Dec. 4--Washington's economy may be doing better than the nation as a whole, but the banks based here are not.

Although Washington state doesn't have the plummeting home values or mass foreclosures that have stunned Florida and California, publicly traded banks in the state as a group trail the industry in profitability and have a higher share of sour loans than the national median.

What's more, banks in the state are setting aside far less money to cover their losses than their peers across the country.

"These banks probably did a decent amount of business with California builders, so the whole West Coast was hit hard," said Sebastian Hindman, a senior analyst at SNL Financial in Charlottesville, Va.

Washington Mutual, which was based in Seattle, became the largest bank failure in U.S. history in September when it was seized by federal regulators after devastating losses in its mortgage portfolio.

Hindman looked at 16 other state banks and found that while they are well-capitalized by industry standards, their performance lags their peers.

Five publicly traded banking companies in Washington were not profitable for the 12 months ended Sept. 30, according to data compiled by SNL.

They are AmericanWest Bancorp., of Spokane; Banner Corp., of Walla Walla; Cowlitz Bancorp., of Longview; First Financial Northwest, of Renton; and WSB Financial Group, of Bremerton.

Victor Karpiak, CEO of First Financial, said its profits turned negative last year when it converted from mutual to stock ownership and donated more than $16 million in stock to a new foundation it created to meet community needs.

He blames construction loans for a rise in First Financial's "nonperforming" loans, which are loans on which a bank is no longer collecting interest.

The company has money set aside to cover only 35 percent of its nonperforming loans should they become "charge-offs," which happens when a bank has given up ever collecting on them.

That is below the 47 percent ratio for the group of 16 Washington banks. And the state's banks as a group trail far behind the 91 percent that banks nationwide have set aside for potential loan losses.

Ideally a bank would have reserves totaling at least 100 percent of its nonperforming loans, according to Hindman at SNL.

But Karpiak said that historically, First Financial has charged off very few loans. "I'd have to go back 15 years to see when we wrote off maybe $20,000," he said.

First Financial added about $3.5 million to reserves last quarter to help cover potential losses, Karpiak said, and executives look at the loans each quarter to see whether they should set aside more.