Business/Economy

Alaska banks positioning for rising rates and inflation

Returns have largely moderated from many early-year records for Alaska’s banks, but the lending business remains strong as people have money to spend.

The drop-off from record income quarters corresponds to the wind-down of the U.S. Small Business Administration’s extremely popular Paycheck Protection Program, said Jed Ballard, chief financial officer at Northrim Bank. Lenders that originated PPP loans have been able to realize the fees that are usually spread out over the life of a loan up front when the loans are forgiven, as intended.

Northrim processed more than $600 million in PPP loans in just more than a year. At First National Bank Alaska, the PPP loan total since the start of the program was $588 million through the third quarter, according to the bank’s quarterly income statement.

Northrim has also been able to leverage the PPP business by turning those borrowers, often new to the bank, into customers in other realms, according to Ballard. While overall loan volumes have fluctuated in recent quarters as PPP loans move on and off institutions’ ledgers, he said longer-term business is solid as well.

“We have been doing very well; the thing that really is positive to me is our core loan growth across the state,” Ballard said.

Northrim ultimately netted nearly $8.9 million in the the third quarter following $8.3 million in the second quarter after several $10 million-plus profits.

The statewide lender increased its asset base approximately 6% in the quarter to just more than $2.6 billion. Northrim has grown both its assets and deposits by about one-fourth over the past year.

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Alaska’s largest in-state bank, First National Bank Alaska, increased its net income to nearly $14.4 million in the third quarter following three periods in the $13 million range, but it was still behind a year ago when the then-$4.7 billion bank netted $15.5 million in the third quarter of 2020. FNBA has similarly increased its assets nearly 20% over the past year.

FNBA’s return on assets has gradually declined to 1.11% over the past year. The average return at Northrim fell to 1.40% in the third quarter after reaching 2.31% a year ago.

Steve Lundgren, CEO of Denali State Bank in Fairbanks, similarly said PPP lending activity has driven the community bank’s income “abnormally high this year,” adding the fee revenue will be hard to replace. Denali netted $1.3 million in the third quarter, basically matching its prior several quarters.

The Interior-area bank has also seen significant increases in total assets as well; its base has grown approximately 20% so far this year to reach more than $462 million.

First Bank in Southeast Alaska also continues to perform well despite drastically curtailed cruise seasons the last two summers that cut deeply into one of the largest sectors of the region’s economy.

The Ketchikan-based bank collected nearly $2.8 million in revenue last quarter, up from $2.1 million in the second quarter on $793 million in assets.

More broadly, bank leaders across Alaska have also highlighted through much of the pandemic that loan delinquency and foreclosure rates have been declining and the numbers their institutions reported for the third quarter continue to back that up.

First Bank, for instance, had just $753,000 in non-current loans during the third quarter and has maintained a loan loss reserve in the $4.3 million range for much of the year, an indication bank leaders do not anticipate a surge in delinquent or nonperforming assets. That has largely been attributed to the effectiveness state and federal pandemic aid programs to avoid sweeping closures, primarily in the tourism industry in Southeast but also in other industries.

FNBA saw a slight increase in its non-current loans last quarter to $17.6 million, but that still represents just 0.32% of the banks total assets. FNBA has also kept a stable loan loss allowance of $23.5 million the last three quarters.

The trillions in government stimulus and aid dispersed over the past 18 months is also leading to increasing inflation after a decade of inflation rates of about 2% or even less per year.

Alaska bank leaders mostly believe they are well-positioned to deal with an inflationary period, which Federal Reserve officials have said of late is likely to stick around for some time.

Lundgren, at Denali State bank said almost certain increases to the 3% and lower interest rates for fixed loans and mortgages that have driven the national real estate boom of the past couple years will undoubtedly slow home buying and mortgage refinancing to a degree, but added that rising rates provide more income for the floating rate loans lenders are much more likely to keep in-house.

Denali, like most smaller banks, generally sells its home mortgages.

The banking industry really is in a pretty good position as far as the rate environment,” Lundgren said.

Northrim Chief Economist Mark Edwards highlighted that low mortgage rates have allowed many homebuyers or those refinancing to maintain similar monthly housing payments even as home prices have gone up.

“If housing (costs) were going up as fast as housing prices are inflation would be even higher,” Edwards said, noting that the situation gives people more flexibility to deal with rising costs elsewhere in their personal budgets.

He said the primary challenge with inflation is how much subsequent Federal Reserve rate increases will impact the overall economy.

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“How fragile is the economy? The rebound in employment is positive but clearly there is still a global pandemic and we don’t know how it’s going to end,” he said. “The faster the economy grows — that eats into inflation.”

Ballard said the fertile banking environment underscores many of the complexities of the current economic situation, both in Alaska and nationally.

“You wouldn’t expect that Northrim would have two record years in a row during a pandemic,” Ballard said. “There’s a lot that goes into that.”

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Elwood Brehmer, Alaska Journal of Commerce

Elwood Brehmer is a reporter for the Alaska Journal of Commerce. Email him: elwood.brehmer@alaskajournal.com

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