
|
$ |
261 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real
estate |
|
|
6,484 |
|
|
|
6,540 |
|
|
|
1,096 |
|
|
|
5,758 |
|
|
|
141 |
|
Owner occupied commercial real
estate |
|
|
5,077 |
|
|
|
5,104 |
|
|
|
860 |
|
|
|
4,416 |
|
|
|
134 |
|
Commercial |
|
|
5,435 |
|
|
|
5,435 |
|
|
|
1,318 |
|
|
|
4,266 |
|
|
|
101 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
2,133 |
|
|
|
2,172 |
|
|
|
343 |
|
|
|
3,270 |
|
|
|
57 |
|
Multifamily |
|
|
469 |
|
|
|
476 |
|
|
|
82 |
|
|
|
159 |
|
|
|
9 |
|
Open ended secured 1-4 family |
|
|
898 |
|
|
|
898 |
|
|
|
439 |
|
|
|
780 |
|
|
|
14 |
|
Consumer and other |
|
|
134 |
|
|
|
135 |
|
|
|
35 |
|
|
|
73 |
|
|
|
3 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
32,793 |
|
|
$ |
33,554 |
|
|
$ |
2,141 |
|
|
$ |
27,806 |
|
|
$ |
467 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real
estate |
|
|
12,216 |
|
|
|
12,343 |
|
|
|
1,096 |
|
|
|
8,138 |
|
|
|
239 |
|
Owner occupied commercial real
estate |
|
|
16,650 |
|
|
|
16,849 |
|
|
|
860 |
|
|
|
9,525 |
|
|
|
321 |
|
Commercial |
|
|
7,433 |
|
|
|
7,439 |
|
|
|
1,318 |
|
|
|
5,492 |
|
|
|
146 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
5,255 |
|
|
|
5,315 |
|
|
|
343 |
|
|
|
4,697 |
|
|
|
117 |
|
Multifamily |
|
|
779 |
|
|
|
791 |
|
|
|
82 |
|
|
|
351 |
|
|
|
22 |
|
Open ended secured 1-4 family |
|
|
1,851 |
|
|
|
1,859 |
|
|
|
439 |
|
|
|
1,074 |
|
|
|
26 |
|
Consumer and other |
|
|
134 |
|
|
|
135 |
|
|
|
35 |
|
|
|
145 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,111 |
|
|
$ |
78,285 |
|
|
$ |
6,314 |
|
|
$ |
57,228 |
|
|
$ |
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans under $100,000 that are not
individually reviewed for impairment |
|
|
9,768 |
|
|
|
10,087 |
|
|
|
2,617 |
|
|
|
12,144 |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
86,879 |
|
|
$ |
88,372 |
|
|
$ |
8,931 |
|
|
$ |
69,372 |
|
|
$ |
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
95
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents the Banks investment in loans considered to be impaired and related
information on those impaired loans as of December 31, 2009:
|
|
|
|
|
|
|
December 31, 2009 |
|
|
(in thousands) |
|
Impaired loans under $100,000 that are not individually
reviewed |
|
$ |
6,001 |
|
Impaired loans without a related allowance for loan
losses |
|
|
16,959 |
|
Impaired loans with a related allowance for loan losses |
|
|
24,497 |
|
Impaired loans acquired without a related allowance for
loan losses |
|
|
2,515 |
|
Impaired loans acquired with subsequent deterioration and
related allowance for loan loss |
|
|
2,725 |
|
|
|
|
Total impaired loans |
|
$ |
52,697 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to impaired loans |
|
$ |
10,971 |
|
|
|
|
Average impaired loans for 2010 and 2009 totaled $69,371,980 and $36,203,174, respectively.
Impaired loans acquired with 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 with subsequent deterioration and related allowance for loan loss 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 purchased impaired loans and were $47,000 and $67,000 as of December 31, 2010 and 2009,
respectively. The following table presents information regarding the change in all purchased
impaired loans from the Companys acquisition of American Community on April 17, 2009 through
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
|
|
Principal |
|
Nonaccretable |
|
Carrying |
|
|
Receivable |
|
Difference |
|
Amount |
|
|
(in thousands) |
|
As of April 17, 2009 acquisition date |
|
$ |
14,513 |
|
|
$ |
3,825 |
|
|
$ |
10,688 |
|
Change due to payoff 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 payoff received |
|
|
(1,528 |
) |
|
|
(20 |
) |
|
|
(1,508 |
) |
Transfer to foreclosed real estate |
|
|
(1,345 |
) |
|
|
(159 |
) |
|
|
(1,186 |
) |
Change due to charge-offs |
|
|
(860 |
) |
|
|
(246 |
) |
|
|
(614 |
) |
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
1,655 |
|
|
$ |
72 |
|
|
$ |
1,583 |
|
|
|
|
|
|
|
|
At December 31, 2010, the outstanding balance of purchased impaired loans from American Community,
which includes principal, interest and fees due, was $1.6 million. 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 other purchased impaired loans from Cardinal State Bank
have been paid or charged-off as of December 31, 2010.
96
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a
provision for loan losses charged to expense, which represents managements best estimate for
probable losses that have been incurred within the existing portfolio of loans. The primary risks
inherent in the Banks loan portfolio, including the adequacy of the allowance or reserve for loan
losses, are based on managements assumptions regarding, among other factors, general and local
economic conditions, which are difficult to predict and are beyond the Banks control. In
estimating these risks, and the related loss reserve levels, management also considers the
financial conditions of specific borrowers and credit concentrations with specific borrowers,
groups of borrowers, and industries.
The allowance for loan losses is adjusted 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 provision for loan losses was $24.3 million in 2010 compared to
$48.4 million in 2009 and $11.1 million in 2008. The provision expense is determined by the Banks
allowance for loan losses model. The components of the model are specific reserves for impaired
loans and a general allocation for unimpaired loans. The general allocation has two components, an
estimate based on historical loss experience and an additional estimate based on internal and
external environmental factors due to the uncertainty of historical loss experience in predicting
current embedded losses in the portfolio that will be realized in the future.
The Company calculated an allowance for loan losses of $37.8 million at December 31, 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.
As part of managements plan to improve policies and procedures and internal controls over the
provision for loan losses, the framework utilized for the model to determine the allowance for loan
losses was modified during 2009. These modifications led to improved written policies and
procedures, a thorough review of the allowance for loan loss model, and improved controls and
support for changes in the underlying assumptions being used in the model. Improvements to the
allowance for loan loss model and related calculations were driven primarily by a change in the
methodology of calculating reserves on unimpaired loans placing greater emphasis on the credit
quality of loans. These changes were incorporated by adding classified asset factors to classified
loan categories including special mention, substandard, and doubtful loans under $100,000. Loans
were also segregated into more defined risk categories based on the underlying collateral and
characteristics in order to provide more accurate assessment of risks within the portfolio. Those
risk categories include the following: nonresidential construction and land development,
residential construction, owner-occupied commercial real estate, non owner-occupied commercial real
estate, commercial loans, first lien 1-4 family residential mortgages, junior lien 1-4 family
residential mortgages, open ended secured 1-4 family equity lines, and other consumer loans. In
2010, further refinement was made to the allowance model, including changes made in the calculation
of classified asset factors. The classified asset factor was updated to incorporate twelve months
of default trends and historical charge-offs for classified loans, as opposed to a single data
point previously used. 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 periods to ensure that the
analysis incorporates the most current and statistically relevant trends. As a result of this
change in methodology, the qualitative reserve for classified loans decreased by $7.5 million from
December 31, 2009 to December 31, 2010. 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. These
improvements lead to a $2.6 million decrease in general reserves.
In determining the general allowance allocation, the ratios from the actual loss history for the
various categories are applied to the homogeneous pools of loans in each category. In addition, to
recognize the probability that loans in special mention, doubtful, and substandard risk grades are
more likely to have embedded losses, additional reserve factors based on the likelihood of loss are
applied to the homogeneous pools of weaker graded loans that have not yet been identified as
impaired.
97
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The
portion of the general allocation based on environmental factors includes estimates of losses related
to interest rate trends, unemployment trends, real estate characteristics, past due and nonaccrual
trends, watch list trends, charge-off trends, and underwriting and servicing assessments. The
factors with the largest impact on the allowance at December 31, 2010 were watch list trends,
unemployment rate trends, and underwriting and servicing assessments. Markets served by the Bank
experienced softening from the general economy and declines in real estate values. The real estate
characteristics component includes trends in real estate concentrations and in exceptions to FDIC
guidelines for loan-to-value ratios.
The following table presents changes in the allowance for loan losses for the year ended December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
|
|
|
|
|
|
|
|
Year |
|
Charge-offs |
|
Recoveries |
|
Provision |
|
End of Year |
|
|
(in thousands) |
|
Construction |
|
$ |
19,978 |
|
|
$ |
19,484 |
|
|
$ |
483 |
|
|
$ |
11,037 |
|
|
$ |
12,014 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner occupied |
|
|
9,756 |
|
|
|
3,322 |
|
|
|
11 |
|
|
|
705 |
|
|
|
7,150 |
|
Owner occupied |
|
|
6,423 |
|
|
|
3,030 |
|
|
|
211 |
|
|
|
2,354 |
|
|
|
5,958 |
|
Commercial |
|
|
3,299 |
|
|
|
4,226 |
|
|
|
409 |
|
|
|
4,853 |
|
|
|
4,335 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,926 |
|
|
|
3,178 |
|
|
|
69 |
|
|
|
2,889 |
|
|
|
3,706 |
|
Multifamily |
|
|
493 |
|
|
|
- |
|
|
|
42 |
|
|
|
(111 |
) |
|
|
424 |
|
Open ended secured 1-4 family |
|
|
3,401 |
|
|
|
2,832 |
|
|
|
69 |
|
|
|
2,660 |
|
|
|
3,298 |
|
Consumer and other |
|
|
1,349 |
|
|
|
748 |
|
|
|
304 |
|
|
|
(38 |
) |
|
|
867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,625 |
|
|
$ |
36,820 |
|
|
$ |
1,598 |
|
|
$ |
24,349 |
|
|
$ |
37,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
Reserves for |
|
|
|
|
loans |
|
Loans |
|
loans |
|
Loans |
|
|
individually |
|
individually |
|
collectively |
|
collectively |
|
|
evaluated for |
|
evaluated for |
|
evaluated for |
|
evaluated for |
|
|
impairment |
|
impairment |
|
impairment |
|
impairment |
|
|
(in thousands) |
|
Construction |
|
$ |
2,141 |
|
|
$ |
32,793 |
|
|
$ |
9,873 |
|
|
$ |
268,084 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner occupied |
|
|
1,096 |
|
|
|
12,216 |
|
|
|
6,054 |
|
|
|
300,015 |
|
Owner occupied |
|
|
860 |
|
|
|
16,650 |
|
|
|
5,098 |
|
|
|
292,548 |
|
Commercial |
|
|
1,318 |
|
|
|
7,433 |
|
|
|
3,016 |
|
|
|
192,262 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
343 |
|
|
|
5,255 |
|
|
|
3,363 |
|
|
|
169,281 |
|
Multifamily |
|
|
82 |
|
|
|
779 |
|
|
|
342 |
|
|
|
28,489 |
|
Open ended secured 1-4 family |
|
|
439 |
|
|
|
1,851 |
|
|
|
2,859 |
|
|
|
207,468 |
|
Consumer and other |
|
|
35 |
|
|
|
134 |
|
|
|
832 |
|
|
|
64,869 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,314 |
|
|
$ |
77,111 |
|
|
$ |
31,437 |
|
|
$ |
1,523,016 |
|
|
|
|
|
|
|
|
|
|
98
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Companys loan charge-off policy for all loan classes is to charge down loans to net realizable
value once a portion of the loan is determined to be uncollectable, and the underlying collateral
shortfall is assessed. Unsecured loans (primarily consumer loans) are charged off against the
reserve once the loan becomes 90 days past due or it is determined that a portion of the loan is
uncollectable. Secured loans (primarily construction, real estate, commercial and other loans) are
moved to nonaccrual status when the loan becomes 90 days delinquent or a portion of the loan is
determined to be uncollectable. Nonaccrual loans are reviewed at least quarterly to determine if
all or a portion of the loan is uncollectable. Nonaccrual loans that are determined to be solely
collateral dependent are promptly charged down to net realizable value.
The following table presents changes in the allowance for loan losses for the years ended December
31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
(in thousands) |
|
Balance, beginning of year |
|
$ |
22,355 |
|
|
$ |
12,445 |
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
Real estate loans |
|
|
(15,009 |
) |
|
|
(1,720 |
) |
Installment loans |
|
|
(1,255 |
) |
|
|
(576 |
) |
Credit card and related plans |
|
|
(107 |
) |
|
|
(63 |
) |
Commercial and all other |
|
|
(6,176 |
) |
|
|
(963 |
) |
Leases |
|
|
(256 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
(22,803 |
) |
|
|
(3,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real estate loans |
|
|
204 |
|
|
|
135 |
|
Installment loans |
|
|
85 |
|
|
|
134 |
|
Credit card and related plans |
|
|
2 |
|
|
|
14 |
|
Commercial and all other |
|
|
333 |
|
|
|
181 |
|
Leases |
|
|
10 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
634 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(22,169 |
) |
|
|
(2,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
48,439 |
|
|
|
11,109 |
|
Allowance acquired from Cardinal State Bank |
|
|
- |
|
|
|
1,659 |
|
|
|
|
|
|
Balance, end of year |
|
$ |
48,625 |
|
|
$ |
22,355 |
|
|
|
|
|
|
In addition to the allowance for loan losses, the Company also estimates probable losses related to
unfunded lending commitments, such as letters of credit, financial guarantees and unfunded loan
commitments. Unfunded lending commitments are analyzed and segregated by loan classification. These
classifications, in conjunction with an analysis of historical loss experience, current economic
conditions, performance trends within specific portfolio segments and any other pertinent
information, result in the estimation of the reserve for unfunded
lending commitments. The reserves for
credit losses related to unfunded lending commitments was $204,000 for the year ended December 31,
2010. There was no reserve for credit losses related to unfunded lending commitments for the
year ended December 31, 2009.
The Company also 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 purchaser. 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. For the year-ended December 31, 2010, the Company recorded $883,000 in provision
expense related to potential repurchase and warranties exposure on the $938 million in loan sales
that occurred during that year. Provision expense recorded for the years ended December 31, 2009
and 2008 was $1.4 million
99
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
and $502,000, respectively. As of December 31, 2010, the Company had reserves for mortgage loans
sold of $2.0 million and recorded actual charges against reserves totaling $637,000. As of
December 31, 2009, the Company had reserves for mortgage loans sold of $1.9 million and recorded
actual charges against reserves totaling $356,000. For the year ended December 31, 2010, the
Company did not repurchase any mortgage loans sold, however, the Company did settle three
make-whole requests totaling $214,000. In 2010 the Company did not repurchase any mortgage loans
sold and has incurred over the last 5 years an average of $226,000 per year in charges against
reserves in actual expenses related to the disposition of these loans.
6. PREMISES AND EQUIPMENT
The following table presents premises and equipment and related accumulated depreciation and
amortization at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
depreciation and |
|
Net book |
|
|
Cost |
|
amortization |
|
value |
|
|
(Amounts in thousands) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
12,802 |
|
|
$ |
- |
|
|
$ |
12,802 |
|
Land and leasehold improvements |
|
|
4,008 |
|
|
|
2,148 |
|
|
|
1,860 |
|
Buildings |
|
|
30,808 |
|
|
|
6,718 |
|
|
|
24,090 |
|
Furniture and equipment |
|
|
24,547 |
|
|
|
18,762 |
|
|
|
5,785 |
|
Construction in process |
|
|
1,433 |
|
|
|
- |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
Total |
|
$ |
73,598 |
|
|
$ |
27,628 |
|
|
$ |
45,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
12,300 |
|
|
$ |
- |
|
|
$ |
12,300 |
|
Land and leasehold improvements |
|
|
3,425 |
|
|
|
1,391 |
|
|
|
2,034 |
|
Buildings |
|
|
27,455 |
|
|
|
4,968 |
|
|
|
22,487 |
|
Furniture and equipment |
|
|
20,057 |
|
|
|
13,468 |
|
|
|
6,589 |
|
Construction in process |
|
|
232 |
|
|
|
- |
|
|
|
232 |
|
|
|
|
|
|
|
|
Total |
|
$ |
63,469 |
|
|
$ |
19,827 |
|
|
$ |
43,642 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended December 31, 2010, 2009 and 2008 were
$3,047,164, $2,764,240, and $2,012,514, respectively.
7. LOAN SERVICING
Mortgage loans serviced for others, consisting of loans sold to Fannie Mae and Freddie Mac, are not
included in the accompanying balance sheets. Mortgage loan portfolios serviced for Fannie Mae and
Freddie Mac were $245,139,672 and $212,941,536 at December 31, 2010 and 2009, respectively.
Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Total servicing fees
received were $522,491, $498,979 and $519,500 during 2010, 2009 and 2008, respectively, and were
included in mortgage banking income (loss). At December 31, 2010 and 2009, mortgage servicing
rights were $2,144,139 and $1,917,941, respectively and are included in other assets on the
consolidated balance sheets. Servicing rights recorded on loans originated and sold by the Bank
and the changes in the fair value were recorded in the consolidated statements of income under the
caption, mortgage banking income.
100
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
7. LOAN SERVICING (Continued)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Mortgage servicing assets, beginning of year |
|
$ |
1,917,941 |
|
|
$ |
1,745,466 |
|
Capitalized |
|
|
657,548 |
|
|
|
722,290 |
|
Change in fair value |
|
|
(431,350 |
) |
|
|
(549,815 |
) |
|
|
|
|
|
Mortgage servicing assets, end of year |
|
$ |
2,144,139 |
|
|
$ |
1,917,941 |
|
|
|
|
|
|
8. DEPOSITS
The following table presents the scheduled maturities of time certificates at December 31, 2010:
|
|
|
|
|
|
|
(in thousands) |
2011 |
|
$ |
755,445 |
|
2012 |
|
|
165,022 |
|
2013 |
|
|
168,165 |
|
2014 |
|
|
60,346 |
|
2015 |
|
|
65,477 |
|
|
|
|
Total |
|
$ |
1,214,455 |
|
|
|
|
Total related party deposits were $14.4 million and $13.1 million as of December 31, 2010 and 2009,
respectively.
9. BORROWED FUNDS
Short-term borrowings at December 31, 2010 and 2009 are presented in the following tables.
Borrowings from the Federal Reserve are payable on demand and are collateralized by state, county
and municipal securities (refer to Note 3). Interest under this arrangement is payable at 50 basis
points above the target federal funds rate as quoted by the Federal Reserve Board. Unused lines of
credit from various correspondent banks totaled $34.9 million at December 31, 2010. Also included
in short-term borrowings is the fair market value adjustment associated with the borrowings
acquired in the American Community acquisition of $(176,186) at December 31, 2010.
101
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
9. BORROWED FUNDS (Continued)
Short-Term Borrowings Excluding Federal Home Loan Bank (FHLB) Advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Maximum |
|
|
Average Daily |
|
|
Average |
|
|
|
|
|
|
|
average |
|
|
amount |
|
|
balance |
|
|
annual |
|
|
|
Balance at |
|
|
interest rate |
|
|
outstanding at |
|
|
outstanding |
|
|
interest |
|
|
|
year end |
|
at year end |
|
any month-end |
|
during year |
|
rate paid |
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overnight borrowings from the
Federal Reserve Bank |
|
$ |
1,014,734 |
|
|
|
0.00 |
% |
|
$ |
1,684,024 |
|
|
$ |
1,158,653 |
|
|
|
0.00 |
% |
Securities sold under agreement to
repurchase |
|
|
36,934,414 |
|
|
|
0.88 |
% |
|
|
46,801,365 |
|
|
|
41,775,432 |
|
|
|
0.93 |
% |
Federal funds purchased |
|
|
- |
|
|
|
0.00 |
% |
|
|
- |
|
|
|
2,700 |
|
|
|
0.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings excluding
FHLB advances |
|
$ |
37,949,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overnight borrowings from the
Federal Reserve Bank |
|
$ |
1,513,033 |
|
|
|
0.00 |
% |
|
$ |
1,513,033 |
|
|
$ |
1,013,720 |
|
|
|
0.01 |
% |
Securities sold under agreement to
repurchase |
|
|
42,954,010 |
|
|
|
0.95 |
% |
|
|
56,896,242 |
|
|
|
48,907,687 |
|
|
|
1.01 |
% |
Federal funds purchased |
|
|
- |
|
|
|
0.00 |
% |
|
|
38,659,000 |
|
|
|
3,586,715 |
|
|
|
0.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings excluding
FHLB advances |
|
$ |
44,467,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal balance of short term advances from the FHLB consist of the following at December 31,
2010. There were no short term advances outstanding from the FHLB as
of December 31, 2009.
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest Rate |
|
2010 |
|
2/28/2011 |
|
|
5.37 |
% |
|
$ |
2,000,000 |
|
5/2/2011 |
|
|
1.72 |
% |
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,000,000 |
|
|
|
|
|
|
|
|
Long-term Borrowings
Long-term borrowings at December 31, 2010 consisted of junior subordinated debentures of
$36,084,000 with an average annual interest rate of 2.11% and an average daily balance of
$36,084,000. The long-term FHLB advances are presented below. Also, included in long-term
borrowings is a structured wholesale repurchase agreement with a balance of $5,000,000 at year end,
an average daily balance of $4,999,943, an average interest rate of 2.64%, and a year-end interest
rate of 2.60%. Also included in long-term borrowings is the fair market value adjustment associated
with the borrowings acquired in the American Community acquisition of $(1,102,618) at December 31,
2010. Long-term borrowings at December 31, 2009 consisted of junior subordinated debentures of
$36,084,000 with an average annual interest rate of 2.61% and an average daily balance of
$31,267,811; and a structured wholesale purchase agreement with a balance of $5,000,000, an average
daily balance of $4,999,800, and an average interest rate of 2.62%. The fair market value
adjustment associated with the borrowings acquired in the American Community acquisition was
$(1,128,544) at December 31, 2009.
Pursuant to a collateral agreement with the FHLB, advances are collateralized by all of the Banks
FHLB stock and qualifying first mortgage, commercial, and home equity line loans. The balance of
the lendable collateral value of all loans as of December 31, 2010 was approximately $137 million
with $98 million remaining available. This agreement with the FHLB provides for a line of credit up
to 20% of the Banks assets.
102
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
9. BORROWED FUNDS (Continued)
The following table presents long-term advances from the FHLB at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest Rate |
|
2010 |
|
2009 |
2/28/2011 |
|
|
5.37 |
% |
|
$ |
- |
|
|
$ |
2,000,000 |
|
5/2/2011 |
|
|
1.72 |
% |
|
|
- |
|
|
|
5,000,000 |
|
7/16/2012 |
|
|
3.90 |
% |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
1/10/2013 |
|
|
3.10 |
% |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
2/25/2013 |
|
|
3.45 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
1/11/2015 |
|
|
2.99 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
4/27/2015 |
|
|
2.97 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
2/28/2018 |
|
|
2.93 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
10/29/2018 |
|
|
0.25 |
% |
|
|
736,159 |
|
|
|
752,102 |
|
12/19/2023 |
|
|
2.00 |
% |
|
|
277,424 |
|
|
|
293,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,013,583 |
|
|
$ |
39,045,353 |
|
|
|
|
|
|
|
|
|
|
FHLB advances, both short and long-term, had average annual interest rate paid during the year of
2.60% and 1.46% for 2010 and 2009, respectively. The weighted average interest rate at December
31, 2010 and 2009 was 2.99%. Maximum amount outstanding during the years at any month-end for 2010
and 2009 was $39,042,749 and $125,913,370, respectively.
On November 1, 2007, the Company created Yadkin Valley Statutory Trust I (the Trust) to issue
trust preferred securities in conjunction with the Company issuing junior subordinated debentures
to the Trust. The terms of the junior subordinated debentures are substantially the same as the
terms of the trust preferred securities. The interest rate in effect is the three-month LIBOR plus
1.32%. The effective interest rate was 1.62% and 1.57% at December 31, 2010 and December 31, 2009,
respectively. The Companys obligations under the debentures and a separate guarantee agreement
constitute a full and unconditional guarantee by the Company of the obligations of the Trust.
On November 1, 2007, the Trust completed the sale of $25.0 million of trust preferred securities.
The trust preferred securities mature in 30 years and can be called by the Trust without penalty
after five years. The Trust used the proceeds from the sale of the securities to purchase the
Companys junior subordinated deferrable interest notes due 2037 (the Debenture). The net
proceeds from the offering were used by the Company in connection with the acquisition of Cardinal,
and for general corporate purposes. Currently, regulatory capital rules allow trust preferred
securities to be included as a component of regulatory capital for the Company up to certain
limits. This treatment has continued despite the deconsolidation of these instruments for financial
reporting purposes.
The Company assumed junior subordinated debt in the amount of $10.0 million in the American
Community acquisition. American Community had a trust that issued trust preferred securities which
pay cumulative cash distributions quarterly at a rate priced off 90-day LIBOR plus 280 basis
points. The interest rate at December 31, 2010 and December 31, 2009 was 3.09% and 3.05%,
respectively. The preferred securities are redeemable on December 15, 2033. The Companys
obligations under the debentures and a separate guarantee agreement constitute a full and
unconditional guarantee by the Company of the obligations of the Trust.
Under the accounting for variable interest entities, the Companys $774,000 and $310,000 investment
in the common equity of the Trusts are included in the consolidated balance sheets as other assets
and funded by long-term debt. The income and interest expense received from and paid to the Trust,
respectively, is included in the consolidated statements of income and comprehensive income as
other noninterest income and interest expense.
103
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
10. INCOME TAXES
The following table presents the provision for income taxes for the years ended December 31, 2010,
2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(6,681,247 |
) |
|
$ |
(3,524,067 |
) |
|
$ |
3,776,291 |
|
State |
|
|
- |
|
|
|
(5,207 |
) |
|
|
756,727 |
|
|
|
|
|
|
|
|
|
|
|
(6,681,247 |
) |
|
|
(3,529,274 |
) |
|
|
4,533,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,755,963 |
|
|
|
(3,735,175 |
) |
|
|
(2,656,853 |
) |
State |
|
|
536,665 |
|
|
|
(1,611,252 |
) |
|
|
(634,762 |
) |
|
|
|
|
|
|
|
|
|
|
5,292,628 |
|
|
|
(5,346,427 |
) |
|
|
(3,291,615 |
) |
|
|
|
|
|
|
|
Total income taxes |
|
$ |
(1,388,619 |
) |
|
$ |
(8,875,701 |
) |
|
$ |
1,241,403 |
|
|
|
|
|
|
|
|
The following table presents the tax effects of significant components of the Companys net
deferred tax assets as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
14,808,620 |
|
|
$ |
18,911,645 |
|
FMV adjustments related to mergers |
|
|
(49,631 |
) |
|
|
2,013,988 |
|
Other than temporary impairment |
|
|
466,661 |
|
|
|
1,736,196 |
|
Accrued liabilities |
|
|
529,593 |
|
|
|
2,935,763 |
|
SERP |
|
|
- |
|
|
|
279,827 |
|
OREO property |
|
|
680,115 |
|
|
|
- |
|
Net operating loss |
|
|
4,651,982 |
|
|
|
1,311,415 |
|
Other |
|
|
514,563 |
|
|
|
557,885 |
|
|
|
|
|
|
|
|
$ |
21,601,903 |
|
|
$ |
27,746,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
(333,147 |
) |
|
$ |
(1,847,263 |
) |
Depreciation |
|
|
(2,214,513 |
) |
|
|
(2,317,821 |
) |
Prepaid expenses |
|
|
(356,850 |
) |
|
|
(356,851 |
) |
Core deposit intangible |
|
|
(1,929,458 |
) |
|
|
(2,405,047 |
) |
Leases |
|
|
- |
|
|
|
(139,951 |
) |
Noncompete intangible |
|
|
(231,744 |
) |
|
|
(299,867 |
) |
Goodwill |
|
|
(763,934 |
) |
|
|
(634,337 |
) |
Other |
|
|
(137,399 |
) |
|
|
(332,212 |
) |
|
|
|
|
|
|
|
$ |
(5,967,045 |
) |
|
$ |
(8,333,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
15,634,858 |
|
|
$ |
19,413,370 |
|
|
|
|
|
|
104
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
10. INCOME TAXES (Continued)
Our net deferred tax asset was $15.6 million and $19.4 million at December 31, 2010 and December
31, 2009, respectively. This decrease is related to the elimination of certain temporary
differences. In evaluating whether the Company will realize the full benefit of our net deferred
tax asset, both positive and negative evidence is considered, including recent earnings trends and
projected earnings, asset quality, etc. As of December 31, 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 the Company 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.
The Banks strong history of earnings since the inception of the bank, and particularly over the
past 10 years, shows the Company has been profitable historically and the Company has no history of
expiration of loss carryforwards. 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.
As of December 31, 2010, the Company did not pass the cumulative loss test by $18.7 million;
although, with the pre-tax impact of managements considerations, the Company feels confident that
deferred tax assets are more likely than not to be realized. The 2010 deficit is reflected in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 Cumulative Loss Test |
|
|
2008 |
|
2009 |
|
2010 |
|
Total |
|
|
(Amounts in thousands) |
|
Income (loss) before income taxes |
|
$ |
5,108 |
|
|
$ |
(83,933 |
) |
|
$ |
(1,401 |
) |
|
$ |
(80,226 |
) |
Goodwill impairment |
|
|
- |
|
|
|
61,566 |
|
|
|
- |
|
|
|
61,566 |
|
|
| |
| |
| |
| |
|
|
$ |
5,108 |
|
|
$ |
(22,367 |
) |
|
$ |
(1,401 |
) |
|
$ |
(18,660 |
) |
|
| |
| |
| |
| |
The Companys loss carryforwards for the tax period ending December 31, 2010 include net
operating loss carryforwards generated in the acquisition of Cardinal State Bank in 2008 and
American Community Bank in 2009, as well as net operating loss carryforwards for the Company. The
expiration of the loss carryforwards for the tax period ending December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit |
|
|
|
|
Net Operating Loss |
|
Recorded at |
|
|
|
|
Carryforward at |
|
December 31, |
|
|
|
|
December 31, 2010 |
|
2010 |
|
Expiration |
|
|
(Amounts in thousands) |
|
|
Cardinal State Bank acquisition |
|
$ |
2,424 |
|
|
$ |
849 |
|
|
2029 |
American Community Bank acquisition |
|
|
345 |
|
|
|
15 |
|
|
2030 |
Yadkin Valley Federal |
|
|
9,011 |
|
|
|
3,154 |
|
|
2031 |
Yadkin Valley State |
|
|
14,684 |
|
|
|
634 |
|
|
2031 |
|
| |
| |
|
|
Total Loss Carryforwards |
|
$ |
26,464 |
|
|
$ |
4,652 |
|
|
|
|
| |
| |
|
|
Deferred tax assets of $21.6 million reduced by deferred tax liabilities of $6.0 million,
resulted in a net deferred tax asset of approximately $15.6 million as of December 31, 2010.
Deferred tax assets of $27.7 million as of December 31, 2009, reduced by deferred tax liabilities
of $8.3 million, resulted in a net deferred tax asset of approximately $19.4 million. 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 $15.6 million in deferred tax assets. However, if
negative trends occur with credit quality and earnings, valuation allowances may be needed in
future periods.
105
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
10. INCOME TAXES (Continued)
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 managements evaluation of the Companys outlook.
The following table presents a reconciliation of applicable income taxes for the years ended
December 31, 2010, 2009 and 2008 to the amount of tax expense computed at the statutory federal
income tax rate of 35%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Tax expense at statutory rate on income before income taxes |
|
$ |
(490,284 |
) |
|
$ |
(29,376,488 |
) |
|
$ |
1,787,811 |
|
Increases (decreases) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest on investments |
|
|
(819,141 |
) |
|
|
(765,108 |
) |
|
|
(572,293 |
) |
State income tax, net of federal benefits |
|
|
348,832 |
|
|
|
(1,050,698 |
) |
|
|
79,181 |
|
Income from bank-owned life insurance |
|
|
(288,399 |
) |
|
|
(296,099 |
) |
|
|
(323,741 |
) |
Goodwill write-down |
|
|
- |
|
|
|
21,548,018 |
|
|
|
- |
|
Merger expenses |
|
|
- |
|
|
|
543,130 |
|
|
|
- |
|
Other |
|
|
(139,627 |
) |
|
|
521,544 |
|
|
|
270,445 |
|
|
| |
| |
| |
Total income taxes |
|
$ |
(1,388,619 |
) |
|
$ |
(8,875,701 |
) |
|
$ |
1,241,403 |
|
|
| |
| |
| |
The Company recognizes interest and penalties associated with uncertain tax positions as components
of income taxes. The Companys federal tax returns are subject to examination for years 2007, 2008
and 2009. The interest associated with the uncertain tax positions amounts to approximately
$42,000 at December 31, 2010. The Companys state income tax returns are subject to examination
for years 2008 and 2009.
11. EARNINGS PER SHARE
Basic earnings per share (EPS) are computed by dividing net income to common shareholders by the
weighted-average number of common shares outstanding for the year. 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 year ended
December 31, 2010 excludes 18,000 shares of unvested restricted stock. At December 31,
2010, there were 18,000 shares of restricted stock that were antidilutive. There were no shares of
restricted stock outstanding as of December 31, 2009 and 2008. The following table presents the
reconciliation of EPS for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
(3,193,377 |
) |
|
$ |
(77,492,525 |
) |
|
$ |
3,866,628 |
|
Weighted average shares outstanding |
|
|
16,129,640 |
|
|
|
14,808,325 |
|
|
|
11,235,943 |
|
Basic earnings (loss) per share |
|
$ |
(0.20 |
) |
|
$ |
(5.23 |
) |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
(3,193,377 |
) |
|
$ |
(77,492,525 |
) |
|
$ |
3,866,628 |
|
Weighted-average shares outstanding |
|
|
16,129,640 |
|
|
|
14,808,325 |
|
|
|
11,235,943 |
|
Dilutive effect of stock options |
|
|
- |
|
|
|
- |
|
|
|
70,799 |
|
Weighted-average shares, as adjusted |
|
|
16,129,640 |
|
|
|
14,808,325 |
|
|
|
11,306,742 |
|
Diluted earnings (loss) per share |
|
$ |
(0.20 |
) |
|
$ |
(5.23 |
) |
|
$ |
0.34 |
|
For 2010 and 2009, net income (loss) to common shareholders is net income (loss) less the preferred
stock dividends and accretion of discount.
106
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
11. EARNINGS PER SHARE (Continued)
At December 31, 2010, there were 421,129 options outstanding to purchase shares of the Companys
common stock at a range of $3.84 to $19.07. The average market price during the period was $3.30.
During 2010, there were 18,000 shares of restricted stock granted at a weighted average fair value
of $4.18 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. A total of 18,000
shares of restricted stock are nonvested as of December 31, 2010.
At December 31, 2009, there were 619,515 options outstanding to purchase shares of the
Companys common stock at a range of $6.36 to $19.07. The average market prices during the period
ranged from $3.97 to $5.45.
At December 31, 2008, there were 189,319 options outstanding to purchase shares of the Companys
common stock at a range of $14.24 to $19.07. The average market prices during the period ranged
from $14.10 to $14.33 which excluded the options from the computation of diluted EPS as they would
be anti-dilutive.
Unvested shares of restricted stock and stock options were excluded from the determination of
diluted earnings per share for the years ended December 31, 2010 and 2009 due to the Companys loss
position for the periods.
12. BENEFIT PLANS
401(K) PLAN
The Company maintains profit-sharing and 401(k) plans for substantially all employees.
Contributions to the profit-sharing plan are at the discretion of the Board of Directors but are
limited to amounts deductible in accordance with the Internal Revenue Code. Under the Companys
401(k) plan, employees are permitted to contribute up to 60% of pre-tax compensation. The Company
will match 50% of an employees contribution, up to a maximum of 3% of pre-tax employee
compensation. The Companys policy is to fund the profit-sharing/401(k) costs as incurred. Employer
contributions in 2010, 2009 and 2008 to the 401(k) plan were $578,602, $537,410, and $334,537,
respectively. There were no discretionary contributions to the profit-sharing plan for the years
ended December 31, 2010, 2009 and 2008. American Communitys 401(k) and profit sharing plan with
plan assets of $2.2 million was merged into the Companys plan as of April 17, 2009.
BANK-OWNED LIFE INSURANCE
During 2001 and 2000, the Company created an Officer Supplemental Insurance Plan (OSIP) and
entered into Life Insurance Endorsement Method Split Dollar Agreements with certain officers. Under
the plan, upon death of the officer, the Company first recovers the cash surrender value of the
contract and then shares the remaining death benefits from insurance contracts, which are written
with different carriers, with the designated beneficiaries of the officers. The death benefit to
the officers beneficiaries is a multiple of base salary at the time of the agreements. During
2010, the OSIP was amended and the death benefit to the officers beneficiaries is now subject to
the limit of total death proceeds less cash surrender value. The Company, as owner of the
policies, retains an interest in the life insurance proceeds and a 100% interest in the cash
surrender value of the policies. The OSIP contains a five-year vesting requirement and certain
provisions relating to change of control and termination of service. The Company funded the OSIP
through the purchase of bank-owned life insurance (BOLI) during the first quarter of 2000 and the
second quarter of 2001 with initial investments of $4.8 million and $5.0 million, respectively.
Additional investments in BOLI were made in August of 2006 in the amount of $5.5 million. The
corresponding cash surrender values of BOLI policies as of December 31, 2010 and 2009 was
$25,277,669 and $24,453,672, respectively.
107
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
12. BENEFIT PLANS (Continued)
During 2007 the Company created the 2007 Group Term Carve Out Plan and entered into Life Insurance
Endorsement Method Split Dollar Agreements with certain officers who did not participate in the
2001 Plan discussed in the previous paragraph. Under the plan, upon death of the officer, the
Company first recovers the cash surrender value of the contract and then shares the remaining death
benefits from the insurance contracts which are written with New York Life Insurance and Annuity
Corporation, with the designated beneficiaries of the officers. The death benefit to the officers
beneficiaries is a multiple of base salary at the time of the agreements, subject to the limit of
total death proceeds less cash surrender value. The Company, as owner of the policies, retains an
interest in the life insurance proceeds and a 100% interest in the cash surrender value of the
policies. The 2007 plan contains a five-year vesting requirement and certain provisions related
to change of control and termination of service. The Company uses the cost of insurance method for
determining liabilities related to the plan and developed a discount rate of 5.75% at December 31,
2010 and 5.60% at December 31, 2009 based on the Citigroup Pension Liability Yield Curve. As of
December 31, 2010 and 2009, the liability accrued for the plan was $1.8 million. The net periodic
benefit costs of the plan are recorded to other non-interest expense and were approximately $58,000
and $448,000 for the years ended December 31, 2010 and 2009, respectively. The decrease in net
periodic benefit costs was primarily related to the change in death benefits for the OSIP mentioned
above.
NON-EQUITY INCENTIVE PLAN
Incentive compensation is provided for certain officers of the Bank based on defined levels of
earnings performance. Expenses related to such compensation during 2010, 2009 and 2008 totaled
$-0-, $-0-, and $170,000, respectively. Incentive compensation is provided for certain officers of
Sidus based on pre-tax income. Expenses related to such compensation during 2010, 2009, and 2008
totaled approximately $-0-, $1.1 million and $295,000, respectively.
13. STOCK OPTIONS AND RESTRICTED STOCK
The Company has stock option plans for directors, selected executive officers and other key
employees. The plans provide for the granting of options to purchase shares of the Companys
common stock at a price not less than the fair market value at the date of grant of the option.
Option exercise prices are established at market value on the grant date. Vesting schedules are
determined by the Board of Directors. Upon termination, unexercised options held by employees are
forfeited and made available for future grants.
On May 22, 2008, the shareholders approved the 2008 Omnibus Stock Ownership and Long Term Incentive
Plan (the Omnibus Plan). An aggregate of 700,000 shares has been reserved for issuance by the
Company under the terms of the Omnibus Plan pursuant to the grant of incentive stock options (not
to exceed 200,000 shares), non-statutory stock options, restricted stock (not to exceed 500,000
shares) and restricted stock units, long-term incentive compensation units and stock appreciation
rights.
During 2010, 24,300 options were vested resulting in 53,900 unvested options at December 31, 2010.
There were no options granted or exercised during 2010. In 2010, 18,000 shares of restricted stock
were granted at a weighted average fair value of $4.18 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. A total of 18,000 shares of restricted stock are nonvested as of
December 31, 2010. There are 482,000 shares of restricted stock available for issuance as of
December 31, 2010.
108
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
13. STOCK OPTIONS (Continued)
The following table presents certain option information for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
Exercisable Options |
|
|
Shares |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
available |
|
|
|
|
|
average |
|
|
|
|
|
average |
|
|
for future |
|
Number |
|
exercise |
|
Number |
|
exercise |
|
|
grants |
|
of options |
|
price |
|
of options |
|
price |
At December 31, 2009 |
|
|
197,862 |
|
|
|
579,363 |
|
|
$ |
13.26 |
|
|
|
477,263 |
|
|
$ |
13.01 |
|
Options authorized |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Options granted/vested |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,300 |
|
|
|
14.94 |
|
Options exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Options expired |
|
|
- |
|
|
|
(12,061 |
) |
|
|
8.66 |
|
|
|
(12,061 |
) |
|
|
8.66 |
|
Options forfeited |
|
|
- |
|
|
|
(146,172 |
) |
|
|
13.16 |
|
|
|
(122,272 |
) |
|
|
12.02 |
|
|
| |
| |
|
|
|
|
| |
| |
At December 31, 2010 |
|
|
197,862 |
|
|
|
421,130 |
|
|
$ |
13.42 |
|
|
|
367,230 |
|
|
$ |
13.41 |
|
|
| |
| |
|
|
|
|
| |
| |
During 2009, 27,700 options were vested and 13,000 options were granted resulting in 102,100
unvested options at December 31, 2009. There was no intrinsic value of 2009 option grants since
options are granted at the market price of the stock on date of grant. There was no intrinsic
value of options exercised in 2009 since the option price exceeded the market price of the stock on
date of exercise. The intrinsic values of options exercised in 2008 were $630,098.
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 and
2008: dividend yield of 0.76% and 3.77%, respectively; expected volatility of 56.38% and 22.72%,
respectively; risk-free interest rate of 2.35% and 2.80%, respectively, and expected life of 5.5
and 5.4 years, respectively. The weighted-average fair value of options granted during 2009 and
2008 was approximately $2.82 and $2.03 respectively, at the grant date.
At December 31, 2010, the weighted-average remaining contractual life of outstanding and
exercisable options was 4.2 years and 3.7 years, respectively. At December 31, 2009, the weighted
average remaining contractual life of outstanding and exercisable options was 4.9 years and 4.2
years, respectively.
There was no aggregate intrinsic value of options outstanding and exercisable at December 31, 2010
and December 31, 2009, since the exercise price of options outstanding exceeded the market share
price of $1.81 and $3.66, respectively, at year end. The following table segregates the shares
outstanding at December 31, 2010 into meaningful ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
remaining |
|
Weighted- |
|
exercisable |
|
|
|
|
|
|
Option price |
|
contractual |
|
average |
|
December 31, |
Shares |
|
|
|
per share |
|
life (years) |
|
exercise price |
|
2010 |
|
5,000 |
|
|
|
|
|
$3.84 |
|
|
|
8.9 |
|
|
|
$3.84 |
|
|
|
1,000 |
|
|
43,765 |
|
|
|
|
|
6.36 - 7.85 |
|
|
|
2.1 |
|
|
|
7.43 |
|
|
|
37,365 |
|
|
39,384 |
|
|
|
|
|
9.31 - 10.75 |
|
|
|
4.6 |
|
|
|
10.06 |
|
|
|
39,384 |
|
|
25,314 |
|
|
|
|
|
11.24 - 11.99 |
|
|
|
1.5 |
|
|
|
11.93 |
|
|
|
25,314 |
|
|
80,929 |
|
|
|
|
|
12.79 - 13.91 |
|
|
|
5.6 |
|
|
|
13.80 |
|
|
|
61,729 |
|
|
148,488 |
|
|
|
|
|
14.00 - 14.97 |
|
|
|
3.5 |
|
|
|
14.78 |
|
|
|
135,288 |
|
|
50,750 |
|
|
|
|
|
15.24 - 15.65 |
|
|
|
5.3 |
|
|
|
15.24 |
|
|
|
50,650 |
|
|
27,500 |
|
|
|
|
|
19.07 |
|
|
|
6.1 |
|
|
|
19.07 |
|
|
|
16,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
13. STOCK OPTIONS (Continued)
All options expire ten years after date of grant and are made available for future grants at
expiration.
The
Bank recorded compensation expense totaling $76,939 in 2010, $73,820 in 2009 and $66,787 in
2008 for the options in the process of vesting based on amortization of the fair value of options
granted (See Share-Based Payment under Note 1). The Bank recorded compensation expense totaling
$16,619 in 2010 for the restricted stock in the process of vesting based on amortization of the
fair value of shares granted. Unrecognized compensation expense related to nonvested
share-based compensation arrangements granted under all of the Companys stock benefit plans
totaling $197,082 at December 31, 2010 will be recognized over the remaining vesting period, 2010
through 2014. There were 146,172 shares forfeited and 12,061 shares expired during the year ended
December 31, 2010. There were no shares forfeited during the year ended December 31, 2009.
14. LEASES
Operating Leases
The Company has entered into non-cancelable operating leases for branch facilities and equipment.
These leases have terms from five to thirty years. Rental expense was approximately $2.3 million
in 2010, $1.7 million in 2009 and $738,000 in 2008 and primarily represents rentals of real estate.
The following table presents the future minimum lease payments for the next five years:
|
|
|
|
|
|
|
(in thousands) |
2011 |
|
$ |
1,590 |
|
2012 |
|
|
1,265 |
|
2013 |
|
|
1,073 |
|
2014 |
|
|
974 |
|
2015 |
|
|
727 |
|
Thereafter |
|
|
2,470 |
|
|
| |
Total |
|
$ |
8,099 |
|
|
| |
Capital Lease Obligation
The Company leases its Monroe Main office facility, which was acquired from American Community,
under a capital lease. Leases that meet the criteria for capitalization are recorded as assets and
the related obligations are reflected on the accompanying balance sheets. Amortization of property
under capital lease is included in depreciation expense. Included in premises and equipment at
December 31, 2010 is $2.4 million as the capitalized cost of the Companys Monroe Main office and
accumulated amortization of approximately $47,600 at December 31, 2010.
The following table presents aggregate future minimum lease payments due under this capital lease
obligation as of December 31, 2010:
|
|
|
|
|
2011 |
|
$ |
225,552 |
|
2012 |
|
|
225,552 |
|
2013 |
|
|
225,552 |
|
2014 |
|
|
226,868 |
|
2015 |
|
|
241,344 |
|
2016-2029 |
|
|
3,641,050 |
|
|
| |
Total minimum lease payments |
|
|
4,785,918 |
|
Less amount representing interest |
|
|
(2,383,518 |
) |
|
|
|
|
|
Present value of net minimum lease payments |
|
$ |
2,402,400 |
|
|
| |
110
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
15. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheets. The contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of conditions established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on managements credit evaluation of the borrower. Collateral
obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
The following table presents a summary by type of contract and amount the Banks exposure to
off-balance sheet risk as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
|
|
|
|
Loan commitments and undisbursed lines of credit |
|
$ |
265,752,158 |
|
|
$ |
284,851,799 |
|
Undisbursed standby letters of credit |
|
|
9,106,181 |
|
|
|
9,655,268 |
|
Undisbursed portion of construction loans |
|
|
13,580,221 |
|
|
|
21,971,644 |
|
Commitments to close first mortgages |
|
|
119,168,227 |
|
|
|
97,548,000 |
|
Commitments to sell first mortgages |
|
|
119,168,277 |
|
|
|
97,548,000 |
|
16. 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, 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.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the assumptions used to
determine fair value, under the Fair Market Value Measurements and Disclosures topic of the FASB
Accounting Standards Codification. These levels are:
|
|
|
Level 1
|
|
Valuation is based upon quoted prices for identical instruments traded in active markets. |
|
|
|
Level 2
|
|
Valuation is based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in
the market. |
|
|
|
Level 3
|
|
Valuation is generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing models, discounted cash
flow models and similar techniques. |
111
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
16. FAIR VALUE (Continued)
The 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 securitys 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 years ended December 31, 2010 and 2009. 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
December 31, 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 |
|
|
159 |
|
|
|
159 |
|
|
| |
| |
Balance, December 31, 2010 |
|
$ |
159 |
|
|
$ |
159 |
|
|
| |
| |
Interest Rate Locks and Forward Sale Loan Commitments
Sidus, the Companys mortgage lending subsidiary, enters into interest rate lock commitments and
commitments to sell mortgages. At December 31, 2010, the amount of fair value associated with
these interest rate lock commitments and sale commitments was $104,810 and $161,071, 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. There have been no
changes in valuation techniques for the years ended December 31, 2010 and 2009. Valuation
techniques are consistent with techniques used in prior periods.
Mortgage Servicing Rights
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 a Level 3 security. There have been no changes in valuation techniques for the
years ended December 31, 2010 and 2009. Valuation techniques are consistent with techniques used
in prior periods.
112
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
16. FAIR VALUE (Continued)
The following table presents assets and (liabilities) measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 (in thousands) |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
14,550 |
|
|
$ |
- |
|
|
$ |
14,550 |
|
|
$ |
- |
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
52,075 |
|
|
|
- |
|
|
|
52,075 |
|
|
|
- |
|
Collateralized mortgage obligations |
|
|
155,926 |
|
|
|
- |
|
|
|
155,926 |
|
|
|
- |
|
Private label collateralized
mortgage obligations |
|
|
1,705 |
|
|
|
- |
|
|
|
1,705 |
|
|
|
- |
|
State and municipal securities |
|
|
72,622 |
|
|
|
- |
|
|
|
72,622 |
|
|
|
- |
|
Common and preferred stocks |
|
|
1,124 |
|
|
|
1,124 |
|
|
|
- |
|
|
|
- |
|
Interest rate lock commitments |
|
|
105 |
|
|
|
- |
|
|
|
105 |
|
|
|
- |
|
Forward loan sale commitments |
|
|
161 |
|
|
|
- |
|
|
|
161 |
|
|
|
- |
|
Mortgage servicing rights |
|
|
2,144 |
|
|
|
- |
|
|
|
- |
|
|
|
2,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
50,884 |
|
|
|
- |
|
|
|
50,884 |
|
|
|
- |
|
Collateralized mortgage obligations |
|
|
25,217 |
|
|
|
- |
|
|
|
25,217 |
|
|
|
- |
|
Private label collateralized
mortgage obligations |
|
|
2,288 |
|
|
|
- |
|
|
|
2,288 |
|
|
|
- |
|
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 |
|
Mortgage Loans Held-for-Sale
Loans held-for-sale are carried at lower of cost or market value. 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 loans measured at fair value on a nonrecurring
basis as a Level 2 security. At December 31, 2010 the cost of the Companys mortgage loans
held-for-sale was less than the market value. Accordingly, the Companys loans held-for-sale are
carried at cost. There have been no changes in valuation techniques for the years ended December
31, 2010 and 2009. Valuation techniques are consistent with techniques used in prior periods.
113
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
16. FAIR VALUE (Continued)
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 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 December 31, 2010, substantially all
of the total 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 measured at fair value on a nonrecurring basis as a Level 2
security. 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 measured at fair value on a nonrecurring basis as a Level 3
security. There have been no changes in valuation techniques for the years ended December 31, 2010
and 2009. Valuation techniques are consistent with techniques used in prior periods.
Foreclosed real estate
Other real estate owned (OREO) is adjusted to fair value upon transfer of the loans to OREO.
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 managements 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 current carrying value of OREO at
December 31, 2010 is $25,582,234. At December 31, 2009 the carrying value of OREO was $14,344,599.
There have been no changes in valuation techniques for the years ended December 31, 2010 and 2009.
Valuation techniques are consistent with techniques used in prior periods.
Goodwill
We perform our annual goodwill impairment assessment on October 1st for the Sidus
segment. We also make judgments about goodwill whenever events or changes in circumstances
indicate that impairment in the value of goodwill recorded on our balance sheet may exist. In
order to estimate the fair value of goodwill, we typically make various judgments and assumptions,
including, among other things, the identification of the reporting units, the assignment of assets
and liabilities to reporting units, the future prospects for the reporting unit that the asset
relates to, the market factors specific to that reporting unit, the future cash flows to be
generated by that reporting unit, and the weighted-average cost of capital for purposes of
establishing a discount rate. Assumptions used in these assessments are consistent with our
internal planning. At September 30, 2009, it was determined that impairment existed in the banking
reporting unit and a goodwill impairment charge of $61.6 million was recorded. See additional
disclosures and discussions regarding the goodwill impairment in Footnote 22 to the financial
statements. There have been no changes in valuation techniques for the years ended December 31,
2010 and 2009. Valuation techniques are consistent with techniques used in prior periods.
114
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
16. FAIR VALUE (Continued)
The following table presents assets measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
December 31, 2010 |
|
(Amounts in thousands) |
|
Other real estate owned at December 31, 2010 |
|
$ |
2,941 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,941 |
|
Impaired loans at December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
8,975 |
|
|
|
- |
|
|
|
- |
|
|
|
8,975 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
5,388 |
|
|
|
- |
|
|
|
- |
|
|
|
5,388 |
|
Owner occupied |
|
|
4,217 |
|
|
|
- |
|
|
|
- |
|
|
|
4,217 |
|
Commercial |
|
|
4,117 |
|
|
|
- |
|
|
|
- |
|
|
|
4,117 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
1,790 |
|
|
|
- |
|
|
|
- |
|
|
|
1,790 |
|
Multifamily |
|
|
387 |
|
|
|
- |
|
|
|
- |
|
|
|
387 |
|
Open ended secured 1-4 family |
|
|
459 |
|
|
|
- |
|
|
|
- |
|
|
|
459 |
|
Consumer and other |
|
|
99 |
|
|
|
- |
|
|
|
- |
|
|
|
99 |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned at December 31, 2009 |
|
|
2,510 |
|
|
|
- |
|
|
|
- |
|
|
|
2,510 |
|
Impaired loans at December 31, 2009 |
|
|
16,250 |
|
|
|
- |
|
|
|
- |
|
|
|
16,250 |
|
17. REGULATORY REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly, additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that, as of December 31, 2010, the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2010, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company must maintain minimum Total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed in the Companys category.
115
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
17. REGULATORY REQUIREMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
adequacy purposes |
|
action provisions |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(Amounts in thousands) |
Yadkin Valley Bank and Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
$ |
183,690 |
|
|
|
10.5 |
% |
|
$ |
140,030 |
|
|
|
8.0 |
% |
|
$ |
175,038 |
|
|
|
10.0 |
% |
Tier 1 Capital (to risk-weighted assets) |
|
|
161,614 |
|
|
|
9.2 |
% |
|
|
70,015 |
|
|
|
4.0 |
% |
|
|
105,023 |
|
|
|
6.0 |
% |
Tier 1 Capital (to average assets) |
|
|
161,614 |
|
|
|
7.0 |
% |
|
|
91,873 |
|
|
|
4.0 |
% |
|
|
114,841 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
$ |
186,255 |
|
|
|
10.3 |
% |
|
$ |
145,152 |
|
|
|
8.0 |
% |
|
$ |
181,440 |
|
|
|
10.0 |
% |
Tier 1 Capital (to risk-weighted assets) |
|
|
163,217 |
|
|
|
9.0 |
% |
|
|
72,577 |
|
|
|
4.0 |
% |
|
|
108,864 |
|
|
|
6.0 |
% |
Tier 1 Capital (to average assets) |
|
|
163,217 |
|
|
|
8.0 |
% |
|
|
81,398 |
|
|
|
4.0 |
% |
|
|
101,747 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yadkin Valley Financial Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
$ |
185,318 |
|
|
|
10.6 |
% |
|
$ |
140,271 |
|
|
|
8.0 |
% |
|
$ |
175,339 |
|
|
|
10.0 |
% |
Tier 1 Capital (to risk-weighted assets) |
|
|
164,290 |
|
|
|
9.4 |
% |
|
|
70,135 |
|
|
|
4.0 |
% |
|
|
105,203 |
|
|
|
6.0 |
% |
Tier 1 Capital (to average assets) |
|
|
164,290 |
|
|
|
7.2 |
% |
|
|
91,950 |
|
|
|
4.0 |
% |
|
|
114,937 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets) |
|
$ |
192,223 |
|
|
|
10.6 |
% |
|
$ |
145,436 |
|
|
|
8.0 |
% |
|
$ |
181,794 |
|
|
|
10.0 |
% |
Tier 1 Capital (to risk-weighted assets) |
|
|
170,225 |
|
|
|
9.4 |
% |
|
|
72,718 |
|
|
|
4.0 |
% |
|
|
109,077 |
|
|
|
6.0 |
% |
Tier 1 Capital (to average assets) |
|
|
170,225 |
|
|
|
8.4 |
% |
|
|
81,502 |
|
|
|
4.0 |
% |
|
|
101,877 |
|
|
|
5.0 |
% |
The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits
as determined pursuant to North Carolina General Statutes Section 53-87. At December 31, 2010 and
2009, there were no undivided profits available for dividend payments. At December 31, 2008,
$48,070,348 was legally available for dividend payments. The Bank is currently prohibited from
paying dividends to the holding company without prior FDIC and Commissioner approval. We also may
be required to defer dividend payments on the Series T and Series T-ACB Preferred Stock and
interest payments on the trust preferred securities in the future given liquidity levels at the
holding company. If we defer dividend payments on the Series T and Series T-ACB Preferred Stock
and defer interest payments on our trust preferred securities, we will be prohibited from paying
any dividends on our common stock until all deferred payments have been made in full.
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 Bank. Management, on an ongoing basis, continues to monitor
capital levels closely and evaluate options which would improve the capital position.
For the reserve maintenance period in effect at December 31, 2010, the Bank was required by the
Federal Reserve Bank to maintain average daily reserves of $250,000 on deposit.
The Sidus mortgage banking segment qualifies as a HUD-approved Title II Nonsupervised Mortgagee and
issues mortgages insured by the US Department of Housing and Urban Development (HUD). A Title II
nonsupervised mortgagee must maintain an adjusted net worth equal to a minimum of $250,000 plus 1%
of mortgage volume in excess of $25 million, up to a maximum net worth of $1 million.
Possible penalties related to noncompliance with this minimum net worth requirement includes the
revocation of Sidus license to issue HUD insured mortgages, which may have a material adverse
affect on Sidus financial condition and results of operations.
116
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
17. REGULATORY REQUIREMENTS (Continued)
For the years ended December 31, 2010 and 2009, Sidus was required to maintain $1 million in
adjusted net worth. As of December 31, 2010 and 2009, Sidus adjusted net worth was $21,321,047,
and $18,344,062 respectively, which exceeds the required minimum net worth requirements.
18. FINANCIAL INSTRUMENTS
The following table presents a summary of the carrying amounts and fair values of the Companys
financial assets and liabilities at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
(in thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
229,780 |
|
|
$ |
229,780 |
|
|
$ |
92,336 |
|
|
$ |
92,336 |
|
Investment securities |
|
|
298,002 |
|
|
|
298,002 |
|
|
|
183,841 |
|
|
|
183,841 |
|
Loans and loans held-for-sale, net |
|
|
1,613,206 |
|
|
|
1,541,071 |
|
|
|
1,677,538 |
|
|
|
1,676,845 |
|
Accrued interest receivable |
|
|
7,947 |
|
|
|
7,947 |
|
|
|
7,783 |
|
|
|
7,783 |
|
Federal Home Loan Bank stock |
|
|
9,416 |
|
|
|
9,416 |
|
|
|
10,539 |
|
|
|
10,539 |
|
Investment in Bank-owned life insurance |
|
|
25,278 |
|
|
|
25,278 |
|
|
|
24,454 |
|
|
|
24,454 |
|
Forward loan sale commitments |
|
|
161 |
|
|
|
161 |
|
|
|
1,020 |
|
|
|
1,020 |
|
Interest rate lock commitments |
|
|
105 |
|
|
|
105 |
|
|
|
- |
|
|
|
- |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits, NOW, savings and money
market accounts |
|
$ |
805,951 |
|
|
$ |
805,951 |
|
|
$ |
653,358 |
|
|
$ |
653,358 |
|
Time deposits |
|
|
1,214,455 |
|
|
|
1,227,628 |
|
|
|
1,168,394 |
|
|
|
1,185,405 |
|
Borrowed funds |
|
|
116,768 |
|
|
|
117,741 |
|
|
|
123,468 |
|
|
|
124,947 |
|
Accrued interest payable |
|
|
3,302 |
|
|
|
3,302 |
|
|
|
3,015 |
|
|
|
3,015 |
|
Interest rate lock commitments |
|
|
- |
|
|
|
- |
|
|
|
791 |
|
|
|
791 |
|
The carrying amounts of cash and cash equivalents approximate their fair value.
The fair value of marketable securities is based on quoted market prices 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 fair values 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% in 2010 and 2009.
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 December
31, 2010 and 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 December
31, 2010 and 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.
117
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
18. FINANCIAL INSTRUMENTS (Continued)
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 Companys credit risk is not material to calculation of fair value.
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.
19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
During the May 24, 2006 annual meeting, the shareholders approved the formation of the Company
whereby each share of the Bank was automatically converted to one share of the Company. The
Companys authorized capital consists of 50,000,000 shares of common stock, par value $1.00 per
share, and 1,000,000 shares of preferred stock, no par value, whose rights, privileges, and
preferences will be established by the Board of Directors on issuance. As of the conversion date,
10,648,300 common shares and no preferred shares were issued and outstanding. The following table
presents condensed financial data for the parent company only:
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
(Amounts in thousands) |
Assets: |
|
|
|
|
|
|
|
|
Cash on deposit with bank subsidiary |
|
$ |
849 |
|
|
$ |
4,120 |
|
Investment in subsidiary |
|
|
179,659 |
|
|
|
180,513 |
|
Other investments |
|
|
2,351 |
|
|
|
2,876 |
|
Other assets |
|
|
585 |
|
|
|
629 |
|
|
|
|
|
|
Total |
|
$ |
183,444 |
|
|
$ |
188,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
Dividends payable |
|
$ |
411 |
|
|
$ |
314 |
|
Other liabilities |
|
|
35,576 |
|
|
|
35,558 |
|
Shareholders equity |
|
|
147,457 |
|
|
|
152,266 |
|
|
|
|
|
|
Total |
|
$ |
183,444 |
|
|
$ |
188,138 |
|
|
|
|
|
|
Condensed Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Equity in earnings of subsidiary bank: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received |
|
$ |
- |
|
|
$ |
1,658 |
|
|
$ |
5,859 |
|
Undistributed earnings (loss) |
|
|
1,364 |
|
|
|
(75,886 |
) |
|
|
(1,170 |
) |
Income (expenses), net |
|
|
(1,376 |
) |
|
|
(829 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
|
(12 |
) |
|
|
(75,057 |
) |
|
|
3,867 |
|
|
|
|
|
|
|
|
Preferred stock dividend and accretion of preferred
stock discount |
|
|
3,181 |
|
|
|
2,435 |
|
|
|
- |
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
(3,193 |
) |
|
$ |
(77,492 |
) |
|
$ |
3,867 |
|
|
|
|
|
|
|
|
118
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
19. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (Continued)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
|
|
(Amounts in thousands) |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
(12 |
) |
|
$ |
(75,057 |
) |
|
$ |
3,867 |
|
Adjustments to reconcile net income (loss) to net cash
from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity (loss) in undistributed earnings of subsidiaries |
|
|
(1,364 |
) |
|
|
75,886 |
|
|
|
1,170 |
|
Other-than-temporary impairment of investments |
|
|
482 |
|
|
|
201 |
|
|
|
- |
|
Change in other assets |
|
|
53 |
|
|
|
2,578 |
|
|
|
(125 |
) |
Change in other liabilities |
|
|
114 |
|
|
|
(611 |
) |
|
|
171 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(727 |
) |
|
|
2,997 |
|
|
|
5,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
|
- |
|
|
|
(291 |
) |
|
|
(632 |
) |
Maturities, call and repayments of investments |
|
|
19 |
|
|
|
22 |
|
|
|
- |
|
Additional investment in bank subsidiary |
|
|
- |
|
|
|
(45,006 |
) |
|
|
(23,458 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
19 |
|
|
|
(45,275 |
) |
|
|
(24,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock and warrants |
|
|
- |
|
|
|
49,312 |
|
|
|
- |
|
Dividends paid |
|
|
(2,563 |
) |
|
|
(3,672 |
) |
|
|
(5,986 |
) |
Proceeds from exercise of stock options |
|
|
- |
|
|
|
1 |
|
|
|
623 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(2,563 |
) |
|
|
45,641 |
|
|
|
(5,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(3,271 |
) |
|
|
3,363 |
|
|
|
(24,370 |
) |
Cash at beginning of year |
|
|
4,120 |
|
|
|
757 |
|
|
|
25,127 |
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
849 |
|
|
$ |
4,120 |
|
|
$ |
757 |
|
|
|
|
|
|
|
|
20. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments, the Bank, Sidus, and other. The Bank
encompasses the five regional banks, Yadkin Valley Bank and Trust, Piedmont Bank, High Country
Bank, Cardinal State Bank, and American Community Bank. Sidus Financial, LLC (Sidus) was acquired
October 1, 2004 as a single member LLC with the Bank as the single member. Sidus is headquartered
in Greenville, North Carolina and offers mortgage banking services throughout the east coast. The
other segment consists of the Holding Company and also includes the eliminations necessary to
accurately report each segments operations.
119
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
20. BUSINESS SEGMENT INFORMATION (Continued)
The following table presents the results of operations for the twelve months of 2010, 2009 and 2008
for the Bank and Sidus using the acquisition method of accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
Bank |
|
Sidus |
|
Other |
|
Total |
|
(Amounts in thousands) |
Interest income |
|
$ |
96,821 |
|
|
$ |
2,181 |
|
|
$ |
- |
|
|
$ |
99,002 |
|
Interest expense |
|
|
33,359 |
|
|
|
186 |
|
|
|
788 |
|
|
|
34,333 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
63,462 |
|
|
|
1,995 |
|
|
|
(788 |
) |
|
|
64,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
23,930 |
|
|
|
419 |
|
|
|
- |
|
|
|
24,349 |
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
39,532 |
|
|
|
1,576 |
|
|
|
(788 |
) |
|
|
40,320 |
|
Other income |
|
|
13,375 |
|
|
|
9,023 |
|
|
|
(260 |
) |
|
|
22,138 |
|
Other expense |
|
|
55,421 |
|
|
|
8,110 |
|
|
|
328 |
|
|
|
63,859 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
(2,514 |
) |
|
|
2,489 |
|
|
|
(1,376 |
) |
|
|
(1,401 |
) |
Income taxes (benefit) |
|
|
(1,389 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,389 |
) |
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
(1,125 |
) |
|
$ |
2,489 |
|
|
$ |
(1,376 |
) |
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,275,617 |
|
|
$ |
61,189 |
|
|
$ |
(36,212 |
) |
|
$ |
2,300,594 |
|
Net loans |
|
|
1,562,787 |
|
|
|
- |
|
|
|
- |
|
|
|
1,562,787 |
|
Loans held for sale |
|
|
1,447 |
|
|
|
48,972 |
|
|
|
- |
|
|
|
50,419 |
|
Goodwill |
|
|
- |
|
|
|
4,944 |
|
|
|
- |
|
|
|
4,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Bank |
|
Sidus |
|
Other |
|
Total |
|
(Amounts in thousands) |
Interest income |
|
$ |
91,834 |
|
|
$ |
3,708 |
|
|
$ |
- |
|
|
$ |
95,542 |
|
Interest expense |
|
|
30,628 |
|
|
|
351 |
|
|
|
852 |
|
|
|
31,831 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
61,206 |
|
|
|
3,357 |
|
|
|
(852 |
) |
|
|
63,711 |
|
Provision for loan losses |
|
|
48,366 |
|
|
|
73 |
|
|
|
- |
|
|
|
48,439 |
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
12,840 |
|
|
|
3,284 |
|
|
|
(852 |
) |
|
|
15,272 |
|
Other income |
|
|
10,627 |
|
|
|
13,575 |
|
|
|
641 |
|
|
|
24,843 |
|
Other expense |
|
|
52,915 |
|
|
|
8,950 |
|
|
|
617 |
|
|
|
62,482 |
|
Goodwill impairment |
|
|
61,566 |
|
|
|
- |
|
|
|
- |
|
|
|
61,566 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
(91,014 |
) |
|
|
7,909 |
|
|
|
(828 |
) |
|
|
(83,933 |
) |
|
Income taxes (benefit) |
|
|
(8,876 |
) |
|
|
- |
|
|
|
- |
|
|
|
(8,876 |
) |
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
(82,138 |
) |
|
$ |
7,909 |
|
|
$ |
(828 |
) |
|
$ |
(75,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,086,388 |
|
|
$ |
61,314 |
|
|
$ |
(34,090 |
) |
|
$ |
2,113,612 |
|
Net loans |
|
|
1,627,823 |
|
|
|
- |
|
|
|
- |
|
|
|
1,627,823 |
|
Loans held for sale |
|
|
- |
|
|
|
49,715 |
|
|
|
- |
|
|
|
49,715 |
|
Goodwill |
|
|
- |
|
|
|
4,944 |
|
|
|
- |
|
|
|
4,944 |
|
120
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
20. BUSINESS SEGMENT INFORMATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Bank |
|
Sidus |
|
Other |
|
Total |
|
(Amounts in thousands) |
Interest income |
|
$ |
71,997 |
|
|
$ |
2,530 |
|
|
$ |
- |
|
|
$ |
74,527 |
|
Interest expense |
|
|
32,468 |
|
|
|
873 |
|
|
|
1,195 |
|
|
|
34,536 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
39,529 |
|
|
|
1,657 |
|
|
|
(1,195 |
) |
|
|
39,991 |
|
|
Provision for loan losses |
|
|
11,109 |
|
|
|
- |
|
|
|
- |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
28,420 |
|
|
|
1,657 |
|
|
|
(1,195 |
) |
|
|
28,882 |
|
Net loss on investment securities |
|
|
(1,016 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,016 |
) |
Other income |
|
|
8,451 |
|
|
|
7,518 |
|
|
|
911 |
|
|
|
16,880 |
|
Other expense |
|
|
32,713 |
|
|
|
6,386 |
|
|
|
538 |
|
|
|
39,637 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
3,142 |
|
|
|
2,789 |
|
|
|
(822 |
) |
|
|
5,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) |
|
|
1,241 |
|
|
|
- |
|
|
|
- |
|
|
|
1,241 |
|
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
1,901 |
|
|
$ |
2,789 |
|
|
$ |
(822 |
) |
|
$ |
3,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,555,684 |
|
|
$ |
54,153 |
|
|
$ |
(85,550 |
) |
|
$ |
1,524,287 |
|
Net loans |
|
|
1,165,214 |
|
|
|
- |
|
|
|
- |
|
|
|
1,165,214 |
|
Loans held for sale |
|
|
172 |
|
|
|
49,757 |
|
|
|
- |
|
|
|
49,929 |
|
Goodwill |
|
|
48,559 |
|
|
|
4,944 |
|
|
|
- |
|
|
|
53,503 |
|
121
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited, summarized quarterly data for the years ended December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
2010 |
|
December 31 |
|
September 30 |
|
June 30 |
|
March 31 |
|
|
(in thousands) |
Interest income |
|
$ |
24,836 |
|
|
$ |
25,129 |
|
|
$ |
24,247 |
|
|
$ |
24,790 |
|
Interest expense |
|
|
8,880 |
|
|
|
8,820 |
|
|
|
8,650 |
|
|
|
7,983 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,956 |
|
|
|
16,309 |
|
|
|
15,597 |
|
|
|
16,807 |
|
Provision for loan losses |
|
|
6,277 |
|
|
|
7,879 |
|
|
|
5,809 |
|
|
|
4,384 |
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses |
|
|
9,679 |
|
|
|
8,430 |
|
|
|
9,788 |
|
|
|
12,423 |
|
Other income |
|
|
7,332 |
|
|
|
5,572 |
|
|
|
5,454 |
|
|
|
3,780 |
|
Other expense |
|
|
16,975 |
|
|
|
17,372 |
|
|
|
14,980 |
|
|
|
14,532 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
36 |
|
|
|
(3,370 |
) |
|
|
262 |
|
|
|
1,671 |
|
Income taxes (benefit) |
|
|
(824 |
) |
|
|
(1,299 |
) |
|
|
(23 |
) |
|
|
757 |
|
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
|
860 |
|
|
|
(2,071 |
) |
|
|
285 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend and accretion
of preferred
stock discount |
|
|
868 |
|
|
|
771 |
|
|
|
771 |
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
(8 |
) |
|
$ |
(2,842 |
) |
|
$ |
(486 |
) |
|
$ |
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share- basic |
|
$ |
0.00 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
Net income (loss) per common share- diluted |
|
$ |
0.00 |
|
|
$ |
(0.18 |
) |
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
25,482 |
|
|
$ |
26,637 |
|
|
$ |
25,823 |
|
|
$ |
17,600 |
|
Interest expense |
|
|
7,620 |
|
|
|
8,256 |
|
|
|
8,269 |
|
|
|
7,686 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
17,862 |
|
|
|
18,381 |
|
|
|
17,554 |
|
|
|
9,914 |
|
Provision for loan losses |
|
|
3,146 |
|
|
|
18,285 |
|
|
|
16,458 |
|
|
|
10,550 |
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan losses |
|
|
14,716 |
|
|
|
96 |
|
|
|
1,096 |
|
|
|
(636 |
) |
Other income |
|
|
6,312 |
|
|
|
5,678 |
|
|
|
7,719 |
|
|
|
5,134 |
|
Other expense |
|
|
14,482 |
|
|
|
17,182 |
|
|
|
19,164 |
|
|
|
11,654 |
|
Goodwill impairment |
|
|
- |
|
|
|
61,566 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
6,546 |
|
|
|
(72,974 |
) |
|
|
(10,349 |
) |
|
|
(7,156 |
) |
Income taxes (benefit) |
|
|
2,629 |
|
|
|
(4,716 |
) |
|
|
(3,795 |
) |
|
|
(2,994 |
) |
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
|
3,917 |
|
|
|
(68,258 |
) |
|
|
(6,554 |
) |
|
|
(4,162 |
) |
|
|
|
|
|
|
|
|
|
Preferred stock dividend and accretion
of preferred
stock discount |
|
|
754 |
|
|
|
708 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders |
|
$ |
3,163 |
|
|
$ |
(68,966 |
) |
|
$ |
(6,554 |
) |
|
$ |
(4,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share- basic |
|
$ |
0.20 |
|
|
$ |
(4.28 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.40 |
) |
Net income (loss) per common share- diluted |
|
$ |
0.20 |
|
|
$ |
(4.28 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.40 |
) |
122
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
22. 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.
In performing our annual analysis of goodwill for the Sidus reporting unit, the Company engaged the
services of a third party to test the balance of goodwill reported for impairment. Based on the
independent opinion of the third party, in regards to the fair value of the Sidus reporting unit
which included goodwill, the fair value exceeded the carrying value indicating that there was no
goodwill impairment.
In performing the first step (Step 1) of the goodwill impairment testing and measurement process
to identify possible impairment for the Sidus reporting unit, the estimated fair value of the Sidus
reporting unit was developed using the tangible book value multiple and EBITDA multiple market
approaches. The significant inputs to the tangible book value approach include a multiple of
tangible book value of 1.25 derived from industry averages, discounted for mortgage businesses as
compared to full service bank. The EBITDA multiple market valuation approach utilizes the current
transactions of several mortgage banking companies of comparable size which translated to a
multiple of 3.6 as an indicator of fair market value. Both approaches resulted in the fair value
exceeding the carrying value. These results conclude that there was no need to continue with the
second step, and no impairment was recorded as a result of the goodwill testing performed during
2010.
We updated our Step 1 goodwill impairment testing for the Bank reporting unit as of September 30,
2009. Given the substantial declines in our common stock price, declining operating results, asset
quality trends, market comparables and the economic outlook for our industry, the results of this
Step 1 process indicated that the Bank reporting units estimated fair value was less than book
value, thus requiring a second step (Step 2) of the goodwill impairment test in accordance with
accounting for Intangibles- Goodwill and other. The Step 2 analysis included a determination of
the fair value of net assets that was compared with the fair value of the reporting units as
determined in Step 1. Assumptions included in the fair value of net assets included current market
rates for loans, deposits, and other borrowings. Based on the Step 2 analysis, it was determined
that the Banks fair value did not support the goodwill recorded; therefore, the Company recorded a
$61.6 million goodwill impairment charge to write-off all of its goodwill at the Bank reporting
unit as of September 30, 2009. This non-cash goodwill impairment charge to earnings was recorded
as a component of non-interest expense on the consolidated statement of income. No impairment was
recorded as a result of goodwill testing performed during 2008.
The following table presents changes in the carrying amount of goodwill for the year ended December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Segment |
|
Sidus Segment |
|
Total |
Balance as of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
48,559,015 |
|
|
$ |
4,943,872 |
|
|
$ |
53,502,887 |
|
Goodwill acquired during the year |
|
|
13,006,753 |
|
|
|
- |
|
|
|
13,006,753 |
|
Impairment losses |
|
|
(61,565,768 |
) |
|
|
- |
|
|
|
(61,565,768 |
) |
|
|
|
|
|
|
|
Balance as of December 31, 2010 and 2009 |
|
$ |
- |
|
|
$ |
4,943,872 |
|
|
$ |
4,943,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment losses |
|
$ |
(61,565,768 |
) |
|
$ |
- |
|
|
$ |
(61,565,768 |
) |
123
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
23. 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 Companys 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 $2.1 million, representing the
amount of outstanding fixed-rate receivables and obligations outstanding at December 31, 2010, and
are included in other assets and other liabilities at their fair value of $159,177. The Company
had a gain of $159,177 on the interest rate swap asset and a loss of $159,177 on the interest rate
swap liability for the year ended December 31, 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 Companys 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 Companys 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 Companys interest rate
lock commitments and forward-loan-sales commitments are based on current secondary market pricing
and included on the balance sheet in the 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.
At December 31, 2010, Sidus had $119.2 million of commitments outstanding to originate mortgage
loans held-for-sale at fixed prices and $167.6 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 the interest rate lock
commitments recorded in assets was $104,810 at December 31, 2010. The fair value of forward sales
commitments recorded in other assets was $161,071 at December 31, 2010. Recognition of gains
(losses) related to the change in fair value of the interest rate lock commitments and forward
sales commitments were $36,312 and $(10,247), respectively, for the year ended December 31, 2010,
and are included in mortgage banking income within noninterest income. Recognition of losses
related to the change in fair value of the interest rate lock commitments and forward sales
commitments were $85,345 and $55,199, respectively, for the year ended December 31, 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.
124
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
24. 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 December 31, 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.
25. 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. 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 took place in the first quarter of 2011.
Terminated lease payments in the amount of $220,000 have been accrued in occupancy and equipment
expense as part of this consolidation at December 31, 2010.
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 took place
in mid-November after proper notification was provided to customers.
26. LEGAL PROCEEDINGS
In the course of ordinary business, the Company may, from time to time, be named a party to legal
actions and proceedings. In accordance with GAAP, the Company establishes reserves for litigation
and regulatory matters when those matters present loss contingencies that are both probable and
estimable. When loss contingencies are not both probable and estimable, the Company does not
establish reserves. There are no material pending legal proceedings to which we are a party or of
which any of our properties are the subject.
27. PARTICIPATION IN U.S. TREASURY CAPITAL PURCHASE PROGRAM AND PRIVATE PLACEMENT OF COMMON STOCK
On January 16, 2009, the Company issued 36,000 shares of senior preferred stock, each with a
liquidation preference of $1,000 per share, to the Treasury for $36 million pursuant to the Capital
Purchase Program (CPP). Additionally, the Company issued warrants to purchase up to 385,990
shares of common stock to the U.S. Treasury as a condition to its participation in the CPP. The
warrant has an exercise price of $13.99 per share, is immediately exercisable and expires 10 years
from the date of issuance. Proceeds from this sale of preferred stock were used for general
corporate purposes, including supporting the continued growth and lending in the communities served
by the Bank. The CPP preferred stock is non-voting, other than having class voting rights on
certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first
five years and 9% thereafter. The preferred shares are redeemable at the option of the Company
under certain circumstances during the first three years and only thereafter without restriction.
In order to determine the relative value of the preferred stock, the present value of the preferred
stock cash flows, using a discount rate of 14%, was calculated as $18.2 million. The following
table shows the determination of the value attributed to the proceeds of $36 million received for
the preferred stock and warrant based on the relative values of each.
125
YADKIN VALLEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2010, 2009 and 2008
27. PARTICIPATION IN U.S. TREASURY CAPITAL PURCHASE PROGRAM AND PRIVATE PLACEMENT OF COMMON STOCK
(Continued)
Relative Value Calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
Relative Value |
|
|
(in millions) |
|
Relative Value (%) |
|
(in millions) |
NPV of Preferred (14% discount) |
|
$ |
18.2 |
|
|
|
95.3 |
% |
|
$ |
34.3 |
|
Fair Value of warrants (Black Scholes) |
|
|
0.9 |
|
|
|
4.7 |
% |
|
|
1.7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
19.1 |
|
|
|
100.0 |
% |
|
$ |
36.0 |
|
|
|
|
|
|
|
|
These common stock warrants have been assigned a fair value of $2.38 per share, or $0.9 million in
aggregate as of January 16, 2009. Using a relative fair value allocation approach, $1.7 million
was recorded as a discount on the preferred stock and will be accreted as a reduction in the net
income available for common shareholders over the next five years at $300,000 to $400,000 per year.
Under the CPP, the Company issued an additional $13.3 million in Cumulative Perpetual Preferred
Stock, Series T-ACB, on July 24, 2009. In addition, the Company issued warrants to the Treasury to
purchase 273,534 shares of the Companys common stock at an exercise price of $7.30 per share.
These warrants are immediately exercisable and expire 10 years from the date of issuance. The
preferred stock is non-voting, other than having class voting rights on certain matters, and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum
thereafter. The preferred shares are redeemable at the option of the Company under certain
circumstances during the first three years and only thereafter without restriction.
Relative Value Calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
Relative Value |
|
|
(in millions) |
|
Relative Value (%) |
|
(in millions) |
NPV of Preferred (14% discount) |
|
$ |
6.7 |
|
|
|
85.9 |
% |
|
$ |
11.4 |
|
Fair Value of warrants (Black Scholes) |
|
|
1.1 |
|
|
|
14.1 |
% |
|
|
1.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7.8 |
|
|
|
100.0 |
% |
|
$ |
13.3 |
|
|
|
|
|
|
|
|
These common stock warrants have been assigned a fair value of $3.97 per share, or $1.1 million in
aggregate as of July 24, 2009. Using a relative fair value allocation approach, $1.9 million was
recorded as a discount on the preferred stock and will be accreted as a reduction in the net income
available for common shareholders over the next five years at $300,000 to $400,000 per year.
As a condition of the CPP, the Company must obtain consent from the U.S. Treasury to repurchase its
common stock or to increase its cash dividend on its common stock from the June 30, 2009 quarterly
amount. Furthermore, the Company has agreed to certain restrictions on executive compensation.
Under the American Recovery and Reinvestment Act of 2009, the Company is limited to using
restricted stock as the form of payment to the top five highest compensated executives under any
incentive compensation programs.
126
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A Controls and Procedures
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the Companys 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 SECs 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 Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. The Companys internal control over financial reporting is a process
designed under the supervision of the Companys Chief Executive Officer and Chief Financial Officer
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Companys financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles. Management has made a comprehensive review,
evaluation and assessment of the Companys internal control over financial reporting as of December
31, 2010. In making its assessment of internal control over financial reporting, management used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal ControlIntegrated
Framework. Based on this assessment, management believes that, as
of December 31, 2010, the Companys internal control over
financial reporting is effective. In accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, management makes the following assertions:
|
|
|
Management has implemented a process to monitor and assess both the design and
operating effectiveness of internal control over financial reporting. |
|
|
|
|
Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate. |
The Companys registered public accounting firm that audited the Companys consolidated financial
statements included in this annual report has issued an attestation report on the effectiveness of
the Companys internal control over financial reporting.
127
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, changes in the Companys internal controls over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth
quarter of 2010. In connection with such evaluation, the Company has determined that there have
been no changes in internal control over financial reporting during the fourth quarter that have
materially affected or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
March 10, 2011
|
|
|
|
|
|
|
/s/ Joseph H. Towell
|
|
|
|
/s/ Jan H. Hollar
|
|
|
|
|
|
|
|
|
|
Joseph H. Towell
|
|
|
|
Jan H. Hollar |
|
|
President and Chief Executive Officer
|
|
|
|
Executive Vice President & Chief Financial Officer |
|
|
128
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Yadkin Valley Financial Corporation
Elkin, North Carolina
We
have audited Yadkin Valley Financial Corporation and subsidiary (the Company) internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our
opinion, Yadkin Valley Financial Corporation and subsidiary maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Yadkin Valley Financial Corporation
and subsidiary as of and for the year ended December 31, 2010, and our report dated March 10,
2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ Dixon Hughes PLLC
Charlotte, North Carolina
March 10, 2011
129
Item 9B Other Information
None.
PART III
Item 10 Directors and Executive Officers and Corporate Governance
The information required by this item appears under the captions Corporate Governance, Executive
Compensation and Other Information and Section 16(a) Beneficial Ownership Reporting Compliance
in Yadkins proxy statement for its 2011 annual meeting of shareholders (the Proxy Statement) and
is incorporated herein by reference.
Item 11 Executive Compensation
The information required by this Item 11 appears under the caption Proposal No.1 Election of
Directors and under the caption Executive Compensation and Other Information and Summary
Compensation Table of the Proxy Statement, and is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 regarding the security ownership of certain beneficial
owners and management is included in the section captioned Security Ownership of Certain
Beneficial Owners and Management of the Proxy Statement, which section is incorporated herein by
reference.
The following table sets forth equity compensation plan information at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
Number of securities |
|
|
|
|
|
remaining available for |
|
|
to be issued |
|
Weighted-average |
|
future issuance under |
|
|
upon exercise of |
|
exercise price of |
|
equity compensation plans |
|
|
outstanding options, |
|
outstanding options, |
|
(excluding securities |
|
|
warrants and rights |
|
warrants and rights |
|
reflected in column (a)) |
|
|
(a) |
|
(b) |
|
(c) |
Equity compensation plans approved by
shareholders |
|
|
421,130 |
|
|
|
13.42 |
|
|
|
197,853 |
|
Equity compensation plans not approved
by shareholders |
|
NA |
|
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
Total |
|
|
421,130 |
|
|
$ |
13.42 |
|
|
|
197,853 |
|
|
|
|
|
|
|
|
A description of Yadkins equity compensation plans is presented in Note 12 to the accompanying
consolidated financial statements.
Item 13 Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is included in the sections captioned Corporate
Governance, Proposal No. 1: Election of Directors, Family Relationships and Compensation
Committee Interlocks and Insider Participation of the Proxy Statement, which sections are
incorporated by reference.
Item 14 Principal Accounting Fees and Services
The information required by this Item 14 is included in the section captioned Independent
Registered Public Accounting Firm of the Proxy Statement, which section is incorporated herein by
reference.
130
PART IV
Item 15 Exhibits, Financial Statement Schedules
(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.
|
|
|
|
|
Financial Statements |
|
Form 10-K Page |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
76 |
|
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under
Regulation S-X have been included in the Notes to the Consolidated Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
|
|
|
Exhibit No. |
|
Description |
|
|
|
Exhibit 2.1
|
|
Agreement and Plan of Merger by and between Yadkin Valley Financial Corporation and American
Community Bancshares, Inc. dated as of September 9, 2008 (incorporated by reference to 2.1 of
the Form 8-K filed on September 10, 2008) |
|
|
|
Exhibit 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) |
|
|
|
Exhibit 3.2:
|
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Form 8-K filed on
December 19, 2008) |
|
|
|
Exhibit 3.3
|
|
Articles of Amendment to the Companys Restated Articles of Incorporation establishing the
terms of the Series T Preferred Stock (incorporated by reference to Exhibit 3.1 to the Form 8-K
filed on January 20, 2009) |
|
|
|
Exhibit 3.4
|
|
Articles of Amendment to the Companys Restated Articles of Incorporation establishing the
terms of the Series T-ACB Preferred Stock (incorporated by reference to Exhibit 3.1 to the Form
8-K filed on July 27, 2009) |
|
|
|
Exhibit 4.1:
|
|
Specimen certificate for Common Stock (incorporated by reference to Exhibit 3.2 to the Annual
Report on Form 10K for the year ended December 31, 2006) |
|
|
|
Exhibit 4.2
|
|
Form of Series T Preferred Stock Certificate issued to The United States Department of the
Treasury (incorporated by reference to Exhibit 4.2 to the Form 8-K filed January 20, 2009) |
131
|
|
|
|
|
|
Exhibit 4.3
|
|
Form of Series T-ACB Preferred Stock Certificate issued to The United States Department of the
Treasury (incorporated by reference to Exhibit 4.2 to the Form 8-K filed July 27, 2009) |
|
|
|
Exhibit 4.4
|
|
Warrant to Purchase up to 385,990 shares of Common Stock (incorporated by reference to Exhibit
4.1 to the Form 8-K filed on January 20, 2009) |
|
|
|
Exhibit 4.5
|
|
Warrant to Purchase up to 13,312 shares of Common Stock (incorporated by reference to Exhibit
4.1 to the Form 8-K filed on July 27, 2009) |
|
|
|
Exhibit 10.1
|
|
Yadkin Valley Financial Corporation 1998 Employees Incentive Stock Option Plan (incorporated by
reference to Exhibit 4 to Registration Statement on Form S-8 filed August 8, 2006* |
|
|
|
Exhibit 10.2
|
|
Yadkin Valley Financial Corporation 1999 Stock Option Plan (incorporated by reference to
Exhibit 4 to Registration Statement on Form S-8 filed
August 8, 2006)* |
|
|
|
Exhibit 10.3
|
|
Yadkin Valley Financial Corporation 1998 Non-Statutory Stock Option Plan (incorporated by
reference to Exhibit 4 to Registration Statement on
Form S-8 filed August 8, 2006)* |
|
|
|
Exhibit 10.4
|
|
Yadkin Valley Financial Corporation 1998 Incentive Stock Option Plan (incorporated by reference
to Exhibit 4 to Registration Statement on Form S-8 filed August 8, 2006)* |
|
|
|
Exhibit 10.5
|
|
Amended and Restated Employment Agreement with William A. Long (incorporated by reference to
Exhibit 10.5 to the Annual Report on Form 10-K for the year ended December 31, 2008)* |
|
|
|
Exhibit 10.6
|
|
Retirement and Transition Agreement with William A. Long (attached hereto)* |
|
|
|
Exhibit 10.7
|
|
Amended and Restated Employment Agreement with Joseph H. Towell (incorporated by reference to
Exhibit 10.2 of Form 8-K filed on November 24, 2010)* |
|
|
|
Exhibit 10.8
|
|
Amendment to Amended and Restated Employment Agreement with Joseph H. Towell (incorporated by
reference to Exhibit 10.3 of Form 8-K filed on November 24, 2010)* |
|
|
|
Exhibit 10.9
|
|
Employment Agreement with Jan H. Hollar (incorporated by reference to Exhibit 10.1 to Form 8-K
filed June 22, 2010)* |
|
|
|
Exhibit 10.10
|
|
Amendment to Employment Agreement with Jan H. Hollar (incorporated by reference to Exhibit 10.1
filed November 24, 2010)* |
|
|
|
Exhibit 10.11
|
|
Employment Agreement with William M. DeMarcus (incorporated by reference to Exhibit 10.5 of
Form 8-K filed on November 24, 2010)* |
|
|
|
Exhibit 10.12
|
|
Amended and Restated Employment Agreement with Stephen S. Robinson (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2008)* |
|
|
|
Exhibit 10.13
|
|
Amendment to Amended and Restated Employment Agreement with Stephen S. Robinson (incorporated
by reference to Exhibit 10.1 of Form 8-K filed on August 24, 2010)* |
|
|
|
Exhibit 10.14
|
|
2007 Group Term Carve Out Plan (incorporated by reference to Exhibit 10.7 to the Annual Report
on Form 10-K for the year ended December 31, 2007)* |
132
|
|
|
Exhibit 10.15
|
|
Letter Agreement, dated January 16, 2009, including Securities Purchase Agreement Standard
Terms incorporated by reference therein, between the Company and the United States Department
of the Treasury (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 20,
2009) |
|
|
|
Exhibit 10.16
|
|
Form of Waiver, executed by each of John M. Brubaker, Joe K. Johnson, William A. Long, John W.
Mallard, Jr., Edward L. Marxen, Stephen S. Robinson, and Joseph H. Towell (incorporated by
reference to Exhibit 10.2 to the Form 8-K filed on January 20, 2009)* |
|
|
|
Exhibit 10.17
|
|
Form of Letter Agreement, executed
by each of John M. Brubaker, Joe K. Johnson, William A. Long, John W. Mallard, Jr., Edward L.
Marxen, Stephen S. Robinson, and Joseph H. Towell with the Company (incorporated by reference
to Exhibit 10.3 to the Form 8-K filed on January 20, 2009)* |
|
|
|
Exhibit 10.18
|
|
Letter Agreement, dated July 24, 2009, including Securities Purchase Agreement Standard
Terms incorporated by reference therein, between the Company and the United States Department
of the Treasury (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on July 27,
2009) |
|
|
|
Exhibit 10.19
|
|
ARRA Side Letter Agreement, dated July 24, 2009, between the Company and the United States
Department of the Treasury (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on
July 27, 2009) |
|
|
|
Exhibit 10.20
|
|
Form of Waiver, executed by each of John M. Brubaker, William A. Long, Jan H. Hollar, William
M. DeMarcus, John W. Mallard, and Stephen S. Robinson (incorporated by reference to Exhibit
10.3 to the Form 8-K filed on July 27, 2009)* |
|
|
|
Exhibit 10.21
|
|
Form of Letter Amendment, executed by each of John M. Brubaker, William A. Long, Jan H. Hollar,
William M. DeMarcus, John W. Mallard, Jr., and Stephen S. Robinson with the Company
(incorporated by reference to Exhibit 10.4 to the Form 8-K filed on July 27, 2009)* |
|
|
|
Exhibit 10.22
|
|
2008 Omnibus Stock Ownership and Long-Term Incentive Plan (incorporated by reference to Exhibit
4 to the Form S-8 filed on September 5, 2008).* |
|
|
|
Exhibit 21:
|
|
Subsidiaries of the Registrant |
|
|
|
Exhibit 23:
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
Exhibit 31.1:
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
Exhibit 31.2:
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
Exhibit 32:
|
|
Section 1350 Certification |
|
|
|
Exhibit 99.1
|
|
TARP Certification of Chief Executive Officer |
|
|
|
Exhibit 99.2
|
|
TARP Certification of Chief Financial Officer |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
Copies of exhibits are available upon written request to Corporate Secretary, Yadkin Valley
Financial Corporation, P.O. Drawer 888, Elkin, North Carolina 28621.
133
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
YADKIN VALLEY FINANCIAL CORPORATION
|
|
|
|
|
|
|
By:
|
|
/s/ Joseph H. Towell
|
|
|
|
Date: March 10, 2011 |
|
|
|
|
|
|
|
|
|
Joseph H. Towell |
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jan H. Hollar
|
|
|
|
Date: March 10, 2011 |
|
|
|
|
|
|
|
|
|
Jan H. Hollar |
|
|
|
|
|
|
Principal Accounting
Officer and Chief Financial Officer |
|
|
|
|
134
In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
/s/ Joseph H. Towell
|
|
Date: March 10, 2011 |
|
|
|
President, Chief Executive Officer, and
Director |
|
|
|
|
|
/s/ Ralph L. Bentley
|
|
Date: March 10, 2011 |
|
|
|
Director |
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/s/ J. T. Alexander, Jr.
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Date: March 10, 2011 |
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Director |
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/s/ Nolan G. Brown
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Date: March 10, 2011 |
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Director |
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/s/ Harry M. Davis
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Date: March 10, 2011 |
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Director |
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/s/ Thomas J. Hall
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Date: March 10, 2011 |
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Director |
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/s/ James A. Harrell, Jr.
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Date: March 10, 2011 |
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Director |
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/s/ Larry S. Helms
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Date: March 10, 2011 |
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Director |
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/s/ Dan W. Hill, III
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Date: March 10, 2011 |
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Director |
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/s/ Jan H. Hollar
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Date: March 10, 2011 |
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Executive Vice President and Chief Financial Officer |
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/s/ James L. Poindexter
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Date: March 10, 2011 |
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Director |
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/s/ Morris L. Shambley
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Date: March 10, 2011 |
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Director |
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/s / Alison J. Smith
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Date: March 10, 2011 |
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Director |
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135
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/s / James N. Smoak
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Date: March 10, 2011 |
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Director |
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/s/ Harry C. Spell
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Date: March 10, 2011 |
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Director |
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/s/ C. Kenneth Wilcox
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Date: March 10, 2011 |
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Director |
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136