News and Finance

As panic gripped the financial markets last fall, and big banks begged for bailouts, fear spread that America’s once free-lending bankers would turn into tightwads and help tank the economy.

The recession has certainly arrived, but in St. Louis at least, it’s hard to blame the local banks. Many actually increased lending as the economy slumped.

Data from 14 banks that do much or all of their lending in St. Louis showed that only two reduced the loans on their books between Sept. 30 and Dec. 31. The others increased lending, and a few dived in to take advantage of the troubled market. For instance, loans at the Bank of Edwardsville grew 6.8 percent.

"We’ve continued to lend, although we believe conservatively," said Tom Holloway, the bank’s president. "We’re absolutely buried under mortgage refinancing requests."

The local sample excluded national mega-banks, such as Bank of America and US Bank, which do a small portion of their lending in St. Louis and don’t break out local numbers.

The local banks kept lending even as their profits slid and more borrowers defaulted. All but two saw their profits shrink last year. Two others, Truman Bank and St. Louis Bank, lost money in 2008.

The increase in lending at local banks isn’t all good news. In part, banks are gaining because other giant players in the financial system are shrinking fast, notes Bill Emmons, economist at the Federal Reserve Bank of St. Louis. "Even though banks have been able to maintain lending, the so-called shadow banking system has disappeared," he said.

Those Wall Street firms and other nonbank players wrapped loans into securities and sold them to investors. All sorts of loans, from credit cards to business loans, were securitized before the practice stalled in last year’s credit crisis.

"You couldn’t securitize a bunch of commercial real estate loans to save your soul," says David Naunheim, president of UMB Bank, where loans rose 4.4 percent in the last quarter of 2008. "The whole securitization market has gone away."

Nonbank lenders — investment firms, insurance companies and the like — have sharply slowed their lending in St. Louis, bankers say. So, borrowers are returning to banks.

Loans are growing on bankers’ books in part because fewer borrowers are paying them off, said Rick Bagy president of First National Bank in Clayton online payday loans. A real estate developer, for instance, would normally pay down his loan as he sold his units. If they don’t sell quickly, he keeps the loan.

Meanwhile, there’s an ongoing shuffle among business borrowers. Some are seeing their credit lines trimmed as nationwide banks restrict lending as their capital levels shrink. Some of those customers end up at smaller regional banks.

Bankers say they’re seeing an influx of deposits as investors pull money out of the sickly stock and bond markets. Emmons says businesses are putting massive amounts in no-interest transaction accounts to take advantage of unlimited federal deposit insurance for such accounts.

A surplus of deposits is bad news for savers, because it drives down rates on bank savings. But a big pile of deposits makes it easier for bankers to lend.

Bankers say they’re becoming pickier about borrowers, chastened in part by the growing number of bad loans on their books. Meanwhile, their best business customers are hunkering down to ride out the recession, and trying to reduce their debts.

"We like to lend money, but business is being hesitant," said Robert Witterschein, president at Southwest Bank, where lending was flat in the fourth quarter. "They’re not going to borrow to expand their plant because they don’t think they’ll need it for two years."

The increase in St. Louis lending happened with little help from the federal government. The four St. Louis banks who took federal capital injections got the money too late to affect the December figures.

Major national banking players got the federal money earlier, and the Treasury says they continued to lend steadily after receiving it. In a report released last week, the Treasury concluded that the banks probably would have lent less without the federal capital.

"Loan activity was resilient in the face of the worst economic downturn in decades," the Treasury said.

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

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