WASHINGTON — With the government's policy on private-equity deals still a work in progress, the Federal Deposit Insurance Corp. found an alternative last week for resolving certain types of failures.

The agency gave Georgia banker Joe Evans the green light to use the $300 million he raised from 26 institutional investors — none of which were private-equity firms — to acquire the six subsidiaries of Security Bank Corp. of Macon, Ga., which all failed Friday.

Observers said the quasi-public offering for the purpose of assuming a failed bank was rare — the last well-known example was in 1993 — and gives the FDIC another tool when buyers for failed banks remain few and far between.

"This is a complementary approach, or another alternative. It's not going to replace what private equity will do, but it's another … arrow in their quiver of ways to resolve and find buyers of failed institutions," said Robert Hartheimer, a former FDIC director of resolutions and now a special adviser to Promontory Financial Group LLC.

Private equity is still considered important to the capital needed in a slow acquisition market, especially as the FDIC prepares for the failure of larger institutions. But officials have also been reluctant to just open the door to wealthy investors who lack commercial banking experience.

The FDIC this month proposed restrictions on private-equity buyers, including a 15% Tier 1 leverage ratio, but the guidelines were universally criticized as too stringent and are expected to be diluted. Private-equity investors taking big stakes already face rules that an institutional investor taking a smaller chunk may not. For example, investors with more than 9.9% of an institution are subject to control restrictions and must file with the bank's regulator, and those owning at least 25% must become a bank holding company.

But observers said the investors in Security may avoid the new FDIC guidelines and — with each owning less than 10% — not face the control restrictions.

"There is no investor in the transaction large enough that would have required any kind of filing on their part," Evans said in an interview.

In the deal, said Ralph "Chip" MacDonald, a partner at Jones Day, "there is more diversification, and fewer issues about control and source of strength, so there are fewer regulatory issues."

Evans, who formerly ran the $1.8 billion-asset Flag Financial Corp. in Atlanta, raised the capital with assistance from Friedman, Billings, Ramsey Group Inc. He cut a deal with State Bank and Trust Co., the $35 million-asset institution in Pinehurst, Ga., that officially bought the six failed banks, to let him run the small institution on the condition that it would assume Security's assets.

State Bank and Trust, under a management team formed by Evans with him as chief executive, took control of 86% of Security's $2.8 billion of assets and over the weekend began operating all the branches of its six banks.

Hartheimer called the deal a "clever way to use the capital market to buy a failed bank, and to do it in a way that the FDIC was comfortable with."

"The FDIC really deserves credit for being innovative in this tough environment for selling failed institutions," he said.

He added that it was similar in some ways to the FDIC's resolution of Crossland Federal Savings Bank. There, the FDIC in the $5.3 billion-asset Brooklyn thrift after its failure in January 1992 and, the next year, used a stock offering to find new owners.

After the bridge bank, the FDIC "did a … semi-public offering to sophisticated institutional investors," Hartheimer said. "At that level, it's a very similar structure, and I don't believe it's been done since Crossland."

But the structure probably could not have been used to resolve some of the largest institutions the FDIC has had to deal with, nor some substantial failures expected around the bend.

Private-equity investors were tapped in the resolutions of the $30 billion-asset IndyMac Bank in California and Florida-based BankUnited, which had roughly $13 billion of assets at the time of its failure.

Observers said those deals demanded investors capable of taking much larger stakes and, as a result, must face the government's restrictions.

"This is an alternative that the FDIC is going to have to consider for an institution as large as" Security, said Sanford Brown, the managing partner in Bracewell & Giuliani's Dallas office.However, he added, "raising the kind of money" needed for bigger deals "without having a significant known investor behind you — it's hard to do."

"You've got to put together a lot more people," Brown said. "If you are going to gather institutional investors, they each have to own below 9.9%. To raise that kind of money without a 24.9% shareholder taking the lead is harder to do."

Still, observers said Evans had another factor in his favor.

Though some officials have expressed concern about private-equity investors' potentially lacking true banking experience, the Security deal put a known quantity at the head of the operation.

"This has one distinct difference," MacDonald said, "and that is, Joe Evans has run banks this size before and is a very good operator. Here, you have a very experienced guy who the FDIC has known for a long time. … There are other people like that out there. So I think you will see more of it."

Evans agreed that it is important to assemble acquirers of failed banks where the new board and management are ultimately accountable for the institution's success, rather than giving outside investors too much control over operations.

"From the perspective of a longtime banker, two things that seemed to me to be important benchmarks of being a bank are: One, the buck stops with the board, and the buck stops with the regulators," he said.

"I have seen … transactions that were proposed that involved things like investor rights or dedicated board seats that basically give rights to certain investors that are beyond just simply owning common stock in a company," he said. "None of those conditions apply in our situation."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.