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St. Louis bankers are a sour lot these days. Profits are down. More borrowers can’t pay their debts. Bank stocks are as popular as hay fever during the first week of spring.

But amid the gloom, bankers are seeing glimmers of hope that the economic slump in St. Louis may be nearing the bottom. And once the recession passes, they’re counting on a return to a more financially conservative era, in which both bankers and their customers will be tighter with a buck.

"A lot of things, albeit small things, are showing signs of life" said Robert Witterschein, president of Southwest Bank. "People are starting to feel a little bit better. I’m thinking maybe the worst was the fourth quarter."

Local banks largely avoided major investments in subprime mortgage securities, which morphed into toxic waste on bank balance sheets. Still, they have seen rising foreclosures, even among prime mortgages. Several banks also took hits on loans to bankrupt developers. Other borrowers have weakened as well.

Now, bankers are detecting some stirring amid the housing wreckage.

Bottom fishers are appearing, an early sign of revival. On the suburban fringes, investors are buying new but unsold houses in bulk from distressed developers.

Such purchases are on the low end of the market, among houses selling for about $120,000, says Peter Benoist, chief executive of Enterprise Financial, parent of Enterprise Bank & Trust in Clayton.

The investors may be counting on a new $8,000 federal credit for first-time homebuyers to boost sales.

Several developers went broke over the past year when they could no longer keep up the payments on land they purchased for development. Now, a few builders are starting to shop for lots again, said Benoist, whose bank specializes in serving small and mid-size businesses.

These are "early, early, early" signs that a bottom may be near for the local economy, Benoist says.

Industrial companies in St. Louis seem to be holding up better than expected, bankers say. They cut back sharply on production last fall, which is helping them wait out the slump.

DROPPING PROFITS

After an awful year, bankers are anxious for any sign of improvement. Of the 25 largest banks operating in St. Louis, 20 saw their profits drop last year as more borrowers defaulted.

Seven banks lost money. The losers include big super-regionals based elsewhere, such as Regions Bank of Alabama and National City of Cleveland, which is being taken over by PNC Financial of Pittsburgh.

Among St. Louis-based banks, First Banks lost $241 million, largely through misadventures in California residential real estate. The bank had to be shored up with capital injections from the federal government and from its owners, the Jim Dierberg family.

Other banks with losses included Truman, Southern Commercial, St. Louis and Premier banks. Truman bank has signed an agreement with regulators calling for improvements in management and capital. Tiny Westbridge Bank was slapped with a more serious "cease and desist" order from regulators.

Among the Top 25, only five banks managed to make more money last year than in 2007. They were First National, Reliance, Midwest Bank Center, Carrollton Bank and Kansas City-based UMB.

All St. Louis-based banks remain "well capitalized" under federal guidelines, says Julie Stackhouse, a senior vice president in charge of banking supervision at the Federal Reserve Bank of St paperless payday loans. Louis. That means they are in no immediate danger of failure.

Still, she suspects that a few smaller banks might not survive the recession. About 140 banks now operate in St. Louis.

Small banks are under extra pressure from rising FDIC insurance rates, says Stackhouse, and they may try to team up with bigger partners.

Banks here are working through problems in the housing market, says Stackhouse.

But now local bankers are facing the other problems that come with a recession: Job losses and worried consumers lead to slower retail sales, which spills over into losses for commercial real estate operators.

Many analysts think that commercial real estate loans will be the next domino to fall for bankers, followed by rising credit card defaults.

The office market in St. Louis was never overbuilt, but shopping centers are "suffering greatly," says Benoist, of Enterprise Bank.

RETURN TO OLD MODEL

When the slump finally ends, the banking business will be headed back to the future.

"The world of banking will look like the world of banking 10 years ago," says Joe Stieven of Stieven Capital Advisors, and the dean of St. Louis bank analysts. "That was before Wall Street and the shadow banking system let the credit genie out of the bottle."

It was before Congress tore down the Depression-era wall that separated commercial banking from investment banking, letting giants such as Citigroup entangle themselves in capital markets around the world.

It was before the major explosion of loan securitization, in which piles of real estate loans and consumer debt were wrapped into bonds and traded. This let the people who made the loans pass the credit risk to other investors, who had no reliable way to tell if borrowers could pay their debts.

LOANS MADE THE

old-fashioned way

Securitization won’t go away. Before the crunch, that business provided nearly half the credit for consumers and business.

The expectation is that the market for prime securitized loans will recover. But the market for subprime loans — on houses, cars, credit cards — will remain buried, leaving less credit for those down on their luck.

The shadow banking system — a crowd of Wall Street firms, insurance companies and other non-bank lenders — will rise again, but it won’t be as big as in the past, bankers and analysts say. More loans will be made the old fashioned way — by banks that know their borrowers and keep their paper.

"The traditional banking system’s importance will increase, and actually that’s healthy," Stieven said. "Here in St. Louis, we want bankers to be funding good sound projects and saying no to unsound projects."

Banks will make fewer loans, but better ones, bankers say.

"Historically after recessions, banks will be more conservative. But probably not as conservative as they’re being right now," said Rick Bagy, president of First National Bank in Clayton.

jgallagher@post-dispatch.com | 314-340-8390
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