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YDKN > SEC Filings for YDKN > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for YADKIN FINANCIAL CORP

Form 10-K for YADKIN FINANCIAL CORP


28-Feb-2014

Annual Report


Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes combined in Item 8 of this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company. Because Financial Corporation has no material operations and conducts no business on its own other than owning its subsidiary, Yadkin Bank ("the Bank"), the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, Yadkin Financial Corporation and Yadkin Bank are collectively referred to herein as the Company unless otherwise noted.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations describes our results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012 and the year ended December 31, 2011, and also analyzes our financial condition as of December 31, 2013 as compared to December 31, 2012. Like most financial institutions, 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 most of which we pay interest. Consequently, one of the key measures of our success is the 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.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb our estimate of 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.

Markets in the United States and elsewhere experienced extreme volatility and disruption since the latter half of 2007. These circumstances have exerted downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in increased market volatility, constrained credit and capital markets, particularly for financial institutions, and has caused an overall loss of investor confidence. Loan portfolio performances deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. Slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the value of the collateral securing these loans has, in some cases, declined below the loan balance. The following discussion and analysis describes our performance in this challenging economic environment.

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 our financial statements and the other statistical information included in this report. Throughout Management Discussion and Analysis we make reference to tangible equity which is a non-GAAP measure. See page 59 for a reconciliation from the GAAP measure to non-GAAP measure.


Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include the Bank's accounting for loans, the provision and allowance for loan losses, other real estate owned, goodwill and deferred tax assets. In particular, the Bank's accounting policies relating to the provision and allowance for loan losses and possible impairment of goodwill involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material differences in the consolidated financial position or consolidated results of operations. Please see the discussion below under "Loans," "Provision for Allowance for Loan Losses," and "Deferred Tax Assets." Also, please refer to Note 1 in the "Notes to Consolidated Financial Statements" for additional information regarding all of the Bank's critical and significant accounting policies.

LOANS - Loans that management has the intent and ability to hold for the foreseeable future are stated at their outstanding principal balances adjusted for any deferred fees and costs. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination and other fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

PROVISIONS AND ALLOWANCE FOR LOAN LOSSES - We have established an allowance for loan losses through a provision for loan losses charged to expense on our statements of income. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but may differ from actual results. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower's ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Periodically, we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance for loan losses and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the commercial real estate market in our market areas.

OTHER REAL ESTATE OWNED "OREO" - OREO property obtained in satisfaction of a loan is recorded at its estimated fair value less anticipated selling costs based upon the property's appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loan losses. Subsequent declines in value are reported as adjustments to the carrying amount and are charged to noninterest expense. Gains or losses resulting from the sale of OREO are recognized in noninterest expense on the date of sale.

DEFERRED TAX ASSETS - At December 31, 2013, we had $23.4 million in net deferred tax assets. A valuation allowance is provided when it is more-likely-than-not that some portion of the deferred tax asset will not be realized. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. Our forecast process includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of net deferred tax assets, such assets may be impaired. Based on our analysis of both positive and negative evidence we concluded that no valuation allowance should be recorded against deferred tax assets at December 31, 2013. Financial Condition

The Bank's total assets decreased 6.10% from $1,923.4 million at December 31, 2012 to $1,806.0 million at December 31, 2013, primarily due to a $97.4 million decrease in cash as excess liquidity from the prior year loan sale was utilized. Total gross loans and loans-held-for sale increased 3.03% from $1,337.2 million at December 31, 2012 to $1,377.7 million at December 31, 2013. Deposits decreased 6.94% from $1,631.7 million at December 31, 2012 to $1,518.4 million at December 31, 2013.

Loans held-for-investment increased by $49.2 million, or 3.76% for the year ended December 31, 2013 as economic conditions improved and the Company saw increased loan demand.


The table below presents the increases (decreases) in loans by category year over year.

                                             Balance         Balance          Increase          % Increase
Loan Category                               12/31/13        12/31/12         (Decrease)         (Decrease)
                                                            (dollar amounts in millions)
Construction                              $     131.0     $     132.0     $         (1 )         (0.8 )%
Commercial real estate                          579.7           554.5             25.2            4.5  %
1-4 family mortgage loans                       174.1           168.6              5.5            3.3  %
Home equity lines of credit                     194.1           191.9              2.2            1.1  %
Multifamily                                      41.7            35.3              6.4           18.1  %
Commercial (includes deferred costs)            186.4           175.5             10.9            6.2  %
Consumer and other                               51.7            51.7                -              -  %
Total loans                               $   1,358.7     $   1,309.5     $       49.2            3.8  %

Loan composition includes commercial real estate loans which account for 43% of total loans, followed by commercial and industrial loans at 14%, home equity lines at 14%, residential 1-4 family first mortgage liens at 13%, construction and land development loans at 9%, multifamily loans at 3% and consumer loans at 4%.

The weighted average rate for loans held-for-investment at December 31, 2013 was 5.00% as compared to 5.30% at December 31, 2012. Fixed rate loans comprised 59% and 56% of total loans held-for-investment at December 31, 2013 and 2012, respectively. Fixed rate loans held at the end of the current and prior year yielded 5.32% and 5.81%, respectively, a decrease of 49 basis points. This decrease is primarily due to the repricing of loans at lower rates. At December 31, 2013, and 2012, the aggregate yields of variable rate loans were 4.55% and 4.64%, respectively, a decrease of 9 basis points. The decrease in variable rate loan yields is also attributable to repricing at lower rates as interest rates remain at historical lows.

Mortgage loans held-for-sale decreased by $8.8 million, or 31.7%, as mortgage activity has decreased as rates rise from historically low levels in 2012. These loans are closed, managed, and sold by the mortgage banking segment of the Bank. 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 and Federal Home Loan Mortgage Corporation with servicing rights retained. Loans held-for-sale are normally sold to investors within two to three weeks after closing. Loans closed by the mortgage banking segment during 2013 totaled $266.0 million, compared to $328.8 million in 2012, with monthly volumes in 2013 ranging from $13.7 million in October to $30.9 million in May.

The securities portfolio decreased by $54.2 million, or 15.80%, due to principal reductions and maturities in the amount of $84.1 million and $80.1 million in sales during 2013 as the Company looked to improve returns. These decreases were partially offset by $123.8 million in purchases during 2013. All securities were held in the available-for-sale category and included U.S. Government agency securities of $16.4 million, or 5.7%, state and municipal securities of $98.7 million, or 34.2%, mortgage-backed securities of $103.4 million, or 35.8%, collateralized mortgage obligations of $67.2 million, or 23.2%, and $3.2 million, or 1.1%, in other common and preferred stocks. The unrealized gains decreased to a net unrealized gain of $8,000 from a net unrealized gain of $6.8 million in 2012. The tax equivalent yield on securities held at December 31, 2013 was 2.96%, an increase from 2.28% a year earlier.

Premises and equipment, net of accumulated depreciation, decreased by $1.2 million from December 31, 2012 to December 31, 2013. Additions were $2.9 million in premises and equipment while depreciation and disposals accounted for a $4.1 million decrease.

Foreclosed real estate, also referred to as OREO, decreased by $5.5 million from December 31, 2012 to December 31, 2013, primarily due to the sale and writedown of $9.7 million in properties in 2013 as part of the previously announced auction of foreclosed properties in the first quarter of 2013.


The following table presents the foreclosed real estate:

                                               2013            2012
                                              (Amounts in thousands)
Beginning balance                          $    8,738       $  24,966
Loans transferred to OREO                       4,233          13,896
Proceeds of sales, net of selling expenses    (10,579 )       (17,741 )
Net writedowns, gains and losses                  875         (12,383 )
Ending balance of OREO                     $    3,267       $   8,738

Fair value of OREO is based on recent appraisals or discounted collateral values for properties in which recent appraisals were not available.

Other assets (including FHLB stock, investment in bank owned life insurance, core deposit intangibles, and deferred tax assets) decreased by $6.6 million from December 31, 2012 to December 31, 2013. The decrease was primarily related to deferred tax assets that decreased from $31.4 million to $23.4 million as taxable income was recorded for the year ended December 31, 2013. Other decreases include a $682,000 decrease in FHLB stock and a $680,000 decrease in core deposit intangibles due to amortization. Offsetting the decreases, was a $599,000 increase in investment in bank owned life insurance and a $2.0 million increase in mortgage servicing rights.

Deposits decreased by $113.2 million, or 6.9%, for the year ended December 31, 2013 primarily as a result of a decrease in certificates of deposit of $176.0 million, or 24.0% as management focused on shifting deposit mix from higher cost time deposits to lower cost core deposits. The table below presents increases and decreases in deposits year over year.

                                             Balance         Balance         Increase        % Increase
Deposit Category                            12/31/13        12/31/12        (Decrease)       (Decrease)
                                                            (dollar amounts in millions)
Certificates of Deposit                   $     557.3     $     733.3     $     (176.0 )      (24.0 )%
Money market                                    390.8           363.0             27.8          7.7  %
NOW                                             224.3           193.1             31.2         16.2  %
Savings                                          78.4            68.4             10.0         14.6  %
Demand deposits                                 267.6           273.9             (6.3 )       (2.3 )%
Total deposits                            $   1,518.4     $   1,631.7     $     (113.3 )       (6.9 )%

Notwithstanding the decrease in total deposits, interest bearing NOW accounts increased $31.2 million; savings accounts increased $10.0 million and money market accounts increased $27.8 million. Although there is no concentration of deposits from one individual or entity, the Bank does have $227.9 million or 15.0% of its total deposits in the over $100,000 ("jumbo CDs") category. Jumbo CDs decreased by $88.2 million, or 27.9%, over the balance at December 31, 2012. The Bank's brokered CD's are 2.3% of the Bank's total deposits at December 31, 2013 and are discussed in further detail under "Liquidity Management".

The weighted-average rate for CDs outstanding on December 31, 2013 was 1.05% down from 1.59% at the end of the prior year. During 2013 the aggregate CD rate decreased as CDs repriced throughout the year. The weighted-average rate paid on outstanding jumbo CDs at December 31, 2013 was 22 basis points higher than on other CDs, an increase from the prior year-end spread of 17 basis points. The weighted-average remaining term on jumbo CDs at December 31, 2013 was 16.6 months, up from 13.5 months, at the end of 2012.

In addition to deposits, funding for the Bank's assets was obtained from overnight repurchase agreements with businesses in the local market area. Funds borrowed under repurchase agreements decreased from $44.2 million at December 31, 2012 to $28.3 million at December 31, 2013. Advances from the FHLB at December 31, 2013 totaled $25.9 million compared to $25.9 million at December 31, 2012. On November 1, 2007, the Company issued $25.0 million in trust preferred securities at the floating interest rate of three month LIBOR plus 132 basis points. The interest rate at December 31, 2013 was 1.56% and will be effective until March 14, 2014. These securities are classified as long-term debt and mature in the year 2032. The Company now has the option to call for redemption of the securities, although the Company has no plans to redeem at this time. The proceeds provided funding for the acquisition of Cardinal at the end of the first quarter of 2008. In addition to the $25.0 million in trust preferred


securities issued in 2007, the Company acquired $10.0 million in trust preferred securities in the American Community acquisition. These trust preferred securities pay cumulative cash distributions quarterly at a rate priced off 90-day LIBOR plus 280 basis points. Their interest rate at December 31, 2013 was 3.05% and they are redeemable on December 15, 2033.

The Company also acquired capital lease obligations in the amount of $2.3 million from American Community. See Note 13 in the Consolidated Financial Statements for further details.

Accrued interest payable decreased $777,000 as total deposits decreased at December 31, 2013. Other liabilities decreased by $1.1 million, or 9.3%, from December 31, 2012 to December 31, 2013. The decrease was due primarily to a liability recorded in the sale of the reinsurance subsidiary in the amount of $1.7 million, as the Bank had entered into an agreement to sale its reinsurance subsidiary for a loss, and a $873,000 payable set up for potential property taxes owed as part of the accelerated asset disposition plan at December 31, 2012. In addition, commercial remittances which represent loan payments due to third parties also decreased $1.4 million from December 31, 2012. These decreases were offset by a $3.0 million increase in accrued incentive compensation at December 31, 2013.

Effect of Economic Trends

The downturn in the real estate market over the past few years has resulted in increased loan delinquencies, defaults and foreclosures. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. Management continues to monitor real estate trends and its effect on our portfolio, and is continuing to monitor credits with weaknesses.

Beginning in September 2007, the Federal Reserve began aggressively lowering the short-term rates which has caused the rates on our short-term or variable rate assets and liabilities to decline. These rates have stayed at historically low levels since 2007 and are projected to remain at these levels over the next 12 months. The following discussion includes our analysis of the effect that we anticipate changes in interest rates will have on our financial condition. However, we can give no assurances as to the future actions of the Federal Reserve or to the anticipated results that will actually occur. Results of Operations

Net income to common shareholders for 2013 was $16.9 million compared to a net loss of $12.6 million in 2012 and a net loss of $17.4 million in 2011. Basic and diluted net income per common share available to common shareholders was $1.19 in 2013 compared to basic net loss per common share of $(1.91) in 2012 and $(2.86) in 2011. The Company's net income before preferred dividends for 2013 was $18.8 million, an increase in income of $27.5 million from 2012 net loss before preferred dividends of $8.7 million. Return (loss) on average assets was 0.93% in 2013, (0.64)% in 2012, and (0.82)% in 2011. Return (loss) on average equity was 9.65% in 2013, (7.99)% in 2012, and (12.14)% in 2011. The return on assets and equity increased in 2013 primarily due to increased credit losses in 2012 as the Company executed an asset disposition plan to sell over $50 million in problem loans and foreclosed real estate. Net Interest Income

Net interest income is the primary source of operating income for the Company. Net interest income is the difference between interest and fee income generated from earning assets and the interest paid on deposits and borrowed funds. The factors that influence net interest income include both changes in interest rates and changes in volume and mix of loans and deposits.

For analytical purposes, net interest income may be reported on a tax-equivalent basis, which illustrates the tax savings on loans and investments exempt from state and/or federal income taxes. The tables that follow, Interest Rates Earned and Paid, and Interest Rate/Volume Analysis, represent components of net interest income for the years 2013, 2012, and 2011. These tables present changes in interest income and expense and net interest income changes caused by rate and/or volume.

Net interest income increased $3.1 million, or 5.0%, in 2013 from 2012 compared to a decrease of $1.5 million, or 2.4%, in 2012 over 2011. As the Rate/Volume Variance Analysis table of earning assets and interest-bearing liabilities shows, the increase in net interest income was attributable to a decreased cost of deposits as the deposit mix shifted from higher cost time deposits to lower cost core deposits and a decrease in volume of deposits. The decrease in rates on deposits led to increased net interest income of $4.1 million on a tax equivalent basis, and the decrease in volume increased net income $3.1 million. Offsetting this increase was a decrease in interest income of $4.7 million due primarily to a decrease in volume of loans. Average earning assets decreased $125.4 million, or 6.9%, in 2013 as compared to 2012 after decreasing $160.9 million, or 8.1%, in 2012. Average loans decreased $65.9 million, or 4.7%, in 2013 compared with a decrease of $135.3 million, or 8.8%, in 2012. Average interest bearing deposits decreased $161.7 million, or 11.3%, in 2013 compared to 2012 after decreasing $205.0 million, or 12.5% from 2011 to


2012. Acquisition accounting adjustments increased net interest income by $275,000 in the current year and $307,000 in the prior year.

The net interest margin (tax-equivalent net interest income as a percentage of average interest-earning assets) increased to 3.86% in 2013 from 3.40% in 2012 after increasing to 3.40% in 2012 from 3.21% in 2011. This increase in 2013 is due primarily to a decrease in cost of funds as the deposit mix has shifted from higher cost time deposits to lower cost core deposits, as well as an increase in yields on securities. Excluding the accretion of fair value adjustments recorded in the American Community merger in 2009, net interest margin was 3.84% in 2013, 3.39% in 2012 and 3.19% in 2011, respectively.

Interest spread was 3.71% in 2013 compared to 3.21% in 2012 and 3.03% in 2011. Interest spread measures the difference between the average yield on interest-earning assets (tax-equivalent interest income as a percentage of average interest- earning assets) and the interest paid on interest-bearing liabilities. The rate increase in 2013 was due to an earning asset rate increase from 4.39% in 2012 to 4.46% in 2013 which resulted from an increase in yields on securities as the Company repositioned its portfolio to higher return securities, as well as the impact of decreased nonaccrual loans following the accelerated asset disposition plan. The interest-bearing liability rate declined 42 basis points from 2012 to 2013, due to a shift from higher cost time deposits to lower cost demand deposits. The following table presents the daily average balances, interest income and expense, and average rates earned and paid on interest-earning assets and interest-bearing liabilities of the Company for 2013, 2012, and 2011.


Interest Rates Earned and Paid
                                  Year Ended December 31, 2013                        Year Ended December 31, 2012                        Year Ended December 31, 2011
                        Average Balance         Interest      Yield/Rate      Average Balance        Interest     Yield/Rate      Average Balance        Interest     Yield/Rate
                                                                                         (Dollars in thousands)
Interest-earning
assets:
Interest-bearing
deposits and
federal funds sold      $       23,280      $          72         0.31 %    $       81,748        $       201         0.25 %    $      141,249        $       376         0.27 %
Investment securities
(1)                            342,156              7,970         2.33 %           343,137              7,761         2.26 %           309,199              9,226         2.98 %
Total loans (1)(2)(6)        1,333,647             67,719         5.08 %         1,399,590             72,093         5.15 %         1,534,929             80,111         5.22 %

Total interest -earning
assets                       1,699,083             75,761         4.46 %         1,824,475             80,055         4.39 %         1,985,377             89,713         4.52 %

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