A $2.3 billion investment fund managed by bond giant Pacific Investment Management Co that is largely targeting distressed U.S. banks is trying to get regulatory approval for one of its first major transactions -- a deal involving a North Carolina community bank.

The Federal Reserve Bank of Richmond is reviewing an application for a company set-up by the year-old PIMCO Bravo Fund to acquire an ownership stake of roughly 20 percent in ECB Bancorp Inc .

The PIMCO fund is making a $25 million investment in the parent company of The East Carolina Bank as part of a $79.7 million recapitalization of the Engelhard, N.C. based lender. The PIMCO Bravo fund is the single largest investor in the deal announced in June by the bank, which has 25 branches and about $945 million in deposits.

I have always described this as partnership, A. Dwight Utz, ECB Bancorp's president and chief executive officer, said about the deal with PIMCO and five other investment firms.

In dollars, the transaction is small, but it appears to be the first investment in a bank by the PIMCO Bravo fund, which has aggressively raised money from retail investors for over a year.

PIMCO, home to the world's largest bond fund and managed by its highly-visible founder, Bill Gross, was recently granted full control of its various investment products by its parent company, Allianz SE -- a move that gives the Newport Beach, Calif. firm more independence to expand into new businesses.

This latest move, which follows PIMCO's major push into equities, could make Warren Buffett-style profits by purchasing stakes in distressed and undervalued U.S. banks still struggling to get by in the wake of the financial crisis.

In July, PIMCO sought to raise $600 million for real estate investment trust PIMCO REIT Inc, which plans to invest in residential mortgages and provide an alternative to government-sponsored enterprises Fannie Mae and Freddie Mac .

The PIMCO Bravo fund, which is short for Bank Recapitalization and Value Opportunities, also plans to invest in other bank assets, such as problem loans.

The PIMCO Bravo fund is opening for business at the same time the Federal Deposit Insurance Corporation reported there were still 865 banks in the United States at risk of failing at the end of the second quarter.

With the economy not recovering fast enough, small banks continue to need to raise capital. Many are still trying to pay back cash received from the federal Troubled Asset Relief Program during the height of the crisis.

The parent company of East Carolina Bank intends to use the proceeds from the private placement of stock to boost capital and redeem roughly $18 million in preferred stock and warrants the bank issued in exchange for TARP money. Some of the money will also go toward completing the tentative purchase of several branches from a rival bank.

We are in no way distressed, said Utz, noting that PIMCO and the other investors are buying shares well in excess of the going market rate.

Other investors in the private placement include Philadephia-based Patriot Financial Partners, New York-based Endicott Management and Minnesota-based Waterstone Capital Management.

As the three largest investors in the private placement, PIMCO, Patriot and Endicott each get to name a director to sit on the bank's board. PIMCO is proposing that Bryan Sullivan, who recently joined the PIMCO Bravo fund from Goldman Sachs Group Inc , serve as one of East Carolina Bank's directors.

We see value from bank dispositions and recapitalizations and are targeting opportunities across a variety of strategies, Dan Ivascyn, PIMCO Managing Director and a portfolio manager for the Bravo fund, said in a statement.

PIMCO and Gross have faced growing criticism the work the firm -- with $1.2 trillion in assets under management -- does for the Federal Reserve and other government agencies, gives it an unfair information advantage in assessing deals for troubled assets.

PIMCO, Allianz's largest fund manager, is applying to the Richmond Fed to approve the investment because it constitutes a change in the control of East Carolina Bank. According to the application with the Fed, the PIMCO Bravo fund is paying a premium for its controlling stake in the regional lender.

The 1,575,000 shares the PIMCO fund is getting are valued at $16 each. ECB Bancorp shares currently trade at $11.30, but the bank's stated book value is $21.71 a share.

The transaction also gives the PIMCO fund a warrant to buy an additional 393,750 shares and the right to participate in any future equity offerings by the bank. The transaction appears to be a long-term bet by the PIMCO fund that ECB Bancorp is a turnaround story and that the stock will eventually recover.

Over the past two years, other institutional investors, including hedge funds and private equity firms, have made a similar calculation and have been providing either cash infusions to ailing banks or acquiring them outright.

(Editing by Andre Grenon)