Alaska’s bankers keep eyes on uncertain future

By DJ Summers

Morris News Service – Alaska

“There was cautious optimism in the first six months of the year,” said First National Bank Alaska Senior Vice President and Chief Financial Officer Michelle Schuh. “Now I think people are just being cautious.”

Schuh clarified that the second quarter of 2016 was steady for her bank, and likely for the rest of the state, but the lack of legislative solutions to the state’s $4 billion budget deficit is starting to affect the business community’s outlook, if not the numbers.

Wells Fargo has $6.1 billion in deposits in Alaska, a little more than 53 percent of the market. While the company is still expanding, management said loan growth is starting to look stale.

“Wells Fargo continues to experience moderate deposit and loan growth in Alaska,” said Joe Everhart, Wells Fargo’s Alaska region president. “Consumer deposits were up 5 percent year-over-year in the second quarter. While loan demand has started to slow due to Alaska’s economic headwinds, Wells Fargo continues to actively provide capital to help Alaska businesses fund new projects and streamline operations.

“In the second quarter, business lending in Alaska increased 9.5 percent year-year-over and total loans are up 6 percent. Through July 31, Wells Fargo has approved 81 (Small Business Administration) loans in Alaska for a total of $16.7 million in federal fiscal year 2016.”

Banks in the Last Frontier continued both deposit and loan growth in the second quarter of 2016, with collective net income increase of 12 percent to $33.7 million, up from $30 million, and a loan increase of 3.5 percent to $3.1 billion, up from $3 billion.

Fairbanks’ Mt. McKinley Bank led with a 27 percent income growth, bumped from $1.7 million to $2.1 million. Denali State Bank followed with a 25 percent net income increase, from $982,000 in 2015 to $1.2 million this year.

The two largest Alaska-based banks, First National Bank Alaska and Northrim Bank, represent 20 percent and 11 percent of the state’s deposits, respectively.

FNBA grew net income by 20 percent year-over-year. Net loans and leases increased 7 percent from $1.5 billion to $1.6 billion.

Though the bank is on a growth track, Schuh said, performance from the second quarter into the third seems to be stagnating.

“Our loan growth this year through year was slightly behind expectations, but not very much so,” Schuh said. “We’re getting a little bit mindful of the changing environment. We’re not sure second half loan growth will match the first half. We’re starting to already see some effect in our loan demand of the economic challenges of the state. The other thing I would say, today, that I may not have noticed in June was deposit growth. We’ve been on a five-year run of fairly healthy deposit growth year over year. Our deposit are up slightly this year, but we’re not seeing the same deposit growth.”

Schuh said state budget cuts are the beginning of a trend she hopes doesn’t materialize, with declining home values at the end. Though none of the banks have noticed home values dropping in the state, Schuh said the lack of a state budget solution could produce such a decline.

“If we don’t address the budget, we know we’re going to have state layoffs,” she said. “If you’re seeing lower state employment, and you’re already seeing private sector layoffs happen, your housing concerns are going to be next. That’s where we’re going to see a softening in the real estate market.”

Other banks also note a slowdown in loan growth.

Northrim BanCorp, Inc. reported a 29 percent increase in second quarter net income over first quarter, but a decrease of 9 percent year-over-year to $4.4 million “mainly due to increased operating expenses this year in the community banking segment,” according to an earnings statement.

Net loans and leases decreased 2 percent year over year.

High mortgage activity curbed the slowdown in loan growth, Northrim leadership said, noting an increase in mortgage refinancing rather than new home loans. A $6.2 million rise in delinquent loans, the bank’s chief financial officer said, came almost entirely from two commercial customers.

Like Schuh, Northrim Chief Financial Officer Latosha Frye said the bank’s balance sheet is still healthy, but the gloom of the state’s fiscal situation is setting in.

“General sentiment is people are waiting for what’s going to happen next, and every day there’s a barrage of information about all the action the state isn’t taking with fiscal issues,” she said. “It’s just unavoidable. At some point that becomes a downer. The psych impact takes that to another level, I think.”

Denali State Bank had the typical summer increase in construction lending, growing net income 26 percent year over year to $1.2 million. Net loans and leases grew by 6 percent, from $140 million in the second quarter of 2015 to $148 million this year.

In the Interior, financial leaders are keeping a close watch for impacts of state budget cuts.

“The University of Alaska Fairbanks is a bigger part of the Fairbanks budget than UAA is of the Anchorage economy,” said Denali State Bank president Steven Lundgren. “I’ve heard from our chancellor up here they’ve cut 320 jobs from the university. We’re frankly concerned about that. We hope that they manage their budgeting cautiously so it doesn’t negatively impact the community or the state. That’s the biggest question mark.”

For credit unions, which have higher rates of consumer loan portfolios than that of banks, numbers are looking even less optimistic.

Alaska’s credit unions, unlike the banks, posted an overall decrease in quarterly net income of 22 percent year over year from $30.8 million in 2015 to $24 million this year. Loan holdings increased by 9 percent, from $6.3 billion to $6.8 billion, while total assets grew by 8 percent from $8.1 billion to $8.8 billion.

Year over year, Alaska USA Credit Union’s net income dropped from $23.1 million in the second quarter of 2015 to $17.7 million in 2016, a 23 percent year over year decline. Credit Union 1 posted a net income decline of 29 percent, from $3 million to $2.2 million, and Denali Alaskan’s net income dropped 52 percent, from $2.4 million to $1.2 million.

Each of the three largest credit unions also posted rises in the rate of delinquent loans.

Alaska USA’s delinquent loan rate rose a negligible 0.1 percent, but the delinquent loan rate for Credit Union 1 and Denali Alaskan rose by 54 percent and 77 percent respectively.

DJ Summers is a reporter for the Alaska Journal of Commerce. He can be reached at daniel.summers@alaskajournal.com.