A North Carolina banking deal is in danger of being undone, quite unusually, from the inside out.

In September the directors of the $1.5 billion-asset Yadkin Valley Financial Corp. in Elkin voted to approve a deal to buy the $532 million-asset American Community Bancshares Inc. in Charlotte. But with market conditions worsening, one board member's effort to stop the deal is gaining support. If that effort were successful, it would be an extremely rare instance of a deal failing because of lack of shareholder approval.

Given the current industry climate, shareholders are going to be more skeptical about board recommendations, industry watchers said.

"I think it is possible for shareholders to become much more active in these deliberations," said John Blaylock, an associate director with Sheshunoff & Co. Investment Banking. "The shareholders are questioning much more of the pricing and deal structure than they were in the past."

Dozens of deals have been terminated in the past year under pressure from the economy, but typically they are called off at the board level. According to Sheshunoff & Co. Investment Banking, 39 deals were terminated last year, versus 12 in 2007 and 10 in 2006.

The Yadkin-American Community deal could be a close call. Last week the two companies postponed shareholder votes, so a new proxy statement could be sent to shareholders. And Yadkin has said it will restate fourth-quarter results, changing a profit to a loss.

American Community's banking unit posted a $865,000 fourth quarter loss, government data show.

For Yadkin, the delay reflects protests by Daniel Park, a founding board member and a lawyer in Elkin. Park took issue with the wording of the original proxy statement, which said the board voted unanimously, even though he had disapproved during September's vote. "The economy was really bad and has gotten worse and worse and worse," he said. "We have had banks that bought other banks and then got into trouble. … To me, it was not a good thing for shareholders."

Now other Yadkin board members are thinking like Park. In January, nine supported it, and five objected.

Still, Bill Long, Yadkin's president and chief executive, said he believes in the deal and thinks it will be approved. "I am 100% behind this deal. For one thing, the deal cost is less than half that it was to start with," he said, and buying American Community would expand Yadkin's geographic reach into Union and Mecklenburg counties.

Experts said it is not clear whether the deal will close, but the betting seems to be against it. "We don't know what will be in the revised proxy and updated financials," said Mark Muth, an analyst at Howe Barnes Hoefer & Arnett Inc.

The market is reacting as if the deal will die. Since the shareholder votes were postponed, American Community's shares have dropped 30%, closing at $2.96 Friday. Carter Bundy, a vice president with Stifel Nicolaus & Co., said the drop reveals pessimism among the company's shareholders.

"Given what the market is doing with American Community, they are basically suggesting that the deal is not going to get done," he said, noting that by Friday the stock price would have created a 68% arbitrage opportunity if the deal closed.

Yadkin would pay $12.35 for 19.5% of American Community's outstanding shares and buy the rest with stock, exchanging one Yadkin Valley share for roughly 0.85 of American Community's. The declining value of American Community's stock has reduced the deal price from $92 million to roughly $32 million last week.

Bundy, who covers both companies, said the deal makes sense to him, because the price is well below American Community's tangible book of $41 million. "Yadkin is getting a pretty good footprint at less than tangible book," he said. "They are getting entrance to a market that would have been hard to get into without the deal." The seller's "franchise value has been diminished, but the deal still makes sense."

Muth disagreed with that assessment. "The strategy made sense last summer to get into Charlotte, but it is a different market today," he said. "You are going to have issues as big employers in town face layoffs. This is a difficult time to be doing a transaction. From an operational standpoint, there is a lot of execution risk, and with credit quality and the credit cycle, it is a scary time to do a transaction, regardless of price."

Yadkin initially reported earning $214,000 for the quarter but it said the restatement would include a provision of $2.5 million to $2.9 million.

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