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EXCEL - IDEA: XBRL DOCUMENT - YADKIN FINANCIAL Corp | Financial_Report.xls |
EX-32 - EX-32 - YADKIN FINANCIAL Corp | g27554exv32.htm |
EX-31.1 - EX-31.1 - YADKIN FINANCIAL Corp | g27554exv31w1.htm |
EX-31.2 - EX-31.2 - YADKIN FINANCIAL Corp | g27554exv31w2.htm |
Table of Contents
US Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2011
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2011
Commission File Number 000-52099
Yadkin Valley Financial Corporation
(Exact name of registrant specified in its charter)
North Carolina | 20-4495993 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
209 North Bridge Street, Elkin, North Carolina 28621
(address of principal executive offices)
(address of principal executive offices)
336-526-6300
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 þ No o
Common shares outstanding as of August 4, 2011, par value $1.00 per share, were 19,526,188.
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Six Months Ended June 30, 2011 and 2010
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three and Six Months Ended June 30, 2011 and 2010
Part I. Financial Information |
||||||||
Item 1. Financial Statements |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6-7 | ||||||||
8-43 | ||||||||
44-55 | ||||||||
56 | ||||||||
56 | ||||||||
57 | ||||||||
57 | ||||||||
58 | ||||||||
Exhibits |
59-61 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
1
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of June 30, 2011 and December 31, 2010
June 30, | December 31,* | |||||||
2011 | 2010 | |||||||
(Amounts in thousands, except share data) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 30,011 | $ | 31,967 | ||||
Federal funds sold |
| 31 | ||||||
Interest-bearing deposits |
99,158 | 197,782 | ||||||
Securities available-for-sale at fair value
(amortized cost $312,882 in 2011 and $297,086 in 2010) |
317,459 | 298,002 | ||||||
Gross loans |
1,504,267 | 1,600,539 | ||||||
Less: allowance for loan losses |
35,652 | 37,752 | ||||||
Net loans |
1,468,615 | 1,562,787 | ||||||
Loans held-for-sale |
27,737 | 50,419 | ||||||
Accrued interest receivable |
7,066 | 7,947 | ||||||
Premises and equipment, net |
44,173 | 45,970 | ||||||
Other real estate owned |
22,046 | 25,582 | ||||||
Federal Home Loan Bank stock, at cost |
7,814 | 9,416 | ||||||
Investment in bank-owned life insurance |
25,602 | 25,278 | ||||||
Goodwill |
| 4,944 | ||||||
Core deposit intangible (net of accumulated amortization of $8,219
in 2011 and $7,615 in 2010) |
4,304 | 4,907 | ||||||
Other assets |
27,057 | 35,562 | ||||||
Total Assets |
$ | 2,081,042 | $ | 2,300,594 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits |
||||||||
Noninterest-bearing demand deposits |
$ | 222,556 | $ | 216,161 | ||||
Interest-bearing deposits: |
||||||||
NOW, savings and money market accounts |
597,611 | 589,790 | ||||||
Time certificates: |
||||||||
$100 or more |
409,410 | 477,030 | ||||||
Other |
596,218 | 737,425 | ||||||
Total Deposits |
1,825,795 | 2,020,406 | ||||||
Short-term borrowings |
36,532 | 44,773 | ||||||
Long-term borrowings |
66,992 | 71,995 | ||||||
Capital lease obligations |
2,384 | 2,402 | ||||||
Accrued interest payable |
2,748 | 3,302 | ||||||
Other liabilities |
12,524 | 10,259 | ||||||
Total Liabilities |
1,946,975 | 2,153,137 | ||||||
Shareholders Equity |
||||||||
Preferred stock, no par value, 6,000,000 shares authorized; 49,312
issued and outstanding in 2011 and 2010 |
47,080 | 46,770 | ||||||
Common stock, $1 par value, 50,000,000 shares authorized;
19,526,188 issued and outstanding in 2011 and 16,147,640
issued and outstanding in 2010 |
19,526 | 16,148 | ||||||
Warrants |
3,581 | 3,581 | ||||||
Surplus |
117,763 | 114,649 | ||||||
Accumulated deficit |
(56,717 | ) | (34,273 | ) | ||||
Accumulated other comprehensive income |
2,834 | 582 | ||||||
Total Shareholders Equity |
134,067 | 147,457 | ||||||
Total Liabilities and Shareholders Equity |
$ | 2,081,042 | $ | 2,300,594 | ||||
* | Derived from audited financial statements |
See notes to condensed consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
2
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
Three and Six Months Ended June 30, 2011 and 2010
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Amounts in thousands, except per share data) | ||||||||||||||||
INTEREST INCOME: |
||||||||||||||||
Interest and fees on loans |
$ | 20,768 | $ | 22,458 | $ | 42,117 | $ | 45,416 | ||||||||
Interest on federal funds sold |
9 | 2 | 15 | 2 | ||||||||||||
Interest and dividends on securities: |
||||||||||||||||
Taxable |
1,698 | 1,170 | 3,202 | 2,379 | ||||||||||||
Non-taxable |
557 | 492 | 1,161 | 1,054 | ||||||||||||
Interest-bearing deposits |
90 | 126 | 205 | 187 | ||||||||||||
TOTAL INTEREST INCOME |
23,122 | 24,248 | 46,700 | 49,038 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Time deposits of $100 or more |
2,541 | 3,274 | 5,478 | 6,635 | ||||||||||||
Other time and savings deposits |
3,731 | 4,780 | 8,112 | 8,835 | ||||||||||||
Borrowed funds |
539 | 596 | 1,110 | 1,163 | ||||||||||||
TOTAL INTEREST EXPENSE |
6,811 | 8,650 | 14,700 | 16,633 | ||||||||||||
NET INTEREST INCOME |
16,311 | 15,598 | 32,000 | 32,405 | ||||||||||||
PROVISION FOR LOAN LOSSES |
10,393 | 5,809 | 15,260 | 10,193 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES |
5,918 | 9,789 | 16,740 | 22,212 | ||||||||||||
NON-INTEREST INCOME: |
||||||||||||||||
Service charges on deposit accounts |
1,437 | 1,486 | 2,782 | 2,924 | ||||||||||||
Other service fees |
967 | 917 | 1,929 | 1,758 | ||||||||||||
Net gain on sales and fees of mortgage loans |
179 | 1,876 | 2,078 | 3,210 | ||||||||||||
Net gain on sale of securities |
429 | 844 | 522 | 888 | ||||||||||||
Income on investment in bank-owned life insurance |
161 | 191 | 324 | 398 | ||||||||||||
Mortgage banking income |
103 | 60 | 311 | 116 | ||||||||||||
Other than temporary impairment of securities |
(22 | ) | (61 | ) | (42 | ) | (266 | ) | ||||||||
Other income |
102 | 139 | 244 | 205 | ||||||||||||
TOTAL NON-INTEREST INCOME |
3,356 | 5,452 | 8,148 | 9,233 | ||||||||||||
NON-INTEREST EXPENSES: |
||||||||||||||||
Salaries and employee benefits |
7,793 | 6,941 | 15,663 | 13,604 | ||||||||||||
Occupancy and equipment expense |
2,330 | 1,956 | 4,500 | 3,922 | ||||||||||||
Printing and supplies |
156 | 259 | 337 | 533 | ||||||||||||
Data processing |
381 | 384 | 754 | 697 | ||||||||||||
Amortization of core deposit intangible |
299 | 326 | 603 | 660 | ||||||||||||
Communications |
473 | 435 | 919 | 894 | ||||||||||||
FDIC assessment |
1,328 | 1,288 | 2,678 | 2,118 | ||||||||||||
Loan collection fees |
465 | 289 | 898 | 561 | ||||||||||||
Other professional fees |
334 | 331 | 612 | 521 | ||||||||||||
Net cost of operation of other real estate owned |
2,430 | 403 | 3,224 | 1,199 | ||||||||||||
Loss on sales and impairment of premises and equipment |
1,195 | | 1,195 | | ||||||||||||
Goodwill impairment |
4,944 | | 4,944 | | ||||||||||||
Other |
2,329 | 2,368 | 5,039 | 4,803 | ||||||||||||
TOTAL NON-INTEREST EXPENSES |
24,457 | 14,980 | 41,366 | 29,512 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(15,183 | ) | 261 | (16,478 | ) | 1,933 | ||||||||||
INCOME TAX EXPENSE (BENEFIT) |
5,030 | (24 | ) | 4,521 | 733 | |||||||||||
NET INCOME (LOSS) |
(20,213 | ) | 285 | (20,999 | ) | 1,200 | ||||||||||
Preferred stock dividend and accretion of preferred stock
discount |
674 | 771 | 1,445 | 1,542 | ||||||||||||
NET LOSS TO COMMON SHAREHOLDERS |
$ | (20,887 | ) | $ | (486 | ) | $ | (22,444 | ) | $ | (342 | ) | ||||
NET LOSS PER COMMON SHARE: |
||||||||||||||||
Basic |
$ | (1.16 | ) | $ | (0.03 | ) | $ | (1.31 | ) | $ | (0.02 | ) | ||||
Diluted |
$ | (1.16 | ) | $ | (0.03 | ) | $ | (1.31 | ) | $ | (0.02 | ) | ||||
CASH DIVIDENDS PER COMMON SHARE |
$ | | $ | | $ | | $ | |
See notes to condensed consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
3
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (LOSS)
(UNAUDITED)
Three and Six Months Ended June 30, 2011 and 2010
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Amounts in thousands) | (Amounts in thousands) | |||||||||||||||
NET INCOME (LOSS) |
$ | (20,213 | ) | $ | 285 | $ | (20,999 | ) | $ | 1,200 | ||||||
OTHER COMPREHENSIVE INCOME: |
||||||||||||||||
Unrealized holding gains on securities available-for-sale |
3,413 | 981 | 4,263 | 1,597 | ||||||||||||
Tax effect |
(1,314 | ) | (378 | ) | (1,641 | ) | (614 | ) | ||||||||
Unrealized holding gains on securities available-for-sale,
net of tax amount |
2,099 | 603 | 2,622 | 983 | ||||||||||||
Reclassification adjustment for realized gains |
(429 | ) | (844 | ) | (602 | ) | (888 | ) | ||||||||
Tax effect |
165 | 325 | 232 | 342 | ||||||||||||
Reclassification adjustment for realized gains,
net of tax amount |
(264 | ) | (519 | ) | (370 | ) | (546 | ) | ||||||||
OTHER COMPREHENSIVE INCOME, NET OF TAX |
1,835 | 84 | 2,252 | 437 | ||||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | (18,378 | ) | $ | 369 | $ | (18,747 | ) | $ | 1,637 | ||||||
See notes to condensed consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
4
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(UNAUDITED)
Six Months Ended June 30, 2011 and 2010
Retained | Accumulated | |||||||||||||||||||||||||||||||
Earnings | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Preferred | (Accumulated | Comprehensive | Shareholders | ||||||||||||||||||||||||||||
Shares | Amount | Stock | Warrants | Surplus | Deficit) | Income (loss) | Equity | |||||||||||||||||||||||||
(Amounts in thousands, except share data) | ||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31,
2009 |
16,129,640 | $ | 16,130 | $ | 46,152 | $ | 3,581 | $ | 114,574 | $ | (31,080 | ) | $ | 2,909 | $ | 152,266 | ||||||||||||||||
Net income |
| | | | | 1,200 | | 1,200 | ||||||||||||||||||||||||
Restricted stock issued |
15,000 | 15 | | | (15 | ) | | | | |||||||||||||||||||||||
Discount accretion on
preferred stock |
| | 309 | | | (309 | ) | | | |||||||||||||||||||||||
Stock option compensation: |
||||||||||||||||||||||||||||||||
stock options |
| | | | 38 | | | 38 | ||||||||||||||||||||||||
restricted stock |
| | | | 5 | | | 5 | ||||||||||||||||||||||||
Preferred stock dividends |
| | | | | (1,233 | ) | | (1,233 | ) | ||||||||||||||||||||||
Other comprehensive income |
| | | | | | 437 | 437 | ||||||||||||||||||||||||
BALANCE, JUNE 30, 2010 |
16,144,640 | $ | 16,145 | $ | 46,461 | $ | 3,581 | $ | 114,602 | $ | (31,422 | ) | $ | 3,346 | $ | 152,713 | ||||||||||||||||
BALANCE, DECEMBER 31,
2010 |
16,147,640 | $ | 16,148 | $ | 46,770 | $ | 3,581 | $ | 114,649 | $ | (34,273 | ) | $ | 582 | $ | 147,457 | ||||||||||||||||
Net loss |
| | | | | (20,999 | ) | | (20,999 | ) | ||||||||||||||||||||||
Issuance of common stock |
3,233,548 | 3,233 | | | 3,169 | | | 6,402 | ||||||||||||||||||||||||
Restricted stock issued |
145,000 | 145 | | | (145 | ) | | | | |||||||||||||||||||||||
Discount accretion on
preferred stock |
| | 310 | | | (310 | ) | | | |||||||||||||||||||||||
Stock option compensation: |
||||||||||||||||||||||||||||||||
stock options |
| | | | 38 | | | 38 | ||||||||||||||||||||||||
restricted stock |
| | | | 52 | | | 52 | ||||||||||||||||||||||||
Preferred stock dividends |
| | | | | (1,135 | ) | | (1,135 | ) | ||||||||||||||||||||||
Other comprehensive income |
| | | | | | 2,252 | 2,252 | ||||||||||||||||||||||||
BALANCE, JUNE 30, 2011 |
19,526,188 | $ | 19,526 | $ | 47,080 | $ | 3,581 | $ | 117,763 | $ | (56,717 | ) | $ | 2,834 | $ | 134,067 | ||||||||||||||||
See notes to condensed consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
5
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30, 2011 and 2010
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (20,999 | ) | $ | 1,200 | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Net amortization of premiums on investment securities |
2,298 | 467 | ||||||
Provision for loan losses |
15,260 | 10,193 | ||||||
Net gain on sales of mortgage loans |
(2,078 | ) | (3,210 | ) | ||||
Other than temporary impairment of investments |
42 | 266 | ||||||
Impairment of goodwill |
4,944 | | ||||||
Increase in cash surrender value of life insurance |
(324 | ) | (398 | ) | ||||
Depreciation and amortization |
1,449 | 1,532 | ||||||
Loss on sales and impairment of premises and equipment |
1,195 | 8 | ||||||
Net losses on other real estate owned |
2,119 | 1,199 | ||||||
Gain on sale of securities |
(602 | ) | (888 | ) | ||||
Amortization of core deposit intangible |
603 | 660 | ||||||
Deferred tax provision |
4,036 | 4,523 | ||||||
Stock based compensation expense |
90 | 43 | ||||||
Originations of mortgage loans held-for-sale |
(363,246 | ) | (337,208 | ) | ||||
Proceeds from sales of mortgage loans |
388,007 | 340,591 | ||||||
Decrease in capital lease obligations |
18 | 17 | ||||||
Decrease in accrued interest receivable |
881 | 263 | ||||||
Decrease in other assets |
4,001 | 941 | ||||||
Increase (decrease) in accrued interest payable |
(554 | ) | 776 | |||||
Increase (decrease) in other liabilities |
1,709 | (1,511 | ) | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
38,849 | 19,464 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of available-for-sale securities |
(76,754 | ) | (83,414 | ) | ||||
Proceeds from sales of available-for-sale securities |
39,094 | 29,180 | ||||||
Proceeds from maturities of available-for-sale securities |
20,168 | 30,939 | ||||||
Net decrease in loans |
71,450 | 4,997 | ||||||
Proceeds from the redemption of Federal Home Loan Bank stock |
1,602 | | ||||||
Purchases of premises and equipment |
(1,830 | ) | (2,332 | ) | ||||
Proceeds from the sale of other real estate owned |
8,880 | 4,115 | ||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
62,610 | (16,515 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase in checking, NOW, money market
and savings accounts |
14,215 | 26,355 | ||||||
Net increase (decrease) in time certificates |
(208,827 | ) | 105,331 | |||||
Net decrease in borrowed funds |
(13,244 | ) | (4,846 | ) | ||||
Proceeds from the issuance of common stock |
6,402 | | ||||||
Preferred dividends paid |
(616 | ) | (1,233 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(202,070 | ) | 125,607 | |||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
6
Table of Contents
YADKIN VALLEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
Six Months Ended June 30, 2011 and 2010
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
Six Months Ended June 30, 2011 and 2010
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
(100,611 | ) | 128,556 | |||||
CASH AND CASH EQUIVALENTS: |
||||||||
Beginning of year |
229,780 | 92,337 | ||||||
End of year |
$ | 129,169 | $ | 220,893 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | 15,186 | $ | 16,478 | ||||
Cash paid for income taxes |
$ | 26 | $ | 5 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH |
||||||||
INVESTING AND FINANCING ACTIVITIES: |
||||||||
Transfer from loans to foreclosed real estate |
$ | 7,463 | $ | 9,164 | ||||
Unrealized gain on investment securities available
for sale, net of tax effect |
$ | 2,622 | $ | 983 | ||||
See notes to condensed consolidated financial statements
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
7
Table of Contents
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 Companys 2010 Annual Report on
Form 10-K filed with the Securities and Exchange Commission (SEC) on March 10, 2011. Operating
results, for the three and six months ended June 30, 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 June 30, 2011 and December 31, 2010, and the results of its
operations and cash flows for the three and six months ended June 30, 2011 and 2010. The
accounting policies followed are set forth in Note 1 to the Consolidated Financial Statements in
the Companys 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 (ASU 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 Companys statements of income and condition. When the Company
adopts the deferred requirements of ASU 2010-20, the Company will have additional disclosures
related to its troubled debt restructured loans.
In April 2011, the FASB issued additional guidance regarding A Creditors 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, including
factors and examples for creditors to consider in evaluating whether a restructuring results in a
delay in payment that is insignificant, prohibiting creditors from using the borrowers effective
rate test to evaluate whether a concession has been granted to the borrower, and adding factors for
creditors to use in determining whether a borrower is experiencing financial difficulties. A
provision in the standard also ends the FASBs deferral of the additional disclosures about
troubled debt restructurings as required by previously released standards. The provisions of this
guidance are effective for the Companys reporting period ending September 30, 2011. The adoption
of the standard is not expected to have a material impact on the Companys
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
8
Table of Contents
statements of income and financial condition, however; this guidance could result in an increase in
troubled debt restructured loans. Management is still evaluating the impact of this standard.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 Presentation of Comprehensive
Income (ASU 2011-05). This standard eliminates the current option to report other comprehensive
income and its components in the statement of changes in shareholders equity and is intended to
enhance comparability between entities that report under U.S. GAAP and those that report under
International Financial Reporting Standards (IFRS), and to provide a more consistent method of
presenting non-owner transactions that affect an entitys equity. ASU 2011-05 requirements are
effective for public entities as of the beginning of fiscal years beginning after December 15, 2011
and interim and annual periods thereafter. Early adoption is permitted, but full retrospective
application is required under both sets of accounting standards. The Company has adopted the
standard and the adoption of ASU 2011-05 did not have an impact on the Companys financial
condition, results of operations, or cash flows.
3. Stock-based Compensation
During the three and six months ended June 30, 2011, 6,400 and 20,300 options were vested,
respectively. During the three and six months ended June 30, 2010, 4,000 and 25,200 options were
vested, respectively. At June 30, 2011, there were 33,600 options unvested and no shares available
for grants of options other than shares available under the Omnibus Plan.
There were no restricted shares granted in the second quarter of 2011. 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. The restricted shares granted to date vest over a three-year period. As of June
30, 2011, 1,666 shares of restricted stock are vested and 161,334 shares are nonvested. During the
second quarter of 2010, there were 10,000 shares of restricted stock granted at a fair value of
$4.99 per share. The fair value of each share grant is based on the closing market price of the
stock on the date of issuance. There were 5,000 shares of restricted stock granted at a fair value
of $3.71 per share during the first quarter of 2010.
There were no options granted during the first six months of 2011 or 2010.
The compensation expense related to options and restricted shares was $53,725 for the three-month
period ended June 30, 2011 and $90,373 for the six-month period ended June 30, 2011. As of June 30,
2011, there was $445,309 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under all of the Companys stock benefit plans. This cost is
expected to be recognized over an average vesting period of 2.4 years. The compensation expense
related to options was $23,552 for the three-month period ended June 30, 2010 and $43,302 for the
six-month period ended June 30, 2010.
There were no options exercised during the three and six months ended June 30, 2011 and 2010.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
9
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4. Investment Securities
Investment securities at June 30, 2011 and December 31, 2010 are summarized as follows:
June 30, 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 |
$ | 34,209 | $ | 276 | $ | | $ | 34,485 | ||||||||
34,209 | 276 | | 34,485 | |||||||||||||
Government sponsored agencies: |
||||||||||||||||
Residential mortgage-backed securities due: |
||||||||||||||||
After 1 but within 5 years |
747 | 24 | | 771 | ||||||||||||
After 5 but within 10 years |
19,419 | 791 | | 20,210 | ||||||||||||
After 10 years |
41,169 | 977 | 325 | 41,821 | ||||||||||||
61,335 | 1,792 | 325 | 62,802 | |||||||||||||
Collateralized mortgage obligations due: |
||||||||||||||||
After 5 but within 10 years |
18,738 | 290 | | 19,028 | ||||||||||||
After 10 years |
130,481 | 1,261 | 336 | 131,406 | ||||||||||||
149,219 | 1,551 | 336 | 150,434 | |||||||||||||
Private label collateralized mortgage
obligations due: |
||||||||||||||||
After 5 but within 10 years |
332 | 13 | | 345 | ||||||||||||
After 10 years |
1,265 | | 50 | 1,215 | ||||||||||||
1,597 | 13 | 50 | 1,560 | |||||||||||||
State and municipal securities due: |
||||||||||||||||
Within 1 year |
624 | 4 | | 628 | ||||||||||||
After 1 but within 5 years |
8,617 | 414 | | 9,031 | ||||||||||||
After 5 but within 10 years |
22,895 | 729 | 17 | 23,607 | ||||||||||||
After 10 years |
33,273 | 838 | 343 | 33,768 | ||||||||||||
65,409 | 1,985 | 360 | 67,034 | |||||||||||||
Common and preferred stocks: |
1,113 | 68 | 37 | 1,144 | ||||||||||||
Total available-for-sale securities |
$ | 312,882 | $ | 5,685 | $ | 1,108 | $ | 317,459 | ||||||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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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 | ||||||||||||
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 June
30, 2011, $62.8 million of the Banks mortgage-backed securities were pass-through securities and
$152.0 million were collateralized mortgage obligations. At December 31, 2010, $52.1 million of
the Banks 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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
11
Table of Contents
Gross realized gains on the sale of securities for the three and six months ended June 30, 2011
were $428,664 and $601,900, respectively. Gross realized gains on the sale of securities for the
three and six months ended June 30, 2010 were $844,320 and $888,319, respectively. There were no
losses on the sale of securities available-for-sale for the three and six month periods ended June
30, 2011 and 2010.
Investment securities with carrying values of approximately $110,847,763 and $111,803,619
at June 30, 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 June 30, 2011 and December 31, 2010. Securities that have
been in a loss position for twelve months or more at June 30, 2011 include one collateralized
mortgage obligation, one municipal security and one private label collateralized mortgage
obligation. The key factors considered in evaluating the collateralized mortgage obligation, 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 issuers 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 three and six months ended June 30, 2010,
there were no securities available-for-sale deemed to be other than temporarily impaired (OTTI).
If management determines that an investment has experienced an other than temporary impairment, the
loss is recognized in the income statement.
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
June 30, 2011 | Fair value | losses | Fair value | losses | Fair value | losses | ||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
U.S. government agencies |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Government sponsored agencies: |
||||||||||||||||||||||||
Mortgage-backed securities |
17,007 | 325 | | | 17,007 | 325 | ||||||||||||||||||
Collateralized mortgage obligations |
18,200 | 308 | 3,553 | 28 | 21,753 | 336 | ||||||||||||||||||
Private label collateralized
mortgage obligations |
| | 1,215 | 50 | 1,215 | 50 | ||||||||||||||||||
State and municipal securities |
13,793 | 356 | 293 | 4 | 14,086 | 360 | ||||||||||||||||||
Common and preferred stocks |
74 | 37 | | | 74 | 37 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 49,074 | $ | 1,026 | $ | 5,061 | $ | 82 | $ | 54,135 | $ | 1,108 | ||||||||||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
12
Table of Contents
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 Companys cost method investments totaled $9,195,013 at June 30,
2011 and $12,463,510 at December 31, 2010. Cost method investments at June 30, 2011 include
$7,814,200 in FHLB stock and $1,380,813 of investments in various trust and financial companies,
which are included in other assets. All cost method investments were evaluated for impairment at
June 30, 2011 and December 31, 2010. The following factors have been considered in determining the
carrying amount of FHLB stock; 1) the recoverability of the par value, 2) the Company has
sufficient liquidity to meet all operational needs in the foreseeable future and would not need to
dispose of the stock below recorded amounts, 3) redemptions and purchases of the stock are at the
discretion of the FHLB, 4) the Company 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 Companys investment in a
local community bank was considered to be other than temporarily impaired and $20,000 and $22,154
was charged off in the first and second quarters of 2011, respectively. During the first six
months of 2010, the Companys investment in a financial services company was considered to be OTTI
and $27,925 was charged-off. In addition, the Companys investment in a local community bank was
considered to be OTTI and $226,236 was charged-off in 2010. In addition to the impairments listed
above, the Company also sold its investment in a financial services company during the first
quarter of 2011, resulting in 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 June 30, 2011, the Company had commitments outstanding of $294.3 million
for additional loan amounts. Commitments of Sidus, the Banks mortgage lending subsidiary, are
excluded from this amount and discussed in the paragraph below. Additional commitments totaling
$7.1 million were outstanding under standby letters of credit. Management does not expect any
significant losses to result from these commitments.
At June 30, 2011, Sidus had $30.7 million of commitments outstanding to originate mortgage loans
held-for-sale at fixed prices and $57.9 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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
13
Table of Contents
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
three and six months ended June 30, 2011 excludes 161,334 shares of unvested restricted stock.
Weighted average shares outstanding for the three and six months ended June 30, 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 | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic EPS denominator: |
||||||||||||||||
Weighted average number of
common shares outstanding |
18,041,174 | 16,129,640 | 17,091,130 | 16,129,640 | ||||||||||||
Dilutive effect arising from assumed
exercise of stock options |
| | | | ||||||||||||
Diluted EPS denominator |
18,041,174 | 16,129,640 | 17,091,130 | 16,129,640 |
For the three months ended June 30, 2011 and 2010, net income (loss) for determining net loss
per common share was reported as net income (loss) less the dividend on preferred stock. During
the quarter and six months ended June 30, 2011, there were 375,276 warrants and stock options that
were not considered dilutive because the exercise prices exceeded the average market price per
share. These non-dilutive shares had exercise prices ranging from $3.84 to $19.07 per share.
During the quarter ended June 30, 2010, 578,962 warrants and stock options were not considered
dilutive because the exercise prices exceeded the average market price per share. These
non-dilutive shares had exercise prices ranging from $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 (loss) per share for the three and six months ended June 30, 2011 due to the
Companys 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 June 30, 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 NC Banking Commissioner
approval. The Company has committed to regulators that the Bank will maintain a Tier 1 Leverage
Ratio of 8%. The Company deferred dividend payments on its Series T and Series T-ACB Preferred
Stock and interest payment on the trust preferred securities in the second quarter of 2011. The
Company also 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. Because the Company deferred dividend payments on the Series T and Series
T-ACB Preferred Stock and deferred interest
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
14
Table of Contents
payments on its trust preferred securities, the Company is 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 Companys
outstanding common shares (2007 plan). There are 28,719 common shares available to purchase
under the 2007 plan at June 30, 2011 and December 31, 2010. The Company did not repurchase any
common shares during the first three and six 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 Treasurys Troubled Asset Relief Program. Generally, the Company must
obtain Treasurys consent for any repurchases that would be made prior to July 24, 2012 (the third
anniversary of the second of the Companys two issuances of securities under this program), and the
Company will be prohibited from making any repurchases at any time that it has deferred making
dividend payments on the Series T and Series T-ACB 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 Companys strategy is to use derivative
contracts to stabilize and improve net interest margin and net interest income currently and in
future periods. The Company does not enter into derivative financial instruments for speculative
or trading purposes. For derivatives that are economic hedges, but are not designated as hedging
instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value
are recognized in non-interest income during the period of change.
As part of interest rate risk management, the Company has entered into two interest rate swap
agreements to convert certain fixed-rate receivables to floating rates and certain fixed-rate
obligations to floating rates. The interest rate swaps are used to provide fixed rate financing
while managing interest rate risk and were not designated as hedges. The interest rate swaps pay
and receive interest based on a floating rate based on one month LIBOR, with payments being
calculated on the notional amount. The interest rate swaps are settled quarterly and mature on June
15, 2016. The interest rate swaps each had a notional amount of $2.1 million at June 30, 2011,
representing the amount of fixed-rate receivables outstanding and liabilities outstanding, and are
included in other assets and other liabilities at their fair value of $173,323. The Company had a
gain of $40,406 on the interest rate swap asset and a loss of $40,406 on the interest rate swap
liability for the three months ended June 30, 2011. The Company had a gain of $14,146 on the
interest rate swap asset and a loss of $14,146 on the interest rate swap liability for the six
months ended June 30, 2011. The Company had a gain of $162,000 on the interest rate swap asset and
a loss of $162,000 on the interest rate swap liability for the three and six months ended June 30,
2010. The interest rate swaps had a notional amount of $2.1 million outstanding as of December 31,
2010. The interest rate swaps were not designated as hedges and all changes in fair value are
recorded as 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 Banks mortgage lending subsidiary, enters into interest rate lock commitments and
commitments to sell mortgages. The primary risks managed by derivative instruments are these
interest rate lock commitments and forward-loan-sale commitments. Interest rate lock commitments
are entered into to manage interest rate risk associated with the Companys fixed rate loan
commitments. The period of time between the issuance of a loan commitment and the closing and sale
of the loan generally ranges from 10 to 60 days. Such interest rate lock commitments and
forward-loan-sale commitments represent derivative instruments which are required to be carried at
fair value. These derivative instruments do not qualify as hedges under the Derivatives and Hedging
topic of the FASB Accounting Standards Codification. The fair value of the Companys interest rate
lock commitments 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 Companys 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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
15
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At June 30, 2011, Sidus had $30.7 million of commitments outstanding to originate mortgage loans
held-for-sale at fixed prices and $57.9 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 forward sales commitments recorded in
other liabilities was $92,367 at June 30, 2011. The fair value of the interest rate lock
commitments recorded in assets was $16,251 at June 30, 2011. Recognition of losses related to the
change in fair value of the interest rate lock commitments and forward sales commitments were
$35,422 and $443,693, respectively, for the three months ended June 30, 2011, and are included in
other income. Recognition of gains related to the change in fair value of the interest rate lock
commitments and losses on forward sales commitments were $16,101 and $157,263, respectively, for
the six months ended June 30, 2011, and are included in other income. Recognition of gains related
to the change in fair value of the interest rate lock commitments and gains related to forward
sales commitments were $85,345 and $55,199, respectively, for the three months ended June 30, 2010,
and are included in other income. Recognition of losses related to the change in fair value of the
interest rate lock commitments and gains related to forward sales commitments were $3,925 and
$61,910, respectively, for the six months ended June 30, 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 at December 31, 2010. The fair value of
the forward sales commitments recorded in other assets was $161,071 at December 31, 2010.
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 June 30, 2011 and December 31, 2010 by class:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Construction and land development |
$ | 243,681 | $ | 300,877 | ||||
Commercial real estate: |
||||||||
Owner occupied |
351,936 | 309,198 | ||||||
Non-owner occupied |
248,960 | 312,231 | ||||||
Residential mortgages: |
||||||||
1-4 family |
179,372 | 174,536 | ||||||
Multifamily |
31,313 | 29,268 | ||||||
Home equity lines of credit |
205,308 | 209,319 | ||||||
Commercial |
181,473 | 199,696 | ||||||
Consumer and other |
61,600 | 65,003 | ||||||
Total |
1,503,643 | 1,600,128 | ||||||
Less: Net deferred loan origination fees |
624 | 411 | ||||||
Allowance for loan losses |
(35,652 | ) | (37,752 | ) | ||||
Loans, net |
$ | 1,468,615 | $ | 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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
16
Table of Contents
Commercial real estate loans totaled $600.9 million and $621.4 million at June 30, 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 $243.7 million and $300.9 million at June 30, 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 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 $179.4 million and $174.5 million at June 30, 2011
and December 31, 2010, respectively. The Banks residential mortgage loans are typically
construction loans that convert into permanent financing and are secured by properties located
within the Banks market areas.
Commercial Loans. At June 30, 2011 and December 31, 2010, the Banks commercial loan portfolio
totaled $181.5 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
$61.6 million and $65.0 million at June 30, 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 Banks loan policies and procedures establish the basic guidelines governing
its lending operations. The guidelines address the type of loans that the Bank seeks, target
markets, underwriting and collateral requirements, terms, interest rate and yield considerations
and compliance with laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrowers total outstanding
indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and
approved at least annually by the Board of Directors of the Bank. The Bank supplements its own
supervision of the loan underwriting and approval process with periodic loan reviews by
independent, outside professionals experienced in loan review. Responsibility for loan review and
loan underwriting resides with the Chief Credit Officer position. This position is responsible for
loan underwriting and approval. On an annual basis, the Board of Directors of the Bank determines
officers lending authority. Authorities may include loans, letters of credit, overdrafts,
uncollected funds and such other authorities as determined by the Board of Directors.
Substantially all of the Companys loans have been granted to customers in the Piedmont, foothills,
northwestern mountains, and the Research Triangle regions of North Carolina and the upstate region
of South Carolina.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
17
Table of Contents
Credit Review and Evaluation. The Bank has a credit risk review department that reports to the
Chief Credit Officer. The focus of the department is on policy compliance and proper grading of
higher credit risk loans as well as new and existing loans on a sample basis. Additional reporting
for problem/criticized assets has been developed along with an after-the-fact loan review.
The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses
and the adequacy of the allowance for loan losses for real estate, commercial and consumer loans.
In this program, risk grades are initially assigned by loan officers, reviewed by regional credit
officers, and reviewed by internal credit review analysts on a test basis. The Bank strives to
maintain the loan portfolio in accordance with conservative loan underwriting policies that result
in loans specifically tailored to the needs of the Banks market area. Every effort is made to
identify and minimize the credit risks associated with such lending strategies.
Loans over $20,000 are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable
loans at inception are grades 1 through 4, and these grades have underwriting requirements that at
least meet the minimum requirements of a secondary market source. If borrowers do not meet credit
history requirements, other mitigating criteria such as substantial liquidity and low loan-to-value
ratios could be considered and would generally have to be met in order to make the loan. The
Banks loan policy states that a guarantor may be necessary if reasonable doubt exists as to the
borrowers ability to repay. The Board of Directors has authorized the loan officers to have
individual approval authority for risk grade 1 through 4 loans up to maximum exposure limits for
each customer. New or renewed loans that are graded 5 (special mention) or lower 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
the Banks credits. The Risk Review Officer focuses on lending policy compliance, credit risk
grading, and credit risk reviews on larger dollar exposures. Management uses the information
developed from the procedures above in evaluating and grading the loan portfolio. This continual
grading process is used to monitor the credit quality of the loan portfolio and to assist
management in determining the appropriate levels of the allowance for loan losses.
The following is a summary of the credit risk grade definitions for all loan types:
1 Highest Quality- These loans represent a credit extension of the highest quality. The
borrowers historic (at least five years) cash flows manifest extremely large and stable margins of
coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt
service for proposed and existing debt, projected cash flows continue to be strong and provide
ample coverage. The borrower typically reflects broad geographic and product diversification and
has access to alternative financial markets.
2 Good Quality- These loans have a sound primary and secondary source of repayment. The
borrower may have access to alternative sources of financing, but sources are not as widely
available as they are to a higher graded borrower. This loan carries a normal level of risk, with
minimal loss exposure. The borrower has the ability to perform according to the terms of the
credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid
deterioration than the highest quality loans.
3 Satisfactory- The borrowers are a reasonable credit risk and demonstrate the ability to
repay the debt from normal business operations. Risk factors may include reliability of margins
and cash flows, liquidity, dependence on a
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
18
Table of Contents
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 banks debt in the future.
5 Watch or Special Mention These loans are typically existing loans, made using the
passing grades outlined above, that have deteriorated to the point that cash flow is not
consistently adequate to meet debt service or current debt service coverage is based on
projections. Secondary sources of repayment may include specialized collateral or real estate that
is not readily marketable or undeveloped, making timely collection in doubt.
6 Substandard- Loans and other credit extensions bearing this grade are considered
inadequately protected by the current sound worth and debt service capacity of the borrower or of
any pledged collateral. These obligations, even if apparently protected by collateral value, have
well-defined weaknesses related to adverse financial, managerial, economic, market, or political
conditions jeopardizing repayment of principal and interest as originally intended. Clear loss
potential, however, does not have to exist in any individual assets classified as substandard.
7 Doubtful (also includes any loans over 90 days past due, excluding sold mortgages )- Loans
and other credit extensions graded 7 have all the weaknesses inherent in those graded 6, with
the added characteristic that the severity of the weaknesses makes collection or liquidation in
full highly questionable or improbable based upon currently existing facts, conditions, and values.
The probability of some loss is extremely high, but because of certain important and reasonably
specific factors, the amount of loss cannot be determined.
8 Loss- Loans in this classification are considered uncollectible and cannot be justified as
a viable asset of the bank. Such loans are to be charged-off or charged-down. This classification
does not mean the loan has absolutely no recovery value, but that it is neither practical nor
desirable to defer writing off this loan even though partial recovery may be obtained in the
future.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
19
Table of Contents
The following is a summary of credit quality indicators by class at June 30, 2011 and December 31,
2010:
Real Estate Credit Exposure as of June 30, 2011
Commercial Real Estate | ||||||||||||||||||||||||
Non-owner | Owner | |||||||||||||||||||||||
Construction | occupied | occupied | 1-4 Family | Multifamily | Home Equity | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
High Quality |
$ | | $ | | $ | 129 | $ | 433 | $ | | $ | 141 | ||||||||||||
Good Quality |
583 | 131 | 109 | 1,814 | | 8,090 | ||||||||||||||||||
Satisfactory |
33,465 | 56,265 | 119,764 | 96,579 | 9,329 | 128,937 | ||||||||||||||||||
Merits Attention |
115,340 | 145,150 | 178,114 | 58,803 | 19,535 | 57,468 | ||||||||||||||||||
Special Mention |
48,319 | 26,139 | 26,501 | 8,401 | 713 | 4,943 | ||||||||||||||||||
Substandard |
13,990 | 9,386 | 9,657 | 4,190 | 641 | 2,828 | ||||||||||||||||||
Doubtful |
31,984 | 11,889 | 17,662 | 9,152 | 1,095 | 2,901 | ||||||||||||||||||
Loss |
| | | | | |||||||||||||||||||
$ | 243,681 | $ | 248,960 | $ | 351,936 | $ | 179,372 | $ | 31,313 | $ | 205,308 | |||||||||||||
Other Credit Exposures as of June 30, 2011
Consumer | ||||||||
Commercial | and other | |||||||
(in thousands) | ||||||||
High Quality |
$ | 3,316 | $ | 2,709 | ||||
Good Quality |
6,538 | 1,759 | ||||||
Satisfactory |
54,661 | 31,287 | ||||||
Merits Attention |
81,243 | 23,813 | ||||||
Special Mention |
19,880 | 1,177 | ||||||
Substandard |
7,148 | 211 | ||||||
Doubtful |
8,687 | 642 | ||||||
Loss |
| 2 | ||||||
$ | 181,473 | $ | 61,600 | |||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
20
Table of Contents
Real Estate Credit Exposure as of December 31, 2010
Commercial Real Estate | ||||||||||||||||||||||||
Non-owner | Owner | |||||||||||||||||||||||
Construction | occupied | occupied | 1-4 Family | Multifamily | Home Equity | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
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 | |||||||
(in thousands) | ||||||||
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 June 30, 2011 and December 31, 2010.
Nonperforming loans as of June 30, 2011 totaled $68.9 million, or 4.50% of total loans, compared
with $65.4 million or 3.96% of total loans, 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 the Banks collection department. The total number of
loans on nonaccrual status has increased from 490 to 525 since December 31, 2010. The increase in
nonperforming loans from December 31, 2010 to June 30, 2011 is related primarily to continued
deterioration of previously classified loans and the addition of troubled debt restructured loans
which will remain on nonaccrual status until sufficient payment evidence is obtained.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
21
Table of Contents
For the six months ended June 30, 2011, the Company recognized interest income on nonaccrual loans
of approximately $513,000, 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 $1.6 million for the six months ended June 30, 2011.
The following is a breakdown of nonaccrual loans as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||
(in thousands) | ||||||||
Financing Receivables on Nonaccrual status |
||||||||
Construction |
$ | 28,452 | $ | 25,833 | ||||
Commercial Real Estate: |
||||||||
Non-owner occupied |
10,619 | 10,767 | ||||||
Owner occupied |
13,895 | 12,829 | ||||||
Mortgages: |
||||||||
1-4 Family first lien |
8,202 | 7,889 | ||||||
Multifamily |
1,081 | 967 | ||||||
Home Equity lines of credit |
2,604 | 3,068 | ||||||
Commercial |
3,480 | 3,420 | ||||||
Consumer and other |
565 | 627 | ||||||
Total |
$ | 68,898 | $ | 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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
22
Table of Contents
Loans are considered past due if the required principal and interest income have not been received
as of the date such payments were due. The following table presents the Banks aged analysis of
past due loans:
Greater | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | Than 90 | Total Past | |||||||||||||||||||||
Past Due | Past Due | Days | Due | Current | Total Loans | |||||||||||||||||||
(in Thousands) | ||||||||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
Construction |
$ | 3,143 | $ | 2,999 | $ | 13,134 | $ | 19,276 | $ | 224,405 | $ | 243,681 | ||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Non-owner occupied |
818 | 320 | 2,557 | 3,695 | 245,265 | 248,960 | ||||||||||||||||||
Owner occupied commercial |
4,763 | 2,001 | 5,499 | 12,263 | 339,673 | 351,936 | ||||||||||||||||||
Commercial |
1,919 | 2,018 | 572 | 4,509 | 176,964 | 181,473 | ||||||||||||||||||
Mortgages: |
||||||||||||||||||||||||
Secured 1-4 family- first lien |
1,267 | 1,334 | 4,501 | 7,102 | 172,270 | 179,372 | ||||||||||||||||||
Multifamily |
19 | 601 | 233 | 853 | 30,460 | 31,313 | ||||||||||||||||||
Open ended secured 1-4 family |
1,923 | 495 | 1,002 | 3,420 | 201,888 | 205,308 | ||||||||||||||||||
Consumer and other |
540 | 208 | 112 | 860 | 60,740 | 61,600 | ||||||||||||||||||
Total |
$ | 14,392 | $ | 9,976 | $ | 27,610 | $ | 51,978 | $ | 1,451,665 | $ | 1,503,643 | ||||||||||||
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 | 197,420 | 199,696 | ||||||||||||||||||
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 | $ | 1,542,878 | $ | 1,600,128 | ||||||||||||
Impaired Loans. Management considers certain loans graded doubtful (loans graded 7) or loss
(loans graded 8) to be individually impaired and may consider substandard loans (loans graded 6)
individually impaired depending on the borrowers payment history. The Bank measures impairment
based upon probable cash flows or the value of the collateral. Collateral value is assessed based
on collateral value trends, liquidation value trends, and other liquidation expenses to determine
logical and credible discounts that may be needed. Updated appraisals are required for all
impaired loans and typically at renewal or modification of larger loans if the appraisal is more
than 12 months old.
Impaired loans for all classes of 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 borrowers 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
23
Table of Contents
modifies 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
nonaccrual or restructured loans above, but about which we have serious doubts as to the
borrowers ability to comply with present repayment terms. These loans are likely to be included
later in nonaccrual, past due or 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.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
24
Table of Contents
The following table presents the Banks investment in loans considered to be impaired and related
information on those impaired loans as of June 30, 2011 and December 31, 2010:
Quarter to Date | Year to Date | |||||||||||||||||||||||||||
Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recorded | Income | ||||||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||||||
Impaired loans without a related
allowance for loan losses |
||||||||||||||||||||||||||||
Construction |
$ | 20,947 | $ | 33,900 | $ | | $ | 22,835 | $ | 156 | $ | 22,020 | $ | 298 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Non-owner occupied |
6,697 | 9,621 | | 6,640 | 26 | 6,294 | 63 | |||||||||||||||||||||
Owner occupied |
9,820 | 12,109 | | 10,104 | 117 | 10,451 | 259 | |||||||||||||||||||||
Commercial |
4,736 | 5,363 | | 2,561 | 34 | 2,319 | 59 | |||||||||||||||||||||
Mortgages: |
||||||||||||||||||||||||||||
Secured 1-4 family real estate |
3,016 | 3,818 | | 2,372 | 26 | 2,484 | 42 | |||||||||||||||||||||
Multifamily |
297 | 308 | | 299 | 3 | 302 | 5 | |||||||||||||||||||||
Open ended secured 1-4 family |
580 | 595 | | 707 | 5 | 813 | 9 | |||||||||||||||||||||
Consumer and other |
| | | | | | | |||||||||||||||||||||
Impaired loans with a related
allowance for loan losses |
||||||||||||||||||||||||||||
Construction |
$ | 7,316 | $ | 8,711 | $ | 1,136 | $ | 7,181 | $ | 52 | $ | 8,740 | $ | 148 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Non-owner occupied |
3,764 | 4,235 | 494 | 3,866 | 48 | 4,993 | 88 | |||||||||||||||||||||
Owner occupied |
6,759 | 6,820 | 1,183 | 6,498 | 61 | 5,891 | 114 | |||||||||||||||||||||
Commercial |
2,080 | 2,080 | 655 | 5,113 | 51 | 5,218 | 93 | |||||||||||||||||||||
Mortgages: |
||||||||||||||||||||||||||||
Secured 1-4 family real estate |
1,841 | 1,871 | 507 | 2,601 | 14 | 2,331 | 34 | |||||||||||||||||||||
Multifamily |
443 | 466 | 56 | 447 | 7 | 453 | 16 | |||||||||||||||||||||
Open ended secured 1-4 family |
745 | 751 | 237 | 618 | 9 | 720 | 12 | |||||||||||||||||||||
Consumer and other |
125 | 132 | 27 | 125 | | 129 | 6 | |||||||||||||||||||||
Total impaired loans |
||||||||||||||||||||||||||||
Construction |
$ | 28,263 | $ | 42,611 | $ | 1,136 | $ | 30,016 | $ | 208 | $ | 30,760 | $ | 446 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Non-owner occupied |
10,461 | 13,856 | 494 | 10,506 | 74 | 11,287 | 151 | |||||||||||||||||||||
Owner occupied |
16,579 | 18,929 | 1,183 | 16,602 | 178 | 16,342 | 373 | |||||||||||||||||||||
Commercial |
6,816 | 7,443 | 655 | 7,674 | 85 | 7,537 | 152 | |||||||||||||||||||||
Mortgages: |
||||||||||||||||||||||||||||
Secured 1-4 family real estate |
4,857 | 5,689 | 507 | 4,973 | 40 | 4,815 | 76 | |||||||||||||||||||||
Multifamily |
740 | 774 | 56 | 746 | 10 | 755 | 21 | |||||||||||||||||||||
Open ended secured 1-4 family |
1,325 | 1,346 | 237 | 1,325 | 14 | 1,533 | 21 | |||||||||||||||||||||
Consumer and other |
125 | 132 | 27 | 125 | | 129 | 6 | |||||||||||||||||||||
Total impaired loans individually
reviewed for impairment |
$ | 69,166 | $ | 90,780 | $ | 4,295 | $ | 71,967 | $ | 609 | $ | 73,158 | $ | 1,246 | ||||||||||||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
25
Table of Contents
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 losses
are loans in which additional impairment has been identified in excess of credit discounts
resulting in additional reserves. These additional reserves are included in the allowance for loan
losses related to purchased impaired loans and were $76,000 and $47,000 as of June 30, 2011 and
December 31, 2010, respectively. The following table presents information regarding the change in
all purchased impaired loans from the Companys acquisition of American Community on April 17, 2009
through June 30, 2011.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
26
Table of Contents
Contractual | ||||||||||||
Principal | Nonaccretable | Carrying | ||||||||||
Receivable | Difference | Amount | ||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2009 |
$ | 5,388 | $ | 497 | $ | 4,891 | ||||||
Change due to payoff received |
(214 | ) | (20 | ) | (194 | ) | ||||||
Transfer to foreclosed real estate |
(9 | ) | (159 | ) | 150 | |||||||
Change due to charge-offs |
(386 | ) | (246 | ) | (140 | ) | ||||||
Balance at June 30, 2010 |
$ | 4,779 | $ | 72 | $ | 4,707 | ||||||
Balance at December 31, 2010 |
$ | 1,655 | $ | 72 | $ | 1,583 | ||||||
Change due to payoff received |
(214 | ) | (27 | ) | (187 | ) | ||||||
Balance at June 30, 2011 |
$ | 1,441 | $ | 45 | $ | 1,396 | ||||||
At June 30, 2011, the outstanding balance of purchased impaired loans from American Community,
which includes principal, interest and fees due, was $1.4 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 managements best estimate for
probable losses that have been incurred within the existing portfolio of loans. The primary risks
inherent in the Banks loan portfolio, including the adequacy of the allowance or reserve for loan
losses, are based on managements assumptions regarding, among other factors, general and local
economic conditions, which are difficult to predict and are beyond the Banks control. In
estimating these risks, and the related loss reserve levels, management also considers the
financial conditions of specific borrowers and credit concentrations with specific borrowers,
groups of borrowers, and industries.
The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans
are charged against the allowance for loan losses in the accounting period in which they are
determined by management to be uncollectible. Recoveries during the period are credited to the
allowance for loan losses. The provision for loan losses was $10.4 million for the quarter ended
June 30, 2011 as compared to $5.8 million for the quarter ended June 30, 2010; and $15.2 million
for the six months ended June 30, 2011 as compared to $10.2 million for the six months ended June
30, 2010. The provision expense is determined by the Banks allowance for loan losses model. The
components of the model are specific reserves for impaired loans and a general allocation for
unimpaired loans. The general allocation has two components, an estimate based on historical loss
experience and an additional estimate based on internal and external environmental factors due to
the uncertainty of historical loss experience in predicting current embedded losses in the
portfolio that will be realized in the future.
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 (criticized asset factor) based
on the likelihood of loss are applied to the homogeneous pools of weaker graded loans that have not
yet been identified as impaired. During the second quarter of 2011, the Company performed its
semi-annual update to the criticized asset factor. Changes to the factor included updated loss
information and further segregation of loss information by loan type. These changes resulted in an
overall reduction in allowances of approximately $831,000.
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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
27
Table of Contents
trends, and underwriting and servicing assessments. During the second quarter of 2011, a new
environmental factor was added to reflect changes in real estate market values over the average
life of construction and permanent real estate loans. The application of this new factor during
the quarter ended June 30, 2011 resulted in additional reserves of approximately $1.3 million.
Markets served by the Bank continue to experience softening from the general economy and declines
in real estate values. The real estate characteristics component includes trends in real estate
concentrations, exceptions to FDIC guidelines for loan-to-value ratios, and changes in real estate
market values. Other factors impacting the allowance at June 30, 2011 were watch list trends,
unemployment rate trends, and underwriting and servicing assessments.
The following table presents changes in the allowance for loan losses for the three and six months
ended June 30, 2011:
December 31, | ||||||||||||||||||||
2010 | Charge-offs | Recoveries | Provision | June 30, 2011 | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
Construction |
$ | 12,014 | $ | 7,875 | $ | 1,081 | $ | 5,550 | $ | 10,770 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Non owner occupied |
7,150 | 2,332 | 52 | (590 | ) | 4,280 | ||||||||||||||
Owner occupied |
5,958 | 2,837 | 106 | 3,474 | 6,701 | |||||||||||||||
Commercial |
4,335 | 2,024 | 111 | 1,598 | 4,020 | |||||||||||||||
Mortgages: |
||||||||||||||||||||
Secured 1-4 family- first lien |
3,706 | 1,780 | 76 | 2,512 | 4,514 | |||||||||||||||
Multifamily |
424 | 12 | | 114 | 526 | |||||||||||||||
Open ended secured 1-4 family |
3,298 | 1,686 | 81 | 2,319 | 4,012 | |||||||||||||||
Consumer and other |
867 | 413 | 92 | 283 | 829 | |||||||||||||||
$ | 37,752 | $ | 18,959 | $ | 1,599 | $ | 15,260 | $ | 35,652 | |||||||||||
March 31, | ||||||||||||||||||||
2011 | Charge-offs | Recoveries | Provision | June 30, 2011 | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
Construction |
$ | 9,592 | $ | 4,097 | $ | 1,008 | $ | 4,267 | $ | 10,770 | ||||||||||
Commercial real estate: |
||||||||||||||||||||
Non owner occupied |
5,269 | 1,355 | 52 | 314 | 4,280 | |||||||||||||||
Owner occupied |
7,234 | 2,098 | 30 | 1,535 | 6,701 | |||||||||||||||
Commercial |
4,939 | 1,806 | 43 | 844 | 4,020 | |||||||||||||||
Mortgages: |
||||||||||||||||||||
Secured 1-4 family- first lien |
4,323 | 1,239 | 46 | 1,384 | 4,514 | |||||||||||||||
Multifamily |
486 | | | 40 | 526 | |||||||||||||||
Open ended secured 1-4 family |
3,144 | 1,154 | 42 | 1,980 | 4,012 | |||||||||||||||
Consumer and other |
873 | 129 | 56 | 29 | 829 | |||||||||||||||
$ | 35,860 | $ | 11,878 | $ | 1,277 | $ | 10,393 | $ | 35,652 | |||||||||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
28
Table of Contents
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 as reserve percentages on certain loans may have increased or decreased based on new
classifications.
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 June 30, 2011 | (Amounts in thousands) | |||||||||||||||
Construction |
$ | 1,136 | $ | 28,263 | $ | 9,634 | $ | 215,418 | ||||||||
Commercial real estate: |
||||||||||||||||
Non owner occupied |
494 | 10,461 | 3,786 | 238,499 | ||||||||||||
Owner occupied |
1,183 | 16,579 | 5,518 | 335,357 | ||||||||||||
Commercial |
655 | 6,816 | 3,365 | 174,657 | ||||||||||||
Mortgages: |
||||||||||||||||
Secured 1-4 family- first lien |
507 | 4,857 | 4,007 | 174,515 | ||||||||||||
Multifamily |
56 | 740 | 471 | 30,573 | ||||||||||||
Open ended secured 1-4 family |
237 | 1,325 | 3,774 | 203,983 | ||||||||||||
Consumer and other |
27 | 125 | 802 | 61,475 | ||||||||||||
$ | 4,295 | $ | 69,166 | $ | 31,357 | $ | 1,434,477 | |||||||||
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 | |||||||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
29
Table of Contents
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 Companys loan charge-off policy for all loan classes is to charge down loans to net realizable
value once a portion of the loan is determined to be uncollectable, and the underlying collateral
shortfall is assessed. Unsecured loans (primarily consumer loans) are charged off against the
reserve once the loan becomes 90 days past due or it is determined that a portion of the loan is
uncollectable. Secured loans (primarily construction, real estate, commercial and other loans) are
moved to 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 $261,000 and $204,000 as of June 30,
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
June 30, 2011, the Company had reserves for mortgage loans sold of $2.1 million, and charges
against reserves for the three and six months ended June 30, 2011 were $131,000 and $305,000,
respectively. For the three and six months ended June 30, 2011 the Company recorded $545,000 and
$417,000, respectively, in provision expense related to potential repurchase and warranties
exposure on the $185 million in loan sales that occurred during that period. For the three and six
months ended June 30, 2010 the Company recorded $229,000 and $469,000, respectively, in provision
expense related to potential repurchase and warranties exposure and charges against reserves were
$246,000 and $427,000, respectively. For the quarters ended June 30, 2011 and June 30, 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, interest
rate swaps, mortgage servicing rights, interest rate lock commitments and forward sale loan
commitments are recorded at fair value on a recurring 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
30
Table of Contents
pricing models or other model-based valuation techniques
such as the present value of future cash flows, adjusted for the securitys credit rating,
prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities
include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities
that are traded by dealers or brokers in active over-the-counter markets, and money market funds.
Level 2 securities include mortgage-backed securities issued by government sponsored entities and
private label entities, municipal bonds and corporate debt securities. There have been no changes
in valuation techniques for the quarter ended June 30, 2011. Valuation techniques are consistent
with techniques used in prior periods.
Interest Rate Locks and Forward Loan Sale Commitments
Sidus, the Companys mortgage lending subsidiary, enters into interest rate lock commitments and
commitments to sell mortgages. At June 30, 2011, the amount of fair value associated with these
interest rate lock commitments and forward loan sale commitments was $16,251 and $92,367
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 release 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 June 30, 2011. Valuation techniques are consistent with
techniques used in prior periods.
Interest Rate Lock Commitments | ||||||||
Level 3 | ||||||||
Fair Value | Fair Value | |||||||
Balance, March 31, 2011 and 2010 |
$ | 337,453 | $ | 214,858 | ||||
Gains/losses included in other income |
(321,202 | ) | 179,617 | |||||
Transfer in and out |
| | ||||||
Balance, June 30, 2011 and 2010 |
$ | 16,251 | $ | 394,475 | ||||
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 |
(88,559 | ) | 1,185,083 | |||||
Transfer in and out |
| | ||||||
Balance, June 30, 2011 and 2010 |
$ | 16,251 | $ | 394,475 | ||||
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 June 30, 2011. Valuation
techniques are consistent with techniques used in prior periods.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
31
Table of Contents
The following table presents a rollforward of mortgage servicing rights from December 31, 2010 to
June 30, 2011 and December 31, 2009 to June 30, 2010 and shows that the mortgage servicing rights
are classified as Level 3 as discussed above.
Level 3 | ||||||||
Fair Value | Fair Value | |||||||
(In thousands) | ||||||||
Balance, March 31, 2011 and 2010 |
$ | 2,220 | $ | 1,941 | ||||
Capitalized |
60 | 80 | ||||||
Gains/losses included in other income |
(87 | ) | (61 | ) | ||||
Balance, June 30, 2011 and 2010 |
$ | 2,193 | $ | 1,960 | ||||
Level 3 | ||||||||
Fair Value | Fair Value | |||||||
(In thousands) | ||||||||
Balance, December 31, 2010 and 2009 |
$ | 2,144 | $ | 1,918 | ||||
Capitalized |
195 | 181 | ||||||
Gains/losses included in other income |
(146 | ) | (139 | ) | ||||
Balance, June 30, 2011 and 2010 |
$ | 2,193 | $ | 1,960 | ||||
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 June 30, 2011 and December 31, 2010, the cost of the Companys
mortgage loans held-for-sale was less than the market value. Accordingly, at quarter end the
Companys loans held-for-sale were carried at cost. There have been no changes in valuation
techniques for the quarter ended June 30, 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 June 30, 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 June 30, 2011. Valuation
techniques are consistent with techniques used in prior periods.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
32
Table of Contents
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 June
30, 2011, and from December 31, 2009 to June 20, 2010 and shows that the interest rate swaps are
classified as Level 3 as discussed above.
Level 3 | ||||||||
Fair Value- Assets | Fair Value- Liabilities | |||||||
(Amounts in thousands) | ||||||||
Balance, March 31, 2011 |
$ | 133 | $ | 133 | ||||
Purchases, sales, issuances and settlements |
| | ||||||
Gains/losses included in other income |
40 | 40 | ||||||
Balance, June 30, 2011 |
$ | 173 | $ | 173 | ||||
Balance, March 31, 2010 |
$ | | $ | | ||||
Purchases, sales, issuances and settlements |
| | ||||||
Gains/losses included in other income |
162 | 162 | ||||||
Balance, June 30, 2010 |
$ | 162 | $ | 162 | ||||
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 |
14 | 14 | ||||||
Balance, June 30, 2011 |
$ | 173 | $ | 173 | ||||
Balance, December 31, 2009 |
$ | | $ | | ||||
Purchases, sales, issuances and settlements |
| | ||||||
Gains/losses included in other income |
162 | 162 | ||||||
Balance, June 30, 2010 |
$ | 162 | $ | 162 | ||||
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
managements estimation of the value of the collateral. When the fair value of the collateral is
based on an observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the OREO as nonrecurring Level 3. There have
been no changes in valuation techniques for the quarter ended June 30, 2011. Valuation techniques
are consistent with techniques used in prior periods.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
33
Table of Contents
Assets (liabilities) subjected to recurring fair value adjustments:
June 30, 2011 (in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. government agencies |
$ | 34,485 | $ | | $ | 34,485 | $ | | ||||||||
Government sponsored agencies: |
||||||||||||||||
Residential mortgage-backed securities |
62,802 | | 62,802 | | ||||||||||||
Collateralized mortgage obligations |
150,434 | | 150,434 | | ||||||||||||
Private label collateralized
mortgage obligations |
1,560 | | 1,560 | | ||||||||||||
State and municipal securities |
67,034 | | 67,034 | | ||||||||||||
Common and preferred stocks |
1,144 | 1,144 | | | ||||||||||||
Interest rate swap agreements |
173 | | | 173 | ||||||||||||
Interest rate swap agreements |
(173 | ) | | | (173 | ) | ||||||||||
Interest rate lock commitments |
16 | | | 16 | ||||||||||||
Forward loan sale commitments |
92 | | 92 | | ||||||||||||
Mortgage servicing rights |
2,193 | | | 2,193 |
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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
34
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Assets subjected to nonrecurring fair value adjustments:
June 30, 2011 (Amounts in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Other real estate owned |
$ | 6,042 | $ | | $ | | $ | 6,042 | ||||||||
Impaired loans: |
||||||||||||||||
Construction |
6,180 | | | 6,180 | ||||||||||||
Commercial real estate: |
||||||||||||||||
Non-owner occupied |
3,270 | | | 3,270 | ||||||||||||
Owner occupied |
5,576 | | | 5,576 | ||||||||||||
Commercial |
1,425 | | | 1,425 | ||||||||||||
Mortgages: |
||||||||||||||||
Secured 1-4 family real estate |
1,334 | | | 1,334 | ||||||||||||
Multifamily |
387 | | | 387 | ||||||||||||
Open ended secured 1-4 family |
508 | | | 508 | ||||||||||||
Consumer and other |
98 | | | 98 | ||||||||||||
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 |
The carrying value of OREO at June 30, 2011 is $22,045,691. At December 31, 2010 the carrying
value of OREO was $25,582,234. Other real estate owned with a carrying amounts of $7.3 million
were written down to their fair value of $6.0 million for the six months ended June 30, 2011 and
have been included in the table above, resulting in a loss of $1.3 million, which was included in
earnings.
There were no transfers between valuation levels for any assets during the quarter ended June 30,
2011 or the quarter ended June 30, 2010. 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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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11. Financial Instruments
The following is a summary of the carrying amounts and fair values of the Companys financial
assets and liabilities at June 30, 2011 and December 31, 2009:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
amount | fair value | amount | fair value | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 129,169 | $ | 129,169 | $ | 229,780 | $ | 229,780 | ||||||||
Investment securities |
317,459 | 317,459 | 298,002 | 298,002 | ||||||||||||
Loans and loans held-for-sale, net |
1,496,352 | 1,427,010 | 1,613,206 | 1,541,071 | ||||||||||||
Accrued interest receivable |
7,066 | 7,066 | 7,947 | 7,947 | ||||||||||||
Federal Home Loan Bank stock |
7,814 | 7,814 | 9,416 | 9,416 | ||||||||||||
Investment in Bank owned life insurance |
25,602 | 25,602 | 25,278 | 25,278 | ||||||||||||
Interest rate swap agreements |
173 | 173 | 159 | 159 | ||||||||||||
Interest rate lock commitments |
16 | 16 | 105 | 105 | ||||||||||||
Forward sales commitments |
92 | 92 | 161 | 161 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Demand deposits, NOW, savings
and money market accounts |
820,167 | 821,360 | 805,951 | 805,951 | ||||||||||||
Time deposits |
1,005,628 | 1,008,217 | 1,214,455 | 1,227,628 | ||||||||||||
Borrowed funds |
103,524 | 104,404 | 116,768 | 117,741 | ||||||||||||
Accrued interest payable |
2,748 | 2,748 | 3,302 | 3,302 | ||||||||||||
Interest rate swap agreements |
173 | 173 | 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 lower of cost or market as these loans are
typically sold within 60 days of origination. Fair values for adjustable-rate mortgages are based
on quoted market prices of similar loans adjusted for differences in loan characteristics. The
Company applied an additional illiquidity discount in the amount of 5.0%.
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 June 30,
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 June 30,
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 June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
36
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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 Companys credit risk is not material to calculation of fair value
because these borrowings are collateralized.
The carrying values of accrued interest receivable and accrued interest payable approximates fair
values due to the short-term duration.
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.
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 release premium, origination income net of origination costs, and
changes in loan pricing between the commitment date and period end, typically month end.
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.
Goodwill relating to the Sidus acquisition is evaluated by management on an annual basis at October
1st or more frequently if circumstances indicate possible impairment for the Sidus reporting unit.
For the first six months of 2011, Sidus has experienced losses of $2.6 million due to declines in
revenues and one-time expenses for severance and termination costs. During the quarter
ended June 30, 2011, management made the strategic decision to exit out of the wholesale market and
concentrate the focus on retail mortgage sales. As a result of these triggering events, goodwill
related to the Sidus acquisition was evaluated for impairment as of June 30, 2011.
In performing the first step (Step 1) of the goodwill impairment testing and measurement process
to identify possible impairment, the estimated fair value of the Sidus reporting unit was developed
using the income and market approaches to value Sidus. The income approach consists of
discounting projected long-term future cash flows, which are derived from internal forecasts and
economic expectations for Sidus. Significant inputs to the income approach include the
multiple of earnings derived from recent acquisitions, an annual discount rate of 25% representing
investors estimated long-term required rate of return, and projected long-term earnings for the
reporting units. A significant discount rate has been applied to the projections due to the fact that Sidus has
sustained losses for the first six months of 2011 and has recently exited its wholesale business.
The market valuation approach utilizes price-to-book value multiple and EBITDA multiples.
Significant inputs to the price-to-book value multiple approach include a weighted-average multiple
of long-term book value of 0.84 derived from southeast industry data, and long-term tangible book
values of 1.06 for the reporting units.
The valuation has declined over the last twelve months as investors have demanded a higher return
for equity investments in the mortgage business due to sustained weakness in the industry.
Earnings multiples have declined and discount rates have increased as discussed in the paragraph
above. These industry trends coupled with losses for the first six months of 2011, changes in the
regulatory environment and additional costs associated with those changes,
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
37
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and risks associated
with recourse have all decreased expected future earnings and have resulted in management reducing
its internal valuations. The lower valuations have resulted in goodwill impairment.
We updated our Step 1 goodwill impairment testing as of June 30, 2011. The results of this Step 1
process indicated that the estimated fair value of Sidus was less than book value, thus requiring a
second step (Step 2) of the goodwill impairment test in accordance with accounting for
Intangibles- Goodwill and other. The Step 2 analysis included an allocation of estimated fair
value of the entity and allocated that value to identifiable tangible and intangible assets and
liabilities as determined in Step 1. Assumptions included in the fair value of net assets included
current market rates
for loans. Based on the Step 2 analysis, it was determined that Sidus fair value did not support
the goodwill recorded; therefore, Sidus has recorded a $4.9 million goodwill impairment charge to
write-off all of its goodwill. This non-cash goodwill impairment charge to earnings was recorded
as a component of non-interest expense on the consolidated statement of income (loss).
The following table presents changes in the carrying amount of goodwill for the six months
ended June 30, 2011:
Banking Segment | Sidus Segment | Total | ||||||||||
Balance as of December 31, 2010 |
||||||||||||
Goodwill |
$ | | $ | 4,943,872 | $ | 4,943,872 | ||||||
Impairment losses |
| (4,943,872 | ) | (4,943,872 | ) | |||||||
Balance as of June 30, 2011 |
$ | | $ | | $ | | ||||||
Accumulated impairment losses |
$ | (61,565,768 | ) | $ | (4,943,872 | ) | $ | (66,509,640 | ) |
13. Business Segment Information
The Company has two reportable segments, including the Bank and Sidus Financial, 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 three and six months ended June 30,
2011 and 2010 for the Bank and for Sidus.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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Bank | Sidus | Other | Total | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
For Three Months Ended June 30, 2011 |
||||||||||||||||
Interest income |
$ | 22,754 | $ | 368 | $ | | $ | 23,122 | ||||||||
Interest expense |
6,528 | 90 | 193 | 6,811 | ||||||||||||
Net interest income |
16,226 | 278 | (193 | ) | 16,311 | |||||||||||
Provision for loan losses |
10,391 | 2 | | 10,393 | ||||||||||||
Net interest income (loss) after provision
for loan losses |
5,835 | 276 | (193 | ) | 5,918 | |||||||||||
Other income |
3,183 | 179 | (6 | ) | 3,356 | |||||||||||
Other expense |
16,704 | 7,724 | 29 | 24,457 | ||||||||||||
Loss before income taxes |
(7,686 | ) | (7,269 | ) | (228 | ) | (15,183 | ) | ||||||||
Income taxes |
5,030 | | | 5,030 | ||||||||||||
Net loss |
$ | (12,716 | ) | $ | (7,269 | ) | $ | (228 | ) | $ | (20,213 | ) | ||||
Total assets |
$ | 2,059,918 | $ | 35,486 | $ | (14,362 | ) | $ | 2,081,042 | |||||||
Net loans |
1,468,615 | | | 1,468,615 | ||||||||||||
Loans held for sale |
376 | 27,361 | | 27,737 | ||||||||||||
For Six Months Ended June 30, 2011 |
||||||||||||||||
Interest income |
$ | 45,951 | $ | 749 | $ | | $ | 46,700 | ||||||||
Interest expense |
14,154 | 162 | 384 | 14,700 | ||||||||||||
Net interest income |
31,797 | 587 | (384 | ) | 32,000 | |||||||||||
Provision for loan losses |
15,240 | 20 | | 15,260 | ||||||||||||
Net interest income (loss) after provision
for loan losses |
16,557 | 567 | (384 | ) | 16,740 | |||||||||||
Other income |
6,151 | 2,079 | (82 | ) | 8,148 | |||||||||||
Other expense |
31,108 | 10,229 | 29 | 41,366 | ||||||||||||
Loss before income taxes |
(8,400 | ) | (7,583 | ) | (495 | ) | (16,478 | ) | ||||||||
Income taxes |
4,521 | | | 4,521 | ||||||||||||
Net loss |
$ | (12,921 | ) | $ | (7,583 | ) | $ | (495 | ) | $ | (20,999 | ) | ||||
(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 Banks Due from Sidus account ($12,591 in 2011), the Banks Investment in Sidus ($3,000 in 2011), and the Banks A/R from Sidus ($29 in 2011). Also included in this column are Holding Company assets ($1,258 in 2011) and Holding Company income and expenses. |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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Bank | Sidus | Other | Total | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
For Three Months Ended June 30, 2010 |
||||||||||||||||
Interest income |
$ | 23,835 | $ | 413 | $ | | $ | 24,248 | ||||||||
Interest expense |
8,409 | 54 | 187 | 8,650 | ||||||||||||
Net interest income |
15,426 | 359 | (187 | ) | 15,598 | |||||||||||
Provision for loan losses |
5,580 | 229 | | 5,809 | ||||||||||||
Net interest income (loss) after provision
for loan losses |
9,846 | 130 | (187 | ) | 9,789 | |||||||||||
Other income |
3,609 | 1,876 | (33 | ) | 5,452 | |||||||||||
Other expense |
12,834 | 2,021 | 125 | 14,980 | ||||||||||||
Income (loss) before income taxes (benefit) |
621 | (15 | ) | (345 | ) | 261 | ||||||||||
Income taxes |
(24 | ) | | | (24 | ) | ||||||||||
Net income(loss) |
$ | 645 | $ | (15 | ) | $ | (345 | ) | $ | 285 | ||||||
Total assets |
$ | 2,217,984 | $ | 59,823 | $ | (37,626 | ) | $ | 2,240,181 | |||||||
Net loans |
1,603,469 | | | 1,603,469 | ||||||||||||
Loans held for sale |
816 | 48,726 | | 49,542 | ||||||||||||
Goodwill |
| 4,944 | | 4,944 | ||||||||||||
For Six Months Ended June 30, 2010 |
||||||||||||||||
Interest income |
$ | 48,274 | $ | 764 | $ | | $ | 49,038 | ||||||||
Interest expense |
16,201 | 63 | 369 | 16,633 | ||||||||||||
Net interest income |
32,073 | 701 | (369 | ) | 32,405 | |||||||||||
Provision for loan losses |
9,964 | 229 | | 10,193 | ||||||||||||
Net interest income (loss) after provision
for loan losses |
22,109 | 472 | (369 | ) | 22,212 | |||||||||||
Other income |
6,244 | 3,211 | (222 | ) | 9,233 | |||||||||||
Other expense |
25,892 | 3,399 | 221 | 29,512 | ||||||||||||
Income (loss) before income taxes (benefit) |
2,461 | 284 | (812 | ) | 1,933 | |||||||||||
Income taxes (benefit) |
733 | | | 733 | ||||||||||||
Net income(loss) |
$ | 1,728 | $ | 284 | $ | (812 | ) | $ | 1,200 | |||||||
(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 Banks Due from Sidus account ($32,477 in 2010), the Banks Investment in Sidus ($3,000 in 2010), and the Banks A/R from Sidus ($12 in 2010). Also included in this column are Holding Company assets ($2,137 in 2010) and Holding Company income and expenses. |
14. Cost Savings Initiatives
During the second quarter of 2011, the Company continued evaluating areas for cost savings as part
of the earnings improvement initiative announced in 2010 in order to streamline the organization
during this prolonged economic cycle. Additional evaluations of the branch network, Sidus, and
staffing levels across all areas of the Bank were performed. As a result of these
evaluations, the decision was made to consolidate four additional branch offices across the
franchise. This decision was a result of an extensive evaluation of the entire network of
branches. These consolidations will take place in the second and third quarters of 2011 and are
expected to be completed by the end of August 2011. Severance payments in the amount of $552,000
have been accrued as of June 30, 2011 in salaries and employee benefits expense as part of this
consolidation. The Company has also accrued $401,000 in lease termination costs as of June 30,
2011 in connection with the branch closures, and recorded impairment charges on fixed assets in the
amount of $1.2 million.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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In addition to the consolidation of branches, the Bank made the decision to exit the wholesale
business line at Sidus effective on June 1, 2011 and to reposition the mortgage focus to
concentrate primarily on retail consumer mortgages going forward.
15. Property Held-for-Sale
During the quarter ended June 30, 2011, the Company entered into contracts to sell certain property
and equipment in connection with the branch closures announced in late 2010 and 2011. As a result,
approximately $2.2 million in buildings and furniture have been written down to fair value of
$984,000 based on current appraisals and offers. These buildings are now classified as
held-for-sale and are included in other assets on the consolidated balance sheet as of June 30,
2011.
16. Private Placement
On May 6, 2011, the Company completed the private placement of 3,081,867 shares of common stock
(the Private Placement) to accredited investors, including certain of the Companys officers and
directors, for total cash proceeds of $6.4 million. The purchase price per share for investors was
at a 10% discount to the weighted average closing sale price of the Companys common stock on
Nasdaq for the 10-day period ending five business days prior to the closing of the Private
Placement. On June 23, 2011, the Companys shareholders approved the Private Placement which
permitted the Company pursuant to Nasdaq Rule 5635(c) to issue the Companys directors and
executive officers additional shares of common stock in the amount of 151,681 shares so that the
directors and executive officers were able to invest on the same terms as other investors that
participated in the Private Placement. The Company issued 3,233,548 shares of common stock in
total as a result of the Private Placement. Proceeds received from the Private Placement are
expected to be kept at the holding company level for general corporate purposes.
17. Income Taxes
Income tax expense for the three and six months ended June 30, 2011 was $5.0 million and $4.5
million, respectively, compared to income tax benefit of $24,000 for the three months ended June
30, 2010, and income tax expense of $733,000 for the six months ended June 30, 2010. The
significant increase is attributable to valuation allowances for deferred tax assets of $11.0
million. The following table presents the provision for income taxes for the six months ended June
30, 2011 and 2010:
2011 | 2010 | |||||||
(in thousands) | ||||||||
Current: |
||||||||
Federal |
$ | 485 | $ | (2,980 | ) | |||
State |
| | ||||||
485 | (2,980 | ) | ||||||
Deferred: |
||||||||
Federal |
(5,912 | ) | 3,086 | |||||
State |
(1,052 | ) | 627 | |||||
(6,964 | ) | 3,713 | ||||||
Increase in valuation allowance for deferred tax assets |
11,000 | | ||||||
Total income taxes |
$ | 4,521 | $ | 733 | ||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
41
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The following table presents the tax effects of significant components of the Companys net
deferred tax assets as of June 30, 2011 and December 31, 2010:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 13,983 | $ | 14,809 | ||||
Other than temporary impairment |
467 | 467 | ||||||
Accrued liabilities |
272 | 529 | ||||||
OREO property |
1,008 | 680 | ||||||
Net operating loss |
10,375 | 4,652 | ||||||
Other |
530 | 515 | ||||||
26,635 | 21,652 | |||||||
Less: Valuation Allowance |
(11,000 | ) | | |||||
$ | 15,635 | $ | 21,652 | |||||
Deferred tax liabilities: |
||||||||
Unrealized gain on available-for-sale securities |
$ | (1,814 | ) | $ | (333 | ) | ||
FMV adjustment related to mergers |
(185 | ) | (50 | ) | ||||
Depreciation |
(2,215 | ) | (2,215 | ) | ||||
Prepaid expenses |
(357 | ) | (357 | ) | ||||
Core deposit intangible |
(1,692 | ) | (1,929 | ) | ||||
Noncompete intangible |
(232 | ) | (232 | ) | ||||
Goodwill |
1,115 | (764 | ) | |||||
Other |
(137 | ) | (137 | ) | ||||
$ | (5,517 | ) | $ | (6,017 | ) | |||
Net deferred tax asset |
$ | 10,118 | $ | 15,635 | ||||
As of June 30, 2011, deferred tax assets of $26.6 million reduced by a valuation allowance of
$11.0 million and $5.5 million in deferred tax liabilities, resulted in a net deferred tax asset of
approximately $10.1 million. 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.
In evaluating whether the Company will realize the full benefit of its net deferred tax asset, it
considers both positive and negative evidence, including recent earnings trends and projected
earnings, asset quality, etc. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized. Due to a cumulative three-year,
pre-tax loss position, significant net operating losses in 2011, and ongoing stress on the
Companys financial performance from elevated credit losses, the Company has reserved $11.0
million against deferred tax assets as of June 30, 2011. In future periods, the Company may be
able to reduce some or all of the valuation allowance upon a determination that it will be able to
realize such tax savings.
The Company is currently considering and implementing a variety of tax planning strategies in an
attempt to increase after tax income and taxable earnings, which will increase the likelihood of
the company to recognize its deferred tax assets. These tax planning strategies include
repositioning the Companys municipal securities portfolio to taxable securities and sale of
various assets.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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The Companys loss carryforwards for the tax period ending June 30, 2011 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 June 30, 2011 are
as follows:
Net Operating Loss | ||||||||
Carryforward at | ||||||||
June 30, 2011 | Expiration | |||||||
(Amounts in | ||||||||
thousands) | ||||||||
Cardinal State Bank acquisition |
$ | 2,424 | 2029 | |||||
American Community Bank acquisition |
345 | 2030 | ||||||
Yadkin Valley Federal Tax |
23,792 | 2031 | ||||||
Yadkin Valley State Tax |
27,403 | 2031 | ||||||
Total Loss Carryforwards |
$ | 53,964 | ||||||
The following table presents a reconciliation of applicable income taxes for the six months ended
June 30, 2011 and 2010 to the amount of tax expense computed at the statutory federal income tax
rate of 35%:
2011 | 2010 | |||||||
(Amounts in thousands) | ||||||||
Tax expense at statutory rate on income before income taxes |
$ | (5,767 | ) | $ | 676 | |||
Increases (decreases) resulting from: |
||||||||
Tax-exempt interest on investments |
(442 | ) | (399 | ) | ||||
State income tax, net of federal benefits |
(684 | ) | 408 | |||||
Income from bank-owned life insurance |
(113 | ) | (139 | ) | ||||
Valuation allowance on deferred tax assets |
11,000 | | ||||||
Other |
527 | 187 | ||||||
Total income taxes |
$ | 4,521 | $ | 733 | ||||
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
43
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Item 2. Managements 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 |
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
44
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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 that have persisted over the past several years, and we are unable to predict what effect
these uncertain market conditions will continue to have on us. There can be no assurance that
these unprecedented 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 and six months periods
ended June 30, 2011 and 2010 and also analyzes our financial condition as of June 30, 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
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
45
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source of funds for making these loans and investments is our deposits, on which we pay interest.
Consequently, one of the key measures of our success is our amount of net interest income, or the
difference between the income on our interest-earning assets, such as loans and investments, and
the expense on our interest-bearing liabilities, such as deposits. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate we pay on our
interest-bearing liabilities.
Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to
absorb probable losses on existing loans that may become uncollectible. We establish and maintain
this allowance by charging a provision for loan losses against our operating earnings. In the
following section, we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other
expenses we charge to our customers. We describe the various components of this noninterest
income, as well as our noninterest expense, in the following discussion.
The following discussion and analysis also identifies significant factors that have affected our
financial position and operating results during the periods included in the accompanying financial
statements. We encourage you to read this 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 June 30, 2011 were $2,081.0 million, a decrease of $219.6 million, or 9.5%,
compared to assets of $2,300.6 million at December 31, 2010. The loan portfolio, net of allowance
for losses, was $1,468.6 million compared to $1,562.8 million at December 31, 2010. Gross loans
held-for-investment decreased by $96.3 million, or 6.0%. The allowance for loan losses decreased
$2.1 million driven primarily by decreases in classified loans for the six months ended June 30,
2011, as well as an overall decrease of $96.3 million in loans held-for-investment. Total watch
list and substandard loans were $184.1 million as compared to $252.7 million as of December 31,
2010, a decrease of $68.6 million. 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 $22.7 million, or 45.0%, from December 31, 2010 to June
30, 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
and the Federal Home Loan Mortgage Corporation with servicing rights retained. These loans are
normally held for a period of two to three weeks before being sold to investors. During the second
quarter of 2011, the Company made the decision to exit wholesale markets focusing its efforts on
retail based mortgage lending leading to the overall decrease in loans held-for-sale as of June 30,
2011. Mortgage loans closed in the first six months of 2011 ranged from a low of $41.0 million in
February to a high of $79.8 million in January and totaled $363.2 million. Mortgage loans closed
during the six months ended June 30, 2010 totaled $337.2 million.
The securities portfolio increased from $298.0 million at December 31, 2010, to $317.5 million at
June 30, 2011, an increase of $19.5 million. The portfolio is comprised of securities of U.S.
government agencies (10.9%), mortgage-backed securities (67.7%), state and municipal securities
(21.1%), and publicly traded common and preferred stocks (0.3%).
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
46
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Other assets decreased $8.5 million due largely to the fact that the Company recorded an $11.0
million valuation allowance against deferred tax assets. OREO decreased $3.5 million due to
foreclosures in the amount of $7.5 million less dispositions of $8.8 million and losses of $2.1
million for the six months ended June 30, 2011.
Deposits decreased $194.6 million, or 9.6%, comparing June 30, 2011 to December 31, 2010. Overall,
noninterest-bearing demand deposits increased $6.4 million, or 3.0%, NOW, savings, and money market
accounts increased $7.8 million, or 1.3%, Certificates of deposit (CODs) over $100,000 decreased
$67.6 million, or 14.2%, and other CODs decreased $141.2 million, or 19.1%. 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 2011.
Borrowed funds decreased $13.2 million, or 11.3%, comparing June 30, 2011 to December 31, 2010.
Repurchase agreements decreased $1.2 million, while advances from FHLB and overnight borrowings
decreased $12.0 million. Long term borrowings included $35.0 million in trust preferred
securities and advances from the FHLB of $27.0 million. The American Community merger added $10.4
million in trust preferred securities at a rate equal to the three-month LIBOR rate plus 2.80% and
will mature in 2033. Yadkin Valley Statutory Trust I (the Trust) issued $25.9 million in trust
preferred securities at a rate equal to the three-month LIBOR rate plus 1.32%. The trust preferred
securities mature in 30 years, and can be called by the Trust without penalty after five years.
Other liabilities and accrued interest payable combined increased by $1.7 million, or 12.6%, from
December 31, 2010 to June 30, 2011. Increases in other liabilities included the following:
preferred dividends payable $519,000; escrow balances $222,000; commercial remittances $413,000;
accrued property taxes $388,000; and accounts payable $452,000. Offsetting the increases in other
liabilities was a decrease in accrued interest payable of $554,000, or 16.8%, which resulted from a
9.6% decrease in deposits and timing differences.
At June 30, 2011, total shareholders equity was $134.1 million, or a book value of $4.45 per
common share, compared to $147.5 million, or a book value of $6.24 per common share, at December
31, 2010. The Companys equity to assets ratio was 6.44% and 6.41%, at June 30, 2011 and December
31, 2010, respectively.
The following table sets forth the Companys and the Banks various capital ratios as of June 30,
2011, and December 31, 2010. The Company and the Bank exceeded the minimum regulatory capital
ratios as of June 30, 2011, as well as the ratios to be considered well capitalized. We have
committed to regulators that the Bank will maintain a Tier 1 Leverage Ratio of 8%. The recent
increase in liquidity caused the Bank to fall below this level. However, the Company has a number
of alternatives available to assist the Bank in achieving this ratio including but not limited to
raising additional capital, decreasing the asset size of the Bank, and infusing additional capital
at the Bank level. The Company completed a private placement offering during the second quarter of
2011 for proceeds of $6.4 million. Although this helped improved capital ratios at the holding
company, management continues to monitor capital levels closely and evaluate options which would
improve the capital position.
June 30, 2011 | December 31, 2010 | ||||||||||||||||
Holding | Holding | ||||||||||||||||
Company | Bank | Company | Bank | ||||||||||||||
Total risk-based capital ratio |
11.1 | % | 10.7 | % | 10.6 | % | 10.5 | % | |||||||||
Tier 1 risk-based capital ratio |
9.9 | % | 9.4 | % | 9.4 | % | 9.2 | % | |||||||||
Leverage ratio |
7.5 | % | 7.1 | % | 7.2 | % | 7.0 | % |
Management of equity is a critical aspect of capital management in any business. The
determination of the appropriate amount of equity for a regulated financial institution is affected
by a number of factors, including but not limited to, the amount of capital needed to meet
regulatory requirements, the amount of risk equity the business requires and balance sheet
leverage.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
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Capital adequacy is an important indicator of financial stability and performance. In order to be
considered well capitalized, the Bank must exceed total risk-based capital ratios of 10%, and
Tier 1 risk-based capital ratios of 6% and leverage ratios of 5%. Our goal has been to maintain a
well-capitalized status for the Bank since failure to meet or exceed this classification affects
how regulatory applications for certain activities, including acquisitions, and continuation and
expansion of existing activities, are evaluated and could make our customers and potential
investors less confident in our Bank.
Liquidity, Interest Rate Sensitivity and Market Risk
The Bank derives the majority of its liquidity from its core deposit base and to a lesser extent
from wholesale borrowing. The balance sheet liquidity ratio, measured by the sum of cash (less
reserve requirements), investments, and loans held-for-sale reduced by pledged securities, as
compared to deposits and short-term borrowings, was 20.2% at June 30, 2011 compared to 23.4% at
December 31, 2010. Additional liquidity is provided by $143.6 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 $206.6 million available for
use as a source of collateral. At June 30, 2011, brokered deposits totaled $28.0 million, or 1.5%
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 June 30, 2011.
The Bank contracted with Promontory Interfinancial Network in 2008 for various services including
wholesale CD funding. Promontorys 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 June 30, 2011, the balance
of funds acquired through the One-Way Buy product totaled $23.4 million, compared to $50.6 million
at December 31, 2010.
Promontory also provides a product, CDARS® Reciprocal, which allows the Banks customers to place
funds in excess of the FDIC insurance limit with Promontorys network of participating Banks so
that the customer is fully insured for the amount deposited. Promontory provides reciprocating
funds to the Bank from funds placed at other banks by their customers. The Bank sets its customers
interest rates when they place deposits through the network and pays/receives the rate difference
to/from the other banks whose reciprocal funds are held by the Bank. The overall impact of this
process is that the Bank effectively pays the rate offered to its relationship customer. Therefore,
the Bank does not consider these funds to be wholesale or brokered funds. In compliance with FDIC
reporting requirements, the Bank reports include reciprocal deposits as brokered deposits in its
quarterly Federal Financial Institutions Examination Council Call Report. At June 30, 2011, CDARS®
reciprocal deposits totaled $13.3 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 Companys strategy is to use derivative
contracts to stabilize and improve net interest margin and net interest income currently and in
future periods. The Company has no market risk sensitive instruments held for trading purposes.
The Companys exposure to market risk is reviewed regularly by management.
To be categorized as well capitalized, the Company and the Bank each must maintain minimum amounts
and ratios. At June 30, 2011, the Company is well-capitalized for regulatory purposes both at the
bank and holding company
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
48
Table of Contents
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, decreasing the asset size of Bank, and infusing additional capital at
the Bank level.
Results of Operations
Net loss for the three-month period ended June 30, 2011 was $20.2 million before preferred
dividends, compared to a net income of $285,000 in the same period of 2010. Net loss available to
common shareholders for the three-month period ended June 30, 2011 was $20.9 million. Net loss
available to common shareholders for the three-month period ended June 30, 2010 was $486,000.
Basic and diluted losses per common share were $1.16 for the three-month period ended June 30,
2011. Basic and diluted losses per common share were $0.03 for the three month period ended June
30, 2010. On an annualized basis, second quarter results represent a return on average assets of
(3.87)% at June 30, 2011 compared to (0.09)% at June 30, 2010, and a return on average equity of
(55.25)% compared to (1.26)% at June 30, 2010.
Net loss for the six month period ended June 30, 2011 was $21.0 million before preferred dividends,
compared to a net income of $1.2 million in the same period of 2010. Net loss available to common
shareholders for the six months ended June 30, 2011 was $22.4 million, compared to a net loss
available to common shareholders of $342,000 for the six months ended June 30, 2010. Basic and
diluted losses per common share were $1.31 for the six months ended June 30, 2011. Basic and
diluted losses per common share were $0.02 for the six months ended June 30, 2010. On an
annualized basis, year-to-date results represent a return on average assets of (2.04)% at June 30,
2011 compared to (0.03)% at June 30, 2010, and a return on average equity of (30.39)% compared to
(0.45)% at June 30, 2010.
Net Interest Income
Net interest income, the largest contributor to earnings, increased $713,000, or 4.6%, to $16.3
million in the second quarter of 2011, compared with $15.6 million in the same period of 2010. The
increase was attributable to a decrease in yields on interest bearing liabilities over 2010 which
resulted from the repricing of liabilities to lower rates, as well as a change in the mix of
depository accounts from higher yielding CDs to lower yielding money market and savings accounts.
Offsetting decrease in interest expense was a compression in loan interest related to increased
nonaccrual loans. The net interest margin increased to 3.30% in the second quarter of 2011 from
3.12% in the second quarter of 2010. Excluding the accretion of acquisition related fair market
value adjustments, net interest margin for the second quarter of 2011 increased to 3.24% as
compared to 2.99% in the second quarter of 2010.
Net interest income for the six months ended June 30, 2011 decreased to $32.0 million from $32.4
million when compared to the same period in 2010. The net interest margin decreased to 3.18% in
the first six months of 2011 from 3.28% in the first six months of 2010. The decrease in yield on
interest earning assets was due primarily to the accretion of fair market valuations of $1.6
million recorded in connection with the American Community acquisition for the six months ended
June 30, 2010 as compared to $596,000 for the six months ended June 30, 2011. Excluding the
accretion of acquisition related fair market value adjustments, net interest margin for the six
months ended June 30, 2011 decreased to 3.12% as compared to 3.14% for the six months ended June
30, 2010. The Company maintains an asset-sensitive position with respect to the impact of
changing rates on net interest income.
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
49
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Six Months Ended June 30, 2011 | Six Months Ended June 30, 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 |
$ | 12,682 | $ | 15 | 0.25 | % | $ | 1,771 | $ | 2 | 0.25 | % | ||||||||||||
Interest-bearing deposits |
170,079 | 205 | 0.24 | % | 172,680 | 181 | 0.21 | % | ||||||||||||||||
Investment securities (1) |
303,651 | 4,878 | 3.24 | % | 180,470 | 3,904 | 4.36 | % | ||||||||||||||||
Total loans (1)(2)(6) |
1,580,639 | 42,199 | 5.38 | % | 1,685,544 | 45,503 | 5.44 | % | ||||||||||||||||
Total interest-earning assets |
2,067,051 | 47,297 | 4.61 | % | 2,040,465 | 49,590 | 4.90 | % | ||||||||||||||||
Non-earning assets |
146,143 | 139,284 | ||||||||||||||||||||||
Total assets |
$ | 2,213,194 | $ | 2,179,749 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits (7): |
||||||||||||||||||||||||
NOW and money market |
$ | 553,020 | 2,071 | 0.75 | % | $ | 395,115 | 1,611 | 0.82 | % | ||||||||||||||
Savings |
55,680 | 56 | 0.20 | % | 54,682 | 71 | 0.26 | % | ||||||||||||||||
Time certificates |
1,112,020 | 11,463 | 2.08 | % | 1,230,794 | 13,788 | 2.26 | % | ||||||||||||||||
Total interest bearing deposits |
1,720,720 | 13,590 | 1.59 | % | 1,680,591 | 15,470 | 1.86 | % | ||||||||||||||||
Repurchase agreements sold |
40,050 | 210 | 1.06 | % | 47,600 | 204 | 0.86 | % | ||||||||||||||||
Borrowed funds (7) |
67,458 | 900 | 2.69 | % | 74,158 | 959 | 2.61 | % | ||||||||||||||||
Total interest-bearing liabilities |
1,828,228 | 14,700 | 1.62 | % | 1,802,349 | 16,633 | 1.86 | % | ||||||||||||||||
Non-interest bearing deposits |
220,894 | 206,090 | ||||||||||||||||||||||
Shareholders equity |
148,952 | 154,196 | ||||||||||||||||||||||
Other liabilities |
15,120 | 17,114 | ||||||||||||||||||||||
Total average liabilities and
shareholders equity |
$ | 2,213,194 | $ | 2,179,749 | ||||||||||||||||||||
Net interest income (3)
and interest rate spread (5) |
$ | 32,597 | 2.99 | % | $ | 32,957 | 3.04 | % | ||||||||||||||||
Net interest margin (4) |
3.18 | % | 3.28 | % | ||||||||||||||||||||
(1) | Yields related to investment securities and loans exempt from Federal income taxes are stated on a fully tax-equivalent basis, assuming a Federal income tax rate of 35%. The calculation includes an adjustment for the nondeductible portion of interest expense used to fund tax-exempt assets. | |
(2) | The loan average includes loans on which accrual of interest has been discontinued. | |
(3) | The net interest income is the difference between income from earning assets and interest expense. | |
(4) | Net interest margin is net interest income divided by total average earning assets. | |
(5) | Interest spread is the difference between the average interest rate received on earning assets and the average interest rate paid on interest-bearing liabilities. | |
(6) | Interest income on loans for 2011 and 2010 includes $202 and $1,021, respectively, in accretion of fair market value adjustments related to recent mergers | |
(7) | Interest expense on deposits and borrowings in 2011 and 2010 includes $102 and $621, respectively, in accretion of fair market value adjustments related to recent mergers. |
Yadkin Valley Financial Corporation
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Form 10-Q Quarterly Report June 30, 2011
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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 managements assumptions regarding, among other factors, general and local economic
conditions, which are difficult to predict and are beyond the Banks control. In estimating
these 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 $35.7 million at June 30, 2011, or 2.37% of loans
held-for-investment, as compared to $37.8 million, or 2.36% of loans held-for-investment, at
December 31, 2010. Increases in the allowance for loan losses were due to increased charge-offs in
the second quarter of 2011 and increases in nonperforming loans since December 31, 2010.
Charge-offs in the quarter ended June 30, 2011 increased as additional writedowns were taken on
collateral dependent loans. 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 significant weaknesses. These increases were partially offset by 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.
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 $35.7 million in total allowance for loan losses at June 30, 2011, the specific
allowance for impaired loans accounted for $4.3 million, down from $6.3 million at year end as
collateral dependent impaired loans are charged down to fair value. The remaining general
allowance, $31.4 million, was attributed to performing loans and was down slightly 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 $68.6 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 in past dues and underlying credit exposures of
previously classified loans. Also contributing to the decrease in the general allowance for loan
losses was a 6.0% decrease in gross loans as of June 30, 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. The general allowance, as a
percent of loans not individually reviewed for impairment was 2.19% as of June 30, 2011 as compared
to 2.06% as of December 31, 2010.
Net loan charge offs (recoveries) were $10.6 million, or 2.73% (annualized), of average loans, for
the three months ending June 30, 2011 compared to $6.9 million, or 1.64% (annualized), of average
loans for the three months ending June 30, 2010. The increase over last year was the result of
increased charge-offs due to the writedown of collateral dependent loans to fair value as real
estate values continue to decline. For the six months ended June 30, 2011, net loan charge offs
(recoveries) were $17.4 million, or 2.21% (annualized) of average loans compared to $14.5 million,
or 1.74% (annualized) of average loans for the six months ended June 30, 2010.
Management considers the allowance for loan losses adequate to cover the estimated losses inherent
in the Banks loan portfolio as of June 30, 2011. No assurance can be given in this regard,
however, especially considering the overall weakness in the commercial real estate market in the
Banks 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 Banks allowance for loan losses. Such agencies may require the
recognition of adjustments to the allowances based on their judgments of information available to
them at the time of their examinations.
Management realizes that general economic trends greatly affect loan losses. The recent downturn in
the real estate market has resulted in increased loan delinquencies, defaults and foreclosures, and
we believe that these trends are likely to continue. In some cases, this downturn has resulted in a
significant impairment to the value of our collateral
Yadkin Valley Financial Corporation
Form 10-Q Quarterly Report June 30, 2011
Form 10-Q Quarterly Report June 30, 2011
51
Table of Contents
and our ability to sell the collateral upon foreclosure. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If real estate values continue to
decline, it is also more likely that we would be required to increase our allowance for loan losses
and our net charge-offs which could have a material adverse effect on our financial condition and
results of operations. Assurances cannot be made either (1) that further charges to the allowance
account will not be significant in relation to the normal activity or (2) that further evaluation
of the loan portfolio based on prevailing conditions may not require sizable additions to the
allowance and charges to provision expense.
Our real estate portfolio has approximately $243.7 million of construction loans, $600.9 million of
commercial real estate loans, $175.4 million in first lien mortgage loans, $205.3 million in home
equity lines of credit and $4.0 million in junior lien mortgage loans as of June 30, 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 $6.8 million and $5.0 million, respectively, for the six
months ended June 30, 2011. For the six months ended June 30, 2010, net charge-offs (recoveries)
of construction and commercial real estate loans were $8.9 million and $2.0 million, respectively.
As of June 30, 2011, $8.7 million of our real estate loans had interest reserves including both
borrower and bank funded, compared to $21.7 million as of December 31, 2010. There is a risk that
an interest reserve could mask problems with a borrowers willingness and ability to repay the debt
consistent with the terms and conditions of the loan obligation, therefore the Company has
implemented review policies to identify and monitor all loans with interest reserves.
Nonperforming Assets
Total nonperforming assets (which includes nonaccrual loans, loans over 90 days past due but still
accruing, and foreclosed real estate) decreased from $91.0 million to $90.9 million as of December
31, 2010 and June 30, 2011, respectively. Nonperforming assets as a percentage of total assets
increased to 4.36% as of June 30, 2011 as compared to 3.95% as of December 31, 2010, due primarily
to a decrease in total assets since December 31, 2010. Total OREO decreased from approximately
$25.6 million at December 31, 2010 to $22.0 million at June 30, 2011, as the result of $8.9 million
in sales, loss on sales of $840,000 and writedowns of $1.3 million, offset by $7.5 million in
additions. Total nonaccrual loans increased from $65.4 million, or 3.96% of total loans, at
December 31, 2010 to $68.9 million, or 4.50% of total loans, at June 30, 2011. The increases in
nonaccrual and impaired loans 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 $4.3 million, down from $6.3
million at year end, due to the charge-off of collateral dependent impaired loans to fair value.
The increase in nonperforming loans from December 31, 2010 to June 30, 2011 is related primarily to
the continued deterioration of previously classified loans and the addition of troubled debt
restructured loans which will remain on nonaccrual status until sufficient payment evidence is
obtained. Approximately 48.4% of loans in nonaccrual status are not currently past due. The total
number of loans on nonaccrual has increased from 490 to 525 since December 31, 2010. The average
nonaccrual loan balance is $131,000 and $131,000 as of December 31, 2010 and June 30, 2011,
respectively. At June 30, 2011, 94% of the nonaccrual loans were secured by real estate.
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The largest amount of nonaccrual loans for one customer totaled $3.4 million of land development
loans which had previously been charged down to fair market value and no additional reserves were
specifically assigned to the loans. Nonaccrual loans also include three other large relationships
each totaling $2.1 million, $2.1 million and $2.0 million, respectively. The first relationship is
a golf course loan with no reserve required. The second relationship consists of commercial real
estate loans with specific reserves of $241,000, and the third relationship consists of a
commercial real estate loan with specific reserves of $170,000 due to the fact that the value of
collateral exceeds the current loan balances. These loans have been 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 decreased approximately $2.1 million, or
38.4%, comparing the second quarters of 2011 and 2010. A decrease in the gain on sale of mortgages
of $1.7 million made up the majority of the decrease. Other changes in noninterest income include
the following:
| Service charges on deposit accounts decreased $49,000, or 3.3%. Service charges on depository accounts, including NOW, savings, and money market account service charges increased 3.0%. | ||
| Other service fees increased $50,000 when comparing the second quarter of 2011 to the prior year due primarily to increases in commissions and fees on mutual funds and annuities of $51,000 from the previous year. These increases were offset by decreases in commissions and fees on mortgages originated of $35,000. | ||
| Net gain on the sale of mortgages decreased approximately $1.7 million, or 90.4%, as the Company decided to exit wholesale markets in the second quarter of 2011. Mortgage loans sold decreased from $192 million in the second quarter of 2010 to $180 million in the second quarter of 2011. | ||
| Net gain on sale of investment securities decreased $415,000, or 49.2%, as the Company sold approximately $34.5 million in securities during the quarter. | ||
| Income on investment in bank-owned life insurance (BOLI) decreased by 15.7% during the three month period ended June 30, 2011, as the calculation for cost of benefits was updated based on current employee and insurance information. | ||
| Mortgage banking income increased approximately $43,000 for the quarter due to an increase in the servicing fees received. | ||
| Other income decreased by approximately $37,000, or 26.6%, for the quarter primarily due to a $43,000 decrease in miscellaneous other income in connection with additional income recorded due to merger related items in the prior year. |
For the six months ended June 30, 2011, total noninterest income decreased approximately $1.1
million, or 11.8%, as compared to the six months ended June 30, 2010. A decrease in the gain on
sale of mortgages of $1.1 million made up the majority of the decrease. Other changes in
noninterest income include the following:
| Service charges on deposit accounts decreased $142,000, or 4.9%, as total NSF fees (a major component of service charges) decreased $104,000, or 5.2%, 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 3.0%. |
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| The increase in other service fees of $171,000 was due primarily to increases in commissions and fees on mutual funds and annuities of $275,000 from the previous year. These increases were offset by decreases in commissions and fees on mortgages originated of $134,000. | ||
| Net gain in the sale of mortgages decreased approximately $1.1 million, or 35.3%. Although originations increased in 2011, changes in pricing plans led to decreased returns in the wholesale markets. The Company decided to exit the wholesale market during the second quarter of 2011. | ||
| Net gain on sale of investment securities also decreased $366,000, or 41.2%, as the Company sold approximately $39.1 million in securities year-to-date. | ||
| Income on investment in bank-owned life insurance (BOLI) decreased by 18.6% during the six months ended June 30, 201, as the calculation for cost of benefits was updated based on current employee and insurance information. | ||
| Mortgage banking income increased approximately $195,000 for the six months ended June 30, 2011 due to an increase in the servicing fees received. | ||
| Other income increased by approximately $39,000, or 19.0%, year-to-date primarily due to a $22,000 increase in dividends received from the FHLB of Atlanta, as well as an increase in miscellaneous other income of $14,000. |
Noninterest Expense
Total noninterest expenses were $24.5 million for the second quarter of 2011, compared to $15.0
million in the same period of 2010, an increase of $9.5 million, or 63.3%. 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 June 30, 2011 and 2010 was
0.90%, and 0.67%, respectively. Efficiency ratios for the three months ended 2011 and 2010 were
121.07% and 68.75%, respectively. The efficiency ratio is the ratio of noninterest expenses less
amortization of intangibles to the total of the taxable equivalent net interest income and
noninterest income. Noninterest expenses were $41.4 million for the six months ended June 30,
2011, compared to $29.5 million for the same period of 2010, an increase of $11.9 million or 40.2%.
Efficiency ratios for the six months ended June 30, 2011 and 2010 were 100.04% and 68.39%,
respectively. The largest contributor to the increase in noninterest expense was a $4.9 million
goodwill impairment writedown. See additional disclosures and discussions regarding goodwill
impairment in Footnote 12 to the financial statements.
The following is a summary of the fluctuations, other than goodwill impairment, for the quarter and
six months ended June 30, 2011 as compared to June 30, 2010.
| Quarter-to-date, salaries and employee benefit expenses increased by $852,000, or 12.3%. The major components of this increase are summarized as follows: Salaries and wages increased by $568,000 due to the accrual of $552,000 in severance costs related to branch closures. Deferral of salaries and benefit costs related to loan originations (which directly offset salary expense), decreased $138,000 due to decreased loan originations in 2011 as compared to 2010. Payroll taxes also increased $68,000 due to the increase in salaries and wages. Employee incentive expense increased $52,000. Other personnel expenses increased $118,000. Commission expenses decreased by $98,000 as mortgage origination production at the Bank decreased. |
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Year-to-date, salaries and employee benefit expenses increased by $2.1 million, or 15.1%, due partially to the fact that in the prior year the Company recorded an adjustment to previously accrued incentive expenses which decreased incentive expenses by $628,000 in 2010. Other major components of this increase are summarized as follows: Salaries and wages increased by $616,000 due to the accrual of $552,000 in severance costs related to branch closures. Related payroll taxes also increased $165,000, and other personnel expenses increased $170,000. Deferral of salaries and benefit costs related to loan originations (which directly offset salary expense), decreased $349,000 due to decreased loan originations in 2011 as compared to 2010. Commission expenses decreased by $26,000 as mortgage origination production at the Bank decreased. | |||
| Occupancy and equipment expenses increased by $374,000, or 19.1% for the quarter and $578,000 or 14.7% year-to-date. The increase attributable to the accrual of $401,000 in lease termination costs related to branch closures. | ||
| Printing and supplies decreased by $103,000, or 39.8%, comparing the second quarter 2011 with the second quarter 2010. Year-to-date printing and supplies expense decreased $196,000, or 36.8%. Decreases are the result of cost cutting measures by management as well as the introduction of electronic statements for customers who no longer wish to receive paper statements. | ||
| Data processing expense decreased $3,000, or 0.8% for the quarter and increased $57,000, or 8.2% for the year. Increase year-over-year is due to normal fluctuations in transaction volume and timing. | ||
| Communication expense increased $38,000 or 8.7% for the second quarter compared to the second quarter of 2010. Year-to-date communication expense increased $25,000, or 2.8%. | ||
| FDIC assessment expenses increased $40,000 for the quarter and increased $560,000 for the year, due to an increase in average deposits in 2011 as compared to 2010. | ||
| Net cost of operation of other real estate owned increased $2.0 million compared to the second quarter of 2010, and year-over-year due to additional writedowns of $1.3 million which resulted from continued declines in real estate values, as well as loss on sales of $800,000. | ||
| Quarter-to-date other operating expenses (including other professional fees, loan collection fees and amortization of core deposit intangibles) increased approximately $1.3 million, or 44.7% primarily due to loss on disposal and impairments of fixed assets of $1.2 million related to branch closures. Loan collection fees also increased $176,000. | ||
Year-to-date other operating expenses (including other professional fees, loan collection fees and amortization of core deposit intangibles) increased approximately $1.8 million, or 31.6%. As discussed above, losses on disposal of fixed assets accounted for $1.2 million of the increase. Other increases include a $337,000 increase in loan collection fees and a $91,000 increase in other professional fees. |
Income Tax Expense
Income tax expense for the three and six months ended June 30, 2011 was $5.0 million and $4.5
million, respectively, compared to income tax benefit of $24,000 for the three months ended June
30, 2010, and income tax expense of $733,000 for the six months ended June 30, 2010. The
significant increase is attributable to valuation allowances for deferred tax assets of $11.0
million recorded in the quarter ended June 30, 2011.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk
arises principally from interest rate risk inherent in our lending, deposit, and borrowing
activities. Management actively monitors and manages its interest rate risk exposure. In addition
to other risks that we manage in the normal course of business, such as credit quality and
liquidity, management considers interest rate risk to be a significant market risk that could
potentially have a material effect on our financial condition and results of operations. The
information contained in Item 2 in the section captioned Liquidity, Interest Rate Sensitivity and
Market Risk is incorporated herein by reference. Other types of market risks, such as foreign
currency risk and commodity price risk, do not arise in the normal course of our business
activities. The acquisition of American Community and expansion into new market areas in North and
South Carolina have marketing risks that are mitigated by retaining the American Community brand
name in these markets. Credit risk associated with loans acquired in the merger are part of the
overall discussion of credit risk in the sections captioned Provision and Allowance for Loan
Losses and Non-Performing Assets.
The primary objective of asset and liability management is to manage interest rate risk and achieve
reasonable stability in net interest income throughout interest rate cycles. This is achieved by
maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing
liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing
liabilities is the principal factor in projecting the effect that fluctuating interest rates will
have on future net interest income. Rate-sensitive assets and liabilities are those that can be
repriced to current market rates within a relatively short time period. Management monitors the
rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these
instruments, but places particular emphasis on the next twelve months. Following a period of rate
increases (or decreases) net interest income will increase (or decrease) over both a three-month
and a twelve-month period.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined
in Exchange Act Rule 13a-15(e). Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is (i) recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions 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 Companys disclosure controls and procedures were effective (1) to provide reasonable assurance
that information required to be disclosed by the Company in the reports filed or submitted by it
under the Securities Exchange Act was recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and (2) to provide reasonable assurance that
information required to be disclosed by the Company in such reports is accumulated and communicated
to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, the Companys 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 Companys systems evolve with its business.
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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 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 |
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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
|
|||
BY:
|
/s/ Jan H. Hollar
|
|||
Executive Vice President and Chief Financial Officer |
August 4, 2011
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
31.1
|
Rule 13a-14(a) Certification of the Principal Executive Officer. | |
31.2
|
Rule 13a-14(a) Certification of the Principal Financial Officer. | |
32
|
Section 1350 Certifications. | |
101
|
The following financial statements from the Quarterly Report on Form 10-Q of Yadkin Valley Financial Corporation for the quarter ended June 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income (Loss), (iv) Consolidated Statement of Cash Flows and (v) Notes to Consolidated Financial Statements.(1) |
(1) | As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections. |