Before it failed last week, BankUnited was Florida's largest homegrown banking company, and under John Kanas it intends to stay that way.
Kanas said he envisions the reinvented — and reinvigorated — BankUnited as a buyer in South Florida. Armed with $900 million of fresh capital, he aims to transform the failed thrift into a powerhouse ready to scoop up other failures and strugglers in one of the most stressed markets in the country.
Kanas, a highly regarded veteran banker, had such a plan in mind when he joined the New York investment firm W.L. Ross & Co. as a senior adviser in February of last year. He helped scour the Southeast banking market for just the right acquisition target and line up just the right investors.
"Part of our business strategy was to look for an institution like this that we could recapitalize," said Kanas, 62, who is now the chairman and chief executive officer of BankUnited.
Besides Ross, seven other firms joined Kanas in the winning bid for BankUnited, a Coral Gables thrift and the largest and most expensive failure this year.
Regulators seized the $13 billion-asset company last week and immediately sold it to his investor group, which kept the BankUnited name for the new venture.
The sale was a first for private equity in this down cycle. All the other failures that were sold immediately have gone to bidders with an existing bank.
Observers say other private-equity firms are eager to copy Kanas, and the details of the BankUnited transaction are being widely scrutinized and debated in an effort to distill the key factors in his success.
One they agree on is the significance of Kanas himself. They credit him with making the deal both palatable to regulators and attractive to the investors, which include Carlyle Investment Management, Blackstone Capital Partners, Centerbridge Capital Partners, LeFrak Organization Inc., Wellcome Trust, Greenaap Investments Ltd. and East Rock Endowment Fund.
"I think the private-equity funds did some really smart things. I think the smartest thing they did was hire John Kanas. He is a savvy, tough, very direct banker with a heck of a good track record behind him," said Walter G. Moeling 4th, a partner at Bryan Cave LLP. "There are not too many John Kanases around, but I would advise any private-equity group: 'You want to hire someone of stature. You want a banker to be involved who knows regulators, who knows the process, who knows what's expected, if you want a successful bid.' "
Even Wilbur Ross, the chairman and CEO of the investment firm that bears his name, singled out Kanas as crucial.
"The key to any business, but particularly a service business like a bank, is the management," he said in an interview last Friday, the day after BankUnited failed.
Ross said he has known Kanas for about 25 years, calling him "an old friend of mine."
He said Kanas, the former chairman and CEO of North Fork Bancorp in Melville, N.Y., expanded the initially small banking company to $60 billion of assets, partly by opening branches in intensely competitive Manhattan.
"He did an amazing job building it," Ross said.
North Fork sold itself in 2006 to Capital One Financial Corp. in McLean, Va., in what some considered a pricey $13.2 billion deal.
Those make for attractive credentials, particularly to private equity, observers agreed.
Ross, who lives in Palm Beach, said the investor group is keen on the Florida bank market for its long-term growth prospects. Despite the real estate meltdown, which helped topple BankUnited and still torments many banks there, the state's lack of an income tax continues to draw residents.
"It's very attractive to prosperous people," Ross said. "What that means for banks is, you have very good sources of longstanding deposits."
Ross said the investor group is "reasonably well protected" against BankUnited's loan portfolio because of its loss-sharing agreement.
The group assumed $12.7 billion of assets and $8.3 billion in nonbrokered deposits from the failed thrift.
It bought the assets at a discount of $3 billion, or 23.6%, and paid no deposit premium.
It also agreed to make a $900 million capital infusion.
Ralph "Chip" MacDonald, a partner in the Jones Day law firm who tracks bank failures, said the group negotiated a better deal than he has seen for other failures.
However, he said, "they took on some really junky assets, so I'm sure they deserve better protection."
The Federal Deposit Insurance Corp. agreed to share 80% of the first $4 billion of losses and 95% of any further losses.
MacDonald said an unusual element of the agreement is that the covered losses include other-than-temporary impairments. So the FDIC shares in those, not just losses on the dispositions.
The overall losses are expected to be heavy.
At March 31 the thrift had $10.1 billion of real estate loans, 98.2% of its portfolio. Roughly half of these were option adjustable-rate mortgages made in its home state and California.
BankUnited also specialized in mortgages made to people living outside the United States who wanted to buy property in Florida, MacDonald said.
Its heavy chargeoffs and rising nonperforming loans left the thrift with a capital deficit; it reported capital equity of negative $506.5 million at the end of the first quarter, he said.
The FDIC estimated the cost of BankUnited's failure at $4.9 billion, making it the second-most-expensive during the current financial crisis, behind IndyMac, MacDonald said. (IndyMac's resolution cost was last estimated at $10.7 billion, he said.)
Paul Miller, a managing director at Friedman, Billings, Ramsey & Co. Inc., said that Kanas has a lot of cleanup work to do but that he is up to the task.
Miller also said he thinks going with private-equity buyers for failures can be an effective way to bring more capital into the industry. Selling to a bank bidder only diffuses existing capital.
On a conference call shortly after the deal, Kanas said he first met with regulators four months ago to express his interest in pooling private-equity firms to buy BankUnited's assets.
But he said the investor group would not have bought BankUnited without government assistance.
"It was obvious no one would come along and put capital into this bank without a substantial amount of support from regulators," he said.
In the interview this week, Kanas said the agreement gives the FDIC a chance to recover its losses through a warrant that it can exercise if the company goes public or sells.
The warrant is in effect for the period of the loss-sharing arrangement, he said, which is 12 years.
"It's an incentive warrant that, if we're lucky enough someday to either IPO or sell the company at a profit, there is a built-in opportunity for the FDIC to share in that profit," Kanas said.
Observers said that is likely to have added luster to the investor bid.
"They know how to play 'let's make a deal,' " said Bryan Cave's Moeling. "Ross, Carlyle, Blackstone — these are name brands. They bring a lot of savvy to the table."
Moeling said he anticipates that the government could earn back all that it spends on BankUnited.
"The potential is great. When you look at the shift in bank stock prices from 1990 to 1995, coming out of that period, as the market regained strength, there were 300%, 400%, 500% returns being made in bank stocks, so it's not at all inconceivable that that could turn into a nice benefit," he said.
Still, Kanas said his group is patient and intends to be around for years.
"We selected these people based on the fact that we think they understand the long-term nature of a bank investment, and they have enough capital that, if we're successful in our ongoing plan, they can contribute more capital over time as we grow."
Part of his strategy is to make BankUnited more like a commercial bank, though it will remain a thrift, Kanas said. It will continue to offer residential mortgages but only on a retail basis in its local market, and it will keep them on its balance sheet, he said.
"The bank was almost totally focused on residential mortgages, wholesale and retail. We're clearly turning our attention away from that and turning a lot more attention to developing commercial relationships," Kanas said. "It's actually a plan that the BankUnited people had started a couple of years ago. Unfortunately, they had to terminate it because of their problems."
Kanas said he brought only a few key executives with him, so most of the BankUnited team would remain in place.
One newcomer is to be Raj Singh, according to Ross. Singh, who had been at North Fork and moved to Ross' company along with Kanas, is now at BankUnited to head its merger and acquisitions activity, Ross said.
Kanas said the focus for now would be on South Florida targets. "We think it could expand beyond South Florida into other parts of the state someday and possibly into contiguous states, but it's a little early to make that call."
He said the buyout is going over well with BankUnited employees, who had feared that, if the acquirer had been an existing bank, it would slash jobs.
Customers are also enthusiastic, he added. "We started to see growth in our deposits on Saturday, and that's continuing."