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

• changes in political conditions or the legislative or regulatory environment;

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

• changes occurring in business conditions and inflation;

• changes in technology;

• changes in deposit flows;

• the level of allowance for loan loss;

• the rate of delinquencies and amounts of charge-offs;

• the rates of loan growth;

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

• changes in monetary and tax policies;

• 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 Securities and Exchange Commission.

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 quarter and six-month period ended June 30, 2008 as compared to the quarter and six-month period ended June 30, 2007, and also analyzes our financial condition as of June 30, 2008 as compared to December 31, 2007. 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.
Restatement for Correction of Error
As discussed in the notes to the interim condensed consolidated financial statements, the Company has restated its previously issued interim financial statements for the three and six months ended June 30, 2008 to reflect the correction of an error related to the provision for loan losses for the three and six months ended June 30, 2008, and the allowance for loan losses as of June 30, 2008. The misstatement was caused by a keying error on the spreadsheet used to assign specific valuation allowances to impaired loans. For one loan, the allowance should have been $700,000 but the amount assigned was $70,000, resulting in the understatement of the provision for loan losses of $630,000 for the three and six months ended June 30, 2008, and the allowance for loan losses as of June 30, 2008.
The impact on the condensed consolidated balance sheet as of June 30, 2008, and the condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2008, and the statements of stockholders' equity and cash flows for the six months ended June 30, 2008, is presented in note 11 to the interim condensed consolidated financial statements. The management's discussion and analysis of financial condition and results of operations for the three and six months ended June 30, 2008, presented herein has been revised to reflect the impact of the aforementioned restatement. Changes in Financial Position
Total assets at June 30, 2008 were $1,431.1 million, an increase of $220.0 million or 18.2% compared to assets of $1,211.1 million at December 31, 2007. The increase included assets acquired from the Cardinal merger and capitalized merger costs totaling $220.1 million. Without the additional assets acquired in the merger, assets would have decreased $0.1 million or 0.01%. The loan portfolio, net of allowance for losses, was $1,060.6 million including

net loans at fair value from the Cardinal acquisition of $149.9 million at March 31, 2008, compared to $886.3 million at December 31, 2007. Gross loans held for investment increased by $177.8 million, or 19.8%, of which $151.6 million came from the Cardinal acquisition. Excluding the impact of the Cardinal acquisition, gross loans held for investment increased by $26.2 million, or 2.9%. The allowance for loan losses increased $3.4 million with Cardinal contributing $1.7 million to the allowance on the date of acquisition.
Loan growth concentration was divided within the following categories. Commercial loans increased by $96.8 million with $98.2 million acquired at Cardinal merger and $8.5 million of the increase attributable to the Cardinal region since acquisition. Construction and land development loans increased by $40.7 million with $18.3 million acquired at Cardinal merger and a decrease of $0.6 million attributable to the Cardinal region since acquisition. Home equity lines of credit increased $19.8 million with $8.3 million acquired at merger and $0.4 million decrease attributable to the Cardinal region since acquisition. Loans were funded by certificates of deposit ("CODs"), negotiable orders of withdrawal ("NOW"), money market deposits, and borrowings. The Bank promoted one or more special COD rates throughout the period.
Mortgage loans held for sale decreased by $5.6 million (10.6%) as the Bank continued its strategy of selling mortgage loans mostly to various investors with servicing released and to a lesser extent to the Federal National Mortgage Association with servicing rights retained. These loans are held normally for a period of two to three weeks before being sold to investors. June 2008 mortgage loans closed were $77.2 million, the second lowest monthly amount for 2008, and was slightly lower than $79.4 million loans sold in December 2007. This reduction in monthly volume as well as the timing of loans closed within each month allowed the Bank to sell more of its outstanding loans at the end of June 2008 than at year end 2007. Monthly mortgage loans closed during 2008 have totaled $525.4 million, ranging from a low of $58.7 million in January to a high of $109.1 million in February.
The securities portfolio decreased 0.9% from $142.5 million at December 31, 2007, to $141.2 million at June 30, 2008. The portfolio is comprised of U.S. treasury securities (4.2%), securities of federal agencies (32.1%), mortgage-backed securities (34.4%), tax-exempt municipal securities (28.3%), corporate bonds (0.4%), and publicly traded common and preferred stocks (0.5%). Temporary investments, including deposits at the Federal Home Loan Bank and federal funds sold, decreased from approximately $472,000 at December 31, 2007 to $377,000 at June 30, 2008. . The Company had unrealized losses of $318,800 in Freddie Mac preferred securities with a cost basis of $1,000,000 at June 30, 2008 and at this time do not believe that any other than temporary impairment exists based upon management's analysis. However, no assurance can be made that the Company will not have other than temporary impairment on these securities in the future.
Other assets increased $3.3 million due largely to the deferred tax benefit of $2.0 million acquired in the purchase of Cardinal. Other real estate owned (OREO) increased $1.5 million with $0.9 million attributable to the Cardinal merger, while the receivable of $568,000 from the BOLI death benefit decreased as it was received during the first quarter 2008. The Company evaluates the Banking segment for impairment on an annual basis at April 30. Upon evaluation management determined that no impairment existed in the banking segment. However, no assurance can be made that the Company will not have impairment in the banking reporting unit in the future.
Deposits increased $133.3 million or 13.8% comparing June 30, 2008 to December 31, 2007. Deposits totaling $170.7 million were attributable to the Cardinal acquisition. Overall, noninterest-bearing demand deposits increased $10.1 million or 6.5% which includes the $15.8 million from the Cardinal acquisition. NOW, savings, and money market accounts increased $50.5 million or 21.7% with Cardinal contributing $49.6 million. CODs over $100,000 increased $9.4 million or 3.5% and other COD's increased $63.3 million or 20.5%. Cardinal contributed $34.0 million in COD's over $100,000 and $69.3 million in other COD's. The noninterest-bearing deposit growth was concentrated in business checking accounts which increased $9.4 million. The largest increase in interest-bearing deposits was in the money market accounts which increased $29.2 million. NOW accounts and savings increased $21.3 million. During the first quarter, the Company offered a three-month COD special rate as an alternative to its money market investors who were seeking higher rates. In the second quarter, the Company increased its money market rate and discontinued its special three-month COD rate. The primary reasons for these changes were to shift the funding mix to money

market accounts and to lower the cost of funds due to competitive money market rates being lower than short-term COD rates.
Borrowed funds increased $68.8 million or 66.0% comparing June 30, 2008 to December 31, 2007. The portion of the increase allocated to the Cardinal acquisition was $4.3 million in borrowings and $0.7 million in repurchase agreements. The rest of the increase was advances from the FHLB and overnight borrowings from Silverton Bank which provided additional liquidity and funded loan growth. Long term borrowings consisted of the $25.8 million trust preferred securities and advances from the FHLB of $14.3 million. Yadkin Valley Statutory Trust I ("the Trust") issued the trust preferred securities at a rate equal to the three-month LIBOR rate plus 1.32%. The trust preferred securities mature in 30 years, and can be called by the Trust without penalty after five years. Deposit growth also provided funding for the growth in the loan portfolio. Other liabilities increased by $1.6 million or 23.4% from December 31, 2007 to June 30, 2008. Of that increase, $1.9 million was attributable to the other liabilities acquired from the purchase of Cardinal.
At June 30, 2008, total stockholders' equity was $149.7 million or a book value of $13.00 per share compared to $133.3 million or a book value of $12.62 per share at year-end December 31, 2007. The tangible book values per share at June 30, 2008 and December 31, 2007 were $7.87 and $9.12, respectively. At June 30, 2008, the Company was in compliance with all existing regulatory capital requirements to maintain its status as a well-capitalized bank. During the six-month period ended June 30, 2008, the Company did not purchase any shares of its common stock.
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 14.3% at June 30, 2008 compared to 17.1% at December 31, 2007. Additional liquidity is provided by $102.1 million in unused credit including federal funds purchased lines provided by correspondent banks as well as credit availability from the Federal Home Loan Bank of Atlanta. In addition, the Bank has unpledged marketable securities of $71 million available for use as a source of collateral. The Bank has been able to generate deposits in its local markets without having to rely significantly on brokered deposits. At June 30, 2008, brokered deposits totaled $18.8 million which was primarily brokered deposits acquired in the Cardinal acquisition.
Management continues to assess interest rate risk internally and by utilizing outside sources. Following a period of stable rates 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. 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. 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 mortgage loans held for sale by Sidus are funded by short-term borrowings. Although the repricing dates of the mortgage assets and borrowings are approximately the same, the interest rate spread fluctuates because the assets and liabilities reprice at different points on the yield curve. The fifteen to thirty year mortgage assets, usually held for two to three weeks prior to being sold, are priced based on the fifteen to thirty year mortgage-backed security yield curve, whereas the borrowing rates to fund Sidus loans are based on the one month point on the LIBOR yield curve. While the net interest income between these points is positive unless the yield curve is inverted, a decrease in the slope of the yield curve will result in a decrease in the net interest margin for Sidus. Conversely, an increase in the slope will result in an increase in Sidus' net interest margin. The yield curve for the first six months of 2008 was generally steeper than it was for the first six months of 2007, and as expected, Sidus' net interest margin increased by 154 basis points from the second quarter of 2007 to the second quarter of 2008 and by 215 basis points for the first six months of 2007 as compared to the first six months of 2008.

The Company has not used derivative financial instruments such as futures, forwards, swaps and options historically, however, such instruments are available to management if needed. 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 three-month period ended June 30, 2008 was $1,726,924, compared to $3,786,398 in the same period of 2007, a decrease of 54.4%. Basic and diluted earnings per common share were $0.15 for the three-month period ended June 30, 2008. Basic and diluted earnings per common share were $0.36 and $0.35 for the three-month periods ended June 30, 2007, respectively. On an annualized basis, results represent returns on average assets of 0.49%, 1.04%, and 1.36% for the quarters ended June 30, 2008, December 31, 2007, and June 30, 2007, respectively. Returns on average equity for the same periods were 4.57%, 9.14%, and 11.85%.
The Company calculates tangible equity by subtracting goodwill and core deposit intangible from total equity. Return on average tangible equity (annualized) was 7.45% for the quarter ended June 30, 2008, as compared to 16.74% for the quarter ended June 30, 2007 mainly due to the decline of the quarterly net income. Net income for the six-month period ended June 30, 2008 was $4,641,237, compared to $7,698,805 in the same period of 2007, a decrease of 39.7%. Basic and diluted earnings per common share were both $0.42 for the six-month period ended June 30, 2008. Basic and diluted earnings per common share were $0.73 and $0.71 for the six-month period ended June 30, 2007, respectively. On an annualized basis, year-to-date results represent a return on average assets of 0.72% for the six months ended June 30, 2008 compared to 1.41% for the six months ended June 30, 2007, and a return on average equity of 6.45% compared to 12.16% for the six months ended June 30, 2007.
Net Interest Income
Net interest income, the largest contributor to earnings, remained unchanged at $10.4 million in the second quarter of 2008, compared with $10.4 million in the same period of 2007. The decrease in the prime interest rate was offset by the additional net interest income earned by the recently acquired Cardinal region. The net interest margin declined to 3.34% in the second quarter of 2008 from 3.56% in the first quarter of 2008 and 4.21% in the second quarter of 2007. Net interest income for the six-month period ended June 30, 2008 decreased to $19.7 million from $20.6 million when compared to the same period in 2007. The decrease in the prime interest rate was offset by the additional net interest income earned by the recently acquired Cardinal region. The net interest margin declined to 3.44% in the first six months of 2008 from 4.27% in the first six months of 2007.
The margin decline was driven by the Bank's short term asset sensitivity to changing interest rates. A comparison of the second quarters of 2008 and 2007 shows that yield on earning assets decreased by 140 basis points which was partially offset by a decrease of 67 basis points in the yield on interest bearing liabilities. The decline in yield on earning assets was attributable to the yield on loans which declined by 164 basis points in the second quarter of 2008 as compared to the second quarter of 2007. Loans that reprice in three months or less comprised 49.4% of total loans held for investment at June 30, 2008, down from 51.5% at June 30, 2007.
The net interest margin for the six-month period ended June 30, 2008 declined by 83 basis points to 3.44% from the same period in the prior year. The decrease was attributed to a decline in the yield from loans by 133 basis points as compared to the yield on interest bearing liabilities that only declined by 46 basis points. The impact of the steep decline in the prime rate over the past nine months, especially during the first quarter of 2007, has reduced net interest income as earning assets have been more sensitive to rate changes than interest-bearing liabilities.

The Company maintains an asset-sensitive position with respect to the impact of changing rates on net interest income. The prime rate decreased by 325 basis points from September 19, 2007 to March 19, 2008, including a steep decline of 175 basis points during the first quarter of 2008 and another 25 basis points in April 2008. After a period of about three months following a rate decrease, the Company's net interest margin should begin to increase assuming a constant mix of asset and liability categories. The Company's internal management reports indicate that the monthly net interest margin, excluding the impact of Sidus, reached its lowest point for the quarter during May and began to rise in June. Comparing the linked second and first quarters of 2008, the net interest margin declined by 22 basis points as rate decreases that occurred during the first quarter had a more significant impact on net interest income during the second quarter.
Average Balance Sheets and Net Interest Income Analysis

Six Months Ended:                                    June 30, 2008                                      June 30, 2007
                                        Average                           Yield/           Average                           Yield/
                                        Balance          Interest          Rate            Balance          Interest          Rate
INTEREST EARNING ASSETS
Federal funds sold                    $     3,394        $      37           2.19 %      $     6,137        $     168           5.52 %
Interest bearing deposits                   9,800              139           2.84 %            2,728               63           4.66 %
Investment securities (1)                 144,036            3,736           5.15 %          132,036            3,322           5.07 %
Total loans (1,2)                       1,017,687           33,515           6.60 %          849,781           33,399           7.93 %

Total average earning assets (1)        1,174,917           37,427           6.38 %          990,682           36,952           7.52 %

Noninterest earning assets                126,125                                            112,928

Total average assets                  $ 1,301,042                                        $ 1,103,610

INTEREST BEARING LIABILITIES
NOW and money market                  $   223,633        $   2,013           1.81 %      $   187,481        $   2,059           2.21 %
Savings                                    36,597              109           0.60 %           36,160              182           1.01 %
Time certificates                         603,561           13,071           4.34 %          537,494           12,735           4.78 %

Total interest bearing deposits           863,791           15,193           3.53 %          761,135           14,976           3.97 %
Repurchase agreements sold                 47,681              628           2.64 %           34,879              570           3.30 %
Borrowed funds                             78,556            1,453           3.71 %           19,607              451           4.64 %

Total interest bearing
liabilities                               990,028           17,274           3.50 %          815,621           15,997           3.96 %


Noninterest bearing deposits              152,462                                            152,553
Stockholders' equity                      144,234                                            127,719
Other liabilities                          14,318                                              7,717

Total average liabilities and
stockholders' equity                  $ 1,301,042                                        $ 1,103,610

NET INTEREST INCOME/ YIELD (3,4)                         $  20,153           3.44 %                         $  20,955           4.27 %


INTEREST SPREAD (5)                                                          2.89 %                                             3.57 %

1. Interest income and yields related to securities and loans exempt from Federal income taxes are stated on a fully tax equivalent basis, assuming a Federal income tax rate of 34%, reduced by the nondeductible portion of interest expense

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

3. Net interest income is the difference between income from earning assets and interest expense.

4. Net interest yield 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 rate paid on interest bearing liabilities.

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 provision for loan losses was $1,708,000 for the second quarter of 2008 compared to $200,000 for the second quarter of 2007 and $2,158,000 for the six-month period ended June 30, 2008 compared to $500,000 for the same period in 2007. A large portion of the increase in the provision for loan losses for the quarter and year to date periods ended June 30, 2008 was due to the $630,000 increase in the allowance for impaired loans as discussed more fully in Note 11. This provision reflects management's assessment of the adequacy of the allowance for loan losses to absorb losses inherent in the loan portfolio due to credit deterioration or changes in the risk profile. The assessment primarily considers the allowance for loan loss levels relative to risk grades assigned by credit administration to loan types. The risk grades 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 individual credits within specific loan types. Because these factors are dynamic, the provision for loan losses can fluctuate. Periodic credit quality . . .