Getting Rich Remaking A Subprime Lender

With the FDIC’s help, Florida’s BankUnited is back on its feet and bidding for business in New York | People say “‘it was a great deal, you guys made a lot of money.’ But where was everybody then?”

Karen Weise


John Kanas was grilling burgers for dinner on the porch of his Long Island home in May 2009 when the call came. An official at the Federal Deposit Insurance Corp. told him he and his private equity partners had won the bidding to take over BankUnited, a Florida lender that was sinking under the weight of its subprime mortgages. Desperate to avoid liquidating the bank, the FDIC had accepted Kanas’s terms, in what would come to be known as one of the sweetest of sweet deals made during the crisis. There was just one catch: Kanas and his team had to take over the bank at 8 a.m. the next morning. “I was stunned,” Kanas says. That night, he hopped on his private jet and flew to Miami.

With the FDIC deal providing a floor under future losses, Kanas, 66, started to rebuild BankUnited from a risky mortgage lender into one of the more profitable and best capitalized banks in the country. “We have a lot of money, and we make a lot of money,” he says. Now the $12.7 billion bank is pushing into New York, opening branches and luring staff from rivals. A veteran New York banker, Kanas is betting he can regain footing in the biggest and most competitive market in the country. “It’s been a pretty big turnaround story,” says Brady Gailey, an analyst at Keefe, Bruyette & Woods.

Kanas spent almost three decades building a small community bank called North Fork Bancorp into a New York regional powerhouse, selling it to Capital One for $13.2 billion at the top of the market in late 2006. He earned $214 million in stock and other compensation from the deal, according to estimates by GMI Ratings.

As banks started to fail with the bursting of the housing bubble, Kanas went to work scouting takeover targets for billionaire investor Wilbur Ross. He eventually zeroed in on BankUnited, a Miami-area lender that had pushed a particularly pernicious type of mortgage called an Option ARM. The loans let borrowers reduce their monthly payments by adding to the principal of the mortgage, digging them deeper into debt. In early 2009 the FDIC contacted more than 60 potential buyers, trying to find a new owner for the bank. In the midst of the credit crunch, only two other parties submitted bids. “People were very distressed and very frightened,” Kanas says. “In retrospect everybody looks back and says, ‘Oh, it was a great deal, you guys made a lot of money.’ But where was everybody then?”

Kanas and his private equity backers, including Ross, Blackstone Group, and Carlyle Group, put up $900 million in new capital, according to the FDIC. In exchange, the agency agreed to eat much of the future losses from most of the bank’s loan portfolio. It would reimburse BankUnited for 80 percent of the first $4 billion in losses and 95 percent of all additional losses. The FDIC also provided $2.2 billion in cash. By selling to Kanas’s group, the FDIC expected to lose $4.9 billion on the bank — which was still $1.5 billion less than it estimated it would spend if it had to liquidate it. The agency says its losses have grown to $5.9 billion.

The generous deal sparked public outrage and enticed more potential buyers to bid on other failing banks. The increased competition let the FDIC get tougher on subsequent deals, reducing the share of losses it promised to absorb. While the stricter terms reduced costs for the FDIC, they also hampered Kanas and his partners, who had planned to buy up other troubled banks on the cheap. “That type of deal was a once-in-a-lifetime opportunity,” says Herman Chan, a Wells Fargo Securities analyst.

Instead of buying other banks, Kanas focused his time and capital on retooling the operations in Florida. Flying in his jet to Florida for two or three days each week, he laid off more than 600 employees, largely from the bank’s mortgage division, and built a commercial bank. While competitors such as Wachovia and Washington Mutual were retrenching under new owners, Kanas ran full-page ads in the Wall Street Journal and Miami Herald to recruit unhappy Florida bankers. “We’ll change your life,” he says the ad promised. Seven thousand applicants responded, and Kanas hired more than 400 of them.

His new clients were developers and midsize businesses ranging from food importers to a shipyard operator. To reflect its new focus, the bank brought on design firm Pentagram for a brand makeover, replacing BankUnited’s floppy palm tree logo with a hardened arch. Before the acquisition, residential mortgages made up 88 percent of BankUnited’s lending. A year and a half after Kanas took over, mortgages were only 21 percent of its new loans. More than three-quarters of the bank’s new lending was for commercial clients. In January 2011, things were going so well that he and his partners took the company public with a $2.7 billion valuation — tripling their investment.

With BankUnited’s Florida lending growing a healthy $1.2 billion a year, Kanas decided to expand into his home turf. In 2011 the bank bought a tiny, three-branch New York lender. Capital One sued Kanas and another executive, saying the purchase violated a noncompete agreement. Without admitting any wrongdoing, they paid $20 million to settle. BankUnited opened three Manhattan branches in May and June. It also has one on Long Island, just down the road from Kanas’s old North Fork headquarters. “We picked up where we left off five years earlier,” Kanas says. All told, the bank has about 100 branches and 1,459 employees.

Of the roughly 125 employees now in New York, two-thirds worked with Kanas at North Fork. “He’s brought the team back together and really is trying to gain some market share in New York,” says Wells Fargo’s Chan. Kanas is calling on old clients and has hosted a reception in Midtown and a golf outing on Long Island. He told investors on an April conference call that 95 percent of the bank’s New York clients, which include developers and taxi medallion owners, are businesses that banked with Kanas and his team at North Fork. “This is our folks,” he said. While the bank lends money to home buyers, it doesn’t actively promote the business — and no longer offers Option ARMs.

Despite the strong results, the bank’s shares are trading slightly below the initial public offering price of $27. Investors sent the stock down in March after Kanas and his partners sold about $500 million in shares in a secondary offering. (They now hold about 30 percent of the stock.) Analysts expect the bank’s profit margins to shrink over time as the accounting benefits of the FDIC deal fade. Kanas acknowledges that the turnaround never could have happened without the FDIC’s backstop, adding that the deal covered losses for 10 years. “It’s got a long life ahead of it,” he says.

The bottom line With the FDIC picking up $5.9 billion of its losses, BankUnited has come back to life as a commercial lender.


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