A Tale of Two Cities, Charles Dickens’ famous novel of the 19th century, follows two stories of political, social and economic upheaval in London and Paris.
A key lesson from Dickens’ story was that in both cities the ruling class was acting wrong and reaping what they had sown. Revolutionaries were resorting to violence following years of oppression.
Below is a tale of two banks also reaping what they have sown. This banking story is an economic lesson of the past two years, one of the worst economic recessions in decades.
The first is in Galena in northwest Illinois. Diane Eastabrook profiled Galena for the PBS’s daily show Nightly Business Report in 2008.
Eastabrook describes historic Galena, Illinois as a postcard town, with small businesses and specialty stores dotting Main Street and white church steeples peeping through trees. Galena was named as one of the 10 prettiest towns in America. President Ulysses S. Grant's home overlooks the town.
Galena is home to Apple River State Bank, a 60-year-old community bank that lends money the old-fashioned way, “with a handshake.” At the time Apple River had about $225 million in assets and $20 million in provisions against losses on these loans. That same year many community banks around the nation had been on a building-loan binge, or investing heavily in the preferred stock of the government-sponsored mortgage banks Fannie Mae and Freddie Mac. Apple River didn’t follow this strategy. Apple River State Bank put lending caps on speculative homebuilding and didn't hold stock in either Fannie or Freddie.
Apple River weathered the economic downturn well. During 2009, the bank increased its assets by nearly 10 percent and made $1.96 million in net income. The local area economy is also doing fine. The city projects revenue increases of 27 percent in 2009-2010.
The second bank in this tale is Coeur d'Alene, a gem of Idaho. The city is beautiful and attracts a tremendous amount of tourism. Galena and Coeur d'Alene share a rich history, as both were founded during mining booms.
A banking story from Coeur d'Alene, however, is the story of our economic woes. Idaho Independent Bank (IIB) was founded in October 1993. The bank states it was opened “to fill a void in Idaho caused by the many bank mergers, consolidations, and centralizations taking place at the time.” Like other community banks, IIB bankers are much more likely to know you by name and can make loan approvals much faster than big national firms.
Like Apple River, IIB is doing business the old fashion way. But the results have been much different.
Idaho Independent Bank announced last month its financial results for the 2009. The bank reported a decline in assets of 16 percent and a loss for the fourth quarter of 2009 of $1.98 million.
The CEO stated the bank is “being diligent and methodical about putting our problem land and land-development loans behind us.” During 2009, bank management had to add more than $20 million to its provisions for loan losses.
IIB remains well capitalized and will weather the economic storm like Apple River, but at a much higher cost. According to FDIC reports, real estate loans still make up more than 80 percent of the bank’s net lending, compared with only 60 percent for Apple River.
The problems at IIB are bleeding into the local economy. Unlike Galena, the 2009-2010 city of Coeur d'Alene budget projects a revenue decline of 3 percent.
To fully recover from this recession, the national economy needs banks like IIB and towns like Coeur d'Alene to improve. The financial markets over the past few months have responded well to improvements in the banking sector, seeing any improvement in profitability as a harbinger of better times ahead.
The lesson of how the U.S. economy fell into this so called “Great Recession” is now common knowledge: A bank-led speculative real estate bubble burst quickly. The tale of two cities, however, teaches that it may take a long time to dig out of this hole.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.