Homer Alaska - Business

Alaska-based banks saw increases of 14 percent to 28 percent in net income during 2009 following the disastrous fourth quarter of 2008, but nobody is breaking out the party hats just yet.

Bankers remain cautious about job growth, interest rates, continuing soft loan demand and pending financial reform legislation in Washington, D.C., being driven in part by political posturing more than substance before the 2010 midterm elections.

Traditionally insulated from Lower 48 economic stresses, Alaska banks were not immune to an increase in nonperforming assets — charge-offs more than doubled at the six banks, from $8.1 million in 2007 to $20.4 million in 2009 — but have still fared better than most.

Five out of the six Alaska-based banks grew net income year-over-year in 2009, although Alaska Pacific Bank of Juneau did not post a profit. Its loss of $750,000 was a 65 percent improvement from a $2.1 million loss in 2008.

Mt. McKinley Bank of Fairbanks posted a record profit of $3.9 million.

"We wouldn't anticipate 2010 being a record year, but we're still projecting a very good year for the bank," said Mt. McKinley CEO Craig Ingham. "We should do north of the $3 million mark again this year. What we had in 2009 was driven by a lot of home refinancing activity for the first half of the year because (the Federal Reserve) had pushed down interest rates and we had a real refinance boom."

Managing margins

Anchorage-based First National Bank of Alaska, which grew its asset portfolio by 8.8 percent to $2.6 billion in 2009, was the only institution to see an income decline, from $42.9 million in 2008 to $37.1 million in 2009.

With its loan portfolio virtually unchanged, the FNB decline can be attributed to a $3.6 million increase in charge-offs from 2008 and the addition of $1 million to its loan loss allowance. FNB's loan loss allowance, funded from profits to cover potential losses, was $19 million in 2009.

Only Denali State Bank of Fairbanks grew its loan portfolio, by 7.6 percent to $150 million. The total decline in loans among Alaska banks was 3.2 percent, to $2.84 billion.

Increasing income while loan volume declines is not the way banks make money, but the Federal Reserve cutting short-term lending rates to the historic low of between 0 and 0.25 percent provided a one-time benefit in 2009 that bankers do not expect to continue.

Banks borrow short term and lend long term, and the spread between loan income and the cost to borrow for banks — either on an overnight basis or from rates paid to depositors — produces income.

Because short-term rates were so low and payments continued from loans written when rates were higher, banks derived greater income without increasing loan volume.

At First National, interest expense declined from $15 million in 2008 to $5 million in 2009, softening the blow from $7.6 million in charge-offs and $55 million in nonperforming loans.

Working through nonperforming loans and assets acquired through foreclosure were a major challenge of 2009. Other real estate owned, or OREO, has increased at the six Alaska banks from $7.6 million at the end of the third quarter of 2007 to $34 million in 2009.

For First National, part of its $9.3 million in OREO is related to low-income housing investments the federal government allows banks to take tax credits against. The key to managing OREO, said Northrim CEO and founder Marc Langland, is patience.

"From my knowledge, most banks have good quality bad stuff," Langland said. "People laugh at that, but it's the truth. It's a matter of time. When you have low interest rates like this, you have a good opportunity to go about marketing the products without doing a lot of stupid stuff so you don't destroy the prices by lowballing.'

If loan volume remains weak when the Fed decides to raise the short-term rates, interest margins will tighten and cut into bank income.

Lending outlook

For loan demand, the problem is as much psychological as it is fundamental. Borrowers are reluctant to take on new debt.

Two consecutive months of job growth have improved perceptions a bit. Loans at First National were up $7.6 million year-over-year in the first quarter of 2010. First Bank of Ketchikan CEO Jim Sarvela said loan demand is stronger than last year. Ingham said loan demand at Mt. McKinley has been slow or weak.