Simply More Newsletter

There will be more bank failures in the weeks, months and years ahead. If history is any indicator, we'll continue to see higher than average bank closings well into 2011 and perhaps beyond. The good news is that The Peoples Community Bank won't be one of those.

Some industry pundits have gone so far as to predict a reduction from the present nationwide level of 8,000+ banks to 4,000. This reduction will occur in small part because of bank closings and in large part because of weaker banks being merged into or being sold to stronger banks. It's probable that two very distinct types of banks will emerge from the coming consolidation: large money-center banks with nationwide branches and community banks, such as ours, that serve a well-defined market area. The difference in product offerings between the two will be negligible. The primary distinction will be in the level of service quality.

The FDIC deposit insurance fund will remain solvent irrespective of what some media outlets would have you believe. Since its creation in 1933, this fund has been supported through the payment of insurance premiums from banks such as ours. To-date, no depositor has ever lost money in an FDIC insured account. To be certain, the level of insurance premiums paid by banks will increase to cover losses now being incurred by the insurance fund - ours have quadrupled in the past year. But taxpayer money will not be used to ensure the solvency of the fund.

We'll see increased regulation of the financial services industry. Some additional regulation is necessary. The sub-prime mortgages that helped create this downturn were passed onto many unsuspecting consumers who ultimately could no longer afford the payment when interest rates were reset. The winners were the mortgage brokers who by then had closed-up shop. The losers were the homeowners. Unfortunately, increased regulation invariably means increased paperwork, which too often increases the cost of a transaction and proves more confusing to the consumer.

Banks will be required to have more capital (net worth) with which to absorb future loan and other types of credit losses. As an industry, banking went into this recession with far too little capital and reserves. This forced many banks to borrow from the government to stay afloat. Some large banks had capital ratios (as a percentage of total assets) of 4% or less, compared to the 10% capital ratio that our bank maitains. Just as with households that borrowed too much money, some banks leveraged themselves to the point of insolvency.

When The Peoples State Bank and Community Bank merged in July, 2005, we could not have predicted the length or breadth of the current economic downturn. What we did know was that merging the two banks would allow us to create a lower cost structure with operating efficiencies that would help us survive and prosper in such a downturn. That has happened. In 2005 the newly merged bank had $175 million in assets. Four years later bank assets have increased to $240 million, we manage additional assets for others of $180 million, and we remain nicely profitable.

What's next for the banking industry? For us it's business as usual. We will be part of the fix - not part of the problem. We remain committed to being here, serving you for many years to come - and promising you Simply Good Banking.

- Gary Harrop