Alaska is one of just four states without a budget deficit, has an unemployment rate of 7.9 percent compared to the national average of 9.5 percent and one of the lowest foreclosure rates in the country, according to RealtyTrac.

Loan demand, however, remained essentially flat from the fourth quarter of 2009 to the first quarter of 2010, declining by 0.2 percent overall among the six Alaska banks according to Federal Deposit Insurance Corp. reports.

First National Bank Alaska had the largest growth in its loan portfolio with a 0.4 percent increase to $1.18 billion. First National also grew its deposits, boosting its total assets by 3.3 percent from the fourth quarter of 2009 to $2.74 billion.

Mt. McKinley Bank of Fairbanks saw the biggest drop in that period, with its loan portfolio declining by 3.9 percent to $126.9 million, and by 11.6 percent compared to $143.7 million in the first quarter of 2009.

Among the six Alaska-chartered banks — First National, Anchorage-based Northrim, Mt. McKinley, First Bank of Ketchikan, Denali State Bank of Fairbanks and Alaska Pacific Bank of Juneau — the total loan portfolio declined by 2.5 percent year-over-year in the first quarter to $2.48 billion.

Alaska-based bank income is also down across the board, falling by 8.1 percent overall in the first quarter of 2010 compared to the first quarter of 2009 as interest margins tighten and banks shift more money into their loan-loss allowances, which are funded out of profits to cover potential losses from bad loans.

Loan-loss allowances increased $1.5 million among the six banks year-over-year in the first quarter, nearly equal to the $1.3 million decline in net income in the same period.

Interest margins, the spread between the banks' cost to borrow and the rates it charges on loans or earns on investments, are closing after nearly two years of short-term interest rates being kept near zero by the Federal Reserve. With shrinking loan demand, banks must turn to safe investments such as U.S. Treasury bonds to generate income, but returns on 10-year notes are returning less than 3 percent.

The low short-term borrowing costs for banks boosted incomes in 2009 as higher-rate loans continued to perform, but now that loans are being written based on a prime rate — charged to the highest quality customers — of 3.25 percent, banks are seeing their yields shrink.

"The underlying economy throughout most of the state is stable," said FNB's chief financial officer Jason Roth. "Going forward, what we don't see is a lot of optimism and opportunity geared toward future development and future businesses. Our borrowers and most of who we do business with are still taking a very cautious approach."

Roth said the "800-pound gorilla" lurking over the Alaska economy is the prospects for the state energy sector.

"We see the decline in Prudhoe Bay continuing and we don't see something being teed up to replace that," Roth said. "Even if they go ahead with the (in-state) gasline or some other development, for lack of a better word there is a donut hole of nothing going on until something comes along to replace it. We also don't see legislators doing things to make Alaska a better place to do business."

Mt. McKinley Bank CEO Craig Ingham was satisfied with his bank's performance in the current climate. Mt. McKinley is on pace for more than $3 million in net income after posting a record profit of $3.9 million during 2009.

"Given the slowdown in our real estate market and given the slow economy not only in Alaska, but throughout the United States, it's created an environment where if you have a good quarter, you're doing OK," Ingham said. "We're off to a good first half of the year."

Ingham said the Fed policy of low interest rates is misguided as a means to spur loan demand.

"It's not working," Ingham said. "People will not go out and buy a new home unless they feel like it will be a long-term advantage for them. They don't want to buy in a falling environment. Business customers are not going to borrow money to expand their business unless they feel the demand for their goods and services is going to support the expansion. It's that simple."

Northrim CEO and founder Marc Langland said the bank is just "a hair above" its projections through the first half of the year, but that national politics have created a climate of unknowns revolving around health care costs, potential tax increases and energy policy.

"The most negative things are really coming out of Washington and the overall economy still has people frozen in place in terms of investment decisions they are making, which means they are not making those decisions," Langland said. "Loan demand is not only flat, it is declining and you're certainly seeing that here. You have the overall impact of attitude and concern. Political leadership is not very positive in my perception on the national scene and the impact that's having in Alaska on a long-term basis is very negative."

Alaska bankers are wary of the financial reform bill, signed into law July 21 by President Barack Obama, which they say will reduce access to credit and disproportionately impact small community banks that weren't responsible for the Wall Street meltdown in 2008.

Among Alaska banks, only First National has an in-house general counsel to digest the 220 new rules expected to generate more than 5,000 pages of regulations. FNB general counsel Dave Lawer said the bank spends between $5 million and $6 million per year in compliance costs.

The reams of new regulations could put an unsustainable burden on smaller banks, that can't realize the economies of scale or compete with the huge compliance departments at national banks, Lawer said.

"There's every reason to suppose this new regulation — in so far as small regional and community banks — will result in a lot of consolidation and acquisition for the simple reason that a small bank with a limited consumer base can't pass along the cost of compliance to the customer," Lawer said.

Ingham, who has one compliance officer at Mt. McKinley and performs some of those duties himself, said the tightening interest margins are more likely to result in consolidation among small banks than the costs of compliance. He noted that national banks generate income in ways community banks do not, such as insurance, mutual funds and brokerage fees.

"Those are all kinds of things community banks don't offer," Ingham said. "We make money off loans and investments rather than charging for every little service a customer wants. Community banks have given away a lot of services at no or low cost. We will have to start charging for those things.

"Everything that has been done politically has been to the detriment of Main Street and not Wall Street — the opposite of what they said it was going to do."