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YADKIN FINANCIAL Corp 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

 

US Securities and Exchange Commission

Washington, DC 20549

 

Form 10-Q

 

Quarterly Report Pursuant To Section 13 or 15(d) Of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2009

 

Commission File Number 000-52099

 

Yadkin Valley Financial Corporation

(Exact name of registrant specified in its charter)

 

North Carolina

 

20-4495993

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

209 North Bridge Street, Elkin, North Carolina  28621

(address of principal executive offices)

 

336-526-6300

(Registrant’s telephone number, including area code)

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Common shares outstanding as of November 4, 2009, par value $1.00 per share, were 16,129,640.

 

 

 



 

Part I. Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

Condensed Consolidated Balance Sheets September 30, 2009 and December 31, 2008

3

 

 

Condensed Consolidated Statements of Income (Loss) Three and Nine Months Ended September 30, 2009 and 2008

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended September 30, 2009 and 2008

5

 

 

Condensed Consolidated Statement of Shareholders’ Equity Nine Months Ended September 30, 2009 and 2008

6

 

 

Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2009 and 2008

7

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8-33

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

33-48

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

48-49

 

 

Item 4. Controls and Procedures

49-51

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

51

 

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

51

 

 

Item 6. Exhibit Index

52

 

 

Signatures

53

 

 

Exhibits

 

 

2



 

YADKIN VALLEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008*

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Cash and due from banks

 

$

70,702,266

 

$

22,553,561

 

Federal funds sold

 

723

 

58,000

 

Interest-bearing deposits

 

2,984,412

 

3,410,977

 

TOTAL CASH AND CASH EQUIVALENTS

 

73,687,401

 

26,022,538

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE-At fair value
(Amortized cost $186,467,810 in 2009 and $134,533,342 in 2008)

 

191,422,660

 

137,813,529

 

 

 

 

 

 

 

GROSS LOANS

 

1,646,326,304

 

1,187,568,945

 

Less: Allowance for loan losses

 

(54,269,997

)

(22,355,231

)

NET LOANS

 

1,592,056,307

 

1,165,213,714

 

 

 

 

 

 

 

LOANS HELD FOR SALE

 

46,910,701

 

49,929,375

 

 

 

 

 

 

 

ACCRUED INTEREST RECEIVABLE

 

7,648,538

 

5,441,754

 

 

 

 

 

 

 

PREMISES AND EQUIPMENT, NET

 

44,272,020

 

33,899,915

 

 

 

 

 

 

 

FORECLOSED REAL ESTATE

 

9,366,226

 

4,017,880

 

 

 

 

 

 

 

FEDERAL HOME LOAN BANK STOCK, AT COST

 

10,539,400

 

7,876,800

 

 

 

 

 

 

 

INVESTMENT IN BANK-OWNED LIFE INSURANCE

 

24,308,463

 

23,607,675

 

 

 

 

 

 

 

GOODWILL

 

4,943,872

 

53,502,887

 

 

 

 

 

 

 

CORE DEPOSIT INTANGIBLE (net of accumulated amortization of $5,997,292 in 2009 and $4,869,974 in 2008)

 

6,524,569

 

4,660,116

 

 

 

 

 

 

 

OTHER ASSETS

 

39,992,168

 

12,301,838

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

2,051,672,325

 

$

1,524,288,021

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

DEPOSITS

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

205,674,124

 

$

153,573,487

 

Interest-bearing deposits:

 

 

 

 

 

NOW, savings, and money market accounts

 

413,694,450

 

283,890,757

 

Time certificates:

 

 

 

 

 

Over $100,000

 

549,492,607

 

333,375,040

 

Other

 

577,883,703

 

384,202,791

 

TOTAL DEPOSITS

 

1,746,744,884

 

1,155,042,075

 

 

 

 

 

 

 

SHORT-TERM BORROWINGS

 

57,263,715

 

169,111,959

 

 

 

 

 

 

 

LONG-TERM BORROWINGS

 

79,002,082

 

38,849,795

 

 

 

 

 

 

 

ACCRUED INTEREST PAYABLE

 

3,389,367

 

3,554,522

 

 

 

 

 

 

 

OTHER LIABILITIES

 

16,163,082

 

8,085,348

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

1,902,563,130

 

1,374,643,699

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock (a)

 

16,129,640

 

11,536,500

 

Preferred stock (b)

 

46,018,226

 

 

Surplus (c)

 

118,135,566

 

88,030,481

 

 

 

 

 

 

 

Retained earnings (deficit)

 

(34,241,635

)

48,070,348

 

Accumulated other comprehensive income

 

3,067,398

 

2,006,993

 

TOTAL SHAREHOLDERS’ EQUITY

 

149,109,195

 

149,644,322

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

2,051,672,325

 

$

1,524,288,021

 

 


(a)        $1.00 par value, authorized 20,000,000 shares; issued 16,129,640 in 2009 and 11,536,500 in December 2008.

(b)        1,000,000 shares of authorized, no par value preferred stock of which 49,312 shares are issued and outstanding in 2009 and none in 2008.

(c)         Includes ten-year warrants with an allocated fair value of $1.7 million and $1.8 million at issuance to purchase up to 385,990 shares and 273,534 shares of common stock, $1.00 par value, at an initial price of $13.99 per share and $7.30 per share, respectively.

See notes to condensed consolidated financial statements

* Derived from audited consolidated financial statements

 

3



 

YADKIN VALLEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

24,730,726

 

$

17,552,428

 

$

64,694,447

 

$

50,989,199

 

Interest on federal funds sold

 

19,305

 

8,195

 

21,554

 

45,071

 

Interest on securities:

 

 

 

 

 

 

 

 

 

Taxable

 

1,310,988

 

1,334,959

 

3,848,993

 

3,984,590

 

Non-taxable

 

565,829

 

381,658

 

1,463,437

 

1,123,390

 

Interest-bearing deposits

 

9,928

 

161,331

 

31,226

 

300,443

 

Total interest income

 

26,636,776

 

19,438,571

 

70,059,657

 

56,442,693

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Time deposits of $100,000 or more

 

4,516,603

 

2,950,752

 

11,351,454

 

8,633,227

 

Other deposits

 

3,004,546

 

4,594,436

 

10,717,517

 

14,104,850

 

Borrowed funds

 

734,374

 

1,268,265

 

2,141,324

 

3,349,410

 

Total interest expense

 

8,255,523

 

8,813,453

 

24,210,295

 

26,087,487

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

18,381,253

 

10,625,118

 

45,849,362

 

30,355,206

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

18,285,660

 

1,334,000

 

45,292,967

 

3,492,000

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

95,593

 

9,291,118

 

556,395

 

26,863,206

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

1,576,817

 

1,171,772

 

4,159,462

 

3,246,318

 

Other service fees

 

1,189,285

 

858,162

 

3,619,091

 

2,598,978

 

Net gain on sales of mortgage loans

 

2,750,707

 

1,872,365

 

10,751,489

 

5,429,043

 

Net loss on investment securities

 

 

6,549

 

 

(26

)

Income on investment in bank owned life insurance

 

235,238

 

237,759

 

700,788

 

706,221

 

Mortgage banking income (loss)

 

6,971

 

(10,878

)

(507,204

)

67,229

 

Other income

 

94,111

 

61,111

 

162,902

 

208,642

 

Total noninterest income

 

5,853,129

 

4,196,840

 

18,886,528

 

12,256,405

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

7,761,861

 

5,136,319

 

21,688,130

 

15,051,823

 

Occupancy and equipment expenses

 

1,858,092

 

1,307,042

 

5,027,659

 

3,577,635

 

Printing and supplies

 

345,300

 

176,085

 

849,479

 

556,617

 

Data processing

 

348,996

 

217,010

 

908,956

 

600,420

 

Communication expense

 

371,936

 

271,657

 

1,023,982

 

757,975

 

Advertising and marketing expense

 

357,385

 

445,138

 

946,415

 

780,945

 

Amortization of core deposit intangible

 

326,954

 

228,717

 

901,921

 

651,582

 

FDIC assessment expense

 

973,461

 

199,489

 

3,432,549

 

442,665

 

Acquisition related costs

 

291,601

 

 

2,593,655

 

 

Attorney fees

 

468,548

 

110,971

 

991,747

 

239,977

 

Accounting fees

 

438,687

 

81,970

 

947,627

 

533,777

 

Other than temporary impairment of securities

 

175,405

 

972,800

 

354,898

 

972,800

 

Goodwill impairment

 

61,565,768

 

 

61,565,768

 

 

Net loss on other real estate owned

 

1,217,922

 

166,349

 

1,368,983

 

249,389

 

Other

 

2,421,242

 

1,586,385

 

7,319,035

 

5,362,732

 

Total noninterest expense

 

78,923,158

 

10,899,932

 

109,920,804

 

29,778,337

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

(72,974,436

)

2,588,026

 

(90,477,881

)

9,341,274

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE (BENEFIT)

 

(4,715,553

)

795,271

 

(11,505,081

)

2,907,282

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

(68,258,883

)

1,792,755

 

(78,972,800

)

6,433,992

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend and amortization of preferred stock discount

 

708,079

 

 

1,681,079

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) TO COMMON SHAREHOLDERS

 

$

(68,966,962

)

$

1,792,755

 

$

(80,653,879

)

$

6,433,992

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) TO COMMON SHAREHOLDERS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

(4.28

)

$

0.16

 

$

(5.62

)

$

0.57

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(4.28

)

$

0.15

 

$

(5.62

)

$

0.57

 

 

 

 

 

 

 

 

 

 

 

CASH DIVIDENDS PER COMMON SHARE

 

$

 

$

0.13

 

$

0.12

 

$

0.39

 

 

See notes to condensed consolidated financial statements

 

4



 

YADKIN VALLEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(68,258,883

)

$

1,792,755

 

$

(78,972,800

)

$

6,433,992

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale

 

1,859,785

 

1,315,130

 

1,674,667

 

(383,240

)

Tax effect

 

(716,577

)

(506,324

)

(614,262

)

147,548

 

Unrealized holding gains (losses) on securities available for sale, net of tax

 

1,143,208

 

808,806

 

1,060,405

 

(235,692

)

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized losses

 

 

966,251

 

 

972,826

 

Tax effect

 

 

(372,007

)

 

(374,538

)

Reclassification adjustment for realized losses, net of tax

 

 

594,244

 

 

598,288

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX

 

1,143,208

 

1,403,050

 

1,060,405

 

362,596

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

(67,115,675

)

$

3,195,805

 

$

(77,912,395

)

$

6,796,588

 

 

See notes to condensed consolidated financial statements

 

5



 

YADKIN VALLEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

 

 

Common Stock

 

Preferred Stock

 

Surplus

 

Retained Earnings

 

Accumulated Other
Comprehensive
Income

 

Total Shareholders’
Equity

 

Balance, December 31, 2007*

 

$

10,563,356

 

$

 

$

70,986,684

 

$

51,086,684

 

$

632,270

 

$

133,268,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

6,433,992

 

 

6,433,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock option plan

 

86,254

 

 

510,854

 

 

 

597,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option compensation

 

 

 

47,669

 

 

 

47,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit from exercise of stock options

 

 

 

252,250

 

 

 

252,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of EITF 06-04

 

 

 

 

(897,253

)

 

(897,253

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common cash dividends declared

 

 

 

 

(4,484,118

)

 

(4,484,118

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fractional shares purchased

 

(58

)

 

 

2

 

 

 

 

 

(56

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued in acquisition of Cardinal State Bank

 

883,747

 

 

16,191,450

 

 

 

17,075,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

362,596

 

362,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2008

 

$

11,533,299

 

$

 

$

87,988,909

 

$

52,139,305

 

$

994,866

 

$

152,656,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008*

 

11,536,500

 

 

88,030,481

 

48,070,348

 

2,006,993

 

149,644,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(78,972,800

)

 

(78,972,800

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under stock option plan

 

8

 

 

 

111

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock issued

 

 

49,312,000

 

 

 

 

49,312,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock discount

 

 

(3,581,000

)

 

 

 

(3,581,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued

 

 

 

3,581,000

 

 

 

3,581,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount accretion of preferred stock warrants

 

 

287,226

 

 

(287,226

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option compensation

 

 

 

54,929

 

 

 

54,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends accrued

 

 

 

 

(1,393,853

)

 

(1,393,853

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common cash dividends declared

 

 

 

 

(1,658,104

)

 

(1,658,104

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issued in acquisition of American Community Bancshares, Inc.

 

4,593,132

 

 

 

26,469,045

 

 

 

 

 

31,062,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

1,060,405

 

1,060,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2009

 

$

16,129,640

 

$

46,018,226

 

$

118,135,566

 

$

(34,241,635

)

$

3,067,398

 

$

149,109,195

 

 

See notes to condensed consolidated financial statements

 


* Derived from audited consolidated financial statements

 

6



 

YADKIN VALLEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

 

 

2009

 

2008

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(78,972,800

)

$

6,433,992

 

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

 

 

 

 

 

Net amortization (accretion) of premiums (discounts) on investment securities

 

475,675

 

(30,840

)

Provision for loan losses

 

45,292,967

 

3,492,000

 

Net gain on sales of mortgage loans held for sale

 

(10,751,489

)

(5,429,043

)

Increase in investment in Bank owned life insurance

 

(700,788

)

(706,221

)

Depreciation and amortization

 

2,024,299

 

1,511,501

 

Net loss on sale of premises and equipment

 

126,716

 

50,029

 

Net loss on sale of other real estate owned

 

1,368,983

 

 

Net loss on sale of available for sale securities

 

 

26

 

Impairment of goodwill

 

61,565,768

 

 

Other than temporary impairment of cost method investments

 

354,898

 

972,800

 

Amortization of core deposit intangible

 

901,921

 

651,582

 

Deferred tax benefit

 

(9,313,763

)

(1,419,553

)

Stock based compensation expense

 

54,929

 

47,669

 

Originations of mortgage loans held-for-sale

 

(1,392,024,046

)

(772,639,226

)

Proceeds from sales of mortgage loans

 

1,405,794,209

 

785,981,484

 

(Increase) decrease in accrued interest receivable

 

(212,951

)

405,972

 

Increase in other assets

 

(9,774,273

)

(1,831,365

)

Decrease in accrued interest payable

 

(753,487

)

(666,193

)

Increase (decrease) in other liabilities

 

5,749,422

 

(696,712

)

 

 

 

 

 

 

Net cash provided by operating activities

 

21,206,190

 

16,127,902

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available for sale securities

 

(31,228,898

)

(30,762,451

)

Proceeds from sales of available for sale securities

 

41,889,460

 

13,067,292

 

Proceeds from maturities of available for sale securities

 

8,000,000

 

19,624,095

 

Net change in loans

 

(65,295,035

)

(69,357,144

)

Acquisition of Cardinal State Bank, net of cash acquired

 

 

11,979,969

 

Acquisition of American Community Bancshares, net of cash acquired

 

2,040,754

 

 

Purchases of premises and equipment

 

(4,020,925

)

(1,703,824

)

Proceeds from redemption of Federal Home Loan Bank stock

 

1,851,100

 

1,161,100

 

Purchases of Federal Home Loan Bank stock

 

(2,385,300

)

(5,742,000

)

Proceeds from sale of premises and equipment

 

895,492

 

287,136

 

Proceeds from sale of other real estate owned

 

3,213,500

 

 

Proceeds from death benefit from bank owned life insurance

 

 

2,561

 

 

 

 

 

 

 

Net cash used in investing activities

 

(45,039,854

)

(61,443,266

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net increase (decrease) in checking, NOW, money market and savings accounts

 

49,140,991

 

(17,487,340

)

Net increase (decrease) in time certificates

 

102,612,761

 

(9,639,973

)

Net increase (decrease) in borrowed funds

 

(125,363,022

)

88,872,850

 

Fractional shares retired

 

 

(56

)

Proceeds from issuance of preferred stock and warrants

 

49,312,000

 

 

Dividends paid

 

(4,204,324

)

(4,484,118

)

Tax benefit from exercise of stock options

 

 

252,250

 

Proceeds from exercise of stock options

 

119

 

597,108

 

 

 

 

 

 

 

Net cash provided by financing activities

 

71,498,525

 

58,110,721

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

47,664,863

 

12,795,357

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

26,022,538

 

26,325,875

 

End of period

 

$

73,687,401

 

$

39,121,232

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

27,907,907

 

$

26,152,261

 

Cash paid for income taxes

 

2,897,414

 

4,092,214

 

Transfer from loans to foreclosed real estate

 

9,498,079

 

3,192,880

 

 

See notes to condensed consolidated financial statements

 

7



 

Notes to Unaudited Condensed Consolidated Financial Statements

 

1.  Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Yadkin Valley Financial Corporation and its subsidiary, Yadkin Valley Bank and Trust Company.  On July 1, 2006, Yadkin Valley Bank and Trust Company (the “Bank”) became a subsidiary of Yadkin Valley Financial Corporation (the “Company”) through a one for one share exchange of the then outstanding 10,648,300 shares.  Sidus Financial, LLC (“Sidus”) is a single member LLC with the Bank as its single member. Sidus offers mortgage banking services and is headquartered in Greenville, NC. The Company acquired American Community Bancshares Inc., on April 17, 2009 (See note 5). The interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial statements and with instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements.  Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited consolidated financial statements and accompanying footnotes included with the Company’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2009.  Operating results, for the three and nine months ended September 30, 2009, do not necessarily indicate the results that may be expected for the year or other interim periods.

 

In the opinion of management, the accompanying condensed consolidated financial statements contain all the adjustments, all of which are normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2009 and December 31, 2008, and the results of its operations and cash flows for the three and nine months ended September 30, 2009 and 2008.  The accounting policies followed are set forth in Note 1 to the Consolidated Financial Statements in the Company’s 2008 Annual Report on Form 10-K.

 

2. New Accounting Standards

 

Recently Adopted Accounting Standards

 

In June 2009, the FASB developed and implemented The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles— (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph.  The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.  FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position but will change the referencing system for accounting standards.

 

Effective January 1, 2009, the Company adopted new accounting for disclosures about derivative instruments and hedging activities.  Under the Derivative and Hedging topic of the FASB Accounting Standards Codification, companies are required to enhance disclosures about how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect the balance sheet, income statement and statement of cash flows. Adoption of this standard did not result in a change to

 

8



 

the accounting for the Company’s derivative financial instruments but instead resulted in enhanced disclosures which are in Note 10.

 

In the second quarter of 2009, additional guidance was issued under the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and for identifying transactions that are not orderly.  The new standard also includes guidance on identifying circumstances that indicate a transaction is not orderly. Further, the new accounting emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Certain additional disclosures are now required in interim and annual periods to discuss the inputs and valuation technique(s) used to measure fair value. The adoption of the new accounting disclosures did not have a material effect on the Company’s financial position or results of operations; however, it did result in additional disclosures.

 

In the second quarter of 2009, the Company adopted new accounting practices for the interim disclosures about fair value of financial instruments.  The Company now provides disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.

 

On April 9, 2009, the FASB issued guidance on the recognition and presentation of Other-Than-Temporary Impairments (“OTTI”).  The recognition practice categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors.  Other-than-temporary impairment exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered.  An OTTI related to credit losses should be recognized through earnings.  An OTTI related to other factors should be recognized in other comprehensive income.  Required annual disclosures are now also required for interim periods (including the aging of securities with unrealized losses). The adoption of the new practices did not have a material effect on the Company’s financial position or results of operations, however it did result in additional disclosures.

 

In May 2009, the Company adopted new accounting disclosure practices for subsequent events.  Under the Subsequent Events topic of the FASB Accounting Standards Codification, all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued.  For nonrecognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed.  See Note 18 for management’s evaluation of subsequent events.

 

In December 2007, the FASB issued guidance under the business combinations topic of the FASB Accounting Standards Codification.  The new guidance requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair value on the acquisition date, with goodwill being the excess value of consideration paid over the fair value of the net identifiable assets acquired and replaces the cost allocation method used in mergers entered into prior to December 15, 2008. Other key differences that resulted under the new guidance include the expensing of acquisition-related costs as incurred as opposed to the capitalization of those costs in previous mergers.  We followed the new guidance under the business combinations topic, as originally issued, for our American Community Bancshares, Inc. acquisition in April 2009. This new guidance does not require retroactive restatement of accounting for business combinations prior to January 1, 2009 and therefore was not required for our Cardinal State Bank acquisition in 2008.

 

9



 

Recently Issued but not yet Effective Accounting Pronouncements:

 

In June 2009, the FASB issued an update to the accounting standards for transfers and servicing of financial assets which eliminates the concept of a qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures, including information about continuing exposure to risks related to transferred financial assets. This update is effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009.  The disclosure requirements must be applied to transfers that occurred before and after the effective date. The Company is currently evaluating the impact on its financial statements of adopting this update.

 

In June 2009, the FASB issued an update to the accounting standards for consolidation which contains new criteria for determining the primary beneficiary, eliminates the exception to consolidating QSPE’s, requires continual reconsideration of conclusions reached in determining the primary beneficiary, and requires additional disclosures. This update for consolidations is effective as of the beginning of fiscal years beginning after November 15, 2009 and is applied using a cumulative effect adjustment to retained earnings for any carrying amount adjustments (e.g., for newly- consolidated Variable Interest Entities). The Company is currently evaluating the impact on its financial statements of adopting this update.

 

3.  Participation in U.S. Treasury Capital Purchase Program and Private Placement of Common Stock

 

On January 16, 2009, Yadkin Valley Financial Corporation issued 36,000 shares of senior preferred stock, each with a liquidation preference of $1,000 per share, to the U.S. Treasury for $36 million pursuant to the Capital Purchase Program (“CPP”). Additionally, the Company issued a warrant to purchase up to 385,990 shares of common stock to the U.S. Treasury as a condition to its participation in the CPP. The warrant has an exercise price of $13.99 per share, is immediately exercisable and expires 10 years from the date of issuance. Proceeds from this sale of the preferred stock are expected to be used for general corporate purposes, including supporting the continued growth and lending in the communities served by the Bank. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. The preferred shares are redeemable at the option of the Company under certain circumstances during the first three years and only thereafter without restriction.

 

In order to determine the relative value of the preferred stock, the present value of the preferred stock cash flows, using a discount rate of 14%, was calculated as $18.2 million.  The following table shows the determination of the value attributed to the proceeds of $36 million received for the preferred stock and warrant based on the relative values of each.

 

Relative Value Calculation

 

 

 

Fair Value
(in millions)

 

Relative Value (%)

 

Relative Value
(in millions)

 

NPV of Preferred (14% discount)

 

$

18.2

 

95.3

%

$

34.3

 

Fair Value of warrants (Black Scholes)

 

0.9

 

4.7

%

1.7

 

Total

 

$

19.1

 

100.0

%

$

36.0

 

 

These common stock warrants have been assigned a fair value of $2.38 per share, or $0.9 million in aggregate as of January 16, 2009.  Using a relative fair value allocation approach, $1.7 million was recorded as a discount on the preferred stock and will be accreted as a reduction in the net income available for common shareholders over the next five years at $300,000 to $400,000 per year.

 

10



 

Under the CPP, the Company issued an additional $13.3 million in Cumulative Perpetual Preferred Stock, Series T-ACB, on July 24, 2009.  In addition, the Company provided a warrant to the Treasury to purchase 273,534 shares of the Company’s common stock at an exercise price of $7.30 per share.  These warrants are immediately exercisable and expire ten years from the date of issuance.  The preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter.  The preferred shares are redeemable at the option of the Company under certain circumstances during the first three years and only thereafter without restriction.

 

Relative Value Calculation

 

 

 

Fair Value
(in millions)

 

Relative Value (%)

 

Relative Value
(in millions)

 

NPV of Preferred (14% discount)

 

$

6.7

 

86.1

%

$

11.5

 

Fair Value of warrants (Black Scholes)

 

1.1

 

13.9

%

1.8

 

Total

 

$

7.8

 

100.0

%

$

13.3

 

 

These common stock warrants have been assigned a fair value of $3.97 per share, or $1.1 million in aggregate as of July 24, 2009.  Using a relative fair value allocation approach, $1.8 million was recorded as a discount on the preferred stock and will be accreted as a reduction in the net income available for common shareholders over the next five years at $300,000 to $400,000 per year.

 

As a condition of the CPP, the Company must obtain consent from the United States Department of the Treasury to repurchase its common stock or to increase its cash dividend on its common stock from the June 30, 2009 quarterly amount.  Furthermore, the Company has agreed to certain restrictions on executive compensation.  Under the American Recovery and Reinvestment Act of 2009, the Company is limited to using restricted stock as the form of payment to the top five highest compensated executives under any incentive compensation programs.

 

4.  Stock-based Compensation

 

On May 22, 2008 the shareholders approved the 2008 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). An aggregate of 700,000 shares have been reserved for issuance by the Company under the terms of the Omnibus Plan pursuant to the grant of incentive stock options (not to exceed 200,000 shares), non-statutory stock options, restricted stock and restricted stock units, long-term incentive compensation units and stock appreciation rights.

 

During the three and nine months ended September 30, 2009, 100 and 26,700 options were vested, respectively.  During the three and nine months ended September 30, 2008, 100 and 14,442 options were vested, respectively. At September 30, 2009, there were 97,100 options unvested and no shares available for future grants of options other than shares available under the abovementioned Omnibus Plan.

 

On March 31, 2008, the number of outstanding options increased by 140,258 in conjunction with the acquisition of Cardinal State Bank.  These options were fully vested according to the merger agreement, and they have a weighted average exercise price of $13.04 per option and a weighted average life of 6.25 years.

 

On April 16, 2009, the number of outstanding options increased by 149,358 in conjunction with the acquisition of American Community Bank.  These options were fully vested according to the merger agreement, and they have a weighted average exercise price of $11.86 per option and a weighted average life of 5.85 years.  The fair market value (“FMV”) of the replacement stock options resulted in additional consideration paid in the acquisition of American Community Bank of approximately $197,000.

 

During the third quarter of 2009, there were 5,000 options granted at a weighted average fair value of $3.607 per option. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  During the third quarter of 2008, there were no options granted.

 

11



 

The compensation expense related to options was $18,416 for the three-month period ending September 30, 2009 and $54,929 for the nine-month period ending September 30, 2009. As of September 30, 2009, there was $223,932 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under all of the Company’s stock benefit plans.  This cost is expected to be recognized over an average vesting period of 1.3 years.

 

Cash received from the options exercised during the nine months ended September 30, 2009 was $119.  There were no options exercised during the three months ended September 30, 2009.  Cash received from the options exercised during the three and nine months ended September 30, 2008 was $143,156 and $597,108, respectively.

 

5. Business Combination

 

Effective at the beginning of business on April 17, 2009, the Company acquired 100% of the outstanding common stock of American Community Bancshares, Inc. (“American Community”), and its subsidiary American Community Bank, headquartered in Charlotte, NC. American Community had $527.5 million in tangible assets, including $416.3 million in loans and $33.6 million in tangible equity at the closing date. Pursuant to the agreement, for each share of American Community common stock, American Community shareholders received either $12.35 in cash or 0.8517 shares of the Company’s common stock, subject to an overall allocation of 19.5% cash and 80.5% stock.  The overall acquisition cost was approximately $47.2 million based on the issuance of 4.6 million shares of the Company’s common stock at a stock price of $6.72 at the date of the merger, and cash payment of $16.1 million to American shareholders.  Further details are available in the press release and Form 8-K filed April 23, 2009.

 

The American Community merger is being accounted for under the acquisition method of accounting.  The statement of net assets acquired as of April 17, 2009 is presented in the following table.  The purchased assets and assumed fair value of liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value.  Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as information relative to closing date fair value becomes available. Goodwill of $13.0 million is calculated as the purchase premium after adjusting for the fair value of net assets acquired.  None of the goodwill is expected to be deductible for income tax purposes. The newly acquired American Community Bank provided revenue of $10.9 million and net loss of $3.4 million for the period of April 17, 2009 to September 30, 2009, and is included in the consolidated financial statements.  American Community’s results of operations prior to the acquisition are not included in the Company’s statement of income.

 

12



 

Acquisition of American Community Bancshares, Inc. (in thousands)

 

April 17, 2009

 

 

 

 

 

Consideration:

 

 

 

Cash

 

$

16,140

 

Stock

 

31,063

 

Fair value of total consideration paid

 

$

47,203

 

 

 

 

 

Cash and cash equivalents

 

16,219

 

Investments

 

71,736

 

Loans, net

 

416,339

 

Premises and equipment, net

 

8,623

 

Core deposit intangible

 

2,766

 

Other assets

 

16,372

 

 

 

 

 

Deposits

 

(439,949

)

Liabilities

 

(57,909

)

Total identifiable net assets at fair value

 

34,197

 

 

 

 

 

Goodwill

 

13,006

 

Fair value of total consideration paid

 

$

47,203

 

 

The Company performed an interim goodwill impairment valuation given the substantial declines in its common stock price, operating results, asset quality trends, market comparables and the economic outlook for our industry.  As a result of this valuation, it was determined that impairment existed in the banking segment, including the newly acquired goodwill from American Community, and a full impairment charge was taken for goodwill related to the banking segment.

 

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date and prohibit the carryover of the related allowance for loan losses, which include loans purchased in the American Community acquisition. Purchased impaired loans are accounted for under the Receivables Topic of the FASB Accounting Standards Codification when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccural status. Purchased impaired loans generally meet the Company’s definition for nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.  Purchased performing loans are recorded at fair value, including a credit discount.  The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans.  There is no allowance for loan losses established at the acquisition date for purchased performing loans.  A provision for loan losses is recorded for any further deterioration in these loans subsequent to the merger.

 

The carrying amount of acquired loans at April 17, 2009 consisted of purchased impaired loans and purchased performing loans as detailed in the following table:

 

13



 

 

 

 

 

Purchased

 

 

 

 

 

Purchased

 

Performing

 

 

 

 

 

Impaired Loans

 

Loans

 

Total Loans

 

 

 

 

 

(In thousands)

 

 

 

Commercial, financial, and agricultural

 

$

265

 

$

58,033

 

$

58,298

 

Construction, land development & other land

 

8,362

 

123,496

 

131,858

 

Real estate- 1-4 Family mortgage loans

 

795

 

41,530

 

42,325

 

Real estate- Commercial and other

 

837

 

98,549

 

99,386

 

Home equity lines of credit

 

58

 

47,760

 

47,818

 

Installment loans to individuals

 

63

 

12,878

 

12,941

 

Other loans

 

308

 

23,405

 

23,713

 

Total

 

$

10,688

 

$

405,651

 

$

416,339

 

 

The following table presents the purchased performing loans receivable at the acquisition date of April 17, 2009.  The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

 

 

 

(In thousands)

 

Contractually required principal payments receivable

 

$

416,833

 

Fair value adjustment for credit, interest rate, and liquidity

 

(11,182

)

Fair value of purchased performing loans receivable

 

$

405,651

 

 

The following table presents the purchased impaired loans receivable at the acquisition date of April 17, 2009.  The Company has initially applied the cost recovery method to all purchased performing loans at the acquisition date due to uncertainty as to the timing of expected cash flows as reflected in the following table:

 

 

 

(In thousands)

 

Contractually required principal payments receivable

 

$

14,513

 

Nonaccretable difference

 

(3,825

)

Present value of cash flows expected to be collected

 

10,688

 

Accretable difference

 

 

Fair value of purchased impaired loans acquired

 

$

10,688

 

 

As previously disclosed, we identified several unreconciled items in the American Community general ledger subsequent to the merger date with the Company.  Our internal investigation is now substantially complete and we are pursuing various claims to recover all or part of the money lost due to these items.  The pending claims are confidential and will not be disclosed.  The internal investigation indicated that improper activity by two individuals contributed to the unreconciled items prior to the acquisition of American Community.  These two individuals are no longer with the Company.

 

The proforma consolidated condensed statements of income for Yadkin Valley and American Community for the nine months ended September 30, 2009 and 2008 are presented below as if the combination had occurred on January 1.  The unaudited proforma information presented does not necessarily reflect the results of operations that would have

 

14



 

resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.

 

The proforma purchase accounting adjustments related to investments, loans and leases, deposits, and other borrowed funds are being accreted or amortized into income using methods that approximate a level yield over their respective estimated lives.  Purchase accounting adjustments related to identifiable intangibles are being amortized and recorded as noninterest expense over their respective estimated lives using accelerated methods.

 

Nine Months Ended September 30, 2009
dollars in thousands except per share data

 

Yadkin Valley

 

American
Community

 

Proforma
Adjustments

 

Proforma
Combined

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

54,778

 

$

17,228

 

$

6,735

 

$

78,741

 

Interest Expense

 

22,092

 

8,749

 

(3,486

)

27,355

 

Net Interest Income

 

32,686

 

8,479

 

10,221

 

51,386

 

Provision for Loan Losses

 

31,114

 

2,424

 

14,575

 

48,113

 

Net Interest Income (Loss) after Provision for Loan Losses

 

1,572

 

6,055

 

(4,354

)

3,273

 

Noninterest Income

 

16,362

 

1,116

 

 

17,478

 

Noninterest Expense

 

103,688

 

13,632

 

376

 

117,696

 

Income (Loss) Before Taxes

 

(85,754

)

(6,461

)

(4,730

)

(96,945

)

Income Tax Provision (Benefit)

 

(35,997

)

(2,506

)

(1,823

)

(40,326

)

Net Income (Loss)

 

(49,757

)

(3,955