Uncertainty about how lawmakers will shore up the state's fiscal crisis has businesses in Alaska saving more and borrowing less, bank executives say.
The trend is cutting into the banks' major source of revenue: interest on commercial loans. With demand for loans down even as cash reserves are building, banks are plowing more money into the less lucrative bond market.
"We have to do something with that money," said Steve Lundgren, president and CEO of Denali State Bank in Fairbanks. "If there is not enough loan demand, the alternative is put it in a portfolio of risk-averse investments."
Depressed loan activity in the commercial sector reflects widespread lack of confidence that state legislators will be able to reverse an unsustainable pattern of multibillion dollar deficits when they meet next year. Another wild card is how the fiscal landscape will change with the introduction of additional budget cuts and new sources of revenue.
"From a lending perspective, business owners are uncertain about how the situation in Juneau will play out and what solutions we will have and when," said Latosha Frye, chief financial officer at Northrim Bank. "We're all tentative about making big decisions when the future is so unknown."
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Betsy Lawer, chair and president of First National Bank Alaska, described the trend in a recent opinion piece in the November issue of Alaska Business Monthly.
"Private enterprise and its constituents are maintaining liquidity and increasing savings so they have reserves to fall back on if state government fails to do what is necessary to sustain economic prosperity in Alaska," Lawer wrote. Socking away resources will also allow them to take advantage of "opportunities that will become available when the pale of state government inaction (or worse) is removed," she added.
A spokesperson for First National said no one was available to speak directly to Alaska Dispatch News.
Policy uncertainty is not the only reason for the conservative business environment. Low oil prices and pullbacks in state spending have led to layoffs and positions being eliminated or going unfilled in those and closely affiliated sectors. With fewer work opportunities coming from industry and government, commercial construction loans are down noticeably.
"Some of the larger projects are winding down — low-income housing tax projects and other larger commercial projects — and we aren't seeing new projects come on to replace those," Northrim's Frye said.
She said Northrim’s loan portfolio is still growing, but at a slower rate than in recent years. The bank had $997 million in average portfolio loans at the end of the third quarter of 2016, only slightly up from the year before.
“It is accurate to say that loan growth is down,” Frye said. “Historically it has grown more than that. The short banker vernacular is: our margin is compressed.”
On the bright side, excess liquidity is “preferable to having too little cash on hand,” she said.
The largest bank in Alaska appears to be a notable exception to the trend. Wells Fargo, an international banking player based in San Francisco, said loan demand in Alaska was up 6 percent for 2016 year-over-year through the third quarter. The rate of growth is about the same as it has been over the past three to four years, said spokesman David Kennedy.
Joe Everhart, the bank’s Pacific Northwest business banking division manager, said Alaska Native corporations engaging in mergers and acquisitions are behind many of those loans.
“We are a bit more diversified and the Native corporations have really provided a buffer to our local economy that was not here during the big recession in the 1980s,” he said.
But it’s not all unicorns and rainbows. Like other Alaska banks, Wells Fargo is seeing “modest growth” in deposits, Everhart said, with “companies preparing for our economic shoe to drop in Alaska.”
“They’re not investing in new inventory or adding staff based on future growth,” Everhart said in a recent phone interview. “It’s clear to me that businesses are hunkering down.”