Yadkin Valley Financial Corp. has benefited from a serendipitous turn of events.

Shortly after it bought American Community Bancshares Inc. in April, the $2 billion-asset Yadkin Valley said it was not counting on American getting any government capital. Such funds hadn't been a motivation for the deal between the North Carolina banks, which was announced in September 2008, the month before the Troubled Asset Relief Program was created.

American subsequently applied to the program, but last month, William A. Long, Yadkin Valley's chief executive officer, told analysts he did not anticipate approval. "I don't imagine they are receiving that," he said. "There won't be any Tarp funds."

However, American's application was approved this month, and none too soon for Yadkin Valley. Analysts said the company could use the money now — even though it received $36 million of Tarp funds, directly, in January.

The second helping is noteworthy because many banking companies are trying to get out of their Tarp investments, not increase them.

"The general sense I am getting from the ones who have it is … they are anxious to get rid of it and get out of the additional government restrictions and executive compensation restrictions," said T. Alan Harris, the principal of Harris Law Firm PC in Houston.

But since Yadkin Valley was already a Tarp recipient, the $13.2 million infusion for American, which is expected to close this month, would not add any strings, industry watchers said.

"Here, Yadkin has already closed $36 million in January, so they are subject to the restrictions and reporting requirements," said B.T. Atkinson, a partner in the Charlotte office of the law firm Bryan Cave LLP. "Everything that comes with Tarp they are already subject to. Adding $13.2 million won't change that."

Observers said Yadkin Valley is believed to be the first banking company to do an acquisition without government assistance and then access the target's would-be allotment of Tarp capital.

When PNC Financial Services Group Inc. acquired National City Corp. in October, the Treasury Department sweetened the deal by allowing PNC to apply for capital on a pro-forma basis, aggregating the two company's risk-weighted assets.

PNC paid $5.58 billion for Nat City, and received $7.7 billion in Tarp funds. On its own, PNC would have qualified for only $3.5 billion.

Bank of America Corp., which got $15 billion from Tarp on its own, also received another $20 billion through the program to complete its purchase of Merrill Lynch & Co. (which had received $10 billion itself).

Aside from the prospect of federal meddling, many of the terms of the Tarp investments are considered attractive — such as the 5% preferred dividend.

"If you are able to put up with the government's handcuffs and whatever else comes down the road, 5% is cheap," said Mark Muth, an analyst at Howe Barnes Hoefer & Arnett Inc. "Definitely cheaper than a capital raise."

Yadkin Valley, of Elkin, paid 19.5%, or $16 million, of the purchase price for American, of Charlotte, in cash.

It also bulked up on mortgages in the first quarter.

Analysts said those actions likely shrunk Yadkin Valley's capital cushion (though it is still well capitalized by regulatory standards).

The additional capital the government is injecting will bring the company closer to being in line with capital levels at other banks its size, said Carter Bundy, a vice president with Stifel, Nicolaus & Co. Inc.

"If they had not received Tarp funding, the total regulatory risk-based capital ratio would have gotten tighter than peers are running at right now," he said.

Bulking up in mortgages drove "a significant increase in loans held for sale," Bundy said — from $50 million at yearend to $180 million on March 31.

"That increased the risk-weighted assets in the quarter so the risk-based capital cushion was compressed," he said.

He estimated that Yadkin Valley's total risk-based capital ratio fell to 10.6% this quarter, from 10.91% on March 31, and that the $13 million will get this figure back up to more than 11% by the end of this quarter.

The Federal Deposit Insurance Corp. shows the national average for the total risk-based capital ratio at banks with between $1 billion and $10 billion in assets was 12.90% at March 31.

The average in North Carolina was 12.08%.

In the first quarter, Yadkin Valley lost $4.2 million, largely due to provisioning for loan losses. The provision for the first quarter was $10.5 million, compared to $450,000 at the same time last year.

Whether Yadkin Valley's deal for American Community would get done was questionable after some members of the company's board objected to the deal and pushed for shareholders to vote against it. But in April, shareholders approved the acquisition.

Atkinson said the government investment in American would be in the "spirit of Tarp" and in line with Tarp guidelines.

"Both constituent banks had applications filed after the merger agreement," he said. "There is nothing sneaky about it, nothing in the Tarp regulations that prohibits it. In fact, they don't really address it. I would view it as a loose end that was tied up post-application."

Tarp investments are limited to 3% of an institution's total risk-based assets for banks of Yadkin's size.

For Yadkin, Atkinson pointed out, that figure "increased with the merger because of the addition of American's assets."

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