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[BKU] Secret to Bank's Comeback: A Rich Uncle Named Sam (1/28/11)

By ROBIN SIDEL

MIAMI LAKES, Fla.—Before BankUnited FSB collapsed in May 2009, employees lit candles and prayed that Florida's biggest bank would survive the bad loans it made before the housing bubble burst.

The miracle came in the form of Uncle Sam, or more precisely, the Federal Deposit Insurance Corp., which sold the failed BankUnited to a group of Wall Street financiers led by a longtime New York banker. The FDIC agreed to reimburse as much as $10.5 billion in future loan losses—and gave the new owners $2.2 billion in cash. The buyers paid $945 million.

Since then, BankUnited has become one of the most profitable, highly capitalized financial institutions in the U.S. Deposits are pouring in, loans are flowing to businesses, and executives are itching to buy banks in Florida and New York City.

After the closing bell Thursday, BankUnited sold 29 million shares at $27 each in an initial public offering that values the company at roughly $2.6 billion. The deal is the first IPO by a bank raised from the dead during the financial crisis.

The owners of what is now called BankUnited Inc. are expected to collect more than $500 million from the sale, while keeping a roughly 70% stake in the company, and the FDIC will get at least $25 million from the stock sale. Shares of the BankUnited are expected to start trading Friday on the New York Stock Exchange.

"I wish I had access to that kind of money," says Keith Costello, chief executive at Broward Bank of Commerce, based in Fort Lauderdale, Fla. He says his bank recently lost a potential customer to BankUnited because it was too small to make the loan the borrower needed.

As the nation's roughly 7,700 banks and savings institutions try to recover from about $493 billion in loan losses since the start of 2007, BankUnited is emerging as a case study of how government largess in the immediate wake of the crisis has allowed certain lucky institutions to thrive—while others, whose timing was less opportune, continue to struggle.

As the economy stabilized, the FDIC's incentives to lure buyers became less generous than those enjoyed by the new owners of BankUnited.

The bank is also proving that it's still possible to wring money out of humdrum banking. Instead of relying on the adjustable-rate mortgages that doomed the old bank, BankUnited now dangles sales incentives at employees to make conventional loans. It funnels deposits into plain-vanilla consumer and commercial loans, and makes money the old-fashioned way, from the difference between the interest it pays depositors and what it collects on the loans. Through the first nine months of 2010, BankUnited earned $156.9 million in profits. Return on equity was 18%, compared with 10% at J.P. Morgan Chase & Co. and 12% at U.S. Bancorp, the strongest giant banks in the U.S.

The bank's revival has come at a price: So far, BankUnited's failure has cost the FDIC more than $3.2 billion, including the initial cash pay-out and subsequent reimbursements for losses on loans that have soured. The agency estimates that the failure will ultimately cost its deposit-insurance fund $5.7 billion. The FDIC is funded by the nation's banks, which have had to pony up extra money over the past two years to cover the cost of industry failures.

Other Florida bankers acknowledge the terms received by BankUnited's new owners were generous, but also note that there were few other buyers willing or able to step up and take on the risks. "They still have to put in a lot of work. They're earning their money," says David Seleski, chief executive officer of Stonegate Bank in Fort Lauderdale.

And the FDIC estimates the final tally will still be $1.5 billion less than what it would have cost the agency if it hadn't found a buyer and absorbed the losses itself. "The fact that BankUnited can issue an IPO which will result in more capital for the institution and a more diverse set of investors is a very positive development and indicative of the change in market conditions since the original transaction," says James Wigand, who oversaw until recently the FDIC's sales of assets from failed banks.

BankUnited declined to comment, citing Securities and Exchange Commission rules against speaking publicly just before an initial public offering. In a securities filing last week, the company said: "We believe that our customers are attracted to us because we offer the resources and sophistication of a large bank as well as the responsiveness and relationship-based approach of a community bank."

Other banks, chastened by their recent losses and 332 bank failures since the start of 2007, also are getting back to basics.

Bank of America Corp. is shedding assets outside the U.S. and trying to talk checking-account customers into moving money into Merrill Lynch retirement accounts. Wells Fargo & Co. wants to double the number of services it sells to its business customers. City National Corp., a Los Angeles bank with entertainment-industry roots, recently opened a branch in New York's Times Square and is pitching checking accounts to Broadway actors.

"Our industry needs to become a simpler place for the broad majority of mass-market customers we serve," Brian Moynihan, Bank of America's chief executive, said in November.

BankUnited got a head start on the rest of the banking industry. The biggest reason: As part of the deal with regulators, the FDIC reimburses BankUnited for 80% of all losses on about $4 billion in loans made before it failed—and 95% of losses on an additional $7.7 billion. The FDIC wires the money directly to BankUnited: more than $1 billion as of the end of 2010. The loss-sharing agreement lasts as long as 10 years, depending on the loan.

"It was the perfect deal at the perfect time," says Carlos Fernandez-Guzman, a former BankUnited senior executive vice president who left last spring to become president and CEO of Pacific National Bank in Miami. "I think everyone involved made out like a bandit: the regulators, the private-equity firms, the customers and certainly the folks that are going to invest."

BankUnited's owners include private-equity firms Carlyle Group LP, Blackstone Group LP and Centerbridge Partners LP, financier Wilbur Ross and several smaller investors. Until the crisis, private-equity firms usually steered clear of buying banks because returns were lackluster compared with other companies. Regulators were also wary of these firms, worried that such investors cared only about making a quick buck.

After the crisis hit, federal officials, desperate to attract capital to reeling U.S. banks, were more welcoming to private-equity groups. They now get essentially the same terms as traditional banks when buying failed institutions, though private-equity firms are subject to more rules.

As a result, private-equity firms have pumped billions of dollars into more than 50 financial institutions since 2008. IndyMac Bank FSB, the Pasadena, Calif., lender that failed in July 2008, came back to life as OneWest Bank FSB. Its current owners include billionaire George Soros and Dell Inc. CEO Michael Dell. OneWest has raked in nearly $1.5 billion of profits so far and bought two other California banks that failed.

BankUnited's turnaround is led by John Kanas, 64 years old, who turned a sleepy Long Island, N.Y., thrift into regional-bank powerhouse North Fork Bancorp during the 1990s. He pocketed an estimated $185 million after selling North Fork to Capital One Financial Corp. in 2006, but soon left and started looking for new investment opportunities.

In mid-2008, Mr. Kanas was approached by Andrew Senchak at Keefe, Bruyette & Woods Inc., a boutique investment bank that specializes in the financial-services industry. Mr. Senchak was trying to help BankUnited raise capital and urged Mr. Kanas to take a look. Started in 1984 by a Florida lawyer, the bank rode the boom in adjustable-rate mortgages, which let borrowers make minimal initial payments on their home loans but face sharply higher ones later.

As the housing market sank, BankUnited executives tried to maintain employee morale by throwing a Halloween costume contest, handing out $25 gas cards and letting workers wear jeans on Friday, according to employees. To keep nervous depositors from pulling their money out, BankUnited jacked up interest rates.

Mr. Kanas wasn't ready to make a bid. Over the next six months, he sifted through the books of 75 stumbling financial institutions in California, Las Vegas and the Midwest.

As BankUnited grew sicker, though, Mr. Kanas began to think it might be more attractive. In January 2009, he received a phone call from Olivier Sarkozy, a former investment banker in charge of Carlyle's financial-services investments who was also considering buying BankUnited. Mr. Kanas and another Carlyle banker flew to Atlanta to meet with representatives of the FDIC and Office of Thrift Supervision.

"If and when this bank gets on your [failure] list, I'd like to be considered," Mr. Kanas told government officials, according to a person who heard the comment.

Regulators soon declared BankUnited "critically undercapitalized" and ordered it to raise new capital or sell itself. Because nearly 20% of the bank's loan portfolio had gone bad, Mr. Kanas and other bidders balked at buying BankUnited without assistance from the government.

As FDIC officials prepared to seize BankUnited, more than 60 potential buyers were invited to examine the bank's financial statements and loan records. In the end, there were just three bidders, including the Kanas-led group.

"I tried to find the worst bank in the country, and I did," Mr. Kanas quipped in a presentation to bank-industry investors shortly after the BankUnited acquisition.

Mr. Kanas, who invested $23.5 million in the deal and commutes to Florida each week, declined to be interviewed for this article.

"Everybody would like to repeat what John did, but that's not happening," says Herb Boydstun, CEO of First Southern Bank in Boca Raton, Fla., since the FDIC's terms aren't as generous anymore.

After taking control, Mr. Kanas, now BankUnited's chairman, president and CEO, brought in three former North Fork lieutenants, closed branches in unappealing neighborhoods and slashed interest rates paid on certificates of deposit.

He also shook up the bank's high-rent corporate culture. The headquarters moved from a wood-paneled penthouse in downtown Coral Cables to a low-rise office complex about 30 miles away in Miami Lakes. Mr. Kanas threw a "welcome home" party in the parking lot for employees, and promised to provide more picnic tables so people could eat lunch outside.

Across the street is a pasture where Mr. Kanas regularly walks to visit about two dozen cows who graze there. "For Sale or Lease" signs stick up in front of nearby office buildings, casualties of the battered real-estate market.

BankUnited's private-equity ownership comes with some restrictions. Regulators prohibit the bank from doing business with any of the scores of companies that are owned by Blackstone, Carlyle or the other investors, in order to avoid potential conflicts. These include a range of business, such as Hilton, Hertz and SeaWorld.

When Mr. Kanas wanted new software for BankUnited's loan-servicing department, he had to hire his second choice because his first was owned by Carlyle. The restrictions also affect this week's IPO because Carlyle recently acquired a stake in Sandler O'Neill + Partners LP, which had advised the old BankUnited and Mr. Kanas. As a result, the investment bank is prohibited from handling the underwriting.

Since the failure in May 2009, deposits, not including CDs, at BankUnited have surged about 80% through September. The bank has made $429.5 million in new loans and had $11.2 billion in total assets as of Sept. 30. BankUnited hasn't reported fourth-quarter results.

Mr. Kanas has seven new branches in the works. He wrote a series of cheeky ads in local newspapers that encouraged "unhappy Florida bankers" to quit their jobs and bring their clients to BankUnited. He pried some away by offering extra cash and restricted stock if they met certain goals.

"It is not the kind of sportsmanship that we are used to," one rival banker says.

Some bankers say Mr. Kanas will get a run for his money once other financial institutions in Florida rebuild their capital and start generating consistent profits. "The returns that John Kanas has had are phenomenal, but you couldn't get them in a real banking environment," says Bruce Keir, chief executive of Community Bank of Broward, based in Weston, Fla.

BankUnited's initial public offering raised nearly $800 million, based on the $27 price. It will rank among the 20 largest-ever financial-services deals, according to Dealogic Inc.

http://online.wsj.com/article/SB20001424052748704279704576101823931818868.html