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

Yadkin Valley Financial Corporation

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

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March 31, 2011 and December 31, 2010			2
Condensed Consolidated Statements of Income (Loss) Three Months Ended March 31, 2011 and 2010			3
Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2011 and 2010			4
Condensed Consolidated Statement of Shareholders’ Equity Three Months Ended March 31, 2011 and 2010			5
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010			6-7
Notes to Unaudited Condensed Consolidated Financial Statements			8-36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37-46
Item 3. Quantitative and Qualitative Disclosures About Market Risk			47
Item 4. Controls and Procedures			47
Part II. Other Information
Item 1. Legal Proceedings			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 5. Other Information			48
Item 6. Exhibit Index			49
Signatures			50
Exhibits			51-53
EX-31.1
EX-31.2
EX-32

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011

YADKIN VALLEY FINANCIAL CORPORATION

		March 31,				December 31,*
		2011				2010
		(Amounts in thousands, except share data)
ASSETS
Cash and due from banks		$	31,537			$	31,967
Federal funds sold			50				31
Interest-bearing deposits			188,003				197,782
Securities available-for-sale at fair value (amortized cost $299,936 in 2011 and $297,086 in 2010)			301,529				298,002
Gross loans			1,552,707				1,600,539
Less: allowance for loan losses			35,860				37,752
Net loans			1,516,847				1,562,787
Loans held-for-sale			32,880				50,419
Accrued interest receivable			7,515				7,947
Premises and equipment, net			46,245				45,970
Foreclosed real estate			27,461				25,582
Federal Home Loan Bank stock, at cost			9,416				9,416
Investment in bank-owned life insurance			25,441				25,278
Goodwill			4,944				4,944
Core deposit intangible (net of accumulated amortization of $7,920 in 2011 and $7,615 in 2010)			4,602				4,907
Other assets			34,421				35,562
Total Assets		$	2,230,891			$	2,300,594
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand deposits		$	222,457			$	216,161
Interest-bearing deposits:
NOW, savings and money market accounts			631,791				589,790
Time certificates:
$100 or more			442,725				477,030
Other			662,833				737,425
Total Deposits			1,959,806				2,020,406
Short-term borrowings			42,458				44,773
Long-term borrowings			66,994				71,995
Capital lease obligations			2,393				2,402
Accrued interest payable			2,811				3,302
Other liabilities			9,921				10,259
Total Liabilities			2,084,383				2,153,137
Shareholders’ Equity
Preferred stock, no par value, 6,000,000 shares authorized; 49,312 issued and outstanding in 2011 and 2010.			46,925				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			16,293				16,148
Warrants			3,581				3,581
Surplus			114,540				114,649
Accumulated deficit			(35,830	)			(34,273	)
Accumulated other comprehensive income			999				582
Total Shareholders’ Equity			146,508				147,457
Total Liabilities and Shareholders’ Equity		$	2,230,891			$	2,300,594

See notes to consolidated financial statements

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011

YADKIN VALLEY FINANCIAL CORPORATION

		Three Months Ended March 31,
		2011				2010
		(Amounts in thousands,
		except per share data)
INTEREST INCOME:
Interest and fees on loans		$	21,349			$	22,958
Interest on federal funds sold			6				—
Interest and dividends on securities:
Taxable			1,504				1,209
Non-taxable			604				562
Interest-bearing deposits			115				61
TOTAL INTEREST INCOME			23,578				24,790
INTEREST EXPENSE
Time deposits of $100 or more			2,938				3,361
Other time and savings deposits			4,380				4,055
Borrowed funds			570				567
TOTAL INTEREST EXPENSE			7,888				7,983
NET INTEREST INCOME			15,690				16,807
PROVISION FOR LOAN LOSSES			4,867				4,384
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			10,823				12,423
NON-INTEREST INCOME:
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			207				56
Other than temporary impairment of securities			(20	)			(205	)
Other income			142				66
TOTAL NON-INTEREST INCOME			4,791				3,780
NON-INTEREST EXPENSES:
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				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

YADKIN VALLEY FINANCIAL CORPORATION

		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

YADKIN VALLEY FINANCIAL CORPORATION

																										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

YADKIN VALLEY FINANCIAL CORPORATION

		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

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

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

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

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

		December 31, 2010
						Unrealized				Unrealized
		Amortized Cost				Gains				Losses				Fair Value
		(Amounts in thousands)
Available-for-sale securities:
Securities of U.S. government agencies due:
After 1 but within 5 years		$	14,547				6				3				14,550
			14,547				6				3				14,550
Government sponsored agencies:
Residential mortgage-backed securities due:
After 1 but within 5 years			1,040				36				—				1,076
After 5 but within 10 years			7,839				602				—				8,441
After 10 years			41,863				1,132				437				42,558
			50,742				1,770				437				52,075
Collateralized mortgage obligations due:
After 5 but within 10 years			16,063				165				57				16,171
After 10 years			140,021				672				938				139,755
			156,084				837				995				155,926
Private label collateralized mortgage obligations due:
After 5 but within 10 years			406				17				—				423
After 10 years			1,430				—				148				1,282
			1,836				17				148				1,705
State and municipal securities due:
Within 1 year			2,476				18				—				2,494
After 1 but within 5 years			10,680				327				53				10,954
After 5 but within 10 years			21,348				413				236				21,525
After 10 years			38,260				295				906				37,649
			72,764				1,053				1,195				72,622
Common and preferred stocks:			1,113				36				25				1,124
			1,113				36				25				1,124
Total available-for-sale securities		$	297,086			$	3,719			$	2,803			$	298,002

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

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.

		Less Than 12 Months								12 Months or More								Total
						Unrealized								Unrealized								Unrealized
March 31, 2011		Fair value				losses				Fair value				losses				Fair value				losses
		(Amounts in thousands)
Securities available-for-sale:
U.S. Government agencies		$	14,281			$	35			$	—			$	—			$	14,281			$	35
Government sponsored agencies:
Mortgage-backed securities			18,053				478				135				2				18,188				480
Collateralized mortgage obligations			66,905				1,099												66,905				1,099
Private label collateralized mortgage obligations			—				—				1,254				39				1,254				39
State and municipal securities			21,988				684				285				13				22,273				697
Common and preferred stocks			73				31				—				—				73				31
Total temporarily impaired securities		$	121,300			$	2,327			$	1,674			$	54			$	122,974			$	2,381

Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report March 31, 2011

		Less Than 12 Months								12 Months or More								Total
						Unrealized								Unrealized								Unrealized
December 31, 2010		Fair value				losses				Fair value				losses				Fair value				losses
		(Amounts in thousands)
Securities available-for-sale:
U.S. government agencies		$	4,569			$	3			$	—			$	—			$	4,569			$	3
Government sponsored agencies:
Residential mortgage-backed securities			21,637				435				136				2				21,773				437
Collateralized mortgage obligation			76,925				995				—				—				76,925				995
Private label collateralized mortgage obligations			—				—				1,283				148				1,283				148
State and municipal securities			31,775				1,174				276				21				32,051				1,195
Common and preferred stocks, and other			79				25				—				—				79				25
Total temporarily impaired securities		$	134,985			$	2,632			$	1,695			$	171			$	136,680			$	2,803

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

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:

		Three Months Ended
		March 31,
		2011				2010
Basic EPS denominator:
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

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

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

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

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

“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

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

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