FDIC's Decision to Wind Down the Atlanta Lender Isn't Expected to Cool Buyout Ardor for Similar Purchases

June 6, 2009

The Federal Deposit Insurance Corp. has decided to wind down Silverton Bank, the failed Atlanta "bankers' bank," instead of selling it to investors, a setback for the private-equity industry but not one expected to damp its hunger for troubled banks.

A consortium that included Carlyle Group LLC submitted a bid for the lender two weeks ago. "The bid underwent an evaluation and negotiation process by the FDIC," the agency said in a letter sent to Silverton's customers late Thursday. "Regrettably, an equitable offer could not be agreed upon by all parties."

In addition to Carlyle, the potential investor group included private-equity investors Lightyear Capital LLC, Harvest Partners LLC and Colony Capital LLC.

The strategy of acquiring failed banks seized by the government has appeal to investors because in some cases the FDIC will agree to backstop losses on loans, giving buyers downside protection. Several investors, including some involved in the Silverton negotiations, said Friday that they remain highly interested in bank deals.

But regulatory hurdles and restrictions on ownership are making it hard to get these deals done.

For instance, the Federal Reserve restricts the ability of private investors to take controlling stakes in banks, limiting their ownership to not more than 24.9%. Anything exceeding that subjects private-equity owners to regulations covering bank holding companies.

The patchwork of rules set forth by the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC have made buying distressed banks challenging for private-equity investors. Treasury officials are expected to present Congress by mid-June with a blueprint to overhaul bank regulation and simplify the patchwork of rules.

"It's difficult for private equity," said Brett Barragate, a financial-institutions lawyer at Jones Day in New York. "Where ordinarily private-equity funds are used to negotiating a deal with a corporate seller, when you have the government on the other side of the table, [regulators] have a lot more control over the transaction."

Last month, the FDIC embraced a private-equity buyer when it sold Florida's failed BankUnited Financial Corp. to a group that included Carlyle. The group paid $945 million to acquire BankUnited's operations, and the government agreed to absorb most future losses on the bank's existing assets.

Other buyers have chosen to strike deals without government assistance. Just days after the BankUnited deal, a group including Fortress Investment Group LLC reached an agreement to inject $800 million of capital into First Southern Bank, a small Florida bank. That deal was struck without government involvement.

Silverton provides services to other banks and doesn't take consumer deposits. It failed after non-performing loans spiked.

After seizing the bank on May 1, regulators created a "bridge bank" to operate Silverton while they looked for a buyer. Because Silverton doesn't have retail deposits, its closure doesn't present the same problems that closing a more conventional bank would.

Its customers, mostly small community banks, can easily move their business elsewhere. The bank, known until last year as Bankers Bank, had about $4.1 billion in assets and $3.3 billion in deposits.

Write to Peter Lattman at peter.lattman@wsj.com

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