Yadkin Valley Financial Corporation
US Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2007
Commission File Number 0001366367
Yadkin Valley Financial Corporation
(Exact name of registrant specified in its charter)
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North Carolina
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20-4495993 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
209 North Bridge Street, Elkin, North Carolina 28621
(address of principal executive offices)
336-526-6300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Common shares outstanding as of July 31, 2007, par value $1.00 per share, were 10,591,255.
The registrant has no other classes of securities outstanding.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
1
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Part I. Financial Information |
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Item 1. Financial Statements |
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3 |
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4 |
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5 |
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6 |
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7-11 |
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11-18 |
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18 |
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18 |
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19 |
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19 |
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20 |
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21 |
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Exhibits |
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22-24 |
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Ex-31.1 |
Ex-31.2 |
Ex-32.1 |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
2
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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JUNE 30, |
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DECEMBER 31, |
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2007 |
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2006* |
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ASSETS |
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CASH AND CASH EQUIVALENTS |
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Cash and due from banks |
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$ |
24,584,182 |
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$ |
42,387,101 |
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Federal funds sold |
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11,264,000 |
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— |
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Interest-bearing deposits |
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8,275,081 |
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1,669,033 |
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Total cash and cash equivalents |
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44,123,263 |
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44,056,134 |
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SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $138,640,652 in 2007 and $128,278,242 in 2006) |
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136,453,530 |
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127,520,514 |
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GROSS LOANS |
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816,467,436 |
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814,909,853 |
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Less: Allowance for loan losses |
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(11,276,486 |
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(10,828,882 |
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NET LOANS |
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805,190,950 |
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804,080,971 |
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LOANS HELD FOR SALE |
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40,888,618 |
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42,350,915 |
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ACCRUED INTEREST RECEIVABLE |
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5,828,602 |
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5,796,450 |
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PREMISES AND EQUIPMENT, NET |
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27,806,657 |
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27,098,420 |
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FEDERAL HOME LOAN BANK STOCK, AT COST |
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2,782,300 |
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3,632,600 |
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INVESTMENT IN BANK-OWNED LIFE INSURANCE |
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22,531,838 |
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22,796,932 |
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GOODWILL |
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32,696,900 |
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32,696,900 |
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CORE DEPOSIT INTANGIBLE (net of accumulated
amortization of $3,836,737 in 2007 and $3,441,799 in 2006) |
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4,642,771 |
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5,037,709 |
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OTHER ASSETS |
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6,510,611 |
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4,834,028 |
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TOTAL ASSETS |
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$ |
1,129,456,040 |
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$ |
1,119,901,573 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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DEPOSITS |
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Noninterest-bearing demand deposits |
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$ |
156,776,241 |
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$ |
151,811,660 |
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Interest-bearing deposits: |
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NOW, savings, and money market accounts |
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229,365,719 |
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233,031,838 |
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Time certificates: |
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Over $100,000 |
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243,921,503 |
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228,553,689 |
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Other |
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312,451,120 |
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294,449,712 |
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Total deposits |
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942,514,583 |
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907,846,899 |
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SHORT-TERM BORROWINGS |
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37,911,335 |
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62,062,598 |
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LONG-TERM BORROWINGS |
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12,000,000 |
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17,000,000 |
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ACCRUED INTEREST PAYABLE |
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3,378,851 |
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2,975,097 |
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OTHER LIABILITIES |
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5,670,077 |
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5,617,838 |
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TOTAL LIABILITIES |
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1,001,474,846 |
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995,502,432 |
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STOCKHOLDERS’ EQUITY |
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Common stock, $1.00 par value; authorized 20,000,000
shares; issued 10,608,287 shares in 2007 and 10,611,052
shares in 2006 |
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10,608,287 |
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10,611,052 |
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SURPLUS |
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71,204,636 |
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71,151,626 |
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RETAINED EARNINGS |
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47,512,705 |
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43,107,431 |
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ACCUMULATED OTHER COMPREHENSIVE LOSS |
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(1,344,434 |
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(470,968 |
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TOTAL STOCKHOLDERS’ EQUITY |
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127,981,194 |
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124,399,141 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
1,129,456,040 |
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$ |
1,119,901,573 |
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* |
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Derived from audited consolidated financial statements |
See Notes to Condensed Consolidated Financial Statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
3
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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INTEREST INCOME |
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Interest and fees on loans |
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$ |
16,915,817 |
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$ |
15,433,527 |
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$ |
33,324,966 |
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$ |
29,254,917 |
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Interest on federal funds sold |
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128,245 |
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39,057 |
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168,188 |
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65,382 |
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Interest on securities: |
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Taxable |
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1,261,819 |
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994,532 |
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2,488,271 |
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1,853,593 |
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Non-taxable |
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291,810 |
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282,566 |
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578,722 |
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571,859 |
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Interest-bearing deposits |
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49,417 |
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12,199 |
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62,730 |
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51,599 |
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Total interest income |
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18,647,108 |
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16,761,881 |
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36,622,877 |
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31,797,350 |
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INTEREST EXPENSE |
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Time deposits of $100,000 or more |
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3,008,730 |
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1,989,878 |
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5,727,199 |
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3,642,223 |
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Other deposits |
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4,757,494 |
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3,595,299 |
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9,249,568 |
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6,865,008 |
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Borrowed funds |
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471,799 |
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863,282 |
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1,020,229 |
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1,182,005 |
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Total interest expense |
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8,238,023 |
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6,448,459 |
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15,996,996 |
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11,689,236 |
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NET INTEREST INCOME |
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10,409,085 |
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10,313,422 |
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20,625,881 |
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20,108,114 |
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PROVISION FOR LOAN LOSSES |
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200,000 |
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550,000 |
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500,000 |
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1,115,000 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
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10,209,085 |
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9,763,422 |
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20,125,881 |
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18,993,114 |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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954,231 |
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904,694 |
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1,934,646 |
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1,801,840 |
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Other service fees |
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1,013,679 |
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798,430 |
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1,855,800 |
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1,568,527 |
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Net gain on sales of mortgage loans |
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1,645,664 |
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1,519,340 |
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3,056,366 |
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2,683,759 |
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Net gain on sales of investment securities |
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— |
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7,000 |
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— |
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18,724 |
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Income on investment in bank owned life insurance |
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313,574 |
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146,801 |
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530,343 |
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291,725 |
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Mortgage banking income |
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132,981 |
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49,027 |
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212,267 |
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127,906 |
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Bank owned life insurance death benefit |
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— |
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— |
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481,940 |
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— |
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Other income |
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52,385 |
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64,120 |
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119,780 |
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139,703 |
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Total noninterest income |
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4,112,514 |
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3,489,412 |
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8,191,142 |
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6,632,184 |
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NONINTEREST EXPENSE |
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Salaries and employee benefits |
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4,989,416 |
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4,559,281 |
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9,828,017 |
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9,124,480 |
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Occupancy and equipment expenses |
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987,709 |
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916,421 |
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2,002,617 |
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1,870,945 |
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Printing and supplies |
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139,165 |
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131,946 |
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282,670 |
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|
293,677 |
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Data processing |
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109,712 |
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93,585 |
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210,639 |
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|
206,089 |
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Amortization of core deposit intangible |
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197,468 |
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207,429 |
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394,937 |
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414,859 |
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Other |
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2,259,602 |
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1,996,651 |
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4,228,600 |
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3,917,637 |
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Total noninterest expense |
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8,683,072 |
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7,905,313 |
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16,947,480 |
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15,827,687 |
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INCOME BEFORE INCOME TAXES |
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5,638,527 |
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5,347,521 |
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11,369,543 |
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9,797,611 |
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INCOME TAXES |
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1,852,128 |
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1,927,697 |
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3,670,738 |
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3,449,584 |
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NET INCOME |
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$ |
3,786,399 |
|
|
$ |
3,419,824 |
|
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$ |
7,698,805 |
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$ |
6,348,027 |
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NET INCOME PER COMMON SHARE: |
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Basic |
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$ |
0.36 |
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$ |
0.32 |
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|
$ |
0.73 |
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$ |
0.60 |
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Diluted |
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$ |
0.35 |
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$ |
0.32 |
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$ |
0.71 |
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$ |
0.59 |
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CASH DIVIDENDS PER COMMON SHARE |
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$ |
0.13 |
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$ |
0.12 |
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$ |
0.25 |
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$ |
0.23 |
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See Notes to Condensed Consolidated Financial Statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
4
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
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Three Months Ended |
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Six Months Ended |
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|
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June 30, |
|
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June 30, |
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2007 |
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2006 |
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|
2007 |
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2006 |
|
NET INCOME |
|
$ |
3,786,399 |
|
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$ |
3,419,824 |
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$ |
7,698,805 |
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|
$ |
6,348,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS, BEFORE TAX: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities
available for sale |
|
|
(1,966,042 |
) |
|
|
(768,296 |
) |
|
|
(1,429,393 |
) |
|
|
(937,763 |
) |
Tax effect |
|
|
762,538 |
|
|
|
295,794 |
|
|
|
555,927 |
|
|
|
361,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities
available for sale, net of tax |
|
|
(1,203,504 |
) |
|
|
(472,502 |
) |
|
|
(873,466 |
) |
|
|
(576,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains |
|
|
— |
|
|
|
(7,000 |
) |
|
|
— |
|
|
|
(18,724 |
) |
Tax effect |
|
|
— |
|
|
|
2,695 |
|
|
|
— |
|
|
|
7,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized
gains, net of tax |
|
|
— |
|
|
|
(4,305 |
) |
|
|
— |
|
|
|
(11,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE LOSS, NET OF TAX |
|
|
(1,203,504 |
) |
|
|
(476,807 |
) |
|
|
(873,466 |
) |
|
|
(588,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
2,582,895 |
|
|
$ |
2,943,017 |
|
|
$ |
6,825,339 |
|
|
$ |
5,759,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
5
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,698,805 |
|
|
$ |
6,348,027 |
|
Adjustments to reconcile net income to net cash used by
operating activities: |
|
|
|
|
|
|
|
|
Net amortization of premiums on investment securities |
|
|
42,931 |
|
|
|
178,543 |
|
Provision for loan losses |
|
|
500,000 |
|
|
|
1,115,000 |
|
Net gain on sales of mortgage loans held for sale |
|
|
(3,056,366 |
) |
|
|
(2,683,759 |
) |
Net loss on sales of available for sale securities |
|
|
— |
|
|
|
19,305 |
|
(Increase) decrease in investment in Bank owned life insurance |
|
|
265,093 |
|
|
|
(291,725 |
) |
Depreciation and amortization |
|
|
1,000,210 |
|
|
|
976,249 |
|
Net (gain) loss on sale of premises and equipment |
|
|
(7,030 |
) |
|
|
47,860 |
|
Amortization of core deposit intangible |
|
|
394,937 |
|
|
|
414,859 |
|
Originations of mortgage loans held-for-sale |
|
|
(495,955,031 |
) |
|
|
(400,175,144 |
) |
Proceeds from sales of mortgage loans |
|
|
500,473,694 |
|
|
|
389,385,559 |
|
Increase in accrued interest receivable |
|
|
(32,151 |
) |
|
|
(312,983 |
) |
(Increase) decrease in other assets |
|
|
(1,676,582 |
) |
|
|
468,956 |
|
Increase in accrued interest payable |
|
|
403,754 |
|
|
|
812,088 |
|
Increase (decrease) in other liabilities |
|
|
594,417 |
|
|
|
(1,315,896 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
10,646,681 |
|
|
|
(5,013,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of available for sale securities |
|
|
(21,325,213 |
) |
|
|
(23,048,964 |
) |
Proceeds from sales of available for sale securities |
|
|
7,998,622 |
|
|
|
5,000,860 |
|
Proceeds from maturities of available for sale securities |
|
|
2,935,000 |
|
|
|
8,310,000 |
|
Net change in loans |
|
|
(1,609,979 |
) |
|
|
(38,484,714 |
) |
Purchases of premises and equipment |
|
|
(1,732,340 |
) |
|
|
(1,139,715 |
) |
Proceeds from redemption of Federal Home Loan Bank stock |
|
|
850,300 |
|
|
|
985,500 |
|
Purchases of Federal Home Loan Bank stock |
|
|
— |
|
|
|
(1,256,100 |
) |
Proceeds from sale of premises and equipment |
|
|
30,925 |
|
|
|
28,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,852,685 |
) |
|
|
(49,604,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in checking, NOW, money market
and savings accounts |
|
|
1,298,462 |
|
|
|
2,545,942 |
|
Net increase in time certificates |
|
|
33,369,222 |
|
|
|
50,190,609 |
|
Net increase (decrease) in borrowed funds |
|
|
(29,151,263 |
) |
|
|
1,285,148 |
|
Purchases of common stock |
|
|
(939,774 |
) |
|
|
(516,063 |
) |
Dividends paid |
|
|
(2,653,633 |
) |
|
|
(2,451,207 |
) |
Proceeds from exercise of stock options |
|
|
350,119 |
|
|
|
26,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,273,133 |
|
|
|
51,081,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |
|
|
67,129 |
|
|
|
(3,536,373 |
) |
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
44,056,134 |
|
|
|
55,493,487 |
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
44,123,263 |
|
|
$ |
51,957,114 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
6
Notes to Unaudited Condensed Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Yadkin Valley Financial Corporation and its subsidiary, Yadkin Valley Bank and Trust Company. On
July 1, 2006, Yadkin Valley Bank and Trust Company (the “Bank”) became a subsidiary of Yadkin
Valley Financial Corporation (the “Company”) through a one for one share exchange of the then
outstanding 10,648,300 shares. The interim financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America for interim financial
statements and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements. Because
the accompanying condensed consolidated financial statements do not include all of the information
and footnotes required by GAAP, they should be read in conjunction with the audited financial
statements and accompanying footnotes filed with the Company’s 2006 Annual Report on Form 10-K.
Operating results for the three and six months ended June 30, 2007 do not necessarily indicate the
results that may be expected for the year or other interim periods.
In the opinion of management, the accompanying condensed consolidated financial statements contain
all the adjustments, all of which are normal recurring adjustments, necessary to present fairly the
financial position of the Company as of June 30, 2007 and December 31, 2006, and the results of its
operations and cash flows for the three and six months ended June 30, 2007 and 2006. The
accounting policies followed are set forth in Note 1 to the Company’s 2006 10-K Annual Report to
Shareholders filed with the Securities and Exchange Commission.
2. Stock-based Compensation
During the three and six months ended June 30, 2007, 2,728 and 3,571 options, respectively, were
vested. At June 30, 2007 there were 59,297 options unvested and 89,130 shares of common stock
available for future grants of options. During the second quarter 2007, there were no options
granted. 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 2007: dividend yield of 2.52%, expected volatility of 11.8%, risk-free interest rate of 5.25%,
and expected life of 7 years. During the first six months of 2007, 52,500 options were granted
with a weighted-average fair value of $3.53 per option and a five year vesting period. No options
were granted during the first six months of 2006.
The compensation expense charged against income was $11,581 ($7,007, net of income tax) for the
three month period ending June 30, 2007 and $23,162 ($14,013, net of income tax) for the six-month
period ending June 30, 2007. The Company elected the modified-prospective method, under which prior
periods are not revised for comparative purposes. The valuation provisions of SFAS 123(R) apply to
new grants and to grants that were outstanding as of the effective date and are subsequently
modified. Estimated compensation for grants that were outstanding as of the effective date will be
recognized over the remaining service period using the compensation cost estimated for the SFAS 123
pro forma disclosures. As of June 30, 2007 there was $182,501 of total unrecognized compensation
costs related to nonvested share-based compensation arrangements granted under all of the Company’s
stock benefit plans. This cost is expected to be recognized over a weighted-average period of 2.4
years.
The adoption of SFAS 123(R) did not have a material impact on our consolidated financial position,
results of operations or cash flows.
Prior to the adoption of SFAS No. 123(R), the Company used the intrinsic value method as prescribed
by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices
equal to the fair market value of the Company’s common stock on the date of the grant.
Cash received from the options exercised during the three and six months ended June 30, 2007 were
$158,790 and $ 350,119, respectively. Cash received from the options exercised during the three
and six months ended June 30, 2006
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
7
were $1,240 and $26,821, respectively. The exercises in 2007
included 26,811 director options that had been granted under stock option plans at other banks
prior to the acquisition of those banks by the Bank.
3. Commitments and Contingencies
In the normal course of business, there are various outstanding commitments and contingent
liabilities, such as commitments to extend credit, which are not reflected in the accompanying
financial statements. At June 30, 2007, the Company had commitments outstanding of $235.2 million
for additional loan amounts and $4.4 million under standby letters of credit excluding Sidus’
commitments. Management does not expect any significant losses to result from these commitments.
At June 30, 2007, Sidus had $155.9 million of commitments outstanding to close mortgage loans at
fixed prices and $155.9 million of commitments outstanding to sell mortgages to agencies and other
investors.
4. Pending Litigation
The Company has pending litigation relating to former employees’ suit for breach of contract.
Management does not expect the settlement to have an impact on results of operations in the future,
although the outcome is uncertain.
5. Earnings per share
Basic net income per share is computed by dividing net income by the weighted average number of
shares of common stock outstanding for the reporting periods. Diluted net income per share
reflects the potential dilution that could occur if the Company’s common stock equivalents, which
consist of dilutive stock options, were exercised. The numerators of the basic net income per
share computations are the same as the numerators of the diluted net income per share computations
for all the periods presented. A reconciliation of the denominator of the basic net income per
share computations to the denominator of the diluted net income per share computations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Basic EPS denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common
shares outstanding |
|
|
10,613,687 |
|
|
|
10,650,739 |
|
|
|
10,613,902 |
|
|
|
10,660,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect
arising from assumed
exercise of stock
options |
|
|
178,741 |
|
|
|
137,081 |
|
|
|
184,037 |
|
|
|
140,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS denominator |
|
|
10,792,428 |
|
|
|
10,787,821 |
|
|
|
10,797,939 |
|
|
|
10,800,704 |
|
|
|
|
During the quarter ended June 30, 2007, the average market price of $18.90 was less than the
exercise price of $19.07 for 52,500 options, and these options were excluded from the computation
of diluted shares. During the first six months of 2007, the exercise prices of all the outstanding
options were lower than the average market price per share of $19.17; therefore, all options were
included in the computation of diluted shares.
6. Stockholders’ Equity
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
8
On June 21, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.13
per share to all shareholders of record on July 6, 2007, and payable July 24, 2007. The dividend
reduced shareholders’ equity by $1,379,026.
During the three and six months ended June 30, 2007, 21,932 and 45,843 stock options were exercised
with net proceeds of $158,790 and $350,119, respectively.
Following reorganization as a holding company on July 1, 2006, the Board of Directors of Yadkin
Valley Financial Corporation approved stock repurchases of up to 100,000 shares (“2006 plan”).
During the second quarter of 2007, the remaining 18,790 shares in this plan were repurchased at an
average per share cost of $19.03. The average price of all 2006 plan repurchases was $17.24 per
share. On May 24, 2007, the Board approved another plan to repurchase up to 100,000 shares (“2007
plan”), and during the quarter the Company purchased 112 shares at a cost of $19.04 per share under
the 2007 plan.
7. Business Segment Information
Sidus Financial, LLC 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 to its customers in North Carolina, South Carolina, Virginia, Georgia, Alabama, Florida,
Maryland, Kentucky, West Virginia, Arkansas, Pennsylvania, Mississippi, Louisiana, Delaware and
Tennessee. The following table details the results of operations for the first six months of 2007
and 2006 for the Company and for Sidus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
Bank |
|
|
Sidus |
|
|
Other |
|
|
Total |
|
|
Interest income (1) |
|
$ |
35,320,232 |
|
|
$ |
1,379,645 |
|
|
$ |
(77,000 |
) |
|
$ |
36,622,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,979,819 |
|
|
|
1,096,223 |
|
|
|
(79,046 |
) |
|
|
15,996,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
20,340,413 |
|
|
|
283,422 |
|
|
|
2,046 |
|
|
|
20,625,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
500,000 |
|
|
|
— |
|
|
|
— |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
19,840,413 |
|
|
|
283,422 |
|
|
|
2,046 |
|
|
|
20,125,881 |
|
Net gain (loss) on sale
of investment Securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
5,134,776 |
|
|
|
3,056,366 |
|
|
|
— |
|
|
|
8,191,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
14,330,830 |
|
|
|
2,530,164 |
|
|
|
86,486 |
|
|
|
16,947,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,644,359 |
|
|
|
809,624 |
|
|
|
(84,440 |
) |
|
|
11,369,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (2) |
|
|
3,354,985 |
|
|
|
315,753 |
|
|
|
— |
|
|
|
3,670,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,289,374 |
|
|
$ |
493,871 |
|
|
|
(84,440 |
) |
|
$ |
7,698,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (3) |
|
$ |
1,144,643,474 |
|
|
$ |
47,638,748 |
|
|
$ |
(62,826,182 |
) |
|
$ |
1,129,456,040 |
|
Net loans |
|
|
805,190,950 |
|
|
|
— |
|
|
|
— |
|
|
|
805,190,950 |
|
Loans held for sale |
|
|
97,000 |
|
|
|
40,791,618 |
|
|
|
— |
|
|
|
40,888,618 |
|
Goodwill |
|
|
32,696,900 |
|
|
|
4,943,872 |
|
|
$ |
(4,943,872 |
) |
|
|
32,696,900 |
|
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
Bank |
|
|
Sidus |
|
|
Other |
|
|
Total |
|
|
Interest income (1) |
|
$ |
30,816,097 |
|
|
$ |
1,109,971 |
|
|
$ |
(128,718 |
) |
|
$ |
31,797,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
10,929,906 |
|
|
|
888,048 |
|
|
|
(128,718 |
) |
|
|
11,689,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
19,886,191 |
|
|
|
221,923 |
|
|
|
— |
|
|
|
20,108,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,115,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,115,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
18,771,191 |
|
|
|
221,923 |
|
|
|
— |
|
|
|
18,993,114 |
|
Net gain (loss) on sale
of investment Securities |
|
|
18,724 |
|
|
|
— |
|
|
|
— |
|
|
|
18,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
3,929,701 |
|
|
|
2,683,759 |
|
|
|
— |
|
|
|
6,613,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
13,302,959 |
|
|
|
2,524,728 |
|
|
|
— |
|
|
|
15,827,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,416,657 |
|
|
|
380,954 |
|
|
|
— |
|
|
|
9,797,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (2) |
|
|
3,302,917 |
|
|
|
146,667 |
|
|
|
— |
|
|
|
3,449,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,113,740 |
|
|
$ |
234,287 |
|
|
|
— |
|
|
$ |
6,348,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (3) |
|
$ |
1,091,976,384 |
|
|
$ |
50,895,026 |
|
|
$ |
(62,607,883 |
) |
|
$ |
1,080,263,527 |
|
Net loans |
|
|
765,426,104 |
|
|
|
— |
|
|
|
— |
|
|
|
765,426,104 |
|
Loans held for sale |
|
|
— |
|
|
|
44,900,073 |
|
|
|
— |
|
|
|
44,900,073 |
|
Goodwill |
|
|
32,136,183 |
|
|
|
4,383,155 |
|
|
|
(4,383,155 |
) |
|
|
32,136,183 |
|
|
|
|
(1) |
|
Note: The Bank allocates interest expense to Sidus based on the Bank’s cost of funds plus an
additional charge of 87.5 basis points. The additional basis points charge, reflected in interest
income to the Bank and interest expense to Sidus, is eliminated in the “Other” column. |
|
(2) |
|
Note: Income tax expense has been allocated to the Sidus business segment for comparative
purposes. As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which
is taxed on that income. |
|
(3) |
|
Note: The “Other” column includes asset eliminations representing the Bank’s Due from Sidus
account ($55,000,000 in 2007 and 2006), the Bank’s Investment in Sidus ($3,000,000 in 2007 and
2006), the Bank’s A/R from Sidus ($191,797 in 2007 and $224,728 in 2006), and Sidus’ Goodwill
account ($4,943,872 in 2007 and $4,383,155 in 2006). Also included in this column are Holding
Company assets ($309,487 in 2007 and $2,461 in 2006) and Holding Company income and expenses. |
8. Business Combination
The Company has entered into a definitive agreement, subject to regulatory and shareholder
approval, with Cardinal State Bank (“Cardinal”), headquartered in Durham, NC, where Cardinal
shareholders will receive $17.62 per share in a total transaction value of approximately $41.8
million. Cardinal shareholders will elect to receive either Yadkin Valley Financial Corporation
stock or cash subject to the following allocation: 42% of Cardinal stock will be exchanged for
Yadkin stock and 58% exchanged for cash. The acquisition is expected to take place in the fourth
quarter. Further details are available in the press release and Form 8-K filed June 14, 2007.
Press releases are available on our website at www.yadkinvalleybank.com.
9. Reclassifications
Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007
presentation. The reclassifications had no effect on net income or stockholders’ equity, as
previously reported.
10. New Accounting Standards
In the first quarter of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 156,
“Accounting for Servicing of Financial Assets” (“SFAS No.156”). SFAS No.156 sets accounting
requirements for separately recognizing a servicing asset or a servicing liability when a company
undertakes an obligation to service a financial asset under a
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
10
servicing contract in certain
situations. Such servicing assets or servicing liabilities are required to be initially measured
at fair value, if practicable. SFAS No. 156 also allows an entity to choose one of two methods when
subsequently measuring its servicing assets and servicing liabilities (1) the amortization method
or (2) the fair value measurement method. The amortization method existed under Statement 140 and
remains unchanged in (1) allowing entities to amortize their servicing assets or servicing
liabilities in proportion to and over the period of estimated net servicing income or net servicing
loss and (2) requiring the assessment of those servicing assets or servicing liabilities for
impairment or increased obligation based on fair value at each reporting date. The fair value
measurement method allows entities to measure their servicing assets or servicing liabilities at
fair value each reporting date and report changes in fair value in earnings in the period the
change occurs. SFAS No. 156 permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights upon initial adoption, provided
certain criteria are met. The Company adopted SFAS No. 156 in the first quarter of 2007 and the
adoption did not have a material impact on its financial position and results of operations,
including the valuation methods and support for the assumptions that underlie the valuation.
In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in
accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to
be recognized, measured, and derecognized in financial statements; requires certain disclosures of
uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on
the balance sheet; and provides transition and interim period guidance, among other provisions. FIN
48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective
for the Company in the first quarter of fiscal 2007. Adoption on January 1, 2007 did not have a
material effect on the Company.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
When used in this report, the words or phrases “will likely result,” “should,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project” or other similar expressions are intended
to identify “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the market area, and competition and other
factors described in our filings with the Securities and Exchange Commission that could cause
actual results to differ materially from historical earnings and those presently anticipated or
projected. The Company cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company further advises readers that the
factors listed above and other factors could affect the Company’s financial performance and could
cause the Company’s actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to reflect events or
occurrences after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Changes in Financial Position
Total assets at June 30, 2007 were $1,129.5 million, an increase of $9.6 million or 0.85% compared
to December 31, 2006 of $1,119.9 million. The increase in total assets was primarily in the
available-for-sale securities, which were funded by the increases in certificates of deposits and
noninterest bearing accounts. Also, contributing to the increase
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
11
in total assets was the
reclassification of the deferred tax benefit from other liabilities to other assets. The loan
portfolio, net of allowance for losses, was $805.2 million at June 30, 2007, compared to $804.1
million at December 31, 2006, an increase of $1.1 million or 0.14%. Gross loans held for
investment increased by $1.6 million, and the allowance account increased by approximately
$448,000. Loan growth was concentrated in the following products: commercial real estate fixed
rate loans increased by $22.5 million (14.2%), construction and land development loans increased by
$1.6 million (1.5%) and rental and multifamily loans increased by $2.1 million (8.2%). Partially
offsetting the increases, commercial and industrial (“C & I”) fixed rate loans declined by $11.3
million or 24.4%, the balance of the offset was spread over several different loan categories. The
C & I loans decreased $11.6 million early in January which is a normal recurring seasonal
fluctuation. Loans were funded by growth in certificates of deposit (“COD”) and noninterest bearing
demand deposits as the Bank promoted one or more special rates throughout the period.
Mortgage loans held for sale decreased by $1.5 million (3.4%) as 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 with servicing rights retained. These loans are held
normally for a period of two to three weeks before being sold to investors.
The securities portfolio increased from $127.5 million at December 31, 2006, to $136.5 million at
June 30, 2007, an increase of 7.0%. Budgeted increases in investment securities as a percentage of
total assets and improved market yields were factors for purchasing the investment securities. The
portfolio is comprised of U.S. treasury securities (2.1%), securities of federal agencies (42.1%),
mortgage-backed securities (31.5%), tax-exempt municipal securities (22.7%), corporate bonds
(0.6%), and publicly traded common and preferred stocks (1.0%). At the end of the second quarter
2007, temporary investments including deposits at the Federal Home Loan Bank increased by $17.8
million from $0.2 million to $18.0 million when compared with the balances at December 31, 2006.
Deposits increased $34.7 million or 3.8% comparing June 30, 2007 to December 31, 2006. Overall,
noninterest-bearing demand deposits increased $4.9 million or 3.3%; NOW, savings, and money market
accounts decreased $3.7 million or 1.6%; CODs over $100,000 increased $15.4 million or 6.7%; and
other COD’s increased $18.0 million or 6.1%. The noninterest-bearing deposit growth of $4.9
million was concentrated in business checking accounts. The largest decrease in interest-bearing
deposits was in the money market accounts which decreased $7.0 million or 5.8%. Partially
offsetting that decrease was an increase in the IOLTA accounts of $3.7 million or 43.0%. NOW
accounts and savings remained relatively constant decreasing only 0.4% during the last six months.
The time deposit growth continued to be strong with increases in jumbo CODs and other CODs of $15.4
million, or 6.1%, and $18.0 million, or 6.7%, respectively. The Company’s sufficient liquidity
permitted it to lag behind market pricing for money market products while offering one or more
special rates on COD’s to attract longer term funding. The Company offered a three-month COD
special rate as an alternative to its money market investors who were seeking higher rates.
Borrowed funds decreased $29.2 million or 36.8% comparing June 30, 2007 to December 31, 2006. The
decrease was attributed to the growth in total deposits.
At June 30, 2007, total shareholders’ equity was $128.0 million or a book value of $12.06 per share
compared to $124.4 million or a book value of $11.72 per share at year-end December 31, 2006. The
tangible book values per share at June 30, 2007 and December 31, 2006 were $8.54 and $8.17,
respectively. At June 30, 2007, the Company was in compliance with all existing regulatory capital
requirements to maintain its status as a well-capitalized bank. Year to date, the Company has
purchased 48,608 shares of its common stock at a total cost of $939,774. All shares purchased were
cancelled.
Liquidity, Interest Rate Sensitivity and Market Risk
The Bank derives the majority of its liquidity from its core deposit base and to a lesser extent
from wholesale borrowing. The balance sheet liquidity ratio, measured by the sum of cash (less
reserve requirements), investments, and loans held for sale reduced by pledged securities, as
compared to deposits and short-term borrowings, was 18.7% at June 30, 2007 compared to 16.6% at
December 31, 2006. Additional liquidity is provided by $167 million in unused credit including
federal funds purchased lines provided by correspondent banks as well as credit availability
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
12
from
the Federal Home Loan Bank of Atlanta. In addition, the bank has unpledged marketable securities of
$70 million available for use as a source of collateral. The Bank has been able to generate
deposits in its local markets without having to rely on brokered deposits which total only $1.6
million in a NOW account.
Management continues to assess interest rate risk internally and by utilizing outside sources.
Following a period of stable rates the balance sheet is asset sensitive over a three-month period,
meaning that there will be more assets than liabilities immediately repricing as market rates
change. Over a period of twelve months, the balance sheet becomes slightly liability sensitive.
Following a period of rate increases (or decreases) net interest income will increase (or decrease)
over both three-month and twelve-month periods.
The mortgage loans held for sale by Sidus are funded by short-term borrowings. Although the
repricing dates of the mortgage assets and borrowings are approximately the same, the interest rate
spread fluctuates because the assets and liabilities reprice at different points on the yield
curve. The fifteen to thirty year mortgage assets, usually held for two to three weeks prior to
being sold, are priced based on the fifteen to thirty year mortgage-backed security yield curve,
whereas the borrowing rates to fund Sidus loans are based on the one month point on the LIBOR yield
curve. While the net interest income between these points is positive unless the yield curve is
inverted, a decrease in the slope of the yield curve will result in a decrease in the net interest
margin for Sidus. Conversely, an increase in the slope will result in an increase in net interest
margin. The yield curve for the first six months of 2007 was flatter than it was for the first six
months of 2006, and as expected, Sidus’ net interest margin narrowed 32 basis points. However,
during June 2007, the yield curve began steepening and ended the period with a steeper slope than a
year ago. Generally, Sidus’ loans held for sale have firm price commitments from investors that
minimize price sensitivity to interest rate fluctuations.
The Company has not used derivative financial instruments such as futures, forwards, swaps and
options historically, however, such instruments are available to management if needed. The Company
has no market risk sensitive instruments held for trading purposes. The Company’s exposure to
market risk is reviewed regularly by management.
Results of Operations
Net income for the three-month period ended June 30, 2007 was $3,786,399, compared to $3,419,824 in
the same period of 2006, an increase of 10.7%. Basic earnings per common share were $0.36 and
$0.32 and diluted earnings per common share were $0.35 and $0.32 for the three-month periods ended
June 30, 2007 and June 30, 2006, respectively. On an annualized basis, quarter-to-date results
represent a return on average assets of 1.36% in 2007 compared to 1.30% in 2006, and a return on
average equity of 11.85% compared to 10.78%, respectively.
The Company calculates tangible equity by subtracting goodwill and core deposit intangible from
total equity. Quarterly results declined, slightly, as return on average tangible equity was
16.74% for the quarter ended June 30, 2007, as compared to 16.79% for the quarter ended June 30,
2006. Year to date results improved as return on average tangible equity was 17.22% for the
six-month period ended June 30, 2007, as compared to 15.82% for the six-month period ended June 30,
2006.
Net income for the six-month period ended June 30, 2007 was $7,698,805, compared to $6,348,027 in
the same period of 2006, an increase of 21.3%. Basic earnings per common share were $0.73 and $0.60
and diluted earnings per common share were $0.71 and $0.59 for the six-month periods ended June 30,
2007 and June 30, 2006, respectively. On an annualized basis, year-to-date results represent a
return on average assets of 1.41% in 2007 compared to 1.24% in 2006, and a return on average equity
of 12.16% compared to 10.78%, respectively.
Net Interest Income
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
13
Net interest income, the largest contributor to earnings, was $10.4 million in the second quarter
of 2007, compared with $10.3 million in the same period of 2006, an increase of 0.9%. This
quarterly increase was attributable to loan growth. The net interest margin declined from 4.47% in
the second quarter of 2006 to 4.21% in the second quarter of 2007 as CODs have repriced over the
past year. By the end of June 30, 2007, the cost of funds was stabilizing as CODs were being
issued at approximately the same aggregate rate as CODs that were maturing. During the second
quarter, the Bank decreased its rates on special offerings for terms less than one year as
liquidity increased. Excluding the impact of net interest income from Sidus Financial, LLC, the
Bank’s mortgage lending subsididary, the Bank’s net interest margin was 4.33% for the second
quarter of 2007 and down only 23 basis points from the comparable figure last year.
Comparing the first quarter of 2007 to the second quarter of 2007, the Company’s year-to-date net
interest margin has decreased from 4.32% to 4.27% as the prime rate remained unchanged during the
quarter following the last increase on June 30, 2006. This quarter over quarter slight decrease
was attributable to the following factors: higher repricing of time deposits which have lagged
behind the prime rate increases and an increase in time deposits as a percentage of total funding.
Net interest income for the first six months of 2007 was $20.6 million as compared to $20.1 million
in 2006, an increase of 2.6%. The increase was attributable to the same factors identified in the
quarterly discussion above. Net interest margin, as shown in the table below, declined from 4.50%
to 4.27% for the six months ended June 30, 2006 and June 30, 2007, respectively.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
14
Average Balance Sheets and Net Interest Income Analysis
(Dollars in Thousands)
(Unaudited)
Six Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
INTEREST EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
6,137 |
|
|
$ |
168 |
|
|
|
5.52 |
% |
|
$ |
2,874 |
|
|
$ |
65 |
|
|
|
4.56 |
% |
Interest bearing deposits |
|
|
2,728 |
|
|
|
63 |
|
|
|
4.66 |
% |
|
|
2,399 |
|
|
|
51 |
|
|
|
4.29 |
% |
Investment securities (1) |
|
|
132,036 |
|
|
|
3,322 |
|
|
|
5.07 |
% |
|
|
123,129 |
|
|
|
2,680 |
|
|
|
4.39 |
% |
Total loans (1,2) |
|
|
849,781 |
|
|
|
33,399 |
|
|
|
7.93 |
% |
|
|
787,340 |
|
|
|
29,312 |
|
|
|
7.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning assets (1) |
|
|
990,682 |
|
|
|
36,952 |
|
|
|
7.52 |
% |
|
|
915,742 |
|
|
|
32,108 |
|
|
|
7.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest earning assets |
|
|
112,928 |
|
|
|
|
|
|
|
|
|
|
|
114,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
1,103,610 |
|
|
|
|
|
|
|
|
|
|
$ |
1,030,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
$ |
187,481 |
|
|
$ |
2,059 |
|
|
|
2.21 |
% |
|
$ |
197,869 |
|
|
$ |
1,815 |
|
|
|
1.85 |
% |
Savings |
|
|
36,160 |
|
|
|
182 |
|
|
|
1.01 |
% |
|
|
40,294 |
|
|
|
200 |
|
|
|
1.00 |
% |
Time certificates |
|
|
537,494 |
|
|
|
12,735 |
|
|
|
4.78 |
% |
|
|
441,535 |
|
|
|
8,492 |
|
|
|
3.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
761,135 |
|
|
|
14,976 |
|
|
|
3.97 |
% |
|
|
679,698 |
|
|
|
10,507 |
|
|
|
3.12 |
% |
Repurchase agreements sold |
|
|
34,879 |
|
|
|
570 |
|
|
|
3.30 |
% |
|
|
30,091 |
|
|
|
421 |
|
|
|
2.82 |
% |
Borrowed funds |
|
|
19,607 |
|
|
|
451 |
|
|
|
4.64 |
% |
|
|
51,778 |
|
|
|
762 |
|
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
815,621 |
|
|
|
15,997 |
|
|
|
3.96 |
% |
|
|
761,567 |
|
|
|
11,690 |
|
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits |
|
|
152,553 |
|
|
|
|
|
|
|
|
|
|
|
143,731 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
127,719 |
|
|
|
|
|
|
|
|
|
|
|
118,748 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
7,717 |
|
|
|
|
|
|
|
|
|
|
|
6,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and
stockholders’ equity |
|
$ |
1,103,610 |
|
|
|
|
|
|
|
|
|
|
$ |
1,030,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME/
YIELD (3,4) |
|
|
|
|
|
$ |
20,955 |
|
|
|
4.27 |
% |
|
|
|
|
|
$ |
20,418 |
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST SPREAD (5) |
|
|
|
|
|
|
|
|
|
|
3.57 |
% |
|
|
|
|
|
|
|
|
|
|
3.98 |
% |
|
|
|
1. |
|
Interest income and yields related to securities and loans exempt from Federal income taxes are
stated on a fully tax equivalent
basis, assuming a Federal income tax rate of 34%, reduced by the nondeductible portion of interest
expense |
|
2. |
|
The loan average includes loans on which accrual of interest has been discontinued. |
|
3. |
|
Net interest income is the difference between income from earning assets and interest expense. |
|
4. |
|
Net interest yield is net interest income divided by total average earning assets. |
|
5. |
|
Interest spread is the difference between the average interest rate received on earning assets
and the average
rate paid on interest bearing liabilities. |
Provisions and Allowance for Loan Losses
The provisions for loan losses for the three-month periods ended June 30, 2007 and June 30, 2006
were $200,000 and $550,000, respectively. Net charge-offs year to date for 2007 were $52,397 or
0.01% (annualized) of average loans held for investment compared to $311,829 or 0.08% (annualized)
of average loans held for investment in the same period in 2006. As of June 30, 2007 and December
31, 2006, the allowance for loan losses as a percentage of gross
loans held for investment was 1.38% and 1.34%, respectively. The increase in the allowance
percentage of gross loans was based on a quarterly analysis of risk-graded loans. Management uses
a continuous assessment process to monitor loan portfolio quality. Based on this review,
management considers the level of reserves adequate based on the risk profile of the loan
portfolio. However, future adjustments may be necessary if economic and other conditions differ
substantially from management’s assumptions.
Total non-performing assets increased from $2.4 million to $3.3 million and from 0.21% to 0.29% of
total assets as of December 31, 2006 and June 30, 2007, respectively as the total of nonaccrual
loans increased during the first six months of 2007. The additions to non-performing loans are
secured primarily by real estate and in some cases, by
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
15
equipment and accounts receivable. The
largest loan added to nonaccruals had an outstanding balance of $500,000 and is secured by a first
deed of trust. The Bank expects no loss on this loan at this time. The other additional loans
placed in nonaccrual had amounts outstanding ranging from $400 to $250,000 each. Each
non-performing loan has been analyzed to determine the amount to reserve in the allowance for loan
losses based on an assessment of the collateral value. As discussed in the preceding paragraph,
the Bank has determined that the aggregate balance in the allowance for loan losses is adequate
based upon a detailed analysis of loan quality and collateral values.
Noninterest Income
Noninterest income consists of all revenues that are not included in interest and fee income
related to earning assets. Total noninterest income increased $623,102 or 17.9% comparing the
second quarters of 2007 and 2006. The quarterly fluctuations in the income categories that make up
noninterest income are as follows:
|
• |
|
Service charges on deposit accounts increased $49,537 or 5.5% due largely to an
increase in service charge income on business checking, NOW, and money market accounts
as well as paid overdraft fees on commercial accounts and ATM service charge fees. |
|
|
• |
|
Other service fees increased by $215,249 or 27.0%, due mainly to a $95,765 or 27.6%
increase in Sidus commission fees and a $95,195 or 88.8% increase in annuity and mutual
funds commissions. Also, a higher volume of annuities were sold along with recurring
income from annuities sold earlier. |
|
|
• |
|
Net gain on sale of mortgages increased $126,324 or 8.3% due to the increase in total
loans sold (14.3%) that resulted from an increase in total loans closed (23.4%). |
|
|
• |
|
Net gain on sale of investments decreased $7,000. Investments were not sold due to
sufficient liquidity during the second quarter. |
|
|
• |
|
Income on investment in BOLI increased as a result of additional investment in BOLI
during August 2006 and a conversion of existing policies to a higher yielding product
in November 2006 |
|
|
• |
|
Mortgage banking income increased $83,954 or 171.2% due to an adjustment of Mortgage
Servicing Rights (“MSR”) to reflect a more recent valuation of the MSR |
|
|
• |
|
Other income decreased by $11,735 or 18.3% mainly due to the increased loss on the
sale of other real estate owned, which increased by $11,314. |
Comparing the first six months of 2007 and 2006, total noninterest income increased $1,558,958 or
23.5%. The year-to-date fluctuations in the noninterest income categories are summarized as
follows:
|
• |
|
Service charges on deposit accounts up $132,806 or 7.4% due to NSF fees increasing by
$113,691 or 6.4% and ATM service charge income up by $16,333 or 10.9%. NOW and Money
Market service charges increased as regular checking and club checking service charges
decreased. |
|
|
• |
|
Other service fees increased by $287,273 or 18.3% due mainly to a $139,136 or 20.7%
increase in Sidus commission fees and a $90,024 or 80.3% increase in annuity and mutual
fund commissions. The Bank had a larger amount of mortgages originated in the first six
months of 2007 than 2006 and a greater volume of annuities sold. |
|
|
• |
|
Net gain on sale of mortgages had an increase of $372,607 or 13.9% due to the
increase in total loans sold and total loans originated. |
|
|
• |
|
Net gain on sale of investments decreased $18,724. The Bank’s liquidity remained at
sufficient levels and did not necessitate any investment sales. |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
16
|
• |
|
Income on investment in BOLI increased $238,618 as a result of additional investments
in BOLI in August 2006 and the conversion of existing policies to a higher yielding product in
November 2006. |
|
|
|
|
|
|
• |
|
Mortgage banking income increased $84,361 or 66.0% due to an adjustment of Mortgage
Servicing Rights (“MSR”) in the second quarter to reflect a more recent valuation of the
MSR. |
|
|
• |
|
The Bank received a BOLI death benefit resulting in income of $481,940 in the first
quarter of 2007. |
|
|
• |
|
Other income decreased by $19,923 or 14.3% mainly due to a decrease in dividends
earned on FHLB stock as the Bank owned a lesser number of shares during 2007 and due to
check cashing fees decreasing by $13,445 or 36.9%. |
Noninterest Expense
Total noninterest expenses were $8,683,072 in the second quarter of 2007, compared to $7,905,313 in
the same period of 2006, an increase of $777,759, or 9.8%. The following is a summary of the
fluctuations for the quarter ending June 30, 2007 as compared to June 30, 2006.
|
• |
|
Salaries and employee benefit expenses increased $430,135 or 9.4%. Salaries expense
increased by $295,656 due to the new position added in administration and normal annual
increases. Commission expense increased by $99,197 due to additional revenue generated by
mortgage originators and investment brokers. |
|
|
• |
|
Occupancy and equipment expense increased by $71,288 or 7.8%. The largest contributor
to the increase was the expense incurred to prepare the new branch in Pfafftown for
opening in April 2007. Also, an increase in depreciation expense as the Bank upgrades
equipment and adds to new offices. |
|
|
• |
|
Printing and supplies increased only $7,219 or 5.5%. The addition of a loan production
office in Wilmington and a branch in Pfafftown being the most significant factors. |
|
|
• |
|
Data processing expense increased $16,127 or 17.2% due mainly to enhancements to the
internet banking products. |
|
|
• |
|
Amortization of the core deposit intangible, recognized with the purchases of Main
Street BankShares, Inc. in 2002 and High Country Financial Corporation in 2004, decreased
$9,961 or 4.8% in accordance with the scheduled amortization expense. |
|
|
• |
|
Other operating expenses increased $262,950 or 13.2%. Miscellaneous expense increased
as the Bank accrued for expenses relating to former employees’ suit for breach of
contract. Telephone expense
increased as the Bank changed service providers and incurred extra expense relating to
the switch over. Decreases in outside service fees helped offset the impact of the
increases as fewer consultant services were utilized. Accounting fees in the second
quarter of 2007 showed an increase over the first quarter of the year. ATM service fees
increased as charges increased from ATM service provider due to a larger number of
debit cards being issued along with increased usage. |
For the six-month period ended June 30, 2007, noninterest expense totaled $16,947,480, an increase
of 7.1% over the total of $15,827,687 for the same period last year.
|
• |
|
Salaries and employee benefit expenses increased $703,537 or 7.7% over the last year
due to additional employees to staff the new branch scheduled to open in April 2007 and
normal salary and wage increases. The largest increase was in commissions paid due to the
increase in revenue from the investment brokerage division and the mortgage originators. |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
17
|
• |
|
Occupancy and equipment costs increased $131,672 or 7.0%. The increases were due to
higher depreciation costs as the Bank grows and expenses for new offices in Pfafftown and
Wilmington. |
|
|
• |
|
Amortization of the core deposit intangible, recognized with the purchases of Main
Street BankShares, Inc. in 2002 and High Country Financial Corporation in 2004, decreased
$19,922 or 4.8% in accordance with the scheduled amortization expense. |
|
|
• |
|
Other operating expenses increased $310,963 or 7.9%. The largest increases were in
expenses related to utilities due to the increased fuel costs and ATM fees due to
increased fees from the service provider. Miscellaneous expense increased as the Bank
accrued for expenses relating to former employees’ suit for breach of contract, as did
telephone expenses as the Bank added offices. Decreases in outside service fees helped
offset the impact of the increases as fewer professional services were engaged. |
Income Tax Expense
Income tax expense for the second quarter of 2007 was $1,852,128 compared to $1,927,697 in the
second quarter of 2006, a decrease of 3.9%. The effective tax rate for the second quarter of 2007
was 32.8% compared to 36.0% in the same period of 2006. The effective tax rate decrease was
attributable to increased nontaxable income relating to additional BOLI investments made in August,
2006 and to conversion to policies with higher yielding investments in November, 2006. Income tax
expense for the year to date June 30, 2007 was $3,670,738 compared to $3,449,584 for the same
period of 2006, an increase of 6.4%. The effective tax rate for the six-month period ended June
30, 2007 was 32.3% compared to 35.2% in the same period of 2006. The effective tax rate decrease
was attributable to a nontaxable, nonrecurring income item relating to a BOLI benefit received upon
the death of a bank officer in the first quarter. In addition the rate decrease was attributable
to reasons discussed above for the second quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations, under the caption “Liquidity, Interest Rate
Sensitivity and Market Risk.”
Item 4. Controls and Procedures
Management, with participation of the Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of
June 30, 2007. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were effective as of June
30, 2007. There were no changes in the Company’s internal controls over financial
reporting during the second quarter of 2007 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth information with respect to shares of common stock repurchased by the
Company during the three months ended June 30, 2007. See Note 5 of our Notes to Unaudited Condensed
Consolidated Financial Statements for additional information regarding our share repurchase
program.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
of Shares That |
|
|
|
Total Number |
|
|
Average Price |
|
|
Part of |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Paid per |
|
|
Publicly |
|
|
Purchased Under |
|
Period |
|
Purchased |
|
|
Share |
|
|
Announced Program |
|
|
the Program(1) |
|
April 1, 2007 to April 30, 2007 |
|
|
1,500 |
|
|
$ |
19.34 |
|
|
|
1,500 |
|
|
|
17,290 |
|
May 1, 2007 to May 31, 2007 |
|
|
12,402 |
|
|
|
18.98 |
|
|
|
12,402 |
|
|
|
4,888 |
|
June 1, 2007 to June 30, 2007 (2006 plan) |
|
|
4,888 |
|
|
|
19.04 |
|
|
|
4,888 |
|
|
|
-0- |
|
June 1, 2007 to June 30, 2007 (2007 plan) |
|
|
112 |
|
|
|
19.04 |
|
|
|
112 |
|
|
|
99,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
18,902 |
|
|
$ |
19.03 |
|
|
|
18,902 |
|
|
|
|
|
|
|
|
(1) |
|
The Company’s stock repurchase program, as
approved by the Board of Directors on May 24, 2007
provides for the repurchase of up to 100,000 shares.
There have been 112 shares purchased under the 2007
plan. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations, under the caption “Liquidity, Interest Rate
Sensitivity and Market Risk.”
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders was held on May 24, 2007. Of 10,621,702 shares entitled to
vote at the meeting, 7,745,908 shares voted. The following matters were voted on at the meeting:
|
|
|
Proposal 1: |
|
Shareholders elected J.T. Alexander, Jr., Ralph L. Bentley, M.D., Nolan G. Brown, Faye
E. Cooper, Harry M. Davis, James A. Harrell, Jr., William A. Long, Daniel J. Park, James L.
Poindexter, James N. Smoak, Harry C. Spell and C. Kenneth
Wilcox to serve one-year terms on the Board of Directors or until their successors
are elected and qualified. Votes for each nominee were as follows: |
|
|
|
|
|
|
|
|
|
Name |
|
For |
|
Withheld |
J.T. Alexander, Jr. |
|
|
7,601,418 |
|
|
|
144,490 |
|
Ralph L. Bentley, M.D. |
|
|
7,599,213 |
|
|
|
146,695 |
|
Nolan G. Brown |
|
|
7,588,556 |
|
|
|
157,352 |
|
Faye E. Cooper |
|
|
7,562,052 |
|
|
|
183,856 |
|
Harry M. Davis |
|
|
7,633,479 |
|
|
|
112,429 |
|
James A. Harrell, Jr. |
|
|
7,631,157 |
|
|
|
114,751 |
|
William A. Long |
|
|
7,634,326 |
|
|
|
111,582 |
|
Daniel J. Park |
|
|
7,569,675 |
|
|
|
176,233 |
|
James L. Poindexter |
|
|
7,563,076 |
|
|
|
182,832 |
|
James N. Smoak |
|
|
7,639,114 |
|
|
|
106,794 |
|
Harry C. Spell |
|
|
7,604,271 |
|
|
|
141,637 |
|
C. Kenneth Wilcox |
|
|
7,483,183 |
|
|
|
262,725 |
|
Item 6. Exhibits
|
|
|
Exhibit # |
|
Description |
|
10.1
|
|
Definitive Agreement and Plan of Reorganization with Cardinal State Bank (incorporated by
reference to exhibit 2.1 to Form 8-K filed on August 18, 2007 (file 000-52099)) |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
32.1
|
|
Section 1350 Certification |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
19
Signatures
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Yadkin Valley Financial Corporation |
|
|
|
|
|
|
|
BY:
|
|
/s/ William A. Long |
|
|
|
|
|
|
|
William A. Long, President and Chief Executive Officer |
|
|
|
|
|
|
|
BY:
|
|
/s/ Edwin E. Laws |
|
|
|
|
|
|
|
Edwin E. Laws, Chief Financial Officer |
|
|
August 7, 2007
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2007
20