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EX-32.2 - EXHIBIT 32.2 - YADKIN FINANCIAL Corpex32-2q22016.htm
EX-32.1 - EXHIBIT 32.1 - YADKIN FINANCIAL Corpex32-1q22016.htm
EX-31.2 - EXHIBIT 31.2 - YADKIN FINANCIAL Corpex31-2q22016.htm
EX-31.1 - EXHIBIT 31.1 - YADKIN FINANCIAL Corpex31-1q22016.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2016
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________
 
Commission File Number 000-52099 
 YADKIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina
20-4495993
(State or other jurisdiction of Incorporation
(IRS Employer Identification Number)
or organization)
 
 
3600 Glenwood Avenue, Suite 300
Raleigh, North Carolina 27612
(Address of principal executive offices)
(Zip Code) 
(919) 659-9000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x        No ¨
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 (Section 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 x      No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer x
 
Non-accelerated filer ¨
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 ¨      No x
 
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date: 51,534,635 shares of Voting Common Stock and 199,663 shares of Non-Voting Common Stock outstanding as of August 4, 2016.


YADKIN FINANCIAL CORPORATION
TABLE OF CONTENTS

 
 
 
 
Page
Part I. 
 
FINANCIAL INFORMATION 
 
 
 
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
 
 
 
 
 
 
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II.
 
OTHER INFORMATION
 
 56
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 




Part I. Financial Information

Item 1. Financial Statements
YADKIN FINANCIAL CORPORATION
 
 
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
 
As of June 30, 2016 and December 31, 2015
(Dollars in thousands, except share data)
 
June 30,
2016
 
December 31, 2015*
Assets
 
 

 
 

Cash and due from banks
 
$
70,637

 
$
60,783

Interest-earning deposits with banks
 
49,744

 
50,885

Federal funds sold
 
155

 
250

Investment securities available for sale, at fair value
 
1,038,307

 
689,132

Investment securities held to maturity
 
38,959

 
39,182

Loans held for sale
 
139,513

 
47,287

Loans
 
5,268,768

 
3,076,544

Allowance for loan losses
 
(11,633
)
 
(9,769
)
Net loans
 
5,257,135

 
3,066,775

Purchased accounts receivable
 
9,657

 
52,688

Federal Home Loan Bank stock, at cost
 
45,284

 
24,844

Premises and equipment, net
 
111,245

 
73,739

Bank-owned life insurance
 
141,930

 
78,863

Other real estate
 
23,091

 
15,346

Deferred tax asset, net
 
67,829

 
55,607

Goodwill
 
338,180

 
152,152

Other intangible assets, net
 
30,745

 
13,579

Accrued interest receivable and other assets
 
92,814

 
53,032

Total assets
 
$
7,455,225

 
$
4,474,144

 
 

 


Liabilities
 
 
 
 

Deposits:
 
 

 
 

Non-interest demand
 
$
1,156,507

 
$
744,053

Interest-bearing demand
 
1,119,970

 
523,719

Money market and savings
 
1,620,217

 
1,024,617

Time
 
1,441,892

 
1,017,908

Total deposits
 
5,338,586

 
3,310,297

Short-term borrowings
 
811,383

 
375,500

Long-term debt
 
229,012

 
194,967

Accrued interest payable and other liabilities
 
73,706

 
30,831

Total liabilities
 
6,452,687

 
3,911,595

 
 
 
 
 
Shareholders’ Equity
 
 

 
 

Preferred stock, no par value, 1,000,000 shares authorized, no shares issued or outstanding
 

 

Common stock, $1.00 par value, 75,000,000 shares authorized; 51,577,575 and 31,727,767 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
51,578

 
31,727

Common stock warrants
 
717

 
717

Additional paid-in capital
 
905,727

 
492,828

Retained earnings
 
45,895

 
44,794

Accumulated other comprehensive loss
 
(1,379
)
 
(7,517
)
Total shareholders' equity
 
1,002,538

 
562,549

Total liabilities and shareholders' equity
 
$
7,455,225

 
$
4,474,144

See accompanying Notes to Consolidated Financial Statements.

*
Derived from the audited consolidated financial statements included in the Company's 2015 Annual Report on Form 10-K.


- 3 -



YADKIN FINANCIAL CORPORATION
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
For the Three and Six Months Ended June 30, 2016 and 2015
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Interest income
 
 

 
 

 
 

 
 

Loans
 
$
64,345

 
$
40,404

 
$
112,316

 
$
80,200

Investment securities
 
7,231

 
3,786

 
13,344

 
7,782

Federal funds sold and interest-earning deposits
 
81

 
45

 
184

 
95

Total interest income
 
71,657

 
44,235

 
125,844

 
88,077

Interest expense
 
 

 
 

 
 

 
 

Deposits
 
4,433

 
3,073

 
7,980

 
5,962

Short-term borrowings
 
1,360

 
331

 
2,166

 
620

Long-term debt
 
2,375

 
1,504

 
4,244

 
2,992

Total interest expense
 
8,168

 
4,908

 
14,390

 
9,574

Net interest income
 
63,489

 
39,327

 
111,454

 
78,503

Provision for loan losses
 
2,298

 
994

 
4,173

 
1,955

Net interest income after provision for loan losses
 
61,191

 
38,333

 
107,281

 
76,548

Non-interest income
 
 

 
 

 
 

 
 

Service charges and fees on deposit accounts
 
5,795

 
3,495

 
10,007

 
6,748

Government-guaranteed lending
 
2,680

 
3,677

 
5,752

 
6,550

Mortgage banking
 
3,850

 
1,633

 
5,473

 
2,955

Bank-owned life insurance
 
733

 
465

 
1,285

 
937

Gain on sales of available for sale securities
 
64

 
84

 
194

 
85

Gain on sale of trust business
 
417

 

 
417

 

Other
 
2,098

 
1,446

 
3,863

 
2,364

Total non-interest income
 
15,637

 
10,800

 
26,991

 
19,639

Non-interest expense
 
 

 
 

 
 
 
 

Salaries and employee benefits
 
22,939

 
15,391

 
40,979

 
30,593

Occupancy and equipment
 
7,315

 
4,637

 
12,850

 
9,436

Data processing
 
2,783

 
1,929

 
4,923

 
3,817

FDIC deposit insurance premiums
 
770

 
772

 
1,591

 
1,486

Professional services
 
1,547

 
1,407

 
2,655

 
2,499

Foreclosed asset expenses, net
 
137

 
445

 
448

 
633

Loan, collection, and repossession expense
 
1,004

 
850

 
2,144

 
1,786

Merger and conversion costs
 
6,531

 
(25
)
 
16,866

 
195

Restructuring charges
 
25

 
2,294

 
46

 
3,201

Amortization of other intangible assets
 
1,671

 
777

 
2,723

 
1,592

Other
 
5,483

 
3,839

 
9,704

 
8,036

Total non-interest expense
 
50,205

 
32,316

 
94,929

 
63,274

Income before income taxes
 
26,623

 
16,817

 
39,343

 
32,913

Income tax expense
 
9,219

 
6,076

 
14,140

 
11,922

Net income
 
17,404

 
10,741

 
25,203

 
20,991

Dividends on preferred stock
 

 
182

 

 
821

Net income available to common shareholders
 
$
17,404

 
$
10,559

 
$
25,203

 
$
20,170

 
 
 
 
 
 
 
 
 
Net income per common share
 
 

 
 

 
 

 
 

Basic
 
$
0.34

 
$
0.33

 
$
0.56

 
$
0.64

Diluted
 
0.34

 
0.33

 
0.56

 
0.64

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 

 
 

 
 

 
 

Basic
 
51,311,504

 
31,609,021

 
44,707,215

 
31,607,971

Diluted
 
51,490,182

 
31,610,620

 
44,836,812

 
31,609,785


See accompanying Notes to Consolidated Financial Statements.

- 4 -


YADKIN FINANCIAL CORPORATION
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
For the Three and Six Months Ended June 30, 2016 and 2015
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
17,404

 
$
10,741

 
$
25,203

 
$
20,991

Other comprehensive income (loss):
 
 
 
 
 
 
 
Securities available for sale:
 

 
 

 
 

 
 

Unrealized net gains (losses) on available for sale securities
9,267

 
(6,518
)
 
16,542

 
(2,196
)
Tax effect
(3,489
)
 
2,502

 
(6,255
)
 
954

Reclassification of gains on sales of securities
(64
)
 
(84
)
 
(194
)
 
(85
)
Tax effect
24

 
32

 
73

 
33

Net of tax amount
5,738

 
(4,068
)
 
10,166

 
(1,294
)
Cash flow hedges:
 

 
 

 
 

 
 

Unrealized net gains (losses) on cash flow hedges
(2,014
)
 
3,493

 
(6,610
)
 
(670
)
Tax effect
714

 
(1,347
)
 
2,442

 
258

Reclassification of amounts into interest expense from termination of interest rate swaps
112

 
8

 
224

 
8

Tax effect
(42
)
 
(3
)
 
(84
)
 
(3
)
Net of tax amount
(1,230
)
 
2,151

 
(4,028
)
 
(407
)
Total other comprehensive income (loss)
4,508

 
(1,917
)
 
6,138

 
(1,701
)
Comprehensive income
$
21,912

 
$
8,824

 
$
31,341

 
$
19,290

 

See accompanying Notes to Consolidated Financial Statements.

- 5 -



YADKIN FINANCIAL CORPORATION
 
 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015
 
 
 
Preferred Stock
 
Common Stock
 
Common Stock Warrants
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
(Dollars in thousands)
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
 
28,405

 
$
28,405

 
31,599,150

 
$
31,599

 
$
717

 
$
492,014

 
$
7,311

 
$
(2,244
)
 
$
557,802

Net income
 

 

 

 

 

 

 
20,991

 

 
20,991

Other comprehensive loss
 

 

 

 

 

 

 

 
(1,701
)
 
(1,701
)
Restricted stock grants
 

 

 
103,000

 
103

 

 
(103
)
 

 

 

Stock-based compensation
 

 

 

 

 

 
130

 

 

 
130

Stock options exercised
 

 
 
 
9,871

 
10

 

 
110

 

 

 
120

Redemption of preferred stock
 
(28,405
)
 
(28,405
)
 

 

 

 

 

 

 
(28,405
)
Preferred stock dividends
 

 
 
 

 

 

 

 
(821
)
 

 
(821
)
Balance as of June 30, 2015
 

 
$

 
31,712,021

 
$
31,712

 
$
717

 
$
492,151

 
$
27,481

 
$
(3,945
)
 
$
548,116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 

 
$

 
31,726,767

 
$
31,727

 
$
717

 
$
492,828

 
$
44,794

 
$
(7,517
)
 
$
562,549

Net income
 

 

 

 

 

 

 
25,203

 

 
25,203

Other comprehensive income
 

 

 

 

 

 

 

 
6,138

 
6,138

Restricted stock grants
 

 

 
100,000

 
100

 

 
(100
)
 

 

 

Restricted stock forfeiture
 

 

 
(10,000
)
 
(10
)
 

 
10

 

 

 

Stock-based compensation
 

 

 

 

 

 
404

 

 

 
404

Stock options exercised
 

 

 
86,790

 
87

 

 
923

 

 

 
1,010

Acquisition of NewBridge Bancorp
 

 

 
19,605,374

 
19,605

 

 
411,731

 

 

 
431,336

Shares issued for restricted stock units
 

 

 
68,644

 
69

 

 
(69
)
 

 

 

Common stock dividends
 

 

 

 

 

 

 
(24,102
)
 

 
(24,102
)
Balance as of June 30, 2016
 

 
$

 
51,577,575

 
$
51,578

 
$
717

 
$
905,727

 
$
45,895

 
$
(1,379
)
 
$
1,002,538

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


See accompanying Notes to Consolidated Financial Statements.

- 6 -



YADKIN FINANCIAL CORPORATION
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015
 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
25,203

 
$
20,991

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Stock-based compensation
404

 
130

Provision for loan losses
4,173

 
1,955

Accretion of acquisition discount on purchased loans
(13,704
)
 
(13,145
)
Depreciation
4,131

 
3,109

Amortization of core deposit intangible
2,723

 
1,592

Amortization of acquisition premium on time deposits
(1,024
)
 
(1,874
)
Net accretion of acquisition discount on long-term debt
179

 
232

Gain on mortgage loan commitments
(1,200
)
 
(141
)
Gain on sales of loans held for sale
(9,012
)
 
(8,718
)
Originations of loans held for sale
(174,128
)
 
(140,721
)
Proceeds from sales of loans held for sale
146,922

 
131,022

Increase in cash surrender value of bank-owned life insurance
(1,320
)
 
(937
)
Deferred income taxes
9,711

 
11,922

Change in deferred tax valuation allowance
148

 

Gain on sales of available for sale securities
(194
)
 
(85
)
Net amortization of premiums on available for sale securities
3,310

 
2,917

Net (gain) loss on disposal of foreclosed assets
(274
)
 
(210
)
Valuation adjustments on foreclosed assets
425

 
605

Change in assets and liabilities:
 

 
 

Decrease (increase) in accrued interest receivable
1,236

 
(138
)
Increase in other assets
(6,785
)
 
(2,952
)
(Decrease) increase in accrued interest payable
(356
)
 
23

Increase in other liabilities
2,570

 
850

Net cash provided by (used in) operating activities
(6,862
)
 
6,427

Cash flows from investing activities
 

 
 

Purchases of investment securities available for sale
(189,485
)
 
(40,897
)
Proceeds from maturities and repayments of investment securities available for sale
115,844

 
40,187

Proceeds from sales of investment securities available for sale
180,616

 
19,169

Net loan (originations) principal collections
(165,987
)
 
(49,556
)
Net cash received in business combinations
45,143

 

Proceeds from (purchases of) trade accounts receivables, net
43,031

 
(25,112
)
Purchases of premises and equipment
(872
)
 
(935
)
Disposals of premises and equipment
2,262

 
692

Proceeds from disposal of foreclosed assets
1,989

 
2,731

Redemptions (purchases) of Federal Home Loan Bank stock
1,137

 
(2,477
)
Net cash provided by (used in) investing activities
33,678

 
(56,198
)
Cash flows from financing activities
 

 
 

Net increase (decrease) in deposits
39,204

 
(2,396
)
Net increase in short-term borrowings
41,548

 
37,000

Net (decrease) increase in long-term debt
(75,858
)
 
34,869

Proceeds from exercise of stock options
1,010

 
120

Repurchase of preferred stock

 
(28,405
)
Dividends paid on preferred stock

 
(821
)
Dividends paid on common stock
(24,102
)
 

Net cash provided by (used in) financing activities
(18,198
)
 
40,367

Net change in cash and cash equivalents
8,618

 
(9,404
)
Cash and cash equivalents, beginning of period
111,918

 
132,365

Cash and cash equivalents, end of period
$
120,536

 
$
122,961

 
 
 
 

- 7 -



 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
 
 
 
 
SUPPLEMENTAL DISCLOSURES:
 

 
 

Cash payments for:
 

 
 

Interest
$
14,801

 
$
11,071

Income taxes
4,100

 

Noncash investing activities:
 

 
 

Transfers of loans to held for sale
$
42,347

 
$

Transfers of loans to foreclosed assets
3,947

 
3,782

Change in fair value of securities available for sale, net of tax
10,166

 
(1,294
)
Change in fair value of cash flow hedge, net of tax
(4,028
)
 
(407
)
Acquisition:
 
 
 
Assets acquired (excluding goodwill)
$
2,780,138

 
$

Liabilities assumed
2,534,830

 

Purchase price
431,336

 

Goodwill recorded
186,028

 



See accompanying Notes to Consolidated Financial Statements.

- 8 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)



NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying unaudited consolidated financial statements include the accounts of Yadkin Financial Corporation (the "Company" or "Yadkin") and its wholly-owned subsidiary, Yadkin Bank. The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all of the information and footnotes required by such accounting principles for complete financial statements. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company's 2015 Form 10-K.

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Recently Adopted and Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to Credit Losses. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

In March 2016, the FASB issued new guidance related to Stock Compensation. The new guidance eliminates the concept of APIC pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

In March 2016, the FASB issued new guidance related to Derivatives and Hedging. The new guidance clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, which is used to determine whether the embedded derivative should be separated from the host contract and accounted for separately as a derivative. An entity performing the assessment will be required to assess the embedded call or put options solely in accordance with the pre-existing four-step decision sequence. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

In February 2016, the FASB issued new guidance related to Leases. The new guidance requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet. The new guidance also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

In January 2016, the FASB issued new guidance related to the Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance addresses the recognition, measurement, presentation, and disclosure of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.


- 9 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


In September 2015, the FASB issued new guidance related to Business Combinations. The new guidance requires acquirers to recognize adjustments to provisional amounts (that are identified during the measurement period) in the reporting period in which the adjustment amounts are determined. The new guidance also requires such amounts to be disclosed in the consolidated financial statements. The Company early-adopted this guidance effective September 30, 2015. The adoption of this guidance was not material to the consolidated financial statements. All measurement period adjustments related to the March 1, 2016 acquisition of NewBridge Bancorp were recorded in the period in which the adjustment was determined.

In May 2015, the FASB issued new guidance related to Fair Value Measurement. The new guidance eliminates the requirement to classify in the fair value hierarchy any investments for which fair value is measured at net asset value per share using the practical expedient. This guidance became effective for interim and annual periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In April 2015, the FASB issued new guidance related to Debt Issuance Costs. The new guidance requires a reporting entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability.  The recognition and measurement guidance for debt issuance costs are not affected by this guidance. This guidance became effective for interim and annual periods beginning after December 15, 2015 and is to be applied retrospectively. As of June 30, 2016, the Company had $549 of debt issuance costs that were included in long-term debt.

In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

NOTE B – PER SHARE RESULTS
 
Basic and diluted net income per share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted net income per share reflects the dilutive impact of restricted stock as well as the potential dilution that could occur if dilutive common stock options and common stock warrants were exercised, resulting in the issuance of common stock that then shared in the net income of the Company.

Basic and diluted net income per share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Weighted average number of common shares
51,311,504

 
31,609,021

 
44,707,215

 
31,607,971

Dilutive effect of stock options, stock warrants and restricted stock
178,678

 
1,599

 
129,597

 
1,814

Weighted average number of common shares and dilutive potential common shares
51,490,182

 
31,610,620

 
44,836,812

 
31,609,785

 
 
 
 
 
 
 
 
Anti-dilutive stock options
17,407

 
37,279

 
17,407

 
37,279

Anti-dilutive stock warrants

 
91,178

 

 
91,178

 
NOTE C – MERGERS AND ACQUISITIONS
 
Proposed Merger with F.N.B. Corporation

On July 20, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with F.N.B. Corporation, a Florida corporation (“FNB”). The Merger Agreement provides that, upon the terms and conditions set forth therein, the Company will merge with and into FNB (the “Merger”), with FNB continuing as the surviving corporation. As soon as practicable following execution of the Merger Agreement, the Company’s wholly-owned subsidiary, Yadkin Bank, will merge with and into FNB’s wholly-owned subsidiary, First National Bank of Pennsylvania ("FNB Bank"), with FNB Bank continuing as the surviving entity (the “Bank Merger”).


- 10 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive 2.16 shares of FNB common stock, par value $0.01, for each share of the Company’s common stock. Based on FNB’s closing price of $13.20 as of July 20, 2016, the day before the transaction was announced, the estimated aggregate purchase price was $1,470,000. The transaction is expected to close in the first quarter of 2017, subject to shareholder and regulatory approval and other customary closing conditions.

Acquisition of NewBridge Bancorp

On March 1, 2016, the Company completed its acquisition of NewBridge Bancorp (“NewBridge”), pursuant to an Agreement and Plan of Merger, dated October 12, 2015 (the “NewBridge Merger Agreement”). Pursuant to the NewBridge Merger Agreement, each share of NewBridge Class A common stock and Class B common stock was converted into the right to receive 0.50 shares of the common stock of the Company (the "NewBridge Merger"). Based on the Company's stock price at the closing date of the NewBridge Merger, purchase consideration totaled $431,336. Immediately following the merger of NewBridge into Yadkin, NewBridge Bank, a North Carolina-chartered commercial bank, merged with and into Yadkin Bank, with Yadkin Bank surviving such merger.

The NewBridge Merger was accounted for under the acquisition method of accounting with Yadkin as the legal and accounting acquirer and NewBridge as the legal and accounting acquiree. The assets and liabilities of NewBridge have been recorded at their estimated fair values and added to those of Yadkin for periods following the merger date. The Company may refine its valuations of acquired NewBridge assets and liabilities for up to one year following the merger date. The NewBridge Merger had a significant impact on all aspects of the Company's financial statements, and as a result, financial results after the NewBridge Merger may not be comparable to financial results prior to the merger.

The purchase price is calculated based on the number of Yadkin shares issued multiplied by the share price as shown in the following table. The purchase price also includes cash paid to NewBridge shareholders in lieu of fractional shares as well as the value of stock-base compensation awards assumed on the merger date.
 
 
Purchase Price Calculation
 
 
 
 
 
Number of shares of Yadkin common stock issued to NewBridge shareholders
 
19,605,374

 
 
Closing price of Yadkin common stock on February 29, 2016
 
$
21.65

 
 
Value of shares of Yadkin common stock issued to NewBridge shareholders
 
 
 
$
424,456

Cash paid in lieu of fractional shares
 
 
 
27

Stock-based compensation awards assumed from NewBridge:
 
 
 
 
Restricted stock
 
 
 
2,455

Stock options
 
 
 
4,398

Total purchase price
 
 
 
$
431,336

 
 
 
 
 


- 11 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following table presents the NewBridge assets acquired and liabilities assumed as of March 1, 2016, the initial fair value adjustments, the measurement period adjustments, the purchase price and calculation of the residual goodwill.
 
As Reported by NewBridge
 
Initial
Fair Value Adjustments
 
Measurement Period Adjustments
 
As Reported by Yadkin
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
45,143

 
$

 
$

 
$
45,143

 
Investment securities
443,535

 
(1,948
)
(a)
1,109

(l)
442,696

 
Loans
2,087,331

 
(26,195
)
(b)

 
2,061,136

 
Allowance for loan losses
(21,100
)
 
21,100

(c)

 

 
Loans held for sale
13,661

 

 

 
13,661

 
Federal Home Loan Bank stock, at cost
21,577

 

 

 
21,577

 
Premises and equipment, net
43,408

 
4,371

(d)

 
47,779

 
Bank owned life insurance
61,747

 

 

 
61,747

 
Other real estate
1,241

 

 
(55
)
(m)
1,186

 
Deferred tax asset, net
30,014

 
(3,490
)
(e)
(1,166
)
(n)
25,358

 
Other intangibles, net
3,506

 
16,384

(f)

 
19,890

 
Other assets
40,375

 
(271
)
(g)
(139
)
(o)
39,965

 
Total assets
2,770,438

 
9,951

 
(251
)
 
2,780,138

 
Liabilities:
 
 
 
 
 
 
 
 
Deposits
1,990,247

 
(138
)
(h)

 
1,990,109

 
Short-term borrowings
471,800

 
535

(i)

 
472,335

 
Long-term debt
41,049

 
(9,325
)
(j)

 
31,724

 
Other liabilities
34,461

 
5,983

(k)
218

(p)
40,662

 
Total liabilities
2,537,557

 
(2,945
)
 
218

 
2,534,830

 
Net assets acquired
232,881

 
12,896

 
(469
)
 
245,308

 
Purchase price
 
 
 
 
 
 
431,336

 
Goodwill
 
 
 
 
 
 
$
186,028

(q)

Explanation of initial fair value adjustments and measurement period adjustments
(a) Adjustment reflects opening fair value of securities portfolio, which was established as the new book basis of the portfolio.
(b) Adjustment reflects fair value discount of $32,589 on the loan portfolio, reversal of $3,450 in net deferred loan costs, and reversal of $9,844 in previously-existing fair value discount recognized by NewBridge in prior acquisitions. The fair value discount was calculated by forecasting cash flows over the expected remaining life of each loan and discounting those cash flows to present value using current market rates for similar loans. Forecasted cash flows include an estimate of lifetime credit losses on the loan portfolio.
(c) Adjustment reflects the elimination of NewBridge's historical allowance for loan losses of $21,100.
(d) Adjustment reflects fair value adjustments on acquired branch and administrative offices.
(e) Adjustment reflects the tax impact of acquisition accounting fair value adjustments.
(f) Adjustment reflects the fair value of the acquired core deposit intangible, net of the reversal of core deposit intangible recorded by NewBridge in prior acquisitions.
(g) Adjustment reflects the impact of fair value adjustments on other assets, which include adjustments related to the elimination of accrued interest on purchased credit-impaired loans, recognition of a servicing asset related to U.S. Small Business Association ("SBA") loans, and termination of certain derivative contracts.
(h) Adjustment reflects the fair value premium on time deposits, which was calculated by discounting future contractual interest payments at a current market interest rate.
(i) Adjustments reflect the fair value adjustments for a short-term repurchase obligation and Federal Home Loan Bank ("FHLB") advances. The repurchase obligation was valued by discounting future contractual interest payments at a current market interest rate for a similar instrument. For FHLB advances, the fair value was calculated by reference to the acquisition date prepayment penalty the FHLB would charge to terminate the advance.
(j) Adjustments reflect fair value adjustments for subordinated debt obligations and junior subordinated debentures related to trust preferred securities outstanding at the acquisition date.
(k) Adjustments reflect compensation obligations, reserve for unfunded commitments, benefit costs for merger-related obligations, and miscellaneous other accrued liabilities.
(l) Adjustment to initial fair value of investment securities.
(m) Adjustment to initial fair value of other real estate.
(n) Deferred tax adjustment resulting from adjustments (l), (m), (o) and (p)
(o) Adjustment to initial fair value of accrued interest receivable.
(p) Adjustment to initial fair value of accrued liabilities.
(q) Goodwill represents the excess of the purchase price over the fair value of acquired net assets.


- 12 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


Supplemental Pro Forma Information

The table below presents supplemental pro forma information as if the NewBridge Merger had occurred at the beginning of the earliest period presented, which was January 1, 2015. Pro forma results include adjustments for amortization and accretion of fair value adjustments and do not include any projected cost savings or other anticipated benefits of the merger. Therefore, the pro forma financial information is not indicative of the results of operations that would have occurred had the transactions been effected on the assumed date.
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
Net interest income
 
$
62,449

 
$
127,716

 
$
102,148

Net income (a)
 
10,798

 
36,986

 
12,378

Net income available to common shareholders (a)
 
10,616

 
36,986

 
11,557

Basic income per common share (a)
 
0.21

 
0.72

 
0.23

Diluted income per common share (a)
 
0.21

 
0.72

 
0.23

Weighted average basic common shares outstanding
 
50,531,158

 
51,235,805

 
50,530,108

Weighted average diluted common shares outstanding
 
50,777,541

 
51,365,402

 
50,776,706


(a) For purposes of the supplemental pro forma information, merger-related expenses of $16,866 that are reflected in the Company's consolidated statement of operations for the six months ended June 30, 2016 and $3,532 of merger-related expenses that were recorded by NewBridge prior to the merger date were reflected in the pro forma presentation for the six months ended June 30, 2015. These pro forma merger-related expenses include $7,481 of professional fees paid for investment banking, legal and accounting services, $8,594 of personnel-related expenses, $3,046 of facility and equipment-related expenses, and $1,277 of other miscellaneous expenses related to the NewBridge Merger.

NOTE D – INVESTMENT SECURITIES
 
The following tables summarize the amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale and held to maturity by major classification.
 
 
June 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities available for sale:
 
 

 
 

 
 

 
 

GSE obligations
 
$
31,322

 
$
232

 
$

 
$
31,554

SBA-guaranteed securities
 
18,938

 
150

 
46

 
19,042

Mortgage-backed securities issued by GSEs
 
556,287

 
7,476

 
350

 
563,413

Municipal bonds
 
131,241

 
3,131

 
35

 
134,337

Corporate bonds
 
201,600

 
1,815

 
974

 
202,441

Collateralized loan obligations
 
50,516

 
15

 
255

 
50,276

Non-agency CMBS
 
25,334

 
180

 
17

 
25,497

Certificates of deposit
 
992

 

 

 
992

Equity securities
 
11,108

 
215

 
568

 
10,755

Total securities available for sale
 
$
1,027,338

 
$
13,214

 
$
2,245

 
$
1,038,307

 
 
 
 
 
 
 
 
 
Securities held to maturity:  
 
 
 
 
 
 
 
 
Municipal bonds
 
$
38,959

 
$
2,238

 
$

 
$
41,197

 

- 13 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


 
 
December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities available for sale:
 
 

 
 

 
 

 
 

GSE obligations
 
$
5,980

 
$
3

 
$
1

 
$
5,982

SBA-guaranteed securities
 
12,114

 
74

 
12

 
12,176

Mortgage-backed securities issued by GSEs
 
440,654

 
887

 
5,916

 
435,625

Municipal bonds
 
55,402

 
504

 
106

 
55,800

Corporate bonds
 
123,669

 
551

 
688

 
123,532

Collateralized loan obligations
 
50,538

 

 
55

 
50,483

Non-agency RMBS
 
3,528

 
144

 
9

 
3,663

Certificates of deposit
 
245

 

 

 
245

Equity securities
 
2,381

 
33

 
788

 
1,626

Total securities available for sale
 
$
694,511

 
$
2,196

 
$
7,575

 
$
689,132

 
 
 
 
 
 
 
 
 
Securities held to maturity:  
 
 
 
 
 
 
 
 
Municipal bonds
 
$
39,182

 
$
1,318

 
$

 
$
40,500

 
The following tables summarize gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position. 
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
SBA-guaranteed securities
 
$
11,108

 
$
46

 
$

 
$

 
$
11,108

 
$
46

Mortgage-backed securities issued by GSEs
 
43,247

 
87

 
35,499

 
263

 
78,746

 
350

Municipal bonds
 
4,403

 
35

 

 

 
4,403

 
35

Corporate bonds
 
48,563

 
433

 
17,946

 
541

 
66,509

 
974

Collateralized loan obligations
 
40,219

 
255

 

 

 
40,219

 
255

Non-agency CMBS
 
8,833

 
17

 

 

 
8,833

 
17

Equity securities
 

 

 
1,631

 
568

 
1,631

 
568

Total temporarily impaired AFS securities
 
$
156,373

 
$
873

 
$
55,076

 
$
1,372

 
$
211,449

 
$
2,245

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
 
$
999

 
$
1

 
$

 
$

 
$
999

 
$
1

SBA-guaranteed securities
 
5,043

 
12

 

 

 
5,043

 
12

Mortgage-backed securities issued by GSEs
 
208,620

 
2,453

 
117,144

 
3,463

 
325,764

 
5,916

Municipal bonds
 
8,995

 
106

 

 

 
8,995

 
106

Corporate bonds
 
43,110

 
577

 
3,697

 
111

 
46,807

 
688

Collateralized loan obligations
 
45,471

 
55

 

 

 
45,471

 
55

Non-agency RMBS
 

 

 
901

 
9

 
901

 
9

Equity securities
 
1,411

 
788

 

 

 
1,411

 
788

Total temporarily impaired AFS securities
 
$
313,649

 
$
3,992

 
$
121,742

 
$
3,583

 
$
435,391

 
$
7,575

 

- 14 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The table below summarizes the number of investment securities in an unrealized loss position.
 
 
June 30,
2016
 
December 31, 2015
 
 
 
 
 
Securities available for sale:
 
 
 
 
SBA-guaranteed securities
 
4

 
1

GSE obligations
 

 
1

Mortgage-backed securities issued by GSEs
 
29

 
83

Municipal bonds
 
5

 
9

Corporate bonds
 
17

 
15

Collateralized loan obligations
 
7

 
8

Non-agency RMBS
 

 
1

Equity securities
 
3

 
3

Total number of investment securities in an unrealized loss position
 
65

 
121


As of June 30, 2016, 19 securities had been in an unrealized loss position for more than a twelve month period. The Company had $541 thousand in gross unrealized losses on 5 corporate bonds that had been in unrealized loss positions for more than twelve months as of June 30, 2016. Based on a review of financial statements and other financial data for these corporate issuers, which are all large, investment grade financial institutions, the Company does not believe the unrealized losses on these bonds were due to credit events. Additionally, unrealized losses on equity securities were primarily related to a common stock investment in a publicly-traded business development company that provides financing for lower middle-market companies and financial sponsors. Based on a review of financial statements and other financial data for this business development company, the Company believes the unrealized losses to be temporary. The Company will continue to closely monitor and evaluate this common stock investment for signs of other than temporary impairment in future periods.
 
The securities in an unrealized loss position as of June 30, 2016 continue to perform and are expected to perform through maturity, and the issuers have not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company does not intend to sell these investments and does not believe that it will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses on such securities were not considered to represent other-than-temporary impairment as of June 30, 2016.

As of June 30, 2016 and December 31, 2015, the Company held no individual investment securities with an aggregate book value greater than 10 percent of total shareholders’ equity. As of June 30, 2016 and December 31, 2015, investment securities with carrying values of $383,389 and $279,953, respectively, were pledged to secure public deposits, borrowings and for other purposes required or permitted by law.
 
The amortized cost and fair values of securities available for sale, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
 
June 30, 2016
 
December 31, 2015
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
Securities available for sale:
 
 
 
 
 
 
 
Due within one year
$
60,349

 
$
60,464

 
$
66,591

 
$
67,163

Due after one year through five years
603,269

 
609,942

 
291,298

 
289,525

Due after five years through ten years
317,157

 
321,212

 
309,625

 
306,420

Due after ten years
35,455

 
35,934

 
24,616

 
24,398

Equity securities
11,108

 
10,755

 
2,381

 
1,626

 
$
1,027,338

 
$
1,038,307

 
$
694,511

 
$
689,132

Securities held to maturity:  
 
 
 
 
 
 
 
Due within one year
$
1,014

 
$
1,027

 
$

 
$

Due after one year through five years
30,164

 
31,488

 
31,421

 
32,272

Due after five years through ten years
4,050

 
4,348

 
4,072

 
4,229

Due after ten years
3,731

 
4,334

 
3,689

 
3,999

 
$
38,959

 
$
41,197

 
$
39,182

 
$
40,500



- 15 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following table summarizes securities gains for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Gross gains on sales of securities available for sale
$
92

 
$
84

 
$
286

 
$
85

Gross losses on sales of securities available for sale
(28
)
 

 
(92
)
 

Total securities gains
$
64

 
$
84

 
$
194

 
$
85


NOTE E – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the Company's loans by type.
 
 
June 30,
2016
 
December 31, 2015
Commercial:
 
 
 
 
Commercial real estate
 
$
2,490,724

 
$
1,451,176

Commercial and industrial
 
775,484

 
553,121

Construction and development
 
419,339

 
345,304

Consumer:
 
 
 
 
Residential real estate
 
686,124

 
343,648

Construction and development
 
299,895

 
46,263

Home equity
 
530,979

 
277,900

Other consumer
 
67,408

 
60,244

Gross loans
 
5,269,953

 
3,077,656

Less:
 
 

 
 

Deferred loan fees
 
(1,185
)
 
(1,112
)
Allowance for loan losses
 
(11,633
)
 
(9,769
)
Net loans
 
$
5,257,135

 
$
3,066,775

  
As of June 30, 2016 and December 31, 2015, loans with a recorded investment of $1,844,105 and $948,433, respectively, were pledged to secure borrowings or available lines of credit with correspondent banks.

Purchased Credit-Impaired Loans

Loans for which it is probable at acquisition that all contractually required payments will not be collected are considered purchased credit-impaired ("PCI") loans. The following table relates to NewBridge PCI loans and summarizes the contractually required payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the merger date.
 
NewBridge Merger on March 1, 2016
 
 
Contractually required payments
$
124,808

Nonaccretable difference
(14,878
)
Cash flows expected to be collected at acquisition
109,930

Accretable yield
(13,995
)
Fair value of PCI loans at acquisition
$
95,935


The following table summarizes changes in accretable yield, or income expected to be collected, related to all of the Company's PCI loans for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Balance, beginning of period
$
34,566

 
$
26,364

 
$
22,309

 
$
25,181

Additions resulting from acquisitions

 

 
13,995

 

Accretion of income
(3,933
)
 
(3,290
)
 
(7,228
)
 
(6,918
)
Reclassifications from nonaccretable difference
4,197

 
2,501

 
4,910

 
4,055

Other, net
1,926

 
(1,475
)
 
2,770

 
1,782

Balance, end of period
$
36,756

 
$
24,100

 
$
36,756

 
$
24,100


- 16 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


 
The outstanding balance of PCI loans consists of the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loan, owed by the borrower at the reporting date, whether or not currently due and whether or not any such amounts have been written or charged off. The unpaid principal balance of PCI loans was $228,829 and $160,500 as of June 30, 2016 and December 31, 2015, respectively.

Purchased Non-impaired Loans

Purchased non-impaired loans are also recorded at fair value at acquisition, and the related fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan. The following table relates to acquired NewBridge purchased non-impaired loans and provides the contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at the merger date.
 
NewBridge Merger on March 1, 2016
 
 
Contractually required payments
$
2,257,195

Fair value of acquired loans at acquisition
1,965,201

Contractual cash flows not expected to be collected
26,370


Allowance for Loan Losses
 
The following tables summarize the activity in the allowance for loan losses for the periods presented.
 
 
Commercial
Real Estate
 
Commercial and Industrial
 
Commercial Construction
 
Residential
Real Estate
 
 Consumer Construction
 
Home Equity
 
Other Consumer
 
Total
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,457

 
$
3,272

 
$
793

 
$
991

 
$
256

 
$
1,019

 
$
443

 
$
10,231

Charge-offs
 
(10
)
 
(474
)
 
(98
)
 
(57
)
 

 
(145
)
 
(228
)
 
(1,012
)
Recoveries
 
2

 
73

 
17

 
11

 

 
2

 
11

 
116

Provision for loan losses
 
1,076

 
186

 
570

 
40

 
33

 
243

 
150

 
2,298

Ending balance
 
$
4,525

 
$
3,057

 
$
1,282

 
$
985

 
$
289

 
$
1,119

 
$
376

 
$
11,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,682

 
$
2,431

 
$
866

 
$
1,257

 
$
237

 
$
883

 
$
413

 
$
9,769

Charge-offs
 
(91
)
 
(1,435
)
 
(115
)
 
(217
)
 

 
(342
)
 
(445
)
 
(2,645
)
Recoveries
 
6

 
77

 
28

 
193

 

 
2

 
30

 
336

Provision for loan losses
 
928

 
1,984

 
503

 
(248
)
 
52

 
576

 
378

 
4,173

Ending balance
 
$
4,525

 
$
3,057

 
$
1,282

 
$
985

 
$
289

 
$
1,119

 
$
376

 
$
11,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
2,954

 
$
1,336

 
$
1,732

 
$
1,251

 
$
213

 
$
706

 
$
92

 
$
8,284

Charge-offs
 
(157
)
 
(602
)
 
(51
)
 
(120
)
 

 
(183
)
 
(112
)
 
(1,225
)
Recoveries
 
7

 
114

 
5

 
28

 

 
113

 
38

 
305

Provision for loan losses
 
333

 
1,112

 
(1,021
)
 
168

 
56

 
139

 
207

 
994

Ending balance
 
$
3,137

 
$
1,960

 
$
665

 
$
1,327

 
$
269

 
$
775

 
$
225

 
$
8,358

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
2,796

 
$
1,274

 
$
1,691

 
$
1,237

 
$
194

 
$
546

 
$
79

 
$
7,817

Charge-offs
 
(256
)
 
(971
)
 
(67
)
 
(130
)
 

 
(318
)
 
(248
)
 
(1,990
)
Recoveries
 
12

 
250

 
10

 
52

 
27

 
154

 
71

 
576

Provision for loan losses
 
585

 
1,407

 
(969
)
 
168

 
48

 
393

 
323

 
1,955

Ending balance
 
$
3,137

 
$
1,960

 
$
665

 
$
1,327

 
$
269

 
$
775

 
$
225

 
$
8,358

 

- 17 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following tables summarize the ending allowance for loans losses and the recorded investment in loans by portfolio segment and impairment method.
 
 
June 30, 2016
 
 
Commercial
Real Estate
 
Commercial and Industrial
 
Commercial Construction
 
Residential
Real Estate
 
Consumer Construction
 
Home Equity
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
 
$
390

 
$

 
$

 
$
60

 
$

 
$

 
$

 
$
450

Collectively evaluated for impairment
 
3,766

 
2,857

 
1,280

 
854

 
289

 
997

 
371

 
10,414

Purchased credit-impaired
 
369

 
200

 
2

 
71

 

 
122

 
5

 
769

Total
 
$
4,525

 
$
3,057

 
$
1,282

 
$
985

 
$
289

 
$
1,119

 
$
376

 
$
11,633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Ending balance:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
 
$
14,847

 
$
3,253

 
$
886

 
$
993

 
$

 
$

 
$

 
$
19,979

Collectively evaluated for impairment
 
2,387,256

 
758,840

 
400,257

 
623,382

 
297,663

 
513,195

 
66,809

 
5,047,402

Purchased credit-impaired
 
88,621

 
13,391

 
18,196

 
61,749

 
2,232

 
17,784

 
599

 
202,572

Total
 
$
2,490,724

 
$
775,484

 
$
419,339

 
$
686,124

 
$
299,895

 
$
530,979

 
$
67,408

 
$
5,269,953


 
 
December 31, 2015
 
 
Commercial
Real Estate
 
Commercial and Industrial
 
Commercial Construction
 
Residential
Real Estate
 
Consumer Construction
 
Home Equity
 
Other Consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Ending balance:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
 
$
314

 
$
106

 
$

 
$

 
$

 
$
67

 
$

 
$
487

Collectively evaluated for impairment
 
2,976

 
2,309

 
704

 
837

 
233

 
542

 
359

 
7,960

Purchased credit-impaired
 
392

 
16

 
162

 
420

 
4

 
274

 
54

 
1,322

Total
 
$
3,682

 
$
2,431

 
$
866

 
$
1,257

 
$
237

 
$
883

 
$
413

 
$
9,769

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Ending balance:
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
 
$
8,449

 
$
2,623

 
$
177

 
$
3,550

 
$
417

 
$
337

 
$

 
$
15,553

Collectively evaluated for impairment
 
1,354,977

 
540,685

 
330,714

 
315,030

 
44,630

 
274,042

 
59,983

 
2,920,061

Purchased credit-impaired
 
87,750

 
9,813

 
14,413

 
25,068

 
1,216

 
3,521

 
261

 
142,042

Total
 
$
1,451,176

 
$
553,121

 
$
345,304

 
$
343,648

 
$
46,263

 
$
277,900

 
$
60,244

 
$
3,077,656

  
For non-PCI loans, the evaluation of the adequacy of the allowance for loan losses ("ALLL") includes both loans evaluated collectively for impairment and loans evaluated individually for impairment. For loans evaluated collectively for impairment, loans are grouped based on common risk characteristics which include loan type and risk grade. Historical loss rates are calculated based on the historical probability of default ("PD") and loss given default ("LGD") for each loan grouping. PDs represent the likelihood that a loan will default within a one year period of time, and LGDs represent the estimated magnitude of loss the Company will incur if a loan defaults. A loan is considered to be in default if it becomes 90 days or more past due, meets the criteria for nonaccrual status, or incurs a charge-off. Historical loss rates are developed with four years of trailing default and loss data. These historical loss rates are then combined with certain qualitative factors to determine ALLL reserve rates for each loan grouping. Qualitative factors include consideration of certain internal and external factors, such as loan delinquency levels and trends, loan growth, loan portfolio composition and concentrations, local and national economic conditions, the loan review function, and other factors management deems relevant to the ALLL calculation.


- 18 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans according to credit risk. The Company uses the following general definitions for risk ratings:
 
Pass. These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.
 
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Loans where adverse economic conditions have developed that do not jeopardize liquidation of the debt, but substantially increase the level of risk may also warrant this rating.
 
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following tables summarize the risk category of loans by class of loans.
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
June 30, 2016
 
 

 
 

 
 

 
 

 
 

Non-PCI Loans
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
2,339,723

 
$
28,579

 
$
33,801

 
$

 
$
2,402,103

Commercial and industrial
 
724,422

 
24,033

 
13,638

 

 
762,093

Construction and development
 
394,604

 
4,776

 
1,763

 

 
401,143

Consumer:
 
 

 
 

 
 

 
 

 
 

Residential real estate
 
609,044

 
7,915

 
7,416

 

 
624,375

Construction and development
 
292,749

 
4,914

 

 

 
297,663

Home equity
 
503,281

 
3,948

 
5,966

 

 
513,195

Other consumer
 
66,086

 
305

 
410

 
8

 
66,809

Total
 
$
4,929,909

 
$
74,470

 
$
62,994

 
$
8

 
$
5,067,381

 
 
 
 
 
 
 
 
 
 
 
PCI Loans
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
29,410

 
$
41,967

 
$
17,244

 
$

 
$
88,621

Commercial and industrial
 
1,681

 
1,719

 
9,986

 
5

 
13,391

Construction and development
 
10,864

 
2,754

 
4,578

 

 
18,196

Consumer:
 
 
 
 
 
 
 
 
 
 

Residential real estate
 
43,047

 
9,470

 
9,232

 

 
61,749

Construction and development
 
548

 
356

 
1,328

 

 
2,232

Home equity
 
13,728

 
2,355

 
1,620

 
81

 
17,784

Other consumer
 
466

 
114

 
19

 

 
599

Total
 
$
99,744

 
$
58,735

 
$
44,007

 
$
86

 
$
202,572



- 19 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
December 31, 2015
 
 

 
 

 
 

 
 

 
 

Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
1,308,789

 
$
32,525

 
$
22,112

 
$

 
$
1,363,426

Commercial and industrial
 
523,643

 
5,436

 
14,229

 

 
543,308

Construction and development
 
326,979

 
3,298

 
560

 
54

 
330,891

Consumer:
 
 

 
 

 
 

 
 

 
 

Residential real estate
 
305,046

 
5,682

 
7,852

 

 
318,580

Construction and development
 
43,274

 
666

 
1,107

 

 
45,047

Home equity
 
265,128

 
4,442

 
4,809

 

 
274,379

Other consumer
 
59,273

 
233

 
477

 

 
59,983

Total
 
$
2,832,132

 
$
52,282

 
$
51,146

 
$
54

 
$
2,935,614

 
 
 
 
 
 
 
 
 
 
 
PCI Loans
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
40,805

 
$
29,889

 
$
17,056

 
$

 
$
87,750

Commercial and industrial
 
7,913

 
630

 
1,270

 

 
9,813

Construction and development
 
5,975

 
3,022

 
5,416

 

 
14,413

Consumer:
 
 

 
 

 
 

 
 

 
 

Residential real estate
 
11,158

 
7,134

 
6,776

 

 
25,068

Construction and development
 
314

 
328

 
574

 

 
1,216

Home equity
 
264

 
2,016

 
1,059

 
182

 
3,521

Other consumer
 
8

 
200

 
53

 

 
261

Total
 
$
66,437

 
$
43,219

 
$
32,204

 
$
182

 
$
142,042


The following tables summarize the past due status of non-PCI loans based on contractual terms.
 
 
30-89 Days
Past Due
 
90 Days or Greater
Past Due
 
Total
Past Due
 
Current
 
Total
June 30, 2016
 
 

 
 

 
 

 
 

 
 

Non-PCI Loans
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
7,497

 
$
12,639

 
$
20,136

 
$
2,381,967

 
$
2,402,103

Commercial and industrial
 
5,042

 
10,238

 
15,280

 
746,813

 
762,093

Construction and development
 
287

 
1,464

 
1,751

 
399,392

 
401,143

Consumer:
 
 

 
 

 
 

 
 

 
 

Residential real estate
 
5,395

 
3,721

 
9,116

 
615,259

 
624,375

Construction and development
 
431

 

 
431

 
297,232

 
297,663

Home equity
 
5,848

 
2,413

 
8,261

 
504,934

 
513,195

Other consumer
 
694

 
224

 
918

 
65,891

 
66,809

Total
 
$
25,194

 
$
30,699

 
$
55,893

 
$
5,011,488

 
$
5,067,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-89 Days
Past Due
 
90 Days or Greater
Past Due
 
Total
Past Due
 
Current
 
Total
December 31, 2015
 
 

 
 

 
 

 
 

 
 

Non-PCI Loans
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

Real estate
 
$
3,205

 
$
4,503

 
$
7,708

 
$
1,355,718

 
$
1,363,426

Commercial and industrial
 
6,004

 
2,599

 
8,603

 
534,705

 
543,308

Construction and development
 
68

 
414

 
482

 
330,409

 
330,891

Consumer:
 
 

 
 

 
 

 
 

 
 

Residential real estate
 
7,625

 
2,876

 
10,501

 
308,079

 
318,580

Construction and development
 
1,495

 
946

 
2,441

 
42,606

 
45,047

Home equity
 
3,857

 
1,877

 
5,734

 
268,645

 
274,379

Other Consumer
 
1,015

 
208

 
1,223

 
58,760

 
59,983

Total
 
$
23,269

 
$
13,423

 
$
36,692

 
$
2,898,922

 
$
2,935,614

 
 
 
 
 
 
 
 
 
 
 

- 20 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


 
The following table summarizes the recorded investment of non-PCI loans on nonaccrual status and loans greater than 90 days past due and accruing by class.
 
June 30, 2016
 
December 31, 2015
 
Nonaccrual
 
Loans greater than 90 days past due and accruing
 
Nonaccrual
 
Loans greater than 90 days past due and accruing
Non-PCI Loans
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial real estate
$
15,387

 
$

 
$
6,130

 
$

Commercial and industrial
11,851

 
234

 
4,126

 
552

Construction and development
1,644

 

 
468

 

Consumer:
 
 
 
 
 
 
 
Residential real estate
5,862

 

 
5,353

 

Construction and development

 

 
1,324

 

Home equity
4,028

 

 
3,245

 

Other consumer
267

 
110

 
548

 

Total
$
39,039

 
$
344

 
$
21,194

 
$
552

 
 
 
 
 
 
 
 
 
The following table provides information on impaired loans. This table excludes PCI loans and loans evaluated collectively as a homogeneous group.
 
Recorded Investment With a Recorded Allowance
 
Recorded Investment With no Recorded Allowance
 
Total
 
Related
Allowance
 
Unpaid Principal Balance
June 30, 2016
 
 
 
 
 
 
 
 
 
Non-PCI Loans
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
$
3,680

 
$
11,167

 
$
14,847

 
$
390

 
$
16,417

Commercial and industrial
380

 
2,873

 
3,253

 

 
7,434

Construction and development

 
886

 
886

 

 
886

Consumer:
 
 
 
 
 
 
 
 
 
Residential real estate
993

 

 
993

 
60

 
993

Total
$
5,053

 
$
14,926

 
$
19,979

 
$
450

 
$
25,730

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Non-PCI Loans
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,262

 
$
7,187

 
$
8,449

 
$
314

 
$
8,515

Commercial and industrial
531

 
2,092

 
2,623

 
106

 
2,695

Construction and development

 
177

 
177

 

 
180

Consumer:
 
 
 
 
 
 
 
 
 
Residential real estate
1,465

 
2,085

 
3,550

 

 
3,568

Construction and development

 
417

 
417

 

 
417

Home equity
20

 
317

 
337

 
67

 
359

Total
$
3,278

 
$
12,275

 
$
15,553

 
$
487

 
$
15,734


The following table provides the average balance of impaired loans for each period presented and interest income recognized during the period in which the loans were considered impaired.

- 21 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
Average Balance
 
Interest Income
 
Average Balance
 
Interest Income
 
Average Balance
 
Interest Income
 
Average Balance
 
Interest Income
Non-PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
11,679

 
$
43

 
$
11,253

 
$
5

 
$
10,602

 
$
85

 
$
8,579

 
$
25

Commercial and industrial
2,778

 
4

 
2,994

 
1

 
2,726

 
8

 
2,724

 
2

Construction and development
560

 

 
523

 

 
432

 

 
545

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,337

 
12

 
2,224

 
22

 
2,075

 
28

 
2,020

 
44

Construction and development

 

 

 

 
139

 

 

 

Home equity

 

 
197

 

 
112

 

 
213

 

Total
$
16,354

 
$
59

 
$
17,191

 
$
28

 
$
16,086

 
$
121

 
$
14,081

 
$
71


The Company may modify certain loans under terms that are below market in order to maximize the amount collected from a borrower that is experiencing financial difficulties. These modifications are considered to be troubled debt restructurings ("TDRs"). TDRs are evaluated individually for impairment based on the collateral value, if the loan is determined to be collateral dependent, or discounted expected cash flows, if the loan is not determined to be collateral dependent. The Company has no commitments to lend additional funds to any borrowers that have had a loan modified in a TDR. The following table provides the number and recorded investment of TDRs outstanding.
 
June 30, 2016
 
December 31, 2015
 
Recorded Investment
 
Number
 
Recorded Investment
 
Number
TDRs:
 
 
 
 
 
 
 
Commercial real estate
$
4,638

 
6

 
$
4,684

 
7

Commercial and industrial
1,166

 
9

 
795

 
11

Commercial construction
174

 
2

 
177

 
2

Residential real estate
989

 
2

 
1,594

 
4

Home equity

 

 
20

 
1

Total
$
6,967

 
19

 
$
7,270

 
25


The following tables provide the number and recorded investment of TDRs modified during the periods presented.
 
Three months ended June 30,
 
2016
 
2015
 
Recorded Investment
 
Number
 
Recorded Investment
 
Number
TDRs:
 
 
 
 
 
 
 
Below market interest rate modifications:
 
 
 
 
 
 
 
Commercial real estate
$
597

 
1

 
$
647

 
2

Total
$
597

 
1

 
$
647

 
$
2


 
Six months ended June 30,
 
2016
 
2015
 
Recorded Investment
 
Number
 
Recorded Investment
 
Number
TDRs:
 
 
 
 
 
 
 
Below market interest rate modifications:
 
 
 
 
 
 
 
Commercial real estate
$
721

 
2

 
$
647

 
2

Residential real estate

 

 
398

 
1

Total
$
721

 
2

 
$
1,045

 
$
3


One TDR totaling $353 thousand was modified in the twelve months ended June 30, 2016 and subsequently defaulted during the six months ended June 30, 2016. No TDRs that were modified in the twelve months ended June 30, 2015 subsequently defaulted during the six months ended June 30, 2015. The Company does not generally forgive principal or unpaid interest when restructuring loans. Therefore, the recorded investment in TDRs during 2016 and 2015 did not change following the modifications.


- 22 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


NOTE F - PURCHASED ACCOUNTS RECEIVABLE

The Company has previously invested in short-term trade accounts receivable, purchased on an exchange, using qualified intermediaries. These receivables have repayment terms of less than one year. Income from purchased accounts receivable, which is recorded in other non-interest income, totaled $247 and $352, respectively, in the six months ended June 30, 2016 and 2015.

Purchased accounts receivable include delinquent short-term receivables of $7,907 at June 30, 2016 that are due from a U.S. bioenergy company that produces ethanol, with the debt guaranteed by its Spanish parent company. The Spanish parent company commenced pre-insolvency proceedings in Spain during November, 2015, which allows a business to restructure its financial creditor debt on a voluntary basis without filing an insolvency proceeding. The Company is an operational creditor, and its debt and accrued interest are not affected under the current proceedings. Only if the Spanish parent enters into an insolvency proceeding can the debt including interest to the Company be subject to adjustment. The prior agreement between the Spanish Parent and its financial creditors is being renegotiated and any revised agreement must be presented to the Spanish Court prior to the expiration of the seven month period from and after March 28, 2016.

An involuntary bankruptcy petition was filed against the U.S. subsidiary in the District of Kansas on February 11, 2016. On February 24, 2016, a related U.S. subsidiary of the Spanish parent company filed a voluntary Chapter 11 bankruptcy petition in the Eastern District of Missouri, along with various affiliates, including the U.S. subsidiary, with joint administration requested. On February 29, 2016, the Kansas case for the U.S. subsidiary was converted to a voluntary Chapter 11 case, with venue transferred to the Eastern District of Missouri on March 1, 2016. On March 10, 2016, the Spanish parent company announced the basis of a debt restructuring agreement that, among other things, will give selected financial creditors of the Spanish parent a controlling stake in the company in return for a 70 percent reduction in the Spanish parent company’s outstanding debt as well as $2,000,000 in additional loans. Under governing law, the parent company needs to present a restructuring plan to a Spanish court to avoid insolvency proceedings. Any such transaction would also require approval of at least 75 percent of its financial creditors. On March 28, 2016, creditors consented to a standstill agreement for seven months to give the company time to complete its restructuring. At this time, management lacks sufficient information to determine the extent of loss on the investment in purchased accounts receivable in the pending bankruptcy case for the U.S. subsidiary. Management similarly lacks sufficient information to determine the extent of recovery possible on the guarantee by the Spanish parent company. There was no contingency accrual related to this potential exposure as of June 30, 2016.

NOTE G – LOAN SERVICING

Mortgage Loan Servicing

The Company retains the servicing rights on mortgage loans sold. The unpaid principal balance of loans serviced for others was $613,411 and $563,802 as of June 30, 2016 and December 31, 2015, respectively. Mortgage servicing rights ("MSRs") are initially recognized at fair value in other assets on the consolidated balance sheets and are subsequently accounted for at the lower of cost or market. MSRs are amortized in proportion to, and over the estimated period, that net servicing income is expected to be received based on estimates of net cash flows on the loans serviced. The amount and timing of estimated future net cash flows are updated based on actual results and updated projections. Mortgage servicing fees, which are recorded in mortgage banking income in the consolidated statements of operations, totaled $373 and $308, respectively, in the second quarters of 2016 and 2015, and $731 and $602, respectively, for the six months ended June 30, 2016 and June 30, 2015.

The following table summarizes MSR activity for the periods presented.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Balance at beginning of period before valuation allowance
 
$
5,110

 
$
4,368

 
$
5,037

 
$
4,284

Additions
 
554

 
608

 
911

 
1,003

Repayments
 
(107
)
 
(114
)
 
(191
)
 
(243
)
Amortization
 
(208
)
 
(174
)
 
(408
)
 
(356
)
Balance at end of period before valuation allowance
 
5,349

 
4,688

 
5,349

 
4,688

Valuation allowance at end of period
 
(110
)
 
(36
)
 
(110
)
 
(36
)
Balance at end of period after valuation allowance
 
$
5,239

 
$
4,652

 
$
5,239

 
$
4,652

 
 
 
 
 
 
 
 
 


- 23 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


MSRs are separated into pools based on common risk characteristics of the underlying loans, and impairment is evaluated at least quarterly at the pool level. If impairment exists at the pool level, the MSR is written down through a valuation allowance and is charged against mortgage income. Valuation allowances at period end are summarized in the preceding table.

The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

The characteristics and sensitivity of the fair value of MSRs to changes in key assumptions is included in the accompanying table.
 
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
Composition of mortgage loans serviced for others:
 
 
 
 
Fixed rate loans
 
99.91
%
 
99.90
%
Adjustable rate loans
 
0.09
%
 
0.10
%
Total
 
100.00
%
 
100.00
%
 
 
 
 
 
Weighted average life (years)
 
5.73

 
6.60

Prepayment speed
 
12.6
%
 
9.98
%
Discount rate
 
9.47
%
 
9.66
%
Effect on fair value due to change in interest rates:
 
 
 
 
+ 0.25%
 
$
534

 
$
421

+ 0.50%
 
968

 
660

- 0.25%
 
(559
)
 
(599
)
- 0.50%
 
(1,038
)
 
(1,104
)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in the preceding table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions. Frequently, changes in one factor would result in another factor changing, which would magnify or contract the effect of the change.

SBA-Guaranteed Loan Servicing

The Company retains the servicing rights on SBA-guaranteed loans sold to investors. The standard sale structure under the SBA Secondary Participation Guaranty Agreement provides for the Company to retain a portion of the cash flow from the interest payment received on the loan, which is commonly known as a servicing spread. The unpaid principal balance of SBA-guaranteed loans serviced for investors was $226,021 and $205,879 as of June 30, 2016 and December 31, 2015, respectively. SBA-guaranteed loan servicing assets are initially recognized at fair value in other assets on the consolidated balance sheets and are subsequently accounted for at the lower of cost or market. SBA servicing assets are amortized over the expected life of the related loans serviced as a reduction to the servicing income recognized from the servicing spread. SBA servicing fees, which are recorded in government-guaranteed lending income in the consolidated statements of operations, totaled $545 and $413, respectively, in the second quarters of 2016 and 2015, and $1,069 and $785, respectively, in the six months ended June 30, 2016 and 2015.

The table below summarizes the activity in the SBA-guaranteed loan servicing asset for the periods presented.
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
4,701

 
3,520

 
$
4,485

 
$
3,081

Fair value of SBA servicing assets acquired in NewBridge Merger
 

 

 
16

 

Additions
 
443

 
560

 
1,040

 
1,095

Amortization
 
(245
)
 
(144
)
 
(642
)
 
(240
)
Balance at end of period
 
$
4,899

 
3,936

 
$
4,899

 
$
3,936

 
 
 
 
 
 
 
 
 


- 24 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The fair value of the servicing asset is compared to the amortized basis when certain triggering events occur. If the amortized basis exceeds the fair value, the asset is considered impaired and is written down to fair value through a valuation allowance on the asset and a charge against SBA income. There was no valuation allowance recorded on the SBA-guaranteed loan servicing asset as of June 30, 2016 or December 31, 2015.

NOTE H – COMMITMENTS AND CONTINGENCIES
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the maximum exposure the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on a credit evaluation of the borrower. Collateral obtained varies but may include real estate, equipment, stocks, bonds, and certificates of deposit.

The following table is a summary of the contractual amount of the Company’s exposure to off-balance sheet commitments.
 
June 30,
2016
 
December 31, 2015
Lending commitments:
 
 
 
Commitments to extend credit
$
1,493,102

 
$
799,058

Commercial letters of credit
22,379

 
16,342

Other commitments:
 
 
 
Standby letters of credit issued by the FHLB on the Bank's behalf
31,000

 
10,000

 
The reserve for unfunded commitments was $1,164 and $603 as of June 30, 2016 and December 31, 2015, respectively, which was recorded in other liabilities on the consolidated balance sheets.

NOTE I – DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company uses derivative financial instruments to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate, and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities on the balance sheet and are measured at fair value. Subsequent changes in the fair value of derivatives are recognized in other comprehensive income ("OCI") for effective hedges, and changes in fair value are recognized in earnings for all other derivatives.

Interest Rate Swaps

The table below provides a summary of forward starting pay fixed interest rate swaps that are being used to hedge short-term FHLB advances. These interest rate swaps are expected to be highly effective and are accounted for as cash flow hedges with the change in fair value recognized in OCI. The purpose of these cash flow hedges is to reduce the Company's exposure to variability in interest payments attributable to changes in the three-month LIBOR component of three-month FHLB advances. Each three-month FHLB advance will be executed to correspond to the effective dates of the respective interest rate swaps and will continue to be rolled for the full term of each interest rate swap.
Interest Rate Swap
 
Notional Amount
 
Effective Start Date
 
Maturity Date
 
Pay Fixed Rate
 
Receive Floating Rate
 
 
 
 
 
 
 
 
 
 
 
FHLB Advance Swap 1
 
$
25,000

 
February 5, 2016
 
February 5, 2021
 
2.703
%
 
3-Month LIBOR
FHLB Advance Swap 2
 
50,000

 
August 5, 2016
 
August 5, 2021
 
2.882

 
3-Month LIBOR
FHLB Advance Swap 3
 
25,000

 
October 5, 2017
 
October 5, 2027
 
2.540

 
3-Month LIBOR
FHLB Advance Swap 4
 
25,000

 
March 5, 2018
 
March 5, 2028
 
2.576

 
3-Month LIBOR
 
 
$
125,000

 
 
 
 
 
 
 
 


- 25 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following table provides information on a receive fixed interest rate swap that is being used to hedge certain floating rate loans. This interest rate swap is expected to be highly effective and is accounted for as a cash flow hedge with the change in fair value recognized in OCI. The purpose of this cash flow hedge is to reduce the Company's exposure to variability in interest receipts attributable to changes in one-month LIBOR, which is the index underlying the hedged floating rate loans.
Interest Rate Swap
 
Notional Amount
 
Effective Start Date
 
Maturity Date
 
Receive Fixed Rate
 
Pay Floating Rate
 
 
 
 
 
 
 
 
 
 
 
Loan Swap
 
$
40,000

 
October 1, 2015
 
October 1, 2020
 
1.23
%
 
1-Month LIBOR

In 2015, the Company terminated certain pay fixed interest rate swaps. For terminated interest rate swaps, the changes in fair value that were recorded in accumulated other comprehensive income ("AOCI") prior to termination will be amortized to yield over the period the hedged transactions impact earnings. The hedged transactions are currently outstanding and are expected to remain outstanding through the full original term of the interest rate swaps. The following table summarizes information regarding the terminated interest rate swaps.
Terminated Interest Rate Swap
 
Notional Amount
 
Original Effective Start Date
 
Original Maturity Date
 
Date Terminated
 
Unamortized Pre-Tax Loss in AOCI as of June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Terminated Swap 1
 
$
25,000

 
April 6, 2015
 
April 5, 2020
 
March 27, 2015
 
$
63

Terminated Swap 2
 
25,000

 
May 5, 2015
 
May 5, 2020
 
March 27, 2015
 
64

Terminated Swap 3
 
25,000

 
June 5, 2015
 
June 5, 2020
 
March 27, 2015
 
66

Terminated Swap 4
 
25,000

 
August 5, 2015
 
August 5, 2020
 
March 27, 2015
 
738

Terminated Swap 5
 
25,000

 
October 1, 2014
 
August 31, 2017
 
October 7, 2015
 
128

Terminated Swap 6
 
25,000

 
October 16, 2014
 
August 16, 2018
 
October 7, 2015
 
309

 
 
$
150,000

 
 
 
 
 
 
 
$
1,368


Interest Rate Caps

In previous years, the Company purchased interest rate caps that are being used to hedge a floating rate subordinated term loan and certain floating rate trust preferred securities ("TRUPs"). The underlying index for each debt instrument is three-month LIBOR. In the event that the underlying index rate exceeds the strike rate on the respective cap, the counterparty would pay the Company the difference between the underlying index and the strike rate.

These interest rate cap contracts are classified as effective cash flow hedges. Therefore, the changes in fair value of the caps are recognized in OCI. The following table summarizes key terms of each interest rate cap.
Interest Rate Cap
 
Notional Amount
 
Effective Start Date
 
Maturity Date
 
Strike Rate
 
Underlying Index of Cap
 
Variable Rate on Underlying Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Cap 1
 
$
7,500

 
July 1, 2012
 
July 1, 2017
 
0.47
%
 
3-Month LIBOR
 
3-Month LIBOR + 4.00%
Cap 2
 
8,000

 
July 7, 2012
 
July 7, 2017
 
0.47

 
3-Month LIBOR
 
3-Month LIBOR + 3.10%
Cap 3
 
25,000

 
September 15, 2014
 
September 15, 2019
 
1.82

 
3-Month LIBOR
 
3-Month LIBOR + 1.32%
Cap 4
 
10,000

 
September 30, 2014
 
September 30, 2019
 
1.85

 
3-Month LIBOR
 
3-Month LIBOR + 2.80%
 
 
$
50,500

 
 
 
 
 
 
 
 
 
 

Mortgage Loan Commitments

The Company enters into interest rate lock commitments with customers and commitments to sell mortgages to investors. The forward sale commitments are entered into with investors to manage the interest rate risk associated with the customer interest rate lock commitments, and both are considered derivative financial instruments. These derivative instruments are carried at fair value and do not qualify for hedge accounting. The fair value of the 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 consolidated balance sheets in other assets and on the consolidated statements of operations in mortgage banking income. The fair value of the forward sale commitments is based on changes in the value of the commitment, principally because of changes in interest rates, and is included on the consolidated balance sheets in other assets or other liabilities and on the consolidated statements of operations in mortgage banking income.


- 26 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following table summarizes the balance sheet location and fair value amounts of derivative instruments grouped by the underlying hedged instrument.
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Balance Sheet
Location
 
Notional
Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
Receive fixed interest rate swap
 
Other assets
 
$
40,000

 
$
798

 
$

 
$

 
Other liabilities
 

 

 
40,000

 
493

 
 
 
 
 
 
 
 
 
 
 
FHLB advances:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Other liabilities
 
125,000

 
11,585

 
125,000

 
3,822

 
 
 
 
 
 
 
 
 
 
 
Subordinated term loan:
 
 
 
 

 
 

 
 

 
 

Interest rate cap
 
Other assets
 
7,500

 
16

 
7,500

 
61

 
 
 
 
 
 
 
 
 
 
 
TRUPs:
 
 
 
 

 
 

 
 
 
 

Interest rate caps
 
Other assets
 
43,000

 
91

 
43,000

 
482

 
 
 
 
 
 
 
 
 
 
 
Mortgage loan commitments:
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Other assets
 
70,167

 
1,607

 
30,313

 
408

Forward sale commitments
 
Other assets
 

 

 
52,862

 
106

 
Other liabilities
 
174,914

 
357

 

 

 
Activity in AOCI related to cash flow hedges is presented in Note K. If a cash flow hedge ceases to be highly effective or is terminated, then the hedge is dedesignated, and effective changes in value that are recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings. If the transaction is no longer probable of occurring during the forecast period or within a short period thereafter, hedge accounting is ceased and any gain or loss in AOCI is reported in earnings immediately.

The Company only transacts with derivative counterparties with strong credit standings and requires liquid collateral to secure credit exposure.

NOTE J – FAIR VALUE MEASUREMENTS
 
Fair value is defined as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
 
Investment Securities. Securities available for sale ("AFS") are recorded at fair value on a recurring basis. Fair value measurements are based upon quoted market exchange prices, if available. If quoted prices are not available, third-party pricing sources are generally utilized to determine fair value. These fair values are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads, and broker quotes. Level 1 securities include securities traded on an active exchange, such as the New York Stock Exchange, or SBA-guaranteed securities where active market pricing is readily available. Level 2 securities generally include GSE securities and mortgage-backed securities issued by GSEs, private label mortgage-backed securities, municipal bonds, corporate debt securities, and collateralized loan obligations. Level 3 securities include one municipal bond and certain corporate debt securities with limited trading activity. The following table provides the components of the change in fair value of Level 3 available for sale securities for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Level 3 AFS securities at beginning of period
$
11,506

 
$
11,380

 
$
11,728

 
$
11,290

Purchases

 

 

 

Sales, calls or maturities

 

 

 

Changes in unrealized gains and losses
219

 
23

 
(3
)
 
113

Level 3 AFS securities at end of period
$
11,725

 
$
11,403

 
$
11,725

 
$
11,403



- 27 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


SBA-Guaranteed Loans. The Company has elected to account for certain SBA-guaranteed loans at fair value on a recurring basis. Generally, the Company has reached an agreement with an investor to sell the guaranteed portion of these loans, and these amounts are classified in loans held for sale on the consolidated balance sheets until the sale is complete. The unguaranteed retained portion of the loans remains in loans held for investment and continues to be adjusted to fair value over the remaining life of the respective loans. Fair value estimates for these loans are based on observable market data and pricing and are therefore classified as recurring Level 2.

Derivatives. Derivative instruments include interest rate swaps and caps and are valued on a recurring basis using quoted market prices, dealer quotes, or third party pricing models that are primarily sensitive to market observable data. Currently outstanding derivatives, except for mortgage interest rate lock commitments described below, are classified as Level 2 within the fair value hierarchy.

Mortgage Loan Commitments. The fair value of interest rate lock commitments, which are included in derivatives assets and liabilities in the fair value measurement tables below, is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing between the commitment date and period end. Interest rate lock commitments are measured at fair value on a recurring basis and are classified as Level 3. The following table provides the components of the change in fair value of interest rate lock commitments for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Interest rate lock commitments at beginning of period
$
1,125

 
$
636

 
$
408

 
$
342

Issuances
4,041

 
1,645

 
6,802

 
2,972

Settlements
(3,559
)
 
(1,798
)
 
(5,603
)
 
(2,831
)
Interest rate lock commitments at end of period
$
1,607

 
$
483

 
$
1,607

 
$
483

 
The fair value of forward sale commitments, also included in derivative assets and liabilities in the fair value measurement tables below, is based on changes in loan pricing between the commitment date and period end. Forward sale commitments are measured at fair value on a recurring basis and are classified as Level 2. The difference between the interest rate lock commitment issuances and settlements in the preceding table and the change in fair value of forward sale commitments in the period represents the gain on mortgage loan commitments and is included in mortgage banking income on the consolidated statements of operations.

Loans. Loans are not generally recorded at fair value on a recurring basis. However, certain loans are determined to be impaired, and those loans are charged down to estimated fair value. The fair value of impaired loans that are collateral dependent is based on collateral value. For impaired loans that are not collateral dependent, estimated value is based on either an observable market price, if available, or the present value of expected future cash flows. Those impaired loans not requiring a charge-off represent loans for which the estimated fair value exceeds the recorded investments in such loans. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, and there is no observable market price, the impaired loan is classified as nonrecurring Level 3.
 
Other Real Estate. Foreclosed assets are adjusted to fair value upon transfer of loans to other real estate. Subsequently, other real estate is carried at lower of cost or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company classifies other real estate as nonrecurring Level 3.


- 28 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


The following tables summarize fair value information for assets and liabilities measured on a recurring and nonrecurring basis.
 
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2016
 
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 

 
 

 
 

 
 

GSE obligations
 
$
31,554

 
$

 
$
31,554

 
$

SBA-guaranteed securities
 
19,042

 
19,042

 

 

Mortgage-backed securities issued by GSE
 
563,413

 

 
563,413

 

Municipal bonds
 
134,337

 

 
133,211

 
1,126

Corporate bonds
 
202,441

 
2,529

 
189,313

 
10,599

Collateralized loan obligations
 
50,276

 

 
50,276

 

Non-agency CMBS
 
25,497

 

 
25,497

 

Certificates of deposit
 
992

 
992

 

 

Equity securities
 
10,755

 
10,755

 

 

SBA-guaranteed loans held for sale
 
31,933

 

 
31,933

 

SBA loans held for investment
 
39,077

 

 
39,077

 

Derivative assets
 
2,512

 

 
905

 
1,607

Derivative liabilities
 
11,942

 

 
11,942

 

 
 
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
Impaired loans
 
$
19,529

 
$

 
$

 
$
19,529

Other real estate
 
23,091

 

 

 
23,091

 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
December 31, 2015
 
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 

 
 

 
 

 
 

GSE obligations
 
$
5,982

 
$

 
$
5,982

 
$

SBA-guaranteed securities
 
12,176

 
12,176

 

 

Mortgage-backed securities issued by GSE
 
435,625

 

 
435,625

 

Collateralized loan obligations
 
50,483

 

 
50,483

 

Municipal bonds
 
55,800

 

 
54,692

 
1,108

Corporate bonds
 
123,532

 
2,485

 
110,427

 
11,728

Non-agency RMBS
 
3,663

 

 
3,663

 

Certificates of deposit
 
245

 
245

 

 

Equity securities
 
1,626

 
1,626

 

 

SBA-guaranteed loans held for sale
 
23,664

 

 
23,664

 

SBA loans held for investment
 
20,423

 

 
20,423

 

Derivative assets
 
996

 

 
588

 
408

Derivative liabilities
 
4,376

 

 
4,376

 

 
 
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
Impaired loans
 
$
15,066

 
$

 
$

 
$
15,066

Other real estate
 
15,346

 

 

 
15,346

 

- 29 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


Quantitative Information About Level 3 Fair Value Measurements

The table below outlines the valuation techniques, unobservable inputs, and the range of quantitative inputs used in the valuations.
 
 
 
 
 
 
 
 
Fair Value
 
 
Valuation Technique
 
Unobservable Input
 
Range
 
June 30, 2016
December 31, 2015
Recurring measurements:
 
 
 
 
 
 
 
Investment securities
 
Pricing model
 
Illiquidity or credit factor in discount rates
 
1-2%
 
$
11,725

$
11,728

 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Pricing model
 
Pull through rates
 
80-95%
 
1,607

408

 
 
 
 
 
 
 
 
 
 
Nonrecurring measurements:
 
 
 
 
 
 
 
Impaired loans
 
Discounted appraisals
 
Collateral discounts
 
15-50%
 
19,529

15,066

 
Discounted expected cash flows
 
Expected loss rates
 
0-75%
 
 
 
Discount rates
 
2-8%
 
Other real estate
 
Discounted appraisals
 
Collateral discounts
 
15-50%
 
23,091

15,346

 
The significant unobservable input used in the fair value measurement of the Company’s interest rate lock commitments is the closing ratio (or pull through rate), which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an interest rate lock commitment is positive (negative) if the prevailing interest rate is lower (higher) than the interest rate lock commitment rate. Therefore, an increase in the pull through rates (i.e., higher percentage of loans estimated to close) will result in the fair value of the interest rate lock commitments increasing in a gain position, or decreasing in a loss position. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed based on historical internal data and the ratio is periodically reviewed by the Company’s mortgage banking department.
 
Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. The fair value of such instruments has been derived based on assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.
 
Cash and Cash Equivalents. The carrying amounts for cash and cash equivalents are a reasonable estimate of fair value.

Investment Securities Available for Sale. A description of fair value estimates for securities available for sale is included in the recurring fair value measurements section above.
 
Investment Securities Held to Maturity. The fair value of the municipal bonds classified as held to maturity are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads, and broker quotes. These securities are classified as Level 2 in the fair value hierarchy since the inputs used in the valuation are readily available market inputs.

Loans Held For Sale. The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market. A description of fair value estimates for SBA-guaranteed loans held for sale is included in the recurring fair value measurements section above.

Loans. Expected cash flows are forecasted over the remaining life of each loan and are discounted to present value at current market interest rates for similar loans considering loan collateral type and credit quality.
 
Federal Home Loan Bank Stock. Given the option to redeem this stock at par through the FHLB, the carrying value of FHLB stock approximates fair value.


- 30 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


Purchased Accounts Receivable. Purchased accounts receivable, which are classified in other assets on the consolidated balance sheet, are initially recorded at fair value, which is the same as the discounted purchase price, and generally have maturities between 30 and 60 days. Due to the short duration of these assets, the carrying amounts are a reasonable estimate of fair value.

Deposits. The fair value of demand deposits, savings, money market and NOW accounts represents the amount payable on demand. The fair value of time deposits is estimated by calculating the present value of cash flows on the time deposit portfolio discounted using interest rates currently offered for instruments of similar remaining maturities.
 
Short-term Borrowings and Long-term Debt. The fair value of short-term borrowings and long-term debt are based upon the discounted value when using current rates at which borrowings of similar maturity could be obtained.

Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest receivable and payable approximate fair value due to the short maturities of these instruments.
 
Derivative Instruments. A description of fair value estimates for derivative instruments is included in the recurring fair value measurements section above.

The following tables summarize the carrying amounts and estimated fair values of the Company's financial instruments.
 
 
June 30, 2016
 
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
120,536

 
$
120,536

 
$
120,536

 
$

 
$

Investment securities available for sale
 
1,038,307

 
1,038,307

 
33,318

 
993,264

 
11,725

Investment securities held to maturity
 
38,959

 
41,197

 

 
41,197

 

Loans held for sale
 
139,513

 
139,513

 

 
139,513

 

Loans, net
 
5,257,135

 
5,334,194

 

 
39,077

 
5,295,117

Purchased accounts receivable
 
9,657

 
9,657

 

 
9,657

 

Federal Home Loan Bank stock
 
45,284

 
45,284

 

 
45,284

 

Derivative assets
 
2,512

 
2,512

 

 
905

 
1,607

Accrued interest receivable
 
19,590

 
19,590

 

 
19,590

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

Deposits
 
5,338,586

 
5,345,875

 

 
5,345,875

 

Short-term borrowings
 
811,383

 
811,383

 

 

 
811,383

Long-term debt
 
229,012

 
239,072

 

 

 
239,072

Derivative liabilities
 
11,942

 
11,942

 

 
11,942

 

Accrued interest payable
 
2,985

 
2,985

 

 
2,985

 

 
 
December 31, 2015
 
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 

 
 

 
 
 
 
 
 
Cash and cash equivalents
 
$
111,918

 
$
111,918

 
$
111,918

 
$

 
$

Investment securities available for sale
 
689,132

 
689,132

 
16,532

 
665,872

 
6,728

Investment securities held to maturity
 
39,182

 
40,500

 

 
40,500

 

Loans held for sale
 
47,287

 
47,287

 

 
47,287

 

Loans, net
 
3,066,775

 
3,092,461

 

 
23,664

 
3,068,797

Purchased accounts receivable
 
52,688

 
52,688

 

 
52,688

 

Federal Home Loan Bank stock
 
24,844

 
24,844

 

 
24,844

 

Derivative assets
 
996

 
996

 

 
588

 
408

Accrued interest receivable
 
12,695

 
12,695

 

 
12,695

 

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 
 
 
 
 
Deposits
 
3,310,297

 
3,310,306

 

 
3,310,306

 

Short-term borrowings
 
375,500

 
375,500

 

 

 
375,500

Long-term debt
 
194,967

 
198,928

 

 

 
198,928

Derivative liabilities
 
4,376

 
4,376

 

 
4,376

 

Accrued interest payable
 
2,550

 
2,550

 

 
2,550

 



- 31 -

YADKIN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


NOTE K - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the activity in accumulated other comprehensive income for the periods presented. All amounts are net of tax.
 
Unrealized Net Gains (Losses) on AFS Securities
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Total
Three Months Ended
 
 
 
 
 
Balance at April 1, 2016
$
1,107

 
$
(6,994
)
 
$
(5,887
)
Other comprehensive income (loss) before reclassifications
5,778

 
(1,300
)
 
4,478

Reclassification of gains on AFS securities
(40
)
 

 
(40
)
Reclassification of amounts into interest expense from termination of interest rate swaps

 
70

 
70

Net other comprehensive income (loss) during period
5,738

 
(1,230
)
 
4,508

Balance at June 30, 2016
$
6,845

 
$
(8,224
)
 
$
(1,379
)
 
 
 
 
 
 
Balance at April 1, 2015
$
1,589

 
$
(3,617
)
 
$
(2,028
)
Other comprehensive income (loss) before reclassifications
(4,016
)
 
2,146

 
(1,870
)
Reclassification of gains on AFS securities
(52
)
 

 
(52
)
Reclassification of amounts into interest expense from termination of interest rate swaps

 
5

 
5

Net other comprehensive income (loss) during period
(4,068
)
 
2,151

 
(1,917
)
Balance at June 30, 2015
$
(2,479
)
 
$
(1,466
)
 
$
(3,945
)
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
Balance at January 1, 2016
$
(3,321
)
 
$
(4,196
)
 
(7,517
)
Other comprehensive income (loss) before reclassifications
10,287

 
(4,168
)
 
6,119

Reclassification of gains on AFS securities
(121
)
 

 
(121
)
Reclassification of amounts into interest expense from termination of interest rate swaps

 
140

 
140

Net other comprehensive income (loss) during period
10,166

 
(4,028
)
 
6,138

Balance at June 30, 2016
$
6,845

 
$
(8,224
)
 
$
(1,379
)
 
 
 
 
 
 
Balance at January 1, 2015
$
(1,185
)
 
$
(1,059
)
 
$
(2,244
)
Other comprehensive loss before reclassifications
(1,242
)
 
(412
)
 
(1,654
)
Reclassification of gains on AFS securities
(52
)
 

 
(52
)
Reclassification of amounts into interest expense from termination of interest rate swaps

 
5

 
5

Net other comprehensive loss during period
(1,294
)
 
(407
)
 
(1,701
)
Balance at June 30, 2015
$
(2,479
)
 
$
(1,466
)
 
$
(3,945
)



- 32 -



Management's Discussion and Analysis of Financial Condition and Results of Operations

Yadkin Financial Corporation (the “Company” or “Yadkin”) is a bank holding company incorporated under the laws of North Carolina and headquartered in Raleigh, North Carolina. The Company conducts its business operations primarily through its wholly-owned subsidiary, Yadkin Bank, a North-Carolina chartered commercial bank. Yadkin Bank provides banking, mortgage, investment and insurance services to businesses and consumers across the Carolinas.

Management’s discussion and analysis is intended to assist readers in understanding and evaluating the financial condition and consolidated results of operations of the Company. This discussion and analysis includes descriptions of significant transactions, trends and other factors affecting the Company’s operating results for the three- and six-month periods ended June 30, 2016 and 2015, as well as the financial condition of the Company as of June 30, 2016 and December 31, 2015. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in this report.

Executive Summary
 
The following is a summary of the Company’s financial highlights and significant events in the second quarter of 2016:

Net income available to common shareholders totaled $17.4 million, or $0.34 per diluted share, in Q2 2016 compared to $0.33 per diluted share in Q2 2015.

The Company achieved record operating earnings in the quarter as net operating earnings available to common shareholders, which excludes certain non-operating income and expenses, improved to $21.2 million, or $0.41 per diluted share, in Q2 2016 from $0.38 per diluted share in Q2 2015.

Annualized return on average tangible common equity was 11.89 percent in Q2 2016 compared to 11.90 percent in Q2 2015. Annualized net operating return on average tangible common equity improved to 14.35 percent in Q2 2016 from 13.13 percent in Q2 2015.

Efficiency ratio, the ratio of expenses to total revenues, improved to 63.5 percent in Q2 2016 from 64.5 percent in Q2 2015. Operating efficiency ratio improved to 55.5 percent in Q2 2016 from 60.0 percent in Q2 2015 as the Company cut costs and achieved greater operating scale following the NewBridge Merger.

Asset quality remains strong, and annualized net charge-offs improved to 0.07 percent of average loans in Q2 2016 from 0.12 percent in Q2 2015.

The Company organically grew shareholders' equity in the quarter as tangible common equity to tangible assets was 8.94 percent as of June 30, 2016 compared to 8.72 percent as of March 31, 2016 and 9.21 percent as of December 31, 2015. Tangible book value per common share was $12.28 as of June 30, 2016 compared to $11.94 as of March 31, 2016 and $12.51 as of December 31, 2015.


Mergers and Acquisitions

Proposed Merger with F.N.B. Corporation.

On July 20, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with F.N.B. Corporation, a Florida corporation (“FNB”). The Merger Agreement provides that the Company will merge with and into FNB (the “Merger”), with FNB continuing as the surviving corporation. As soon as practicable following execution of the Merger Agreement, the Company’s wholly-owned subsidiary, Yadkin Bank, will merge with and into FNB’s wholly-owned subsidiary, First National Bank of Pennsylvania ("FNB Bank"), with FNB Bank continuing as the surviving entity (the “Bank Merger”).

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive 2.16 shares of FNB common stock, par value $0.01, for each share of the Company’s common stock. Based on FNB’s closing price of $13.20 as of July 20, 2016, the day before the transaction was announced, the estimated aggregate purchase price was $1.47 billion. The transaction is expected to close in the first quarter of 2017, subject to shareholder and regulatory approval and other customary closing conditions.


- 33 -



Acquisition of NewBridge Bancorp

On March 1, 2016, the Company completed its acquisition of NewBridge Bancorp (“NewBridge”), pursuant to an Agreement and Plan of Merger, dated October 12, 2015 (the “NewBridge Merger Agreement”). Pursuant to the NewBridge Merger Agreement, each share of NewBridge Class A common stock and Class B common stock was converted into the right to receive 0.50 shares of the common stock of the Company (the "NewBridge Merger"). Based on the Company's stock price at the closing date of the NewBridge Merger, purchase consideration totaled $431.3 million. Immediately following the merger of NewBridge into Yadkin, NewBridge Bank, a North Carolina-chartered commercial bank, merged with and into Yadkin Bank, with Yadkin Bank surviving such merger.

The NewBridge Merger was accounted for under the acquisition method of accounting with Yadkin as the legal and accounting acquirer and NewBridge as the legal and accounting acquiree. The assets and liabilities of NewBridge have been recorded at their estimated fair values and added to those of Yadkin for periods following the merger date. The Company may refine its valuations of acquired NewBridge assets and liabilities for up to one year following the merger date.

The Company is currently the fourth largest bank headquartered in North Carolina and ranks first by North Carolina deposit market share among community banks. The Company now operates 100 full-service banking locations in its North Carolina and South Carolina banking network and has a significant presence in all major North Carolina markets, including Charlotte, the Raleigh-Durham-Chapel Hill Triangle, the Piedmont Triad, and Wilmington. The previously announced systems integration (originally scheduled for September 2016), will now be completed following the FNB Merger. The NewBridge Merger added $2.1 billion in loans, $2.0 billion in deposits, and resulted in significant changes across most balance sheet categories. The NewBridge Merger, which was effective on March 1, 2016, had a material impact on Company's results of operations. As a result, the Company's second quarter 2016 and first quarter 2016 financial results may not be comparable to financial results in prior periods.

Non-GAAP Financial Measures

Statements included in this management's discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company's management uses these non-GAAP financial measures, including: (i) net operating earnings available to common shareholders; (ii) pre-tax, pre-provision operating earnings, (iii) operating non-interest income, (iv) operating non-interest expense, (v) operating efficiency ratio, (vi) taxable-equivalent net interest income, (vii) taxable-equivalent net interest margin, (viii) core net interest income, (ix) core net interest margin, (x) adjusted allowance for loan losses to loans; and (xi) tangible common equity, in its analysis of the Company's performance. The adjusted allowance for loan losses non-GAAP reconciliation is presented within the allowance for loan losses section below. The tangible common equity non-GAAP reconciliations, which include tangible book value per share and the tangible common equity to tangible assets ratio, are presented within the capital section below.

Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company without regard to transactional activities. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP. 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands, except per share data)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Operating Earnings
 
 
 
 
 
 
 
Net income
$
17,404

 
$
10,741

 
$
25,203

 
$
20,991

Securities gains
(64
)
 
(84
)
 
(194
)
 
(85
)
Merger and conversion costs
6,531

 
(25
)
 
16,866

 
195

Restructuring charges
25

 
2,294

 
46

 
3,201

Sale of trust business
(417
)
 

 
(417
)
 

Income tax effect of adjustments
(2,269
)
 
(836
)
 
(5,486
)
 
(1,267
)
Net operating earnings (Non-GAAP)
21,210

 
12,090

 
36,018

 
23,035

Dividends on preferred stock

 
182

 

 
821

Net operating earnings available to common shareholders (Non-GAAP)
$
21,210

 
$
11,908

 
$
36,018

 
$
22,214

 
 
 
 
 
 
 
 
Net operating earnings per common share:
 
 
 
 
 
 
 

- 34 -



Basic (Non-GAAP)
$
0.41

 
$
0.38

 
$
0.81

 
$
0.70

Diluted (Non-GAAP)
0.41

 
0.38

 
0.80

 
0.70

 
 
 
 
 
 
 
 
Pre-Tax, Pre-Provision Operating Earnings
 
 
 
 
 
 
 
Net income
$
17,404

 
$
10,741

 
$
25,203

 
$
20,991

Provision for loan losses
2,298

 
994

 
4,173

 
1,955

Income tax expense
9,219

 
6,076

 
14,140

 
11,922

Pre-tax, pre-provision income
28,921

 
17,811

 
43,516

 
34,868

Securities gains
(64
)
 
(84
)
 
(194
)
 
(85
)
Merger and conversion costs
6,531

 
(25
)
 
16,866

 
195

Restructuring charges
25

 
2,294

 
46

 
3,201

Pre-tax, pre-provision operating earnings (Non-GAAP)
$
35,413

 
$
19,996

 
$
60,234

 
$
38,179

 
 
 
 
 
 
 
 
Operating Non-Interest Income
 
 
 
 
 
 
 
Non-interest income
$
15,637

 
$
10,800

 
$
26,991

 
$
19,639

Securities gains
(64
)
 
(84
)
 
(194
)
 
(85
)
Gain on sale of branches

 

 

 

Operating non-interest income (Non-GAAP)
$
15,573

 
$
10,716

 
$
26,797

 
$
19,554

 
 
 
 
 
 
 
 
Operating Non-Interest Expense
 
 
 
 
 
 
 
Non-interest expense
$
50,205

 
$
32,316

 
$
94,929

 
$
63,274

Merger and conversion costs
(6,531
)
 
25

 
(16,866
)
 
(195
)
Restructuring charges
(25
)
 
(2,294
)
 
(46
)
 
(3,201
)
Operating non-interest expense (Non-GAAP)
$
43,649

 
$
30,047

 
$
78,017

 
$
59,878

 
 
 
 
 
 
 
 
Operating Efficiency Ratio
 
 
 
 
 
 
 
Efficiency ratio
63.45
 %
 
64.47
 %
 
68.57
 %
 
64.47
 %
Effect to adjust for securities gains
0.05

 
0.11

 
0.09

 
0.06

Effect to adjust for gain on sale of branches

 

 

 

Effect to adjust for restructuring charges
(0.03
)
 
(4.58
)
 
(0.04
)
 
(3.26
)
Effect to adjust for merger and conversion costs
(8.31
)
 
0.04

 
(12.23
)
 
(0.21
)
Operating efficiency ratio (Non-GAAP)
55.16
 %
 
60.04
 %
 
56.39
 %
 
61.06
 %
 
 
 
 
 
 
 
 
Taxable-Equivalent Net Interest Income
 
 
 
 
 
 
 
Net interest income
$
63,489

 
$
39,327

 
$
111,454

 
$
78,503

Taxable-equivalent adjustment
586

 
302

 
1,026

 
419

Taxable-equivalent net interest income (Non-GAAP)
$
64,075

 
$
39,629

 
$
112,480

 
$
78,922

 
 
 
 
 
 
 
 
Core Net Interest Income and Net Interest Margin (Annualized)
 
 
 
 
 
 
 
Taxable-equivalent net interest income (Non-GAAP)
$
64,075

 
$
39,629

 
$
112,480

 
$
78,922

Acquisition accounting amortization / accretion adjustments related to:
 
 
 
 
 
 
 
Loans
(4,781
)
 
(4,035
)
 
(8,346
)
 
(8,346
)
Deposits
(471
)
 
(863
)
 
(1,024
)
 
(1,024
)
Borrowings and debt
60

 
132

 
179

 
179

Income from issuer call of debt security

 

 
(165
)
 
(165
)
Core net interest income (Non-GAAP)
$
58,883

 
$
34,863

 
$
103,124

 
$
69,566

 
 
 
 
 
 
 
 
Divided by: average interest-earning assets
$
6,532,542

 
$
3,702,156

 
$
5,673,105

 
$
3,696,451

Taxable-equivalent net interest margin (Non-GAAP)
3.94
 %
 
4.29
 %
 
3.99
 %
 
4.31
 %
Core taxable-equivalent net interest margin (Non-GAAP)
3.63
 %
 
3.78
 %
 
3.66
 %
 
4.00
 %


- 35 -



Analysis of Results of Operations

Q2 2016 compared to Q2 2015

Net income available to common shareholders was $17.4 million, or $0.34 per diluted common share, in the second quarter of 2016 compared to $10.6 million, or $0.33 per diluted common share, in the second quarter of 2015. Net operating earnings available to common shareholders, which excludes certain nonrecurring income and expenses, improved to $21.2 million in the second quarter of 2016 from $11.9 million in the comparable period of 2015. Similarly, pre-tax, pre-provision operating earnings increased to $35.0 million in the second quarter of 2016 from $20.0 million in the same period of 2015.

Year-to-Date

Net income available to common shareholders was $25.2 million, or $0.56 per diluted common share, in the first six months of 2016 compared to $20.2 million, or $0.64 per diluted common share, in the first six months of 2015. Net operating earnings available to common shareholders, which excludes certain nonrecurring income and expenses, improved to $36.0 million in the first six months of 2016 from $22.2 million in the comparable period of 2015. Similarly, pre-tax, pre-provision operating earnings increased to $59.8 million in the first six months of 2016 from $38.2 million in the same period of 2015.

Net Interest Income

Q2 2016 compared to Q2 2015

Net interest income was $63.5 million in the second quarter of 2016, an increase from $39.3 million in the second quarter of 2015. This increase was due to the impact of earning assets acquired in the NewBridge Merger as well as solid organic loan growth. Net interest margin declined from 4.29 percent in the second quarter of 2015 to 3.94 percent in the second quarter of 2016, primarily due to lower-yielding acquired NewBridge loans. Core net interest margin, which excludes the impact of accretion income on net interest income, was 3.63 percent in the second quarter of 2016 compared to 3.78 percent in the second quarter of 2015.

Net accretion income on acquired loans totaled $4.8 million in the second quarter of 2016, which consisted of $723 thousand of net accretion on purchased credit-impaired (“PCI”) loans and $4.1 million of accretion income on purchased non-impaired loans. Net accretion income on acquired loans in the second quarter of 2015 totaled $3.6 million, which included $1.1 million of net accretion on PCI loans and $2.4 million of accretion income on purchased non-impaired loans. Accretion income on purchased non-impaired loans included $767 thousand of accelerated accretion due to principal prepayments in the second quarter of 2016 compared to $906 thousand in the second quarter of 2015.


- 36 -



The following table summarizes the major components of net interest income and the related yields and costs for the quarterly periods presented.
 
Three months ended June 30, 2016
 
Three months ended June 30, 2015
(Dollars in thousands)
Average
Balance
 
Interest*
 
Yield/Cost*
 
Average
Balance
 
Interest*
 
Yield/Cost*
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 

 
 

 
 

 
 
 
 
 
 
Loans (1)
$
5,322,521

 
$
64,478

 
4.87
%
 
$
2,966,953

 
$
40,468

 
5.47
%
Investment securities (2)
1,150,664

 
7,684

 
2.69

 
685,796

 
4,024

 
2.35

Federal funds and other
59,357

 
81

 
0.55

 
49,407

 
45

 
0.37

Total interest-earning assets
6,532,542

 
72,243

 
4.45
%
 
3,702,156

 
44,537

 
4.83
%
Goodwill
337,485

 
 
 
 
 
152,152

 
 
 
 
Other intangibles, net
31,797

 
 
 
 
 
15,570

 
 
 
 
Other non-interest-earning assets
514,206

 
 

 
 

 
401,690

 
 

 
 

Total assets
$
7,416,030

 
 

 
 

 
$
4,271,568

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand
$
1,141,173

 
536

 
0.19
%
 
$
475,546

 
158

 
0.13
%
Money market and savings
1,582,191

 
1,115

 
0.28

 
997,732

 
718

 
0.29

Time
1,448,912

 
2,782

 
0.77

 
1,078,460

 
2,197

 
0.82

Total interest-bearing deposits
4,172,276

 
4,433

 
0.43

 
2,551,738

 
3,073

 
0.48

Short-term borrowings
758,180

 
1,360

 
0.72

 
320,694

 
331

 
0.41

Long-term debt
280,520

 
2,375

 
3.41

 
136,377

 
1,504

 
4.42

Total interest-bearing liabilities
5,210,976

 
8,168

 
0.63
%
 
3,008,809

 
4,908

 
0.65
%
Noninterest-bearing deposits
1,147,659

 
 

 
 

 
676,858

 
 

 
 

Other liabilities
64,282

 
 

 
 

 
27,090

 
 

 
 

Total liabilities
6,422,917

 
 

 
 

 
3,712,757

 
 

 
 

Shareholders’ equity
993,113

 
 

 
 

 
558,811

 
 

 
 

Total liabilities and shareholders' equity
$
7,416,030

 
 

 
 

 
$
4,271,568

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income, taxable equivalent
 

 
$
64,075

 
 

 
 

 
$
39,629

 
 

Interest rate spread (3)
 

 
 

 
3.82
%
 
 

 
 

 
4.18
%
Tax equivalent net interest margin (4)
 

 
 

 
3.94
%
 
 

 
 

 
4.29
%
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of average interest-earning assets to average interest-bearing liabilities
 

 
 

 
125.36
%
 
 

 
 

 
123.04
%
* Taxable equivalent basis
 
 
 
 
 
 
 
 
 
 
 
                                         
(1)
Loans include loans held for sale and nonaccrual loans.
(2)
Investment securities include investments in FHLB stock. Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a 35.0 percent federal income tax rate and a 4.0 percent state income tax rate. The taxable-equivalent adjustment was $586 thousand and $302 thousand for the 2016 and 2015 periods, respectively.
(3)
Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)
Net interest margin represents annualized net interest income divided by average interest-earning assets.

- 37 -



Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents the relative impact on tax-equivalent net interest income to changes in the average outstanding balances of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities.
 
Change from Q2 2015 to Q2 2016 due to:
(Dollars in thousands)
Volume
 
Yield/Cost
 
Total Change
Interest earning assets:
 
 
 
 
 
Loans
$
28,986

 
$
(4,976
)
 
$
24,010

Investment securities
3,032

 
628

 
3,660

Federal funds and other interest-earning assets
10

 
26

 
36

Total interest-earning assets
32,028

 
(4,322
)
 
27,706

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
288

 
90

 
378

Money market and savings
420

 
(23
)
 
397

Time deposits
723

 
(138
)
 
585

Total interest-bearing deposits
1,431

 
(71
)
 
1,360

Short-term borrowings
666

 
363

 
1,029

Long-term debt
1,285

 
(414
)
 
871

Total interest-bearing liabilities
3,382

 
(122
)
 
3,260

Change in net interest income, taxable equivalent
$
28,646

 
$
(4,200
)
 
$
24,446


Year-to-Date

Net interest income was $111.5 million in the first six months of 2016, an increase from $78.5 million in the first six months of 2015. This increase was due to the impact of earning assets acquired in the NewBridge Merger and organic loan growth. Net interest margin declined from 4.31 percent in the first six months of 2015 to 3.99 percent in the first six months of 2016, primarily due to lower-yielding acquired NewBridge loans. Core net interest margin, which excludes the impact of accretion income on net interest income, was 3.66 percent in the first six months of 2016 compared to 4.00 percent in the first six months of 2015.

Net accretion income on acquired loans totaled $8.3 million in the first six months of 2016, which consisted of $1.9 million of net accretion on purchased credit-impaired (“PCI”) loans and $6.5 million of accretion income on purchased non-impaired loans. Net accretion income on acquired loans in the first six months of 2015 totaled $8.0 million, which included $1.8 million of net accretion on PCI loans and $6.2 million of accretion income on purchased non-impaired loans. Accretion income on purchased non-impaired loans included $2.6 million of accelerated accretion due to principal prepayments in the first six months of 2016 compared to $2.4 million in the first six months of 2015.


- 38 -



The following table summarizes the major components of net interest income and the related yields and costs for the quarterly periods presented.
 
Six months ended June 30, 2016
 
Six months ended June 30, 2015
(Dollars in thousands)
Average
Balance
 
Interest*
 
Yield/Cost*
 
Average
Balance
 
Interest*
 
Yield/Cost*
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 

 
 

 
 

 
 
 
 
 
 
Loans(1)
$
4,582,815

 
$
112,542

 
4.94
%
 
$
2,945,620

 
$
80,148

 
5.49
%
Investment securities(2)
1,028,782

 
14,144

 
2.76

 
696,342

 
8,253

 
2.39

Federal funds and other
61,508

 
184

 
0.60

 
54,489

 
95

 
0.35

Total interest-earning assets
5,673,105

 
126,870

 
4.50
%
 
3,696,451

 
88,496

 
4.83
%
Goodwill
277,122

 
 
 
 
 
152,152

 
 
 
 
Other intangibles, net
25,915

 
 
 
 
 
15,965

 
 
 
 
Other non-interest-earning assets
475,091

 
 

 
 

 
396,055

 
 

 
 

Total assets
$
6,451,233

 
 

 
 

 
$
4,260,623

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing demand
$
941,381

 
840

 
0.18
%
 
$
473,233

 
318

 
0.14
%
Money market and savings
1,392,494

 
1,971

 
0.28

 
1,000,444

 
1,434

 
0.29

Time
1,322,495

 
5,169

 
0.79

 
1,084,205

 
4,210

 
0.78

Total interest-bearing deposits
3,656,370

 
7,980

 
0.44

 
2,557,882

 
5,962

 
0.47

Short-term borrowings
634,217

 
2,166

 
0.69

 
281,421

 
620

 
0.44

Long-term debt
248,987

 
4,244

 
3.43

 
166,340

 
2,992

 
3.63

Total interest-bearing liabilities
4,539,574

 
14,390

 
0.64
%
 
3,005,643

 
9,574

 
0.64
%
Noninterest-bearing deposits
1,005,925

 
 

 
 

 
667,280

 
 

 
 

Other liabilities
54,034

 
 

 
 

 
26,223

 
 

 
 

Total liabilities
5,599,533

 
 

 
 

 
3,699,146

 
 

 
 

Shareholders’ equity
851,700

 
 

 
 

 
561,477

 
 

 
 

Total liabilities and shareholders' equity
$
6,451,233

 
 

 
 

 
$
4,260,623

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income, taxable equivalent
 

 
$
112,480

 
 

 
 

 
$
78,922

 
 

Interest rate spread(3)
 

 
 

 
3.86
%
 
 

 
 

 
4.19
%
Tax equivalent net interest margin(4)
 

 
 

 
3.99
%
 
 

 
 

 
4.31
%
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of average interest-earning assets to average interest-bearing liabilities
 

 
 

 
124.97
%
 
 

 
 

 
122.98
%
* Taxable equivalent basis
 
 
 
 
 
 
 
 
 
 
 
                                         
(1)
Loans include loans held for sale and nonaccrual loans.
(2)
Investment securities include investments in FHLB stock. Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a 35.0 percent federal income tax rate and a 4.0 percent state income tax rate. The taxable-equivalent adjustment was $1.0 million and $419 thousand for the 2016 and 2015 periods, respectively.
(3)
Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)
Net interest margin represents annualized net interest income divided by average interest-earning assets.

- 39 -



Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents the relative impact on tax-equivalent net interest income to changes in the average outstanding balances of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities.
 
Change from YTD 2015 to YTD 2016 due to:
(Dollars in thousands)
Volume
 
Yield/Cost
 
Total Change
Interest earning assets:
 
 
 
 
 
Loans
$
40,853

 
$
(8,459
)
 
$
32,394

Investment securities
4,429

 
1,462

 
5,891

Federal funds and other interest-earning assets
13

 
76

 
89

Total interest-earning assets
45,295

 
(6,921
)
 
38,374

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
394

 
128

 
522

Money market and savings
577

 
(40
)
 
537

Time deposits
911

 
48

 
959

Total interest-bearing deposits
1,882

 
136

 
2,018

Short-term borrowings
1,068

 
478

 
1,546

Long-term debt
1,415

 
(163
)
 
1,252

Total interest-bearing liabilities
4,365

 
451

 
4,816

Change in net interest income, taxable equivalent
$
40,930

 
$
(7,372
)
 
$
33,558


Provision for Loan Losses

Q2 2016 compared to Q2 2015

The following table summarizes the changes in the Company's ALLL for the quarters presented.
(Dollars in thousands)
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
 
 
 
 
 
2Q 2016:
 
 
 
 
 
 
Balance at April 1, 2016
 
$
9,453

 
$
778

 
$
10,231

Net charge-offs
 
(896
)
 

 
(896
)
Provision for loan losses
 
2,307

 
(9
)
 
2,298

Balance at June 30, 2016
 
$
10,864

 
$
769

 
$
11,633

 
 
 
 
 
 
 
2Q 2015:
 
 
 
 
 
 
Balance at April 1, 2015
 
$
6,907

 
$
1,377

 
$
8,284

Net charge-offs
 
(920
)
 

 
(920
)
Provision for loan losses
 
1,013

 
(19
)
 
994

Balance at June 30, 2015
 
$
7,000

 
$
1,358

 
$
8,358


Provision for loan losses was $2.3 million in the second quarter of 2016 compared to $994 thousand in the second quarter of 2015. The higher provision for loan losses was primarily due to an increase in originated loan growth. Net charge-offs declined to an annualized 0.07 percent of average loans in the second quarter of 2016 compared to an annualized 0.12 percent of average loans in the second quarter of 2015.

Loans acquired with evidence of credit deterioration since origination are accounted for as PCI loans. Subsequent to acquisition of these loans, estimates of cash flows expected to be collected are updated each reporting period based on assumptions regarding default rates, loss severities, and other factors that reflect current market conditions. If the Company has probable decreases in cash flows expected to be collected at the pool level due to credit, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. Events that would result in probable decreases in expected cash flows include (i) reductions in estimated collateral values for collateral dependent loans, (ii) loans becoming collateral dependent during the period for which there is an estimated collateral shortfall, (iii) non-payment of cash flows expected to be collected in prior re-estimations, and (iv) deterioration in the weighted average credit grade or past due status for loans with cash flows estimated based on these factors.


- 40 -



If there are probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established ALLL and then increase interest income as a prospective yield adjustment over the remaining life of the loans. Events that would result in probable increases in expected cash flows include (i) increases in estimated collateral values for collateral dependent loans, (ii) loans becoming non-collateral dependent during the period for which there was an estimated collateral shortfall in prior estimations, (iii) actual cash flow collections in excess of prior estimates, and (iv) improvement in the weighted average credit grade or past due status for loans with cash flows estimated based on these factors.

Results of the Company’s cash flow re-estimation for PCI loans in the second quarter of 2016 are summarized below.
(Dollars in thousands)
 
Provision
 
Yield Adjustment
 
Previous Yield
 
New Yield
 
 
 
 
 
 
 
 
 
Loan pools with cash flow improvement
 
$
(226
)
 
$
4,458

 
6.41
%
 
7.67
%
Loan pools with cash flow decrease
 
222

 
(339
)
 
14.39

 
12.71

Non-pooled loans
 
(5
)
 
(308
)
 
65.30

 
19.51

Total
 
$
(9
)
 
$
3,811

 
7.34
%
 
8.14
%
 
 
 
 
 
 
 
 
 

Year-to-Date

The following table summarizes the changes in the Company's ALLL for the year-to-date periods presented.
(Dollars in thousands)
 
Non-PCI Loans
 
PCI Loans
 
Total
 
 
 
 
 
 
 
2016:
 
 
 
 
 
 
Balance at January 1, 2016
 
$
8,447

 
$
1,322

 
$
9,769

Net charge-offs
 
(2,309
)
 

 
(2,309
)
Provision for loan losses
 
4,726

 
(553
)
 
4,173

Balance at June 30, 2016
 
$
10,864

 
$
769

 
$
11,633

 
 
 
 
 
 
 
2015:
 
 
 
 
 
 
Balance at January 1, 2015
 
$
6,519

 
$
1,298

 
$
7,817

Net charge-offs
 
(1,414
)
 

 
(1,414
)
Provision for loan losses
 
1,895

 
60

 
1,955

Balance at June 30, 2015
 
$
7,000

 
$
1,358

 
$
8,358


Provision for loan losses was $4.2 million in the six months ended June 30, 2016 compared to $2.0 million in the same period of 2015. The higher provision for loan losses reflected higher provision expense on non-PCI loans, net of a provision credit on PCI loans. Provision expense on non-PCI loans was primarily due to an increase in originated loan growth. Net charge-offs represented an annualized 0.09 percent of average loans in the six months ended June 30, 2016, compared to an annualized 0.10 percent of average loans in the same period of 2015. The current period YTD provision credit resulted from improving cash flows on certain of the Company's PCI loan pools in the first quarter of 2016.

Non-Interest Income

The following table provides a summary of non-interest income for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service charges and fees on deposit accounts
$
5,795

 
$
3,495

 
$
10,007

 
$
6,748

Government-guaranteed lending
2,680

 
3,677

 
5,752

 
6,550

Mortgage banking
3,850

 
1,633

 
5,473

 
2,955

Bank-owned life insurance
733

 
465

 
1,285

 
937

Gains on sales of available for sale securities
64

 
84

 
194

 
85

Gain on sale of trust business
417

 

 
417

 

Other
2,098

 
1,446

 
3,863

 
2,364

Total non-interest income
$
15,637

 
$
10,800

 
$
26,991

 
$
19,639



- 41 -



Q2 2016 compared to Q2 2015

Non-interest income totaled $15.6 million in the second quarter of 2016, an increase from $10.8 million in the same period of 2015. Service charges and fees on deposit accounts increased by $2.3 million primarily due to the addition of acquired NewBridge deposit accounts. Government-guaranteed, small business lending income declined by $997 thousand due to changes in the mix of SBA loan production as well as lower gain on sale premiums. Mortgage banking income improved by $2.2 million as a result of strong local housing markets within the Company's footprint, a favorable interest rate environment for mortgage activity, a $1.2 million gain on a forward commitment to sell a portfolio of conforming residential mortgage loans previously held in the NewBridge loan portfolio, and the addition of NewBridge mortgage bankers. Other non-interest income increased $652 thousand, primarily due to improved wealth and brokerage income.

Year-to-Date

Non-interest income totaled $27.0 million in the six months ended June 30, 2016, an increase from $19.6 million in the same period of 2015. Service charges and fees on deposit accounts increased by $3.3 million primarily due to the addition of acquired NewBridge deposit accounts. Government-guaranteed, small business lending income declined $798 thousand in the six months ended June 30, 2016 due to changes in the mix of SBA loan production as well as lower gain on sale premiums. Mortgage banking income improved by $2.5 million as a result of strong local housing markets within the Company's footprint, a favorable interest rate environment for mortgage activity, a $1.2 million gain on a forward commitment to sell a portfolio of conforming residential mortgage loans previously held in the NewBridge loan portfolio, and the addition of NewBridge mortgage bankers. Other non-interest income increased $1.5 million, primarily due to improved wealth and brokerage income.

Non-Interest Expense

The following table provides a summary of non-interest expense for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Salaries and employee benefits
$
22,939

 
$
15,391

 
$
40,979

 
$
30,593

Occupancy and equipment
7,315

 
4,637

 
12,850

 
9,436

Data processing
2,783

 
1,929

 
4,923

 
3,817

FDIC deposit insurance premiums
770

 
772

 
1,591

 
1,486

Professional services
1,547

 
1,407

 
2,655

 
2,499

Foreclosed asset expense, net
137

 
445

 
448

 
633

Loan, collection, and repossession expense
1,004

 
850

 
2,144

 
1,786

Merger and conversion costs
6,531

 
(25
)
 
16,866

 
195

Restructuring charges
25

 
2,294

 
46

 
3,201

Amortization of other intangible assets
1,671

 
777

 
2,723

 
1,592

Other
5,483

 
3,839

 
9,704

 
8,036

Total non-interest expense
$
50,205

 
$
32,316

 
$
94,929

 
$
63,274


Q2 2016 compared to Q2 2015

Non-interest expense totaled $50.2 million in the second quarter of 2016, an increase from $32.3 million in the second quarter of 2015. The increase in expenses was primarily due to a $6.6 million increase in merger and conversion costs, which includes professional fees, personnel costs, and other expenses required to close the NewBridge Merger as well as costs to convert data processing, technology, signage, and branch network to the Company's integrated platform. Operating non-interest expense, which excludes merger and conversion costs and restructuring charges, increased from $30.0 million in the second quarter of 2015 to $43.6 million in the second quarter of 2016. Salaries and employee benefits, occupancy and equipment, data processing, and other non-interest expense categories all increased as a result of the NewBridge Merger, which added employees, branch and other facilities, and equipment to the Company's expense base.

Operating efficiency ratio, which excludes merger and conversion costs and restructuring charges, improved from 60.0 percent in the second quarter of 2015 to 55.5 percent in the second quarter of 2016. In an effort to improve operating efficiency, the Company closed ten branches in late Q2 2016. The previously announced systems integration (originally scheduled for September 2016), will now be completed following the FNB Merger.


- 42 -



Year-to-Date

Non-interest expense totaled $94.9 million in the six months ended June 30, 2016, an increase from $63.3 million the same period of 2015. Merger and conversion costs, which includes professional fees, personnel costs, and costs to convert data processing, technology, signage, and branch network to the Company's integrated platform, increased $16.7 million during 2016. Operating non-interest expense, which excludes merger and conversion costs and restructuring charges, increased from $30.0 million in the six months ended June 30, 2015 to $43.6 million in the same period of 2016. Salaries and employee benefits, occupancy and equipment, data processing, and other non-interest expense categories all increased as a result of the NewBridge Merger, which added employees, branch and other facilities, and equipment to the Company's expense base, beginning March 1, 2016.

Income Taxes

Q2 2016 compared to Q2 2015

Income tax expense was $9.2 million in the second quarter of 2016 compared to $6.1 million in the second quarter of 2015. The Company's effective tax rate totaled 34.6 percent in the second quarter of 2016 compared to 36.1 percent in the second quarter of 2015. The lower effective tax rate during the second quarter of 2016 resulted from renewable energy tax credit investments made in late 2015 that had a favorable impact on income tax expense during 2016.

Year-to-Date

Income tax expense was $14.1 million in the six months ended June 30, 2016 compared to $11.9 million in the same period of 2015. The Company's effective tax rate totaled 35.9 percent in the six months ended June 30, 2016 compared to 36.2 percent in the same period of 2015.

Analysis of Financial Condition

The NewBridge Merger significantly impacted each major component of the Company's balance sheet. The following table summarizes the year-to-date changes in major balance sheet components, including and excluding the acquired NewBridge balances.
(Dollars in thousands)
June 30, 2016
 
December 31, 2015
 
YTD Change
 
Acquired NewBridge Balances
 
YTD Change Excluding Acquired NewBridge Balances
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
120,536

 
$
111,918

 
$
8,618

 
$
45,143

 
$
(36,525
)
Investment securities
1,077,266

 
728,314

 
348,952

 
442,696

 
(93,744
)
Loans held for sale
139,513

 
47,287

 
92,226

 
13,661

 
78,565

Loans
5,268,768

 
3,076,544

 
2,192,224

 
2,061,136

 
131,088

Allowance for loan losses
(11,633
)
 
(9,769
)
 
(1,864
)
 

 
(1,864
)
Other assets
860,775

 
519,850

 
340,925

 
403,530

 
(62,605
)
Total assets
$
7,455,225

 
$
4,474,144

 
$
2,981,081

 
$
2,966,166

 
$
14,915

 
 
 
 
 
 
 
 
 
 
Deposits
$
5,338,586

 
$
3,310,297

 
$
2,028,289

 
$
1,990,109

 
$
38,180

Short-term borrowings
811,383

 
375,500

 
435,883

 
472,335

 
(36,452
)
Long-term debt
229,012

 
194,967

 
34,045

 
31,724

 
2,321

Other liabilities
73,706

 
30,831

 
42,875

 
40,662

 
2,213

Total liabilities
6,452,687

 
3,911,595

 
2,541,092

 
2,534,830

 
6,262

Shareholders' equity
1,002,538

 
562,549

 
439,989

 
431,336

 
8,653

Total liabilities and shareholders' equity
$
7,455,225

 
$
4,474,144

 
$
2,981,081

 
$
2,966,166

 
$
14,915



- 43 -



Investment Activities

The Company's investment portfolio plays a major role in the management of liquidity and interest rate sensitivity and, therefore, is managed in the context of the overall balance sheet. In general, the primary goals of the investment portfolio are: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds as prescribed by law and other borrowings; (iii) to provide structures and terms to enable proper interest rate risk management; and (iv) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i), (ii) and (iii). The Company invests in securities as allowable under bank regulations and its investment policy. These securities include obligations of the U.S. Treasury, U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, bank eligible obligations of state or political subdivisions, bank eligible corporate bonds, Volcker Rule-compliant collateralized loan obligations ("CLOs"), privately-issued residential and commercial mortgage-backed securities, limited types of mutual funds, and equity securities.

The amortized cost and fair value of the available-for-sale securities portfolio were both $1.03 billion as of June 30, 2016, compared to $694.5 million and $689.1 million, respectively, as of December 31, 2015. The amortized cost and fair value of the held-to-maturity securities portfolio was $39.0 million and $41.2 million, respectively, as of June 30, 2016 compared to $39.2 million and $40.5 million, respectively, as of December 31, 2015.

Marketable investment securities accounted for as available-for-sale are recorded at fair value with unrealized gains and losses charged to accumulated other comprehensive income. As of June 30, 2016 and December 31, 2015, the available-for-sale securities portfolio had $13.2 million and $2.2 million, respectively, of unrealized gains and $2.2 million and $7.6 million, respectively, of unrealized losses. Marketable investment securities accounted for as held to maturity are recorded at amortized cost.

The securities in an unrealized loss position as of June 30, 2016 continue to perform and are expected to perform through maturity, and the issuers have not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company does not intend to sell these investments and does not believe that it will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses on such securities were not considered to represent other-than-temporary impairment as of June 30, 2016.

The following table summarizes the amortized cost and fair value of the securities portfolio.
 
 
June 30, 2016
 
December 31, 2015
(Dollars in thousands)
 
Amortized
Cost
 
Fair 
Value
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
GSE obligations
 
$
31,322

 
$
31,554

 
$
5,980

 
$
5,982

SBA-guaranteed securities
 
18,938

 
19,042

 
12,114

 
12,176

Mortgage-backed securities issued by GSEs
 
556,287

 
563,413

 
440,654

 
435,625

Municipal bonds
 
131,241

 
134,337

 
55,402

 
55,800

Corporate bonds
 
201,600

 
202,441

 
123,669

 
123,532

Collateralized loan obligations
 
50,516

 
50,276

 
50,538

 
50,483

Non-agency RMBS
 

 

 
3,528

 
3,663

Non-agency CMBS
 
25,334

 
25,497

 

 

Certificates of deposit
 
992

 
992

 
245

 
245

Equity securities
 
11,108

 
10,755

 
2,381

 
1,626

Total securities available for sale
 
$
1,027,338

 
$
1,038,307

 
$
694,511

 
$
689,132

 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
Municipal bonds
 
$
38,959

 
$
41,197

 
$
39,182

 
$
40,500

 

- 44 -



The table below summarizes the amortized cost of debt securities in the investment portfolio as of June 30, 2016, segregated by major category with ranges of maturities and average yields. Mortgage-backed securities, and other similar securities collateralized by loan pools which are not due at a single maturity date, have been included in maturity groupings based on weighted average maturities of the underlying collateral, anticipating future prepayments.
 
 
1 Year or Less
 
Over 1 to
5 Years
 
Over 5 to
10 Years
 
More than
10 Years
 
Total
(Dollars in thousands)
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE obligations
 
$
1,004

 
0.98
%
 
$
16,187

 
1.42
%
 
$
14,363

 
2.27
%
 
$

 
%
 
$
31,554

 
1.79
%
SBA-guaranteed securities
 

 

 
3,993

 
2.72

 
15,049

 
2.35

 

 

 
19,042

 
2.43

Mortgage-backed securities
 
7,753

 
2.28

 
423,838

 
1.99

 
136,682

 
2.48

 
20,637

 
2.91

 
588,910

 
2.14

Municipal bonds (1)
 
9,134

 
3.95

 
44,184

 
2.63

 
70,229

 
3.01

 
10,790

 
5.75

 
134,337

 
3.17

Corporate bonds
 
41,581

 
2.71

 
121,740

 
2.99

 
34,613

 
3.72

 
4,507

 
3.46

 
202,441

 
3.07

Collateralized loan obligations
 

 

 

 

 
50,276

 
2.75

 

 

 
50,276

 
2.75

Certificates of deposit
 
992

 
0.50

 

 

 

 

 

 

 
992

 
0.50

Total debt securities available for sale
 
$
60,464

 
2.78
%
 
$
609,942

 
2.23
%
 
$
321,212

 
2.76
%
 
$
35,934

 
3.83
%
 
$
1,027,552

 
2.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds (1)
 
$
1,014

 
3.45
%
 
$
30,164

 
3.86
%
 
$
4,050

 
4.11
%
 
$
3,731

 
5.78
%
 
$
38,959

 
4.06
%

(1)
Yields are calculated on a taxable equivalent basis using the statutory federal income tax rate of 35 percent. Yields are calculated based on the amortized cost of the securities.

As of June 30, 2016, the weighted average life of the Company's debt securities was 4.7 years, and the weighted average effective duration was 2.9 years.

The Company owned $45.3 million and $24.8 million of Federal Home Loan Bank ("FHLB") stock as of June 30, 2016 and December 31, 2015, respectively. The FHLB stock is recorded at cost and is classified separately from investment securities on the consolidated balance sheets.

Lending Activities
 
The primary goal of the Company's lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Company. In addition to the importance placed on client knowledge and continuous involvement with clients, the Company's lending process incorporates the standards of a consistent company-wide credit culture and an in-depth knowledge of our local markets. Furthermore, the Company employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio. In this context, the Company strives to meet the credit needs of businesses and consumers in its markets while pursuing a balanced strategy of loan profitability, loan growth, and loan quality.

The Company provides a wide range of business and consumer loans in the markets it serves. Its objective is to have a well-diversified and balanced portfolio of business and consumer loans. In order to manage loan portfolio risk, the Company has established concentration limits by borrower, product type, loan structure, and industry. The majority of business loans are secured by business assets and real estate supported in most cases by personal guarantees. Consumer loans are primarily secured with personal assets and real estate. Underwriting is primarily focused on the underlying cash flow of the business or consumer and secondarily on assets securing the loans.

Loans, net of deferred loan fees, totaled $5.27 billion as of June 30, 2016, which was an increase of $2.19 billion from December 31, 2015. Excluding acquired NewBridge loans, the YTD increase in loan balances was $131.1 million. The following table provides a summary of the Company’s loan portfolio composition by loan type.

- 45 -



Composition of Loan Portfolio:
 
June 30, 2016
 
December 31, 2015
Commercial:
 
 
 
 
Commercial real estate
 
47.2
%
 
46.8
%
Commercial and industrial
 
14.7

 
16.2

Construction and development
 
8.0

 
12.8

Consumer:
 
 
 
 
Residential real estate
 
13.0

 
12.4

Construction and development
 
5.7

 
1.0

Home equity
 
10.1

 
9.5

Consumer
 
1.3

 
1.3

Total
 
100.0
%
 
100.0
%
 
The following table summarizes the scheduled maturities of loans separated by fixed and variable rate loans.
 
June 30, 2016
(Dollars in thousands)
Commercial Real Estate
 
Commercial and Industrial
 
Commercial Construction and Development
 
Residential Real Estate
 
Consumer Construction
 
Home Equity
 
Consumer
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year or less
$
116,546

 
$
33,150

 
$
18,606

 
$
39,966

 
$
15,659

 
$
1,644

 
$
6,307

 
$
231,878

1-5 years
1,220,678

 
188,385

 
74,213

 
201,564

 
70,687

 
1,563

 
25,551

 
1,782,641

After 5 years
525,695

 
59,275

 
34,697

 
178,249

 
17,032

 
1,505

 
27,447

 
843,900

Total
1,862,919

 
280,810

 
127,516

 
419,779

 
103,378

 
4,712

 
59,305

 
2,858,419

Variable Rate: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year or less
86,200

 
177,115

 
215,609

 
11,473

 
69,482

 
16,724

 
5,393

 
581,996

1-5 years
389,958

 
239,348

 
63,056

 
26,407

 
107,838

 
95,310

 
1,055

 
922,972

After 5 years
151,647

 
78,211

 
13,158

 
228,465

 
19,197

 
414,233

 
1,655

 
906,566

Total
627,805

 
494,674

 
291,823

 
266,345

 
196,517

 
526,267

 
8,103

 
2,411,534

Total loans
$
2,490,724

 
$
775,484

 
$
419,339

 
$
686,124

 
$
299,895

 
$
530,979

 
$
67,408

 
$
5,269,953

(1) Loan maturities are presented based on the final contractual maturity of each loan and do not reflect contractual principal payments prior to maturity on amortizing loans.

Loans acquired with evidence of credit deterioration since origination are accounted for as PCI loans. Where possible, PCI loans with common risk characteristics are grouped into pools at acquisition. For PCI loan pools, the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the PCI loans using the effective yield method, provided that the timing and the amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The recorded investment in PCI loans as of June 30, 2016 totaled $202.6 million, of which $201.7 million were grouped into pools and $914 thousand were accounted for on an individual loan basis. The recorded investment in PCI loans as of December 31, 2015 totaled $142.0 million, of which $141.2 million were grouped into pools and $855 thousand were accounted for on an individual loan basis.

Due to the significance of the acquired loan portfolio and related acquisition accounting adjustments, the Company's current period credit metrics and ratios may not be comparable to those in prior periods or to credit metrics and ratios reported by other financial institutions. Specifically, (i) ALLL to total loans, (ii) ALLL to nonperforming loans, (iii) nonperforming loans to total loans, (iv) nonperforming assets to total assets, and (v) net charge-offs to average loans may not be comparable to prior periods or other financial institutions.

- 46 -




Nonperforming Assets

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. Loans are generally classified as nonaccrual if they are past due for a period of 90 days or more, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or as partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.

PCI loans with common risk characteristics are grouped in pools at acquisition. These loans are evaluated for accrual status at the pool level rather than the individual loan level and performance is based on management's ability to reasonably estimate the amount and timing of future cash flows rather than a borrower's ability to repay contractual loan amounts. Since management is able to reasonably estimate the amount and timing of future cash flows on the Company's PCI loan pools, none of these loans have been identified as nonaccrual. However, PCI loans included in pools are identified as nonperforming if they are past due 90 days or more at acquisition or become 90 days or more past due after acquisition. The past due status is determined based on the contractual terms of the individual loans.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
 
Assets acquired as a result of foreclosure are recorded at estimated fair value in other real estate (or foreclosed assets). Any excess of cost over estimated fair value at the time of foreclosure is charged to the allowance for loan losses. Valuations are periodically performed on these properties, and any subsequent write-downs are charged to earnings. Routine maintenance and other holding costs are included in non-interest expense.
 
Loans, excluding pooled PCI loans, are classified as troubled debt restructurings (“TDR”) by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest. The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual until there is demonstrated performance under new terms. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on non-accrual status. The Company closely monitors these loans and ceases accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.

PCI loans that were classified as TDRs prior to acquisition are not classified as TDRs by the Company after the acquisition date. Subsequent modification of a PCI loan accounted for in a pool that would otherwise meet the definition of a TDR is not reported, or accounted for, as a TDR since pooled PCI loans are excluded from the scope of TDR accounting. A PCI loan not accounted for in a pool would be reported, and accounted for, as a TDR if modified in a manner that meets the definition of a TDR after the acquisition date.
 
Nonperforming loans as a percentage of total loans was 0.94 percent as of June 30, 2016, which was a decline from 1.06 percent as of December 31, 2015 and 1.10 percent as of June 30, 2015. Total nonperforming assets as a percentage of total assets was 1.08 percent as of June 30, 2016 compared to 1.07 percent as of December 31, 2015 and 1.06 percent as of June 30, 2015. Acquired PCI loans that are included in loan pools, including acquired Yadkin PCI loans, are reclassified at acquisition to accrual status and thus are not included as nonperforming assets unless they are 90 days or greater past due.


- 47 -



The following table summarizes the Company's nonperforming assets as of the dates presented.
(Dollars in thousands)
 
June 30,
2016
 
December 31, 2015
 
 
 
 
 
Nonaccrual loans
 
 
 
 
Commercial:
 
 
 
 
Commercial real estate
 
$
15,387

 
$
6,130

Commercial and industrial
 
11,851

 
4,126

Construction and development
 
1,644

 
468

Consumer:
 
 
 
 
Residential real estate
 
5,862

 
5,353

Construction and development
 

 
1,324

Home equity
 
4,028

 
3,245

Other consumer
 
267

 
548

Total nonaccrual loans
 
39,039

 
21,194

Accruing loans past due 90 days or more (1)
 
10,264

 
11,337

Total nonperforming loans
 
49,303

 
32,531

Nonperforming purchased accounts receivable
 
7,907

 

Other real estate:
 
 
 
 
Residential real estate
 
2,416

 
1,784

All other real estate
 
20,675

 
13,562

Total nonperforming assets
 
$
80,301

 
$
47,877

 
 
 
 
 
Restructured loans not included above
 
$
5,663

 
$
5,609

(1)    Balances include PCI loans past due 90 days or more that are grouped in pools which accrue interest based on pool yields. 

As of June 30, 2016, nonperforming assets includes $7.9 million of nonperforming purchased accounts receivable. As discussed in Note F, there was no contingency accrual related to this potential exposure as of June 30, 2016. The Company has discontinued its investment in purchased accounts receivable.

Allowance for Loan Losses

The ALLL is a reserve established through a provision for probable loan losses charged to expense. Balances are charged against the ALLL when the collectability of principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. The ALLL is maintained at a level based on management's best estimate of probable credit losses that are inherent in the loan portfolio. Management evaluates the adequacy of the ALLL on at least a quarterly basis.

For non-PCI loans, the evaluation of the adequacy of ALLL includes both loans evaluated collectively for impairment and loans evaluated individually for impairment. For loans evaluated collectively for impairment, loans are grouped based on common risk characteristics which include loan type and risk grade. Historical loss rates are calculated based on the historical probability of default ("PD") and loss given default ("LGD") for each loan grouping. PDs represent the likelihood that a loan will default within a one year period of time, and LGDs represent the estimated magnitude of loss the Company will incur if a loan defaults. A loan is considered to be in default if it becomes 90 days or more past due, meets the criteria for nonaccrual status, or incurs a charge-off. Historical loss rates are developed with four years of trailing default and loss data. These historical loss rates are then combined with certain qualitative factors to determine ALLL reserve rates for each loan grouping. Qualitative factors include consideration of certain internal and external factors, such as loan delinquency levels and trends, loan growth, loan portfolio composition and concentrations, local and national economic conditions, the loan review function, and other factors management deems relevant to the ALLL calculation.

A loan, excluding PCI loans, is considered individually impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Reserves, or charge-offs, on individually impaired loans that are collateral dependent are based on the fair value of the underlying collateral, less an estimate of selling costs, while reserves, or charge-offs, on loans that are not collateral dependent are based on either an observable market price, if available, or the present value of expected future cash flows discounted at the historical effective interest rate. PCI loans within pools are not evaluated individually for impairment.


- 48 -



The following table presents the allocation of ALLL for the periods presented.
 
 
June 30, 2016
 
December 31, 2015
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
Commercial real estate
 
$
4,525

 
38.9
%
 
$
3,682

 
37.7
%
Commercial and industrial
 
3,057

 
26.3

 
2,431

 
24.9

Construction and development
 
1,282

 
11.0

 
866

 
8.9

Consumer:
 
 
 
 
 
 
 
 
Residential real estate
 
985

 
8.5

 
1,257

 
12.9

Construction and development
 
289

 
2.5

 
237

 
2.4

Home equity
 
1,119

 
9.6

 
883

 
9.0

Consumer
 
376

 
3.2

 
413

 
4.2

Total allowance for loan losses
 
$
11,633

 
100.0
%
 
$
9,769

 
100.0
%

The following table summarizes changes in ALLL for the periods presented.
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
ALLL, beginning of period
$
10,231

 
$
8,284

 
$
9,769

 
$
7,817

Charge-offs:
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
Commercial real estate
10

 
157

 
91

 
256

Commercial and industrial
474

 
602

 
1,435

 
971

Construction and development
98

 
51

 
115

 
67

Consumer:
 
 
 
 
 
 
 
Residential real estate
57

 
120

 
217

 
130

Home equity
145

 
183

 
342

 
318

Consumer
228

 
112

 
445

 
248

Total charge-offs
1,012

 
1,225

 
2,645

 
1,990

Recoveries:
 
 
 
 
 

 
 

Commercial:
 
 
 
 
 
 
 
Commercial real estate
2

 
7

 
6

 
12

Commercial and industrial
73

 
114

 
77

 
250

Construction and development
17

 
5

 
28

 
10

Consumer:
 
 
 
 
 
 
 
Residential real estate
11

 
28

 
193

 
52

Construction and development

 

 

 
27

Home equity
2

 
113

 
2

 
154

Consumer
11

 
38

 
30

 
71

Total recoveries
116

 
305

 
336

 
576

Net charge-offs
896

 
920

 
2,309

 
1,414

Provision for loan losses
2,298

 
994

 
4,173

 
1,955

ALLL, end of period
$
11,633

 
$
8,358

 
$
11,633

 
$
8,358

 
 
 
 
 
 
 
 
Net charge-offs to average loans (annualized)
0.07
%
 
0.12
%
 
0.09
%
 
0.10
%

The ALLL to total loans ratio was 0.22 percent as of June 30, 2016 compared to 0.32 percent as of December 31, 2015. The decline in the ALLL ratio was due to acquired NewBridge loans. At acquisition, these loans were adjusted to fair value, and the historical ALLL was eliminated. Therefore, ALLL was unchanged as a result of the NewBridge Merger, but loan balances increased significantly. Adjusted ALLL, which includes ALLL as well as net acquisition fair value adjustments for acquired loans, declined from 1.62 percent of total loans as of December 31, 2015 to 1.41 percent of total loans as of June 30, 2016.

The reduction in the ALLL and adjusted ALLL was also influenced by decreases in historical loss rates used in the ALLL model, partially offset adjustments to the ALLL model qualitative factors resulting from higher nonaccrual loan balances during 2016.


- 49 -



The following non-GAAP reconciliation provides a calculation of the adjusted ALLL and the related adjusted ALLL as a percentage of total loans for the periods presented.
(Dollars in thousands)
 
June 30,
2016
 
December 31, 2015
 
 
 
 
 
Allowance for loan losses
 
$
11,633

 
$
9,769

Net acquisition accounting fair value discounts to loans
 
62,745

 
40,188

Adjusted allowance for loan losses (Non-GAAP)

$
74,378

 
$
49,957

 
 
 
 
 
Divided by: total loans
 
$
5,268,768

 
$
3,076,544

Adjusted allowance for loan losses to loans (Non-GAAP)

1.41
%
 
1.62
%

Deposit Activities
 
Deposits are the primary source of funds for the Company's lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including non-interest bearing checking accounts, interest bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company's primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of June 30, 2016 and December 31, 2015, brokered deposits represented 14.1 percent and 13.2 percent, respectively, of total deposits.

Total deposits as of June 30, 2016 were $5.34 billion, which was an increase of $2.03 billion from December 31, 2015. Excluding acquired NewBridge deposits, the increase in deposit balances was $38.2 million. As of June 30, 2016 and December 31, 2015, the Company had outstanding time deposits under $100 thousand of $556.0 million and $335.3 million, respectively, and time deposits over $100 thousand of $885.9 million and $682.6 million, respectively.
 
The table below provides a summary of the Company’s deposit portfolio by deposit type.
Composition of Deposit Portfolio:
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
Non-interest demand
 
21.7
%
 
22.5
%
Interest-bearing demand
 
21.0

 
15.8

Money market and savings
 
30.3

 
31.0

Time deposits
 
27.0

 
30.7

Total
 
100.0
%
 
100.0
%
 

- 50 -



The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the periods presented.
 
Three months ended June 30,
 
2016
 
2015
(Dollars in thousands)
Average
Balance
 
% of Total
 
Average Rate
 
Average
Balance
 
% of Total
 
Average Rate
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest demand
$
1,147,659

 
21.6
%
 
%
 
$
676,858

 
21.0
%
 
%
Interest-bearing demand
1,141,173

 
21.5

 
0.19

 
475,546

 
14.7

 
0.13

Money market and savings
1,582,191

 
29.7

 
0.28

 
997,732

 
30.9

 
0.29

Time deposits
1,448,912

 
27.2

 
0.77

 
1,078,460

 
33.4

 
0.82

Total average deposits
$
5,319,935

 
100.0
%
 
0.34
%
 
$
3,228,596

 
100.0
%
 
0.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
2016
 
2015
(Dollars in thousands)
Average
Balance
 
% of Total
 
Average Rate
 
Average
Balance
 
% of Total
 
Average Rate
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest demand
$
1,005,925

 
18.9
%
 
%
 
$
667,280

 
20.7
%
 
%
Interest-bearing demand
941,381

 
17.7

 
0.18

 
473,233

 
14.7

 
0.14

Money market and savings
1,392,494

 
26.2

 
0.28

 
1,000,444

 
31.0

 
0.29

Time deposits
1,322,495

 
24.9

 
0.79

 
1,084,205

 
33.6

 
0.78

Total average deposits
$
4,662,295

 
87.7
%
 
0.34
%
 
$
3,225,162

 
100.0
%
 
0.37
%
 
 
 
 
 
 
 
 
 
 
 
 

The overall mix of deposits has shifted to a higher percentage of interest-bearing demand balances with reductions in the percentage of deposits held in time deposit accounts. The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of deposits was 0.34 percent in the second quarter of 2016 compared to 0.38 percent in the second quarter of 2015 due to changes in deposit mix and rates.

Borrowings and Long-Term Debt
 
The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital. Short-term borrowings, which consist of FHLB advances maturing within twelve months and a structured repurchase agreement acquired from NewBridge which matures in December 2016, increased by $435.9 million in the first quarter. However, excluding acquired NewBridge funds, short-term borrowings decreased by $36.5 million as the Company used deposit growth and cash flows from the investment portfolio to reduce its borrowed funds balances.

Long-term debt increased by $34.0 million since December 31, 2015. Excluding acquired NewBridge funds, long-term debt increased by $2.3 million. Long-term debt includes FHLB advances maturing beyond one year, subordinated debt, junior subordinated debt to unconsolidated trusts ("TRUPs"), and capital lease obligations. After the NewBridge Merger, the Company began the process of extending and laddering out maturities on certain acquired FHLB advances to better balance the Company's liquidity and interest rate risk profile. All NewBridge FHLB advances at acquisition were set to mature within twelve months.
 
Shareholders’ Equity
 
Total shareholders’ equity was $1.00 billion as of June 30, 2016, an increase of $440.0 million from December 31, 2015. The increase was due to $431.3 million of net assets acquired in the NewBridge Merger, $25.2 million of net income earned during 2016, and $6.1 million of net other comprehensive income, partially offset by $24.1 million of common stock dividends.

Liquidity

Liquidity management involves the ability to fund the needs and requirements of depositors and borrowers, fund loan commitments, pay operating expenses, and ensure compliance with regulatory liquidity requirements. To ensure the Company is positioned to meet immediate and future cash demands, management regularly evaluates the Company's deposit mix and trends and relies on various internal analyses of its liquidity, which includes liquidity stress testing as well as short-term and long-term liquidity planning. The Company's liquidity management is governed by its liquidity policy and contingent funding plan which are both approved annually by the Board of Directors.

- 51 -




Investment portfolio principal payments and maturities, loan principal payments, deposit growth, brokered deposit sources, available borrowings from the FHLB, and various federal funds lines from correspondent banks are the primary sources of liquidity for the Bank. The primary uses of liquidity are repayments of borrowings, deposit maturities and withdrawals, disbursements of loan proceeds, and investment purchases.

The primary sources of liquidity at the holding company are dividend distributions from the Bank. In addition, the holding company maintains a loan agreement with a correspondent bank providing for a revolving loan of up to an aggregate principal amount of $10.0 million. Borrowings under the loan agreement accrue interest at LIBOR plus 4.0 percent. The loan agreement will expire on July 1, 2017. However, the Company may extend the maturity date by twelve months so long as it is not in default under the loan agreement. The obligations of the loan agreement are secured by, among other things, a pledge of all of the capital stock of the Bank. The primary uses of liquidity at the holding company are common stock dividends, debt payments on its subordinated debt and TRUPs, and operating expenses.
 
As of June 30, 2016, the Company's most liquid assets (which include cash and due from banks, interest-earning deposits with banks, federal funds sold, and investment securities available for sale) totaled $1.16 billion, which represented 15.5 percent of total assets and 21.7 percent of total deposits. Supplementing this on-balance sheet liquidity, the Company had available off-balance sheet liquidity in the form of secured and unsecured lines of credit from various correspondent banks which totaled $456.8 million as of June 30, 2016. As of June 30, 2016, outstanding commitments for undisbursed lines of credit and letters of credit totaled $1.52 billion, and standby letters of credit issued by the FHLB on the Bank's behalf totaled $31.0 million. Management believes that the aggregate liquidity position of the Company is sufficient to meet deposit maturities and withdrawals, borrowing commitments, loan funding requirements, and operating expenses. Core deposits (total deposits less brokered deposits), one of the Company's most stable sources of liquidity, together with common equity capital funded $5.59 billion, or 75 percent, of total assets as of June 30, 2016 compared to $3.43 billion or 77 percent of total assets as of December 31, 2015.

Contractual Obligations

The following table presents the Company's significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.
 
June 30, 2016
(Dollars in thousands)
1 Year
or Less
 
Over 1 to 3 Years
 
Over 3 to 5 Years
 
More Than
5 Years
 
Total
 
 
 
 
 
 
 
 
 
 
Time deposits
$
549,749

 
$
600,244

 
$
261,878

 
$
30,021

 
$
1,441,892

Short-term borrowings
811,383

 

 

 

 
811,383

Long-term debt (includes capital leases)
579

 
119,785

 
5,000

 
103,648

 
229,012

Operating leases
5,131

 
10,175

 
2,699

 
2,571

 
20,576

Total contractual obligations
$
1,366,842

 
$
730,204

 
$
269,577

 
$
136,240

 
$
2,502,863

 
Capital

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company's principal goals related to the maintenance of capital are to provide adequate capital to support the Company's risk profile, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to shareholders.


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The Company's and the Bank’s capital amounts and ratios as of June 30, 2016 are presented in the table below.
(Dollars in thousands)
Actual
 
Minimum for Capital Adequacy Purposes
 
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Yadkin Financial Corporation
 

 
 

 
 

 
 

 
 
 
 

Total risk-based capital
$
712,872

 
11.58
%
 
$
492,494

 
8.00
%
 
N/A

 
N/A

Tier 1 risk-based capital
643,036

 
10.45
%
 
369,371

 
6.00
%
 
N/A

 
N/A

Common equity Tier 1
619,109

 
10.06
%
 
277,028

 
4.50
%
 
N/A

 
N/A

Tier 1 leverage capital
643,036

 
9.17
%
 
280,481

 
4.00
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
Yadkin Bank
 

 
 

 
 

 
 

 
 

 
 

Total risk-based capital
$
705,471

 
11.46
%
 
$
492,338

 
8.00
%
 
$
615,422

 
10.00
%
Tier 1 risk-based capital
689,785

 
11.21
%
 
369,253

 
6.00
%
 
492,338

 
8.00
%
Common equity Tier 1
689,785

 
11.21
%
 
276,940

 
4.50
%
 
400,025

 
6.50
%
Tier 1 leverage capital
689,785

 
9.84
%
 
280,315

 
4.00
%
 
350,394

 
5.00
%

On July 20, 2016, the Company's Board of Directors declared a regular quarterly cash dividend of $0.10 per share of its outstanding unrestricted common stock, payable August 18, 2016, to shareholders of record as of August 11, 2016. A similar dividend was declared and paid during the first quarter of 2016. Additionally, on February 15, 2016, the Company declared an extraordinary special cash dividend of $0.50 per share of its outstanding unrestricted common stock, which was paid on March 7, 2016 to shareholders of record as of February 29, 2016.

The Company's tangible book value per common share was $12.28 as of June 30, 2016, compared to $12.51 as of December 31, 2015. Tangible common equity to tangible assets was 8.94 percent as of June 30, 2016, compared to 9.21 percent as of December 31, 2015. The following table presents the calculation of tangible book value per common share and tangible common equity to tangible assets, which are both non-GAAP financial metrics.
(Dollars in thousands, except per share amounts)
June 30, 2016
 
December 31, 2015
 
 
 
 
Total shareholders' equity
$
1,002,538

 
$
562,549

Less: Goodwill and other intangible assets, net
368,925

 
165,731

Tangible common equity (Non-GAAP)
$
633,613

 
$
396,818

Common shares outstanding
51,577,575

 
31,726,767

 
 
 
 
Tangible book value per share (Non-GAAP)
$
12.28

 
$
12.51

 
 
 
 
Total assets
$
7,455,225

 
$
4,474,144

Less: Goodwill and other intangible assets, net
368,925

 
165,731

Tangible assets (Non-GAAP)
$
7,086,300

 
$
4,308,413

 
 
 
 
Tangible common equity to tangible assets (Non-GAAP)
8.94
%
 
9.21
%
 
 
 
 

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Forward-Looking Information
This periodic report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially, including without limitation, risks related to the proposed merger with F.N.B. Corporation, reduced earnings due to larger than expected credit losses in the sectors of our loan portfolio secured by real estate 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 larger 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 and the amount of loan loss provisions required in future periods; costs or difficulties related to the integration of the banks we acquired or may acquire may be greater than expected; our ability to achieve the estimated synergies from the NewBridge Acquisition and once integrated, the effects of such business combination on our future financial condition, operating results, strategy and plans; our ability to integrate NewBridge on our schedule and budget; results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write down assets; the amount of our loan portfolio collateralized by real estate; our ability to maintain appropriate levels of capital; adverse changes in asset quality and resulting credit risk-related losses and expenses; increased funding costs due to market illiquidity, 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 political conditions or the legislative or regulatory environment, including the effect of future 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 monetary and tax policies; ability of borrowers to repay loans; risks associated with a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including cyber attacks, which could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses; changes in accounting principles, policies or guidelines; changes in the assessment of whether a deferred tax valuation allowance is necessary; our reliance on secondary liquidity 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; loss of consumer confidence and economic disruptions resulting from terrorist activities or military actions; and changes in the securities markets. Additional factors that could cause actual results to differ materially are discussed in the Company’s filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K. The forward-looking statements in this periodic report on Form 10-Q speak only as of the date of this periodic report, and the Company does not assume any obligation to update such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
The Company intends to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Company’s most significant market risk exposure is interest rate risk. The Company's primary goal in managing interest rate risk is to minimize the effect that changes in market interest rates have on earnings and capital. This goal is accomplished through the active management of the balance sheet. The goal of these activities is to structure the maturity and repricing of assets and liabilities to produce stable net interest income despite changing interest rates. The Company's overall interest rate risk position is governed by policies approved by the Board of Directors and guidelines established and monitored by the Bank’s Asset/Liability Committee (“ALCO”).

To measure, monitor, and report on interest rate risk, the Company begins with two models: (1) net interest income ("NII") at risk, which measures the impact on NII over the next twelve and twenty-four months to immediate changes in interest rates and (2) net economic value of equity ("EVE"), which measures the impact on the present value of net assets to immediate changes in interest rates. NII at risk is designed to measure the potential short-term impact of changes in interest rates on NII. EVE is a long-term measure of interest rate risk to the Company's balance sheet, or equity. Gap analysis, which is the difference between the amount of balance sheet assets and liabilities repricing within a specified time period, is used as a secondary measure of the Company's interest rate risk position. All of these models are subject to ALCO guidelines and are monitored regularly.


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In calculating NII at risk, the Company begins with a base amount of NII that is projected over the next twelve and twenty-four months, assuming that the balance sheet is static and the yield curve remains unchanged over the period. The current yield curve is then “shocked,” or moved immediately, ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent in a parallel fashion, or at all points along the yield curve. New twelve-month and twenty four-month NII projections are then developed using the same balance sheet but with the new yield curves, and these results are compared to the base scenario. The Company also models other scenarios to evaluate potential NII at risk such as a gradual ramp in interest rates, a flattening yield curve, a steepening yield curve, and others that management deems appropriate.

EVE at risk is based on the change in the present value of all assets and liabilities under different interest rate scenarios. The present value of existing cash flows with the current yield curve serves as the base case. The Company then applies an immediate parallel shock to that yield curve of ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent and recalculates the cash flows and related present values.

Key assumptions used in the models described above include the timing of cash flows, the maturity and repricing of assets and liabilities, changes in market conditions, and interest-rate sensitivities of the Company's non-maturity deposits with respect to interest rates paid and the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NII or predict the impact of changes in interest rates on NII and EVE. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management strategies, among other factors. Projections of NII are assessed as part of the Company's forecasting process.

NII and EVE Analysis. The following table presents the estimated exposure to NII for the next twelve months due to immediate changes in interest rates and the estimated exposure to EVE due to immediate changes in interest rates. All information is presented as of June 30, 2016.
 
June 30, 2016
(Dollars in thousands)
Estimated Exposure to NII
 
Estimated Exposure to EVE
 
 
 
 
Immediate change in interest rates:
 
 
 
+ 4.0%
10.29
 %
 
(4.25
)%
+ 3.0%
7.70

 
(2.98
)
+ 2.0%
4.86

 
(1.86
)
+ 1.0%
1.95

 
(0.98
)
No change

 

- 1.0%
(0.87
)
 
(0.62
)

While the measures presented in the table above are not a prediction of future NII or EVE valuations, they do suggest that if all other variables remained constant, immediate increases in interest rates at all points on the yield curve may produce higher NII in the short term. Other important factors that impact the levels of NII are balance sheet size and mix, interest rate spreads, the slope of the yield curve, the speed of interest rates changes, and management actions taken in response to the preceding conditions.

Item 4. Controls and Procedures
 
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(b) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
There were no changes in the Company’s internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

 

- 55 -



Part II. Other Information
 
Item 1. Legal Proceedings
 
The Company and Yadkin Bank have been named defendants in legal actions arising from normal business activities in which damages in various amounts are claimed. Although the amount of any unrecorded liability with respect to such matters cannot be determined, in the opinion of management, any additional liability arising from these matters will not have a material effect on Yadkin's consolidated financial statements.

Item 1A. Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results.

The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties unknown to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Additionally, there are or will be important factors related to the proposed merger with F.N.B. Corporation that could cause actual results to differ materially from anticipated results. We believe that these factors include, but are not limited to, the following:

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the FNB Merger.

Before the FNB Merger and the FNB Bank Merger may be completed, Yadkin and FNB must obtain approvals from the Federal Reserve Board, the OCC and the North Carolina Commissioner of Banks. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain or a delay in receiving their approval. These regulators may impose conditions on the completion of the FNB Merger or the FNB Bank Merger or require changes to the terms of the FNB Merger or the FNB Bank Merger. Such conditions or changes could delay or prevent completion of the FNB Merger or the FNB Bank Merger or imposing additional costs on or limiting the revenues of the combined company following the FNB Merger and the FNB Bank Merger, any of which might have an adverse effect on the combined company following the FNB Merger.

Combining the two companies may be more difficult, costly or time consuming than expected.

Yadkin and FNB have operated and, until the completion of the FNB Merger, will continue to operate independently. The success of the FNB Merger, including anticipated benefits and cost savings, will depend, in part, on FNB’s ability to successfully combine and integrate the businesses of FNB and Yadkin in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the FNB Merger. The loss of key employees could adversely affect Yadkin’s ability to successfully conduct its business, which could have an adverse effect on Yadkin’s financial results and the value of the Yadkin common stock. If FNB experiences difficulties with the integration process, the anticipated benefits of the FNB Merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause FNB and/or Yadkin to lose customers or cause customers to remove their accounts from FNB and/or Yadkin and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. In addition, the actual cost savings of the FNB Merger could be less than anticipated.


- 56 -



The FNB Merger is subject to certain closing conditions that, if not satisfied or waived, will result in the FNB Merger not being completed. Termination of the FNB Merger Agreement could negatively impact Yadkin.

The FNB Merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and adoption of the FNB Merger by Yadkin shareholders. If any condition to the FNB Merger is not satisfied or waived, to the extent permitted by law, including the absence of any materially burdensome condition in the regulatory approvals, the FNB Merger will not be completed. In addition, either FNB or Yadkin may terminate the FNB Merger Agreement under certain circumstances even if the FNB Merger is adopted by the Yadkin shareholders, including but not limited to, if the FNB Merger has not been completed on or before May 31, 2017.

If the FNB Merger Agreement is terminated, there may be various consequences. For example, Yadkin’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the FNB Merger, without realizing any of the anticipated benefits of completing the FNB Merger. Additionally, if the FNB Merger Agreement is terminated, the market price of Yadkin’s common stock could decline to the extent that the current market prices reflect a market assumption that the FNB Merger will be completed.

FNB and Yadkin will be subject to business uncertainties and contractual restrictions while the FNB Merger is pending.

The FNB Merger Agreement restricts Yadkin from operating its business other than in the ordinary course and prohibits Yadkin from taking specified actions without FNB’s consent until the FNB Merger occurs. These restrictions may prevent Yadkin from pursuing attractive business opportunities that may arise prior to the completion of the FNB Merger. In addition, uncertainty about the effect of the FNB Merger on employees and customers may have an adverse effect on Yadkin. These uncertainties may impair Yadkin’s ability to attract, retain and motivate key personnel until the FNB Merger is completed, and could cause customers and others that deal with Yadkin to seek to change existing business relationships with Yadkin. Retention of certain employees by Yadkin may be challenging while the FNB Merger is pending, as certain employees may experience uncertainty about their future roles with Yadkin. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Yadkin, Yadkin’s business could be harmed.

The uncertainty caused by the pending FNB Merger could cause Yadkin’s clients and business associates to seek to change their existing business relationships with Yadkin. These uncertainties may impair Yadkin’s ability to attract, retain and grow Yadkin’s client base until the FNB Merger is complete.

The market value of the merger consideration that Yadkin shareholders will receive as a result of the FNB Merger may fluctuate.

If the FNB Merger is completed, each share of the Yadkin common stock will be converted into the right to receive 2.16 shares of FNB common stock, and cash in lieu of any fractional shares. The market value of the merger consideration may vary from the closing price of FNB common stock on the date the FNB Merger was announced, on the date that the proxy statement/prospectus is mailed to the Yadkin shareholders, on the date of the special meeting of the Yadkin shareholders, on the date the FNB Merger is consummated and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects, and the regulatory situation of FNB and Yadkin. Many of these factors are beyond the control of Yadkin. Any change in the market price of FNB common stock prior to completion of the FNB Merger will affect the amount of and the market value of the merger consideration that Yadkin shareholders will receive upon completion of the FNB Merger. Accordingly, at the time of the special meeting, the Yadkin shareholders will not know or be able to calculate the amount or the market value of the merger consideration they would receive upon completion of the FNB Merger.

Further, the results of operations of the combined company following the FNB Merger and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of FNB and Yadkin.

If the FNB Merger is not completed, Yadkin will have incurred substantial expenses without realizing the expected benefits of the FNB Merger.

Yadkin has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the FNB Merger Agreement, including a portion of the costs and expenses of filing, printing and mailing the joint proxy statement/prospectus relating to the FNB Merger. If the FNB Merger is not completed, Yadkin would have to recognize its portion of these expenses without realizing the expected benefits of the FNB Merger.

- 57 -



The FNB Merger Agreement limits Yadkin’s ability to pursue an alternative acquisition proposal and could require Yadkin to pay a termination fee of $45 million under certain circumstances relating to alternative acquisition proposals.

The FNB Merger Agreement prohibits Yadkin from soliciting, initiating or knowingly encouraging certain alternative acquisition proposals with any third party, subject to exceptions set forth in the FNB Merger Agreement. The FNB Merger Agreement also provides for the payment by Yadkin to FNB of a termination fee in the amount of $45 million (and, in some cases, FNB’s documented out-of-pocket expenses incurred in connection with the FNB Merger) in the event that Yadkin or FNB terminates the FNB Merger Agreement for certain specified reasons. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Yadkin from considering or proposing such an acquisition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
Not applicable.

Item 5. Other Information
 
Shareholders and other interested parties may initiate communications with the Board, the Chairman, the Lead Independent Director, the Independent Directors as a group or any individual director or directors by writing to our Secretary at: 3600 Glenwood Avenue, Suite 300, Raleigh, North Carolina 27612. You should indicate on the outside of the envelope the intended recipient of your communication (i.e., the full Board, the Independent Directors as a group or any individual director or directors). The Board has instructed our Secretary to review such correspondence and, at her discretion, not to forward items if she deems them to be of a commercial or frivolous nature or otherwise inappropriate for the recipient's consideration.



- 58 -



Item 6. Exhibits
 
2.1
Agreement and Plan of Merger between F.N.B. Corporation and Yadkin Financial Corporation, dated as of July 20, 2016 (incorporated by reference to Exhibit 2.1 to Yadkin Financial Corporation's Current Report on Form 8-K filed on July 21, 2016)
 
 
31.1
Certification of Principal Executive Officer pursuant to Rule 13a – 14(a).
 
 
31.2
Certification of Principal Financial Officer pursuant to Rule 13a – 14(a).
 
 
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.


 

- 59 -



Signatures
 
Pursuant to the requirements of the 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 FINANCIAL CORPORATION
 
 
 
 
Date:    
August 5, 2016
By:
/s/ Scott M. Custer
 
 
 
Scott M. Custer
 
 
 
President and Chief Executive Officer
 
 
 
 
Date:
August 5, 2016
By:
/s/ Terry S. Earley
 
 
 
Terry S. Earley
 
 
 
Executive Vice President and Chief Financial Officer


- 60 -