e10vq
US Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2011
Commission File Number 000-52099
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, a
non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Common shares outstanding as of May 4, 2011, par value $1.00 per share, were 16,292,640.
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the Three Months Ended March 31, 2011 and 2010
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
1
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of March 31,
2011 and December 31, 2010
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March 31, |
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December 31,* |
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2011 |
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2010 |
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(Amounts in thousands, except share data) |
|
ASSETS |
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|
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Cash and due from banks |
|
$ |
31,537 |
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|
$ |
31,967 |
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Federal funds sold |
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50 |
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|
31 |
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Interest-bearing deposits |
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188,003 |
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|
197,782 |
|
Securities available-for-sale at fair value
(amortized cost $299,936 in 2011 and $297,086 in 2010) |
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301,529 |
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298,002 |
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Gross loans |
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1,552,707 |
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1,600,539 |
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Less: allowance for loan
losses |
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35,860 |
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|
37,752 |
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Net loans |
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1,516,847 |
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|
1,562,787 |
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Loans held-for-sale |
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32,880 |
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|
50,419 |
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Accrued interest receivable |
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7,515 |
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7,947 |
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Premises and equipment, net |
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46,245 |
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45,970 |
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Foreclosed real estate |
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27,461 |
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25,582 |
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Federal Home Loan Bank stock, at cost |
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9,416 |
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|
9,416 |
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Investment in bank-owned life insurance |
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|
25,441 |
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|
25,278 |
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Goodwill |
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4,944 |
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|
4,944 |
|
Core deposit intangible (net of accumulated amortization of $7,920
in 2011 and $7,615 in 2010) |
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|
4,602 |
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|
4,907 |
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Other assets |
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34,421 |
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35,562 |
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Total Assets |
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$ |
2,230,891 |
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$ |
2,300,594 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Deposits |
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Noninterest-bearing demand deposits |
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$ |
222,457 |
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$ |
216,161 |
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Interest-bearing deposits: |
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NOW, savings and money market accounts |
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631,791 |
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589,790 |
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Time certificates: |
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$100 or more |
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442,725 |
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477,030 |
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Other |
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662,833 |
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737,425 |
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Total Deposits |
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1,959,806 |
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2,020,406 |
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Short-term borrowings |
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42,458 |
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44,773 |
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Long-term borrowings |
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66,994 |
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71,995 |
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Capital lease obligations |
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2,393 |
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|
2,402 |
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Accrued interest payable |
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|
2,811 |
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|
3,302 |
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Other liabilities |
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|
9,921 |
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|
10,259 |
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|
|
|
|
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Total Liabilities |
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2,084,383 |
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2,153,137 |
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Shareholders’ Equity |
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Preferred stock, no par value, 6,000,000 shares authorized; 49,312
issued and outstanding in 2011 and 2010. |
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46,925 |
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46,770 |
|
Common stock, $1 par value, 50,000,000 shares authorized;
16,292,640 issued and outstanding in 2011 and 16,147,640
issued and outstanding in 2010 |
|
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16,293 |
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|
16,148 |
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Warrants |
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3,581 |
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|
3,581 |
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Surplus |
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|
114,540 |
|
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|
114,649 |
|
Accumulated deficit |
|
|
(35,830 |
) |
|
|
(34,273 |
) |
Accumulated other comprehensive income |
|
|
999 |
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|
582 |
|
|
|
|
|
|
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Total Shareholders’ Equity |
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146,508 |
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|
147,457 |
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Total Liabilities and Shareholders’ Equity |
|
$ |
2,230,891 |
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$ |
2,300,594 |
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* |
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Derived from audited financial statements |
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
2
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three Months Ended
March 31, 2011 and 2010
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Three Months Ended March 31, |
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2011 |
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2010 |
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(Amounts in thousands, |
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|
except per share data) |
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INTEREST INCOME: |
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Interest and fees on loans |
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$ |
21,349 |
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$ |
22,958 |
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Interest on federal funds sold |
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6 |
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— |
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Interest and dividends on securities: |
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Taxable |
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1,504 |
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|
1,209 |
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Non-taxable |
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|
604 |
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|
562 |
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Interest-bearing deposits |
|
|
115 |
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|
61 |
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TOTAL INTEREST INCOME |
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23,578 |
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|
24,790 |
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INTEREST EXPENSE |
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Time deposits of $100 or more |
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2,938 |
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|
3,361 |
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Other time and savings deposits |
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|
4,380 |
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|
4,055 |
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Borrowed funds |
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|
570 |
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|
567 |
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|
|
|
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TOTAL INTEREST EXPENSE |
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|
7,888 |
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|
7,983 |
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|
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NET INTEREST INCOME |
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|
15,690 |
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|
|
16,807 |
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PROVISION FOR LOAN LOSSES |
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|
4,867 |
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|
4,384 |
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|
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|
|
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
|
10,823 |
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|
12,423 |
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|
|
|
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|
NON-INTEREST INCOME: |
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|
|
|
|
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Service charges on deposit accounts |
|
|
1,345 |
|
|
|
1,437 |
|
Other service fees |
|
|
962 |
|
|
|
841 |
|
Net gain on sales and fees of mortgage loans |
|
|
1,899 |
|
|
|
1,334 |
|
Net gain on
sale of securities |
|
|
93 |
|
|
|
44 |
|
Income on investment in bank-owned life insurance |
|
|
163 |
|
|
|
207 |
|
Mortgage banking income |
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|
207 |
|
|
|
56 |
|
Other than temporary impairment of securities |
|
|
(20 |
) |
|
|
(205 |
) |
Other income |
|
|
142 |
|
|
|
66 |
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST INCOME |
|
|
4,791 |
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|
3,780 |
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|
|
|
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|
NON-INTEREST EXPENSES: |
|
|
|
|
|
|
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|
Salaries and employee benefits |
|
|
7,870 |
|
|
|
6,663 |
|
Occupancy and equipment expense |
|
|
2,170 |
|
|
|
1,966 |
|
Printing and supplies |
|
|
181 |
|
|
|
274 |
|
Data processing |
|
|
373 |
|
|
|
313 |
|
Amortization of core deposit intangible |
|
|
305 |
|
|
|
334 |
|
Communications expense |
|
|
445 |
|
|
|
459 |
|
FDIC assessment expense |
|
|
1,350 |
|
|
|
830 |
|
Loan collection fees |
|
|
433 |
|
|
|
272 |
|
Net cost of operation on other real estate owned |
|
|
794 |
|
|
|
1,108 |
|
Franchise taxes |
|
|
381 |
|
|
|
— |
|
Other expenses |
|
|
2,607 |
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|
|
2,313 |
|
|
|
|
|
|
|
|
TOTAL NON-INTEREST EXPENSES |
|
|
16,909 |
|
|
|
14,532 |
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
(1,295 |
) |
|
|
1,671 |
|
INCOME TAX EXPENSE (BENEFIT) |
|
|
(509 |
) |
|
|
757 |
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
(786 |
) |
|
|
914 |
|
Preferred stock dividend and accretion of preferred stock discount |
|
|
771 |
|
|
|
771 |
|
|
|
|
|
|
|
|
NET INCOME (LOSS) TO COMMON SHAREHOLDERS |
|
$ |
(1,557 |
) |
|
$ |
143 |
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
Diluted |
|
$ |
(0.10 |
) |
|
$ |
0.01 |
|
CASH DIVIDENDS PER COMMON SHARE |
|
$ |
— |
|
|
$ |
— |
|
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
3
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)
Three Months Ended March 31, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
NET INCOME (LOSS) |
|
$ |
(786 |
) |
|
$ |
914 |
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME: |
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available-for-sale |
|
|
850 |
|
|
|
616 |
|
Tax effect |
|
|
(327 |
) |
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available-for-sale,
net of tax amount |
|
|
523 |
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains |
|
|
(173 |
) |
|
|
(44 |
) |
Tax effect |
|
|
67 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains,
net of tax amount |
|
|
(106 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME, NET OF TAX |
|
|
417 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
(369 |
) |
|
$ |
1,267 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
4
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
Total |
|
|
|
Common Stock |
|
|
Preferred |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
comprehensive |
|
|
Shareholders’ |
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Warrants |
|
|
Surplus |
|
|
deficit |
|
|
income (loss) |
|
|
equity |
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except share data) |
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31,
2009 |
|
|
16,129,640 |
|
|
|
16,130 |
|
|
|
46,152 |
|
|
|
3,581 |
|
|
|
114,574 |
|
|
|
(31,080 |
) |
|
|
2,909 |
|
|
|
152,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
914 |
|
|
|
— |
|
|
|
914 |
|
Restricted stock issued |
|
|
5,000 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Discount accretion on
preferred stock |
|
|
— |
|
|
|
— |
|
|
|
155 |
|
|
|
— |
|
|
|
— |
|
|
|
(155 |
) |
|
|
— |
|
|
|
— |
|
Stock option compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
Preferred stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(616 |
) |
|
|
— |
|
|
|
(616 |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
353 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2010 |
|
|
16,134,640 |
|
|
|
16,135 |
|
|
|
46,307 |
|
|
|
3,581 |
|
|
|
114,588 |
|
|
|
(30,937 |
) |
|
|
3,262 |
|
|
|
152,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31,
2010 |
|
|
16,147,640 |
|
|
|
16,148 |
|
|
|
46,770 |
|
|
|
3,581 |
|
|
|
114,649 |
|
|
|
(34,273 |
) |
|
|
582 |
|
|
|
147,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(786 |
) |
|
|
— |
|
|
|
(786 |
) |
Restricted stock issued |
|
|
145,000 |
|
|
|
145 |
|
|
|
— |
|
|
|
— |
|
|
|
(145 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Discount accretion on
preferred stock |
|
|
— |
|
|
|
— |
|
|
|
155 |
|
|
|
— |
|
|
|
— |
|
|
|
(155 |
) |
|
|
— |
|
|
|
— |
|
Stock option compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
Preferred stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(616 |
) |
|
|
— |
|
|
|
(616 |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
417 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2011 |
|
|
16,292,640 |
|
|
$ |
16,293 |
|
|
$ |
46,925 |
|
|
$ |
3,581 |
|
|
$ |
114,540 |
|
|
$ |
(35,830 |
) |
|
$ |
999 |
|
|
$ |
146,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
5
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(786 |
) |
|
$ |
914 |
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Net amortization of premiums on investment securities |
|
|
1,251 |
|
|
|
192 |
|
Provision for loan losses |
|
|
4,867 |
|
|
|
4,384 |
|
Net gain on sales of mortgage loans |
|
|
(1,899 |
) |
|
|
(1,334 |
) |
Other than temporary impairment of investments |
|
|
20 |
|
|
|
205 |
|
Increase in cash surrender value of life insurance |
|
|
(163 |
) |
|
|
(207 |
) |
Depreciation and amortization |
|
|
730 |
|
|
|
766 |
|
Loss on sale of premises and equipment |
|
|
4 |
|
|
|
8 |
|
Net loss on sale of foreclosed real estate |
|
|
173 |
|
|
|
796 |
|
Gain on sale of available-for-sale securities |
|
|
(93 |
) |
|
|
(44 |
) |
Amortization of core deposit intangible |
|
|
305 |
|
|
|
334 |
|
Deferred tax provision |
|
|
8,614 |
|
|
|
4,537 |
|
Stock based compensation expense |
|
|
36 |
|
|
|
20 |
|
Originations of mortgage loans held-for-sale |
|
|
(183,147 |
) |
|
|
(171,956 |
) |
Proceeds from sales of mortgage loans |
|
|
202,585 |
|
|
|
198,698 |
|
Decrease in capital lease obligations |
|
|
9 |
|
|
|
8 |
|
(Increase) decrease in accrued interest receivable |
|
|
432 |
|
|
|
(83 |
) |
Increase in other assets |
|
|
(7,834 |
) |
|
|
(1,605 |
) |
Increase (decrease) in accrued interest payable |
|
|
(491 |
) |
|
|
422 |
|
Decrease in other liabilities |
|
|
(355 |
) |
|
|
(2,046 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
24,258 |
|
|
|
34,009 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(19,443 |
) |
|
|
— |
|
Proceeds from sales of available-for-sale securities |
|
|
4,562 |
|
|
|
154 |
|
Proceeds from maturities of available-for-sale securities |
|
|
10,953 |
|
|
|
10,916 |
|
Net decrease in loans |
|
|
36,624 |
|
|
|
7,923 |
|
Purchases of premises and equipment |
|
|
(1,009 |
) |
|
|
(1,208 |
) |
Proceeds from the sale of foreclosed real estate |
|
|
2,398 |
|
|
|
1,776 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES |
|
|
34,085 |
|
|
|
19,561 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in checking, NOW, money market
and savings accounts |
|
$ |
48,296 |
|
|
$ |
13,103 |
|
Net increase (decrease) in time certificates |
|
|
(108,897 |
) |
|
|
74,210 |
|
Net increase (decrease) in borrowed funds |
|
|
(7,316 |
) |
|
|
3,133 |
|
Dividends paid |
|
|
(616 |
) |
|
|
(616 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(68,533 |
) |
|
|
89,830 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
6
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
Three Months Ended March 31, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(10,190 |
) |
|
|
143,400 |
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
229,780 |
|
|
|
92,337 |
|
|
|
|
|
|
|
|
End of year |
|
$ |
219,590 |
|
|
$ |
235,737 |
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
8,496 |
|
|
$ |
7,863 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
26 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH |
|
|
|
|
|
|
|
|
INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Transfer from loans to foreclosed real estate |
|
$ |
4,449 |
|
|
$ |
4,884 |
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available
for sale, net of tax effect |
|
$ |
417 |
|
|
$ |
353 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
7
Notes to Unaudited Condensed Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Yadkin Valley Financial Corporation and its subsidiary, Yadkin Valley Bank and Trust Company. On
July 1, 2006, Yadkin Valley Bank and Trust Company (the “Bank”) became a subsidiary of Yadkin
Valley Financial Corporation (the “Company”) through a one for one share exchange of the then
outstanding 10,648,300 shares. Sidus Financial, LLC (“Sidus”) is a single member LLC with the Bank
as its single member. Sidus offers mortgage banking services and is headquartered in Greenville,
NC. The accompanying unaudited condensed consolidated interim financial statements of the Company
have been prepared in conformity with accounting principles generally accepted in the United States
of America for interim financial statements and with instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by Generally
Accepted Accounting Principles (“GAAP”) for complete financial statements. Because the
accompanying condensed consolidated financial statements do not include all of the information and
footnotes required by GAAP, they should be read in conjunction with the audited consolidated
financial statements and accompanying footnotes included with the Company’s 2010 Annual Report on
Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2011. Operating
results, for the three months ended March 31, 2011, 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 March 31, 2011 and December 31, 2010, and the results of
its operations and cash flows for the three months ended March 31, 2011 and 2010. The accounting
policies followed are set forth in Note 1 to the Consolidated Financial Statements in the Company’s
2010 Annual Report on Form 10-K.
2. New Accounting Standards
Recently Adopted Accounting Standards
In January 2011, the FASB issued guidance on the “Deferral of the Effective Date of Disclosures
about Troubled Debt Restructurings in Update No. 2010-20.” The provisions of this guidance require
the disclosure of more granular information on the nature and extent of troubled debt
restructurings and their effect on the allowance for loan and lease losses. The amendments in this
guidance defer the effective date related to these disclosures, enabling creditors to provide such
disclosures after the FASB completes their project clarifying the guidance for determining what
constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective
date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU
had no impact on the Company’s statements of income and condition.
In April 2011, the FASB issued additional guidance regarding “A Creditor’s Determination of Whether
a Restructuring is a Troubled Debt Restructuring.” The provisions of this new standard provide
additional guidance related to determining whether a creditor has granted a concession, include
factors and examples for creditors to consider in evaluating whether a restructuring results in a
delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate
test to evaluate whether a concession has been granted to the borrower, and add factors for
creditors to use in determining whether a borrower is experiencing financial difficulties. A
provision in the standard also ends the FASB’s deferral of the additional disclosures about
troubled debt restructurings as required by previously released standards. The provisions of this
guidance are effective for the Company’s reporting period ending September 30, 2011. The adoption
of the standard is not expected to have a material impact on the Company’s statements of income and
condition, however, this guidance could result in an increase in troubled debt restructured loans.
Management is still evaluating the impact of this standard.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
8
3. Stock-based Compensation
During the three months ended March 31, 2011 and 2010, 13,900 and 21,200 options were vested,
respectively. At March 31, 2011, there were 40,000 options unvested and no shares available for
future grants of options other than shares available under the Omnibus Plan.
During the first quarter of 2011, there were 145,000 shares of restricted stock granted at an
average fair value of $2.34 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. As of March 31, 2011, 1,666 shares of restricted stock are vested and 161,334 shares are
nonvested. During the first quarter of 2010, there were 5,000 shares of restricted stock granted
at a fair value of $3.71 per share. There were no vested shares of restricted stock outstanding as
of March 31, 2010.
The compensation expense related to options and restricted shares was $36,648 for the three-month
period ending March 31, 2011 and $19,750 for the three-month period ending March 31, 2010. As of
March 31, 2011, there was $499,034 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under all of the Company’s stock benefit plans. This
cost is expected to be recognized over an average vesting period of 2.6 years.
There were no stock options granted or exercised during the three months ended March 31, 2011 and
2010.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
9
4. Investment Securities
Investment securities at March 31, 2011 and December 31, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
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 |
|
$ |
24,294 |
|
|
$ |
3 |
|
|
$ |
35 |
|
|
$ |
24,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,294 |
|
|
|
3 |
|
|
|
35 |
|
|
|
24,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 but within 5 years |
|
|
881 |
|
|
|
29 |
|
|
|
— |
|
|
|
910 |
|
After 5 but within 10 years |
|
|
9,270 |
|
|
|
728 |
|
|
|
— |
|
|
|
9,998 |
|
After 10 years |
|
|
37,697 |
|
|
|
919 |
|
|
|
480 |
|
|
|
38,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,848 |
|
|
|
1,676 |
|
|
|
480 |
|
|
|
49,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 but within 10 years |
|
|
19,431 |
|
|
|
163 |
|
|
|
80 |
|
|
|
19,514 |
|
After 10 years |
|
|
138,247 |
|
|
|
590 |
|
|
|
1,019 |
|
|
|
137,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,678 |
|
|
|
753 |
|
|
|
1,099 |
|
|
|
157,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label collateralized mortgage
obligations due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 but within 10 years |
|
|
393 |
|
|
|
14 |
|
|
|
— |
|
|
|
407 |
|
After 10 years |
|
|
1,293 |
|
|
|
— |
|
|
|
39 |
|
|
|
1,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686 |
|
|
|
14 |
|
|
|
39 |
|
|
|
1,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities due: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
1,942 |
|
|
|
6 |
|
|
|
|
|
|
|
1,948 |
|
After 1 but within 5 years |
|
|
8,060 |
|
|
|
265 |
|
|
|
46 |
|
|
|
8,279 |
|
After 5 but within 10 years |
|
|
20,682 |
|
|
|
597 |
|
|
|
108 |
|
|
|
21,171 |
|
After 10 years |
|
|
36,633 |
|
|
|
602 |
|
|
|
543 |
|
|
|
36,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,317 |
|
|
|
1,470 |
|
|
|
697 |
|
|
|
68,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stocks: |
|
|
1,113 |
|
|
|
58 |
|
|
|
31 |
|
|
|
1,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113 |
|
|
|
58 |
|
|
|
31 |
|
|
|
1,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
299,936 |
|
|
$ |
3,974 |
|
|
$ |
2,381 |
|
|
$ |
301,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
10
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December 31, 2010 |
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Unrealized |
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Unrealized |
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Amortized Cost |
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Gains |
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Losses |
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Fair Value |
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(Amounts in thousands) |
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Available-for-sale securities: |
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Securities of U.S. government
agencies due: |
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After 1 but within 5 years |
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$ |
14,547 |
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6 |
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3 |
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14,550 |
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14,547 |
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6 |
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3 |
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14,550 |
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Government sponsored agencies: |
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Residential mortgage-backed securities due: |
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After 1 but within 5 years |
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1,040 |
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36 |
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— |
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1,076 |
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After 5 but within 10 years |
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7,839 |
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602 |
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— |
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8,441 |
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After 10 years |
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41,863 |
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1,132 |
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437 |
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42,558 |
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50,742 |
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1,770 |
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437 |
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52,075 |
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Collateralized mortgage obligations due: |
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After 5 but within 10 years |
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16,063 |
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165 |
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57 |
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16,171 |
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After 10 years |
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140,021 |
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672 |
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938 |
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139,755 |
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156,084 |
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837 |
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995 |
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155,926 |
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Private label collateralized mortgage
obligations due: |
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After 5 but within 10 years |
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406 |
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17 |
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— |
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423 |
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After 10 years |
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1,430 |
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— |
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148 |
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1,282 |
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1,836 |
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17 |
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148 |
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1,705 |
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State and municipal securities due: |
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Within 1 year |
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2,476 |
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18 |
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— |
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2,494 |
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After 1 but within 5 years |
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10,680 |
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327 |
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53 |
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10,954 |
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After 5 but within 10 years |
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21,348 |
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413 |
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236 |
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21,525 |
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After 10 years |
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38,260 |
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295 |
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906 |
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37,649 |
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72,764 |
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1,053 |
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1,195 |
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72,622 |
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Common and preferred stocks: |
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1,113 |
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36 |
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25 |
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1,124 |
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1,113 |
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36 |
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25 |
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1,124 |
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Total available-for-sale securities |
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$ |
297,086 |
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$ |
3,719 |
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$ |
2,803 |
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$ |
298,002 |
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Mortgage-backed securities are included in maturity groups based upon stated maturity date. At
March 31, 2011, $49.0 million of the Bank’s mortgage-backed securities were pass-through securities
and $159.0 million were collateralized mortgage obligations. At December 31, 2010, $52.1 million
of the Bank’s mortgage-backed securities were pass-through securities and $157.6 million were
collateralized mortgage obligations. Actual maturity will vary based on repayment of the
underlying mortgage loans.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
11
Gross realized gains on the sale of available for sale securities for the three months ended
March 31, 2011 were $173,237. There were no gross realized losses on the sale of available for
sale securities for the three months ended March 31, 2011. Gross realized gains on sale of
available for sale securities for the three months ended March 31, 2010 were $43,999.
Investment securities with carrying values of approximately $110,919,918 and $111,803,619
at March 31, 2011 and December 31, 2010, respectively, were pledged as collateral for public
deposits and for other purposes as required or permitted by law.
The following table presents the gross unrealized losses and fair value of investment securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at March 31, 2011 and December 31, 2010. Securities that have
been in a loss position for twelve months or more at March 31, 2011 include one mortgage-backed
security, one municipal security and one private label collateralized mortgage obligation. The key
factors considered in evaluating the mortgage-backed securities, private label collateralized
mortgage obligations, and municipal securities 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, 2010 include one mortgage-backed security, one municipal
security and one private label collateralized mortgage obligation. The unrealized losses relate
to securities that have incurred fair value reductions due to a shift in demand from
non-governmental securities and municipals to U.S. Treasury bonds and governmental agencies due to
credit market concerns. The unrealized losses are not likely to reverse until market interest rates
decline to the levels that existed when the securities were purchased. None of the unrealized
losses relate to the marketability of the securities or the issuer’s ability to honor redemption
obligations. It is more likely than not that the Company will not have to sell the investments
before recovery of their amortized cost bases. For the quarter ended March 31, 2010, there were no
securities available-for-sale deemed to be OTTI.
If management determines that an investment has experienced an OTTI, the loss is recognized in the
income statement.
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Less Than 12 Months |
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12 Months or More |
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Total |
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Unrealized |
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Unrealized |
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Unrealized |
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March 31, 2011 |
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Fair value |
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losses |
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Fair value |
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|
losses |
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Fair value |
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|
losses |
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(Amounts in thousands) |
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Securities available-for-sale: |
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U.S. Government agencies |
|
$ |
14,281 |
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$ |
35 |
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$ |
— |
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$ |
— |
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$ |
14,281 |
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$ |
35 |
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Government sponsored agencies: |
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Mortgage-backed securities |
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18,053 |
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|
478 |
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|
135 |
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2 |
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18,188 |
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|
480 |
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Collateralized mortgage obligations |
|
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66,905 |
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|
1,099 |
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66,905 |
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|
1,099 |
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Private label collateralized
mortgage obligations |
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— |
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— |
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1,254 |
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39 |
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1,254 |
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39 |
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State and municipal securities |
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21,988 |
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|
684 |
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|
285 |
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13 |
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22,273 |
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|
697 |
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Common and preferred stocks |
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|
73 |
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31 |
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— |
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— |
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|
73 |
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|
31 |
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Total temporarily impaired securities |
|
$ |
121,300 |
|
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$ |
2,327 |
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$ |
1,674 |
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$ |
54 |
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$ |
122,974 |
|
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$ |
2,381 |
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Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
12
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Less Than 12 Months |
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12 Months or More |
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Total |
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Unrealized |
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Unrealized |
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|
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Unrealized |
|
December 31, 2010 |
|
Fair value |
|
|
losses |
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Fair value |
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|
losses |
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Fair value |
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|
losses |
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(Amounts in thousands) |
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Securities available-for-sale: |
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|
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|
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U.S. government agencies |
|
$ |
4,569 |
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|
$ |
3 |
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|
$ |
— |
|
|
$ |
— |
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|
$ |
4,569 |
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|
$ |
3 |
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Government sponsored agencies: |
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Residential mortgage-backed
securities |
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21,637 |
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|
|
435 |
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|
136 |
|
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2 |
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|
21,773 |
|
|
|
437 |
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Collateralized mortgage obligation |
|
|
76,925 |
|
|
|
995 |
|
|
|
— |
|
|
|
— |
|
|
|
76,925 |
|
|
|
995 |
|
Private label collateralized
mortgage obligations |
|
|
— |
|
|
|
— |
|
|
|
1,283 |
|
|
|
148 |
|
|
|
1,283 |
|
|
|
148 |
|
State and municipal securities |
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|
31,775 |
|
|
|
1,174 |
|
|
|
276 |
|
|
|
21 |
|
|
|
32,051 |
|
|
|
1,195 |
|
Common and preferred stocks,
and other |
|
|
79 |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
79 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total temporarily impaired securities |
|
$ |
134,985 |
|
|
$ |
2,632 |
|
|
$ |
1,695 |
|
|
$ |
171 |
|
|
$ |
136,680 |
|
|
$ |
2,803 |
|
|
|
|
|
|
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The aggregate cost of the Company’s cost method investments totaled $10,819,368 at March 31,
2011 and $12,463,510 at December 31, 2010. Cost method investments at March 31, 2011 include
$9,416,400 in FHLB stock and $1,402,968 of investments in various trust and financial companies,
which are included in other assets. All equity investments were evaluated for impairment at March
31, 2011. The following factors have been considered in determining the carrying amount of FHLB
stock; 1) the recoverability of the par value, 2) the Company has sufficient liquidity to meet all
operational needs in the foreseeable future and would not need to dispose of the stock below
recorded amounts, 3) redemptions and purchases of the stock are at the discretion of the FHLB, 4)
the Company believes the FHLB has the ability to absorb economic losses given the expectation that
the various FHLBs’ have a high degree of government support, and 5) the unrealized losses related
to securities owned by the FHLB are manageable given the capital levels of the organization. The
Company estimated that the fair value equaled or exceeded the cost of each of these investments
(that is, the investments were not impaired) on the basis of the redemption provisions of the
issuing entities with two exceptions. The Company’s investment in a local community bank was
considered to be other than temporarily impaired and $20,000 was charged off in the first quarter
2011. The Company’s investments in a financial services company and local community bank
were considered to be other than temporarily impaired and $203,622 was charged off in the first
quarter of 2010. In addition to the impairment charges recorded for the quarter ended March 31,
2011, the Company sold one of its investments in a financial services company for a loss of
$79,910.
5. Commitments and Contingencies
In the normal course of business, there are various outstanding commitments and contingent
liabilities, such as commitments to extend credit, which are not reflected in the accompanying
financial statements. At March 31, 2011, the Company had commitments outstanding of $279.5 million
for additional loan amounts. Commitments of Sidus, the Bank’s mortgage lending subsidiary, are
excluded from this amount and discussed in the paragraph below. Additional commitments totaling
$8.4 million were outstanding under standby letters of credit. Reserves on unfunded commitments
are discussed further in Note 9.
At March 31, 2011, Sidus had $114.9 million of commitments outstanding to originate mortgage loans
held-for-sale at fixed prices and $146.9 million of forward commitments outstanding under best
efforts contracts to sell mortgages to agencies and other investors. See Note 8 for additional
disclosures on these derivative financial instruments.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
13
6. Earnings Per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number
of shares of common stock outstanding for the reporting periods. Diluted net income available to
common shareholders per common share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. The numerators of the basic net
income per share computations are the same as the numerators of the diluted net income per common
share computations for all the periods presented. Weighted average shares outstanding for the
quarter ended March 31, 2011 excludes 161,334 shares of unvested restricted stock.
Weighted average shares outstanding for the quarter ended March 31, 2010 excludes 5,000 shares
of unvested restricted stock. A reconciliation of the denominator of the basic net income per
common share computations to the denominator of the diluted net income per common share
computations is as follows:
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Three Months Ended |
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March 31, |
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2011 |
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|
2010 |
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Basic EPS denominator: |
|
|
|
|
|
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Weighted average number of
common shares outstanding |
|
|
16,130,529 |
|
|
|
16,129,640 |
|
Dilutive effect arising from assumed
exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Diluted EPS denominator |
|
|
16,130,529 |
|
|
|
16,129,640 |
|
For the three months ended March 31, 2011 and 2010, net income (loss) for determining net
income (loss) per common share was reported as net income (loss) less the dividend on preferred
stock. During the quarter ended March 31, 2011, there were 420,729 stock options outstanding to
purchase shares of the Company’s common stock not considered dilutive at a price range of $3.84 to
$19.07 per share. During the quarter ended March 31, 2010, there were 578,962 stock options
outstanding to purchase shares of the Company’s common stock not considered dilutive at a price
range of $3.84 to $19.07 per share. Unvested shares of restricted stock and all other common stock
equivalents were excluded from the determination of diluted earnings per share for the three months
ended March 31, 2011 due to the Company’s loss position for those periods.
7. Shareholders’ Equity
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 March 31, 2011 and
2010, there were no undivided profits available for dividend payments. The Bank is currently
prohibited from paying dividends to the holding company without prior FDIC and Commissioner
approval. The Company may be required to defer dividend payments on
its 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 the Company defers dividend payments on the Series T and Series
T-ACB Preferred Stock and defer interest payments on its trust
preferred securities, the Company will be
prohibited from paying any dividends on its common stock until all deferred payments have been made
in full.
On May 24, 2007, the Board approved a plan to repurchase up to 100,000 shares of the Company’s
outstanding common shares (“2007 plan”). Under the 2007 plan, the Company repurchased a total of
71,281 common shares at an average price of $17.10 per share during 2007. There are 28,719 common
shares available to purchase under the 2007
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
14
plan at March 31, 2011. The Company did not repurchase any common shares during the first
three months of 2011 or 2010. The Company will be subject to restrictions on share
repurchases for so long as it remains a participant in the Capital Purchase Program under the
Treasury’s Troubled Asset Relief Program. Generally, the Company must obtain Treasury’s consent
for any repurchases that would be made prior to July 24, 2012 (the third anniversary of the second
of the Company’s two issuances of securities under this program), and the Company will be
prohibited from making any repurchases at any time that it is delinquent in making dividend
payments on the Treasury preferred stock.
8. Derivatives
The Company currently has derivative instrument contracts consisting of interest rate swaps and
interest rate lock commitments and commitments to sell mortgages. The primary objective for each
of these contracts is to minimize interest rate risk. The Company’s strategy is to use derivative
contracts to stabilize and improve net interest margin and net interest income currently and in
future periods. The Company does not enter into derivative financial instruments for speculative
or trading purposes. For derivatives that are economic hedges, but are not designated as hedging
instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value
are recognized in non-interest income during the period of change.
As part of interest rate risk management, the Company has entered into two interest rate swap
agreements to convert certain fixed-rate receivables to floating rates and certain fixed-rate
obligations to floating rates. The interest rate swaps are used to provide fixed rate financing
while managing interest rate risk and were not designated as hedges. The interest rate swaps pay
and receive interest based on a floating rate based on one month LIBOR, with payments being
calculated on the notional amount. The interest rate swaps are settled quarterly and mature on June
15, 2016. The interest rate swaps each have a notional amount of $2.1 million, representing the
amount of outstanding fixed-rate receivables and obligations outstanding at March 31, 2011, and are
included in other assets and other liabilities at their fair value of $133,000. The Company had a
gain of $26,260 on the interest rate swap asset and a loss of $26,260 on the interest rate swap
liability for the three months ended March 31, 2011. The interest rate swaps had a notional amount
of $2.1 million outstanding as of December 31, 2010. There were no interest rate swap agreements
outstanding as of March 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 Bank’s mortgage lending subsidiary, enters into interest rate lock commitments and
commitments to sell mortgages. The primary risks managed by derivative instruments are these
interest rate lock commitments and forward-loan-sale commitments. Interest rate lock commitments
are entered into to manage interest rate risk associated with the Company’s fixed rate loan
commitments. The period of time between the issuance of a loan commitment and the closing and sale
of the loan generally ranges from 10 to 60 days. Such interest rate lock commitments and
forward-loan-sale commitments represent derivative instruments which are required to be carried at
fair value. These derivative instruments do not qualify as hedges under the Derivatives and Hedging
topic of the FASB Accounting Standards Codification. The fair value of the Company’s interest rate
lock commitments is based on the value that can be generated when the underlying loan is sold on
the secondary market and is included on the balance sheet in other assets and on the income
statement in income from loans. The fair value of the Company’s forward sales commitments is based
on changes in the value of the commitment, principally because of changes in interest rates, and is
included on the balance sheet in other assets or other liabilities and on the income statement in
income from loans.
At March 31, 2011, Sidus had $114.9 million of commitments outstanding to originate mortgage loans
held-for-sale at fixed prices and $146.9 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 $337,000 at March 31, 2011. The fair value of forward sales commitments
recorded in other assets was $215,000 at March 31, 2011. Recognition of gains (losses) related to
the change in fair value of the interest rate lock commitments and forward sales commitments were
$51,523 and $286,430 respectively, for the quarter ended March 31, 2011, and are included in
mortgage banking income within
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
15
noninterest income. Recognition of losses related to the change in fair value of the interest
rate lock commitments and forward sales commitments were $82,559 and $6,711, respectively, for the
quarter ended March 31, 2010, and are included in other income. 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 under best efforts contracts to sell
mortgages to agencies and other investors. The fair value of interest rate locks recorded in other
assets was $104,810. The fair value of the forward sales commitments recorded in other assets was
$161,071.
9. 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.
The following table presents loans at March 31, 2011 and December 31, 2010 by class:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Construction and land development |
|
$ |
261,083 |
|
|
$ |
300,877 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Owner occupied |
|
|
359,720 |
|
|
|
309,198 |
|
Non-owner occupied |
|
|
256,933 |
|
|
|
312,231 |
|
Residential mortgages: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
181,057 |
|
|
|
174,536 |
|
Multifamily |
|
|
30,004 |
|
|
|
29,268 |
|
Home equity lines of credit |
|
|
207,308 |
|
|
|
209,319 |
|
Commercial |
|
|
191,481 |
|
|
|
199,696 |
|
Consumer and other |
|
|
64,639 |
|
|
|
65,003 |
|
|
|
|
|
|
|
|
Total |
|
|
1,552,225 |
|
|
|
1,600,128 |
|
Less: Net deferred loan origination fees |
|
|
482 |
|
|
|
411 |
|
Allowance for loan losses |
|
|
(35,860 |
) |
|
|
(37,752 |
) |
|
|
|
|
|
|
|
Loans, net |
|
$ |
1,516,847 |
|
|
$ |
1,562,787 |
|
|
|
|
|
|
|
|
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 $616.7 million and $621.4 million at March 31, 2011 and
December 31, 2010, respectively. 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 $261.1 million and $300.9 million at March 31, 2011 and
December 31, 2010, respectively. 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
16
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 $181.1 million and $174.5 million at March 31,
2011 and December 31, 2010, respectively. The Bank’s residential mortgage loans are typically
construction loans that convert into permanent financing and are secured by properties located
within the Bank’s market areas.
Commercial Loans. At March 31, 2011 and December 31, 2010, the Bank’s commercial loan portfolio
totaled $191.5 million and $199.7 million, respectively. 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
$64.6 million and $65.0 million at March 31, 2011 and December 31, 2010, respectively. 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 Bank’s 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 borrower’s 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 Company’s 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.
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 Bank’s market area. Every effort is made to
identify and minimize the credit risks associated with such lending strategies.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
17
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 Bank’s loan policy states that a guarantor may be necessary if
reasonable doubt exists as to the borrower’s 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
borrower’s 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.
“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 bank’s 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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
18
“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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
19
The following is a summary of credit quality indicators by class at March 31, 2011 and
December 31, 2010:
Real Estate Credit Exposure as of March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner |
|
|
Owner |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
occupied |
|
|
occupied |
|
|
1-4 Family |
|
|
Multifamily |
|
|
Home Equity |
|
High Quality |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
130 |
|
|
$ |
437 |
|
|
$ |
— |
|
|
$ |
147 |
|
Good Quality |
|
|
597 |
|
|
|
143 |
|
|
|
1,468 |
|
|
|
1,864 |
|
|
|
— |
|
|
|
8,038 |
|
Satisfactory |
|
|
36,770 |
|
|
|
59,710 |
|
|
|
117,640 |
|
|
|
96,792 |
|
|
|
7,851 |
|
|
|
131,098 |
|
Merits Attention |
|
|
114,839 |
|
|
|
145,438 |
|
|
|
184,687 |
|
|
|
59,280 |
|
|
|
20,071 |
|
|
|
56,798 |
|
Special Mention |
|
|
47,958 |
|
|
|
27,773 |
|
|
|
28,144 |
|
|
|
8,316 |
|
|
|
441 |
|
|
|
4,752 |
|
Substandard |
|
|
27,163 |
|
|
|
11,721 |
|
|
|
10,152 |
|
|
|
5,678 |
|
|
|
586 |
|
|
|
2,924 |
|
Doubtful |
|
|
33,756 |
|
|
|
12,148 |
|
|
|
17,499 |
|
|
|
8,690 |
|
|
|
1,055 |
|
|
|
3,551 |
|
Loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
261,083 |
|
|
$ |
256,933 |
|
|
$ |
359,720 |
|
|
$ |
181,057 |
|
|
$ |
30,004 |
|
|
$ |
207,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Credit Exposures as of March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
Commercial |
|
|
and other |
|
High Quality |
|
$ |
3,800 |
|
|
$ |
2,765 |
|
Good Quality |
|
|
6,741 |
|
|
|
1,594 |
|
Satisfactory |
|
|
62,492 |
|
|
|
32,578 |
|
Merits Attention |
|
|
79,361 |
|
|
|
25,260 |
|
Special Mention |
|
|
22,369 |
|
|
|
1,247 |
|
Substandard |
|
|
7,464 |
|
|
|
519 |
|
Doubtful |
|
|
9,254 |
|
|
|
676 |
|
Loss |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
191,481 |
|
|
$ |
64,639 |
|
|
|
|
|
|
|
|
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
20
Real Estate Credit Exposure as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
Commercial |
|
|
and 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 |
|
|
|
|
|
|
|
|
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 nonaccrual 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 March 31, 2011 and December 31, 2010.
Nonperforming loans as of March 31, 2011 totaled $71.4 million or 4.50% of total loans compared
with $65.4 million or 3.96% as of December 31, 2010. 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 490 to 526 since December 31, 2010. The increase in
nonperforming loans from December 31, 2010 to March 31, 2011 is related primarily to continued
deterioration in the Bank’s real estate portfolios, including commercial real estate and
construction loans.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
21
For the quarter ended March 31, 2011, the Company recognized interest income on nonaccrual
loans of approximately $640,000, as interest is received on performing troubled debt restructured
loans. If interest on those loans had been accrued in accordance with the original terms, interest
income would have increased by approximately $1.8 million for the quarter ended March 31 2011.
The following is a breakdown of nonaccrual loans as of March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(in thousands) |
|
Financing Receivables on Nonaccrual status |
|
|
|
|
|
|
|
|
Construction |
|
$ |
28,001 |
|
|
$ |
25,833 |
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
11,013 |
|
|
|
10,767 |
|
Owner occupied |
|
|
14,738 |
|
|
|
12,829 |
|
Mortgages: |
|
|
|
|
|
|
|
|
1-4 Family first lien |
|
|
8,627 |
|
|
|
7,889 |
|
Multifamily |
|
|
1,040 |
|
|
|
967 |
|
Home Equity lines of credit |
|
|
3,537 |
|
|
|
3,068 |
|
Commercial |
|
|
3,821 |
|
|
|
3,420 |
|
Consumer and other |
|
|
591 |
|
|
|
627 |
|
|
|
|
|
|
|
|
Total |
|
$ |
71,368 |
|
|
$ |
65,400 |
|
|
|
|
|
|
|
|
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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
22
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 Bank’s age
analysis of past due loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days |
|
|
60-89 Days |
|
|
Greater Than |
|
|
Total Past |
|
|
|
|
|
|
|
|
|
Past Due |
|
|
Past Due |
|
|
90 Days |
|
|
Due |
|
|
Current |
|
|
Total Loans |
|
|
|
|
|
|
|
|
|
|
|
(in Thousands) |
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
6,160 |
|
|
$ |
4,128 |
|
|
$ |
11,426 |
|
|
$ |
21,714 |
|
|
$ |
239,369 |
|
|
$ |
261,083 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
2,693 |
|
|
|
497 |
|
|
|
3,049 |
|
|
|
6,239 |
|
|
|
250,694 |
|
|
|
256,933 |
|
Owner occupied commercial |
|
|
4,703 |
|
|
|
1,408 |
|
|
|
5,448 |
|
|
|
11,559 |
|
|
|
348,161 |
|
|
|
359,720 |
|
Commercial |
|
|
2,688 |
|
|
|
728 |
|
|
|
500 |
|
|
|
3,916 |
|
|
|
187,565 |
|
|
|
191,481 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,519 |
|
|
|
2,060 |
|
|
|
5,154 |
|
|
|
10,733 |
|
|
|
170,324 |
|
|
|
181,057 |
|
Multifamily |
|
|
31 |
|
|
|
17 |
|
|
|
216 |
|
|
|
264 |
|
|
|
29,740 |
|
|
|
30,004 |
|
Open ended secured 1-4 family |
|
|
172 |
|
|
|
581 |
|
|
|
1,930 |
|
|
|
2,683 |
|
|
|
204,625 |
|
|
|
207,308 |
|
Consumer and other |
|
|
487 |
|
|
|
49 |
|
|
|
183 |
|
|
|
719 |
|
|
|
63,920 |
|
|
|
64,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,453 |
|
|
$ |
9,468 |
|
|
$ |
27,906 |
|
|
$ |
57,827 |
|
|
$ |
1,494,398 |
|
|
$ |
1,552,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 borrower’s 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,
troubled debt restructured loans and other potential problem loans considered impaired based on
other underlying factors. Troubled debt 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 borrower’s weakened financial
condition. Interest on troubled debt 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
23
serious doubts as to the borrower’s ability to comply with present repayment terms. These
loans are likely to be included later in nonaccrual, past due or troubled debt restructured loans,
so they are considered by management in assessing the adequacy of the allowance for loan losses.
Impaired loans under $250,000 are typically not individually evaluated for impairment.
The following table presents the Bank’s investment in loans considered to be impaired and related
information on those impaired loans as of March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
|
|
(in thousands) |
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
24,272 |
|
|
$ |
36,984 |
|
|
$ |
— |
|
|
$ |
21,767 |
|
|
$ |
143 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
6,919 |
|
|
|
9,021 |
|
|
|
— |
|
|
|
6,104 |
|
|
|
38 |
|
Owner occupied commercial real estate |
|
|
10,659 |
|
|
|
12,666 |
|
|
|
— |
|
|
|
10,850 |
|
|
|
142 |
|
Commercial |
|
|
1,838 |
|
|
|
2,473 |
|
|
|
— |
|
|
|
1,957 |
|
|
|
25 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
2,339 |
|
|
|
2,771 |
|
|
|
— |
|
|
|
2,560 |
|
|
|
16 |
|
Multifamily |
|
|
300 |
|
|
|
308 |
|
|
|
— |
|
|
|
305 |
|
|
|
3 |
|
Open ended secured 1-4 family |
|
|
853 |
|
|
|
864 |
|
|
|
— |
|
|
|
928 |
|
|
|
4 |
|
Consumer and other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Impaired loans with a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
7,364 |
|
|
$ |
8,728 |
|
|
$ |
1,052 |
|
|
$ |
9,955 |
|
|
$ |
96 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
3,914 |
|
|
|
3,928 |
|
|
|
657 |
|
|
|
5,851 |
|
|
|
40 |
|
Owner occupied commercial real estate |
|
|
6,425 |
|
|
|
6,458 |
|
|
|
1,652 |
|
|
|
5,417 |
|
|
|
53 |
|
Commercial |
|
|
6,299 |
|
|
|
6,299 |
|
|
|
2,003 |
|
|
|
5,593 |
|
|
|
42 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
2,990 |
|
|
|
3,040 |
|
|
|
850 |
|
|
|
2,226 |
|
|
|
20 |
|
Multifamily |
|
|
450 |
|
|
|
466 |
|
|
|
63 |
|
|
|
459 |
|
|
|
9 |
|
Open ended secured 1-4 family |
|
|
569 |
|
|
|
572 |
|
|
|
159 |
|
|
|
785 |
|
|
|
3 |
|
Consumer and other |
|
|
125 |
|
|
|
132 |
|
|
|
26 |
|
|
|
132 |
|
|
|
6 |
|
Total impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
31,636 |
|
|
$ |
45,712 |
|
|
$ |
1,052 |
|
|
$ |
31,722 |
|
|
$ |
239 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
10,833 |
|
|
|
12,949 |
|
|
|
657 |
|
|
|
11,955 |
|
|
|
78 |
|
Owner occupied commercial real estate |
|
|
17,084 |
|
|
|
19,124 |
|
|
|
1,652 |
|
|
|
16,267 |
|
|
|
195 |
|
Commercial |
|
|
8,137 |
|
|
|
8,772 |
|
|
|
2,003 |
|
|
|
7,550 |
|
|
|
67 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
5,329 |
|
|
|
5,811 |
|
|
|
850 |
|
|
|
4,786 |
|
|
|
36 |
|
Multifamily |
|
|
750 |
|
|
|
774 |
|
|
|
63 |
|
|
|
764 |
|
|
|
12 |
|
Open ended secured 1-4 family |
|
|
1,422 |
|
|
|
1,436 |
|
|
|
159 |
|
|
|
1,713 |
|
|
|
7 |
|
Consumer and other |
|
|
125 |
|
|
|
132 |
|
|
|
26 |
|
|
|
132 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans individually reviewed
for impairment |
|
$ |
75,316 |
|
|
$ |
94,710 |
|
|
$ |
6,462 |
|
|
$ |
74,889 |
|
|
$ |
640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
|
|
(in thousands) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a related
allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
21,677 |
|
|
$ |
32,573 |
|
|
$ |
— |
|
|
$ |
11,427 |
|
|
$ |
230 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
5,732 |
|
|
|
6,660 |
|
|
|
— |
|
|
|
2,380 |
|
|
|
99 |
|
Owner occupied commercial real estate |
|
|
11,573 |
|
|
|
13,892 |
|
|
|
— |
|
|
|
5,109 |
|
|
|
207 |
|
Commercial |
|
|
1,998 |
|
|
|
2,630 |
|
|
|
— |
|
|
|
1,226 |
|
|
|
45 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
3,122 |
|
|
|
4,056 |
|
|
|
— |
|
|
|
1,427 |
|
|
|
64 |
|
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 |
|
|
$ |
12,845 |
|
|
$ |
2,141 |
|
|
$ |
16,379 |
|
|
$ |
263 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
6,484 |
|
|
|
6,861 |
|
|
|
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 |
|
|
|
2,225 |
|
|
|
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 |
|
|
$ |
45,418 |
|
|
$ |
2,141 |
|
|
$ |
27,806 |
|
|
$ |
493 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied commercial real estate |
|
|
12,216 |
|
|
|
13,521 |
|
|
|
1,096 |
|
|
|
8,138 |
|
|
|
240 |
|
Owner occupied commercial real estate |
|
|
16,650 |
|
|
|
18,996 |
|
|
|
860 |
|
|
|
9,525 |
|
|
|
341 |
|
Commercial |
|
|
7,433 |
|
|
|
8,065 |
|
|
|
1,318 |
|
|
|
5,492 |
|
|
|
146 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
5,255 |
|
|
|
6,281 |
|
|
|
343 |
|
|
|
4,697 |
|
|
|
121 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans individually reviewed
for impairment |
|
$ |
77,111 |
|
|
$ |
95,066 |
|
|
$ |
6,314 |
|
|
$ |
57,228 |
|
|
$ |
1,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 purchased impaired loans and were $93,000 and $47,000 as of March 31, 2011 and
December 31, 2010, respectively. The following table presents information regarding the change in
all purchased impaired loans from the Company’s acquisition of American Community on April 17, 2009
through March 31, 2011.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
|
|
|
|
|
|
|
Principal |
|
|
Nonaccretable |
|
|
Carrying |
|
|
|
Receivable |
|
|
Difference |
|
|
Amount |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
5,388 |
|
|
$ |
497 |
|
|
$ |
4,891 |
|
Change due to payoff received |
|
|
(210 |
) |
|
|
— |
|
|
|
(210 |
) |
Transfer to foreclosed real estate |
|
|
(9 |
) |
|
|
(159 |
) |
|
|
150 |
|
Change due to charge-offs |
|
|
(249 |
) |
|
|
(246 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
4,920 |
|
|
$ |
92 |
|
|
$ |
4,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
1,655 |
|
|
$ |
72 |
|
|
$ |
1,583 |
|
Change due to payoff received |
|
|
(6 |
) |
|
|
— |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
$ |
1,649 |
|
|
$ |
72 |
|
|
$ |
1,577 |
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, 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.
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a
provision for loan losses charged to expense, which represents management’s best estimate for
probable losses that have been incurred within the existing portfolio of loans. The primary risks
inherent in the Bank’s loan portfolio, including the adequacy of the allowance or reserve for loan
losses, are based on management’s assumptions regarding, among other factors, general and local
economic conditions, which are difficult to predict and are beyond the Bank’s control. In
estimating these 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 $4.9 million for the quarter ended
March 31, 2011 as compared to $4.4 million for the quarter ended March 31, 2010. The provision
expense is determined by the Bank’s 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.
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.
The portion of the general allocation 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 March 31, 2011 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
26
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 quarters ended March
31, 2011 and March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
Charge-offs |
|
|
Recoveries |
|
|
Provision |
|
|
March 31, 2011 |
|
|
|
(Amounts in thousands) |
|
Construction |
|
$ |
12,014 |
|
|
$ |
3,778 |
|
|
$ |
73 |
|
|
$ |
1,283 |
|
|
$ |
9,592 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner occupied |
|
|
7,150 |
|
|
|
977 |
|
|
|
— |
|
|
|
(904 |
) |
|
|
5,269 |
|
Owner occupied |
|
|
5,958 |
|
|
|
739 |
|
|
|
76 |
|
|
|
1,939 |
|
|
|
7,234 |
|
Commercial |
|
|
4,335 |
|
|
|
218 |
|
|
|
68 |
|
|
|
754 |
|
|
|
4,939 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,706 |
|
|
|
541 |
|
|
|
30 |
|
|
|
1,128 |
|
|
|
4,323 |
|
Multifamily |
|
|
424 |
|
|
|
12 |
|
|
|
— |
|
|
|
74 |
|
|
|
486 |
|
Open ended secured 1-4 family |
|
|
3,298 |
|
|
|
532 |
|
|
|
39 |
|
|
|
339 |
|
|
|
3,144 |
|
Consumer and other |
|
|
867 |
|
|
|
284 |
|
|
|
36 |
|
|
|
254 |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,752 |
|
|
$ |
7,081 |
|
|
$ |
322 |
|
|
$ |
4,867 |
|
|
$ |
35,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
|
loans |
|
|
|
|
|
|
loans |
|
|
Loans |
|
|
collectively |
|
|
Loans |
|
|
|
individually |
|
|
individually |
|
|
evaluated |
|
|
collectively |
|
|
|
evaluated for |
|
|
evaluated for |
|
|
for |
|
|
evaluated for |
|
|
|
impairment |
|
|
impairment |
|
|
impairment |
|
|
impairment |
|
|
|
(Amounts in thousands) |
|
As of March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
1,052 |
|
|
$ |
31,636 |
|
|
$ |
8,540 |
|
|
$ |
229,447 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner occupied |
|
|
657 |
|
|
|
10,833 |
|
|
|
4,612 |
|
|
|
246,100 |
|
Owner occupied |
|
|
1,652 |
|
|
|
17,084 |
|
|
|
5,582 |
|
|
|
342,636 |
|
Commercial |
|
|
2,003 |
|
|
|
8,137 |
|
|
|
2,936 |
|
|
|
183,344 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
850 |
|
|
|
5,329 |
|
|
|
3,473 |
|
|
|
175,728 |
|
Multifamily |
|
|
63 |
|
|
|
750 |
|
|
|
423 |
|
|
|
29,254 |
|
Open ended secured 1-4 family |
|
|
159 |
|
|
|
1,422 |
|
|
|
2,985 |
|
|
|
205,886 |
|
Consumer and other |
|
|
26 |
|
|
|
125 |
|
|
|
847 |
|
|
|
64,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,462 |
|
|
$ |
75,316 |
|
|
$ |
29,398 |
|
|
$ |
1,476,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2011, the Company underwent a review of loan classifications
within the portfolio and noted approximately $40.9 million in reclassifications between non-owner
occupied and owner occupied commercial real estate. As a result, allowances for loan losses in
those categories were impacted.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
|
Reserves for |
|
|
|
|
|
|
loans |
|
|
|
|
|
|
loans |
|
|
Loans |
|
|
collectively |
|
|
Loans |
|
|
|
individually |
|
|
individually |
|
|
evaluated |
|
|
collectively |
|
|
|
evaluated for |
|
|
evaluated for |
|
|
for |
|
|
evaluated for |
|
|
|
impairment |
|
|
impairment |
|
|
impairment |
|
|
impairment |
|
As of December 31, 2010 |
|
(Amounts 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Charge-offs |
|
|
Recoveries |
|
|
Provision |
|
|
March 31, 2010 |
|
|
|
(Amounts in thousands) |
|
Construction |
|
$ |
19,978 |
|
|
$ |
4,329 |
|
|
$ |
33 |
|
|
$ |
1,515 |
|
|
$ |
17,197 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non owner occupied |
|
|
9,756 |
|
|
|
1,094 |
|
|
|
0 |
|
|
|
(433 |
) |
|
|
8,229 |
|
Owner occupied |
|
|
6,423 |
|
|
|
447 |
|
|
|
186 |
|
|
|
594 |
|
|
|
6,756 |
|
Commercial |
|
|
3,299 |
|
|
|
681 |
|
|
|
192 |
|
|
|
2,157 |
|
|
|
4,967 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family- first lien |
|
|
3,926 |
|
|
|
840 |
|
|
|
35 |
|
|
|
193 |
|
|
|
3,314 |
|
Multifamily |
|
|
493 |
|
|
|
— |
|
|
|
0 |
|
|
|
(82 |
) |
|
|
411 |
|
Open ended secured 1-4 family |
|
|
3,401 |
|
|
|
572 |
|
|
|
10 |
|
|
|
394 |
|
|
|
3,233 |
|
Consumer and other |
|
|
1,349 |
|
|
|
204 |
|
|
|
100 |
|
|
|
46 |
|
|
|
1,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,625 |
|
|
$ |
8,167 |
|
|
$ |
556 |
|
|
$ |
4,384 |
|
|
$ |
45,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Company’s 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
28
and other loans) are moved to non-accrual status when the loan becomes 90 days delinquent or a
portion of the loan is determined to be uncollectable and supporting collateral is not considered
to be sufficient to cover potential losses. 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 upon
determination that they are impaired.
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 reserve
for credit losses related to unfunded lending commitments was $221,000 and $204,000 as of March 31,
2011 and December 31, 2010, respectively.
The Company maintains reserves for mortgage loans sold to agencies and investors in the event that,
either through error or disagreement between the parties, the Company is required to indemnify the
purchase. The reserves take into consideration risks associated with underwriting, key factors in
the mortgage industry, loans with specific reserve requirements, past due loans and potential
indemnification by the Company. Reserves are estimated based on consideration of factors in the
mortgage industry such as declining collateral values and rising levels of delinquency, default and
foreclosure, coupled with increased incidents of quality reviews at all levels of the mortgage
industry seeking justification for pushing back losses to loan originators and wholesalers. As of
March 31, 2011, the Company had reserves for mortgage loans sold of $1.7 million, and charges
against reserves for the three months ended March 31, 2011 were $174,000. For the three months
ended March 31, 2010 the Company recorded $240,000 in provision expense related to potential
repurchase and warranties exposure on the $172 million in loan sales that occurred during that
period. For the quarters ended March 31, 2011 and March 31, 2010, the Company did not repurchase
any mortgage loans sold. As of December 31, 2010, the Company had reserves for mortgage loans sold
of $2.0 million.
10. Fair Value
The Company utilizes fair value measurements to record fair value adjustments for certain assets
and liabilities and to determine fair value disclosures. Available-for-sale securities, mortgage
servicing rights, interest rate lock commitments and forward sale loan commitments are recorded at
fair value on a monthly basis. Additionally, from time to time, the Company may be required to
record other assets at fair value, such as loans held-for-investment and certain other assets.
These nonrecurring fair value adjustments usually involve writing the asset down to fair value or
the lower of cost or market value.
Following is a description of valuation methodologies used for assets and liabilities recorded at
fair value.
Available-for-Sale Investment Securities
Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based valuation techniques
such as the present value of future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities
include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities
that are traded by dealers or brokers in active over-the-counter markets and money market funds.
Level 2 securities include mortgage-backed securities issued by government sponsored entities and
private label entities, municipal bonds and corporate debt securities. There have been no changes
in valuation techniques for the quarter ended March 31, 2011. Valuation techniques are consistent
with techniques used in prior periods.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
29
Interest Rate Locks and Forward Loan Sale Commitments
Sidus, the Company’s mortgage lending subsidiary, enters into interest rate lock commitments and
commitments to sell mortgages. At March 31, 2011, the amount of fair value associated with these
interest rate lock commitments and sale commitments was $337,453 and $214,858 respectively. 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. Interest rate locks and forward loan
sale commitments are recorded at fair value on a recurring basis. The fair value of forward sales
commitments is based on changes in loan pricing between the commitment date and period end,
typically month end. The fair value of interest rate lock commitments is based on servicing rate
premium, origination income net of origination costs, and changes in loan pricing between the
commitment date and period end, typically month end. There have been no changes in valuation
techniques for the quarter ended March 31, 2011. Valuation techniques are consistent with
techniques used in prior periods.
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments |
|
|
|
Level 3 |
|
|
|
Fair Value |
|
|
Fair Value |
|
Balance, December 31, 2010 and 2009 |
|
$ |
104,810 |
|
|
$ |
(790,608 |
) |
Gains/losses included in other income |
|
|
232,643 |
|
|
|
769,807 |
|
Transfer in and out |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance, March 31, 2011 and 2010 |
|
$ |
337,453 |
|
|
$ |
(20,801 |
) |
|
|
|
|
|
|
|
Mortgage Servicing Rights
Mortgage servicing rights are recorded at fair value on a recurring basis. A valuation of mortgage
servicing rights is performed using a pooling methodology. Similar loans are pooled together and
evaluated on a discounted earnings basis to determine the present value of future earnings. The
present value of the future earnings is the estimated market value for the pool, calculated using
consensus assumptions that a third party purchaser would utilize in evaluating a potential
acquisition of the servicing. As such, the Company classifies loan servicing rights as Level 3.
There have been no changes in valuation techniques for the quarter ended March 31, 2011. Valuation
techniques are consistent with techniques used in prior periods.
The following table presents a rollforward of mortgage servicing rights from December 31, 2010 to
March 31, 2011 and December 31, 2009 to March 31, 2010 and shows that the mortgage servicing rights
are classified as Level 3 as discussed above.
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
|
Fair Value |
|
|
Fair Value |
|
Balance, December 31, 2010 and 2009 |
|
$ |
2,144,139 |
|
|
$ |
1,917,941 |
|
Capitalized |
|
|
135,147 |
|
|
|
100,731 |
|
Gains/losses included in other income |
|
|
(59,575 |
) |
|
|
(77,736 |
) |
|
|
|
|
|
|
|
Balance, March 31, 2011 and 2010 |
|
$ |
2,219,711 |
|
|
$ |
1,940,936 |
|
|
|
|
|
|
|
|
Mortgage Loans Held-for-Sale
Loans held-for-sale are carried at lower of cost or market value on a recurring basis. The fair
value of loans held-for-sale is based on what secondary markets are currently offering for
portfolios with similar characteristics. As such, the Company classifies mortgage loans
held-for-sale as Level 2. At March 31, 2011 the cost of the Company’s mortgage loans held-for-sale
was less than the market value. Accordingly, at quarter end the Company’s loans held-for-sale
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
30
were carried at cost. There have been no changes in valuation techniques for the quarter ended
March 31, 2011. Valuation techniques are consistent with techniques used in prior periods.
Impaired Loans
The Company does not record loans held-for-investment at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan losses is established.
Loans for which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is
identified as individually impaired, management measures impairment in accordance with the
Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired 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 March 31, 2011, the majority of
impaired loans were evaluated based on the fair value of the collateral. When the fair value of the
collateral is based on an observable market price or a current appraised value, the Company records
the impaired loan as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
There have been no changes in valuation techniques for the quarter ended March 31, 2011. 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, 2010 to March
31, 2011 and shows that the interest rate swaps are classified as Level 3 as discussed above.
There were no interest rate swaps outstanding during the quarter ended March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
|
Fair Value- Assets |
|
|
Fair Value- Liabilities |
|
|
|
(Amounts in thousands) |
|
Balance, December 31, 2010 |
|
$ |
159 |
|
|
$ |
159 |
|
Purchases, sales, issuances and settlements |
|
|
— |
|
|
|
— |
|
Gains/losses included in other income |
|
|
(26 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
Balance, March 31, 2011 |
|
$ |
133 |
|
|
$ |
133 |
|
|
|
|
|
|
|
|
Other Real Estate Owned
Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO on a
nonrecurring basis. Subsequently, OREO is carried at the lower of carrying value or fair value.
Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the OREO as nonrecurring Level 3. The carrying
value of OREO at March 31, 2011 is $27,460,571. At December 31, 2010 the carrying value of OREO
was $25,582,234. There have been no changes in valuation techniques for the quarter ended March
31, 2011. Valuation techniques are consistent with techniques used in prior periods.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
31
Assets (liabilities) subjected to recurring fair value adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 (in thousands) |
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
24,262 |
|
|
$ |
— |
|
|
$ |
24,262 |
|
|
$ |
— |
|
Government sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
49,044 |
|
|
|
— |
|
|
|
49,044 |
|
|
|
— |
|
Collateralized mortgage obligations |
|
|
157,332 |
|
|
|
— |
|
|
|
157,332 |
|
|
|
— |
|
Private
label collateralized
mortgage obligations |
|
|
1,661 |
|
|
|
— |
|
|
|
1,661 |
|
|
|
— |
|
State and municipal securities |
|
|
68,090 |
|
|
|
— |
|
|
|
68,090 |
|
|
|
— |
|
Common and preferred stocks |
|
|
1,140 |
|
|
|
1,140 |
|
|
|
— |
|
|
|
— |
|
Interest rate swap agreements |
|
|
133 |
|
|
|
— |
|
|
|
— |
|
|
|
133 |
|
Interest rate swap agreements |
|
|
(133 |
) |
|
|
— |
|
|
|
— |
|
|
|
(133 |
) |
Interest rate lock commitments |
|
|
337 |
|
|
|
— |
|
|
|
— |
|
|
|
337 |
|
Forward loan sale commitments |
|
|
215 |
|
|
|
— |
|
|
|
215 |
|
|
|
— |
|
Mortgage servicing rights |
|
|
2,220 |
|
|
|
— |
|
|
|
— |
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 swap agreements |
|
|
159 |
|
|
|
— |
|
|
|
— |
|
|
|
159 |
|
Interest rate swap agreements |
|
|
(159 |
) |
|
|
— |
|
|
|
— |
|
|
|
(159 |
) |
Interest rate lock commitments |
|
|
105 |
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
Forward loan sale commitments |
|
|
161 |
|
|
|
— |
|
|
|
161 |
|
|
|
— |
|
Mortgage servicing rights |
|
|
2,144 |
|
|
|
— |
|
|
|
— |
|
|
|
2,144 |
|
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
32
Assets subjected to nonrecurring fair value adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 (Amounts in thousands) |
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Other real estate owned |
|
$ |
1,364 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,364 |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
6,312 |
|
|
|
— |
|
|
|
— |
|
|
|
6,312 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
|
|
3,257 |
|
|
|
— |
|
|
|
— |
|
|
|
3,257 |
|
Owner occupied |
|
|
4,773 |
|
|
|
— |
|
|
|
— |
|
|
|
4,773 |
|
Commercial |
|
|
4,296 |
|
|
|
— |
|
|
|
— |
|
|
|
4,296 |
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured 1-4 family real estate |
|
|
2,140 |
|
|
|
— |
|
|
|
— |
|
|
|
2,140 |
|
Multifamily |
|
|
387 |
|
|
|
— |
|
|
|
— |
|
|
|
387 |
|
Open ended secured 1-4 family |
|
|
410 |
|
|
|
— |
|
|
|
— |
|
|
|
410 |
|
Consumer and other |
|
|
99 |
|
|
|
— |
|
|
|
— |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
2,941 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,941 |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
In accordance with accounting for foreclosed property, other real estate owned with a carrying
amounts of $1.5 million were written down to their fair value of $1.4 million for the quarter ended
March 31, 2011, resulting in a loss of $104,000, which was included in earnings.
There were no transfers between valuation levels for any assets during the quarter ended March 31,
2011. If different valuation techniques are deemed necessary, we would consider those transfers to
occur at the end of the period when the assets are valued.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
33
11. Financial Instruments
The following is a summary of the carrying amounts and fair values of the Company’s financial
assets and liabilities at March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
amount |
|
|
fair value |
|
|
amount |
|
|
fair value |
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
219,590 |
|
|
$ |
219,590 |
|
|
$ |
229,780 |
|
|
$ |
229,780 |
|
Investment securities |
|
|
301,529 |
|
|
|
301,529 |
|
|
|
298,002 |
|
|
|
298,002 |
|
Loans and loans held-for-sale, net |
|
|
1,549,727 |
|
|
|
1,476,927 |
|
|
|
1,613,206 |
|
|
|
1,541,071 |
|
Accrued interest receivable |
|
|
7,515 |
|
|
|
7,515 |
|
|
|
7,947 |
|
|
|
7,947 |
|
Federal Home Loan Bank stock |
|
|
9,416 |
|
|
|
9,416 |
|
|
|
9,416 |
|
|
|
9,416 |
|
Investment in Bank owned life insurance |
|
|
25,441 |
|
|
|
25,441 |
|
|
|
25,278 |
|
|
|
25,278 |
|
Interest rate swap agreements |
|
|
133 |
|
|
|
133 |
|
|
|
159 |
|
|
|
159 |
|
Interest rate lock commitments |
|
|
337 |
|
|
|
337 |
|
|
|
105 |
|
|
|
105 |
|
Forward sales commitments |
|
|
215 |
|
|
|
215 |
|
|
|
161 |
|
|
|
161 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits, NOW, savings
and money market accounts |
|
|
854,248 |
|
|
|
854,248 |
|
|
|
805,951 |
|
|
|
805,951 |
|
Time deposits |
|
|
1,105,558 |
|
|
|
1,116,611 |
|
|
|
1,214,455 |
|
|
|
1,227,628 |
|
Borrowed funds |
|
|
109,452 |
|
|
|
110,314 |
|
|
|
116,768 |
|
|
|
117,741 |
|
Accrued interest payable |
|
|
2,811 |
|
|
|
2,811 |
|
|
|
3,302 |
|
|
|
3,302 |
|
Interest rate swap agreements |
|
|
133 |
|
|
|
133 |
|
|
|
159 |
|
|
|
159 |
|
The carrying amounts of cash and cash equivalents approximate their fair value.
The fair value of marketable securities is based on quoted market prices, prices quoted for similar
instruments, and prices obtained from independent pricing services.
For certain categories of loans, such as installment and commercial loans, the fair value is
estimated by discounting the future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining maturities. The cost of
fixed rate mortgage loans held-for-sale approximates the 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%.
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 March 31,
2011 and December 31, 2010. 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
March 31, 2011 and December 31, 2010, respectively. The fair value of fixed-maturity certificates
of deposit and individual retirement
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
34
accounts is estimated using the present value of the projected
cash flows using rates currently offered for similar deposits with similar maturities.
The fair values of borrowings are based on discounting expected cash flows at the interest rate for
debt with the same or similar remaining maturities and collateral requirements. The carrying values
of short-term borrowings, including overnight, securities sold under agreements to repurchase,
federal funds purchased and FHLB advances, approximates the fair values due to the short maturities
of those instruments. The Company’s credit risk is not material to calculation of fair value.
The carrying values of accrued interest receivable and accrued interest payable approximates fair
values due to the short-term duration.
The fair values of forward loan sales commitments and interest rate lock commitments are based on
changes in the reference price for similar instruments as quoted by secondary market investors.
12. Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets
acquired. Goodwill impairment testing is performed annually or more frequently if events or
circumstances indicate possible impairment. An impairment loss is recorded to the extent that the
carrying value of goodwill exceeds its implied fair value.
We evaluate goodwill on an annual basis at October 1st or more frequently if circumstances indicate
possible impairment for the Sidus reporting unit. During the quarter ended March 31, 2011, there
were no events or circumstances that indicated possible impairment and no additional testing was
performed.
13. Subsequent Events
On April 28, 2011, the Company announced the private placement of up to 3,258,000 shares of common
stock (the “Private Placement”) to accredited investors, including certain of our officers and
directors, for total cash proceeds of approximately $6.4 million on May 6, 2011. The
purchase price per share for investors is at a 10% discount to the weighted average closing
sale price of our common stock on Nasdaq for the 10-day period ending five business days prior to
the closing of the Private Placement. Proceeds received from the Private Placement are expected
to be kept at the holding company level in order to pay interest on trust preferred securities, to
pay dividends on Series T and Series T-ACB Preferred Stock, which were issued and sold to the U.S.
Treasury pursuant to the Capital Purchase Program, and for other general corporate purposes.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
35
14. Business Segment Information
The Company has two reportable segments, including the Bank and Sidus, a single member LLC with
the Bank as the single member. Sidus is headquartered in Greenville, North Carolina and offers
mortgage banking services to its customers throughout the Southeast and MidAtlantic regions. The
following table details the results of operations for the first three months of 2011 and 2010 for
the Bank and for Sidus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
Sidus |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
|
|
For Three Months Ended March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
23,197 |
|
|
$ |
381 |
|
|
$ |
— |
|
|
$ |
23,578 |
|
Interest expense |
|
|
7,626 |
|
|
|
72 |
|
|
|
190 |
|
|
|
7,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,571 |
|
|
|
309 |
|
|
|
(190 |
) |
|
|
15,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
4,849 |
|
|
|
18 |
|
|
|
— |
|
|
|
4,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income (loss) after provision for loan losses |
|
|
10,722 |
|
|
|
291 |
|
|
|
(190 |
) |
|
|
10,823 |
|
Other income |
|
|
2,968 |
|
|
|
1,899 |
|
|
|
(76 |
) |
|
|
4,791 |
|
Other expense |
|
|
14,405 |
|
|
|
2,504 |
|
|
|
— |
|
|
|
16,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
(715 |
) |
|
|
(314 |
) |
|
|
(266 |
) |
|
|
(1,295 |
) |
Income taxes |
|
|
(509 |
) |
|
|
— |
|
|
|
— |
|
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
(206 |
) |
|
$ |
(314 |
) |
|
$ |
(266 |
) |
|
$ |
(786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,203,545 |
|
|
$ |
45,624 |
|
|
$ |
(18,278 |
) |
|
$ |
2,230,891 |
|
Net loans |
|
|
1,516,847 |
|
|
|
— |
|
|
|
— |
|
|
|
1,516,847 |
|
Loans held for sale |
|
|
675 |
|
|
|
32,205 |
|
|
|
— |
|
|
|
32,880 |
|
Goodwill |
|
|
— |
|
|
|
4,944 |
|
|
|
— |
|
|
|
4,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
24,439 |
|
|
$ |
351 |
|
|
$ |
— |
|
|
$ |
24,790 |
|
Interest expense |
|
|
7,791 |
|
|
|
10 |
|
|
|
182 |
|
|
|
7,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
16,648 |
|
|
|
341 |
|
|
|
(182 |
) |
|
|
16,807 |
|
Provision for loan losses |
|
|
4,384 |
|
|
|
— |
|
|
|
— |
|
|
|
4,384 |
|
Net interest
income (loss) after provision for loan losses |
|
|
12,264 |
|
|
|
341 |
|
|
|
(182 |
) |
|
|
12,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
2,634 |
|
|
|
1,335 |
|
|
|
(189 |
) |
|
|
3,780 |
|
Other expense |
|
|
13,058 |
|
|
|
1,378 |
|
|
|
96 |
|
|
|
14,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes (benefit) |
|
|
1,840 |
|
|
|
298 |
|
|
|
(467 |
) |
|
|
1,671 |
|
Income taxes (benefit) |
|
|
757 |
|
|
|
— |
|
|
|
— |
|
|
|
757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
1,083 |
|
|
$ |
298 |
|
|
$ |
(467 |
) |
|
$ |
914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
2,176,939 |
|
|
$ |
33,882 |
|
|
$ |
(7,709 |
) |
|
$ |
2,203,112 |
|
Loans held for sale |
|
|
1,610,632 |
|
|
|
— |
|
|
|
— |
|
|
|
1,610,632 |
|
Goodwill |
|
|
768 |
|
|
|
23,540 |
|
|
|
— |
|
|
|
24,308 |
|
|
|
|
— |
|
|
|
4,944 |
|
|
|
— |
|
|
|
4,944 |
|
|
|
|
(1) |
|
As an LLC, Sidus passes its pre-tax income through to its single member, the Bank, which is
taxed on that income. |
|
(2) |
|
Note: The “Other” column includes asset eliminations representing the Bank’s Due from Sidus
account ($16,549,066 in 2011 and $6,853,856 in 2010), the Bank’s Investment in Sidus ($3,000,000 in
2011 and 2010), and the Bank’s A/R from Sidus ($15,055 in 2011 and $71,632 in 2010). Also included
in this column are Holding Company assets ($1,285,967 in 2011 and $2,216,809 in 2010) and Holding
Company income and expenses. |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following is our discussion and analysis of certain significant factors that have affected our
financial position and operating results during the periods included in the accompanying financial
statements. This commentary should be read in conjunction with the financial statements and the
related notes and the other statistical information included in this report.
This report contains statements which constitute “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements relate to the financial condition, results of operations, plans,
objectives, future performance, and business of our Company. Forward-looking statements are based
on many assumptions and estimates and are not guarantees of future performance. Our actual results
may differ materially from those anticipated in any forward-looking statements, as they will depend
on many factors about which we are unsure, including many factors which are beyond our control. The
words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,”
“potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,”
as well as similar expressions, are meant to identify such forward-looking statements. Potential
risks and uncertainties that could cause our actual results to differ materially from those
anticipated in our forward-looking statements include, without limitation, those described under
the heading “Risk Factors” in our Annual Report on Form 10-K (as amended) for the year ended
December 31, 2010 as filed with the Securities and Exchange
Commission (the “SEC”) and the following:
|
• |
|
reduced earnings due to higher credit losses generally and specifically because losses in the
sectors of our loan portfolio secured by real estate are greater than expected due to economic
factors, including declining real estate values, increasing interest rates, increasing
unemployment, or changes in payment behavior or other factors; |
|
|
• |
|
reduced earnings due to higher credit losses because our loans are concentrated by loan type,
industry segment, borrower type, or location of the borrower or collateral; |
|
|
• |
|
the rate of delinquencies and amount of loans charged-off; |
|
|
• |
|
the adequacy of the level of our allowance for loan losses; |
|
|
• |
|
the amount of our loan portfolio collateralized by real estate, and the weakness in the
commercial real estate market; |
|
|
• |
|
our efforts to raise capital or otherwise increase and maintain our regulatory capital ratios
above the statutory minimums; |
|
|
• |
|
the impact of our efforts to raise capital on our financial position, liquidity, capital, and
profitability; |
|
|
• |
|
adverse changes in asset quality and resulting credit risk-related losses and expenses; |
|
|
• |
|
increased funding costs due to market illiquidity, increased competition for funding, and
increased regulatory requirements with regard to funding; |
|
|
• |
|
significant increases in competitive pressure in the banking and financial services industries; |
|
|
• |
|
changes in the interest rate environment which could reduce anticipated or actual margins; |
|
|
• |
|
changes in political conditions or the legislative or regulatory environment, including the
effect of recent financial reform legislation on the banking industry; |
|
|
• |
|
general economic conditions, either nationally or regionally and especially in our primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality; |
|
|
• |
|
our ability to retain our existing customers, including our deposit relationships; |
|
|
• |
|
changes occurring in business conditions and inflation; |
|
|
• |
|
changes in technology; |
|
|
• |
|
changes in monetary and tax policies; |
|
|
• |
|
ability of borrowers to repay loans, which can be adversely affected by a number of factors,
including changes in economic conditions, adverse trends or events affecting business industry
groups, reductions in real estate values or markets, business closings or lay-offs, natural
disasters, which could be exacerbated by potential climate change, and international
instability; |
|
|
• |
|
changes in deposit flows; |
|
|
• |
|
changes in accounting principles, policies or guidelines; |
|
|
• |
|
changes in the assessment of whether a deferred tax valuation allowance is necessary; |
|
|
• |
|
our ability to maintain internal control over financial reporting; |
|
|
• |
|
our reliance on secondary sources such as Federal Home Loan Bank advances, sales of securities
and loans, federal funds lines of credit from correspondent banks and out-of-market time
deposits, to meet our liquidity needs; |
|
|
• |
|
loss of consumer confidence and economic disruptions resulting from terrorist activities; |
|
|
• |
|
changes in the securities markets; and |
|
|
• |
|
other risks and uncertainties detailed from time to time in our filings with the SEC. |
These risks are exacerbated by the recent developments in national and international financial
markets over the past several years, and we are unable to predict what effect these uncertain market conditions will have on
us. There can be no assurance that these unprecedented recent developments will not continue to
materially and adversely affect our business, financial condition and results of operations.
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 you 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.
Overview
The following discussion describes our results of operations for the three-month periods ended
March 31, 2011 and 2010 and also analyzes our financial condition as of March 31, 2011 as compared
to December 31, 2010. Like most community banks, we derive most of our income from interest we
receive on our loans and investments. Our primary source of funds for making these loans and
investments is our deposits, on which we pay interest. Consequently, one of the key measures of
our success is our amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits. Another key measure is the spread between the yield we earn on
these interest-earning assets and the rate we pay on our interest-bearing liabilities.
Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to
absorb probable losses on existing loans that may become uncollectible. We establish and maintain
this allowance by charging a provision for loan losses against our operating earnings. In the
following section, we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other
expenses we charge to our customers. We describe the various components of this noninterest
income, as well as our noninterest expense, in the following discussion.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
37
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
the financial statements and the related notes and the other statistical information also included
in this report.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to reflect events or
occurrences after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Changes in Financial Position
Total assets at March 31, 2011 were $2,230.9 million, a decrease of $69.7 million, or 3.0%,
compared to assets of $2,300.6 million at December 31, 2010. The loan portfolio, net of allowance
for losses, was $1,516.8 million compared to $1,562.8 million at December 31, 2010. Gross loans
held-for-investment decreased by $47.8 million, or 3.0%. The allowance for loan losses decreased
$1.9 million driven primarily by decreases in classified loans for the three months ended March 31,
2011. Total watch list and substandard loans decreased $40.5 million as compared to December 31,
2010. Offsetting the decreases in criticized loans and decreases in loan balances were increases
in other qualitative factors impacted by increased past dues and nonaccruals. See Note 9
above entitled “Loans and Allowance for Loan Losses” for further discussion of the allowance for loan losses.
Mortgage loans held-for-sale decreased by $17.5 million, or 34.8%, from December 31, 2010 to March
31, 2011 as the Bank continued its strategy of selling mortgage loans mostly to various investors
with servicing rights released and to a lesser extent to the Federal National Mortgage Association
with servicing rights retained. These loans are normally held for a period of two to three weeks
before being sold to investors. The timing of the loans closed within each month allowed the Bank
to sell more of its outstanding loans at March 31, 2011 than at December 31, 2010. Mortgage loans
closed in the first three months of 2011 ranged from a low of $41.0 million in February to a high
of $79.8 million in January and totaled $183.1 million. Mortgage loans closed during the three
months ended March 31, 2010 totaled $145.7 million.
The securities portfolio increased from $298.0 million at December 31, 2010, to $301.5 million at
March 31, 2011, an increase of $3.5 million. The portfolio is comprised of securities of U.S.
government agencies (8.0%), mortgage-backed securities (69.0%), state and municipal securities
(22.6%), and publicly traded common and preferred stocks (0.4%). Temporary investments, including
federal funds sold, increased from approximately $31,000 at December 31, 2010 to $50,000 at March
31, 2011.
Other assets decreased $1.1 million due largely to a decrease in prepaid expenses. OREO increased
$1.9 million due to foreclosures in the amount of $4.4 million less dispositions of $2.5 million
and losses of $183,000 during the quarter.
Deposits decreased $60.6 million, or 3.0%, comparing March 31, 2011 to December 31, 2010. Overall,
noninterest-bearing demand deposits increased $6.3 million, or 2.9%, NOW, savings, and money market
accounts increased $42.0 million, or 7.1%, Certificates of deposit (“CODs”) over $100,000 decreased
$34.3 million, or 7.2%, and other CODs decreased $74.6 million, or 10.1%. The Bank had advertised
several promotional rates for certificates of deposits in the prior year which are now beginning to
mature thus leading to a runoff in certificates of deposits in the current quarter.
Borrowed funds decreased $7.3 million or 6.3% comparing March 31, 2011 to December 31, 2010.
Repurchase agreements remained relatively stable, while advances from FHLB and overnight borrowings
decreased $7.0 million. Long term borrowings included $35.0 million in trust preferred securities
and advances from the FHLB of $68.1 million. The American Community merger added $10.4 million in
trust preferred securities at a rate equal to the three-month LIBOR rate plus 2.80% and will mature
in 2033. Yadkin Valley Statutory Trust I (“the Trust”) issued $25.9
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
38
million in trust preferred securities at a rate equal to the three-month LIBOR rate plus
1.32%. The trust preferred securities mature in 30 years, and can be called by the Trust without
penalty after five years.
Other liabilities and accrued interest payable combined decreased by $829,000, or 6.1%, from
December 31, 2010 to March 31, 2011. Decreases in miscellaneous accruals of $650,000 and a decrease
in accounts payable contributed to the decrease. At December 31 2010, miscellaneous accruals
included accrued severance costs related to the earnings improvement initiative implemented in
2010. These accrued costs were paid out during the first quarter of 2011.
At March 31, 2011, total shareholders’ equity was $146.5 million, or a book value of $6.11 per
common share, compared to $147.5 million, or a book value of $6.24 per common share, at December
31, 2010. The Company’s equity to assets ratio was 6.57% and 6.41%, at March 31, 2011 and December
31, 2010, respectively.
The following table sets forth the Company’s and the Bank’s various capital ratios as of March 31,
2011, and December 31, 2010. On an ongoing basis, we continue to evaluate various options, such as
issuing common or preferred stock, to increase the bank’s capital and related capital ratios in
order to maintain adequate capital levels. The Company and the Bank exceeded the minimum
regulatory capital ratios as of March 31, 2011, as well as the ratios to be considered “well
capitalized.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Company |
|
|
Bank |
|
|
Company |
|
|
Bank |
|
Total risk-based capital ratio |
|
|
10.6% |
|
|
|
10.7% |
|
|
|
10.6% |
|
|
|
10.5% |
|
Tier 1 risk-based capital ratio |
|
|
9.4% |
|
|
|
9.4% |
|
|
|
9.4% |
|
|
|
9.2% |
|
Leverage ratio |
|
|
7.1% |
|
|
|
7.1% |
|
|
|
7.2% |
|
|
|
7.0% |
|
Capital adequacy is an important indicator of financial stability and performance. In order
to be considered “well capitalized”, the Bank must exceed total risk-based capital ratios of 10%,
and Tier 1 risk-based capital ratios and leverage ratios of 5%. Our goal has been to maintain a
“well-capitalized” status for the Bank since failure to meet or exceed this classification affects
how regulatory applications for certain activities, including acquisitions, and continuation and
expansion of existing activities, are evaluated and could make our customers and potential
investors less confident in our Bank.
Liquidity, Interest Rate Sensitivity and Market Risk
The Bank derives the majority of its liquidity from its core deposit base and to a lesser extent
from wholesale borrowing. The balance sheet liquidity ratio, measured by the sum of cash (less
reserve requirements), investments, and loans held-for-sale reduced by pledged securities, as
compared to deposits and short-term borrowings, was 23.1% at March 31, 2011 compared to 23.4% at
December 31, 2010. Additional liquidity is provided by $133.3 million in unused credit including
federal funds purchased lines provided by correspondent banks as well as credit availability from
the FHLB. In addition, the Bank has unpledged marketable securities of $189.5 million available for
use as a source of collateral. At March 31, 2011, brokered deposits totaled $42.1 million, or 2.3%
of total deposits. Brokered certificates of deposit are primarily short-term with maturities of
nine months or less. The Bank also maintains a brokered deposit NOW account to add municipal
deposits totaling $3.3 million at March 31, 2011.
The Bank contracted with Promontory Interfinancial Network in 2008 for various services including
wholesale CD funding. Promontory’s CDARS® product, One-Way BuySM, enables the Bank to
bid on a weekly basis through a private auction for CD terms ranging from four weeks to 260 weeks
(approximately five years) with settlement available each Thursday. At March 31, 2011, the balance
of funds acquired through the One-Way Buy product totaled $23.9 million, compared to $50.6 million
at December 31, 2010.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
39
Promontory also provides a product, CDARS® Reciprocal, which allows the Bank’s customers to
place funds in excess of the FDIC insurance limit with Promontory’s network of participating Banks
so that the customer is fully insured for the amount deposited. Promontory provides reciprocating
funds to the Bank from funds placed at other banks by their customers. The Bank sets its customers’
interest rates when they place deposits through the network and pays/receives the rate difference
to/from the other banks whose reciprocal funds are held by the Bank. The overall impact of this
process is that the Bank effectively pays the rate offered to its relationship customer. Therefore,
the
Bank does not consider these funds to be wholesale or brokered funds. In compliance with FDIC
reporting requirements, the Bank reports include reciprocal deposits as brokered deposits in its
quarterly Federal Financial Institutions Examination Council Call Report. At March 31, 2011,
CDARS® reciprocal deposits totaled $20.2 million, compared to $20.2 million at December 31, 2010.
Management continues to assess interest rate risk internally and by utilizing outside sources. The
balance sheet is asset sensitive over a three-month period, meaning that there will be more assets
than liabilities immediately repricing as market rates change. Over a period of twelve months, the
balance sheet remains slightly asset sensitive. We generally would benefit from increasing market
interest rates when we have an asset-sensitive, or a positive interest rate gap, and we would
generally benefit from decreasing market interest rates when we have liability-sensitive, or a
negative interest rate gap.
The Company currently has derivative instrument contracts consisting of interest rate swaps and
interest rate lock commitments and commitments to sell mortgages. The primary objective for each
of these contracts is to minimize interest rate risk. The Company’s strategy is to use derivative
contracts to stabilize and improve net interest margin and net interest income currently and in
future periods. The Company has no market risk sensitive instruments held for trading purposes.
The Company’s exposure to market risk is reviewed regularly by management.
The management of equity is a critical aspect of capital management in any business. The
determination of the appropriate amount of equity is affected by a number of factors. The primary
factor for a regulated financial institution is the amount of capital needed to meet regulatory
requirements, although other factors, such as the “risk equity” the business requires and balance
sheet leverage, also affect the determination. To be categorized as well capitalized, the Company
and the Bank each must maintain minimum amounts and ratios. At March 31, 2011, the Company is
well-capitalized for regulatory purposes both at the bank and holding company level, however 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.
Results of Operations
Net loss for the three-month period ended March 31, 2011 was $786,000 before preferred dividends,
compared to a net income of $914,000 in the same period of 2010. Net loss available to common
shareholders for the three-month period ended March 31, 2011 was $1.6 million. Basic and diluted
losses per common share were $(0.10) for the three-month period ended March 31, 2011. Basic and
diluted earnings per common share were $0.01 for the three month period ended March 31, 2010. On
an annualized basis, first quarter results represent a loss on average assets of 0.28% at March 31,
2011 compared to a return on average assets of 0.03% at March 31, 2010, and a loss on average
equity of 4.27% compared to return on average equity of 0.38% at March 31, 2010.
Net Interest Income
Net interest income, the largest contributor to earnings, decreased $1.1 million or 6.7% to $15.7
million in the first quarter of 2011, compared with $16.8 million in the same period of 2010. The
decrease was due primarily to the accretion of fair market valuations of $976,000 recorded in
connection with the American Community acquisition for the quarter ended March 31, 2010 as compared
to $292,000 for the quarter ended March 31, 2011. The net interest margin decreased to 3.07% in the
first three months of 2011 from 3.47% in the first three months of 2010. Excluding the accretion,
net interest margin for the first three months of 2011 decreased to 3.01% as compared to 3.27% in
the
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
40
first three months of 2010. The decrease in margin year over year was due to primarily to
decreased yields on investment securities, as well as increased cash levels. The Company maintains
an asset-sensitive position with respect to the impact of changing rates on net interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
|
Three Months Ended March 31, 2010 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
Interest Rates Earned and Paid |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
9,769 |
|
|
$ |
6 |
|
|
|
0.25 |
% |
|
$ |
632 |
|
|
$ |
— |
|
|
|
0.25 |
% |
Interest-bearing deposits |
|
|
207,707 |
|
|
|
115 |
|
|
|
0.22 |
% |
|
|
134,627 |
|
|
|
61 |
|
|
|
0.18 |
% |
Investment securities (1) |
|
|
296,220 |
|
|
|
2,375 |
|
|
|
3.25 |
% |
|
|
180,026 |
|
|
|
2,018 |
|
|
|
4.55 |
% |
Total loans (1)(2)(6) |
|
|
1,602,393 |
|
|
|
21,391 |
|
|
|
5.41 |
% |
|
|
1,683,199 |
|
|
|
23,002 |
|
|
|
5.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
2,116,089 |
|
|
|
23,887 |
|
|
|
4.58 |
% |
|
|
1,998,484 |
|
|
|
25,081 |
|
|
|
5.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets |
|
|
148,253 |
|
|
|
|
|
|
|
|
|
|
|
140,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,264,342 |
|
|
|
|
|
|
|
|
|
|
$ |
2,139,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
$ |
550,688 |
|
|
|
1,176 |
|
|
|
0.87 |
% |
|
$ |
387,493 |
|
|
|
790 |
|
|
|
0.83 |
% |
Savings |
|
|
54,451 |
|
|
|
27 |
|
|
|
0.20 |
% |
|
|
53,662 |
|
|
|
33 |
|
|
|
0.25 |
% |
Time certificates |
|
|
1,167,136 |
|
|
|
6,115 |
|
|
|
2.12 |
% |
|
|
1,199,571 |
|
|
|
6,592 |
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
1,772,275 |
|
|
|
7,318 |
|
|
|
1.67 |
% |
|
|
1,640,726 |
|
|
|
7,415 |
|
|
|
1.83 |
% |
Repurchase agreements sold |
|
|
39,673 |
|
|
|
106 |
|
|
|
1.08 |
% |
|
|
47,402 |
|
|
|
132 |
|
|
|
1.13 |
% |
Borrowed funds (8) |
|
|
71,393 |
|
|
|
464 |
|
|
|
2.64 |
% |
|
|
74,163 |
|
|
|
436 |
|
|
|
2.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,883,341 |
|
|
|
7,888 |
|
|
|
1.70 |
% |
|
|
1,762,291 |
|
|
|
7,983 |
|
|
|
1.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
218,444 |
|
|
|
|
|
|
|
|
|
|
|
205,848 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
147,939 |
|
|
|
|
|
|
|
|
|
|
|
153,973 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
14,618 |
|
|
|
|
|
|
|
|
|
|
|
16,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and
stockholders’ equity |
|
$ |
2,264,342 |
|
|
|
|
|
|
|
|
|
|
$ |
2,139,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (3)
and interest rate spread (5) |
|
|
|
|
|
$ |
15,999 |
|
|
|
2.88 |
% |
|
|
|
|
|
$ |
17,098 |
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4) |
|
|
|
|
|
|
|
|
|
|
3.07 |
% |
|
|
|
|
|
|
|
|
|
|
3.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields relate to investment securities and loans exempt from Federal income taxes are
stated on a fully tax-equivalent basis,
assuming a Federal income tax rate of 35%. The calculation includes an adjustment for the
nondeductible portion of interest expense
used to fund tax-exempt assets. |
|
(2) |
|
The loan average includes loans on which accrual of interest has been discontinued. |
|
(3) |
|
The net interest income is the difference between income from earning assets and interest
expense. |
|
(4) |
|
Net interest margin is net interest income divided by total average earning assets. |
|
(5) |
|
Interest spread is the difference between the average interest rate received on earning assets
and the average interest rate paid on
interest-bearing liabilities. |
|
(6) |
|
Interest income on loans includes $176,000 and $571,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively. |
|
(7) |
|
Interest expense on deposits includes $86,000 and $390,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively. |
|
(8) |
|
Interest expense on borrowings includes $30,000 and $15,000 in accretion of fair market value
adjustments related to recent mergers
for the three months ended March 31, 2011 and 2010, respectively |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
41
Provisions and Allowance for Loan Losses
Adequacy of the allowance or reserve for loan losses of the Bank is a significant estimate that is
based on management’s assumptions regarding, among other factors, general and local economic
conditions, which are difficult to predict and are beyond the Bank’s control. In estimating
these loss reserve levels, management also considers the financial conditions of specific borrowers
and credit concentrations with specific borrowers, groups of borrowers, and industries.
The allowance for loan losses was $35.9 million at March 31, 2011, or 2.31% of loans
held-for-investment, as compared to $37.8 million, or 2.36% of loans held-for-investment, at
December 31, 2010. Decreases in the allowance for loan losses were due to decreases in gross loans
as well as a decrease in criticized loans not considered impaired. Decreases in criticized loans
were due to improvements in loans 30-89 days past due, payoffs and overall improvements in
underlying credit exposures. Increases in non-performing loans partially offset these decreases as
the weak economic environment continued to take a toll on numerous borrowers’ ability to pay as
scheduled. This has resulted in increased loan delinquencies greater than 90 days past due, and in
some cases impairment of the value of
the collateral used to secure real estate loans and the ability to sell the collateral upon
foreclosure. Collateral value is assessed based on collateral value trends, liquidation value
trends, and other liquidation expenses to determine logical and credible discounts that may be
needed. In response to this deterioration in real estate loan quality, management is aggressively
monitoring its classified loans and is continuing to monitor credits with material weaknesses.
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 $35.9 million in total allowance for loan losses at March 31, 2011, the specific
allowance for impaired loans accounted for $6.5 million, up from $6.3 million at year end. The
remaining general allowance, $29.4 million, was attributed to performing loans and was down from
$31.5 million at year end. The decrease in the general allowance was driven primarily by a
decrease in substandard and watch loans of $40.5 million which resulted from additional impairments
of construction and commercial real estate loans, for which specific allowances are now calculated,
as well as a few significant payoffs and improvements past dues and underlying credit exposures of
previously classified loans. Also contributing to the decrease in the general allowance for loan
losses was a 3.0% decrease in gross loans as of March 31, 2011 as compared to December 31, 2010.
Offsetting the decreases in criticized loans and decreases in loan balances were increases in other
qualitative factors including increasing past dues and nonaccruals.
Net loan charge offs (recoveries) were $6.8 million, or 1.71% (annualized), of average loans, for
the three months ending March 31, 2011 compared to $7.6 million, or 1.83% (annualized), of average
loans for the three months ending March 31, 2010. The decrease over last year was the result of
some stabilization in the economy resulting in an increase in recoveries and decreased charge-offs
in many categories. Net loan charge offs (recoveries) for the first quarter of 2011 decreased from
the fourth quarter of 2010, when net loan charge offs (recoveries) were $13.3 million, or 3.08%
(annualized).
Management considers the allowance for loan losses adequate to cover the estimated losses inherent
in the Bank’s loan portfolio as of March 31, 2011. No assurance can be given in this regard,
however, especially considering the overall weakness in the commercial real estate market in the
Bank’s market areas. Management believes it has established the allowance in accordance with
accounting principles generally accepted in the United States of America and will consider future
changes to the allowance that may be necessary based on changes in economic and other conditions.
Additionally, various regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses. Such agencies may require the
recognition of adjustments to the allowances based on their judgments of information available to
them at the time of their examinations.
Management realizes that general economic trends greatly affect loan losses. The recent downturn in
the real estate market has resulted in increased loan delinquencies, defaults and foreclosures, 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
42
of repayment in the event of default by the borrower and may deteriorate in value during the
time the credit is extended. If real estate values continue to decline, it is also more likely that
we would be required to increase our allowance for loan losses and our net charge-offs which could
have a material adverse effect on our financial condition and results of operations. Assurances
cannot be made either (1) that further charges to the allowance account will not be significant in
relation to the normal activity or (2) that further evaluation of the loan portfolio based on
prevailing conditions may not require sizable additions to the allowance and charges to provision
expense.
Our real estate portfolio has approximately $261.1 million of construction loans, $616.7 million of
commercial real estate loans, $176.6 million in first lien mortgage loans, $207.3 million in home
equity lines of credit and $4.5 million in junior lien mortgage loans as of March 31, 2011. We
consider our construction and junior lien mortgage loans our riskiest loans within our real estate
portfolio. Construction loans are typically comprised of loans to borrowers for real estate to be
developed into properties such as sub-divisions or speculative houses. The majority of these
borrowers are having financial difficulties. Normally, these loans are repaid with the proceeds
from the sale of the developed property. We are also seeing declines in commercial real estate
values and the greater degree of strain on these types of real estate loans. The significance of
both construction and commercial real estate loans to our overall loan portfolio has caused us to
apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. Our
analysis has resulted in significant charge-offs and increases in nonaccrual loans. Loans are
placed on nonaccrual status when the loan is past due 90 days or when it is apparent that the
collection of principal and/or interest is
doubtful. Net charge-offs (recoveries) of construction and commercial real estate loans were $3.7
million and $1.6 million, respectively, for the quarter ended March 31, 2011.
As of March 31, 2011, $11.0 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
borrower’s 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.
Nonperforming Assets
Total nonperforming assets (which includes nonaccrual loans, loans over 90 days past due but still
accruing, and foreclosed real estate) increased from $91.0 million to $98.8 million and from 3.95%
to 4.43% of total assets as of December 31, 2010 and March 31, 2011, respectively. Total OREO
increased from approximately $25.6 million at December 31, 2010 to $27.5 million at March 31, 2011.
Total nonaccrual loans increased from $65.4 million, or 3.96% of total loans, at December 31, 2010
to $71.4 million, or 4.50% of total loans, at March 31, 2011. The increases in nonaccrual loans,
impaired loans, and OREO are the result of continued economic strain in our markets during the past
three months. We have analyzed our nonperforming loans to determine what we believe is the amount
needed to reserve in the allowance for loan losses based on an assessment of the collateral value
or discounted cash flows of the loan. We have downgraded loans for which the probability of
collection is uncertain and written down OREO property values where net realizable values have
declined. Specific allowance for nonperforming loans accounted for $6.5 million, up slightly from
$6.3 million at year end.
The increase in nonperforming loans from December 31, 2010 to March 31, 2011 is related primarily
to continued deterioration in the Bank’s overall construction portfolio and the addition of
troubled debt restructured loans which will remain on nonaccrual status until sufficient payment
evidence is obtained. The total number of loans on nonaccrual has increased from 490 to 526 since
December 31, 2010. The average nonaccrual loan balance is $131,000 and $136,000 as of December 31,
2010 and March 31, 2011, respectively. At March 31, 2011, 94% of the nonaccrual loans were
secured by real estate.
The largest amount of nonaccrual loans for one customer totaled $3.6 million of land development
loans which had previously been charged to fair market value and where zero reserve was
specifically assigned to the loans. Nonaccrual loans also included three other large relationships
each totaling $2.7 million, $2.3 million and $1.7 million, respectively. The first relationship is
a commercial real estate loan with specific reserves of $555,000. The second relationship is a
commercial real estate loan that was previously charged off to fair market value with zero specific
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
43
allowance, and the third relationship consists of residential construction loans with no
specific allowances due to the fact that the value of collateral exceeds the current loan balances.
These loans were placed in nonaccrual status because of the customers’ inability to pay,
collateral deterioration and depressed future industry outlook.
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
approximately $1.0 million, or 26.8%,
comparing the first quarters of 2011 and 2010. An increase in the gain on sale of mortgages of
$565,000 made up the majority of the increase. Other changes in noninterest income include the
following:
|
• |
|
Service charges on deposit accounts decreased $92,000, or 6.4%, as total NSF fees (a
major component of service charges) decreased $117,000, or 11.8%, as new legislation
regarding overdraft fees was implemented in the third quarter of 2010. Service charges
on depository accounts, including NOW, savings, and money market account service charges
increased 6.0%. |
|
|
• |
|
The increase in other service fees of $121,000 was due primarily to increases in
commissions and fees on mutual funds and annuities of $224,000 from the previous year.
These increases were offset by decreases in commissions and fees on mortgages originated
of $99,000. |
|
|
• |
|
Net gain in the sale of mortgages increased approximately
$565,000, or 42.4%, as total
loans originated and sold increased during the quarter. Mortgage loans originated
increased from $146 million in the first quarter of 2010 to $183 million in the first
quarter of 2011. |
|
|
• |
|
Net gain on sale of investment securities also increased $49,000, or 111.4%, as the
Company sold approximately $4.6 million in securities during the quarter. |
|
|
• |
|
Income on investment in bank-owned life insurance (“BOLI”) decreased by 21.3% during
the three month period ended March 31, 2011. As changes were made in the fourth quarter
of 2010 to death benefits paid to beneficiaries, limiting it total death benefit
proceeds less cash surrender value. |
|
|
• |
|
Mortgage banking income increased approximately $151,000 for the quarter due to an
increase in the change in fair value of mortgage servicing rights (“MSR”) as compared to
the first quarter of 2010 and an increase in the servicing fees received. |
|
|
• |
|
Other income increased by approximately $76,000, or 116.4%, for the quarter primarily
due to a $29,000 increase in dividends received from the FHLB of Atlanta, as well as an
increase in miscellaneous other income of $57,000. |
Noninterest Expense
Total noninterest expenses were $16.9 million for the first quarter of 2011, compared to $14.5
million in the same period of 2010, an increase of $2.4 million, or 16.4%. Noninterest expense
includes salaries and employee benefits, occupancy and equipment expenses, and all other operating
costs. Noninterest expense to average assets for the quarter ended March 31, 2011 and 2010 was
0.75%, and 0.68%, respectively. Efficiency ratios for 2011 and 2010 were 79.86% and 68.00%,
respectively. The efficiency ratio is the ratio of noninterest expenses less amortization of
intangibles to the total of the taxable equivalent net interest income and noninterest income.
|
• |
|
Salaries and employee benefit expenses increased by
$1.2 million, or 18.1%, primarily
due to the fact that in the prior year the Company recorded an adjustment to previously
accrued incentive expenses which decreased incentive expense by $588,000 in 2010. Other
major components of salaries and employee |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
44
|
|
|
benefit expenses include the following: Salaries and wages (down $19,000),
overtime wages (up $67,000), and commissions related primarily to mortgage lending
activities (up $72,000). In the addition, employee group insurance expense increased by
$73,000, payroll taxes by $97,000, and miscellaneous personnel expenses decreased
$19,000. Salaries and benefit costs directly related to loan originations, which are
expensed over the life of the loan, also decreased $211,000. |
|
|
• |
|
Occupancy and equipment expenses increased by $204,000, or
10.4%, due primarily to and
increase of $104,000 in rental expense, as well as a $129,000 increase in equipment
maintenance expenses. The increase in rental expense was due to normal increases in
lease payments, as well as additional accrual of common area maintenance charges. |
|
|
• |
|
Printing and supplies decreased by $93,000, or 33.9%, comparing first quarter 2011
with first quarter 2010 due to timing of printing expenses which fluctuate based on
advertising campaigns. |
|
|
• |
|
Data processing expense increased $60,000, or 19.2%, due primarily to timing and
increase in activity as the result of a 8% increase in average deposits since the first
quarter of 2010. |
|
|
• |
|
Communication expense decreased slightly by $14,000, or 3.1%. |
|
|
• |
|
FDIC assessment expenses increased $520,000, due to additional assessments imposed by
the FDIC and an increase in deposits since March 31, 2010. |
|
|
• |
|
Net cost of other real estate owned decreased to $794,000 as compared to $1.1 million
in the prior year due to a decrease in losses recognized on sale of foreclosed property
as the Bank is able to more accurately value properties at foreclosure. |
|
|
• |
|
Other operating expenses (including attorney fees, accounting fees, loan collection
fees and amortization of core deposit intangibles) increased approximately $807,000, or
27.6%. The largest increases were in the following categories: loan collection expense
(up $161,000), net charge-offs and fraud expense (up $69,000) and outside professional
and other service fees (up $221,000) and accounting fees (up $51,000). These increases
were offset by decreases in travel expenses (down $33,000) and postage expense (down
$25,000). |
Income Tax Expense
Income tax benefit for the first quarter of 2011 was $509,000 compared to income tax expense of
$757,000 in the first quarter of 2010, a decrease of 167.3%. The effective tax rate for the first
quarter of 2011 was 39.3% compared to 45.3% for the same period of 2010. The decrease is
attributable to a larger percentage of non-taxable income to net income (losses) during the
quarter.
Our net deferred tax asset was $16.1 million and $15.6 million at March 31, 2011 and December 31,
2010, respectively. This increase 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 March 31, 2011, management concluded that the net deferred tax assets were
fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate
whether we will be able to realize the full benefit of our net deferred tax asset and need for
valuation allowance. Significant negative trends in credit quality, losses from operations, etc.
could impact the realizability of the deferred tax asset in the future.
Management believes that the Bank’s strong history of earnings since the inception of the bank, and
particularly over the past 10 years, shows the Company has been profitable historically. The
Company has no history of expiration of
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
45
loss carryforwards, and improvements in both net interest margin and the stabilization of
credit losses should enable the Company to see improved earnings over the next several years.
During the first quarter of 2011, the Company has seen a significant decrease in classified loans,
as well as improvements in past dues. Charge-offs have also decreased substantially as we continue
to see improvements in our loan portfolio. In addition, management has enacted several cost
cutting measures over the past few quarters which we believe should save the Company $3.0 million
annually. We believe our forecasted earnings over the next three years provides positive evidence
to support a conclusion that a valuation allowance is not needed. Management 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 2010 and 2011 we
incurred a loss which did result in the failure of the cumulative loss test. As of March 31, 2011,
the Company did not pass the cumulative loss test by $24.1 million; although, with the pre-tax
impact of management’s considerations noted above, the Company feels confident that deferred tax
assets are more likely than not to be realized. The 2011 deficit is reflected in the following
table:
March 31, 2011 Cumulative Loss Test
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008* |
|
|
2009 |
|
|
2010 |
|
|
2011** |
|
|
Total |
|
Income (loss) before income taxes |
|
$ |
914 |
|
|
$ |
(83,933 |
) |
|
$ |
(1,401 |
) |
|
$ |
(1,295 |
) |
|
$ |
(85,715 |
) |
Goodwill impairment |
|
|
— |
|
|
|
61,566 |
|
|
|
— |
|
|
|
— |
|
|
|
61,566 |
|
|
|
|
|
|
$ |
914 |
|
|
$ |
(22,367 |
) |
|
$ |
(1,401 |
) |
|
$ |
(1,295 |
) |
|
$ |
(24,149 |
) |
|
|
|
|
|
|
* |
|
2nd, 3rd and 4th quarter of 2008 |
|
** |
|
First three months of 2011 |
The Company’s 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. 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 Tax |
|
|
9,011 |
|
|
|
3,154 |
|
|
|
2031 |
|
Yadkin
Valley State Tax |
|
|
14,684 |
|
|
|
634 |
|
|
|
2031 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss Carryforwards |
|
$ |
26,464 |
|
|
$ |
4,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets of $23.5 million reduced by $7.4 million in deferred tax liabilities,
resulted in a net deferred tax asset of approximately $16.1 million as of March 31, 2011. Deferred
tax assets of $21.6 million as of December 31, 2010, reduced by $6.0 million in deferred tax
liabilities, resulted in a net deferred tax asset of approximately $15.6 million. Management
believes that it is more likely than not that the Company will return to profitability and generate
taxable income in the near term sufficient to realize the remaining $16.1 million in deferred tax
assets. However, if negative trends occur with credit quality and earnings, valuation allowances
may be needed in future quarters.
The Company is not relying upon any tax planning strategies or offset of deferred tax liabilities
due to the strength of the positive evidence in management’s evaluation of the Company’s outlook.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
46
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk
arises principally from interest rate risk inherent in our lending, deposit, and borrowing
activities. Management actively monitors and manages its interest rate risk exposure. In addition
to other risks that we manage in the normal course of business, such as credit quality and
liquidity, management considers interest rate risk to be a significant market risk that could
potentially have a material effect on our financial condition and results of operations. The
information contained in Item 2 in the section captioned “Liquidity, Interest Rate Sensitivity and
Market Risk” is incorporated herein by reference. Other types of market risks, such as foreign
currency risk and commodity price risk, do not arise in the normal course of our business
activities. The acquisition of American Community and expansion into new market areas in North and
South Carolina have marketing risks that are mitigated by retaining the American Community brand
name in these markets. Credit risk associated with loans acquired in the merger are part of the
overall discussion of credit risk in the sections captioned “Provision and Allowance for Loan
Losses” and “Non-Performing Assets.”
The primary objective of asset and liability management is to manage interest rate risk and achieve
reasonable stability in net interest income throughout interest rate cycles. This is achieved by
maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing
liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing
liabilities is the principal factor in projecting the effect that fluctuating interest rates will
have on future net interest income. Rate-sensitive assets and liabilities are those that can be
repriced to current market rates within a relatively short time period. Management monitors the
rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these
instruments, but places particular emphasis on the next twelve months. Following a period of rate
increases (or decreases) net interest income will increase (or decrease) over both a three-month
and a twelve-month period.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined
in Exchange Act Rule 13a-15(e). Our disclosure
controls and procedures are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms, and (ii) accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance
that information required to be disclosed by the Company in the reports filed or submitted by it
under the Securities Exchange Act was recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that
information required to be disclosed by the Company in such reports is accumulated and communicated
to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting. The Company reviews its disclosure
controls and procedures, which may include its internal control over financial reporting, on an
ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to
ensure that the Company’s systems evolve with its business.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
47
Part II. Other Information
Item 1. Legal Proceedings.
We are not a party to, nor are any of our properties subject to, any material legal proceedings,
other than legal proceedings that we believe are routine litigation incidental to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On May 6, 2011, we completed a private placement of our common stock (the “Private Placement”) to a
limited number of accredited investors (collectively, the “Purchasers”). We issued a total of
3,081,867 shares of our common stock for an aggregate cash consideration of $6.4 million. The
purchase price per share was $2.25 for our directors and officers (which represented the closing
price of our common stock on April 29, 2011), and $1.98 for other investors (which represented a
10% discount to the volume weighted average trading price of our common stock for the ten trading
days preceding April 29, 2011). Each of the Purchasers executed subscription agreements, which
were accepted by the Company on or prior to close. Due to the dual pricing of the Private
Placement, we utilized two forms of Subscription Agreements, one for directors and officers and one
for other investors.
Our shareholders will vote on a proposal to approve the Private Placement for purposes of the
Nasdaq Listing Rule 5635(c) at the annual shareholder meeting to be held on June 23, 2011 so that
the directors and officers can be treated equally with the other investors in the Private
Placement. If our shareholders approve the proposal, we will issue an additional 148,330 shares to
the directors and officers participating in the Private Placement so that in effect all Purchasers
will have paid the same purchase price for the shares issued in the Private Placement.
We expect to use the net proceeds from the Private Placement to pay interest on our trust preferred
securities, to pay dividends on our Series T and Series T-ACB Preferred Stock, which were issued
and sold to the U.S. Treasury pursuant to the Capital Purchase Program, and for other general
corporate purposes.
The Private Placement was conducted in reliance on the exemption from registration provided in
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of
Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering.
The offerings and sales were made to a limited number of accredited or sophisticated investors, and
the investors had access to our SEC filings. The Shares may not be offered or sold in the United
States absent registration or exemption from registration under the Securities Act and any
applicable state securities laws.
Item 5. Other Information.
The information provided in Item 2 above is hereby incorporated by reference under this Item 5.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
48
Item 6. Exhibits
|
|
|
Exhibit # |
|
Description |
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 March 31, 2011
49
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/ Joseph H. Towell
|
|
|
Joseph H. Towell, President and Chief Executive Officer |
|
|
|
BY: |
/s/ Jan H. Hollar
|
|
|
Jan H. Hollar, Executive Vice
President and Principal Financial Officer |
|
|
|
|
May 6, 2011
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011
50