This article first appeared in the St. Louis Beacon, April 16, 2009 - There's a chicken-and-egg quality to forecasting the health of St. Louis area banks.
What comes first? Do the banks help the local economy out of the morass of recession? Or do the banks need signs of an improving economy, housing market and employment so they will provide a financial jolt to sustain a recovery?
"Banks in general can play a supporting role" in guiding a comeback, but "they cannot play a leading role," says William R. Emmons, an economist at the Federal Reserve Bank of St. Louis.
Banks in Missouri
Banking is characterized by a few giant, often out-of-state companies; several mid-sized, often locally based banks; and the vast majority of tiny banks whose branches you can usually count on one hand.
Among 145 St. Louis area banks with FDIC insurance, the Ohio-based US Bancorp has 17.6 percent of deposits while North Carolina-based Bank of America has a 13.6 percent market share.
Although US Bancorp has $10.2 billion in metro area deposits, it has $117.6 billion outside of Missouri, according to the FDIC.
Bank of America has $7.9 billion in deposits in the metro area -- but $634.4 billion in deposits elsewhere, according to an FDIC report.
The third-largest St. Louis area bank in terms of deposits is Southwest Bank with a market share of 7.9 percent, owned by Marshall & Ilsley.
Missouri's Commerce Bancshares is the fourth largest with a market share of 6.9 percent. Twelve others have market shares of 1 percent or more. Each bank with a market share of 1 percent or more has deposits of $600 million or more.
For all of Missouri, the picture looks much the same. US Bancorp has 11.7 percent market share; Bank of America, 10.2 percent)
Then come two Missouri-based banks -- Commerce (8.1 percent) and UMB Financial (4.1 percent) -- which are followed by Southwest (4 percent). Only seven other banks have deposit market shares of 1 percent or more.
Statewide deposits range from US Bancorp's $13 billion to Tightwad Bank's $301,000. Tightwad Bank, with one Missouri office, has its corporate headquarters -- and its only other branch -- in Reading, Kan. Once known as the Reading State Bank, it changed its name when it opened a branch in early 2008 in Tightwad, Mo.
Since 2008, small banks in Kansas City and Hume, Mo. have failed as have Illinois banks in Glenwood, Pittsfield, Eldred and Berkeley. Their assets were acquired by other banks. Most had less than $40 million in deposits; the biggest had $234 million.
"The bankers all have long faces," says Stuart Greenbaum, former dean of Washington University's Olin School of Business and emeritus professor of managerial leadership. "They are a reflection of what's going on with their customers."
A recovery "will be driven by their customers as well as by their potential customers," Greenbaum adds. "It's the broader environment that colors the business of banking."
The color looks pretty gray, according to the latest Federal Reserve System economic assessment known as the Beige Book. The report issued Wednesday said the district that includes most of Missouri and all or parts of six other states suffered "a weakened" economy compared to the Fed's analysis in mid-January.
"Home sales and residential construction continue to be weak," the report said. "Reports from commercial and industrial real estate contacts indicated a continued slowdown in economic activity. Overall lending at a sample of small and mid-sized banks increased slightly during the first quarter of 2009."
Rising unemployment, a weak housing market, tight credit and a staggering stock market continue to dominate headlines. The news is reflected in many banks' declining profits, rising loan losses and sinking stock prices.
And although banks across the country may think they have a handle on the damage caused by the crippled housing market, more shoes will drop, says Christopher McGratty, a banking analyst at Keefe, Bruyette & Woods.
Banks with a high exposure to consumer debt -- credit cards, home equity loans and auto loans -- could be in for a rough time, he says. If the economy continues to decline and unemployment continues to rise, the best hope for banks in the near-term will be a "slowing in the rate of deterioration," he says.
Fourth-quarter results among larger homegrown banks were mostly disappointing. Using data from the Federal Deposit Insurance Corp., the Beacon looked at 12 banks in the St. Louis area that are based in Missouri and Illinois. These banks -- both private and public -- have the largest number of deposits in the St. Louis metro area, aside from several large out-of-state financial institutions that account for more than 40 percent of metro area deposits.
Eight of the 12 had lower profits or bigger losses in the fourth quarter of 2008 versus the fourth quarter of 2007. Five lost money in the fourth quarter.
Eleven had higher loan charge-offs as a percentage of total loans in the fourth quarter of 2008 compared to the year-ago period, although the percentages for most were still small or manageable. However, each recorded a higher amount of loans or leases in the fourth quarter of 2008 versus the year-ago period.
THE NEXT ROUND
Investors and consumers should get an indication of the recession's continuing impact during the next few weeks as public and private banks issue quarterly results.
Commerce Bancshares, one of Missouri's strongest banks, reported numbers on Tuesday that fell below Wall Street estimates, causing the stock to fall 15.2 percent.
First-quarter earnings of 40 cents a share missed the Wall Street consensus by 9 cents, according to Thomson Reuters. For the January-March quarter last year, Commerce earned 84 cents a share.
The drop in income was "mainly due to an increase in our loan loss provision resulting from higher credit losses created by current economic conditions," said David W. Kemper, chairman and CEO, in a prepared statement.
Kemper said the company's balance sheet remains strong, average deposits grew 6.5 percent in the quarter versus the year-ago period and net interest income grew by 7 percent. However, loan charge-offs for four categories -- business, construction, real estate business, consumer credit and home equity -- were higher than charge-offs in the year-ago quarter as well as in the quarter ended Dec. 31, 2008.
In a presentation prepared for the company's annual meeting Wednesday, Kemper said the percentages of net loan charge-offs for these categories were "consistently better than the national average."
Commerce's performance in each of the four loan charge-off categories was better than the national average in each fiscal quarter from fourth quarter 2007 through the fourth quarter of 2008. National data for the first quarter of 2009 isn't available.
A weakening economy and rising unemployment "will stress our customers and communities," Kemper said. Because greater joblessness and lower corporate profits "generally increase loan losses," Commerce is "budgeting an increase in our loan loss provision."
Investors don't mind taking chances with stocks that they know are risky like tech and biotech; but they do mind when supposedly safe bank stocks with supposedly solid dividends take a dive.
Most of the publicly traded banks serving the St. Louis area have been hit hard, performing worse than the S&P-500 stock index, which was off 37 percent for the 12 months ended April 9.
Out-of-state losers include U.S. Bank, Marshall & Ilsley (which owns Southwest Bank), Bank of America, Regions Financial, and PNC Financial Services (which acquired National City Bank in December 2008).
Missouri-based banks performing worse than the S&P-500 include Enterprise Financial, Pulaski Financial and Centrue Financial.
Swimming against the tide was First Clover Leaf Financial, which fell 15 percent, and UMB Financial, whose stock gained 13 percent. Commerce's stock lost 6 percent for the 12 months ended April 9.
This recession-related performance infected the banks' long-term stock performance. Only Commerce, UMB and Enterprise beat the S&P-500 index, which was off 25 percent for the five-year period ended April 9.
As if sinking stock values weren't enough, investors in many banks suffered significant cuts in their dividends.
U.S. Bank just cut its dividend to 5 cents from 42.5 cents. Bank of America, which had a 64 cent dividend through much of 2008, cut the dividend to 32 cents in late 2008 and then to a penny early this year.
Marshall & Ilsley cut its dividend from 32 cents last year to a penny this year. Regions Financial had been paying 38 cents a quarter until it dropped the payment to a penny starting in September 2008. PNC has cut its quarterly dividend to 10 cents from 66 cents.
Centrue cut its dividend in half to 7 cents, starting with the March 20 payment period.
"Cutting the dividend is the cheapest way to raise capital," says McGratty of Keefe, Bruyette and Woods. "It's the right thing to do for shareholders."
On the bright side, Enterprise Financial has held its dividend at 5.25 cents while UMB Financial has maintained its quarterly payout at 17.5 cents. Pulaski is keeping its 9.5-cent dividend. First Clover Leaf is keeping its 6 cent-a-quarter payout.
Commerce pays two types of dividends -- an annual 5 percent stock dividend, which it paid in December, and a quarterly cash dividend of 24 cents which it paid March 27.
TARP or TRAP?
Commerce and UMB Financial are among the larger Missouri-based banks that declined to take federal bailout money under the troubled asset relief program (TARP).
By rejecting government aid, both are "in a position of strength," says banking analyst McGratty. "Commerce doesn't need the headache of a partnership with the federal government. UMB can go it alone." He praises both for their conservative management and "good credit numbers."
Out-of-state banks with many branches and a large number of deposits in the St. Louis area have taken multiple billions of TARP money, including Bank of America, PNC Financial Services, Regions Financial and US Bancorp.
Among Missouri-based banks, 17 have taken $738 million worth of TARP funds. Many -- such as Enterprise Financial Services, Centrue Financial, Reliance Bancshares and Pulaski Financial -- have received $40 million or less.
The biggest Missouri recipient is the private, St. Louis-based First Banks Inc., which received $295.4 million on Dec. 31. First Banks clearly needed the help.
TARP enabled the bank to strengthen its financial foundation as measured by a ratio of a bank's capital to its risk-weighted assets. The higher the ratio, called the Tier I ratio, the healthier the bank. First Banks had a ratio of 6.97 percent by Sept. 30, just above the federal warning limit of 6 percent. By year-end this ratio was 9.1 percent.
First Banks lost $202.3 million during the fourth quarter of 2008, caused primarily by its real-estate lending in California and Florida. The company raised its provision for loan losses to $220.2 million at the end of 2008 versus $168.4 million by year-end 2007.
FDIC data shows that the 12 Missouri- and Illinois-based banks holding the largest amount of deposits in the St. Louis area had Tier I ratios of 9 percent or better by the end of 2008. Some received TARP funds; some didn't.
ST. LOUIS VS. EVERYONE ELSE
A standard commentary on the U.S. financial crisis is that the St. Louis area banks didn't get hit as hard as banks in California or Arizona or Florida where there was massive overbuilding of houses combined with a flood of exotic mortgages.
"We are a more stable community -- less growth oriented," says Washington University business professor Stuart Greenbaum
St. Louis banks, for the most part, are more conservative than those giant financial supermarkets, whose policies have lead to massive government bailouts or, as the case of the hapless and overextended Wachovia, acquisition by a stronger company.
"St. Louis banks are holding up better than the rest," says banking analyst McGratty, whose comments pertain only to publicly traded banks.
However, local experts say local economic, structural issues could prevent St. Louis and Missouri banks from snapping back as fast as they skidded.
Washington University's Greenbaum predicts unemployment will continue to rise, putting greater pressure on banks with significant exposure to credit cards, home loans and auto loans.
He was interviewed before Missouri reported that March's unemployment rate had climbed to 8.7 percent, up from 8.3 percent in February and 8.1 percent in January.
Last month, the Federal Reserve Bank of St. Louis noted that economic activity "continued to weaken" during January and February in the St. Louis Zone, an area that includes about two-thirds of Missouri and all of southern Illinois.
"Commercial real estate loans declined, although a 'spike' in refinancing probably caused a 'slight increase'" in residential mortgage lending, the Fed report said. "General retailers and car dealers tended to be pessimistic about the near future."
MAKING A COMEBACK
St. Louis Fed economist William Emmons agrees that the St. Louis metro area didn't suffer the economic extremes of the West Coast, Florida and the Upper Midwest that put banks in those regions "definitely under stress."
But he also wonders if the St. Louis region's economic foundation will promote a strong recovery because there has been little or no population growth or job growth in an area whose population is getting older.
"We have weak fundamentals," he says. "There's been no net job growth for a decade, which is worse than the national average."
If the region can't attract new jobs and more people, "where's the job growth going to be?" he asks. "Where are the banks going to make money?"
Noting that the St. Louis area "didn't have as much crazy mortgage activity" as fast-growing part of the country, "that doesn't mean we escaped the housing bubble." There was too much home building relative to the region's economic foundation, said Emmons, who was interviewed before the Wednesday' publication of the Federal Reserve's Beige Book.
In St. Louis, the report says, February residential sales dropped 14 percent versus the same period last year. Single-family housing permits plunged 49 percent. "One contact in St. Louis noted that demand for industrial real estate is waning and that the market is currently overbuilt," the Fed said.
Emmons says smaller banks will feel the pain related to commercial real estate lending. "We probably haven't hit the bottom in residential or commercial real estate lending," he adds.
At the moment, however, banks in the St. Louis Fed's district have "moderate" exposure to commercial real estate and construction lending that is lower than the national average, says a recent Fed analysis.
Regardless of regional differences, however, banks' strategies will require an overhaul if the recession, which officially started in December 2007, becomes deeper and longer.
"If the recession lasts 24, 30 or 36 months," Washington University's Greenbaum says, "then all bets are off."
Robert Steyer, a freelance journalist in New York, writes about business.