Almost every Spokane- and Coeur dAlene-based bank has reported record profits for 2002, the second year in a row in which banks in this area have produced glittering returns.


The banks say they were helped by prevailing low interest rates after numerous rate cuts by the Federal Reserve.


A low-interest rate environment helps financial institutions, says Harold Gilkey, chairman and chief executive officer of Sterling Savings Bank. In such a climate, margins remain solid between the rates banks pay for deposits and charge for loans, helping to boost net interest income, Gilkey says. Last year, Sterlings net income shot up to a historic high of $25.6 million, or $2.12 a share, from $16.2 million, or $1.44 a share, in 2001.


The Feds rate reductions came mostly in 2001, when the central bank cut rates 11 times. Therefore, banks had a hard time reducing the rates they paid for deposits as quickly as their loan rates fell, says Wes Colley, president and CEO of AmericanWest Bank. In 2002, the Fed took action on interest rates just once, with a cut in November, and the stability helped banks, Colley says.


I think the key word is whenever interest rates are going up or down very quickly, it leaves the financial institution behind, he says. When it flattens out, it gives us a chance to catch up. AmericanWest posted record net income of $10.9 million, or $1.33 a share, in 2002, up from $9.2 million, or $1.12 a share, in 2001, when a gain from the sale of a subsidiary bolstered earnings.


Net interest margins, however, didnt strengthen for every bank. Because Washington Trust Bank, of Spokane, has many commercial loans with floating rates tied to its prime rate, its net interest margin decreased last year, Chairman and CEO Peter Stanton says.


That being said, we made it up on volume, Stanton says. For the year, Washington Trust posted record net income of $24 million, up from $21.5 million the previous year.


During 2002, Stanton says, some businesses took advantage of the low rates to refinance their real estate loans, which enabled them to cut their expenses and increase their profitability, making it more likely they would expand, make equipment purchases, and borrow money. In addition, he says, many homeowners refinanced their mortgages or took out home-equity loans.


Currently, Stanton says the threat of war in Iraq and terrorism are holding down economic activity.


In a more normal economic environment, with these rates I think youd have seen double the economic activity, he says. Everybody thought that by the fourth quarter things would be humming again, and theyre not.


Farmers & Merchants Bank, Inland Northwest Bank, and State National Bank, all of Spokane, also reported record profits for 2002, and in Idaho, Mountain West Bank, which is part of Glacier Bancorp, of Kalispell, Mont., and Idaho Independent Bank posted record results.


Farmers & Merchants net income jumped 10.6 percent in 2002, to a record $3.7 million from $3.3 million in 2001. The bank introduced two products, a high-yield money market account and free checking for small-business customers, which helped boost results, Senior Vice President and Chief Operating Officer John Tombari says. He says the high-yield money market account gives customers a safe haven from the stock market, and free checking helps small businesses hold down their costs and brings them into contact with the bank.


Small businesses are one of the major client bases that we serve, Tombari says.


Greg Deckard, president and CEO of State National Bank, Spokanes smallest institution, says State National posted record net income of $576,000 in 2002 after sustaining a net loss of $303,000 in 2001, when it wrote off problematical agricultural loans. As of Dec. 31, State Nationals assets had climbed to $48.2 million from $40.4 million a year earlier; total deposits were up to $42.1 million from $36.1 million; and total loans were up to $39.4 million from $34.2 million. Meanwhile, the little bank reported a 1.3 percent return on average assets and a 12.8 percent return on average equity, both much improved from negative numbers in 2001.


For us to be that small and to post that kind of numbers, were pretty proud of them, says Deckard.


At year-end, State Nationals loan-loss reserve stood at 1.86 percent of total loans, well above the 1.2 percent to 1.5 percent range that its peer institutions usually maintain, and Deckard said the higher level reflects the tenor of the times.


Gilkey says its almost an unwritten rule that a slow economy will show whether a bank did a good job in approving loans and taking credit risks earlier when times were better.


How liberal you were in the good times is reflected in the bad times, he says.


Now, says Randall Fewel, president and CEO of Inland Northwest Bank, Delinquencies, non-performing loans, and charge offs are up. You would have thought that would have had a negative impact on earnings.


As the Inland Northwest economy cooled last year, most institutions here said they were increasing their loan-loss reserves to get ready to deal with bad loans, and most again made such comments as they released their 2002 earnings. Inland Northwest Bank, for example, said that as of Dec. 31, it had beefed up its loan-loss reserve to 1.48 percent of total loans, compared with 1.26 percent at the end of 2001. For 2002, the banks net income rose 19.3 percent to a record $1.4 million, or 78 cents a share, from $1.2 million, or 65 cents a share, in 2001.


Idaho Independent Bank reported record net income of $4 million, or $1.70 a share, last year, up from $3.7 million, or $1.56 a share, in 2001. Chairman, President, and CEO Jack Gustavel says the banks performance shows its strategy of disciplined growth and consistent risk management is working in spite of the challenging economic and interest rate environment.


Mountain West Bank reported record net income of $4 million, up dramatically from $1 million in 2001. President and CEO Jon Hippler said the precipitous increase came partly because Mountain West bought seven bank branches in southern Idaho and Utah and also had strong results, including record mortgage-loan activity. Like Gustavel, he called the economic climate challenging.


Annual results from Wheatland Bank, of Spokane, werent available yet.