The former CEO of North Fork Bank and his private equity partners is converting Florida’s BankUnited, a failed S&L, into “North Fork South,” using the same aggressive tactics he used in New York.
John Kanas and a group of private equity players—with help from FDIC—work to remake Florida’s failed BankUnited using the North Fork Bank playbook
By Steve Cocheo, executive editor,
John Kanas isn’t one for apologies. He brings a New Yorker’s direct attitude and action to the Florida banking market. His $11.1 billion-assets BankUnited, since its recapitalization after closure, has made a very public effort to snatch up bankers from other organizations who can help the reborn savings institution build and transform its business. When told that a Florida community banker accused BankUnited of “lack of decorum,” Kanas smiles, raises his hand, and says, “Guilty.”
“Look,” says Kanas. “Banking is changing. For many years the relations between bankers have been collegial, fraternal. Times are different today. Our job is go find the best possible employees we can, and put them to work managing our capital base, and turning their work into successful results. Unfortunately for some of our competitors, some of our people used to work for them. And we have been aggressive going after them.”
Kanas has never been shy in this regard. He built North Fork Bancorporation into a major New York-area player and the sixteenth-largest bank in the country from a community bank in rural Long Island. He accomplished that, in part, by courting commercial lending “rainmakers.”
BankUnited actually ran ads in 2009 urging Florida bankers who wanted to enjoy their work again to fill out a coupon in the ad to resign, and come to join Kanas.
This and similar ads drew over 6,000 responses in ten days, Kanas says. New hires representing the cream of that crop are bulking up BankUnited, especially on the commercial banking side. He’s particularly proud of a team lifted out from a large regional player.
This talent raid wasn’t needed to manage BankUnited’s current business—Kanas had enough hands for that. The new players have a different purpose.
“If we hire a group of people that’s going to cost us $2 million a year to bring them over and set them up, we need to find the $2 million,” says Kanas. “So they are going to come to us with $2 million in earnings.”
At North Fork, Kanas made twin gods of growth and efficiency, and he aims to do the same in what some see as “North Fork South.” Kanas thinks the moniker is appropriate.
“What was attractive about the Miami market was the very heavy influence from the Northeast,” says Kanas. “It is a major metropolitan area, and it is a market where, for lots of reasons, most of them well-known, the competition has been severely wounded.
“We view BankUnited as a very unique opportunity in a market that will be great again, and which doesn’t have the kind of competition that New York does,” says Kanas. Indeed, he sees his task in Florida as less challenging than taking North Fork Bank into Manhattan.
Private equity, public techniques
A few years ago, predictions ran rampant that private equity was going to come riding to banking’s rescue, injecting capital in depleted institutions like an MD giving out B12 shots. To a great degree, that didn’t happen. But it did happen in the case of BankUnited.
Kanas has known Wilbur Ross, chairman of W.L. Ross & Co., for nearly three decades and did banking business with him on Long Island. He also knew Olivier Sarkozy, from The Carlyle Group. “I respected him and thought he was a very good banker,” says Kanas.
“I had spoken to the folks at Blackstone Group right after I left North Fork,” says Kanas, who sold North Fork to Capital One in 2007. He’d considered either teaming up with Blackstone, or going to work for them or another private equity firm.
“When BankUnited came along, I didn’t actually have to call anyone,” says Kanas. “Olivier Sarkozy called me, and said, ‘John, we’ve been thinking about BankUnited, and I said, ‘Olivier, I’ve been thinking about BankUnited as well.’
And the group was forged from there.”
Private equity players, and former senior North Forkers, dominate the board, with Kanas as chairman, president, and CEO. Something that impresses analyst Tom Brown of bankstocks.com is the wide diversity of investment horizons represented by the group. The Carlyle Group leans toward long-term deals, as does Banyan Street Partners. Ross’ firm typically likes the mid-term, while Blackstone Group often goes for short-term plays.
The investor group’s deal to acquire failed BankUnited, FSB, included all nonbrokered deposits and a favorable loss-sharing arrangement with FDIC on both commercial and residential assets. The group put up $900 million in fresh capital. Some banking observers thought the whole effort was going to be about working the assets acquired through the takeover, skimming the cream out of the arrangement, and then selling off the bank when the returns diminished.
On the other hand, one long-time student of southeastern banking sees BankUnited’s aggressive hiring as a sign of a long-haul strategy.
Asked about the quick-buck speculation, Kanas flatly says, “They’re just wrong.”
Elaborating, he points out that while the loss-sharing looks compelling, it runs out over time. “Our capital is building up at warp speed as a result of it [more than 40% risk-based]. But we’re working hard every day, building a real bank franchise on the foundation of this platform. By the time the economic impact of the loss-share arrangement begins to recede, this bank will be making a lot of money on its own from traditional banking.”
He underscores the point by saying: “This is franchise bid, and we are well on our way to building that franchise.”
Chopping out, building up
Kanas realized that what he had was not so much a traditional acquisition, but in many ways a de novo bank.
“You walk in and you have stores there, some customers, some deposits,” says Kanas. “But you also have a failed strategy, something you don’t want to perpetuate. So it’s like a de novo with a little head start.” Little being relative, of course.
Downsizing of staff had already substantially occurred in the old management’s struggle to stay open, plus some employees getting out before the end.
The wholesale mortgage operation that had played a major role in the old company’s downfall was shuttered. An aggressive private banking operation designed to bring in business from other countries was closed down as a noncore activity. All but one senior manager left.
Though Kanas harps on efficiency in his management, FTE has not changed appreciably.
“We never felt that the old bank was particularly overstaffed,” he explains. Moving resources around has more been the order of the day, except for the discontinued operations.
Nevertheless, Kanas and his team made it clear that the beginning of a new culture had arrived. The dozen or so former associates Kanas brought with him will help that happen.
“The trick becomes cross pollinating them with the remaining people at BankUnited and getting them one conversation at a time, one day at a time, one event at a time, to understand that it’s a new day,” says Kanas.
Melding commercial and savings banking
The old BankUnited, when closed, had assets of $13.1 billion, 73% of that being residential mortgages. Just over half of that 73% were the option ARMs that helped bring the bank down. Mortgages had previously been an even bigger piece of the pie.
Kanas is driving for a hybrid of the savings and commercial model. Residential will be pushed to between 50%-60% of assets, with commercial lending being increased to 25%-30%.
On the liability side, BankUnited had become almost exclusively funded by high-cost deposits, mostly CDs. That is a priority for Kanas, who has long been a believer in the value of core deposits.
“There’s been dramatic change there already,” he says. “We’ve run off about a billion worth of high-cost deposits and replaced them with more core deposits. And embedded within that [which really warms his heart] is an almost 80% increase in commercial deposits.”
For this, Kanas credits the bankers he’s hired away from other institutions. “They’re doing a terrific job,” he says. But Kanas remains alert about building C&I lending too quickly, given the damaged condition of many commercial borrowers in south Florida.
The stress on commercial relationships and deposits correlates with a key element in the new BankUnited culture: incentive compensation. Kanas made extensive use of it at North Fork, but not in the way many others have. Rather than incenting lending, he incents core-deposit gathering.
“The idea is to embrace employees as business partners and to let them share in the success of their work,” says Kanas.
“Now, many people would ask me, ‘Why are you doing that?’ That’s because the banking business—including our bank—is awash in deposits, and we have far more deposit liquidity than we need,” says Kanas.
However, he believes such liquidity is short-term.
“Looking into the future, deposits are still the lifeblood of a bank and they are where value is created,” says Kanas. “So we intend to continue to emphasize deposits.”
Surveying the current scene, Kanas sees a landscape that’s troubled now, but with tremendous potential for BankUnited.
Growth by de novo expansion is in the cards for the bank; about a dozen new branches are in stages of development. But growth by acquisition, both assisted and unassisted, also awaits, as the difficult real estate cycle continues. Kanas and his investment partners’ have already identified which institutions will likely make it through the Valley of the Shadow, and which likely will not.
Nationally, Kanas sees a wave of consolidation coming among the 2,000-3,000 banks that won’t fail but will struggle in the future.
While Florida is his first area of interest, Kanas has looked at institutions outside of Florida—“institutions that bring with them some strategic value that we might not find in Florida.”
He has no definite size target in mind. He plans to use the bank’s enormous capital base judiciously, but opportunistically.
Kanas keeps his planning flexible, and, at times, plays the game by showing the cards he wishes to show.
Analyst Tom Brown acknowledges this, and tips his hat to Kanas as a virtuoso card player.
“In Florida, there will be more disappointment than great deals done,” predicts Brown. But he believes some acquirers will do very well. Kanas, he believes, could be one of them. •