Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.

Bank Board Exchange Ideas: Deposits and Liquidity

During a recent banking conference, my colleague and I led a peer exchange with community bank board members. To guide the conversation, we selected topics based on our experience and prior board surveys. The list included:

 - Liquidity and Deposits

- Credit Risk and Commercial Real Estate Stress

- Fraud

- Cybersecurity

- Economic and Geopolitical Uncertainty

- Strategic Execution

- Artificial Intelligence

- Succession Planning

- Wild Card (an open category)

 

Interestingly, no groups chose to discuss credit risk, CRE stress, geopolitical uncertainty, strategic execution, or any wild-card topics. Whether these felt too routine or too sensitive, they stayed untouched.

What captured the most attention—rightfully so—was liquidity and deposits. Since 2009, the number of U.S. bank branches has declined from nearly 100,000 to about 76,000 today, reflecting industry consolidation and branch profitability. Over the same period, the number of FDIC-insured institutions has nearly halved. Given this backdrop, branch consolidation, especially through mergers, is unsurprising.

As branches consolidated, the average deposits per branch grew dramatically. Using profitability data gathered across hundreds of community bank branches from my firm's profitability outsourcing service, reading right to left, we found that typical branch deposit levels more than doubled over the past decade. And these were community bank branches. No Wells Fargo, no Citi.

 

A similar trend appeared in deposit accounts, using retail money market accounts as an example. Ignoring the temporary spike during COVID, average balances rose from under $50,000 to roughly $80,000. Operationally, supporting an $80,000 account requires no more effort than supporting a $50,000 one, but it generates more spread income although it comes with more liquidity risk. The loss of one larger depositor hurts more.

The larger challenge for community banks is that they are not generating many net new deposit accounts. Big banks, fintech firms, and credit unions are winning the competition for new customers, creating constant headwinds. In response, community banks have increasingly pursued larger accounts—large commercial and municipal deposits. While helpful in the short term, these relationships tend to be volatile, especially in rising-rate environments, as recent Fed tightening demonstrated.

This is why banks must strengthen their marketing, sales strategies, and messaging about the value of depositing with a local institution. Deposits at community banks fund small businesses, local homeowners, and the broader community. In fact, a community bank can lend approximately $10 into its local economy for every dollar it earns in profit. By contrast, the destination of a fintech deposit is lost in translation.

 

Community banks have done well to grow and fund their balance sheets, but the concerns expressed by directors regarding future deposit gathering are well-founded. Chasing only large accounts while neglecting retail and small business depositors is risky. Don't do it.

 

Below is a blackboard of the ideas board members shared for strengthening community bank liquidity and deposit gathering:

~ Jeff

What Really Drives Bank Value—and What To Do Next

Earlier this month, I attended Bank Director’s Acquire or Be Acquired conference. As always, the sessions were strong and the hallway conversations even stronger. But the most thought‑provoking insights I carried with me didn’t start at the conference—they started on the plane ride there.

I was listening to Street Talk by S&P Capital IQ, hosted by longtime industry colleague and friend Nathan Stovall. His guest was Jonah Marcus, a buy‑side fund manager with deep experience evaluating banks—and someone I’ve had the privilege of working with as a board member at one of our strategic planning clients.

I’ve seen Jonah operate up close. He understands what creates real value in banking—and more importantly, what doesn’t. His perspective is worth paying attention to.

Valuations: The Market Isn’t Coming to Save You

One message Jonah was unequivocal about: banks should not expect valuation multiples to rise in the near term.

Institutions trading at 10–11x earnings are unlikely to suddenly revert to historical averages of 12–14x. The same holds true for price‑to‑tangible book. In today’s market, valuation expansion is not a given—it is earned.

So what separates banks that trade at a premium?

• High‑quality, durable earnings
• Consistent profitability
• A clear specialty or niche that drives growth
• Strong core funding
• Superior, sustainable expense management that produces best‑in‑class efficiency ratios

In other words, the market rewards banks that execute exceptionally well—not those waiting for macro conditions to improve.

If your strategy depends on “multiple expansion,” it’s time to revisit the plan. Value creation today comes from disciplined execution, not market optimism.

Recession Watch: Two Perspectives Worth Weighing

Jonah also pointed to meaningful economic and credit tailwinds. Non‑performing loans remain historically low. Capital levels are far stronger than they were heading into the 2008 financial crisis. Banks have improved loan concentrations and overall risk discipline.

Nathan echoed this view at the conference, noting that there are few—if any—early warning “cockroaches” signaling an imminent recession.

I’m slightly more cautious.

We’re beginning to hear about “one‑time” or “isolated” credit events in third‑ and fourth‑quarter earnings calls, particularly from more aggressive lenders—those making larger loans or expanding outside their core markets. Historically, recessions often begin with asset bubbles bursting. Today, we still have a high‑flying stock market and residential real estate prices at elevated levels.

Reasonable people can disagree—and they do.

Whether you’re optimistic or cautious, now is the time to stress‑test assumptions, re‑examine concentrations, and ensure your balance sheet can withstand headwinds should they come. Hope is not a strategy.

Technology: Where Banks Are Falling Behind—and How to Catch Up

The most compelling part of the discussion centered on technology.

Jonah sees technology as a key differentiator today—and an even bigger one tomorrow. In his view, technology should deliver four outcomes:

1. Lower costs
2. Greater scalability
3. Delighted customers
4. Data‑driven, personalized sales and service

Here’s the reality check:

• Banks are generally doing well on cost reduction.
• They’re doing okay on scalability.
• They are largely failing at delighting customers and leveraging data.

Too many banks remain overly dependent on their core processors. Too few are using customer data to meet clients where they are—in an increasingly digital, personalized world.

Jonah’s point was simple but powerful:

If banks can leverage technology to achieve all four outcomes—even competently rather than perfectly—growth becomes easier, margins improve, customer satisfaction rises, and powerful network effects begin to take hold.

That’s how banks lift their heads above an increasingly commoditized competitive landscape.

Fintechs have already proven this model. Many are now seeking bank charters for a reason.

Jonah supports a crawl‑walk‑run approach to technology adoption—avoiding shiny objects and infrastructure strain. But in his view, given where financial technology stands today, banks should be much closer to walk‑to‑run than crawl.

If your technology strategy is still focused primarily on cost containment, you’re missing the bigger opportunity. The real upside is growth, differentiation, and customer relevance.

 

What This Means for You—and How We Can Help

For readers who know me, you’re aware that The Kafafian Group recently merged with Wolf & Company, P.C., a Boston‑based CPA and advisory firm. Together, we now bring deeper capabilities and broader execution support to financial institutions.

What does that mean in practice?

• Strategic plans that don’t just sit on shelves—but get executed
• AI and technology advisory aligned with business outcomes
• Deeper profitability analysis at the product, line‑of‑business, and center level
• Process improvement informed by internal audit and best‑practice insights
• Financial advisory that goes beyond negotiating the deal and running the numbers

Simply put: we can do more, and we can go deeper.

If these themes resonate—valuation pressure, technology differentiation, disciplined growth—I’d welcome the conversation.

You can reach me through this blog, at Jeffrey.Marsico@WolfandCo.com, or at (717) 468‑3208.

And yes—we’re continuing our This Month in Banking podcast, which celebrated its 10‑year anniversary in January 2026. Thanks for keeping us in your listening lineup.

Let’s keep the dialogue going.

~ Jeff

 

 

Note: This post was written by me, and improved by AI, which methodically is breaking my propensity for run-on sentences. Sister Mary Ryan would be pleased. 

 

Interest Rate Caps: Long History of Failure

President Trump called for a temporary, nationwide cap on credit card interest rates at 10% APR for one year, beginning January 20, 2026. He announced the proposal publicly through posts on Truth Social and reiterated it in remarks to reporters and in public speeches. His logic: it's a consumer‑protection measure aimed at reducing what he described as “excessive” credit card interest rates—often 20% to 30%, and higher for subprime borrowers.

Most bad ideas offered by government officials sound good. What's not to like? Champion the consumer that pays that level of interest rates while carrying credit card balances. To heck with the banks! I could see the pithy slogan on the protester sign. 

The problem is that in less time than it would take our hypothetical protester to grab his sharpie and scribble his sign, he could have asked his favorite AI tool to research when the US tried rate caps in its history and what was the result. You would think a reporter would do it and ask any proposer "didn't we try interest rate caps through various state usury laws and, according to a peer-reviewed New York Fed study that credit access declined sharply for high-risk borrowers and delinquency rates did not decline?"

The reporter could have entered the query as the populist, yet foolhardy proposal was coming out of the politician's mouth. In fact, going back through US history, using peer-reviewed studies to feed the summary table, it is clear that interest rate caps restrict credit, particularly for riskier borrowers. But that doesn't fit well on our protesters sign.

Period	Government Action	Result
Colonial-Early Republic	Statutory Usury Caps	Credit Shortages, off-book lending
19th Century	State Usury Ceilings	Slower growth, elite credit access
1933 - 1980s	Reg Q Deposit Caps	Bank disintermediation, loan contraction
2007 - present	Federal and State APR Caps	Reduced access for high-risk borrowers

Overarching Scholarly Consensus

Across four centuries of U.S. economic history, peer‑reviewed research consistently finds that: Interest‑rate caps reduce the supply of credit more reliably than they reduce the price of credit.

The empirical pattern—observed repeatedly in different eras, legal frameworks, and financial systems—is:

• Credit rationing

• Market exit by lenders

• Disproportionate harm to higher‑risk and lower‑income borrowers

• Minimal or no improvement in default outcomes

The evidence is clear and accessible. The question is, should policy be driven by observable facts and common sense, or by what sounds good?

~ Jeff

Sources:

Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits

THE EFFECTS OF USURY LAWS: EVIDENCE FROM THE ONLINE LOAN MARKET on JSTOR

Economic Conditions - Dallas Fed

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

What tool helped me find all of this peer-reviewed research without having to scroll through mountains of BS on a search engine? Copilot.

Guest Post: Financial Markets and Economic Update Fourth Quarter 2025

I had the best fourth quarter!  I’ve always wanted to visit Europe’s Christmas Markets and finally did in late November to early December on a Viking River Cruise from Budapest to Regensburg.  We loved Budapest, especially with both sides of the Danube River lit up at night.  We loved the Christmas Markets, especially in Budapest, Vienna, and Salzburg.  The best mulled wine was in Salzburg, which is an amazing city close to the Alps with so much culture and history.  The best food was in Regensburg.  It was special to sail from place to place, exploring, learning, shopping at Markets, listening to concerts, and enjoying every day.  For me, it is a dream come true and was actually a retirement gift, booked over two years ago.

Government Shutdown

We all saw it coming.  The government shut down on October 1^st when the Senate could not get 60 votes to get a continuing resolution passed.  Whatever happened to annual budgets, I’ll never know.  We keep pushing the current spending levels ahead by a few months.  Democrats first demanded $1.5 trillion in additional spending, including extension of Obamacare subsidies, which they themselves allowed to expire at the end of this year, but the Republicans held firm.  No.  Finally, in November, eight Democrats crossed the aisle to get to the 60 votes needed to pass the continuing resolution and reopen government, but with a near-term expiration of January 30^th.  It was the longest shutdown in history at 43 days.

So, we get to go through this madness again?  Government employees not getting paid, air traffic controllers not coming to work consistently, SNAP or food stamp benefits delayed, and government economic data suspended were all big negatives.  Republicans are not going to fund insurance companies in the failed Obamacare ACA anymore, they will not extend covid subsidies (covid is over!), and they will no longer pay for illegal immigrants. 

During the shutdown, NASA was busy tracking 3I Atlas, which they call a “comet” streaking across our solar system.  Is it a comet?  Is it an alien spacecraft?  Today, it makes its closest pass to Earth, albeit several hundred million miles away.  We shall see if the ETs send us a message.

Inflation

CPI for November surprised to the downside at +2.7% year-over-year; the core CPI was +2.6%.  CPI typically runs about .50% higher than PCE, upon which the Fed targets are set.  CPI is almost there to its implied target of +2.5%.  However, we only have PCE figures from September, which were +2.8% for the headline and core measures. 

There are plenty of hopeful signs that inflation will be declining in 2026.  Crude oil has fallen from nearly $80 per barrel to $55 this year.  Gas prices broke below $3.00 to $2.90 per gallon now.  Large increases in owners equivalent rent are fading, mainly due to deportations of illegal immigrants.  There is room for improvement in electric and natural gas prices, which rose +4.2% y-o-y, as capacity increases and regulations are reduced.  Food prices are tempering; one example is the cost of a Thanksgiving dinner in 2025 fell -5.2% from 2024 to $55.18.

Affordability is the big political buzzword right now.  The past four years brought us the highest inflation in two generations, from explosive government spending, supply chain issues, and a slow reacting Fed that fueled a spike in the CPI index of +20% between 2021 and 2024.  Expect CPI to continue its decline in annual pace, but it will be difficult to overcome the 20% increase in the level of CPI without deflation.  Focusing on growing real wages will certainly help with affordability.

Housing

Housing inflation is clearly down in this struggling sector.  Recent reports show y-o-y price increases diminishing, including the S&P/Case Shiller at +1.4% in September, FHFA at +1.7%, Moody’s at +2.0%, and existing home median sales prices at +1.2%.  Zillow reports that 53% of homes nationally have lost value in the year ended October, 2025, which is the highest percentage increase since April, 2012.  Prices in the Northeast are stable.  There’s a slowdown in demand, with existing home sales up only +.5% in November.  Inventories remain an issue with scarce supply at 4.2 months’ worth of sales.

Mortgage rates continue their painfully slow decline, with the 30-year rate at 6.21% according to FHLMC.  Monthly mortgage payments are still unaffordable for many potential buyers.  Property taxes in many counties are rising along with prices, and in many cases along with declines in value, adding to the angst of existing and potential homeowners.  Due to the government shutdown, new home sales data is delayed.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator was released for September and the trend continued to be negative, with September and August each at -.3%, leaving the index at 98.3 (2016=100).  For 36 of the last 40 months, the index has been negative.  Four months registered no change:  July, 2025, May, 2025, November, 2024, and March, 2024.  There was once a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  So what are we to make of this index falling for over three years, continually signaling a recession that never came?   By the way, the yield curve inversion lasted for years, also signaling a recession.  With Federal Reserve easing, $10 trillion of new investment in manufacturing in the US committed, strong stock markets and earnings prospects, and fiscal stimulus in 2026, I don’t see recession coming soon.

Employment- Job growth has been showing weakness for months.  I can’t help but wonder how much of the decline in payrolls is related to deportations/immigration and cuts in government jobs.  Payrolls rose in November by +64,000, fell in October by -105,000, and rose in September by +108,000.  The unemployment rate rose to 4.6% in November from 4.4% in September.  A bad sign is that the pool of available workers is pushing 14 million, currently at 13.967 million.  Job openings are high in October at 7.67 million.  Quit rates fell below 2.0% to 1.8%, possibly showing workers unease about leaving jobs.  Challenger layoffs averaged 92,820 for the three months ended in November.  Wages rose +3.5% y-o-y in November; real wages have been positive for months.

Real GDP-  We have not received 3Q25 data yet, but the Atlanta Fed GDP Now projection is for +3.5%, following +3.8% in 2Q25, and -.6% in 1Q25.  Imports and inventories distorted both 1Q25 and 2Q25, as companies tried to get ahead of tariffs.  Real final sales strengthened to +2.9% in 2Q25 from +1.9% in 1Q25.  For the first time in a long time, the budget deficit is expected to decline as a percentage of GDP which will be slightly negative to growth.  Final tax changes from the OBBB include accelerated depreciation deductions for business investment and this will improve real GDP.  We are still held back by $38 trillion of US government debt, which is 126% of GDP; if greater than 90% for an extended time (since 2009), real GDP is impaired by about one-third.

Productivity- The talk is all AI, all the time.  Yes, AI will increase productivity and efficiency.  GDP can grow strongly without creating inflation if productivity is also strong.  (We witnessed this in the 1990s).  2Q25 productivity was +3.3% after a decline of -1.8% in 1Q25.  Capacity utilization is recently low at 77.4%, so we can afford to increase productive capacity without inflation.  And remember, if productivity meets its long-term average of +3.5%, employers are amenable to passing on 1.5% of it plus an inflation target of 2.0% for total raise of +3.5% without inflationary impacts.

Moody’s Beige Book Index- The index remained positive again in November at 11.1, following October of 13.9 and September at 0.  There were negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed four districts increasing modestly, three with no change, and five in decline, including Philadelphia.

M2 Money Supply- M2 continues its upward growth trend at a steady clip on a y-o-y basis, with October at +4.6%, September at +4.5%, August at 4.4%, and year-to-date through October at +4.1%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  The velocity of M2 remains at 1.39 for both 1Q25 and 2Q25.  Expect M2 to continue to rise as QT has now ended.

Fed Actions

Another meeting, another rate cut.  That’s three in a row since September for a total easing of .75%, bringing Fed Funds to 3.50% to 3.75%.  The FOMC must have heard my criticism of their anemic GDP projections in September.  They now have raised their GDP projection to +2.3% in 2026.  But, true to form, they project taking two years to reach their inflation targets.  It’s always two years away!  It’s ridiculous!  Thankfully, Powell’s departure is not two years away.  I held to my pledge not to watch his press conferences in October or December and not to watch his BS, doublespeak, and “fog” worries ever again.  This is the same man I called a hero during the covid pandemic but his handling of inflation, QE and QT, and money supply turned me off for good.

The Fed finally ended QT on December 1^st.  They caused trouble in the money markets again by stubbornly refusing to ease enough.  Bank reserves are falling and there was great pressure on short-term funding rates.  SOFR was consistently above the IOR rate.  At the December meeting, they announced they will buy T-Bills as needed to help liquidity in the money markets; first up $40 billion of purchases.

The real Fed Funds rate is now about 1.00% (3.75% less PCE 2.8%).  There’s room to cut more.  Many economists estimate that the neutral rate for Fed Funds is 2.50% to 3.00%.

Year-End

We are almost there!  It will be Christmas before you know it!  We made it through a quarter where we saw:

•            On October 19^th, thieves stole $100 million in jewels from the Louvre
•            Jamie Dimon talking about cockroaches and loan losses
•            On November 12^th, the Philadelphia Mint produced the last penny.  It cost 4 cents to produce 1 cent.
•            A record government shutdown from October 1^st to November 13^th
•            Winter starting early with a snowstorm on December 14^th
•            The navigation of 3I Atlas throughout our solar system
•            Dorothy’s navigation of the Danube River

I wish you and your friends and families a Merry Christmas and a Happy New Year 2026!

I appreciate your support!  Thanks for reading!  DLJ 12/19/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments. 

Banking's Top 5 Total Return to Shareholders: 2025 Edition

There have been some humbling moments in Top 5 recognitions, with some award recipients failing and one voluntarily liquidating. Although we seek long-term performance in our 5-year lookback to mitigate the risk of banks that stoke performance with risky bets, we are reminded that banking is a long game. Business models built to endure do so over different economic cycles. And in today's world, economic cycles tend to last more than five years. We have had minimal failures since 2023 headline closures. Having said that, I am here to count numbers with minimal subjectivity (although there is some), and if they have the best five-year total return to shareholders within the criteria mentioned below, they are most likely on the list.

For the past fourteen years, I searched for the Top 5 financial institutions in five-year total return to shareholders because I support long-term strategic decision-making that may not benefit next quarter's or even next year's earnings. And I am weary of the persistent "get big or get out" mentality of many industry pundits. If their platitudes about scale are correct, then the largest FIs should logically demonstrate better shareholder returns, right?

Not so over the fourteen years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so in 2020. As a reference, the best SIFI bank in five-year total return this year was Wells Fargo & Company at 10th overall, fresh off getting out of its regulatory penalty box that limited its growth. 

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year-over-year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance more than those that make those investments. I call this "pulling into the pits" in my book: Squared Away-How Can Bankers Succeed as Economic First Responders. Short-term focus is a common trait of banks that focus on shareholder primacy over stakeholder primacy.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered out those FIs that trade less than 1,000 shares per day. I changed this from 2,000 shares as it was pruning too many fine institutions. But the 1,000 shares/day minimum naturally eliminates many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements as a seller, turnaround situations (losses suffered from 2018 forward), mutual-to-stock conversions, and penny stocks. 

As a point of reference, the S&P 500 Bank Total Return Index for the five years ended December 12, 2025 was 137.08%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2024:

#1.  The Bancorp, Inc. (Nasdaq: TBBK)

#2.  Northeast Bank (NasdaqGM: NBN)

#3.  Coastal Financial Corporation (Nasdaq: CCB)

#4.  First Citizens BancShares, Inc. (Nasdaq.GS: FCNC.A)

#5.  GBank Financial Holdings, Inc. (OTCQX: GBFH)

Here is this year's list:

#1. Esquire Financial Holdings, Inc. (NasdaqCM: ESQ)

Esquire Financial Holdings, Inc. is a financial holding company headquartered in Jericho, New York, with branch offices in Jericho, New York and Los Angeles, California, as well as an administrative office in Boca Raton, Florida. Esquire Bank, is a full-service commercial bank dedicated to serving the financial needs of the litigation industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan area. The Bank offers tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing solutions to small business owners. Many banks speak of serving a niche or niches, this bank I would characterize as a niche bank. It's loan book is 67% C&I, net interest margin is 6% and has been over 5% since 2021, and has a 2.68% YTD ROA and 24% ROE. All these superlative numbers resulted in a 5-year total return of 456% and our top spot in JFB's Top 5. Well done!

#2 Citizens Bancshares Corporation (OTCPK: CZBS)

Citizens Trust Bank is a Community Development Financial Institution [CDFI]. CDFIs share a common goal of expanding economic opportunity in low-income communities by providing access to financial products and services for local residents and businesses. There is nothing common about this bank and I thought to exclude them. But they are a $767 million in total assets bank. Although they are on the pinks, they trade about 3,400 shares per day, over the JFB 1,000 threshold. And their YTD ROA was 1.78% and ROE was 15.41%. If you invested $100 in CZPS five years ago you would have $445 today, a 445% total return and its debut in the JFB Top 5 at #2. Who says you can't combine good works with good returns?

#3. Coastal Financial Corporation (Nasdaq: CCB)

Since 1997, Coastal Community Bank, the wholly owned bank subsidiary of Coastal Financial Corporation, has delivered a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound (Washington) area through a traditional community bank branch network in its three-county market. The bank consists of two segments: 1) the traditional community bank, and 2) CCBX, which is its Banking as a Service (BaaS) division started in 2018. Prior to starting CCBX and for the year ended 2017, the Company had $806 million in total assets and $5.4 million in net income for an ROA of 0.73%. As of or for the latest twelve months ended September 30, 2025, the Bank had $4.5 billion of total assets, $50.1 million net income and a 1.16% ROA. Their CCBX segment continues to evolve, particularly with enhanced regulatory scrutiny of BaaS banks. CCBX is focused on expanding products with existing partners rather than partner growth. What has this bifurcated business model delivered? A 414% five-year total return and place on the JFB Top 5 in three of the last four years! Well done!

#4. The Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, this $8.6 billion financial institution remains one of the few banks in the U.S. that specializes in providing private-label banking and technology solutions for non-bank companies ranging from entrepreneurial start-ups to those in the Fortune 500.  They provide white-label payments and depository services (think Paypal, Chime) and deploy that funding into specialized lending programs such as lending to wealth management firms, commercial fleet leasing, and real estate bridge lending. Note their asset size, because their value as the BaaS bank for Chime is that they are under $10 billion in total assets and not subject to the Durbin Amendment portion of the Dodd-Frank Act that fixes interchange income pricing. It has not been all sunshine and rainbows for TBBK. They were under an FDIC consent order from 2014 through 2020 relating to their BSA and OFAC compliance and their relationship with third parties seeking access to the banking system. So in 2020, when our 5-year measurement period began, they were emerging from that cloud. Having said that, they posted a 2.53% ROA and 29.24% ROE year-to-date and that surpassed their aspirational goal (which they disclosed) of having a >2% ROA and >20% ROE. They put it out there and got it done! And have delivered a 408% five-year total return to their shareholders and fourth straight Top 5 accolade! 

#5 Northeast Bank (NasdaqGM: NBN)

Northeast Bank is a full-service bank headquartered in Portland, Maine that had $4.2 billion in total assets and seven branches and a cyber branch at September 30, 2025. It offers personal and business services to the Maine market, and sports a national lending platform which purchases and originates commercial loans, mostly secured by real estate, and SBA loans. It has a nationwide digital bank, ableBanking, that offers online savings products to consumers nationwide to assist in funding its nationwide lending program. Its national lending program represents all but a small percentage of its entire loan portfolio, which yields 8.61% YTD and has less than 1% non-performing loans/ loans ratio. Two thirds of its deposits are time deposits, resulting in a YTD (their fiscal year ends September 30th) cost of funds of 4.01%. This is because there are a lot of loans to fund!  All this resulted in a 2.12% YTD ROA and 18.45% ROE and a 346% 5-year total return to shareholders and its second consecutive year on our Top 5 list. Well done!

There they are. Interesting there is no bank that I would deem a traditional community bank. Be it BaaS, nationwide lending, a CDFI and our top spot goes to one that focuses on a specific niche    

The evolution of this august list tells me that having something other than "plain vanilla" is driving performance and shareholder returns. 

~ Jeff

Note: I make no investment recommendations in this article or this blog.

Manage What You Measure: The Perverse Math of Banking

The banking industry is often plagued by misplaced priorities, with resources misdirected in personnel, technology, products, and marketing. Why? Because we don't measure what truly matters.

Consider the common questions that reveal this measurement gap:

• Why are disruptors needed to develop customer-demanded banking products or create demand for new ones? 

• Why do pundits offer platitudes instead of practical advice on what a bank branch should be? 

• Why is "white glove service" focused solely on customers with large balances? 

The Misleading Metric: Balance vs. Value

When we look at two hypothetical customers, Jane Doe and Joe Buck, the flaws in current value perception become clear.

The Perverse Math: In current banking math, Joe Buck is valued more and assigned the most capable bankers because of his greater balances. However, while it would take five Janes to match one Joe’s pre-tax profit, Jane is a stronger candidate for "relationship banking" and requires significantly less capital. The underlying issue is that bank revenues are often calculated as simple spread x average balance. As banks grow, this leads them to prioritize larger, more transactional, and commoditized loans. The continuous pursuit of "Joe's" leads to concentration issues, funding issues, and greater commoditization of our bank.

From "Worry" to "Action": The Power of Measurement

The lack of measurement turns potential improvements into unproductive "worry". A classic example is a bank worried about the attrition of its Passbook Savings accounts, which still had significant balances at one of our clients. If they had measured product profitability, they would have a basis for action:

• An assigned product manager, seeing the trend of declining balances, numbers of accounts, and profitability, would make necessary modifications.

• The discipline of continuous profit improvement enables the financial institution to evolve a product from being demanded by few to something more in-demand.

  
  

The same principle applies to managing branch systems:

• By measuring the profit performance and trends of each branch, managers can be empowered to try new strategies to improve struggling locations and maintain strong performers.

• Continuous feedback loops, judged by improved profitability, allow successful strategies to be implemented across other branches.

• The result is an evolved branch system, with resources re-deployed from unprofitable branches into more promising markets.

The takeaway is simple: If we don’t measure it, we can’t manage it. Continuous profit improvement is the key to evolving products, targeting and providing white-glove service to the most valuable customers and segments, and optimizing resource allocation.

By not doing it, we don't evolve, leading to draconian efforts to modernize our products and branches so we can focus on serving our most valuable clients. By not doing it, we are less relevant today as we were yesterday.

And I want my readers to be around for a long, long time.

~ Jeff