A Steal Of A Deal

BankUnited Inc.’s John Kanas had two things going for him in making his bank the top-performing, publicly-owned mid-sized bank in America.

For one, Miami Lakes, Florida-based BankUnited, which has $12.6 billion in assets, has benefited from one of the best failed bank deals of the last financial crisis. When Kanas and a group of private equity buyers paid $945 million for the failed Florida thrift named BankUnited in 2009-it was the largest Florida-based institution at the time-the Federal Deposit Insurance Corp. (FDIC) agreed to reimburse them up to 95 percent of the bank’s losses with no end date, a deal that gave them no risk of unexpected shortfall. The second thing going for him was the stupendous recovery in real estate values in South Florida. Basically, how could you not do well, given those conditions-unless you were asleep?

To his credit, acquiring a failed bank in 2009 at the height of the financial crisis, when potential buyers were hard to find, did involve personal and professional risk. Kanas might have predicted that South Florida would roar back from the precipice, but that wasn’t obvious to everyone in 2009, including Kanas.

“We tell everybody that we knew that Florida was going to recover,” says Kanas, the chairman, president and CEO of BankUnited. “We didn’t know that. We hoped it was going to happen. We hoped it.”

In that sense, Kanas is wide awake and has proven himself to be an incredible dealmaker. Over a period of 29 years, he and his team turned a small, Long Island-based bank-North Fork Bancorp. Inc.-into a $58.9-billion institution that sold in 2006 to Capital One Financial Corp. for about 400 times tangible book value. His second bank, BankUnited, is worth more than two times what he and his investors paid for it in 2009, based on its stock price in mid-July.

BankUnited topped Bank Director magazine’s list of mid-sized banks in the 2013 Bank Performance Scorecard. Mid-sized banks are defined as those between $5 billion and $50 billion in assets. Some of that performance is due to the FDIC deal, although Kanas says most of it is due to the underlying strength of the bank itself. Still, there are challenges ahead for the banking industry, and how Kanas and his team deal with them will be critical to the success of BankUnited.

Kanas, for sure, was dealt a good hand, but he has played it as if it were a full house. To understand why, it’s important to go back in time. He got his start at North Fork Bank as a young man in the early 1970s when the bank had less than $100 million in assets. His smarts were recognized early and he quickly rose up the ranks, becoming CEO in 1977.

Still, as a small bank CEO, he wasn’t exactly well versed in New York’s social set. When the billionaire Wilbur Ross showed up at his bank in the 1980s and asked for a loan for a beach club in the wealthy enclave of South Hampton, not far from where Kanas lived, Kanas had no idea who he was. “I approached John about the loan and he turned me down,” Ross says. “That was how I met him.” It was a rocky start to what turned out to be a fruitful business relationship. Ross watched Kanas’ career progress.

North Fork bought a bank in the late 1990s that had a Manhattan branch on the corner of 37th Street and 6th Avenue. Ross thought it was crazy for a bank, then based in the sleepy Long Island community of Mattituck, to keep a Manhattan office. “Who in sophisticated Manhattan is going to bank with the North Fork branch from Long Island?” Ross says. “It was quite remarkable. (Kanas) has a disciplined idea of where branches should be and what they should look like. It’s very much a formula and it’s a formula that has worked well.”

The Manhattan operation benefited from the huge amount of consolidation going on in the banking industry in New York at the time. Chemical Banking Corp. bought Chase Manhattan Corp. in 1995. HSBC Holdings bought the parent company of Republic National Bank in 1999. The customers getting lost in the shuffle, according to Kanas, were small and medium-sized business owners. “There’s a lot of crumbs that fall off of the Manhattan table,” he says, “and we managed to sweep up a few of them.” By the time North Fork was sold in 2006, that branch had $1.6 billion in deposits, according to Kanas.

North Fork went on a buying spree in the 1990s that culminated with the sale of the bank in 2006 to Capital One for $13.3 billion, which was 409 percent of its tangible book value, according to SNL Financial. That was a hefty price, given that Capital One inherited through the acquisition the Alt-A mortgage provider GreenPoint Financial, and had to shut it down the next year with a more than $1 billion loss after the U.S. mortgage market collapsed. Kanas, who stayed on for a while after the acquisition, personally received more than $200 million as part of the sale of North Fork to Capital One, according to a lawsuit later filed by Capital One over a non-compete agreement he had signed.

Joe Fenech, an analyst and managing director with Sandler O’Neill + Partners in New York City, says Kanas and his team sold their bank when values were at their peak, and then bought a bank when values were at the bottom. “He is well liked by investors,” Fenech said. “From that standpoint, he has significant credibility with the investment community.”

It was Kanas’ second deal that nailed that reputation down. In 2009, BankUnited was heavily invested in non-traditional mortgages that had become quite popular leading up to the crisis. After it was shut down by the Office of Thrift Supervision in 2009, the FDIC said that 60 percent of the bank’s portfolio was in option adjustable-rate mortgages, often called “pick-a-payment” loans because they allow borrowers to pick their own payment terms. When real estate values started to plummet, the end of BankUnited was only a matter of time. When the old BankUnited went under, Kanas had already left Capital One and was looking for bank deals with Ross.

The FDIC put out for bids in 2009 and said 30 entities did due diligence, but only three actually bid. Kanas and his team, which included Ross and other private equity investors such as New York heavyweights Blackstone Capital Partners and The Carlyle Group, earned the winning bid. The deal that Kanas and his investors signed gave them a loss-share agreement that amounted to the FDIC taking 80 percent of losses up to $4 billion, then 95 percent above that. The end result was a loss-share agreement that covered $11.7 billion in losses. The cost to the FDIC fund rose from an original estimate of $4.9 billion to $5.9 billion at the end of 2012, making it the second costliest failure to the FDIC fund, after the failure of IndyMac Bank of Pasadena, California.

“South Florida real estate had fallen off a cliff,” says Ben Plotkin, executive vice president and vice chairman at investment bank Stifel Financial Corp. “The BankUnited franchise had a lot of challenges. It was a market (Kanas) hadn’t worked in before. There were a lot of people reluctant to work with the federal government. He and his investors took an entrepreneurial bet. In hindsight it looks like a great deal but I give him credit for making that jump.”

The FDIC has said that federal law requires the agency to take the least costly bid, and the BankUnited loss-share agreement cost the FDIC fund about $1.5 billion less than liquidation would have cost.

However, the deal has been criticized both inside and outside of banking. The loss-share agreement encourages the new owners of the bank to “throw things into foreclosure and not do workouts,” says Ken Thomas, a Miami-based bank consultant who owns his own firm, and who has been critical of private equity banking deals. He refers to Florida as a “banking colony” because so many of its banks have ownership outside of Florida. “A community banker wants to do well by the community and wants to do well in terms of workouts,” says Thomas.

Kanas responds to such criticism by saying that BankUnited has obviously not hurt the community, because South Florida has rebounded nicely and that BankUnited has been aggressively growing its loan portfolio. BankUnited now has 95 offices in Florida, up from 85 offices before the acquisition. The first quarter of 2013 saw nearly $400 million in new loans on the books. BankUnited isn’t cutting back its lending to South Florida. It is growing. Most of that growth has been in commercial lending to small and mid-sized business, the forte of BankUnited’s management team. The company got rid of the thrift charter and started over as a commercial bank four years ago. That has meant a substantial shift in the culture of the bank, which is really an entirely new operation.

BankUnited replaced almost all of its residential mortgage lenders with commercial lenders and remade its management team. Many of the top executives are previous North Fork managers. The bank started an aggressive ad campaign, including a display ad in the Miami Herald, that asked for resumes and provided a sample resignation letter applicants could give to their current employers. About 7,000 people responded to the ad within a week, Kanas says. “While the newspaper ad was controversial, I think it was a brilliant move. It brought a tremendous amount of public relations,” Ross says. Kanas is clearly not afraid to push the envelope. Splashed all over the bank’s branches and on TV ads is a bull representing a competitor, BS Bank, referring to the insincere promises known as “BankSpeak.” Like the ad campaign, Kanas, who has a ruddy face and bright blue eyes, also comes off as jovial and not at all stiff and serious. “You’ve got to get people to know who you are,” he says. “And that might mean sort of waving a red flag in front of the face of some people for a while. And I think that worked very well down here.”

The reference to “down here” illustrates the fact that Kanas has never truly left New York. He stays at the Four Seasons hotel when he’s in Miami and commutes back and forth to Long Island, where he has a home, nearly every week. The connections between BankUnited’s team and the New York area are obvious. BankUnited’s vice chairman and chief lending officer, John Bohlsen, worked with Kanas at North Fork Bank. Raj Singh, BankUnited’s chief operating officer, was head of corporate strategy and development at North Fork Bank, and later worked for WL Ross & Co., Ross’s private equity firm. The board is filled with New York private equity-nominated directors, including Ross and Olivier Sarkozy, the brother of the former president of France and a managing director of The Carlyle Group. Chinh Chu is a senior managing director in the Blackstone Private Equity Group.

Kanas seems to have little trouble communicating with a board filled with such a high number of private equity representatives, something not all bankers would enjoy. “He isn’t unafraid to have smart people on his board,” says Plotkin, who has done deals with Kanas. Ross says there is a lot of informal communication with the board. “We have a board meeting every month,” Ross says. “But in between meetings, there is quite a lot of interchange with John. When the actual meeting rolls around, you are not surprised by anything.”

With its ties to New York, it also didn’t surprise many people that BankUnited was interested in getting into the New York market. BankUnited announced plans in the summer of 2011 to buy Herald National Bank, a small bank with a similar focus on small business that BankUnited has, for $71.4 million, or 1.4 times book value. It had three offices in Manhattan, one in Brooklyn and one in Melville, Long Island. This was shortly after an initial public offering of BankUnited stock that raised $792.5 million in proceeds at $27 per share, nearly triple the price the original investors paid at $10 per share.

However, the re-entry into New York has not been smooth. Almost immediately, Kanas and Bohlsen were hit with a lawsuit from Capital One, accusing them of violating a non-compete agreement they had signed after the sale of North Fork. Kanas and Bohlsen settled the case in 2012 for a total of $20 million, which Kanas has described as “personally the most painful part,” although it was well below the compensation he and Bohlsen had received. Kanas says he wanted a speedy end to the case, which was costing BankUnited by hampering its ability to get customers in New York.

Julie Rakes, a spokeswoman for Capital One, wrote in an email that Capital One was pleased with the settlement and the federal court’s affirmation of the “validity of the non-competition agreements.”

In January of 2012, another setback occurred when news leaked that Goldman Sachs was shopping the bank to potential acquirers for $30 per share and found no buyers.

“Goldman came to me and the rest of the board,” says Kanas, “and said, ‘Listen, we think that there’s a number of people out there that are dying to buy your bank for a crazy price’… and (the board) had an obligation to do a price check.” Kanas says it was unfortunate for the bank, because the news made it look like BankUnited executives were shopping the bank, which he says was untrue. A spokesman for Goldman declined to comment.

Other than that, Kanas has been pleased with the reception in New York. As of May, BankUnited had hired more than 100 people in the New York area, all but five of them people who had worked for North Fork previously. “(BankUnited in) Florida is growing by somewhere between $1.5 billion and $2 billion per year,” he says. “We think that New York can grow the same amount after we’ve been there for a couple quarters. And early indications seem to verify that.” He believes that no bank has stepped in to take North Fork’s place in the region, and there are a lot of customers and former employees who would like to do business with BankUnited. Strategically, New York has been one of the stronger economic stories in the aftermath of the most recent recession. South Florida also has seen real estate values jump back. The Miami Association of Realtors says that the median price for a single-family home in the area climbed nearly 20 percent in May from a year prior, to $222,000.

Despite all the good economic growth, BankUnited hasn’t done a lot of acquisitions in South Florida. The prices bank boards want for their banks have been too high, Kanas says. So far, an organic growth strategy has made more sense. “John and the board are very disciplined,” Ross says. “They are big believers in being conservative in the loans he makes. He is conservative in terms of acquisition policy and that is very much compatible with the view of the board.”

The disciplined approach, of course, has made shareholders a lot of money. All told, the original investors, including Kanas, have sold about $1.3 billion worth of stock in the two offerings for BankUnited, a gain of $355 million above their original investment, and they still own a substantial part of the company, about 30 percent. Another 57 percent of the bank’s 100 million shares outstanding is now owned by institutional investors, according to SNL Financial.

However, new investors who bought in the IPO in January of 2011 at $27 per share might be disappointed because the price remained at about $27 per share as of mid-July. There are still challenges for the bank and the industry as a whole, including compressing interest margins in a low interest rate environment. High-yielding assets on the bank’s books are moving off the balance sheet to be replaced by lower-yielding loans and other assets. This phenomenon is not unique to BankUnited. But will there be a strong bank left when the benefits of the FDIC deal wear off? Will Kanas and his team be able to pull off any more acquisitions or a sale as lucrative as the ones they’ve done in the past?

“The common perception is that (BankUnited) was a tremendous financial transaction for the initial investors, but has less value longer-term (to a potential acquirer) due to the weak deposit franchise that was inherited, and the lack of earnings stream beyond that produced by the loss-share agreement,” Fenech wrote in a note this spring to investors.

Fenech is not of that opinion. He believes BankUnited is in the midst of a radical transformation that includes substantial loan growth and a much improved deposit base. (Core deposits have grown 35 percent to $8.2 billion and non-interest bearing deposits have grown more than three times to $1.5 billion as of March compared to 2009, according to the FDIC.)

Fenech’s view is that Kanas and his team do know how to build a bank over time, and that won’t be a problem. The bank has been growing aggressively in both New York and South Florida, and the economies of both regions have been better than expected.

Meanwhile, the 66-year-old Kanas says he has no plans to retire. In fact, he is still hopeful that as the industry’s regulatory burden continues to increase, more banks will be willing to sell and there will be more opportunities to buy banks in the future. He thinks some bank boards are just tired and will eventually decide to sell out. By all measures, Kanas doesn’t seem tired at all. He seems to be charging along on all cylinders. Woody Allen is credited with saying 90 percent of life is showing up. But Kanas and his team are doing a lot more than that.