The Fed has cut interest rates, squeezing margins on banks' basic lines of business. Titans like Washington Mutual are foundering, and Wall Street has lowered the lifeboats, shoving stock prices down for the entire financial services sector.

All in all, 2007 promises to be the most chaotic year for Washington state's banks since the dark days that followed the September 11 terrorist attacks in 2001. "Normally, community banks don't have nearly this much volatility," says Jim Bradshaw, a Northwest banking analyst for D.A. Davidson. "It's normally boring."

So why is John Dickson smiling? Amid all the turmoil, there's still plenty of good news, says the CEO of Everett-based Frontier Bank:

- He's close to completing a merger with Oak Harbor-based Washington Banking Co., growing his branch network almost 50 percent and solidifying Frontier's position as the dominant regional bank along northern Puget Sound.

- Frontier remains one of the nation's most profitable banks, spending far less than other banks to generate each dollar of revenue.

- And while home sales and real estate development - and Frontier Bank revenue growth - have slowed, the drop-off hasn't been precipitate. The housing market in general is merely returning to growth that historically would be considered reasonable, Dickson says. "It's not normal for house prices to go up 15 to 20 percent a year."

The region's economic fundamentals remain sound, and the outlook for most regional banks is good, despite the upheavals on Wall Street.

"I'm cautiously optimistic," says Harold Gilkey, CEO of Sterling Savings in Spokane. "I do believe that the economy in the Pacific Northwest will be generally better than the economy in the rest of the nation. I say we're insulated, but we're not isolated."

"We're going to do just fine," adds D. Michael Jones, CEO of Walla Walla-based Banner Bank. "The fundamentals for Puget Sound, the whole state of Washington, are really good."

It wasn't long ago that regional banks were thought to be a thing of the past, doomed by the 1995 Interstate Banking and Branching Efficiency Act, which removed most restrictions on where banks could operate.

"People used to say that there wouldn't be any regional players left because they would all be gobbled up by the national banks," says Scott Luttinen, the western Washington regional president of Spokane-based Washington Trust Bank. "Now you can see there is still great demand for regional banks. It's hard to take a regional approach when you are re- ally, really big."

In the Northwest, many regionals are doing better than the national players.

Seattle-based Washington Mutual is the state's largest financial institution. With $330 billion in assets, it's almost 15 times larger than the next three largest banks - Sterling, Banner and Dickson's Frontier - combined. WaMu's also been one of the banks hardest hit by the national subprime mortgage meltdown, posting hundreds of millions in operating losses while also writing down the value of the loans it holds.

But it's not necessarily the same for the regional banks.

"The things bothering WaMu - I don't see them bothering the smaller banks as much, but there will be some impact," says Joe Philips, dean of Seattle University's Albers School of Business. "Some banks have been pretty conservative; they're not going to take much of a hit. Some of the banks got into some things that they'll wish they hadn't."

 Few Washington banks have engaged in subprime lending, says Alan Hess, a University of Washington finance professor. That's largely because they have their roots in commercial banking, their bread and butter in loans to local businesses.