Exhibit 13

Yadkin Valley Company

2004

Annual Report To Shareholders

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Business

          Yadkin Valley Company (“Yadkin”) was incorporated under the laws of North Carolina during 1979.  Its primary activity is the ownership of all the outstanding shares of the capital stock and serving as the parent holding company of Yadkin Valley Life Insurance Company (“Yadkin Valley Life”) which is incorporated under the laws of Arizona and is engaged in the business of reinsuring credit life insurance policies.  Yadkin Valley Life’s reinsurance activities currently are limited to assuming risk associated with credit life insurance policies (“credit life policies”) up to a maximum risk of $25,000 on any one insured, issued only by Triangle Life Insurance Company, Raleigh, North Carolina (“Triangle Life”), and sold only in North Carolina by The Fidelity Bank, Fuquay-Varina, North Carolina, The Heritage Bank, Lucama, North Carolina, and Southern Bank and Trust Company, Mount Olive, North Carolina.   Triangle Life is a wholly owned subsidiary of First-Citizens Bank & Trust Company, Raleigh, North Carolina.  In consideration of its assumption of risk, Yadkin Valley Life receives a portion of the premium income on policies it reinsures, less the amount of claims and insurance taxes paid. Results of operations are significantly affected by related party transactions.

Directors and Executive Officers

Name	Position with Yadkin	Principal Occupation and Employment	Principal Business
Hope Holding Connell	Director	Executive Vice President, First-Citizens Bank & Trust Company, Raleigh, NC	Banking
Denton F. Lee, Jr.	Director, Vice President and Secretary	Group Vice President and Manager of Central Bank Operations, First-Citizens Bank & Trust Company, Raleigh, NC	Banking
David S. Perry	Director, President and Treasurer	President and director, American Guaranty Insurance Company, Raleigh, NC (property and casualty insurer); President and director, Triangle Life Insurance Company, Raleigh, NC (credit life and accident and health insurer)	Insurance

Related Party Transactions

          Yadkin and Yadkin Valley Life are parties to Administration Agreements (the “Agreements”) with American Guaranty Insurance Company, Raleigh, North Carolina (“American Guaranty”) a subsidiary of First Citizens BancShares, Inc. Raleigh, North Carolina (“BancShares”).  Under the Agreements, American Guaranty provides the managerial, administrative and operational services necessary in carrying on Yadkin’s business and the reinsurance business of Yadkin Valley Life, subject to the supervision and control of our Board of Directors.  American Guaranty is compensated for its services and reimbursed for its expenses incurred which are reasonable and properly attributable to the management and conduct of Yadkin and Yadkin Valley Life’s business affairs. Either party may terminate the Agreements at any time upon written notice to the other.  Aggregate fees paid to American Guaranty pursuant to the Agreements during 2004 were $24,687.  David S. Perry, who is President, Treasurer and director of Yadkin, also serves as President and a director of American Guaranty, and Frank B. Holding, Jr., one of Yadkin’s principal shareholders, serves as Chairman of American Guaranty.  It is expected that American Guaranty will continue to provide services during 2005.

          Yadkin’s reinsurance business consists solely of assuming risks, through Yadkin Valley Life, on credit life insurance policies issued by Triangle Life Insurance Company, Raleigh, North Carolina (“Triangle Life”), which is a subsidiary of First-Citizens Bank & Trust Company (“FCB”).  David S. Perry, who is President, Treasurer and director of Yadkin, also serves as President and a director of Triangle Life, and Frank B. Holding, Jr., one of Yadkin’s principal shareholders, serves as Chairman of Triangle Life.

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          As noted above, American Guaranty is a subsidiary of BancShares and Triangle Life is a subsidiary of FCB.  Frank B. Holding, Jr., Lewis R. Holding and Hope H. Connell, each is one of Yadkin’s principal shareholders, and each is a principal shareholder of FCB’s parent holding company, BancShares.  Also, Frank B. Holding, Jr., and Lewis R. Holding serve as directors and executive officers of FCB and BancShares, and Hope H. Connell serves as a senior officer of FCB.

          The credit life insurance policies issued by Triangle Life and reinsured by Yadkin Valley Life are sold through Southern Bank and Trust Company, Mount Olive, North Carolina (“Southern”), The Fidelity Bank, Fuquay-Varina, North Carolina (“Fidelity”), and The Heritage Bank, Lucama, North Carolina (“Heritage”).  Each of those banks has an arrangement with Triangle Life whereby it receives a commission on credit life insurance policies it sells to its loan customers.  Hope H. Connell, one of Yadkin’s directors and principal shareholders, also serves as a director of Southern and its parent holding company and is a principal shareholder of Heritage’s parent holding company.  Frank B. Holding, Jr., one of Yadkin’s principal shareholders, also is a principal shareholder of Southern’s parent holding company.  Lewis R. Holding, one of Yadkin’s principal shareholders, also is a principal shareholder of Southern’s and Fidelity’s parent holding companies.  The amounts of commissions received by Southern, Fidelity and Heritage, respectively, in connection with those policies during 2004 were $20,630, $19,873, and $7,814.

          A significant portion of our assets are represented by Yadkin’s investments in equity securities of BancShares, First Citizens Bancorporation, Inc., Columbia, South Carolina (“Bancorporation”), and Heritage’s parent holding company Heritage BancShares, Inc.  Yadkin is affiliated with BancShares and Heritage as a result of the common control relationships described above.  Additionally, Lewis R. Holding, one of Yadkin’s principal shareholders, also is a principal shareholder of Bancorporation, and Peter M. Bristow, one of Yadkin’s principal shareholders, also is a principal shareholder and an executive officer of Bancorporation.

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

          The following discussion is presented to assist shareholders in understanding Yadkin’s consolidated financial condition and results of operations and should be read in conjunction with the audited consolidated financial statements appearing elsewhere in this report.

          Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.  For example, Yadkin Valley Life maintains a reserve for death benefits for estimated losses which have occurred but have not been reported.  If trends in losses trend upward or if catastrophic events occur, these estimates would be updated and additional reserves may be required. 

          Results of Operations.  Yadkin’s operations in 2004 resulted in a net income of $40,706 compared to a net loss of $43,405 for 2003.  The primary factors contributing to the change in net income between 2004 and 2003 were (i) a $112,891 decrease in claims expense and (ii) an increase of $38,920 in dividends. The aforementioned revenue increase was offset by a $19,638 aggregate increase in interest expense, professional fees, management fees and general expenses.

          Life premiums continued to decline during 2004.  Premiums declined 20.6% during 2004, which follows a 15.9% decrease in 2003 and an 8.7% decrease in 2002.  The decline was due to a decrease in premium writings by producers for the company from whom Yadkin Valley Life assumes business.  Since Yadkin Valley Life does not directly solicit business from customers, its revenue from life premiums is dependent on the volume generated by the ceding insurance company.  Accordingly, these decreases may continue in future periods to the extent that the producers do not generate additional volume.  As described above under the caption “Related Party Transactions” and in Note 6 to the Consolidated Financial Statements, the ceding insurance company is related through common ownership to Yadkin.

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          During 2004, dividend income increased $38,920 (58.5%) as a result of  receiving a one time dividend in the amount of $27,461 from Bancorporation on the 5,631 shares of nonvoting common stock. 

          The increase in interest paid on outstanding loans was due to an increase in interest rates throughout 2004 when compared to 2003.  There were no additional borrowings in 2004.  Any future decrease or increase in interest paid will depend on the interest rate environment and Yadkin’s ability to reduce loans or the need for additional borrowings.

          Professional and management fees paid increased by $9,748 (15.5%) during 2004 to provide for internal control and regulation compliance.

          Total death benefit claims paid in 2004 were $14,983, a decrease of $105,813 when compared to death benefit claims paid of $120,796 in 2003.  The percentage of paid claims in 2004 is significantly lower than  in 2003 and is more in line with Yadkin’s historical levels.  The increase is not specifically attributable to any known events, as there have been no changes in operations, underwriting or any other procedures.  The estimate of Yadkin Valley Life’s life policy claim reserves at December 31, 2004 decreased $4,273 from December 31, 2003.  The estimate of life policy claim reserves will vary from period to period based on actuarial development and the amount of known claims at the period reporting date.

          Yadkin’s investments in marketable equity securities experienced an increase in their net unrealized gains during 2004 of $449,727 (3.8%), net of income taxes.  This follows an increase of $3,169,759 (37.2%), net of income taxes, during 2003.  Substantially all of these unrealized gains arise from investments in marketable equity securities issued by banking organizations, all of which are related to Yadkin through common ownership as described above under the caption “Related Party Transactions.”  Decreases in the fair values of these investments in future periods will result in reductions of shareholders’ equity.  Further discussion of the liquidity of these investments is contained under the caption “Liquidity” below.

          Financial Condition.  During 2004, total assets increased 3.4% from $21,895,309 at December 31, 2003, to $22,638,224 at December 31, 2004, primarily due to the increase in unrealized gains on marketable equity securities.  There were no other material changes in assets during 2004.

          During 2004, total liabilities increased 3.3% from $8,308,929 at December 31, 2003, to $8,583,673 at December 31, 2004.  The increase in deferred federal income taxes resulting from unrealized gains on investments was $294,297 while total liabilities increased $274,744.

          Commitments and Contractual Obligations.  As a normal part of its business, Yadkin and Yadkin Valley Life may enter into various contractual obligations and have other commitments.  At December 31, 2004, Yadkin had one contractual obligation in the amount of $902,407 for a one-year loan obligation, due June 5, 2005, and accrued interest thereon.  There were no other commitments.

          Off Balance Sheet Arrangements. During 2004, Yadkin had no off balance sheet arrangements and have none to report at December 31, 2004 and December 31, 2003.

          Liquidity.  Management views liquidity as a key financial objective.  Management relies on the operations of Yadkin Valley Life as the principal source of liquidity.  Further, borrowings from a commercial bank have allowed Yadkin to fund asset growth and maintain liquidity.

          Management believes the liquidity of Yadkin is adequate as evidenced by a ratio of assets to liabilities of 2.64 at December 31, 2004 and 2.64 at December 31, 2003.  Additionally, investments in equity securities had a carrying value at December 31, 2004 and December 31, 2003 of $22,170,052 and

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$21,426,028 respectively, substantially all of which are classified as available for sale and portions of which could be sold as a source of cash.  Factors which could impact Yadkin’s financial position and liquidity are significant increases or decreases in the market values of these equity securities.  While management considers these securities to be readily marketable, Yadkin’s ability to sell a substantial portion of these investments may be inhibited by the limited trading in most of these issuances.  As a result, Yadkin could realize substantial losses on any such sales.  In the event the need for additional liquidity arises, management believes that, as an alternative to selling investment securities, Yadkin has the ability to borrow additional funds from outside sources, using its investment securities as collateral if necessary.

          Capital Resources.  There are no material commitments for capital expenditures and none are anticipated.  At December 31, 2004, Yadkin had outstanding borrowings of $899,205 secured by 10,000 voting common shares of Bancorporation and 18,139 shares of Class A Common Stock of BancShares with an aggregate fair market value of approximately $7,939,107.  Any funds needed to satisfy loan repayments will be derived from dividends from Yadkin Valley Life and the sale of or repositioning of investments.

          Forward-Looking Statements.  The foregoing discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties.  Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events.  Factors that could influence the accuracy of such forward looking statements include, but are not limited to, the financial success or changing strategies of the Company’s customers, actions of government regulators, the level of market interest rates, the market for and values of the equity securities held by Yadkin, and general economic conditions.

Market for Common Equity and Related Stockholders Matters

          Yadkin’s common stock is traded in the over-the-counter market on the OTC Bulletin Board under the trading symbol “YAVL.OB,” but the trading market is very inactive.  As of December 31, 2004, Yadkin’s outstanding common stock was held by an aggregate of approximately 767 shareholders of record.

          The following table lists the high and low closing bid prices for Yadkin’s common stock in the over-the-counter market for the periods indicated.  This information was supplied by First-Citizens Bank & Trust Company, which serves as transfer agent for Yadkin’s common stock, and was obtained by it from Financial Technologies, Inc.  It should not be taken as an indication of the existence of any established trading market.  The above quotations represent prices between dealers and do not include retail markup, markdown or commissions, and they may not represent actual transactions.

Year	Quarterly period	High Bid		Low bid
2004	Fourth Quarter	$	54.50	$	40.00
	Third Quarter		53.80		50.00
	Second Quarter		52.10		48.30
	First Quarter		48.30		44.55
2003	Fourth Quarter		44.55		42.75
	Third Quarter		53.80		42.00
	Second Quarter		53.50		36.75
	First Quarter		45.50		36.75

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          Yadkin has never paid cash dividends on its common stock and does not anticipate any change in its existing dividend policy or practice. Cash dividends may be authorized as and when declared by its Board of Directors, provided that no such distribution results in its insolvency on a going concern or balance sheet basis. 

          Historically, Yadkin has been funded primarily by dividends paid by Yadkin Valley Life.  The amount of dividend payments by Yadkin Valley Life during any 12-month period, without prior approval by the Arizona Department of Insurance (the “Department”), is limited by statute to the lesser of 10% of its statutory capital and surplus or the amount of its gain from operations for the previous fiscal year.

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Report of Independent Registered Public Accounting Firm

Yakin Valley Company and Subsidiary:

We have audited the accompanying consolidated balance sheet of Yadkin Valley Company and subsidiary (the “Company”) as of December 31, 2004, and the related consolidated statements of income (loss), changes in shareholders’ equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of its operations and its cash flows for the year ended, in conformity with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina March 2, 2005

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	KPMG LLP
	Suite 1200
	150 Fayetteville Street Mall
	PO Box 29543
	Raleigh, NC 27626-0543

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Yadkin Valley Company:

We have audited the accompanying consolidated balance sheet of Yadkin Valley Company (the Company) and subsidiary as of December 31, 2003, and the related consolidated statements of income (loss), changes in shareholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility  is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yadkin Valley Company and subsidiary as of December 31, 2003, and the results of their operations and their cash flows for the year ended in conformity with U.S. generally accepted accounting principles.

February 13, 2004
KPMG LLP, a U.S. limited liability partnership is the U.S. member firm of KPMG International, a Swiss cooperative

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2004 and 2003

	2004		2003
Assets
Cash and investments:
Cash	$	108,783		98,945
Investments in equity securities		22,170,052		21,426,028
Certificates of deposit		358,951		370,000
Total cash and investments		22,637,786		21,894,973
Accrued investment income		338		236
Other assets		100		100
Total assets	$	22,638,224		21,895,309
Liabilities and Shareholders’ Equity
Liabilities:
Life policy claims reserve	$	6,374		10,647
Deferred income taxes		7,674,892		7,397,596
Accrued interest payable		3,202		1,481
Notes payable		899,205		899,205
Total liabilities		8,583,673		8,308,929
Shareholders’ equity:
Common stock, par value $1 per share. Authorized 500,000 shares, issued and outstanding 180,700 shares in 2004 and 181,130 in 2003		180,700		181,130
Retained earnings		1,738,931		1,720,057
Accumulated other comprehensive income		12,134,920		11,685,193
		14,054,551		13,586,380
Total liabilities and shareholders’ equity	$	22,638,224		21,895,309

See accompanying notes to consolidated financial statements.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Consolidated Statements of Income (Loss)

Years ended December 31, 2004 and 2003

	2004			2003
Premiums and other revenue:
Life premiums	$	128,208			161,549
Dividend income		105,442			66,522
Interest income		3,598			3,929
		237,248			232,000
Benefits and expenses:
Death benefits		14,983			120,796
Increase (decrease) in reserve for life policy claims		(4,273	)		2,805
Operating expenses:
Commissions		57,311			72,735
Interest		25,905			22,036
Professional fees		48,047			45,260
Management fees		24,687			17,726
General, administrative, and other		46,883			40,862
		213,543			322,220
Income (loss) before income taxes		23,705			(90,220	)
Income tax benefit		(17,001	)		(46,815	)
Net income (loss)	$	40,706			(43,405	)
Net income (loss) per share	$	0.23			(0.24	)
Weighted average shares outstanding		180,911			181,228

See accompanying notes to consolidated financial statements.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Years ended December 31, 2004 and 2003

	Common stock			Retained earnings			Accumulated other comprehensive income		Total shareholders’ equity
Balance at December 31, 2002	$	181,295			1,770,197			8,515,434		10,466,926
Comprehensive income:
Net loss		—			(43,405	)		—		(43,405	)
Net unrealized gains on securities available for sale, net of income taxes of $2,024,786		—			—			3,169,759		3,169,759
Comprehensive income										3,126,354
Redemption of 165 shares of common stock		(165	)		(6,735	)		—		(6,900	)
Balance at December 31, 2003		181,130			1,720,057			11,685,193		13,586,380
Comprehensive income:
Net income		—			40,706			—		40,706
Net unrealized gains on securities available for sale, net of income taxes of $294,297		—			—			449,727		449,727
Comprehensive income										490,433
Redemption of 430 shares of common stock		(430	)		(21,832	)		—		(22,262	)
Balance at December 31, 2004	$	180,700			1,738,931			12,134,920		14,054,551

See accompanying notes to consolidated financial statements.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2004 and 2003

	2004			2003
Operating activities:
Net income (loss)	$	40,706			(43,405	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred tax expense (benefit)		(17,001	)		(40,155	)
Increase (decrease) in reserve for life policy claims		(4,273	)		2,805
(Increase) decrease in accrued investment income		(102	)		360
Increase (decrease) in accrued interest payable		1,721			(592	)
Increase (decrease) in other liabilities		—			(1,028	)
Net cash provided (used) by operating activities		21,051			(82,015	)
Investing activities:
Purchases of certificates of deposit		(1,400,015	)		(1,994,195	)
Maturities of certificates of deposit		1,411,064			2,074,803
Net cash provided by investing activities		11,049			80,608
Financing activities:
Purchases and retirement of common stock		(22,262	)		(6,900	)
Net cash used by financing activities		(22,262	)		(6,900	)
Net increase (decrease) in cash		9,838			(8,307	)
Cash at beginning of year		98,945			107,252
Cash at end of year	$	108,783			98,945
Cash payments for:
Interest	$	24,184			22,628
Income taxes		—			—
Noncash investing and financing activities:
Unrealized gain on securities available for sale, net of applicable income taxes of $294,297 and $2,024,786, respectively.	$	449,727			3,169,759

See accompanying notes to consolidated financial statements.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

(1)	Significant Accounting Policies
	Basis of Presentation
	The consolidated financial statements include the accounts and operations of Yadkin Valley Company (the Parent) and its wholly owned subsidiary, Yadkin Valley Life Insurance Company, hereinafter collectively referred to as the Company. Inter-company accounts and transactions have been eliminated. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which, as to the insurance subsidiary, may vary in some respects from the statutory accounting practices which are prescribed or permitted by the Insurance Department of the State of Arizona.  The insurance subsidiary is domiciled in Arizona.
	Line of Business
	The Parent, which was organized as a North Carolina holding company, manages the operations of Yadkin Valley Life Insurance Company, which is in the business of assuming credit life insurance. All reinsurance is assumed from Triangle Life Insurance Company (TLIC), which is an affiliate through common ownership. TLIC issues credit life insurance policies on loans made by three banks located in North Carolina: Southern Bank and Trust Company (Southern), The Heritage Bank (Heritage) and The Fidelity Bank (Fidelity). The Company and the three aforementioned banks are also related through certain common ownership (see note 6).
	Yadkin Valley Life Insurance Company’s assumption limit, which has been determined by management, is $25,000 per policy.
	Recognition of Premium Revenues
	Revenue is recognized based on premiums collected from TLIC. The premiums are received monthly and are based on the reinsurance coverage provided for the month. Since reinsurance coverage is provided prior to the receipt of premiums, there is no deferral of revenue to future periods.
	Liabilities for Policy and Contract Claims
	The reserve for life policy claims includes estimates of losses on reported claims and claims incurred but not reported, based on information provided by the ceding company and on the Company’s historical experience. Although management believes that the liability for life policy claims is adequate, the ultimate amount of such claims may vary, perhaps significantly, from the estimated amounts in the financial statements.
	Investments
	Investments in equity securities with readily determinable fair values are classified as available-for-sale and are carried at fair value. The unrealized holding gains and losses are reported net of deferred income taxes as a component of accumulated other comprehensive income. An equity security’s fair value is considered readily determinable if its price is quoted on a registered securities exchange or in the over-the-counter market.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Equity securities, which do not have readily determinable fair values, are carried at the lower of cost or estimated fair value. A decline in the fair value of securities which is deemed to be other than temporary is recognized in earnings.

Realized gains and losses on equity securities are recognized in earnings using the specific identification method.

Income Taxes

Income tax provisions are based on income reported for financial statement purposes. Deferred federal income taxes are recorded based on temporary differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance is provided to reduce the deferred tax assets to the amount that is more likely than not to be recovered.

Fair Value of Financial Instruments

The Company’s on-balance sheet financial instruments are cash, investments in equity securities, certificates of deposit, accrued investment income, accrued interest payable and notes payable. Fair values of investments in equity securities are discussed in note 2. The carrying values of other on-balance sheet financial instruments approximate fair value.

The fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holding of a particular financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 2004 and 2003, respectively. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Other Comprehensive Income

Other comprehensive income consists solely of unrealized gains on available-for-sale equity securities net of related income taxes.

Net Income (Loss) Per Share

Net income (loss) per share is computed based on the weighted average number of common shares outstanding during the year and represents basic and diluted net income per share, respectively, for 2004 and 2003, as the Company has no potentially dilutive common stock.

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

	Use of Estimates
	The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and the reported amounts of income and expense included in the consolidated statements of income. Actual results could differ from those estimates. The most significant estimate the Company makes in preparing its consolidated financial statements relates to the determination of the life policy claims reserve.
	Other Than Temporary Impairment of Investment Securities
	Our policy regarding other than temporary impairment of investment securities requires continuous monitoring. Individual investment securities with a fair market that is less than 80% of original cost over a continuous period of two quarters are evaluated  for impairment during the subsequent quarter. The evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value. If the evaluation concludes that the investment is not likely to recover its original value, the unrealized loss is reported as an other than temporary impairment, and the loss is recorded as a securities transaction on the Consolidated Statement of Income. If the evaluation indicates a loss of asset value, management may elect to record an other than temporary impairment immediately.
(2)	Investments
	Investments at December 31, 2004 and 2003, consisted of certificates of deposit and equity securities. Certificates of deposit of $358,951 and $370,000 at December 31, 2004 and 2003, respectively, are carried at cost. These certificates of deposit have maturities of less than one year. The cost of these securities approximates fair value.
	Investments in equity securities at December 31, 2004 and 2003 are classified as follows:

	2004		2003
Available-for-sale, carried at fair value	$	21,446,647		20,702,623
Other, carried at lower of cost or market		723,405		723,405
	$	22,170,052		21,426,028

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Equity securities classified as available-for-sale at December 31, 2004 consist of the following securities:

Description	Number of shares		Cost		Unrealized gain		Fair value
First Citizens Bancorporation of South Carolina, Inc. – voting common stock – par value $5 per share		35,000	$	455,000		17,920,000		18,375,000
First Citizens BancShares, Inc. – Class A common stock – par value $1 per share		18,845		1,013,748		1,780,024		2,793,772
First Citizens BancShares, Inc. – Class B common stock – par value $1 per share		1,900		84,590		193,285		277,875
Total			$	1,553,338		19,893,309		21,446,647

Equity securities classified as available-for-sale at December 31, 2003 consist of the following securities:

Description	Number of shares		Cost		Unrealized gain		Fair value
First Citizens Bancorporation of South Carolina, Inc. – voting common stock – par value $5 per share		35,000	$	455,000		17,745,000		18,200,000
First Citizens BancShares, Inc. – Class A common stock – par value $1 per share		18,845		1,013,748		1,257,075		2,270,823
First Citizens BancShares, Inc. – Class B common stock – par value $1 per share		1,900		84,590		147,210		231,800
Total			$	1,553,338		19,149,285		20,702,623

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Equity securities classified as “other” and carried at lower of cost or market at December 31, 2004 and 2003 consist of the following securities:

	2004				2003
Description	Number of shares		Cost		Number of shares		Cost
First Citizens Bancorporation of South Carolina, Inc. – nonvoting common stock – par value $5 per share		5,631	$	267,473		5,631	$	267,473
The Heritage Bank – common stock – par value $1 per share		7,401		455,932		7,401		455,932
Total			$	723,405			$	723,405

	At December 31, 2004 and 2003, the estimated fair values of investments in equity securities carried at lower of cost or market were $2,920,095 and $2,714,160, respectively. The Company evaluated the fair value of these and did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of those securities. The Company estimated that the fair value exceeded the cost at December 31, 2004 by $2,196,690 with an aggregate cost of $723,405 and exceeded the cost at December 31, 2003 by $1,990,755 with an aggregate cost of $723,405.
	Included in certificates of deposit on the consolidated balance sheets are $100,000 in certificates of deposit owned by Yadkin Valley Life Insurance Company which are held on deposit with the Arizona Department of Insurance.
(3)	Notes Payable
	Notes payable at December 31, 2004 and 2003 consist of the following:

	2004		2003
Advances under line of credit expiring June 5, 2005, interest payable monthly at LIBOR plus 1.25%	$	899,205		899,205

	The line of credit, which is with an unrelated bank, is secured by 10,000 voting common shares of First Citizens Bancorporation of South Carolina, Inc. (FCB-SC) which have a carrying value of $5,250,000 and 18,139 shares of First Citizens BancShares, Inc. of North Carolina (FCB) Class A Common Class, which have a carrying value of $2,689,107.  The Company may borrow up to $1,000,000 under the line of credit.  The interest rate for this line of credit at December 31, 2004 and 2003 is 3.67% and 2.39%, respectively.
(4)	Shareholders’ Equity and Restrictions (Unaudited)
	Prior approval by state regulators is required for insurance companies to pay dividends to their shareholders in excess of certain limitations. In addition, shareholders’ equity and minimum capital requirements, as defined by statute, are restricted and cannot be distributed by insurance

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

	subsidiaries without approval of the state insurance department. The amount which the insurance subsidiary can pay in dividends during any twelve-month period without prior approval is limited by statute to the lesser of 10% of statutory surplus, or statutory gain from operations of the previous fiscal year. In 2005, the subsidiary may not pay dividends without approval of the Arizona Department of Insurance.  In 2004 and 2003, the subsidiary paid dividends to the parent of $50,000 and $46,000, with approval of the Arizona Department of Insurance.
	Statutory surplus at December 31, 2004, and net income for the year then ended of the insurance   subsidiary, as computed in accordance with statutory accounting practices, were $373,979 and $43,523, respectively. Statutory surplus at December 31, 2003, and net loss for the year then ended of the insurance subsidiary, as computed in accordance with statutory accounting practices, were $396,339 and $48,097, respectively.
(5)	Income Taxes
	The Company has elected to file a consolidated federal income tax return. Income tax benefit for the years ended December 31, 2004 and 2003 is composed of the following:

	2004			2003
Current:
Federal	$	0			(6,660	)
State		0			0
		0			(6,660	)
Deferred:
Federal		(17,001	)		(40,155	)
State		0			0
		(17,001	)		(40,155	)
Total	$	(17,001	)		(46,815	)

At December 31, 2004 and 2003, deferred tax assets (liabilities) consist of the following components:

	2004			2003
Deferred tax assets:
Tax loss and credit carryforwards	$	90,982			75,695
Gross deferred tax assets		90,982			75,695
Valuation allowance		(7,485	)		(9,200	)
Net deferred tax asset		83,497			66,495
Deferred tax liabilities:
Unrealized gain on securities available-for-sale		(7,758,389	)		(7,464,091	)
Net deferred tax liability	$	(7,674,892	)		(7,397,596	)

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YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities in making this assessment.

The reasons for the difference between total income tax benefit and the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes are as follows:

	2004			2003
Income tax expense (benefit) at federal statutory rates	$	8,060			(30,675	)
Effect of dividends received deduction and other		(25,061	)		(16,140	)
Income tax benefit	$	(17,001	)		(46,815	)

	At December 31, 2004, the Company has a net operating loss carry-forward (NOL) for federal income tax purposes of $241,292 that expires in 2021 through 2024. At December 31, 2004, the Company has an NOL for state income tax purposes of $164,336 that expires between 2014 and 2019.
	The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss carry-forwards in the case of certain events including significant changes in ownership interests. If the Company’s NOL’s are limited and the Company has taxable income which exceeds the permissible yearly NOL, the Company would incur a federal income tax liability even though NOL’s would be available in future years. The North Carolina general statutes require that carried forward losses must be reduced or offset by any income not taxable received in succeeding years.
(6)	Related Parties
	Certain significant shareholders of the Company are also significant shareholders of First Citizens BancShares, Inc. (FCB), First Citizens Bancorporation of South Carolina, Inc. (FCB-SC), Heritage, Southern and Fidelity. All of these entities are related through common ownership. American Guaranty Insurance Company (AGI) and First-Citizens Bank & Trust Company (FCB&T) are wholly owned subsidiaries of FCB, and TLIC is wholly owned by FCB&T.
	The Company has no employees. AGI provides all managerial, administrative and operational services necessary in carrying out the Company’s business. Management fees for such services were $24,687 in 2004 and $17,726 in 2003.
	The Company holds stock in FCB, FCB-SC and Heritage (refer to note 2). At December 31, 2004 and 2003, the Company had $258,951 and $270,000, respectively, invested in First-Citizens Bank & Trust Company (FCB&T), a subsidiary of FCB, certificates of deposit. The interest rates on the certificates of deposit range from 1.10% to 1.20% at December 31, 2004. The cash balance of $108,783 at December 31, 2004 and $98,945 at December 31, 2003 is represented by deposit accounts at FCB&T.

20

YADKIN VALLEY COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Yadkin Valley Life provides reinsurance to TLIC, a subsidiary of FCB&T. The policies reinsured are sold through Southern, Fidelity, and Heritage. Amounts related to business assumed from TLIC for 2004 and 2003 follows:

	2004		2003
Premiums assumed	$	128,208		161,549
Death benefits assumed		14,983		120,796
Life policy claim reserves assumed		6,374		10,647
Commissions paid		57,311		72,735

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