John A. Kanas, who built North Fork Bancorp. Inc. into one of the largest U.S. banks before selling it to Capital One Financial Corp., is getting back into banking.
Kanas, who had been chairman and chief executive of North Fork until the 2006 sale and is now a consultant for Capital One, is creating a bank holding company that would invest in — or take over — struggling regional banks.
"I am of the belief that we are seeing a lot more red ink" in banking, "and that the regulators are going to have to get creative in the way they structure the exit strategy of some of those institutions," he said in an interview with Dow Jones Newswires. "When that happens I want to be there...with lots of cash."
Kanas said he had been approached by private equity firms and individual investors to create a vehicle that would get them into banking without being regulated like a bank. He said will create a fund that will form a fully regulated bank holding company. Each investor would hold a stake of less than 9.9% in that holding company, thus remaining under the threshold of bank regulatory scrutiny.
Applications have been filed with regulators. "I would hope in late fall we'll be in business," Kanas said.
The target capital for the holding company is between $2 billion and $3 billion, roughly equal to the market capitalization of First Horizon National Corp. or Zions Bancorp.
The new holding company would be run by Kanas, and would look to invest in banks with less than $100 billion in assets. "It will be a combination of control investments and non-control investments and 100% stakes, probably with regulatory assistance," Kanas said.
The holding company will not become "an aggressive investor" orchestrating hostile deals, he said. "These are investments that will be made with the agreement and in concert with the management groups, unless they are failing institutions."
Earlier this summer, Kanas joined investment firm WL Ross & Co. as senior adviser specializing in restructuring distressed companies. Kanas said the firm will likely be the largest investors in the fund owning the new bank holding company; he would not name others.
Private equity investors have long sought a way into banking, which is a tightly regulated industry. The prospect of coming under the control of regulators has so far largely kept private equity firms from taking large stakes in U.S. banks.
But the credit crisis, and subsequent pressure on funding that is expected to bring more banks to their knees, may well create opportunities that private equity investors might find hard to resist.
Bear Stearns Merchant Banking was the first in the U.S. to create a structure that allowed private equity investors to essentially take over a bank. The firm is currently working on separating itself from JPMorgan Chase & Co., following the collapse of Bear Stearns Cos.
Last year, Bear Stearns Merchant Banking bundled several investors to create Doral Holdings Delaware LLC, which, in turn, took a 90% stake in Doral Financial Corp., with the consent of the bank's management and board.
Doral Financial, of San Juan, Puerto Rico, had struggled to recapitalize itself as a community bank after it ran into trouble because of complicated mortgage derivative transactions three years ago and almost failed.
Kanas ran North Fork for decades and is one of the most respected bankers in the industry, not the least because he proved to have an impeccable sense of timing. Four years ago, many bankers struggled to reposition their balance sheets to adjust for the impact of rising interest rates, but Kanas had already started to do so in mid-2003. The same year, he voiced reservations about investments in mortgage-backed securities.
And he sold North Fork to Capital One for a considerable premium at arguably the peak in bank stock valuations. But at Capital One, his influence waned.
"We're going to have to watch some pretty big institutions burn down," he said Wednesday. Though most opportunities will come among banks with assets of less than $50 billion — roughly the size of North Fork before the sale to Capital One.
"The smaller banks won't start healing and returning to historic levels of profitability until real estate values are going up," which will take longer than even next year, he said. "We are in for a long, long period of little or no growth."
But with capital and the support of Kanas' holding company, banks he invests in will "be able to take advantage of weaker institutions as the going gets even tougher," he said. "I also hope that by putting excess capital into some of those institutions and bolstering management strategies, they'll be more attractive to regulators, as regulators select institutions to build around when they close smaller and weaker companies.
"There are lots of management teams in the country that are solid teams that have just fallen victim to the markets but have very successful businesses that will emerge as strong earners. But it will take time, and it will take money," he said. Those management teams Kanas will leave in place, he said. In other cases, he will choose new management.
