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Randy Dennis, President of DD&F quoted

Banking deals are getting done as troubled ones are purchased

The banking business keeps getting uglier, a review of area banks' latest financial
reports shows. Yet some investors see an inner beauty.
They are buying troubled banks and investing capital in even weaker ones.
Kansas City saw two troubled-bank deals unveiled in the past three weeks.
A group led by longtime Kansas City banker Mick Aslin agreed to buy 1st Financial Bank in
Overland Park. The parent company of CrossFirst Bank in Overland Park has agreed to buy Town
& Country Bank in Leawood.
By one consultant's count, perhaps as many as 20 similar transactions have surfaced nationwide
-- from the Pacific Northwest to Florida -- in the past three months.
They're happening because the industry may have finally identified all of the problems it faces.
Problem loans and foreclosed properties are likely worth close to the values recorded on the
books of the banks that own them.
"That's the key difference why some deals are getting done today and they weren't a year ago,"
said John Roddy, who handles bank deals at the Macquarie Group in New York.
Add to that what some see as an emerging economic recovery, signs the real estate market is
stabilizing and the small dip in unemployment.
"All those factors have given investors confidence to put money into the banking system again in
all types of situations," Roddy said.
So far, however, the flow of eagerly sought capital amounts to a trickle compared with the hole
the industry needs to fill.
Last year was particularly rough on the 106 Missouri-based and Kansas-based banks with
branches in the Kansas City area.
As a group they lost money, something they had avoided even in tumultuous 2008.
Financial results for banks are available at economy.kansascity.com.
The breadth of banks' problems became evident in some quick research by Richard Weaver, the
Commissioner of finance, who oversees Missouri's 282 state-chartered banks in urban and rural
areas.
Weaver said Missouri's banks as a group lost money in every quarter of 2009, plus the final three
months of 2008.
Looking back over 30 years, Weaver found only one other quarter in which the state-chartered
flock lost money. It was the fourth quarter of 1981.
Weaver also said he was not counting on a big turnaround for the industry this year.
"I think 2010 is going to be another tough year for the banking industry," Weaver said.
But investors aren't waiting for a turnaround. They're moving on an expectation that bank
conditions won't get worse.
There's reason to believe that's true, said John Pittman, a managing director at CrossFirst
Advisors LLC, which has the same owner as CrossFirst Bank. Pittman said banks had been
through one or two regulatory exams and knew how regulators wanted them to value properties
and classify loans.
It's why bank numbers look so much worse than they did a year ago. It's also why the big
surprises are essentially over, Pittman said.
Roddy said no easy formula would tell which troubled banks probably would find the capital they
needed to either become well capitalized by regulators' standards or remain that way.
But in both of the local deals, the banks being bought had problem loans and foreclosed
properties that roughly equaled the owners' equity in the bank.
Another measure that investors use compares a bank's problems to its owners' equity plus the
reserves set aside to cover losses on the problems.
Deals often involve motivated sellers, said Randy Dennis, president of DD&F Consulting Group in
Little Rock, Ark.
"They're tired, worn out and looking to get out," Dennis said.
Sellers also may have to be willing to keep or make good on the problem assets. That's a
condition in both the 1st Financial and the Town & Country deals.
It's essentially a bet by the existing owners that the actual losses will turn out to be less than
expected. It also gives the buyers a clean bank to grow with their own capital.

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