Quarterly Report (10-q)

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, 2013

Commission File Number 000-52099

Yadkin 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)

Yadkin Valley Financial Corporation

(Former name, former address and former fiscal year, if changed since last report)

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 o	Non-accelerated filer o	Smaller reporting company x

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).

Yes x No o

Shares of Voting Common Stock outstanding as of October 24, 2013 , par value $1.00 per share, were 13,728,989 and shares of Non-Voting Common Stock outstanding as of October 24, 2013 , par value $1.00 per share, were 654,997 .

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the period ended September 30, 2013 and the three and nine months ended September 30, 2013 and 2012



Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2013 and December 31, 2012	2
Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2013 and 2012	3
Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2013 and 2012	4
Condensed Consolidated Statements of Shareholders' Equity Nine Months Ended September 30, 2013 and 2012	5
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2013 and 2012	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3. Quantitative and Qualitative Disclosures About Market Risk	54
Item 4. Controls and Procedures	54

Part II. Other Information
Item 1. Legal Proceedings	56
Item 5. Other Information	56
Item 6. Exhibit Index	56
Signatures	57

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2013 and December 31, 2012



	September 30,			December 31,
	2013			2012*
	(Amounts in thousands, except share data)
ASSETS:
Cash and due from banks	$	32,417		$	36,125
Federal funds sold	15			50
Interest-bearing deposits	6,695			102,221
Securities available-for-sale at fair value (amortized cost $330,619 in 2013 and $336,349 in 2012)	328,690			343,120
Gross loans	1,333,437			1,309,504
Less: allowance for loan losses	21,014			25,149
Net loans	1,312,423			1,284,355
Loans held-for-sale	12,632			27,679
Accrued interest receivable	6,339			6,376
Premises and equipment, net	41,050			41,849
Other real estate owned	2,989			8,738
Federal Home Loan Bank stock, at cost	5,273			4,154
Investment in bank-owned life insurance	26,888			26,433
Core deposit intangible (net of accumulated amortization of $10,387 in 2013 and $9,869 in 2012)	2,133			2,653
Deferred tax assets	26,588			31,358
Other assets	9,385			8,327
Total Assets	$	1,813,517		$	1,923,438
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand deposits	$	266,951		$	273,912
Interest-bearing deposits:
NOW, savings and money market accounts	676,502			624,460
Time certificates:
$100 or more	236,787			316,146
Other	311,096			417,144
Total Deposits	1,491,336			1,631,662

Short-term borrowings	85,129			39,192
Long-term borrowings	45,951			65,944
Capital lease obligations	2,293			2,325
Accrued interest payable	927			1,629
Other liabilities	9,009			11,892
Total Liabilities	$	1,634,645		$	1,752,644

Shareholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; 28,405 issued and outstanding in 2013 and 2012	28,339			27,942
Common stock, $1 par value, 33,333,333 shares authorized at September 30, 2013 and December 31, 2012; 14,383,986 issued and outstanding in 2013 and 14,383,750 issued and outstanding in 2012	14,384			43,152
Warrants	1,731			3,581
Surplus	187,113			156,176
Accumulated deficit	(51,528		)	(64,241		)
Accumulated other comprehensive income (loss)	(1,167		)	4,184
Total Shareholders' Equity	178,872			170,794
Total Liabilities and Shareholders' Equity	$	1,813,517		$	1,923,438

_______________________


*	Derived from audited consolidated financial statements

See notes to condensed consolidated financial statements

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three and nine months ended September 30, 2013 and 2012



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
	(Amounts in thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans	$	16,849	$	17,735		$	50,478		$	54,618
Interest on federal funds sold	—		9			8			24
Interest and dividends on securities:
Taxable	813		1,165			2,578			3,797
Non-taxable	803		509			2,272			1,637
Interest-bearing deposits	5		28			60			103
TOTAL INTEREST INCOME	18,470		19,446			55,396			60,179
INTEREST EXPENSE:
Time deposits of $100 or more	877		1,762			3,238			5,667
Other time and savings deposits	1,034		2,018			3,578			6,582
Borrowed funds	423		477			1,271			1,692
TOTAL INTEREST EXPENSE	2,334		4,257			8,087			13,941
NET INTEREST INCOME	16,136		15,189			47,309			46,238
PROVISION FOR LOAN LOSSES	40		4,251			332			8,820
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	16,096		10,938			46,977			37,418
NON-INTEREST INCOME:
Service charges on deposit accounts	1,336		1,319			3,923			3,887
Other service fees	1,259		857			3,587			2,646
Net gain on sale of securities	253		1,348			529			1,648
Income on investment in bank-owned life insurance	152		159			454			473
Mortgage banking activities	1,713		1,599			7,545			4,412
Other than temporary impairment of cost method investments	—		—			(39		)	—
Gain (loss) on sale of loans	—		(900		)	373			(900		)
Gain on sale of branch	310		—			310			—
Other income	358		283			539			415
TOTAL NON-INTEREST INCOME	5,381		4,665			17,221			12,581
NON-INTEREST EXPENSES:
Salaries and employee benefits	7,780		6,914			23,122			19,378
Occupancy and equipment expense	2,001		1,813			5,766			5,459
Advertising and marketing	348		103			1,036			279
Data processing	374		456			1,118			1,295
Amortization of core deposit intangible	166		266			518			820
Communications	350		314			1,021			1,019
FDIC assessment	363		650			1,597			2,004
Loan collection fees	203		211			621			679
Other professional fees	237		491			1,211			1,276
Net cost of operation of other real estate owned	93		1,322			(903		)	5,295
Gain on sale of premises and equipment	154		—			154			(22		)
Other	2,081		2,252			6,946			6,620
TOTAL NON-INTEREST EXPENSES	14,150		14,792			42,207			44,102
INCOME BEFORE INCOME TAXES	7,327		811			21,991			5,897
INCOME TAX EXPENSE (BENEFIT)	2,616		54			7,822			(9,329		)
NET INCOME	4,711		757			14,169			15,226
Preferred stock dividend and accretion of preferred stock discount	421		838			1,456			2,493
NET INCOME (LOSS) TO COMMON SHAREHOLDERS	$	4,290	$	(81	)	$	12,713		$	12,733
NET INCOME (LOSS) PER COMMON SHARE (1):
Basic	$	0.30	$	—		0.90			$	1.98
Diluted	$	0.30	$	—		0.89			$	1.98
CASH DIVIDENDS PER COMMON SHARE	—		—			—			—

(1) Net income per share has been adjusted to reflect a 1-for-3 reverse stock split in 2013.

See notes to condensed consolidated financial statements

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPRENHENSIVE INCOME (UNAUDITED)

Three and nine months ended September 30, 2013 and 2012



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Amounts in thousands)
NET INCOME	$	4,711		$	757		$	14,169		$	15,226
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on securities available-for-sale	(110		)	1,974			(8,169		)	3,239
Tax effect	40			(760		)	3,143			(1,247		)
Unrealized holding gains (losses) on securities available-for-sale, net of tax amount	(70		)	1,214			(5,026		)	1,992
Reclassification adjustment for realized gains	(253		)	(1,348		)	(529		)	(1,648		)
Tax effect	98			519			204			634
Reclassification adjustment for realized gains, net of tax amount	(155		)	(829		)	(325		)	(1,014		)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	(225		)	385			(5,351		)	978
COMPREHENSIVE INCOME	$	4,486		$	1,142		$	8,818		$	16,204

See notes to condensed consolidated financial statements

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Nine months ended September 30, 2013 and 2012



																	Accumulated
																	Other			Total
	Common Stock					Preferred								Accumulated			Comprehensive			Shareholders'
	Shares ⁽¹⁾		Amount			Stock		Warrants			Surplus			Deficit			Income (Loss)			Equity
	(Amounts in thousands, except share data)
BALANCE, DECEMBER 31, 2011	19,526,188		$	19,526		$	47,389	$	3,581		$	117,883		$	(51,656	)	$	3,863		$	140,586
Net income	—		—			—		—			—			15,226			—			15,226
Issuance of common stock	497,500		498			—		—			(498		)	—			—			—
Restricted stock issued (forfeited)	(20,000	)	(20		)	—		—			20			—			—			—
Discount accretion on preferred stock	—		—			644		—			—			(644		)	—			—
Share based compensation:
stock options	—		—			—		—			23			—			—			23
restricted stock	—		—			—		—			272			—			—			272
Preferred stock dividends	—		—			—		—			—			(1,849		)	—			(1,849		)
Other comprehensive income	—		—			—		—			—			—			978			978
BALANCE, SEPTEMBER 30, 2012	20,003,688		$	20,004		$	48,033	$	3,581		$	117,700		$	(38,923	)	$	4,841		$	155,236

BALANCE, DECEMBER 31, 2012	43,151,652		$	43,152		$	27,942	$	3,581		$	156,176		$	(64,241	)	$	4,184		$	170,794
Net income	—		—			—		—			—			14,169			—			14,169
1-for-3 reverse stock split	(28,767,902	)	(28,768		)	—		—			28,768			—			—			—
Repurchase of fractional shares	(3,006	)	(3		)	—		—			(36		)	—			—			(39		)
Restricted stock issued	3,242		3			—		—			(3		)	—			—			—
Repurchase and cancellation of warrants	—		—			—		(1,850		)	1,830			—			—			(20		)
Discount accretion on preferred stock	—		—			397		—			—			(397		)	—			—
Share based compensation:
stock options	—		—			—		—			18			—			—			18
restricted stock	—		—			—		—			360			—			—			360
Preferred stock dividends	—		—			—		—			—			(1,059		)	—			(1,059		)
Other comprehensive loss	—		—			—		—			—			—			(5,351		)	(5,351		)
BALANCE, SEPTEMBER 30, 2013	14,383,986		$	14,384		$	28,339	$	1,731		$	187,113		$	(51,528	)	$	(1,167	)	$	178,872

⁽¹⁾ Shares outstanding at September 30, 2013 include 13,728,989 shares of voting common stock and 654,997 shares of non-voting common stock. All shares outstanding at September 30, 2012 were voting common stock.

See notes to condensed consolidated financial statements

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine months ended September 30, 2013 and 2012



	Nine Months Ended September 30,
	2013			2012
	(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,169		$	15,226
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums on investment securities	5,218			5,545
Provision for loan losses	332			8,820
(Gain) loss on sales of loans held-for-sale	(373		)	900
Net gain on sale of mortgage loans	(4,192		)	(2,309		)
Reversal of provision for mortgage loans sold	(1,288		)	—
Other than temporary impairment of investments	39			—
Increase in cash surrender value of life insurance	(454		)	(473		)
Depreciation and amortization	2,136			2,028
(Gain) loss on sales and impairment of premises and equipment	154			(22		)
Net (gains) losses on sale and write downs of other real estate owned	(1,130		)	4,595
Gain on sale of securities	(529		)	(1,648		)
Amortization of core deposit intangible	518			820
Deferred tax provision (benefit)	8,115			(8,987		)
Stock based compensation expense	378			295
Originations of mortgage loans held-for-sale	(216,880		)	(100,516		)
Proceeds from sales of mortgage loans	236,120			108,393
Decrease in capital lease obligations	(32		)	(67		)
Decrease in accrued interest receivable	37			515
(Increase) decrease in other assets	(2,876		)	4,246
Decrease in accrued interest payable	(702		)	(873		)
Decrease in other liabilities	(1,221		)	(1,435		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	37,539			35,053
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities	(112,655		)	(73,767		)
Proceeds from sales of available-for-sale securities	42,505			35,444
Proceeds from maturities of available-for-sale securities	72,971			55,883
Net (increase) decrease in loans	(31,961		)	52,550
(Payments for) proceeds from Federal Home Loan Bank stock	(1,119		)	1,975
Purchases of premises and equipment	(2,504		)	(1,383		)
Proceeds from the sale of premises and equipment	1,015			37
Proceeds from the sale of other real estate owned	10,439			11,446
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(21,309		)	82,185
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in checking, NOW, money market and savings accounts	45,082			7,167
Net decrease in time certificates	(185,407		)	(87,048		)
Net increase (decrease) in borrowed funds	25,944			(3,240		)
Payment of fractional shares in the 1-for-3 stock split	(39		)	—
Preferred dividends paid	(1,059		)	(3,813		)
Repurchase of warrants	(20		)	—
NET CASH USED IN FINANCING ACTIVITIES	(115,499		)	(86,934		)

See notes to condensed consolidated financial statements

YADKIN FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED

Nine months ended September 30, 2013 and 2012



	Nine months ended September 30,
	2013			2012
	(Amounts in thousands)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(99,269	)	$	30,304

CASH AND CASH EQUIVALENTS:
Beginning of year	138,396			92,918
End of year	$	39,127		$	123,222

SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for interest	$	8,817		$	18,317
Cash paid for income taxes	$	—		$	—

SUPPLEMENT DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer from loans to foreclosed real estate	$	3,560		$	13,369
Transfer from other assets to investment securities available-for-sale	$	1,780		$	—
Unrealized gain (loss) on investment securities available-for-sale, net of tax effect	$	(5,026	)	$	1,992

See notes to condensed consolidated financial statements

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

Notes to Unaudited Condensed Consolidated Financial Statements

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Yadkin Financial Corporation (the "Company") and its subsidiary, Yadkin Bank (the "Bank"). The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial statements and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited consolidated financial statements and accompanying footnotes included with the Company's 2012 Annual Report on Form 10-K (the "2012 Form 10-K") filed with the Securities and Exchange Commission (“SEC”) on February 28, 2013. Operating results, for the three and nine months ended September 30, 2013 , 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, 2013 and December 31, 2012, and the results of its operations and cash flows for the three and nine months ended September 30, 2013 and 2012. The accounting policies followed are set forth in Note 1 to the Consolidated Financial Statements in the Company's 2012 Form 10-K.

Reclassifications - Certain expenses reported in prior periods have been reclassified to conform to the 2013 presentation. Reclassifications include certain loan collection and occupancy expenses that were previously recorded in other expenses that have now been reclassified to loan collection fees and occupancy expense.

Effective May 28, 2013, the Company executed a one-for-three reverse stock split. All outstanding options and restricted shares and earnings per share calculations have been adjusted for the effect of this reverse stock split. For additional information related to the reverse stock split, see Note 16, Other Events.

The reclassifications above had no effect on net income or shareholders' equity, as previously reported.

2. New Accounting Standards

Recently Adopted Accounting Standards

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). This guidance is the culmination of the FASB's deliberation on reporting reclassification adjustments from accumulated other comprehensive income ("AOCI"). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company has adopted the standard and the adoption of ASU 2013-02 did not have an impact on the Company's financial condition, results of operations, or cash flows but did result in additional disclosures in Footnote 15.

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

3. Stock-based Compensation

During the three and nine months ended September 30, 2013 , 333 and 2,135 options were vested, respectively. During the three and nine months ended September 30, 2012 , 333 and 2,833 options were vested, respectively. Total options outstanding at September 30, 2013 were 52,950 , of which 4,033 options were unvested.

During the nine months ended September 30, 2013, 1,666 options were granted. The weighted average fair value of the options granted was $ 7.55 and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0.00% ; expected volatility of 101.70% ; risk-free interest rate of 1.00% ; and expected life of seven years . There were no options granted for the three months ended September 30, 2013. There were no options exercised for the three and nine months ended September 30, 2013 . There were no options granted or exercised for the three and nine months ended September 30, 2012.

As of September 30, 2013 , there are 211,159 restricted shares outstanding, of which 32,878 shares of restricted stock are vested and 178,281 shares are nonvested. As of December 31, 2012, there were 207,917 restricted shares outstanding, of which 14,549 shares of restricted stock were vested and 193,368 shares were nonvested. There were 3,242 shares of restricted stock issued during the nine months ended September 30, 2013 at an average fair value of $ 12.65 . There were no shares of restricted stock issued during the three months ended September 30, 2013 . There were 165,833 shares of restricted stock issued during the nine months ended September 30, 2012 at an average fair value of $ 6.93 , and 6,666 restricted shares were forfeited.

The compensation expense related to options and restricted shares was $124,990 and $ 377,521 for the three and nine month period ended September 30, 2013 , respectively. The compensation expense related to options and restricted shares was $130,344 and $ 294,384 for the three and nine month period ended September 30, 2012 , respectively. As of September 30, 2013 and December 31, 2012, there was $669,507 and $ 993,423 , respectively, 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 1.5 years.

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

4. Investment Securities

Investment securities at September 30, 2013 and December 31, 2012 are summarized as follows:



	September 30, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(Amounts in thousands)
Available-for-sale securities:
Securities of U.S. government agencies due:
Within 1 year	$	1,698	$	—	$	8	$	1,690
After 1 but within 5 years	15,041		—		195		14,846
	16,739		—		203		16,536
Government sponsored agencies:
Residential mortgage-backed securities due:
Within 1 year	—		—		—		—
After 1 but within 5 years	214		11		—		225
After 5 but within 10 years	16,231		267		—		16,498
After 10 years	102,464		646		1,265		101,845
	118,909		924		1,265		118,568
Collateralized mortgage obligations due:
After 1 but within 5 years	3,435		—		6		3,429
After 5 but within 10 years	5,323		152		1		5,474
After 10 years	60,171		637		219		60,589
	68,929		789		226		69,492
Private label collateralized mortgage obligations due:
After 5 but within 10 years	151		—		—		151
After 10 years	11,457		21		197		11,281
	11,608		21		197		11,432
State and municipal securities due:
Within 1 year	1,061		20		—		1,081
After 1 but within 5 years	6,376		280		—		6,656
After 5 but within 10 years	38,790		1,227		670		39,347
After 10 years	66,338		457		4,253		62,542
	112,565		1,984		4,923		109,626
Common and preferred stocks:	1,869		1,167		—		3,036
Total available-for-sale securities	$	330,619	$	4,885	$	6,814	$	328,690

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(Amounts in thousands)
Available-for-sale securities:
Securities of U.S. government agencies due:
Within 1 year	$	10,005	$	15	$	—	$	10,020
After 1 but within 5 years	17,479		29		1		17,507
	27,484		44		1		27,527
Government sponsored agencies:
Residential mortgage-backed securities due:
Within 1 year	119		2		—		121
After 1 but within 5 years	315		26		—		341
After 5 but within 10 years	10,371		341		—		10,712
After 10 years	94,319		2,089		325		96,083
	105,124		2,458		325		107,257
Collateralized mortgage obligations due:
After 1 but within 5 years	648		2		—		650
After 5 but within 10 years	9,975		206		3		10,178
After 10 years	111,155		902		292		111,765
	121,778		1,110		295		122,593
Private label collateralized mortgage obligations due:
After 5 but within 10 years	178		—		—		178
After 10 years	848		19		—		867
	1,026		19		—		1,045
State and municipal securities due:
Within 1 year	620		6		—		626
After 1 but within 5 years	5,734		321		—		6,055
After 5 but within 10 years	24,464		1,698		12		26,150
After 10 years	50,031		2,064		361		51,734
	80,849		4,089		373		84,565
Common and preferred stocks:	88		46		1		133
Total available-for-sale securities	$	336,349	$	7,766	$	995	$	343,120

Mortgage-backed securities are included in maturity groups based upon stated maturity date. At September 30, 2013 , $ 118.6 million of the Bank's mortgage-backed securities were pass-through securities and $80.9 million were collateralized mortgage obligations. At December 31, 2012 , $107.3 million of the Bank's mortgage-backed securities were pass-through securities and $123.6 million were collateralized mortgage obligations. Actual maturity will vary based on repayment of the underlying mortgage loans.

Gross realized gains on the sale of securities for the three and nine months ended September 30, 2013 were $ 253,433 and $ 575,573 , respectively. There were no gross losses on the sale for the three months ended September 30, 2013 and $ 46,589 in gross losses on the sale of securities available-for-sale for the nine months ended September 30, 2013 . There were $ 1.3 million and $ 1.6 million in gross gains for the three and nine months ended September 30, 2012, respectively. There were no gross losses on the sale of available-for-sale securities for the three and nine months ended September 30, 2012.

Investment securities with carrying values of approximately $82,154,489 and $88,652,919 at September 30, 2013 and December 31, 2012 , respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.

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Form 10-Q Quarterly Report September 30, 2013

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The following table presents the gross unrealized losses and fair value of investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012 . Securities that have been in a loss position for twelve months or more at September 30, 2013 include one private label collateralized mortgage obligation and one collateralized mortgage obligation. The key factors considered in evaluating the collateralized mortgage obligations, private label collateralized mortgage obligations, and municipal securities were cash flows of the investment and the assessment of other relative economic factors, such as credit risk. Securities that have been in a loss position for twelve months or more at December 31, 2012 include three collateralized mortgage obligations, one private label collateralized mortgage obligation and two other securities. The unrealized losses relate to securities that have incurred fair value reductions due to a shift in demand from non-governmental securities and municipals to U.S. Treasury bonds and governmental agencies due to market concerns. The unrealized losses are not likely to reverse unless market interest rates decline to the levels that existed when the securities were purchased. None of the unrealized losses relate to the marketability of the securities or the issuer's ability to honor redemption obligations. It is not more likely than not that the Company will have to sell the investments before recovery of their amortized cost bases. For the three and nine months ended September 30, 2013 , there were no securities available-for-sale deemed to be other than temporarily impaired (“OTTI”).

If management determines that an investment has experienced an other than temporary impairment, the loss is recognized in the income statement.



	Less Than 12 Months				12 Months or More				Total
September 30, 2013	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities available-for-sale:
U.S. government agencies	$	16,536	$	203	$	—	$	—	$	16,536	$	203
Government sponsored agencies:
Residential mortgage-backed securities	63,785		1,265		—		—		63,785		1,265
Collateralized mortgage obligations	18,213		185		2,268		41		20,481		226
Private label collateralized mortgage obligations	6,095		197		151		—		6,246		197
State and municipal securities	64,401		4,923		—				64,401		4,923
Total temporarily impaired securities	$	169,030	$	6,773	$	2,419	$	41	$	171,449	$	6,814



	Less Than 12 Months				12 Months or More				Total
December 31, 2012	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities available-for-sale:
U.S. government agencies	$	2,429	$	1	$	—	$	—	$	2,429	$	1
Government sponsored agencies:
Residential mortgage-backed securities	12,021		325		—		—		12,021		325
Collateralized mortgage obligation	27,417		127		7,626		168		35,043		295
Private label collateralized mortgage obligations	—		—		178		—		178		—
State and municipal securities	22,899		373		—		—		22,899		373
Common and preferred stocks, and other	—		—		60		1		60		1
Total temporarily impaired securities	$	64,766	$	826	$	7,864	$	169	$	72,630	$	995

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

5. Non-marketable Equity Securities

The aggregate cost of the Company's cost method investments totaled $ 5,952,123 at September 30, 2013 and $ 6,706,012 at December 31, 2012 . Cost method investments at September 30, 2013 include $ 5,273,000 in Federal Home Loan Bank ("FHLB") stock and $ 679,123 of investments in various trust and financial companies, which are included in other assets. All cost method investments were evaluated for impairment at September 30, 2013 and December 31, 2012 . The following factors have been considered in determining the carrying amount of FHLB stock: 1) the recoverability of the par value, 2) the Company has sufficient liquidity to meet all operational needs in the foreseeable future and would not need to dispose of the stock below recorded amounts, 3) redemptions and purchases of the stock are at the discretion of the FHLB, 4) the Company believes the FHLB has the ability to absorb economic losses given the expectation that the various FHLBs' have a high degree of government support, and 5) the unrealized losses related to securities owned by the FHLB are manageable given the capital levels of the organization. During the nine months ended September 30, 2013 , the Company's investment in a financial services company was considered to be other than temporarily impaired and approximately $ 39,185 was charged-off. The remaining value of the investment after the charge-off was $62,815 at September 30, 2013 . There were no other than temporary impairments recorded for the three months ended September 30, 2013 . There were no other than temporary impairments recorded for the three and nine months ended September 30, 2012.

6. Commitments and Contingencies

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying financial statements. At September 30, 2013 , the Company had commitments outstanding of $ 307.2 million for additional loan amounts. Commitments of the Bank's mortgage lending department are excluded from this amount and discussed in the paragraph below. Additional commitments totaling $ 4.7 million were outstanding under standby letters of credit. Management does not expect any significant losses to result from these commitments.

At September 30, 2013 , the Bank had $ 25.5 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $ 38.0 million of forward commitments outstanding under best efforts contracts to sell mortgages to agencies and other investors. See Note 9 for additional disclosures on these derivative financial instruments.

7. Earnings Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the reporting periods. Diluted net income available to common shareholders per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The numerators of the basic net income per common share computations are the same as the numerators of the diluted net income per common share computations for all the periods presented. Weighted average shares outstanding for the three and nine months ended September 30, 2013 excludes 178,281 shares of unvested restricted stock. Weighted average shares outstanding for the three and nine months ended September 30, 2012 excludes 199,279 shares of unvested restricted stock. A reconciliation of the denominator of the basic net income per common share computations to the denominator of the diluted net income per common share computations is as follows:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Basic EPS denominator:
Weighted average number of common shares outstanding	14,205,705	6,463,084	14,202,097	6,460,883
Dilutive potential common shares	43,447	—	5,415	—
Diluted EPS denominator	14,249,152	6,463,084	14,207,512	6,460,883

For the quarter and nine months ended September 30, 2013 and 2012, net income for determining net income per common share was reported as net income less the dividend on preferred stock. During the quarter and nine months ended September 30, 2013 , there were 48,452 and 52,950 warrants and stock options, respectively, that were not considered dilutive because the exercise prices exceeded the average market price per share. The non-dilutive options had exercise prices ranging from $20.37 to $57.21 per share for the three months ended September 30, 2013 and exercise prices ranging from $11.52 to $57.21 per share for the nine months ended September 30, 2013. During the quarter and nine months ended September 30, 2013, 136,259 and 173,414 shares of restricted stock, respectively, were not considered dilutive because they were antidilutive under the treasury stock method or

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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because performance and service criteria had not been met. During the three and nine months ended September 30, 2012, there were 82,322 warrants and stock options that were not considered dilutive.

Effective May 28, 2013, the Company executed a one-for-three reverse stock split. All references to net income per share and weighted average shares outstanding have been adjusted for the effect of this reverse stock split. For additional information related to the reverse stock split, see Note 16, Other Events.

8. Shareholders' Equity

Effective October 1, 2012, North Carolina passed the Banking Modernization Act, pursuant to Section 53C-4-7 of which, the Bank, as a North Carolina banking corporation, may pay dividends if such distributions will not reduce its capital below its applicable “required capital.” The Bank's “required capital” is that amount of capital required for the Bank to be deemed “adequately capitalized” under applicable federal regulatory capital ratios. Currently, the Bank exceeds each of these federal regulatory capital ratios. However, the Bank is currently prohibited from paying dividends to the holding company without prior approval of the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Banking Commissioner. In addition, the Company has committed to the regulators that the Bank will maintain a Tier 1 leverage ratio of 8.0% , which is higher than the statutory Tier 1 leverage ratio of 5.0% to be classified as well-capitalized. The Bank's Tier 1 leverage ratio is 10.9% at September 30, 2013 and exceeds committed levels.

As further explained in Note 16, Other Events, during the second quarter of 2013, the Company executed a one-for-three reverse stock split and amendments to the Company's and the Bank's Articles of Incorporation changing their names to Yadkin Financial Corporation and Yadkin Bank, respectively. Both of these events, along with the Company's new NASDAQ ticker symbol, YDKN, were effective on May 28, 2013. All references to net income per share and weighted average shares outstanding have been adjusted for the effect of this reverse stock split.

9. Derivatives

The Company currently has derivative instrument contracts consisting of interest rate swaps and interest rate lock commitments and commitments to sell mortgages. The primary objective for each of these contracts is to minimize interest rate risk. The Company's strategy is to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods. The Company does not enter into derivative financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest income during the period of change.

As part of interest rate risk management, the Company has entered into two interest rate swap agreements to convert certain fixed-rate receivables to floating rates and certain fixed-rate obligations to floating rates. The interest rate swaps are used to provide fixed rate financing while managing interest rate risk and were not designated as hedges. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR , with payments being calculated on the notional amount. The interest rate swaps are settled quarterly and mature on June 15, 2016. The interest rate swaps each had a notional amount of $ 1.9 million at September 30, 2013 , representing the amount of fixed-rate receivables outstanding and liabilities outstanding, and are included in other assets and other liabilities at their fair value of $ 145,930 . The Company had a gain of $ 8,138 on the interest rate swap asset and a loss of $8,138 on the interest rate swap liability for the quarter ended September 30, 2013 . The Company had a gain of $ 50,077 on the interest rate swap asset and a loss of $ 50,077 on the interest rate swap liability for the nine months ended September 30, 2013 . The Company had a gain of $ 334 on the interest rate swap asset and a loss of $334 on the interest rate swap liability for the quarter ended September 30, 2012 . The Company had a gain of $ 4,057 on the interest rate swap asset and a loss of $ 4,057 on the interest rate swap liability for the nine months ended September 30, 2012 . The interest rate swaps had a notional amount of $2.0 million outstanding as of December 31, 2012 and was included in other assets and other liabilities at their fair market value of $196,006 . All changes in fair value are recorded as other income within non-interest income. Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

The Company is exposed to certain risks relating to its ongoing mortgage origination business. The Bank's mortgage banking segment enters into interest rate lock commitments and commitments to sell mortgages. The primary risks managed by derivative instruments are these interest rate lock commitments and forward-loan-sale commitments. Interest rate lock commitments are entered into to manage interest rate risk associated with the Company's fixed rate loan commitments. The period of time between the issuance of a loan commitment and the closing and sale of the loan generally ranges from 10 to 60 days. Such interest rate lock commitments and forward-loan-sale commitments represent derivative instruments which are required to be carried at fair value. These derivative instruments do not qualify as hedges under the Derivatives and Hedging topic of the FASB Accounting Standards Codification. The fair value of the Company's interest rate lock commitments is based on the value that can be generated

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Form 10-Q Quarterly Report September 30, 2013

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when the underlying loan is sold on the secondary market and is included on the balance sheet in other assets and on the income statement in mortgage banking income. The fair value of the Company's forward sales commitments is based on changes in the value of the commitment, principally because of changes in interest rates, and is included on the balance sheet in other assets or other liabilities and on the income statement in mortgage banking income.

At September 30, 2013 , the Bank had $ 25.5 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $ 38.0 million of forward commitments outstanding for original commitments and outstanding mortgage loans held-for-sale under best efforts contracts to sell mortgages to agencies and other investors. The fair value of forward sales commitments recorded in other liabilities was $ 259,855 at September 30, 2013 . The fair value of the interest rate lock commitments recorded in other assets was $ 483,935 at September 30, 2013 . Recognition of losses and gains related to the change in fair value of forward sales commitments were $ (871,940) and $ 220,951 for the three and nine months ended September 30, 2013 , respectively, and are included in mortgage banking activities income. Recognition of gains and losses related to the change in fair value of the interest rate lock commitments were $ 796,052 and $ (388,909) for the three and nine months ended September 30, 2013 , respectively, and are included in mortgage banking activities income. Recognition of gains related to the change in fair value of the interest rate lock commitments and gains related to forward sales commitments were $ 64,294 and $ 41,610 for the three months ended September 30, 2012 , respectively, and are included in other income. Recognition of gains related to the change in fair value of the interest rate lock commitments and gains related to forward sales commitments were $ 141,071 and $ 330,279 for the nine months ended September 30, 2012 , respectively, and are included in other income. At December 31, 2012 , the Bank had $ 46.7 million of commitments outstanding to originate mortgage loans held-for-sale at fixed prices and $ 71.5 million of forward commitments outstanding under best efforts contracts to sell mortgages to agencies and other investors. The fair value of forward sales commitments recorded in other liabilities was $ 480,806 at December 31, 2012 . The fair value of the interest rate lock commitments recorded in other assets was $ 872,844 at December 31, 2012 .

10. Loans and Allowance for Loan Losses

General. The Bank provides to its customers a full range of short- to medium-term commercial, agricultural, Small Business Administration guaranteed, mortgage, home equity, and personal loans, both secured and unsecured. The Bank also makes real estate mortgage and construction loans.

The following table presents loans at September 30, 2013 and December 31, 2012 by class:



	June 30,			December 31,
	2013			2012
	(in thousands)
Construction and land development	$	128,950		$	131,981
Commercial real estate:
Owner occupied	374,377			342,962
Non-owner occupied	201,077			211,489
Residential mortgages:
Secured 1-4 family	171,747			168,611
Multifamily	40,662			35,337
Home equity lines of credit	193,299			191,888
Commercial	171,031			174,440
Consumer and other	51,353			51,664
Total	1,332,496			1,308,372
Less: Net deferred loan origination fees	941			1,132
Allowance for loan losses	(21,014		)	(25,149		)
Loans, net	$	1,312,423		$	1,284,355

Real Estate Loans. Real estate loans include construction and land development loans, commercial real estate loans, residential mortgages, and home equity lines of credit.

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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Commercial real estate loans totaled $ 575.5 million and $ 554.5 million at September 30, 2013 and December 31, 2012 , respectively. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. The Bank generally requires the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

Construction/development lending totaled $ 129.0 million and $ 132.0 million at September 30, 2013 and December 31, 2012 , respectively. The Bank originates one-to-four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an outside banking entity prior to financing the construction of pre-sold homes; however, the Bank also engages in selected speculative housing lending to existing builder clients utilizing lots that the Bank has a collateral interest in. The Bank also makes commercial real estate construction loans, primarily for owner-occupied properties. The Bank limits its construction lending risk through adherence to established underwriting procedures.

Residential one-to-four family loans amounted to $ 171.7 million and $ 168.6 million at September 30, 2013 and December 31, 2012 , respectively. The Bank's residential mortgage loans are typically construction loans that convert into permanent financing and are secured by properties located within the Bank's market areas.

Home equity lines of credit totaled $ 193.3 million and $ 191.9 million at September 30, 2013 and December 31, 2012 , respectively. The Bank's home equity lines of credit generally are variable rate lines of credit secured by junior liens on 1-4 family residential properties with interest only payment options during a draw period. At the end of the draw period, the line of credit generally converts to an amortizing payment with repayment terms of up to 30 years .

Commercial Loans. At September 30, 2013 and December 31, 2012 , the Bank's commercial loan portfolio totaled $ 171.0 million and $ 174.4 million , respectively. Commercial loans include both secured and unsecured loans for working capital, expansion, and other business purposes. Short-term working capital loans are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment. Commercial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans.

Consumer Loans . Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle financing, and miscellaneous secured and unsecured personal loans. Consumer loans totaled $ 51.4 million and $ 51.7 million at September 30, 2013 and December 31, 2012 , respectively. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles, boats, recreational vehicles, and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The Bank manages the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.

Loan Approvals. The Bank's loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower's total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. Responsibility for loan review, loan underwriting, and approval resides with the Chief Credit Officer position. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.

Substantially all of the Company's loans have been granted to customers in the Piedmont, foothills, northwestern mountains, and the Research Triangle regions of North Carolina and the upstate region of South Carolina.

Credit Review and Evaluation. The Bank has a credit review department that reports to the Chief Credit Officer. The focus of the department is on policy compliance and proper grading of higher credit risk loans as well as new and existing loans on a sample

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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basis. Additional reporting for problem/criticized assets has been developed along with an after-the-fact loan review. A newly expanded Enterprise Risk Management role also performs ongoing credit review and evaluation to help manage and assess overall credit risk for the Company.

The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses for real estate, commercial and consumer loans. In this program, risk grades are initially assigned by loan officers, reviewed by regional credit officers, and further reviewed by internal credit review analysts on a test basis. The Bank strives to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of the Bank's market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies.

Loans over $20,000 are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable loans at inception are grades 1 through 4, and these grades have underwriting requirements that at least meet the minimum requirements of a secondary market source. If borrowers do not meet credit history requirements, other mitigating criteria such as substantial liquidity and low loan-to-value ratios could be considered and would generally have to be met in order to make the loan. The Bank's loan policy states that a guarantor may be necessary if reasonable doubt exists as to the borrower's ability to repay. The Board of Directors has authorized the loan officers to have individual approval authority for risk grade 1 through 4 loans up to maximum exposure limits for each customer. New or renewed loans that are graded 5 (special mention) or lower must have approval from a regional credit officer. Any changes in risk assessments as determined by loan officers, credit administrators, regulatory examiners and management are also considered.

The risk grades, normally assigned by the loan officers when the loan is originated and reviewed by the regional credit officers, are based on several factors including historical data, current economic factors, composition of the portfolio, and evaluations of the total loan portfolio and assessments of credit quality within specific loan types. In some cases, the risk grades are assigned by regional executives, depending upon dollar exposure. Because these factors are dynamic, the provision for loan losses can fluctuate. Credit quality reviews are based primarily on analysis of borrowers' cash flows, with asset values considered only as a second source of payment. Regional credit officers work with lenders in underwriting, structuring and risk grading the Bank's credits. The Risk Review Officer focuses on lending policy compliance, credit risk grading, and credit risk reviews on larger dollar exposures. Management uses the information developed from the procedures above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in determining the appropriate levels of the allowance for loan losses.

The following is a summary of the credit risk grade definitions for all loan types:

“1” - High Quality- These loans represent a credit extension of the highest quality. The borrower's historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.

“2” - Good Quality- These loans have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the highest quality loans.

“3” - Satisfactory- The borrowers are a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant.

“4” - Satisfactory - Merits Attention- These credit facilities have potential developing weaknesses that deserve extra attention from the account manager and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the bank's debt in the future.

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Form 10-Q Quarterly Report September 30, 2013

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“5” - Watch or Special Mention - These loans are typically existing loans, made using the passing grades outlined above, that have deteriorated to the point that cash flow is not consistently adequate to meet debt service or current debt service coverage is based on projections. Secondary sources of repayment may include specialized collateral or real estate that is not readily marketable or undeveloped, making timely collection in doubt.

“6” - Substandard- Loans and other credit extensions bearing this grade are considered inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions jeopardizing repayment of principal and interest as originally intended. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

“7” - Substandard Impaired (also includes any loans over 90 days past due, excluding sold mortgages )- Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6,” with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined.

"7B"- Doubtful- Loans and other credit extensions graded “7b” have all the weaknesses inherent in those graded “7,” with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification are placed in non-accrual status, with collections applied to principal on the bank's books and evaluated for impairment. All loans in this category are considered impaired and all material loans are evaluated for a specific reserve in accordance with ASC 310-10 and the Bank's ALLL methodology and specific reserve guidelines.

“8” - Loss- Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. Such loans are to be charged-off or charged-down. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following is a summary of credit quality indicators by class at September 30, 2013 and December 31, 2012 :



Real Estate Credit Exposure as of September 30, 2013
			Commercial Real Estate
	Construction		Owner Occupied		Non-owner Occupied		1-4 Family		Multifamily		Home Equity
	(in thousands)
High Quality	$	—	$	115	$	—	$	—	$	—	$	121
Good Quality	364		—		1,599		1,004		717		6,897
Satisfactory	21,774		124,230		52,587		98,437		6,969		119,019
Merits Attention	87,417		219,372		131,433		59,464		31,556		59,673
Special Mention	14,753		19,058		8,783		5,764		557		4,706
Substandard	1,178		4,226		1,535		3,371		580		1,510
Substandard impaired	3,464		7,376		5,140		3,707		283		1,373
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
	$	128,950	$	374,377	$	201,077	$	171,747	$	40,662	$	193,299

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Form 10-Q Quarterly Report September 30, 2013

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Other Credit Exposures as of September 30, 2013
	Commercial		Consumer and Other		Total Loans
	(in thousands)
High Quality	$	2,222	$	1,755	$	4,213
Good Quality	5,192		1,200		16,973
Satisfactory	53,611		21,858		498,485
Merits Attention	90,359		25,511		704,785
Special Mention	9,563		689		63,873
Substandard	7,931		34		20,365
Substandard impaired	2,153		306		23,802
Doubtful	—		—		—
Loss	—		—		—
	$	171,031	$	51,353	$	1,332,496



Real Estate Credit Exposure as of December 31, 2012
			Commercial Real Estate
	Construction		Owner Occupied		Non-owner Occupied		1-4 Family		Multifamily		Home Equity
	(in thousands)
High Quality	$	—	$	119	$	—	$	375	$	—	$	111
Good Quality	464		—		—		1,301		—		6,756
Satisfactory	22,284		115,347		58,577		95,727		7,945		118,497
Merits Attention	78,668		191,958		129,283		56,629		25,681		59,568
Special Mention	16,797		23,396		16,084		7,862		571		4,228
Substandard	3,939		4,286		2,136		2,850		601		1,687
Substandard impaired	9,829		7,856		5,409		3,867		539		1,041
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
	$	131,981	$	342,962	$	211,489	$	168,611	$	35,337	$	191,888



Other Credit Exposures as of December 31, 2012
	Commercial		Consumer and Other		Total Loans
	(in thousands)
High Quality	$	2,430	$	2,289	$	5,324
Good Quality	5,738		1,316		15,575
Satisfactory	62,071		22,459		502,907
Merits Attention	82,243		24,425		648,455
Special Mention	16,809		551		86,298
Substandard	1,009		122		16,630
Substandard impaired	4,140		502		33,183
Doubtful	—		—		—
Loss	—		—		—
	$	174,440	$	51,664	$	1,308,372

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

Nonaccrual loans and past due loans . Nonperforming assets include loans classified as nonaccrual, foreclosed bank-owned property and loans past due 90 days or more on which interest is still being accrued. It is the general policy of the Bank to stop accruing interest for all classes of loans past due 90 days or when it is apparent that the collection of principal and/or interest is doubtful. In addition, certain restructured loans are placed on nonaccrual status until sufficient evidence of timely payment is obtained. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against interest income in the current period. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. There were no financing receivables past due over 90 days accruing interest as of September 30, 2013 and December 31, 2012 .

Nonperforming loans as of September 30, 2013 totaled $ 17.9 million , or 1.33% of total loans, compared with $ 22.8 million , or 1.71% of total loans, as of December 31, 2012 . The Bank aggressively pursues the collection and repayment of all loans. Other nonperforming assets, such as repossessed and foreclosed collateral is aggressively liquidated by the Bank's collection department. The total number of loans on nonaccrual status has decreased from 315 at December 31, 2012 to 203 at September 30, 2013 .

The following is a breakdown of nonaccrual loans as of September 30, 2013 and December 31, 2012 :



	September 30, 2013		December 31, 2012
	(in thousands)
Financing Receivables on Nonaccrual status
Construction	$	3,464	$	7,385
Commercial real estate:
Owner occupied	5,419		5,787
Non-owner occupied	2,130		1,697
Mortgages:
Secured 1-4 family first lien	3,312		3,123
Multifamily	283		539
Home equity lines of credit	1,373		1,041
Commercial	1,622		2,790
Consumer and other	271		455
Total	$	17,874	$	22,817

Past due loans reported in the following table do not include loans granted forbearance terms since payments terms have been modified or extended, although the loans are past due based on original contract terms. All loans with forbearance terms are included and reported as impaired loans. Loans are considered past due if the required principal and interest income have not been received as of the date such payments were due. The following table presents the Bank's aged analysis of past due loans:

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans
September 30, 2013	(in thousands)
Construction	$	815	$	194	$	1,279	$	2,288	$	126,662	$	128,950
Commercial real estate:
Owner occupied	641		—		1,028		1,669		372,708		374,377
Non-owner occupied	176		42		389		607		200,470		201,077
Commercial	546		76		1,403		2,025		169,006		171,031
Mortgages:
Secured 1-4 family- first lien	553		668		1,717		2,938		168,809		171,747
Multifamily	—		—		27		27		40,635		40,662
Home equity lines of credit	423		—		79		502		192,797		193,299
Consumer and other	265		12		63		340		51,013		51,353
Total	$	3,419	$	992	$	5,985	$	10,396	$	1,322,100	$	1,332,496

December 31, 2012
Construction	$	4,395	$	345	$	1,865	$	6,605	$	125,376	$	131,981
Commercial real estate:
Owner occupied	838		114		4,237		5,189		337,773		342,962
Non-owner occupied	1,688		500		1,098		3,286		208,203		211,489
Commercial	2,027		34		2,660		4,721		169,719		174,440
Mortgages:
Secured 1-4 family- first lien	2,767		910		2,226		5,903		162,708		168,611
Multifamily	12		—		10		22		35,315		35,337
Home equity lines of credit	1,980		52		924		2,956		188,932		191,888
Consumer and other	236		45		342		623		51,041		51,664
Total	$	13,943	$	2,000	$	13,362	$	29,305	$	1,279,067	$	1,308,372

Impaired Loans. Management considers certain loans graded “substandard impaired” (loans graded 7), "doubtful" (loans graded 7B) or “loss” (loans graded 8) to be individually impaired and may consider “substandard” loans (loans graded 6) individually impaired depending on the borrower's payment history. The Bank measures impairment based upon probable cash flows or the value of the collateral. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. Updated appraisals are required for all impaired loans and typically at renewal or modification of larger loans if the appraisal is more than 12 months old.

Impaired loans for all classes of loans typically include nonaccrual loans, loans over 90 days past due still accruing, troubled debt restructured loans and other potential problem loans considered impaired based on other underlying factors. Troubled debt restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower's weakened financial condition. Interest on troubled debt restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur and a sustained payment performance period is obtained. Due to the borrowers' inability to make the payments required under the original loan terms, the Bank modifies the terms by granting a longer amortized repayment structure or reduced interest rates. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which we have serious doubts as to the borrower's ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or troubled debt restructured loans, so they are considered by management in assessing the adequacy of the allowance for loan losses.

Impaired loans under $250,000 are collectively reviewed for impairment based on homogeneous pools established for each class of impaired loans with similar risk characteristics in accordance with ASC 310-10-35-21 and are not included with non-impaired loans. Separate loss given probability of default rates are calculated for each impaired pool representing the risk associated with impaired loans less than $250,000 for that pool of loans. Total impaired loans under $250,000 collectively evaluated were

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

$ 6,542,480 and $ 7,827,783 , respectively, as of September 30, 2013 and December 31, 2012 . Reserves on impaired loans collectively evaluated were $ 2,150,516 and $ 2,179,128 as of September 30, 2013 and December 31, 2012 , respectively.

The following table presents the Bank's investment in loans considered to be impaired and related information on those impaired loans as of September 30, 2013 and December 31, 2012 :



							Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2013	(in thousands)

Impaired loans without a related allowance for loan losses
Construction	$	3,990	$	4,345	$	—	$	4,602	$	39	$	5,341	$	99
Commercial real estate:
Owner occupied	7,058		7,606		—		5,417		53		4,140		102
Non-owner occupied	5,490		5,559		—		5,358		70		5,419		183
Commercial	4,419		5,657		—		4,416		53		4,428		132
Mortgages:
Secured 1-4 family real estate	671		736		—		679		10		701		24
Multifamily	249		291		—		253		—		257		—
Home equity lines of credit	429		500		—		451		—		462		—
Consumer and other	—		—		—		—		—		—		—
Impaired loans with a related allowance for loan losses
Construction	$	—	$	—	$	—	$	63	$	—	$	1,129	$	25
Commercial real estate:
Owner occupied	4,585		4,584		113		5,349		78		6,752		194
Non-owner occupied	—		—		—		105		—		325		2
Commercial	—		—		—		298		—		836		—
Mortgages:
Secured 1-4 family real estate	649		653		296		572		1		475		4
Multifamily	—		—		—		—		—		—		—
Home equity lines of credit	—		—		—		185		—		520		2
Consumer and other	—		—		—		—		—		—		—
Total impaired loans
Construction	$	3,990	$	4,345	$	—	$	4,665	$	39	$	6,470	$	124
Commercial real estate:
Owner occupied	11,643		12,190		113		10,766		131		10,892		296
Non-owner occupied	5,490		5,559		—		5,463		70		5,744		185
Commercial	4,419		5,657		—		4,714		53		5,264		132
Mortgages:
Secured 1-4 family real estate	1,320		1,389		296		1,251		11		1,176		28
Multifamily	249		291		—		253		—		257		—
Home equity lines of credit	429		500		—		636		—		982		2
Consumer and other	—		—		—		—		—		—		—
Total impaired loans individually reviewed for impairment	$	27,540	$	29,931	$	409	$	27,748	$	304	$	30,785	$	767

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	As of December 31, 2012						Quarter to Date September 30, 2012				Year to Date September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
Impaired loans without a related allowance for loan losses
Construction	$	6,212	$	7,676	$	—	$	14,694	$	125	$	20,382	$	275
Commercial real estate:
Owner occupied	6,563		7,071		—		13,840		23		15,594		332
Non-owner occupied	4,976		5,358		—		4,017		29		8,193		39
Commercial	4,460		4,482		—		6,403		—		6,316		130
Mortgages:
Secured 1-4 family real estate	1,435		1,503		—		1,432		—		2,680		29
Multifamily	530		565		—		703		4		702		7
Home equity lines of credit	705		800		—		1,588		—		1,320		7
Consumer and other	—		—		—		—		—		—		—
Impaired loans with a related allowance for loan losses
Construction	$	1,958	$	2,136	$	191	$	4,106	$	—	$	2,379	$	—
Commercial real estate:
Owner occupied	4,961		5,082		189		6,154		66		6,910		134
Non-owner occupied	561		643		89		3,491		26		1,768		42
Commercial	1,193		1,245		928		2,865		—		3,006		164
Mortgages:
Secured 1-4 family real estate	—		—		—		449		—		411		3
Multifamily	—		—		—		—		—		30		7
Home equity lines of credit	—		—		—		29		—		111		—
Consumer and other	—		—		—		54		—		67		—
Total impaired loans
Construction	$	8,170	$	9,812	$	191	$	18,800	$	125	$	22,761	$	275
Commercial real estate:
Owner occupied	11,524		12,153		189		19,994		89		22,504		466
Non-owner occupied	5,537		6,001		89		7,508		55		9,961		81
Commercial	5,653		5,727		928		9,268		—		9,322		294
Mortgages:
Secured 1-4 family real estate	1,435		1,503		—		1,881		—		3,091		32
Multifamily	530		565		—		703		4		732		14
Home equity lines of credit	705		800		—		1,617		—		1,431		7
Consumer and other	—		—		—		54		—		67		—
Total impaired loan individually reviewed for impairment	$	33,554	$	36,561	$	1,397	$	59,825	$	273	$	69,869	$	1,169

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

Impaired loans acquired in business combinations without a related allowance for loan losses includes loans for which no additional reserves have been recorded in excess of credit discounts for purchased impaired loans. Impaired loans acquired with subsequent deterioration and related allowance for loan losses are loans in which additional impairment has been identified in excess of credit discounts resulting in additional reserves. These additional reserves are included in the allowance for loan losses related to purchased impaired loans and were $ 3,713 and $ 6,672 as of September 30, 2013 and December 31, 2012 , respectively.

At September 30, 2013 , the outstanding balance of purchased impaired loans from American Community Bancshares, Inc. ("American Community"), which includes principal, interest and fees due, was $ 91,806 . Because of the uncertainty of the expected cash flows, the Company is accounting for each purchased impaired loan under the cost recovery method, in which all cash payments are applied to principal. Thus, there is no accretable yield associated with the above loans.

Troubled Debt Restructured Loans. Total amount of troubled debt restructured loans outstanding as of September 30, 2013 was $ 21.3 million with related reserves of $ 519,791 . Approximately $ 16.0 million of troubled debt restructured loans are current and accruing interest as of September 30, 2013 , as these loans have sufficient evidence of paying according to the new restructured terms. Total amount of troubled debt restructured loans outstanding as of December 31, 2012 were $ 23.7 million with related reserves of $ 746,581 . Approximately $ 17.7 million of troubled debt restructured loans were accruing interest as of December 31, 2012 , as these loans have sufficient evidence of paying according to the new restructured terms.

The following tables include the recorded investment and number of modifications for troubled debt restructured loans for the three and nine months ended September 30, 2013 and 2012. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to modification.



	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
		(in thousands)			(in thousands)
Extended payment terms
Commercial real estate:
Owner occupied	2	$	593	4	$	1,316
Non-owner occupied	—	—		1	165
Total	2	$	593	5	$	1,481

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	Number of loans	Recorded investment		Number of loans	Recorded investment
Below Market Rate		(in thousands)			(in thousands)
Secured 1-4 family mortgages	1	$	391	1	$	391
Total	1	$	391	1	$	391
Extended payment terms
Construction	2	$	521	5	$	873
Commercial real estate:
Owner occupied	2	331		7	2,021
Non-owner occupied	2	1,156		3	1,367
Commercial	—	—		6	1,482
Secured 1-4 family mortgages	—	—		3	751
Consumer	—	—		1	24
Total extended payment terms	6	$	2,008	25	$	6,518

Principal payment reduction
Commercial real estate:
Owner occupied	—	$	—	2	$	571
Consumer	—	—		1	9
Total principal payment reduction	—	$	—	3	$	580

Total	7	$	2,399	29	$	7,489

The following tables present loans that were modified as troubled debt restructurings during the previous twelve months and for which there was a payment default during the three and nine months ended September 30, 2013 and 2012.



	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
	Number of loans	Recorded investment		Number of loans	Recorded investment
Extended payment terms
Construction	—	$	—	1	$	93
Commercial real estate:
Non-owner occupied	—	—		1	121
Total	—	$	—	2	$	214

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	Number of loans	Recorded investment		Number of loans	Recorded investment
Below Market Rate		(in thousands)			(in thousands)
Construction	—	$	—	1	578
Total below market rate	—	$	—	1	$	578
Extended payment terms
Consumer	—	$	—	1	$	24
Total extended payment terms	—	$	—	1	$	24
Total	—	$	—	2	$	602

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate for probable losses that have been incurred within the existing portfolio of loans. The primary risks inherent in the Bank's loan portfolio, including the adequacy of the allowance or reserve for loan losses, are based on management's assumptions regarding, among other factors, general and local economic conditions, which are difficult to predict and are beyond the Bank's control. In estimating these risks, and the related loss reserve levels, management also considers the financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.

The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses. The provision for loan losses was $ 40,000 for the quarter ended September 30, 2013 as compared to $ 4.3 million for the quarter ended September 30, 2012. The provision expense is determined by management with the use of the Bank's allowance for loan losses model. The components of the model are specific reserves for impaired loans and a general allocation for unimpaired loans. The general allocation has two components, an estimate based on historical loss experience and an additional estimate based on internal and external environmental factors due to the uncertainty of historical loss experience in predicting current embedded losses in the portfolio that will be realized in the future.

The portion of the general allocation on environmental factors includes estimates of losses related to interest rate trends, unemployment trends, real estate characteristics, past due and nonaccrual trends, watch list trends, charge-off trends, and underwriting and servicing assessments. The real estate characteristics component includes trends in real estate concentrations, exceptions to FDIC guidelines for loan-to-value ratios, and changes in real estate market values. Other factors impacting the allowance at September 30, 2013 were watch list trends, unemployment rate trends, and underwriting and servicing assessments.

The following tables present changes in the allowance for loan losses for the three and nine months ended September 30, 2013 and 2012:

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	June 30, 2013		Charge-offs		Recoveries		Provision			September 30, 2013
	(Amounts in thousands)
Construction	$	3,665	$	254	$	128	$	(37	)	$	3,502
Commercial real estate:
Owner occupied	4,160		139		39		(189		)	3,871
Non-owner occupied	3,459		—		60		(648		)	2,871
Commercial	3,985		1,456		221		494			3,244
Mortgages:
Secured 1-4 family- first lien	2,644		49		126		267			2,988
Multifamily	513		—		—		28			541
Home equity lines of credit	3,843		803		261		5			3,306
Consumer and other	655		114		30		120			691
	$	22,924	$	2,815	$	865	$	40		$	21,014

	June 30, 2012		Charge-offs		Recoveries		Provision			September 30, 2012
	(Amounts in thousands)
Construction	$	5,903	$	3,881	$	45	$	3,675		$	5,742
Commercial real estate:
Owner occupied	5,630		146		2		(943		)	4,543
Non-owner occupied	3,582		697		256		1,096			4,237
Commercial	4,715		771		63		624			4,631
Mortgages:
Secured 1-4 family- first lien	3,063		57		4		(83		)	2,927
Multifamily	563		—		—		5			568
Home equity lines of credit	4,399		372		29		(162		)	3,894
Consumer and other	942		313		21		39			689
	$	28,797	$	6,237	$	420	$	4,251		$	27,231

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents



	December 31, 2012		Charge-offs		Recoveries		Provision			September 30, 2013
	(Amounts in thousands)
Construction	$	4,269	$	2,088	$	726	$	595		$	3,502
Commercial real estate:
Owner occupied	4,374		383		80		(200		)	3,871
Non-owner occupied	3,935		175		85		(974		)	2,871
Commercial	4,291		2,079		543		489			3,244
Mortgages:
Secured 1-4 family- first lien	3,191		687		226		258			2,988
Multifamily	594		—		—		(53		)	541
Home equity lines of credit	3,822		884		376		(8		)	3,306
Consumer and other	673		286		79		225			691
	$	25,149	$	6,582	$	2,115	$	332		$	21,014

	December 31, 2011		Charge-offs		Recoveries		Provision			September 30, 2012
	(Amounts in thousands)
Construction	$	8,214	$	7,823	$	323	$	5,028		$	5,742
Commercial real estate:
Owner occupied	5,792		2,019		126		644			4,543
Non-owner occupied	4,668		2,461		289		1,741			4,237
Commercial	5,712		1,789		829		(121		)	4,631
Mortgages:
Secured 1-4 family- first lien	3,726		625		153		(327		)	2,927
Multifamily	805		213		—		(24		)	568
Home equity lines of credit	3,310		1,073		50		1,607			3,894
Consumer and other	621		521		317		272			689
	$	32,848	$	16,524	$	2,087	$	8,820		$	27,231

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

The following tables provide a breakdown of allowance for loan losses for collectively evaluated and individually evaluated loans by type as of September 30, 2013 and December 31, 2012.



	Reserves for loans individually evaluated for impairment		Loans individually evaluated for impairment		Reserves for loans collectively evaluated for impairment		Loans collectively evaluated for impairment
As of September 30, 2013	(Amounts in thousands)
Construction	$	—	$	3,990	$	3,501	$	124,960
Commercial real estate:
Owner occupied	113		11,643		3,758		362,734
Non-owner occupied	—		5,490		2,871		195,587
Commercial	—		4,419		3,244		166,612
Mortgages:
Secured 1-4 family- first lien	296		1,320		2,692		170,427
Multifamily	—		249		542		40,413
Home equity lines of credit	—		429		3,306		192,870
Consumer and other	—		—		691		51,353
	$	409	$	27,540	$	20,605	$	1,304,956

	Reserves for loans individually evaluated for impairment		Loans individually evaluated for impairment		Reserves for loans collectively evaluated for impairment		Loans collectively evaluated for impairment
As of December 31, 2012	(Amounts in thousands)
Construction	$	191	$	8,170	$	4,078	$	123,811
Commercial real estate:
Owner occupied	189		11,524		4,185		331,438
Non-owner occupied	89		5,537		3,846		205,952
Commercial	928		5,653		3,363		168,787
Mortgages:
Secured 1-4 family- first lien	—		1,435		3,191		167,176
Multifamily	—		530		594		34,807
Home equity lines of credit	—		705		3,822		191,183
Consumer and other	—		—		673		51,664
	$	1,397	$	33,554	$	23,752	$	1,274,818

The allowance model is applied to determine the specific allowance balance for impaired loans and the general allowance balance for unimpaired loans grouped by loan type.

The Company's loan charge-off policy for all loan classes is to charge down loans to net realizable value once a portion of the loan is determined to be uncollectable, and the underlying collateral shortfall is assessed. Unsecured loans (primarily consumer loans) are charged off against the reserve once the loan becomes 90 days past due or it is determined that a portion of the loan is uncollectable. Secured loans (primarily construction, real estate, commercial and other loans) are moved to nonaccrual status when the loan becomes 90 days delinquent or a portion of the loan is determined to be uncollectable and supporting collateral is not considered to be sufficient to cover potential losses. Nonaccrual loans are reviewed at least quarterly to determine if all or a portion of the loan is uncollectable. Nonaccrual loans that are determined to be solely collateral dependent are promptly charged down to net realizable value upon determination that they are impaired.

In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and unfunded loan commitments. Unfunded lending commitments are analyzed and segregated by loan classification. These classifications, in conjunction with an analysis of historical loss experience, current

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economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. The reserve for credit losses related to unfunded lending commitments was $ 193,385 and $ 182,000 as of September 30, 2013 and December 31, 2012 , respectively.

The Company maintains reserves for mortgage loans sold to agencies and investors in the event that, either through error or disagreement between the parties, the Company is required to indemnify the purchase. The reserves take into consideration risks associated with underwriting, key factors in the mortgage industry, loans with specific reserve requirements, past due loans and potential indemnification by the Company. Reserves are estimated based on consideration of factors in the mortgage industry such as declining collateral values and rising levels of delinquency, default and foreclosure, coupled with increased incidents of quality reviews at all levels of the mortgage industry seeking justification for pushing back losses to loan originators and wholesalers. As of September 30, 2013 , the Company had reserves for mortgage loans sold of $ 365,211 , and charges against reserves for the nine months ended September 30, 2013 were $ 83,198 . There were no charges against reserves for the three months ended September 30, 2013. For the three months ended September 30, 2013 , the Company recorded $ 6,621 in provision expense related to potential repurchase and warranties exposure on the $ 65.1 million in loan sales that occurred during the period. For the nine months ended September 30, 2013 , the Company recorded $ 1.3 million in negative provision expense related to potential repurchase and warranties exposure on the $ 214.7 million in loan sales that occurred during the period. Reduction in provisions for the nine months ended September 30, 2013 were the result of decreased mortgage activity as Sidus Financial, LLC ("Sidus") started to significantly scale back its wholesale operations and completely exited the wholesale market in 2012. The Company saw improvements in historical loss experience, and declines in specific reserves as claims were paid and settled from previously established reserves. In addition, Sidus Financial discontinued its business and was dissolved in accordance with the provisions of the North Carolina Limited Liability Company Act which limited future liability for loans previously sold by Sidus Financial. For the three and nine months ended September 30, 2012, the Company recorded $ 204,861 and $ 234,576 in provision expense related to potential repurchase and warranties exposure, respectively. Charges against reserves for the three and nine months ended September 30, 2012 were $ 115,238 and $ (157,868) , respectively. For the three and nine ended September 30, 2013 and 2012, the Company did not repurchase any mortgage loans sold. As of December 31, 2012 , the Company had reserves for mortgage loans sold of $ 1.7 million related to potential repurchase and warranties exposure on approximately $ 9.5 billion in loans sold.

11. Fair Value

The Company utilizes fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities, interest rate swaps, mortgage servicing rights, interest rate lock commitments and forward sale loan commitments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value, such as loans held-for-investment and certain other assets. These nonrecurring fair value adjustments usually involve writing the asset down to fair value or the lower of cost or market value.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Available-for-Sale Investment Securities

Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

Interest Rate Swaps

Interest rate swaps are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models run by a third-party on a monthly basis. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. As a result, the Company classifies interest rate swaps as Level 3.

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The following table presents a rollforward of interest rate swaps from December 31, 2012 to September 30, 2013 , and from December 31, 2011 to September 30, 2012.



	Level 3
	Fair Value- Assets			Fair Value- Liabilities
	(Amounts in thousands)
Balance, June 30, 2012	$	213		$	213
Purchases, sales, issuances and settlements	—			—
Gains (losses) included in other income	—			—
Balance, September 30, 2012	$	213		$	213

Balance, June 30, 2013	$	154		$	154
Purchases, sales, issuances and settlements	—			—
Gains (losses) included in other income	(8		)	(8		)
Balance, September 30, 2013	$	146		$	146

The following table presents a rollforward of interest rate swaps from December 31, 2011 to September 30, 2012, and from December 31, 2012 to September 30, 2013.
	Level 3
	Fair Value- Assets			Fair Value- Liabilities
	(Amounts in thousands)
Balance, December 31, 2011	$	217		$	217
Purchases, sales, issuances and settlements	—			—
Gains (losses) included in other income	(4		)	(4		)
Balance, September 30, 2012	$	213		$	213

Balance, December 31, 2012	$	196		$	196
Purchases, sales, issuances and settlements	—			—
Gains (losses) included in other income	(50		)	(50		)
Balance, September 30, 2013	$	146		$	146

Interest Rate Locks and Forward Loan Sale Commitments

The Bank enters into interest rate lock commitments and commitments to sell mortgages. At September 30, 2013 , the amount of fair value associated with these interest rate lock commitments and sale commitments was $ 483,935 and $ (259,855) , respectively. At December 31, 2012 , the amount of fair value associated with these interest rate lock commitments and sale commitments was $ 872,844 and $ (480,806) , respectively. The fair value of interest rate lock commitments 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, typically month end.

The Company classifies interest rate lock commitments as Level 3. The fair value of forward sales commitments is based on changes in loan pricing between the commitment date and period end. The Company classified forward sale commitments as Level 2. There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

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The following table presents a rollforward of interest rate lock commitments for the three months ended September 30, 2013 and 2012, respectively.



	Interest Rate Lock Commitments
	Level 3
	Fair Value			Fair Value
	(In thousands)
Balance, June 30, 2013 and 2012	$	(312	)	$	578
Gains (losses) included in other income	796			(1,069		)
Transfer in and out	—			—
Balance, September 30, 2013 and 2012	$	484		$	(491	)

The following table presents a rollforward of interest rate lock commitments for the nine months ended September 30, 2013 and 2012, respectively.

	Interest Rate Lock Commitments
	Level 3
	Fair Value			Fair Value
	(In thousands)
Balance, December 31, 2012 and 2011	$	873		$	130
Gains (losses) included in other income	(389		)	(621		)
Transfer in and out	—			—
Balance, September 30, 2013 and 2012	$	484		$	(491	)

Mortgage Servicing Rights

A valuation of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and evaluated on a discounted earnings basis to determine the present value of future earnings. The present value of the future earnings is the estimated market value for the pool, calculated by a third party at least semi-annually, using assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing. As such, the Company classifies loan servicing rights as a Level 3 asset. There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

The following table presents a rollforward of mortgage servicing rights for the three and nine months ended September 30, 2013 and 2012 and shows that the mortgage servicing rights are classified as Level 3 as discussed above.

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	Level 3
	Fair Value		Fair Value
	(In thousands)
Balance, June 30, 2013 and 2012	$	3,825	$	1,889
Capitalized	506		300
Gains (losses) included in other income	50		(153		)
Balance, September 30, 2013 and 2012	$	4,381	$	2,036

	Level 3
	Fair Value		Fair Value
	(In thousands)
Balance, December 31, 2012 and 2011	$	2,525	$	1,871
Capitalized	1,193		645
Gains (losses) included in other income	663		(480		)
Balance, September 30, 2013 and 2012	$	4,381	$	2,036

Mortgage Loans Held-for-Sale

Loans held-for-sale are carried at lower of cost or market value. The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The changes in fair value of the assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. As such, the Company classifies loans measured at fair value on a nonrecurring basis as a Level 2 asset. At September 30, 2013 , the cost of the Company's mortgage loans held-for-sale was less than the market value. Accordingly, the Company's loans held-for-sale are carried at cost. There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

Impaired Loans

The Company does not record loans held-for-investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired loans is estimated using one of several methods, including collateral value (through appraisal processes and applying liquidity discounts and deducting expected selling costs), market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2013 , the majority of impaired loans were evaluated based on the fair value of the collateral by obtaining third-party appraisals and applying liquidity discounts. Third party appraisals are obtained at least annually for all impaired loans greater than $250,000. The Company records impaired loans as nonrecurring Level 3. There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

Other Real Estate Owned

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral (through appraisal processes and applying liquidity discounts and deducting expected selling costs). When the fair value of the collateral is measured due to further deterioration in the value of the OREO since initial recognition, the Company records the foreclosed asset as nonrecurring Level 3. The current carrying value of OREO at September 30, 2013 is $ 3.0 million . At December 31, 2012 the carrying value of OREO was $ 8.7 million . There have been no changes in valuation techniques for the three and nine months ended September 30, 2013 . Valuation techniques are consistent with techniques used in prior periods.

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The following table presents assets and (liabilities) measured at fair value on a recurring basis:



September 30, 2013 (in thousands)	Fair Value			Level 1		Level 2			Level 3
Available-for-sale securities:
U.S. government agencies	$	16,536		$	—	$	16,536		$	—
Government sponsored agencies:
Residential mortgage-backed securities	118,568			—		118,568			—
Collateralized mortgage obligations	69,492			—		69,492			—
Private label collateralized mortgage obligations	11,432			—		11,432			—
State and municipal securities	109,626			—		109,626			—
Common and preferred stocks	3,036			3,036		—			—
Interest rate swap agreements	146			—		—			146
Interest rate swap agreements	(146		)	—		—			(146		)
Interest rate lock commitments	484			—		—			484
Forward loan sale commitments	(260		)	—		(260		)	—
Mortgage servicing rights	4,381			—		—			4,381



December 31, 2012 (in thousands)	Fair Value			Level 1		Level 2			Level 3
Available-for-sale securities:
U.S. government agencies	$	27,527		$	—	$	27,527		$	—
Government sponsored agencies:
Residential mortgage-backed securities	107,257			—		107,257			—
Collateralized mortgage obligations	122,593			—		122,593			—
Private label collateralized mortgage obligations	1,045			—		1,045			—
State and municipal securities	84,565			—		84,565			—
Common and preferred stocks	133			133		—			—
Interest rate swap agreements	196			—		—			196
Interest rate swap agreements	(196		)	—		—			(196		)
Interest rate lock commitments	873			—		—			873
Forward loan sale commitments	(481		)	—		(481		)	—
Mortgage servicing rights	2,525			—		—			2,525

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Quantitative Information about Level 3 Fair Value Measurements



	Fair Value at September 30, 2013 (in thousands)		Valuation Technique	Unobservable Input	Range (Weighted Avg)
Recurring measurements:
Interest Rate Swaps	$	146	Discounted cash flow	Discount rate	0.99%
Interest Rate Lock Commitments	484		Pricing model	Pull through rates	81.17%
Mortgage Servicing Rights	4,381		Discounted cash flow	Constant prepayment rate	10.09%
				Cost of service	$50
				Discount rate	8%
Nonrecurring measurements:
Impaired loans	$	4,825	Discounted appraisals	Collateral discounts	15%
Other real estate owned	291		Discounted appraisals	Collateral discounts	15%



	Fair Value at December 31, 2012 (in thousands)		Valuation Technique	Unobservable Input	Range (Weighted Avg)
Recurring measurements:
Interest Rate Swaps	$	196	Discounted cash flow	Discount rate	1.00%
Interest Rate Lock Commitments	873		Pricing model	Pull through rates	83.90%
Mortgage Servicing Rights	2,525		Discounted cash flow	Constant prepayment rate	17.96%
				Cost of service	$50
				Discount rate	8%
Nonrecurring measurements:
Impaired loans	$	7,276	Discounted appraisals	Collateral discounts	10-15%
Other real estate owned	5,281		Discounted appraisals	Collateral discounts	15%

The unobservable input used in the fair value measurement of the Company's interest rate swap agreements is the discount rate. A significant increase (decrease) in the discount rate could result in a significantly lower (higher) fair value measurement. The discount rate is determined by the third-party by obtaining third party market quotes from Reuters, which handle up to 30 year swap maturities. The Company's asset liability management team periodically reviews the discount rates utilized in determining the fair value of the interest rate swap agreements.

The significant unobservable input used in the fair value measurement of the Company's interest rate lock commitments is the pull through ratio, 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 are estimated to close) will result in the fair value of the interest rate lock commitments to increase if in a gain position, or decrease if 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 by our secondary marketing system using historical data and the ratio is periodically reviewed by the Company's mortgage banking division.

The significant unobservable inputs used in the fair value measurement of the Company's mortgage servicing rights are the weighted average constant prepayment rate and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. The Company utilizes an independent third-party to estimate the fair value of mortgage servicing rights through use of a discounted cash flow model to calculate the present value of estimated future net servicing income based on observable and unobservable inputs into the model to arrive at

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an estimated fair value. To assess the reasonableness of the fair value measurement, the fair value and constant prepayment rates are compared to forward-looking estimates by the Company.

The following table presents assets measured at fair value on a nonrecurring basis:



	Fair Value		Level 1		Level 2		Level 3
September 30, 2013	(Amounts in thousands)
Other real estate owned	$	291	$	—	$	—	$	291
Impaired loans:
Owner occupied	4,472		—		—		4,472
Secured 1-4 family real estate	352		—		—		352



	Fair Value		Level 1		Level 2		Level 3
December 31, 2012	(Amounts in thousands)
Other real estate owned	$	5,281	$	—	$	—	$	5,281
Impaired loans:
Construction	1,767		—		—		1,767
Commercial real estate:
Owner occupied	4,772		—		—		4,772
Non-owner occupied	472		—		—		472
Commercial	265		—		—		265

There were no transfers between valuation levels for any assets during the three and nine months ended September 30, 2013 or 2012. If different valuation techniques are deemed necessary, we would consider those transfers to occur at the end of the period when the assets are valued.

12. Financial Instruments

The following is a summary of the carrying amounts and fair values of the Company's financial assets and liabilities at September 30, 2013 and December 31, 2012 :

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	September 30, 2013
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	39,127	$	39,127	$	39,127	$	—	$	—
Investment securities	328,690		328,690		3,036		325,654		—
Loans and loans held-for-sale, net	1,325,055		1,194,418		—		—		1,194,418
Accrued interest receivable	6,339		6,339		—		2,030		4,309
Federal Home Loan Bank stock	5,273		5,273		—		5,273		—
Interest rate swap agreements	146		146		—		—		146
Interest rate lock commitments	484		484		—		—		484
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts	943,453		921,385		—		921,385		—
Time deposits	547,883		551,759		—		551,759		—
Borrowed funds	96,021		96,464		—		96,464		—
Junior subordinated debt	35,059		5,758		—		5,758		—
Accrued interest payable	927		927		—		927		—
Interest rate swap agreements	146		146		—		—		146
Forward sales commitments	260		260		—		260		—



	December 31, 2012
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	138,396	$	138,396	$	138,396	$	—	$	—
Investment securities	343,120		343,120		133		342,987		—
Loans and loans held-for-sale, net	1,312,034		1,187,663		—		—		1,187,663
Accrued interest receivable	6,376		6,376		—		1,760		4,616
Federal Home Loan Bank stock	4,154		4,154		—		4,154		—
Interest rate lock commitments	873		873		—		—		873
Interest rate swap agreements	196		196		—		—		196
Financial liabilities:
Demand deposits, NOW, savings
and money market accounts	898,372		898,372		—		898,372		—
Time deposits	733,290		742,552		—		742,552		—
Borrowed funds	105,136		105,926		—		105,926		—
Accrued interest payable	1,629		1,629		—		1,629		—
Interest rate swap agreements	196		196		—		—		196
Forward sales commitments	481		481		—		481		—

The carrying amounts of cash and cash equivalents approximate their fair value.

The fair value of marketable securities is based on quoted market prices, prices quoted for similar instruments, and prices obtained from independent pricing services.

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For certain categories of loans, such as installment and commercial loans, the fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The cost of fixed rate mortgage loans held-for-sale approximates the lower of cost or market as these loans are typically sold within 60 days of origination. Fair values for adjustable-rate mortgages are based on quoted market prices of similar loans adjusted for differences in loan characteristics. The Company applied an additional illiquidity discount in the amount of 10.0% .

The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB stock.

The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2013 and December 31, 2012 , respectively. The fair value of fixed-maturity certificates of deposit and individual retirement accounts is estimated using the present value of the projected cash flows using rates currently offered for similar deposits with similar maturities.

The fair values of borrowings are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. Due to limited markets, discount rates applied to junior subordinated debt are based on estimated cost to raise capital, which was 8% as of September 30, 2013. The carrying values of short-term borrowings, including overnight, securities sold under agreements to repurchase, federal funds purchased and FHLB advances, approximates the fair values due to the short maturities of those instruments. The Company's credit risk is not material to calculation of fair value because these borrowings are collateralized.

The carrying values of accrued interest receivable and accrued interest payable approximates fair values due to the short-term duration.

Interest rate swaps are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.

Interest rate locks and forward loan sale commitments are recorded at fair value on a recurring basis. The fair value of forward sales commitments is based on changes in loan pricing between the commitment date and period end, typically month end. The fair value of interest rate lock commitments is based on servicing release premium, origination income net of origination costs, and changes in loan pricing between the commitment date and period end, typically month end.

13. Business Segment Information

The Company has two reportable segments, including banking activities and mortgage banking activities.

In the fourth quarter of 2012, a decision was made by management to sell a reinsurance subsidiary held by Sidus. As a result of this decision, Sidus reclassified its investment in the reinsurance subsidiary to held for sale and wrote down its investment by $1.0 million to the estimated fair value at December 31, 2012 . The sale of the subsidiary closed in the first quarter of 2013. In addition, at the beginning of 2013, the Company dissolved Sidus and is no longer doing business as Sidus. All mortgage banking activity beginning in 2013 is at the Bank.

The following table details the results of operations for the three and nine months ended September 30, 2013 and 2012 for bank activities and mortgage activities.

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	Bank Activities		Mortgage Activities		Other ⁽¹⁾			Total
	(Amounts in thousands)
For Three Months Ended September 30, 2013
Interest income	$	18,375	$	95	$	—		$	18,470
Interest expense	2,157		—		177			2,334
Net interest income	16,218		95		(177		)	16,136
Provision for loan losses	40		—		—			40
Net interest income (loss) after provision for loan losses	16,178		95		(177		)	16,096
Other income	3,645		1,713		23			5,381
Other expense	12,610		1,444		96			14,150
Income (loss) before income taxes	7,213		364		(250		)	7,327
Income taxes	2,616		—		—			2,616
Net income (loss)	$	4,597	$	364	$	(250	)	$	4,711

Total assets	$	1,793,225	$	17,923	$	2,369		$	1,813,517
Net loans	1,312,423		—		—			1,312,423
Loans held for sale	—		12,632		—			12,632

For Nine Months Ended September 30, 2013
Interest income	$	55,033	$	363	$	—		$	55,396
Interest expense	7,527		—		560			8,087
Net interest income	47,506		363		(560		)	47,309
Provision for loan losses	332		—		—			332
Net interest income (loss) after provision for loan losses	47,174		363		(560		)	46,977
Other income	9,626		7,545		50			17,221
Other expense	37,723		4,162		322			42,207
Income (loss) before income taxes	19,077		3,746		(832		)	21,991
Income taxes	7,822		—		—			7,822
Net income (loss)	$	11,255	$	3,746	$	(832	)	$	14,169


(1)	Included in this column are Holding Company assets and Holding Company income and expenses.

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	Bank Activities			Mortgage Activities			Other ⁽¹⁾			Total
	(Amounts in thousands)
For Three Months Ended September 30, 2012
Interest income	$	19,238		$	208		$	—		$	19,446
Interest expense	3,985			61			211			4,257
Net interest income	15,253			147			(211		)	15,189
Provision for loan losses	4,254			(3		)	—			4,251
Net interest income (loss) after provision for loan losses	10,999			150			(211		)	10,938
Other income	3,060			1,599			6			4,665
Other expense	13,589			1,192			11			14,792
Income (loss) before income tax expense	470			557			(216		)	811
Income tax expense	54			—			—			54
Net income (loss)	$	416		$	557		$	(216	)	$	757
Balance Sheet Information as of December 31, 2012
Total assets	$	1,890,906		$	31,500		$	1,032		$	1,923,438
Net loans	1,284,355			—			—			1,284,355
Loans held for sale	—			27,679			—			27,679

For Nine Months Ended September 30, 2012
Interest income	$	59,641		$	538		$	—		$	60,179
Interest expense	13,215			90			636			13,941
Net interest income	46,426			448			(636		)	46,238
Provision for loan losses	8,842			(22		)	—			8,820
Net interest income (loss) after provision for loan losses	37,584			470			(636		)	37,418
Other income	8,134			4,412			35			12,581
Other expense	40,781			3,297			24			44,102
Loss before income tax expense	4,937			1,585			(625		)	5,897
Income tax expense	(9,329		)	—			—			(9,329		)
Net loss	$	14,266		$	1,585		$	(625	)	$	15,226


(1)	Included in this column are Holding Company assets and Holding Company income and expenses.

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Form 10-Q Quarterly Report September 30, 2013

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14. Income Taxes

The following table presents the provision for income taxes for the nine months ended September 30, 2013 and 2012:



	2013			2012
	(in thousands)
Current:
Federal	$	(293	)	$	(342	)
State	—			—
	(293		)	(342		)
Deferred:
Federal	6,067			1,575
State	2,048			438
	8,115			2,013
Decrease in valuation allowance for deferred tax assets	—			(11,000		)
Total income taxes	$	7,822		$	(9,329	)

The following table presents the tax effects of significant components of the Company's net deferred tax assets as of September 30, 2013 and December 31, 2012:



	September 30,			December 31,
	2013			2012
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	8,099		$	9,853
Other than temporary impairment	829			827
Accrued liabilities	188			220
OREO property	119			3,767
Net operating loss	16,803			19,627
Mortgage goodwill	811			921
Unrealized loss on available-for-sale securities	763			—
Other	2,165			2,160
	29,777			37,375
Less: Valuation Allowance	—			—
	$	29,777		$	37,375

Deferred tax liabilities:
Unrealized gain on available-for-sale securities	$	—		$	(2,583	)
FMV adjustment related to mergers	(119		)	(181		)
Depreciation	(1,753		)	(1,561		)
Prepaid expenses	(342		)	(358		)
Core deposit intangible	(826		)	(1,043		)
Noncompete intangible	(147		)	(149		)
Other	(2		)	(142		)
	$	(3,189	)	$	(6,017	)
Net deferred tax assets	$	26,588		$	31,358

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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Our net deferred tax asset was $ 26.6 million at September 30, 2013 and $ 31.4 million at December 31, 2012. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is used in the consideration to determine whether, based on the weight of that evidence, a valuation allowance is required.

At September 30, 2013 , the Company considered the following negative and positive evidence in its evaluation of deferred tax assets:


•	The Company is in a cumulative tax loss position for the 3-year period ending September 30, 2013 of $ (13.4) million . Significance: High



	September 30, 2013
	Cumulative Loss Test
	2010*		2011			2012			2013**		Total
Income (loss) before income taxes	$	37	$	(7,701	)	$	(32,635	)	$	21,991	$	(18,308	)
Goodwill impairment	—		4,944			—			—		4,944
	$	37	$	(2,757	)	$	(32,635	)	$	21,991	$	(13,364	)

*4th quarter of 2010

**First nine months of 2013

Positive Evidence

•

The Company reported $ 7.3 million in net income before taxes for the quarter ended September 30, 2013 as provisions for loan losses were $ 40,000 for the quarter. Excluding losses of $49 million sustained in the fourth quarter of 2012 related to the accelerated asset disposition plan, the Company has recorded $37 million in pre-tax income for eight previous consecutive quarters as credit quality has improved and net interest margin has increased over the past year. Significance: High

•

The Company is projecting income on a pretax basis, as well as taxable income, for the future periods 2013-2015. The budgeted provision for loan losses is a key driver of the resulting income. Also, as discussed below, credit quality metrics have significantly improved. While management believes the 2010, 2011 and 2012 levels of provision are indicative of the worst economic downturn in recent history and will not be repeated, it is important to understand why future losses are not projected at these levels. In the three year period ended December 31, 2012, management was proactive in charging down collateral dependent loans that are impaired to current market values. Significance: Moderate

•

In 2012, the Company completed a $45 million private placement offering pursuant to which several institutional investors and members of the Board and management purchased shares of preferred stock. In connection with this private placement, the Company converted approximately $21 million of its outstanding Series T and Series T-ACB preferred shares to common shares. As of September 30, 2013 , the Company's leverage ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio were 11.1% , 13.2% , and 14.4% . Significance: Moderate

•

Credit quality has improved over the past twelve months, including significant decreases in classified loans and nonperforming loans. Credit losses have shown a dramatic reduction in the first half of 2013 and overall nonperforming loans are down $ 39.2 million since September 30, 2012. Nonperforming assets to total assets were 1.15% as of September 30, 2013 as compared to 4.13% as of September 30, 2012. In addition, allowance for loan losses to nonperforming loans increased from 47.43% at September 30, 2012 to 117.57% at September 30, 2013 . Significance: High


•	Management is not aware of any unsettled circumstances that, if resolved, would adversely affect future operations or earnings. Significance: Low


•	Federal net operating losses can be deducted over the twenty year carryforward period. Currently, management is projecting full utilization of these tax benefits within 3 years from September 30, 2013 . The Company's loss carryforwards

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Form 10-Q Quarterly Report September 30, 2013

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for the tax period ending December 31, 2012 include net operating loss carryforwards generated in the acquisition of Cardinal State Bank in 2008 and American Community Bank in 2009, as well as net operating loss carryforwards for the Company. The expiration of the loss carryforwards for the tax period ending September 30, 2013 are as follows:

Significance: Moderate



	Net Operating Loss Carryforward September 30, 2012		Expiration
	(in thousands)
Cardinal State Bank acquisition	$	2,424	2029
American Community Bank acquisition	345		2030
Yadkin Federal Tax	41,717		2031
Yadkin State Tax	36,176		2031
Total Loss Carryforwards	$	80,662

After review of all available evidence and based on the weight of such evidence, the Company believes the realization of the deferred tax asset is, more likely than not and no valuation allowance is deemed necessary at September 30, 2013 based primarily on a return to profitability, net income trends, projected net income for the years 2013-2015 and improving credit quality metrics.

The following table presents a reconciliation of applicable income taxes for the nine months ended September 30, 2013 and 2012 to the amount of tax expense computed at the statutory federal income tax rate of 35% :



	2013			2012
	(in thousands)
Tax expense at statutory rate on income before income taxes	$	7,697		$	2,064
Increases (decreases) resulting from:
Tax-exempt interest on investments	(771		)	(589		)
State income tax, net of federal benefits	1,331			285
Income from bank-owned life insurance	(159		)	(166		)
Valuation allowance on deferred tax assets	—			(11,000		)
Other	(276		)	77
Total income taxes	$	7,822		$	(9,329	)

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

15. Accumulated Other Comprehensive Income

The following table presents changes in accumulated other comprehensive income for the three and nine months ended September 30, 2013 and 2012.



	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013		September 30, 2012
	(Amounts in thousands)
Beginning balance	$	(942	)	$	4,456		4,184		3,863
Other comprehensive income (loss) before reclassifications	(70		)	1,214			(5,026	)	1,992
Amounts reclassified from accumulated comprehensive income:
Realized gain on sale of securities	(253		)	(1,348		)	(529	)	(1,648	)
Impairment expense	—			—			—		—
Reclassified amounts before tax	(253		)	(1,348		)	(529	)	(1,648	)
Tax expense	98			519			204		634
Total reclassifications net of tax	(155		)	(829		)	(325	)	(1,014	)

Net current period other comprehensive income (loss)	(225		)	385			(5,351	)	978

Ending balance	$	(1,167	)	$	4,841		(1,167	)	4,841

The income statement line items impacted by the reclassifications of realized gains on the sale of securities are the net gain on sale of securities and income tax expense line items in the condensed consolidated statements of income.

16. Other Events

Reverse Stock Split - On May 28, 2013, the Company completed a one-for-three reverse stock split of its common stock. In connection with the reverse stock split, every three shares of issued and outstanding Company common stock on May 28, 2013 were exchanged for one share of newly issued common stock. Fractional shares resulting from the reverse stock split were exchanged for a cash payment equal to the fraction to which the shareholder would otherwise have been entitled multiplied by the closing price of the Company's common stock, as such price is reported on The Nasdaq Global Select Market on the last trading day prior to the effectuation of the reverse stock split. Other than the number of outstanding shares of common stock disclosed in the Consolidated Balance Sheets, all prior period share amounts have been retroactively restated to reflect the reverse stock split.

Articles of Amendments - During the second quarter of 2013, the Company and the Bank amended their respective Articles of Incorporation to change their names to Yadkin Financial Corporation and Yadkin Bank, respectively. Both of these amendments, along with the Company's new NASDAQ ticker symbol, YDKN, were effective on May 28, 2013.

Repurchase of Warrants - On June 6, 2013, the U.S. Treasury accepted the Company's bid to repurchase the warrant to purchase 128,663 shares of its voting common stock issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program. The repurchase price agreed upon was $20,000. The repurchase transaction was completed on June 12, 2013. The repurchase of the warrants from the U.S. Treasury has completely eliminated the U.S. Treasury's equity stake in the Company through the TARP Capital Purchase Program.

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

The following is our discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This commentary should be read in conjunction with the financial statements and the related notes and the other statistical information included in this report.

This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to the financial condition, results of operations, plans, objectives, future performance, and business of our Company. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our 2012 Form 10-K as filed with the SEC and the following:


•	reduced earnings due to higher 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 higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;


•	the rate of delinquencies and amount of loans charged-off;


•	the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;


•	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 writedown assets;


•	the amount of our loan portfolio collateralized by real estate, and the weakness in the commercial real estate market;


•	our ability to maintain our regulatory capital ratios above the statutory and agreed upon minimums, including the impact of the capital rules under Basel III;


•	the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;


•	the increase in the cost of capital of our Series T and Series T-ACB Preferred Stock if we do not redeem within five years of the date of issuance;


•	adverse changes in asset quality and resulting credit risk-related losses and expenses;


•	increased funding costs due to market illiquidity, increased competition for funding, and increased regulatory requirements with regard to funding;


•	significant increases in competitive pressure in the banking and financial services industries;


•	changes in the interest rate environment which could reduce anticipated or actual margins;


•	changes in political conditions or the legislative or regulatory environment, including the effect of recent financial reform legislation on the banking industry;


•	general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;


•	our ability to retain our existing customers, including our deposit relationships;


•	changes occurring in business conditions and inflation;


•	changes in technology;


•	changes in monetary and tax policies;

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

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•	ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, which could be exacerbated by potential climate change, and international instability;


•	changes in deposit flows;


•	changes in accounting principles, policies or guidelines;


•	changes in the assessment of whether a deferred tax valuation allowance is necessary;


•	our ability to maintain internal control over financial reporting;


•	our reliance on secondary sources such as FHLB advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;


•	loss of consumer confidence and economic disruptions resulting from terrorist activities;


•	changes in the securities markets; and


•	other risks and uncertainties detailed from time to time in our filings with the SEC.

These risks are exacerbated by the developments in national and international financial markets that have persisted over the past several years, and we are unable to predict what effect these uncertain market conditions will continue to have on us. There can be no assurance that these unprecedented developments will not continue to materially and adversely affect our business, financial condition and results of operations.

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

The following discussion describes our results of operations for the three and nine months ended September 30, 2013 and 2012 and also analyzes our financial condition as of September 30, 2013 as compared to December 31, 2012 . Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or occurrences after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

In 2013, the Company executed a one-for-three reverse stock split and an amendment to both the Company's and the Bank's Articles of Incorporation changing their name to Yadkin Financial Corporation and Yadkin Bank, respectively. Both of these events, along with the Company's new NASDAQ ticker symbol, YDKN, were effective on May 28, 2013. All references to share data have

Yadkin Financial Corporation

Form 10-Q Quarterly Report September 30, 2013

Table of Contents

been adjusted for the effect of this reverse stock split.

Changes in Financial Position

Total assets at September 30, 2013 were $1,813.5 million , a decrease of $ 109.9 million , or 5.7% , compared to assets of $1,923.4 million at December 31, 2012 . The loan portfolio, net of allowance for losses, was $ 1,312.4 million compared to $1,284.4 million at December 31, 2012 . Gross loans held-for-investment increased by $ 23.9 million , or 1.8% as loan production has increased over the past nine months. The allowance for loan losses decreased $ 4.1 million driven primarily by decreases in classified loans for the nine months ended September 30, 2013 and decreased charge-offs in 2013 as compared to 2012. Total watch list and substandard loans were $ 84.2 million as compared to $ 102.9 million as of December 31, 2012 , a decrease of $ 18.7 million . See Note 10 above entitled “Loans and Allowance for Loan Losses” for further discussion of the allowance for loan losses.

Mortgage loans held-for-sale decreased by $ 15.0 million , or 54.4% , from December 31, 2012 to September 30, 2013 as the Bank continued its strategy of selling mortgage loans mostly to various investors with servicing rights released and to a lesser extent to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation with servicing rights retained. These loans are normally held for a period of two to three weeks before being sold to investors. Mortgage loans closed in the first nine months of 2013 ranged from a low of $18.0 million in September 2013 to a high of $30.9 million in May 2013 and totaled $217.1 million for the nine months ended September 30, 2013. Mortgage loans closed during the nine months ended September 30, 2012 totaled $237.3 million. Decrease in mortgage activity, including refinance activity, is the result of an increase in rates and volatility.

The securities portfolio decreased from $ 343.1 million at December 31, 2012 , to $ 328.7 million at September 30, 2013 , a decrease of $ 14.4 million due to purchases of $112.7 million, offset by paydowns and maturities of $73.0 million and sales of $42.5 million in 2013. The portfolio is comprised of securities of U.S. government agencies ( 5.0% ), mortgage-backed securities ( 60.7% ), state and municipal securities ( 33.4% ), and publicly traded common and preferred stocks ( 0.9% ).

Other assets increased $ 1.1 million due largely to an increase in mortgage servicing rights of $1.9 million and an increase in other prepaid expense of $254,000 offset by a $652,000 reduction in prepaid FDIC expense and a $368,000 decrease in other misc assets. OREO decreased $ 5.7 million as the result of sales in the amount of $9.3 million, offset by transfers in the amount of $3.6 million for the nine months ended September 30, 2013 . Premises and equipment decreased $ 799,000 , or 1.91% as the Company sold one of its branches, including the building and furniture and fixtures. Deferred tax assets also decreased $ 4.8 million as the Company recorded $ 22.0 million in income before taxes for the year 2013, utilizing net operating loss carryforwards. See Note 14 for detailed information regarding deferred tax assets.

Deposits decreased $ 140.3 million , or 8.6% , comparing September 30, 2013 to December 31, 2012 . Overall, noninterest-bearing demand deposits decreased $ 7.0 million , or 2.5% , certificates of deposit (“CODs”) over $100,000 decreased $ 79.4 million , or 25.1% , and other CODs decreased $ 106.0 million , or 25.4% , while NOW, savings, and money market accounts increased $ 52.0 million , or 8.3% , Management continues to focus on shifting the deposit mix from higher cost time deposits to lower cost demand and NOW accounts through the use of marketing efforts and interest rates.

Borrowed funds increased $ 25.9 million , or 24.7% , comparing September 30, 2013 to December 31, 2012 due to additional FHLB advances in the amount of $40.0 million as an effort to secure low-rate funding as $20 million in deposits were sold during the quarter as part of the Creedmoor branch sale. This increase was offset by a $14.1 million decrease in repurchase agreements. Long term borrowings included $35.0 million in trust preferred securities and advances from the FHLB of $25.3 million. The American Community merger added $10.4 million in trust preferred securities in 2007 at a rate equal to the three-month LIBOR rate plus 2.80% and will mature in 2033. Yadkin Valley Statutory Trust I (“the Trust”) issued $25.8 million in trust preferred securities at a rate equal to the three-month LIBOR rate plus 1.32%. The trust preferred securities mature in 30 years, and can be called by the Trust without penalty.

Other liabilities, capital lease obligations and accrued interest payable combined decreased by $ 3.6 million , or 22.8% , from December 31, 2012 to September 30, 2013 . Decreases in other liabilities resulted primarily from a $1.7 million decrease in liability related to the sale of the reinsurance subsidiary as well as a $1.4 million reduction in reserves established for sold loans. Significant negative provisions for the nine months ended September 30, 2013 were the result of decreased mortgage activity as Sidus Financial started to significantly scale back its wholesale operations and completely exited the wholesale market in 2012. The Company saw improvements in historical loss experience, and declines in specific reserves as claims were paid and settled from previously established reserves. In addition, Sidus Financial discontinued its business and was dissolved in accordance with the provisions of the North Carolina Limited Liability Company Act which limited future liability for loans previously sold by Sidus Financial. In addition, there was a $702,000 decrease in accrued interest payable as deposits have decreased year-over-year.

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Form 10-Q Quarterly Report September 30, 2013

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At September 30, 2013 , total shareholders' equity was $ 178.9 million , or a book value of $10.47 per common share, compared to $ 170.8 million , or a book value of $ 9.93 per common share, at December 31, 2012 . The Company's equity to assets ratio was 9.86% and 8.88% , at September 30, 2013 and December 31, 2012 , respectively.

Capital adequacy is an important indicator of financial stability and performance. In order to be considered “well capitalized”, a bank must exceed total risk-based capital ratios of 10%, and Tier 1 risk-based capital ratios of 6% and leverage ratios of 5%. In addition, we have committed to regulators that the Bank will maintain a Tier 1 Leverage Ratio of 8%, which is higher than the statutory Tier 1 leverage ratio of 5% to be classified as well-capitalized. Our goal has been to maintain a “well-capitalized” status for the Bank since failure to meet or exceed this classification affects how regulatory applications for certain activities, including acquisitions, and continuation and expansion of existing activities, are evaluated and could make our customers and potential investors less confident in our Bank.

The following table sets forth the Company's and the Bank's various capital ratios as of September 30, 2013 and December 31, 2012 . The Company and the Bank exceeded the minimum regulatory capital ratios as of September 30, 2013 , as well as the ratios to be considered "well capitalized."



	September 30, 2013		December 31, 2012
	Holding Company	Bank	Holding Company	Bank
Total risk-based capital ratio	14.4%	14.2%	13.3%	13.0%
Tier 1 risk-based capital ratio	13.2%	12.9%	12.2%	11.7%
Leverage ratio	11.1%	10.9%	9.2%	8.9%

Management of equity is a critical aspect of capital management in any business. The determination of the appropriate amount of equity for a regulated financial institution is affected by a number of factors, including but not limited to, the amount of capital needed to meet regulatory requirements, the amount of “risk equity” the business requires and balance sheet leverage.

In July 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced its approval of a final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital, the final rule emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The changes begin to take effect for the Bank in January 2015. The ultimate impact of the U.S. implementation of the new capital and liquidity standards on the Company and the Bank is currently being reviewed.

To be categorized as well capitalized, the Company and the Bank each must maintain minimum amounts and ratios. At September 30, 2013 , the Company is well-capitalized for regulatory purposes both at the bank and holding company level, however the Bank has committed to regulators that it will maintain a Tier 1 Leverage Ratio of 8% which it exceeded at September 30, 2013 .

Liquidity, Interest Rate Sensitivity and Market Risk

The Bank derives the majority of its liquidity from its core deposit base and to a lesser extent from wholesale borrowing. The balance sheet liquidity ratio, measured by the sum of cash (less reserve requirements), investments, and loans held-for-sale reduced by pledged securities, as compared to deposits and short-term borrowings, was 19.3% at September 30, 2013 compared to 23.2% at December 31, 2012. Additional liquidity is provided by $ 87.7 million in unused credit including federal funds purchased lines provided by correspondent banks as well as credit availability from the FHLB. In addition, the Bank has unpledged marketable securities of $ 243.0 million available for use as a source of collateral. At September 30, 2013 , brokered deposits totaled $ 99,553 , or 0.01% of total deposits. Brokered certificates of deposit are primarily short-term with maturities of nine months or less. The Bank also maintains a brokered deposit NOW account to add municipal deposits totaling $ 1,299 at September 30, 2013 .

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Form 10-Q Quarterly Report September 30, 2013

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The Bank contracted with Promontory Interfinancial Network ("Promontory") in 2008 for various services including wholesale COD funding. Promontory's CDARS® product, One-Way BuySM, enables the Bank to bid on a weekly basis through a private auction for COD terms ranging from four weeks to 260 weeks (approximately five years) with settlement available each Thursday. There were no outstanding funds acquired through the One-Way Buy product at September 30, 2013 or December 31, 2012.

Promontory also provides a product, CDARS® Reciprocal, which allows the Bank's customers to place funds in excess of the FDIC insurance limit with Promontory's network of participating Banks so that the customer is fully insured for the amount deposited. Promontory provides reciprocating funds to the Bank from funds placed at other banks by their customers. The Bank sets its customers' interest rates when they place deposits through the network and pays/receives the rate difference to/from the other banks whose reciprocal funds are held by the Bank. The overall impact of this process is that the Bank effectively pays the rate offered to its relationship customer. Therefore, the Bank does not consider these funds to be wholesale or brokered funds. In compliance with FDIC reporting requirements, the Bank includes reciprocal deposits as brokered deposits in its quarterly Federal Financial Institutions Examination Council Call Report. CDARS® reciprocal deposits totaled $ 166,506 at September 30, 2013 and $ 165,000 at December 31, 2012.

Management continues to assess interest rate risk internally and by utilizing outside sources. The balance sheet is asset sensitive over a three-month period, meaning that there will be more assets than liabilities immediately repricing as market rates change. Over a period of twelve months, the balance sheet remains slightly asset sensitive. We generally would benefit from increasing market interest rates when we have an asset-sensitive, or a positive interest rate gap, and we would generally benefit from decreasing market interest rates when we have liability-sensitive, or a negative interest rate gap.

The Company currently has derivative instrument contracts consisting of interest rate swaps and interest rate lock commitments and commitments to sell mortgages. The primary objective for each of these contracts is to minimize interest rate risk. The Company's strategy is to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods. The Company has no market risk sensitive instruments held for trading purposes. The Company's exposure to market risk is reviewed regularly by management.

Results of Operations

Net income for the quarter ended September 30, 2013 was $ 4.7 million before preferred dividends, compared to net income of $ 757,000 in the same period of 2012 . Net income to common shareholders for the three month period ended September 30, 2013 was $4.3 million . Net loss to common shareholders for the three month period ended September 30, 2012 was $81,000 . Basic and diluted income per common share were $0.30 for the three month period ended September 30, 2013 . Basic and diluted income per common share were $0.00 for the three month period ended September 30, 2012 . On an annualized basis, first quarter results represent a return on average assets of 0.95% at September 30, 2013 compared to (0.02)% at September 30, 2012 , and a return on average equity of 9.74% compared to (0.21)% at September 30, 2012 .

Net income for the nine month period ended September 30, 2013 was $ 14.2 million before preferred dividends, compared to net income of $ 15.2 million in the same period of 2012 . Net income available to common shareholders for the nine months ended September 30, 2013 was $12.7 million , compared to net income available to common shareholders of $12.7 million for the nine months ended September 30, 2012 . Basic and diluted earnings per common share were $ 0.90 and $ 0.89 , respectively, for the nine months ended September 30, 2013 . Basic and diluted earnings per common share were $1.98 for the nine months ended September 30, 2012 . On an annualized basis, year-to-date results represent a return on average assets of 0.93% at September 30, 2013 compared to 0.87% at September 30, 2012 , and a return on average equity of 9.77% compared to 11.57% at September 30, 2012 .

Prior year net income included a reversal of a valuation allowance on deferred tax assets which resulted in an income tax benefit of $9.3 million for the nine months ended September 30, 2012 .

Net Interest Income

Net interest income, the largest contributor to earnings, increased $ 947,000 , or 6.2% , to $ 16.1 million in the third quarter of 2013 , compared with $15.2 million in the same period of 2012 . The overall increase in net interest income was primarily due to a decrease in interest expense on deposits of 44.4% as average interest bearing deposits are down 11% from the prior year and deposit costs are declining as time deposits continue to reprice at lower rates. The net interest margin increased to 3.93% in the third quarter of 2013 from 3.37% in the third quarter of 2012 . The increase in net interest margin is primarily related to a decrease in deposit yields and borrowings cost. Deposit yields have decreased as management focused efforts on shifting the deposit mix

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Form 10-Q Quarterly Report September 30, 2013

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from higher cost time deposits to lower cost interest bearing NOW and money market accounts. The Company maintains an asset-sensitive position with respect to the impact of changing rates on net interest income.

Net interest income for the nine months ended September 30, 2013 increased to $ 47.3 million from $ 46.2 million when compared to the same period in 2012 . The net interest margin increased to 3.80% in the first nine months of 2013 from 3.46% in the first nine months of 2012 . The Company maintains an asset-sensitive position with respect to the impact of changing rates on net interest income.



	Nine Months Ended September 30, 2013						Nine Months Ended September 30, 2012
	Average				Yield/		Average				Yield/
Interest Rates Earned and Paid	Balance		Interest		Rate		Balance		Interest		Rate
Interest-earning assets:	(Dollars in thousands)
Interest-bearing deposits and
federal funds sold	$	28,829	$	68	0.32	%	$	70,650	$	127	0.24	%
Investment securities (1)	348,317		5,849		2.25	%	337,414		6,161		2.44	%
Total loans (1)(2)(6)(8)	1,327,111		50,563		5.09	%	1,411,072		54,726		5.18	%
Total interest-earning assets	1,704,257		56,480		4.43	%	1,819,136		61,014		4.48	%
Non-earning assets	125,841						125,398
Total assets	$	1,830,098					$	1,944,534
Interest-bearing liabilities:
Deposits (7):
NOW and money market	$	591,280	$	794	0.18	%	$	553,199	$	1,208	0.29	%
Savings	72,889		55		0.10	%	63,487		68		0.14	%
Time certificates	620,035		5,967		1.29	%	830,533		10,973		1.76	%
Total interest bearing deposits	1,284,204		6,816		0.71	%	1,447,219		12,249		1.13	%
Repurchase agreements sold	37,713		97		0.34	%	40,820		217		0.71	%
Borrowed funds (7)	66,100		1,174		2.37	%	66,470		1,475		2.96	%
Total interest-bearing liabilities	1,388,017		8,087		0.78	%	1,554,509		13,941		1.20	%
Non-interest bearing deposits	256,232						237,513
Shareholders' equity	174,021						146,569
Other liabilities	11,828						5,943
Total average liabilities and shareholders' equity	$	1,830,098					$	1,944,534
Net interest income (3) and interest rate spread (5)			$	48,393	3.80	%			$	47,073	3.28	%
Net interest margin (4)					3.65	%					3.46	%

__________________________


(1)	Yields related to investment securities and loans exempt from Federal income taxes are stated on a fully tax-equivalent basis, assuming a Federal income tax rate of 35%. The calculation includes an adjustment for the nondeductible portion of interest expense


(2)	The loan average includes loans on which accrual of interest has been discontinued.


(3)	The net interest income is the difference between income from earning assets and interest expense.


(4)	Net interest margin is net interest income divided by total average earning assets.


(5)	Interest spread is the difference between the average interest rate received on earning assets and the average interest rate paid on interest-bearing liabilities.


(6)	Interest income on loans for 2013 and 2012 includes $177 and $157, respectively, in accretion of fair market value adjustments related to mergers.


(7)	Interest expense on deposits and borrowings in 2013 and 2012 includes $28 and $11, respectively, in accretion of fair market value adjustments related to mergers.


(8)	Certain amounts in the current and prior periods have been reclassified based on a change in segment reporting for mortgage banking activities.

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Provisions and Allowance for Loan Losses

Adequacy of the allowance or reserve for loan losses of the Bank is a significant estimate that is based on management's assumptions regarding, among other factors, general and local economic conditions, which are difficult to predict and are beyond the Bank's control. In estimating these loss reserve levels, management also considers the financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.

The allowance for loan losses was $ 21.0 million at September 30, 2013 , or 1.58% of loans held-for-investment, as compared to $ 25.1 million , or 1.92% of loans held-for-investment, at December 31, 2012 . Decreases in the allowance for loan losses were due to decreased charge-offs and decreased criticized loans in the first nine months of 2013. Decreases in criticized loans were due to improvements in loans 30-89 days past due, payoffs and overall improvements in underlying credit exposures.

The allowance model is applied to the loan portfolio quarterly to determine the specific allowance balance for impaired loans and the general allowance balance for performing loans grouped by loan type. Out of the $ 21.0 million in total allowance for loan losses at September 30, 2013 , the specific allowance for impaired loans accounted for $409,000, down from $1.4 million at year end as impaired loans have decreased since December 31, 2012. See discussion below in "Nonperforming Assets" for further discussion of nonaccrual relationships. The remaining general allowance, $20.6 million, was attributed to performing loans and was down from $23.7 million at year end. The general allowance, as a percent of loans not individually reviewed for impairment was 1.58% as of September 30, 2013 as compared to 1.86% as of December 31, 2012 . The decrease in the general allowance was driven primarily by a decrease in charge-offs, as well as a decrease in substandard and watch loans of $ 18.7 million which resulted from a few significant payoffs and improvements in past dues and underlying credit exposures of previously classified loans. There were decreased provisions in many of the loan types including negative provisions for the nine months ended September 30, 2013 for owner-occupied and non owner-occupied commercial real estate, 1-4 family residential, multifamily and home equity lines of credit as charge-offs, nonaccruals and classified loans in these categories decreased.

Net loan charge offs were $2.0 million, or 0.58% (annualized), of average loans, for the three months ended September 30, 2013 compared to $5.8 million, or 1.66% (annualized), of average loans for the three months ended September 30, 2012. Decrease in charge-offs is related to a significant decrease in problem loans over the past 12 months. Charge-offs over the past three years have been elevated due to declines in real estate values and overall economic conditions. For the nine months ended September 30, 2013 , net loan charge offs were $4.5 million, or 0.45% (annualized) of average loans compared to $14.4 million, or 1.36% (annualized) of average loans, for the nine months ended September 30, 2012.

Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Bank's loan portfolio as of September 30, 2013 . No assurance can be given in this regard, however, especially considering the overall weakness in the commercial real estate market in the Bank's market areas. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and will consider future changes to the allowance that may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the recognition of adjustments to the allowances based on their judgments of information available to them at the time of their examinations.

Management realizes that general economic trends greatly affect loan losses. The downturn experienced in the real estate market from 2008 through 2011 resulted in increased loan delinquencies, defaults and foreclosures. In some cases, that downturn resulted in significant impairments to the value of collateral and the ability to sell the collateral upon foreclosure. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. Management aggressively monitors its classified loans and is continuing to monitor credits with significant weaknesses. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values begin to decline in the future, it is more likely that we would be required to increase our allowance for loan losses and our net charge-offs which could have a material adverse effect on our financial condition and results of operations. Assurances cannot be made either (1) that further charges to the allowance account will not be significant in relation to the normal activity or (2) that further evaluation of the loan portfolio based on prevailing conditions may not require sizable additions to the allowance and charges to provision expense.

Our real estate portfolio has approximately $ 129.0 million of construction loans, $ 575.5 million of commercial real estate loans, $ 171.7 million in first lien mortgage loans, $ 193.3 million in home equity lines of credit and $ 40.7 million in multifamily mortgage loans as of September 30, 2013 . We consider our construction and junior lien mortgage loans our riskiest loans within our real estate portfolio. Construction loans are typically comprised of loans to borrowers for real estate to be developed into properties

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such as sub-divisions or speculative houses. Normally, these loans are repaid with the proceeds from the sale of the developed property. In addition, management continues to evaluate closely junior lien mortgage loans and home equity lines of credit. Given the slow economic recovery, and real estate values that have been slow to recover, the Company recognizes that it may experience some loss in these portfolios, and management continues to monitor borrower financials, LTVs, and first lien positions. The significance of both construction and commercial real estate loans to our overall loan portfolio has caused us to apply a greater degree of scrutiny in analyzing the ultimate collectability of amounts due. Loans are placed on nonaccrual status when the loan is past due 90 days or when it is apparent that the collection of principal and/or interest is doubtful. Net charge-offs (recoveries) of construction and commercial real estate loans were $1.4 million and $392,000, respectively, for the nine months ended September 30, 2013 . For the nine months ended September 30, 2012 , net charge-offs (recoveries) of construction and commercial real estate loans were $7.5 million and $4.1 million, respectively.

As of September 30, 2013 , $8.0 million of our real estate loans had interest reserves including both borrower and bank funded, compared to $9.8 million as of December 31, 2012 . There is a risk that an interest reserve could mask problems with a borrower's willingness and ability to repay the debt consistent with the terms and conditions of the loan obligation, therefore the Company has implemented review policies and internal controls to identify and monitor all loans with interest reserves.

Nonperforming Assets

Total nonperforming assets (which includes nonaccrual loans, loans over 90 days past due but still accruing, and foreclosed real estate) decreased from $31.6 million at December 31, 2012 to $20.9 million at September 30, 2013 . Nonperforming assets as a percentage of total assets decreased to 1.15% as of September 30, 2013 as compared to 1.64% as of December 31, 2012 , due primarily to a decrease in foreclosed real estate since December 31, 2012 as the Company sold over $5 million in foreclosed properties in a recent auction. Total nonaccrual loans decreased from $ 22.8 million , or 1.71% of total loans, at December 31, 2012 to $ 17.9 million , or 1.33% of total loans, at September 30, 2013 . We have analyzed our nonperforming loans to determine what we believe is the amount needed to reserve in the allowance for loan losses based on an assessment of the collateral value or discounted cash flows of the loan. We have downgraded loans for which the probability of collection is uncertain and written down OREO property values where net realizable values have declined. Specific allowance for nonperforming loans accounted for $409,000, down from $1.4 million at year end, due to a decrease in impaired loans since December 31, 2012.

Approximately 63% of loans in nonaccrual status are currently not past due 30 days or more. The total number of loans on nonaccrual has decreased from 315 to 203 since December 31, 2012. The average nonaccrual loan balance is $88,000 and $71,000 as of September 30, 2013 and December 31, 2012 , respectively. At September 30, 2013 , 89% of the nonaccrual loans were secured by real estate.

The largest amount of nonaccrual loans for one customer relationship totaled $2.3 million. This relationship consists of various loans, the proceeds of which were utilized for the purchase and refinance of real estate, acquisition of equipment and related operating expenses. This relationship was charged down to fair market value in the third quarter of 2013. Nonaccrual loans also include three other large relationships each totaling $1.8 million, $1.4 million, and $1.0 million respectively as of September 30, 2013. The first of these nonaccrual relationships consists of one loan that was originally used for working capital purposes and is secured by real estate, account receivables, inventory and equipment. This loan does not have any specific reserves as of September 30, 2013. The second relationship consists of various loans, the proceeds of which were utilized for the purchase of two businesses and secured by the real estate. This relationship does not have any specific reserve assigned to it as of September 30, 2013. The third relationship consists of various loans, the proceeds of which were utilized for the purchase and refinance of real estate, lease debt, and related operating expenses and secured by the real estate. This loan does not have any reserve assigned to it as of September 30, 2013. All of these loans have been placed in nonaccrual status because of concerns for the customers' continued ability to pay, collateral deterioration and depressed future industry outlook.

Noninterest Income

Noninterest income consists of all revenues that are not included in interest and fee income related to earning assets. Total noninterest income increased approximately $ 716,000 , or 15.3% , comparing the third quarters of 2013 and 2012 as the prior year included a loss on sale of loans in the amount of $900,000. Other increases include a gain on sale of a branch in the amount of $310,000 and an increase in mortgage banking income of $ 114,000 , or 7.1% which resulted primarily from an increase in the fair value of mortgage servicing rights. Other changes in noninterest income include the following:


•	Service charges on deposit accounts increased by $ 17,000 , or 1.3% , due primarily to an increase in service charges on NOW and money market accounts, business checking accounts, and regular checking accounts of $104,000 as

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checking and savings accounts have increased $81 million since the prior year. These increases were offset by a $92,000 decrease in NSF (non-sufficient funds) and ODP (overdraft privilege charges).

•

Other service fees increased $ 402,000 when comparing the third quarter of 2013 to the prior year due to an increase of $131,000 in commissions and fees on annuity and mutual fund sales and investment service fee income. Increase in investment service fees and commissions was due to an increase in investment activity in 2013. ATM and debit card fee income also increased $292,000 as compared to the third quarter of 2012 as incentive fees related to the signing of a new contract in 2012 are earned over the life of the contract.


•	Net gain on sale of investment securities decreased $ 1,095,000 as fewer investments were sold in the third quarter of 2013 compared to 2012.


•	Income on investment in bank-owned life insurance (“BOLI”) decreased by $ 7,000 , or 4.4% , during the three month period ended September 30, 2013 .

•

Mortgage banking income increased approximately $ 114,000 for the third quarter of 2013 as servicing income including fair market value adjustments for mortgage servicing rights increased $1.7 million from the prior year due to an increase in mortgage loans serviced from $296 million in September 2012 to $401 million in September 2013. This increase was offset by a decrease in overall gain on sale of loans which is due primarily to a slowdown in the velocity of rate increases during the quarter, which impacts our mortgage income.

•

Other income increased by approximately $ 75,000 , or 26.5% , for the third quarter of 2013. This increase is primarily due to income received on a cost method investment in the amount of $258,000 as the investment company became publicly traded during the quarter. This increase was offset by the fact that prior year other income included a $150,000 settlement on rental income owed from the cancellation of leased rental property.


•	Also included in noninterest income for the quarter ended September 30, 2013 is a $310,000 gain on sale of a branch , including property and equipment as well as loans and deposits. Noninterest income for the quarter ended September 30, 2012 included a $900,000 loss on sale of loans as the Company sold a single loan relationship for a loss.

For the nine months ended September 30, 2013, total noninterest income increased approximately $ 4.6 million , or 36.9% , as compared to the nine months ended September 30, 2012. An increase in the mortgage banking activities of $ 3.1 million made up the majority of the increase, due primarily to $1.3 million in negative provisions recorded related to reserves on sold loans and an increase in the fair value of mortgage servicing rights of $1.7 million. Other changes in noninterest income include the following:


•	Service charges on deposit accounts increased $ 36,000 , or 0.9% , as service charges on business checking accounts , regular checking accounts, and money market and NOW accounts increased $223,000. These increases were partially offset by a decrease in NSF (including overdraft privilege) of $196,000.


•	The increase in other service fees of $ 941,000 was due primarily to an increase in investment service fees and commissions of $692,000 as investment activity has increased in 2013 and an increase in ATM and debit card fee income of $275,000 as compared to the prior year as incentive fees related to the signing of a new contract in late 2012 are earned over the life of the contract.


•	Net gain on sale of investment securities decreased $ 1,119,000 , or 67.9% due to decreased sales activity during the nine months ended September 30, 2013 as compared to 2012.


•	Income on investment in bank-owned life insurance (“BOLI”) decreased by 4.0% during the nine months ended September 30, 2013 .

•

Mortgage banking activities increased approximately $ 3.1 million , or 71.0% for the nine months ended September 30, 2013 as $1.3 million in negative provisions were recorded related to reserves on sold loans and the fair value of servicing rights increased $1.7 million as compared to the prior year due to an increase in mortgage loans serviced from $296 million in September 2012 to $401 million in September 2013. Decrease in mortgage activity is the result of an increase in mortgage rates over the past nine months.


•	Other income increased by approximately $ 124,000 , or 29.9% , year-to-date primarily due to income received on an cost method investment in the amount of $241,000 as the investment company became a publicly traded company.

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This increase was offset by the fact that prior year other income included a $150,000 settlement on rental income owed from the cancellation of leased rental property.


•	Also included in noninterest income for the nine months ended September 30, 2013 is a $310,000 gain on sale of a branch , including property and equipment as well as loans and deposits. Prior year noninterest income included a $900,000 loss on sale of loans as the Company sold a single loan relationship for a loss as compared to a $374,000 gain on sale of loans in the current year.

Noninterest Expense

Total noninterest expenses were $ 14.2 million for the third quarter of 2013, compared to $ 14.8 million in the same period of 2012, a decrease of $ 642,000 , or 4.3% . Noninterest expense includes salaries and employee benefits, occupancy and equipment expenses, and all other operating costs. Noninterest expense to average assets for the quarter ended September 30, 2013 and 2012 was 0.79% , and 0.76%, respectively. Noninterest expense to average assets for the nine months ended September 30, 2013 and 2012 was 2.31% , and 2.27%, respectively. Efficiency ratios for the three months ended September 30, 2013 and 2012 were 63.47% and 66.46%, respectively. Efficiency ratios for the nine months ended September 30, 2013 and 2012 were 65.51% and 65.21%, respectively. The efficiency ratio is the ratio of noninterest expenses less amortization of intangibles and gains on sale of other real estate owned to the total of the taxable equivalent net interest income and noninterest income.

The following is a summary of the fluctuations for the three and nine ended September 30, 2013 as compared to September 30, 2012 :

•

Quarter-to-date, salaries and employee benefit expenses increased by $ 866,000 , or 12.5% . The major components of this increase are summarized as follows: Salaries and wages increased $299,000 due to the addition of several new managerial positions across the Company since September 2012, as well as annual increases. Incentive compensation also increased $936,000 as the Company began accruing for a new Company wide incentive program for all employees in 2013. Offsetting these increases were a $319,000 decrease in commissions and a $470,000 decrease in other miscellaneous personnel expense which includes recruiting fees and BOLI expenses.


•	Year-to-date, salaries and employee benefit expenses increased by $ 3.7 million , or 19.3% . The major components of this increase are summarized as follows: Salaries and wages increased by $1.3 million due to personnel additions and annual increases. Related payroll taxes also increased $214,000 and incentive compensation increased $2.3 million due to the new incentive program noted above.


•	Occupancy and equipment expenses increased by $ 188,000 , or 10.4% , for the quarter and $ 307,000 , or 5.6% , for the nine months ended September 30, 2013 due to an increase in software and equipment maintenance costs.


•	Advertising and marketing expense increased by $ 245,000 , or 237.9% , comparing the third quarter 2013 with the third quarter 2012. Year-to-date advertising and marketing expense increased by $ 757,000 , or 271.3% . The increases are the direct result of a rebranding project announced in early 2013, including a Company and Bank name change.


•	Data processing expense decreased $ 82,000 , or 18.0% , for the quarter and $ 177,000 , or 13.7% year-to-date due to the implementation of live branch capture in 2013 which reduced daily courier service costs and provides additional efficiencies.


•	Communication expense increased $ 36,000 , or 11.5% , for the third quarter of 2013 compared to the third quarter of 2012. Year-to-date communications expense increased $ 2,000 , or 0.2% .


•	FDIC assessment expenses decreased $ 287,000 for the quarter and $ 407,000 year-to-date, due primarily to a decrease in assessment rates. In addition, deposits have decreased 10% since the third quarter of 2012.

•

Net cost of operation of other real estate owned decreased $ 1.2 million compared to the third quarter of 2012 as the Company recorded $90,000 in losses on sales for the quarter ended September 30, 2013 as compared to $1.2 million in writedowns and losses recorded in the third quarter of 2012. Net cost of operation of other real estate owned decreased $ 6.2 million for the nine months ended September 30, 2013 as compared to the prior year. $1.1 million in gains on sales were recorded in 2013 as the turnout and sales from the auction announced in late 2012 were higher than anticipated. In the prior year, the Company recorded losses on sales and writedowns of $4.4 million for the nine months ended September 30, 2012.

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•	Loan collection fees decreased $ 8,000 , or 3.8% , compared to the third quarter of 2012 and decreased $ 58,000 , or 8.5% , year-to-date as past due and nonperforming loans have decreased since 2012.


•	Other professional fees decreased $ 254,000 for the quarter and $ 65,000 year-to-date when compared to the prior year due to timing and fees related to internal audit and external credit reviews were lower than anticipated, thus resulting in a decrease in accruals for the periods.

•

Quarter-to-date other operating expenses decreased by $ 171,000 , or 7.6% . Decreases include a $220,000 decrease in attorney fees as the third quarter of 2012 included fees related to the loan sale, and a $134,000 decrease in appraisal fees which were significantly higher in the third quarter of 2012 due to the anticipated loan and OREO sales. In addition, training expense decreased $131,000 as prior year expenses included a company wide training initiative.

•

Year-to-date other operating expenses increased approximately $ 326,000 or 4.9% . Increases include $377,000 in expenses related to the rebranding project and a $234,000 increase in transfer agent fees related to the recent 1-for-3 reverse stock split and additional filings required in connection with the recent capital raise. Increases also include a $109,000 increase in check losses and a $250,000 increase in software related expenses. In addition, approximately $97,000 in third party fees were incurred related to recent projects including the capital raise, loan sale and OREO auction. These increases were offset by a decrease in training expense of $556,000 as the Company embarked on a training program for all employees in 2012 and a $318,000 decrease in attorney fees.

Income Tax Expense

The Company recorded income tax expense for the three and nine months ended September 30, 2013 of $ 2.6 million and $ 7.8 million , respectively. The Company recorded an income tax benefit for the nine months ended September 30, 2012 of $9.4 million, as the valuation allowance for deferred taxes was reversed in the second quarter of 2012, and income tax expense of $54,000 for the three months ended September 30, 2012 . The reversal of the allowance was based primarily on a return to profitability as the Company has reported four consecutive quarters of net income, projected net income over the next 12 months and improving credit quality metrics. The effective tax rate for the three months ended September 30, 2013 was 35.7% as compared to 6.7% for the three months ended September 30, 2012 , excluding the reversal of allowance. The effective tax rate for the nine months ended September 30, 2013 was 35.6% as compared to 28.3% for the nine months ended September 30, 2012 , excluding the reversal of allowance. See footnote 14 in the consolidated financial statements for further discussion of income tax expense and deferred tax assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations. The information contained in Item 2 in the section captioned "Liquidity, Interest Rate Sensitivity and Market Risk" is incorporated herein by reference. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities. The acquisition of American Community and expansion into new market areas in North and South Carolina have marketing risks that are mitigated by retaining the American Community brand name in these markets. Credit risk associated with loans acquired in the merger are part of the overall discussion of credit risk in the sections captioned “Provision and Allowance for Loan Losses” and “Non-Performing Assets.”

The primary objective of asset and liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the next twelve months. Following a period of rate increases (or decreases) net interest income will increase (or decrease) over both a three-month and a twelve-month period.

Item 4. Controls and Procedures

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As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported as and when required, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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Form 10-Q Quarterly Report September 30, 2013

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Part II. Other Information

Item 1. Legal Proceedings

We are not a party to, nor are any of our properties subject to, any material legal proceedings, other than legal proceedings that we believe are routine litigation incidental to our business.

Item 5. Other Information

None

Item 6. Exhibits



Exhibit #		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification
31.2		Rule 13a-14(a)/15d-14(a) Certification
32.1		Section 1350 Certification
101		The following financial statements from the Quarterly Report on Form 10-Q of Yadkin Valley Financial Corporation for the quarter ended September 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income (Loss), (iii) Consolidated Statements of Changes in Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statement of Cash Flows and (vi) Notes to Consolidated Financial Statements.(1)

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Signatures

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Yadkin Financial Corporation



BY:		/s/ Joseph H. Towell
		Joseph H. Towell, President and Chief Executive Officer

BY:		/s/ Jan H. Hollar
		Jan H. Hollar, Principal Accounting Officer, Executive Vice President and Chief Financial Officer