After coming back from steep losses last year, banking in St. Louis has reached a "plateau," says the chief bank regulator at the Federal Reserve here.
The question now is whether the region's banks will resume their climb out of the recessionary pit or be held back by a sick commercial real estate market.
"We're going to need another quarter or two to see where the commercial real estate market is heading," said Julie Stackhouse, head of bank supervision at the Federal Reserve Bank of St. Louis.
The good news is that the vast majority of banks in St. Louis remain profitable and healthy. Of 77 commercial banks based in St. Louis, 10 have lost money in the first six months of this year. That's down from 17 in the first half of 2009, according to figures from the Fed.
The bad news is that bankers here are still tight with a dollar. As of June, total loans were down nearly 4 percent from March, and 11 percent from mid-2009.
The loan drought has two causes: tighter credit standards imposed by banks, and a reluctance by consumers and businesses to borrow. Nationally, credit card borrowing is down about 9 percent since last year.
But bankers now seem to be loosening their purse strings just a little. The Federal Reserve's latest survey of lenders showed that large banks had eased credit standards for commercial and industrial loans for the first time since 2006. Smaller banks were remaining tight.
A bank's willingness to lend depends mainly on its health. Those with weak capital can't lend, and their customers have to scramble to find loans elsewhere.
Until June, many small business borrowers were ending up at the Small Business Administration, a federal agency, which was on track to double the amount of loans it guarantees this year in St. Louis. Then, money ran out for an emergency federal program that guaranteed up to 90 percent of business loans while waiving fees. SBA loan volume dropped by half, says Dennis Melton, SBA district director. The SBA today guarantees repayment of 75 to 85 percent of loans amounts, making such loans less attractive to bankers.
Bankers at healthy banks here say they can't find enough good borrowers among area businesses. "Banks that can lend are seeing little organic loan demand. They're struggling to replace the normal loan pay downs," said Tom Hough, CEO at Carrollton Bank, a small player in the St. Louis market.
Bankers say businesses are holding back, piling up cash and putting expansion plans on hold. They won't expand until they see a sustained recovery, and the recent bad economic news has them worried. The coming debate on extension of the tax cuts from the era of President George W. Bush adds to the worry level, bankers here say.
Entrepreneurs who want to sell their businesses saw prices plunge during the recession. That started to change this spring, and banks saw a rise in demand for loans to buy businesses, said Peter Benoist, CEO at Enterprise Financial, parent of Enterprise Bank in Clayton.
"A lot of business owners are in their 60s. There's a lot of pent-up demand to sell," he said. He's wondering if that will continue as the pace of the recovery slows.
When a good business decides to borrow, it finds lots of competition for its business. Benoist says he's seen "pricing wars" break out between banks offering lower interest rates to land business loans.
The St. Louis Fed collects data on profits and lending for banks based in St. Louis. That excludes large banks based elsewhere with big market shares here, such as U.S. Bank and Bank of America. Those big banks don't break out St. Louis lending and profit numbers.
All together, the 77 St. Louis banks lost $28 million in the first half of the year, but the bulk of that loss was at a single company, First Bank. The Clayton-based bank, the eighth largest in the region, has taken heavy losses for two years, mainly on loans in California. Excluding First Banks, local banks earned a $58 million profit.
Only three tiny local banks — Peoples Bank & Trust, Westbridge and Superior Bank — failed to meet federal standards as "well capitalized" as of June 30. Westbridge is below the lower "adequately capitalized" standard. Premier Bank of Jefferson City, which has several St. Louis area branches, is also below the "adequate" capital threshold.
In May, a private investment group withdrew an application to buy Westbridge Bank and recapitalize it. Rick Hummell, president of the troubled Chesterfield bank, says plans for a buyout are "evolving" and "may take a different form."
Premier hired a California firm, Cappello Capital Corp., last week to help Premier raise new capital from investors. CEO Bruce Wiley said the bank was having "meaningful success" in selling off repossessed property.
Vital signs have generally been improving for St. Louis banks this year. Capital ratios are going up. The percentage of bad loans has been going down, although at 4.1 percent, it's still more than double the level of prosperous times. Banks here are putting aside less money to cover bad loans.
But commercial real estate is still a worry. Loans for shopping centers, warehouses, office buildings and the like make up 35 percent of loans at St. Louis banks overall, meaning that banks here will live and die with the fate of commercial real estate.
The recession is taking its toll on landlords, as stingy shoppers lead to store vacancies and weak employment lowers demand for office space.
"It's a very treacherous time for owners. Tenants have the advantage in this market," says Thomas Wilcox, executive vice president in charge of St. Louis commercial real estate lending at M&I Bank. "With the exception of some addresses in Clayton, rental rates are soft."
Regulators have been leaning on banks to keep commercial real estate loans below 300 percent of the bank's capital, which makes things tough for landlords who need to renew their loans. The number of such loans on banks books has been slowly coming down.
Stackhouse, the bank regulator, says she'll have to see improved cash flow among commercial real estate companies before she stops worrying about their effect on local banks, and she's not seeing that yet.
Home prices seem to have stabilized in St. Louis, says Benoist, lessening one source of worry for bankers. But commercial real estate loans go bad with a long lag, as the woes of the tenants eventually get passed along to landlords and then to their bankers.
"We're one-third to one-half the way through that cycle," says Benoist.
Meanwhile, the new banking reform law is also expected to slice into profits. Bankers are waiting for the Fed to write new rules designed to limit "interchange" fees on debit cards. Banks collect those fees from merchants whenever debit cards are used. At 1 to 2 percent of purchases, they are a bonanza for banks and credit card companies.
Banks are also likely to suffer from restrictions on overdraft fees and interest rates on credit cards.
