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If there's a hint of a smile in John Kanas's voice, it's for good reason. Two years ago, the former head of New York's North Fork Bancorp parachuted into the middle of Florida's banking mess with private-equity backing to take the helm of the failed BankUnited. Today, he and his partners are richer—make that much richer—for the experience.

In late January, Kanas took an ostensibly healthy BankUnited public, selling 29 million shares worth $786 million in an offering that valued the $11.2 billion-asset company at $2.6 billion-the largest bank IPO ever.

The pace of the turnaround has been breathtaking. Virtually overnight, Miami Lakes-based BankUnited has morphed from a thrift that collapsed under the weight of bad real estate loans into one of the most profitable banks in the country. In 2010, it earned $184.7 million, or $1.99 per share. Its return on average assets was 1.7 percent, and return on average equity was 15.4 percent, both well above industry averages.

The only thing more eye-popping might be the payout collected by Kanas and his partners—who still own 70 percent of the company. They netted more than $500 million from the $900 million they initially invested to recapitalize BankUnited. Kanas, who kicked in $23.5 million of his own money, saw the value of his investment soar to about $175 million, according to calculations by SNL Financial. "We're not complaining," he says of the returns.

Things have gone so well Kanas is now openly plotting his return to the Big Apple next summer, when his noncompete agreement with Capital One Corp., North Fork's buyer in 2006, expires. "The current plan is six or eight BankUnited branches in Manhattan," he says. "We intend to go back to the way we did business as North Fork."

Depending on your perspective, BankUnited's is either an inspirational story about private equity's pivotal role in the banking industry's ongoing resurrection, or a cautionary tale about a group of smart, rich guys who made a killing at the government's expense during a time of crisis. Either way, it's a rarity, even for this cycle.

The May 2009 deal came with a generous loss-share agreement from the Federal Deposit Insurance Corp., which covered 80 percent of the first $4 billion in loan losses, and 95 percent beyond that. The agreement covered $11.4 billion in loans. The investors marked down BankUnited's loan portfolio by $2.7 billion, bringing the carrying value of the loans to $8.7 billion.

For good measure, the FDIC gave the private equity group $2.2 billion in cash, the result of a $3 billion negative asset bid, and agreed to let the company go public 18 months after the buyout (far earlier than the three-year requirement it subsequently imposed on private-equity bidders).

Do the math, and even if every single loan on BankUnited's books went bad, the investors would still make $1.5 billion on the deal, before their expenses. In contrast, the FDIC was forced to awkwardly celebrate a meager $25 million warrant payout from the IPO.

Ken Thomas, an independent bank consultant in Miami, is among the critics who think the FDIC was overly generous in the BankUnited sale. He calls it "the sweetheart deal of this financial crisis" and "one of the best deals ever for a failed bank."

Kanas, 64 and as close to an icon as the battered industry has nowadays, has heard the grumbling—from those incredulous over the size and speed of his payout, and from rival bankers bitter at how he leverages the stability wrought by the government guarantee to steal lenders and customers. But he's unapologetic.

He notes the FDIC sought bids from 63 prospective buyers, and even with the promise of loan-loss coverage, only two other consortiums—one a partnership of TD Bank and Goldman Sachs, the other a group led by investor J.C. Flowers—were willing to make an offer. "It's kind of funny that people think it's unfair," Kanas says. "This was out there in the public market for anyone to buy—the FDIC was actively beating the bushes looking for investors—and almost no one stepped up."

Supporters argue that BankUnited's success should be celebrated as private equity at its most effective. Kanas and his partners—a collection of big-name private equity players, including W.L. Ross & Co., Carlyle Group and Blackstone Group—went where few other investors dared, and saved a company and its jobs, for which they were rewarded. "They made an attractive acquisition, brought in a strong management team and unlocked a lot of value, which enabled them to pursue a public offering and gain some liquidity for their investors," says Joe Thomas, managing director of Hovde Private Equity Advisors LLC. "That's private equity's role: to provide transitional capital for impaired banks that can't find it elsewhere."

Some also view BankUnited as a victory for the FDIC, which has sought to walk a tightrope through the crisis between the industry's need for capital from nontraditional sources and a desire to ensure those investors have, as Sheila Bair, the agency's chairman, said in an August 2009 policy statement, "the experience, competence and willingness" to run banks prudently.

Two years ago, big traditional acquirers were under enormous capital pressures, and unable to take on more trouble. Private equity was a good potential pool of additional money, but suspicions colored the relationship on both sides.

Offering favorable terms on BankUnited, the biggest failed bank in a south Florida market hit hard by the mortgage meltdown, was necessary because no one would buy it otherwise.

The deal also helped rekindle interest by signaling that the agency was willing to work with private-equity groups that had experienced hands at the helm. "You saw a lot of private-equity guys say, 'Hey, deals can get done,'" says Brady Gailey, an analyst for Keefe Bruyette & Woods.

A short time later the agency introduced special rules for private-equity buyers of failed banks, including tier 1 leverage ratios of 10 percent at the acquired institutions and three-year holding periods for investors. The restrictions dampened some of private equity's initial enthusiasm for buying failed banks.

Still, the industry's ability to attract capital improved after the leap by BankUnited's investors, and some contend, at least partly because of it.

From the beginning of 2008 through late March, private-equity firms had invested $32.6 billion in 105 banks, according to PitchBook Data, a Seattle company that tracks private-equity investments.

Of that total, 73 deals occurred since the BankUnited transaction. While none achieved the size and scope of Kanas's transaction, "it highlighted the potential for private equity to participate in the industry," Hovde's Joe Thomas says.

Taken in that light, the FDIC's end of the BankUnited deal "might look bad on the surface," says one private-equity fund manager who declined to comment for attribution. "But if you compare it to the losses that could have occurred [to the Deposit Insurance Fund] if private equity wasn't more involved, it might be a rounding error."

For its part, the FDIC repeatedly responds to critics of any deal by emphasizing that, by law, it must accept the best offer for a failed bank, to minimize losses to the fund.

Private equity's interest might be good for a capital-starved industry, but it still makes many bankers queasy. These investors are seen as hard-nosed negotiators, hands on and blunt. They typically expect to cash out within three to five years—with enough profit to justify the risks—and seem to have a knack for stacking the deck so they win no matter what.

"I am supportive of the private-equity industry, and think they do a good job at what they do," says Ken Thomas, the consultant. But he considers such investors inappropriate for the commercial banking industry, because "there is an inherent mismatch in goals."

Small wonder that when Jim Gallagher, managing director of financial sponsors coverage for KBW, opened the floor for questions at a recent panel discussion on private equity in Florida, "nobody in the audience raised their hand," he recalls. "A lot of bankers are intimidated by private equity," and there's a stigma attached—a concern that considering this option could be seen as desperation. "In a public forum, no one wants it to look like they're interested," he says.

Brash, confident and with a strong track record of success, Kanas had no such squeamishness. He built Long Island's North Fork from a backwater suburban thrift into a $59.4 billion-asset juggernaut that battled head on with some of the nation's biggest banks for commercial clients in Manhattan.

In 2006, not long before the financial crisis descended, he sold North Fork for $14.6 billion to Capital One, reaping an estimated $135 million for himself. The timing couldn't have been much better.

As the crisis unfolded and banks began to teeter, Kanas considered his options. He had banked billionaire Wilbur Ross for more than three decades, and knew Olivier Sarkozy—half-brother of French President Nicolas Sarkozy and co-head of Carlyle's global financial services group—for nearly as long. In conversations, "we spent a lot of time talking about first-mover advantage," Kanas recalls. "If you're old enough to remember the thrift crisis, you remember that the most lucrative deals went to the investors who showed enough steel to pull the trigger early."

Kanas says he looked at several potential failed-bank deals, including $32 billion-asset IndyMac Federal Bank, the Pasadena, Calif. mortgage lender that failed earlier in 2009, but passed. "I didn't understand the southern California market," he explains.

South Florida, with its heavy Northeast influence, felt familiar and was within striking distance of Manhattan. It also was in chaos. The top five banks in the Miami market, all out-of-towners, controlled 53 percent of deposits, and were either going through major crisis-related integrations or fighting big credit troubles of their own.

"It's a market I understand, and one we all know will recover," Kanas says. "But the big banks here do business in south Florida as an adjunct to their principal businesses. It's not a market they're paying a lot of attention to, and most of the business is centered on consumer lending, not C&I or commercial real estate."

A big mortgage lender, BankUnited was the largest local bank, with 80 Florida branches. Many locations were in grocery stores, and the core strategy was to fund its wholesale mortgage business by offering high-priced certificates of deposit to retirees.

As loan losses mounted, it was just a matter of time before the thrift collapsed, and Kanas let the FDIC know he'd be interested. About the same time, Sarkozy reached out: Carlyle was interested too. But for private equity to get involved in something of that size and distress—and to win regulatory approval—there would have to be a proven banker at the helm.

"I didn't actually have to call anyone," Kanas says. Instead, Sarkozy called him. "He said, 'John, we've been thinking about BankUnited.' I said, 'Olivier, I've been thinking about it, too.'"

Even though he was familiar with the principals, the idea of working directly with private equity gave Kanas pause. "Frankly I was a little uncertain as to how it would work, because I had never been partners with them before," he admits. Those concerns, he says, have fallen by the wayside.

Working with big private equity has brought some unforeseen complications. For instance, Sandler O'Neill and Partners was slated to co-manage the IPO, "but we had to drop them after Carlyle acquired an ownership position" in the investment bank.

But the investors have also brought business connections and know-how. "I've found them to be the perfect complementary partners," Kanas says. "They're market-savvy people who are riveted on building value."

It's all but certain that there won't be any more BankUnited-style private-equity investments this time around. Failures are tapering off. Larger banks that need capital are attracting interest from traditional bank buyers, which face fewer ownership hurdles than private equity and can achieve cost saves that allow them to outbid such competition.

"A year ago, most banks weren't in a position to look at acquiring a distressed bank. So if you were a bank with issues and needed capital, your only choice was to go to investors," says Brian Sterling, co-head of investment banking for Sandler O'Neill. "In the last six months, banks have started to buy other banks."

That doesn't mean private equity has no role. KBW's Gallagher estimates that more than 100 private equity firms are in the market looking to plow capital into troubled smaller banks or healthy banks in a position to buy failures.

The arena's most active investor in terms of deal volume has been Patriot Financial Partners, a Philadelphia firm that was launched in 2007 specifically to invest in community banks, and has invested about $200 million in 13 institutions.

"There's going to be a huge capital need in the community bank space over the next few years," says Kirk Wycoff, managing partner of Patriot.

But these investments—at $10 million or $20 million—aren't worth the effort for larger funds, he says. "These are good banks in good markets that see an opportunity to merge with a competitor down the street or buy a [failed] bank," Wycoff adds. "If they don't take the money now—even if it's a little dilutive—they'll miss that opportunity. So they come to us."

By Federal Reserve rules, a single private-equity firm cannot own more than 24.9 percent of a bank, without becoming a bank or thrift holding company. If the percentage is above 9.9 percent, investors must sign passivity agreements barring them from getting too hands on in dictating strategy.

In BankUnited's case, each of the private-equity investors took stakes small enough to avoid the holding company rule.Hovde filed a shelf charter in 2009 with the Office of Thrift Supervision; a year later it acquired the failed Bay National Bank from the FDIC, but only after satisfying regulators that it had the capital, business plan and management to run the company effectively.

Management skill also helped sell the FDIC on Kanas' group, observers say.

Immediately after the deal, he got to work. Key senior managers from the old North Fork were brought in. They shrank the balance sheet, shuttered the mortgage platform, closed many of the supermarket branches, slashed CD rates and began reshaping BankUnited as a sort of "North Fork South," with new emphases on efficiency, core deposits and commercial lending.

To attract good lending officers, Kanas advertised in local and national trade publications for Florida bankers that were unhappy with their jobs, offering to build branches for top performers and give them the assurance of working for a bank whose credit troubles are in the rearview mirror.

The marketing campaign angered many Florida banking executives, who complain that Kanas has leveraged the FDIC's guarantees to poach employees and customers. "That might work in New York, but it's not the way we do things here," gripes one rival. "It's an unfair way to capitalize on the FDIC loss-share."

Nevertheless, the tactic paid dividends. Kanas says he received 7,000 inquiries—3,000 of them from New York—and has hired key lending teams from SunTrust Banks Inc., Regions Financial Corp. and BB&T Corp., among others.

If there's a sense of cutthroat urgency in Kanas's moves, it's that BankUnited's profits are driven by the FDIC guarantees, not performance. "Strip out the loss-share, and there aren't a lot of earnings there," KBW's Gailey says.

Those earnings will continue to flow for the next four years or so, and analysts expect that BankUnited will eventually have enough capital to support a $25 billion-asset bank. To keep the ball rolling, Kanas needs to find growth. That will ultimately come from smaller acquisitions and de novo branch openings in Florida ... and expansion in New York.

One of the more subtle changes brought by Kanas's team is a logo change. Gone is BankUnited's old trademark palm tree, replaced by a blue-and-gray arch that could be a Miami causeway or the George Washington Bridge.

Kanas-splitting his time all along between Miami and New York—where he has an office just off Fifth Avenue—has made no secret of his plans. He expects to open half a dozen branches in Manhattan on Aug. 7, 2012, the day after the noncompete expires, and then add another dozen or so over the next three years.

Those at the biggest risk could be midsize lenders, such as Signature Bank and Flushing Savings Bank, where former North Fork officers landed after the Capital One deal. "You'll see some banks lose talent and relationships," Gailey predicts. "People like working for John Kanas."

For Kanas, it's simply about building a better mousetrap to maximize his returns. "Sophisticated borrowers in New York need an institution large enough to make a good-sized loan, but small enough to let them talk with decision-makers," he says. "We did that with North Fork, and we're going to come right back and provide it with BankUnited."

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